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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934 for the fiscal year ended January 29, 2000 or,
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 for the transition period from _________ to _________
Commission File Number 0-26185
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Zany Brainy, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2663337
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
2520 Renaissance Boulevard, King of Prussia, PA 19406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 278-7800
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check whether the registrant (1) has filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ______
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this annual report on Form 10-K. [X]
As of April 17, 2000, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $62,708,480. Such aggregate market value
was computed by reference to the closing sale price of the Common Stock as
reported on the Nasdaq National Market on such date.
As of April 17, 2000, there were 21,681,606 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
As stated in Part III of this annual report on Form 10-K, portions of the
following document are incorporated herein by reference:
Definitive proxy statement to be filed within 120 days after the end of the
fiscal year covered by this annual report on Form 10-K.
Unless the context indicates otherwise, the terms "Zany Brainy" and "Company"
refer to Zany Brainy, Inc. and, where appropriate, one or more of its
subsidiaries.
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ZANY BRAINY, INC.
FORM 10-K
FISCAL YEAR ENDED JANUARY 29, 2000
INDEX
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Page Number
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PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 10
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 17
ITEM 11. EXECUTIVE COMPENSATION 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
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PART I
ITEM 1: BUSINESS
GENERAL
Zany Brainy is a leading specialty retailer of high quality toys, games,
books and multimedia products for kids. We sell products that entertain, educate
and spark the imaginations of children up to 12 years of age.
We were incorporated in 1991 and opened our first store in Wynnewood,
Pennsylvania in the same year. We opened 28 new stores during the year ended
January 29, 2000 and, as of April 17, 2000, we operated 104 stores in 26 states.
We also sell our merchandise on the worldwide web at www.zanybrainy.com and
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through our catalogs with toll-free ordering.
RECENT DEVELOPMENT
On April 21, 2000, we entered into an Agreement and Plan of Merger
("Merger Agreement") pursuant to which Noodle Kidoodle, Inc., another retailer
of children's specialty toys, will become our wholly-owned subsidiary.
Pursuant to the Merger Agreement, each outstanding share of the Noodle
Kidoodle common stock, par value $.001 per share, will be converted into the
right to receive 1.233 shares of our common stock, par value $.01 per share.
The consummation of the Merger is subject to a number of conditions, including,
among other things, the approval and adoption of the Merger Agreement and Merger
by our shareholders and stockholders of Noodle Kidoodle and the expiration or
early termination of the waiting period under Hart-Scott-Rodino Antitrust
Improvements Act of 1976. It is currently anticipated that the Merger will be
treated as a pooling-of-interests for accounting purposes under Opinion No. 16
of the account principles board and that the Merger will close by the end of the
second quarter of 2000.
ZANY BRAINY STORES
Store Design
We design our stores to be bright, colorful and inviting for children
and adults. Our current store prototype is 10,600 square feet and contains 11
major categories of products. Large banners with unique graphics identify each
of these categories to enable customers to find specific items quickly. Our
stores are fully carpeted and have low shelving to encourage children to see,
touch and play with our products. Departments are located around the perimeter
of the store in a "racetrack" style to promote browsing and impulse sales. We
have a play center in our stores that is surrounded with large red pillars so
children can locate it easily. We also provide seating in the play center so
adults can comfortably play with their children. We typically locate our Zany
Showtime Theater, which is used to show the latest video releases, adjacent to
the play center so we can combine the two spaces to accommodate larger special
events. A reading area is situated next to our book department, and software
demonstration stations are placed near our multimedia department to encourage
sampling of these items.
Merchandise Selection
We strive to carry over 15,000 stock keeping units from more than 400
suppliers in 20 different countries. While our products generally range in price
from less than one dollar up to $200, the average price paid for a single
product is less than $10. We present our merchandise across 11 product
categories to satisfy a broad spectrum of customer needs. Our extensive
selection of merchandise includes:
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Category Description
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Brainy Games and Puzzles Board games and puzzles.
Bright Start Toys for ages up to three.
Creativity Arts and crafts supplies and kits.
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Good Sports Indoor and outdoor sport-theme toys.
Kidtronics Electronic learning aids and musical instruments.
Let's Pretend Pretend play, dress up and doll houses.
Our Planet Science-related toys.
Plush and Dolls Stuffed animals and dolls.
Young Builders Building toys and trains.
Books Over 7,000 titles.
Multimedia Software, audio and video.
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We regularly offer numerous limited distribution, innovative products. We
also work closely with several specialty suppliers to secure exclusive product
or licensing arrangements. In addition, we supplement our merchandise offering
with our own product development efforts, including products under such brand
names as "Ready, Set, Grow!" and "Kidstruments."
Store Associates
We actively recruit educators, child care providers and back-to-work
parents as store employees because we believe that these people are most likely
to have a respect and affection for children, and an appreciation of how
children learn through play. Our sales associates receive approximately 25
hours of training within their first month of employment and are tested before
they are designated a "Certified Kidsultant." In addition, some of our sales
associates receive supplemental training to become specialists in various areas
including books, multimedia and events.
Our stores are typically staffed with a general manager, three assistant
managers, four specialists, and a varying number of part-time sales associates,
depending on store volume and time of year. A general manager and three
assistant managers, who may be specialists, typically manage each store, and are
responsible for building relationships within the community. The operations of
each store are supervised by one of 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 April 17, 2000, we operated 104 stores in 26 states. We plan to add
approximately 25 stores in each of 2000 and 2001. We select geographic markets
and store sites on the basis of demographic information, quality and nature of
co-tenants store visibility and accessibility. Key demographics include
population density, household income, and the number of households with children
and education level. We locate our stores primarily in suburban strip or power
centers as well as in selected freestanding locations. We typically seek sites
with co-tenants that are strong, destination and lifestyle-oriented retailers or
high quality supermarkets.
Competitive Pricing
We price our products competitively, but do not attempt to be the discount
leader in a given market. We do, however, maintain a policy of matching our
competitors' advertised prices.
Marketing
We use direct mail and newspaper advertising to promote Zany Brainy
products and increase awareness of our stores and brand. We primarily rely on
direct mail advertising, which allows us to capitalize on our internally
generated customer database. A variety of direct mail pieces, including our
large, color "Zany Zone" catalog, are mailed throughout the year to both current
and prospective customers. We also use full color newspaper inserts for broader
consumer reach during our peak selling periods. We advertise most heavily during
the Christmas holiday and back-to school seasons.
Special Events Program
We publish a monthly calendar of free events for our stores. Each of our
stores host regular daily activities
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for kids, including creative arts and crafts activities, character and author
appearances and mini-concerts by nationally known children's performers. Our
stores also feature several interactive areas, including play centers and
software demonstration stations. In addition, we show movies throughout the day
at our Zany Showtime Theater.
ZANYBRAINY.COM
During the third quarter we implemented an Internet shopping site
(www.zanybrainy.com) through a joint venture with Online Retail Partners.
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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 our Kidsultants for product recommendations, view the latest
calendar of special events for all of Zany Brainy's stores and check order
status. In addition, ZanyBrainy.com customers can return merchandise to any of
our stores.
PURCHASING AND SUPPLIERS
We purchase merchandise from over 400 suppliers in 20 different countries.
In mid-1998, we entered into a relationship with a subsidiary of Ingram
Industries Inc. to be our principal book distributor. Our central buying staff
is comprised of one vice president, two divisional merchandise managers and
seven buyers, each of whom is responsible for purchasing selected categories of
our products. We also maintain an in-house private label product development
team that develops products that are unique to Zany Brainy. In addition, we
have a merchandise planning team that manages inventory levels and the flow of
merchandise through our stores. This team works closely with our buying staff
to react quickly to sales trends and improve in-stock levels at our stores.
DISTRIBUTION
We currently operate one distribution center in Swedesboro, New Jersey of
approximately 250,000 square feet. Approximately 80% of our products are
distributed through this facility and the balance is shipped to the stores
directly by the manufacturer or supplier. Our automated inventory replenishment
system optimizes the inventory levels at each of our stores. This computerized
system retrieves sales information from our stores, enabling us to pick, price
and ship products to each of our stores on a weekly basis.
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 our products
including card and gift shops, craft stores and department
stores.
MANAGEMENT INFORMATION SYSTEMS
In the first quarter of 2000, we replaced SFR, our old business-wide
software package, with JDA, a business-wide software package that supports our
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, we utilize a point-of-sale system to capture sales
transactions that include price look-up, UPC scanning, check and credit
authorization and zip code capture. Our store systems interface with JDA to
automatically replenish inventory, by stock keeping unit, to each store. We also
analyze this information to tailor our merchandise assortment, determine
markdowns, generate forecasts and evaluate product and supplier performance.
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PROPRIETARY RIGHTS
To protect our proprietary rights, we generally rely 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, we have numerous
pending applications for trademarks. "ZanyBrainy.com", "ZB.com" and numerous
other related URL's have also been registered as an Internet domain name.
BACKLOG AND SEASONALITY
Backlog is not considered relevant to an understanding of our business. Our
business is highly seasonal and approximately 40% of our revenue occurred in the
fourth quarter of fiscal 1999. As a result, we increase levels of inventory
during the months of September through December in order to meet seasonal
requirements.
EMPLOYEES
As of January 29, 2000, we employed approximately 2,800 employees,
approximately 900 of whom were employed full-time. We also employ additional
personnel during peak selling periods. We consider our relationships with our
employees to be good. None of our employees are covered by collective bargaining
agreements.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are:
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Name Age Position
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Keith C. Spurgeon 45 Chairman of the Board and Chief Executive Officer
Thomas G. Vellios 45 President
Robert A. Helpert 56 Chief Financial Officer, Secretary and Treasurer
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Keith C. Spurgeon has served as our Chairman of the Board and Chief
Executive Officer since January 1998. He served as our President and Chief
Executive Officer from June 1996 to January 1998. Prior to joining us, Mr.
Spurgeon was at Toys "R" Us for over ten years where he served in various
capacities, most recently as Vice President for Asia and Australia.
Thomas G. Vellios has served as our President since January 1998. He joined
Zany Brainy in November 1995 as Executive Vice President of Merchandising and
Marketing. Prior to joining us, Mr. Vellios was at Caldor, Inc. for nine years,
where he served in various capacities, most recently as Senior Vice President
and General Merchandise Manager.
Robert A. Helpert has served as our Chief Financial Officer, Secretary and
Treasurer since May 1995. Prior to joining us, from February 1994 to May 1995,
Mr. Helpert was the Executive Vice President and Chief Financial Officer for
Trans World Entertainment Corporation. Prior to joining Trans World, from 1988
to 1994, he was President and Chief Operating Officer of W.H. Smith, Inc., an
operator of hotel and airport newsstands and gift shops.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Annual
Report should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.
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Our business is highly seasonal, and our annual results are highly
dependent on the success of our Christmas selling season
Seasonal shopping patterns affect our business. A significant portion of
our sales occurs in the fourth quarter, coinciding with the Christmas holiday
shopping season. Therefore, our results of operations for the entire year
depend largely on our fourth quarter results. In fact, since inception, we have
never been profitable in any quarter other than the fourth quarter of any fiscal
year, and we expect this trend to continue. Factors that could cause our 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;
. inability to hire adequate temporary personnel;
. inability to maintain appropriate inventory levels; and
. a late Thanksgiving, which reduces the number of days between
Thanksgiving and Christmas.
We generally prefer to open new stores in the first three-quarters of the
year. Our failure to open stores on schedule may particularly impair our
results because of our dependence on the Christmas holiday shopping season.
If we are not able to implement our store expansion program, our growth
will suffer
Our growth depends in large part on our ability to open and profitably
operate new stores in both existing and new geographic markets. Our ability to
open and operate new stores will depend on a number of factors, including our
ability to:
. identify suitable sites;
. negotiate acceptable leases at attractive rents;
. access adequate capital to fund store expansion;
. construct and open stores on schedule; and
. locate, hire, train and retain competent managers.
Our continued growth is dependent, in part, on our ability to increase
sales in our existing stores. Our overall profitability will suffer if the
opening of new stores in existing markets draws business from our existing
stores. We also plan to open many of our new stores in markets where we do not
currently have a presence. The opening of stores in new geographic markets
could present competitive and operational challenges different from those we
currently face or previously faced in entering our existing geographic markets.
For example, we may incur higher costs related to advertising, administration
and distribution as we enter these new markets. In addition, we may not gain
market acceptance, or establish our brand, in new geographic markets, which
would impair our financial results.
We may not have sufficient management, operational, distribution, financial
and information systems resources to accommodate our planned growth. Our
expansion strategy also presents some cultural risks, including our ability to
maintain our product mission, customer service commitment and quality control as
we become larger in size. Finally, if our new stores do not perform as expected,
we may curtail our store expansion, which would impair our financial growth and
profitability.
Our comparable store sales will fluctuate
Changes in our comparable store sales results could cause the price of our
common stock to fluctuate. A number of factors have historically affected, and
will continue to affect, our comparable store sales results, including:
. competition;
. our new store openings;
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. general regional and national economic conditions;
. consumer trends and preferences;
. changes in our co-tenants;
. new product introductions and changes in our 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 our business and our
shareholders
We may need additional financing to support our 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 our spending or ability to pay dividends.
Restrictive loan covenants may limit our ability to take various corporate
actions
Our credit facility contains covenants that require us to satisfy ongoing
financial requirements and which limit our ability to borrow additional money,
pay dividends, divest assets and make additional corporate investments. If we
are unable to meet any of our debt service obligations or to comply with these
covenants, our lenders can accelerate our debt. If that was to occur and we were
unable to obtain alternative financing, our long-term viability could be
impaired.
Our operations, and ZanyBrainy.com's operations, could be disrupted if
information systems fail
Our business depends on the efficient and uninterrupted operation of our
computer and communications software and hardware systems. We regularly make
investments to upgrade, enhance and replace our systems. We must appropriately
expand the capacity of our information systems to accommodate our anticipated
growth or our operations could suffer.
In addition, continued customers' access to www.zanybrainy.com, our
Internet joint venture, is important for the success of ZanyBrainy.com and the
perception of our brand. The ZanyBrainy.com Website may experience occasional
system interruptions that make the Website unavailable or prevents
ZanyBrainy.com from efficiently fulfilling orders. These interruptions may
reduce the volume of goods sold, the attractiveness of products and services
offered and damage our reputation. Additional software and hardware may be
necessary to upgrade the systems and network infrastructure of the
ZanyBrainy.com Website to accommodate increased traffic and sales volume. We
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.
We have no formal disaster recovery plan to prevent delays or other
complications arising from information systems failure. Our business
interruption insurance may not adequately compensate us for losses that may
occur.
Risks associated with our investment in our joint venture, ZanyBrainy.com
ZanyBrainy.com is not currently profitable and has incurred significant
losses since inception. It is likely that ZanyBrainy.com will continue to incur
losses for the foreseeable future. While Online Retail Partners has agreed to
take all losses of ZanyBrainy.com up to the extent of their capital account, any
losses beyond that will require us to recognize losses up to the amount of our
investment. We would also have to recognize losses if our investment were to
become materially impaired, up to the amount of our investment. We recently
contributed an additional $6.8 million to ZanyBrainy.com which will bring our
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 our
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investment. Additional financing may not be available on satisfactory terms or
at all. In the event ZanyBrainy.com is unable to raise additional capital, we
expect to commence incurring losses during the first half of 2000. In addition,
any additional equity financing could reduce our 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 our investment in
ZanyBrainy.com.
ZanyBrainy.com will require substantial participation of our management and
affiliates for certain resources. There is also a risk that selling our products
on the Internet could divert customers from our stores and depress existing
store sales.
We are dependent on executive management and other personnel
We believe that our continued growth and profitability depend on the
continued employment of our management team. If one or more members of our
executive management team were unable or unwilling to continue in their present
positions, our profitability could suffer. We do not carry key person life
insurance on any member of our executive management team.
Our growth and profitability also depend on hiring and retaining quality
managers and sales associates in our stores. Competition for personnel,
particularly for employees with retail expertise, is intense. Additionally, our
ability to maintain consistency in the quality of customer service in our stores
is critical to our operations. If we are unable to hire and retain sales
associates capable of providing a high level of customer service, our brand and
reputation could be damaged. This could cause our sales to decline.
Competition from mass market retailers and discounters, which have greater
brand recognition and financial and other resources
Many mass market retailers and discounters, such as Toys "R" Us, Wal-Mart
and Target, have much greater brand recognition and greater financial, marketing
and other resources than ours. We could be at a disadvantage in responding to
these competitors' merchandising and pricing strategies, advertising campaigns
and other initiatives. Several of these competitors, including Toys "R" Us, have
launched successful Internet shopping sites which compete with ZanyBrainy.com
and our stores. In addition, an increase in focus on the specialty retail market
or the sale by these competitors of more products similar to ours could cause us
to lose market share.
Competition from smaller format, specialty educational and creative toy
retailers, whose growth can impair our sales growth
Our direct competitors are smaller format, specialty educational and
creative toy and game retailers. These retailers are continuing to expand and
could impede our ability to increase our sales.
Competition from non-toy specialty retailers, which compete with our
children's book and software businesses and could limit our ability to
expand in these categories
Non-toy specialty retailers, such as Barnes & Noble and Best Buy, are
competing with our children's book and software businesses. We believe that
some of these competitors have exclusivity restrictions in their leases that
restrict co-tenants from selling similar products. Such restrictions could
hinder our expansion strategy by limiting our ability to sell some products at
those sites.
Competition from Internet-only retailers, which may have a cost advantage
and reach a broader market
We face 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 our competitors, our sales and profitability could
suffer if:
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. new competitors enter markets in which we are currently
operating;
. our competitors implement aggressive pricing strategies;
. our competitors expand their operations;
. our suppliers sell their products directly or enter into
exclusive arrangements with our competitors; or
. our competitors adopt innovative store formats, retail sales
methods or merchandising strategies that are similar to ours.
If our suppliers and distributors do not provide us with sufficient
quantities of our products, our sales and profitability will suffer
Products supplied to us by our top twenty suppliers represented slightly
over half of our purchases in 1999. Our dependence on our principal suppliers
involves risk, and if there is a disruption in supply from a principal supplier
or distributor, we may be unable to obtain the merchandise we desire to sell.
While no one supplier represented greater than 10% of net purchases in 1999, a
disruption in the operations of any of our key suppliers could cause a decline
in our sales. Our sales also could decline if key specialty suppliers sell more
products through mass-market retailers. Many of our suppliers currently provide
us with incentives, such as return privileges, volume purchasing allowances and
cooperative advertising. A reduction or discontinuation of these incentives
could reduce our profits.
If a shipment of products that we import is interrupted or delayed, our
inventory levels and sales could decline
We do not own or operate any manufacturing facilities. Instead, we buy all
of our products from manufacturers and distributors. In 1999, we imported
approximately 9% of our purchases, including most of our private label products,
directly from foreign manufacturers. In addition, we believe that a significant
portion of the products that we purchase from domestic suppliers is manufactured
abroad. We anticipate that our dependence on foreign-sourced merchandise will
increase. We are subject to the following risks inherent in relying on foreign
manufacturers:
. the inability to return products;
. fluctuations in currency exchange rates;
. economic and political instability;
. transportation delays;
. restrictive actions by foreign governments;
. the laws and policies of the United States affecting importation
of goods, including duties, quotas and taxes;
. foreign trade and tax laws;
. foreign labor practices;
. trade infringement claims; and
. increased liability as importer of record.
Interruptions or delays in our imports could cause shortages in our product
inventory and a decline in our sales unless we secure alternative supply
arrangements. Even if we could locate alternative sources, their products may
be of lesser quality or more expensive than those we currently purchase. Our
sales could also suffer if our suppliers experience similar problems with
foreign manufacturers.
If we are unable to predict or react to changes in consumer demand, we may
lose customers and our sales may decline
Our success depends on our ability to anticipate and respond in a timely
manner to changing consumer demand and preferences. Our products must appeal to
a broad range of consumers whose preferences cannot be predicted with certainty
and are subject to change. If we misjudge the market for our merchandise, we
may overstock such products and be forced to take significant inventory
markdowns, which may have a negative impact on our profitability, or return
overstocked products to vendors, which may have a negative impact on our
relationships with our vendors.
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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 1999, Pokemon and Beanie Babies represented over 7% and over 4% of
our sales, respectively. Consumer demand for these popular products or others
could decrease significantly and without warning. If we are unable to identify
new products that will enjoy strong consumer demand, we may lose customers and
our sales 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 effect comparable store sales. Moreover, because we sell only
those products that conform to our product mission, we may choose not to sell
some products that our customers desire and thus lose potential sales.
We may be unable to protect our intellectual property, which could impair
our brand and reputation
Our efforts to protect our proprietary rights may be inadequate. We regard
our intellectual property, particularly our trademark for "Zany Brainy," as
important to our marketing strategy. To protect our proprietary rights, we rely
generally on copyright, trademark and trade secret laws, and confidentiality
agreements with employees and third parties and license agreements with
consultants and suppliers. However, a third party could, without authorization,
copy or otherwise appropriate information from us. Employees, consultants and
others who participate in development activities could breach their
confidentiality agreements, and we may not have adequate remedies for any such
breach. Our failure or inability to protect our proprietary rights could
materially decrease their value, and our brand and reputation could be impaired.
We may be exposed to product liability lawsuits and other claims if we fail
to comply with government and toy industry safety standards
Children can sustain injuries from toys. We may be subject to claims or
lawsuits resulting from such injuries. There is a risk that claims or
liabilities may exceed our insurance coverage. Moreover, we may be unable to
retain adequate liability insurance in the future. We are subject to regulation
by the Consumer Product Safety Commission and similar state regulatory agencies.
If we fail to comply with government and toy industry safety standards, we may
be subject to claims, lawsuits, fines and adverse publicity.
ITEM 2: PROPERTIES
Our corporate headquarters is located at 2520 Renaissance Boulevard in King
of Prussia, Pennsylvania, where we lease approximately 52,000 square feet. We
have 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.
We also currently lease one distribution center in Swedesboro, New Jersey
of approximately 250,000 square feet. We have an option to expand the
distribution center by a minimum of 100,000 and up to 250,000 square feet. The
distribution center lease has an initial term of five years with two five-year
renewal options. We are currently investigating the expansion of our
distribution center in Swedesboro or opening a second distribution center to
support our store growth and seasonal demands.
We lease all of our stores. Initial lease terms are generally for ten
years, and most leases contain multiple five-year renewal options. We generally
select a new store site 6 -18 months before its opening. Our stores are
primarily in suburban strip or power shopping centers as well as in selected
freestanding locations. As of January 29, 2000, we had 13 signed leases for
stores we plan to open in 2000, and one signed lease for stores we plan to open
in 2001.
ITEM 3: LEGAL PROCEEDINGS
We are from time to time involved in litigation that we believe ordinarily
accompanies a retail business. We do not believe that any of our pending or
threatened litigation will result in an outcome that would materially affect our
business.
9
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1999
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Zany Brainy's Common Stock has been quoted on the Nasdaq National Market
under the symbol "ZANY" since Zany Brainy's initial public offering on June 2,
1999. Prior to such time, there was no public market for the Common Stock of
Zany Brainy.
As of April 17, 2000, there were approximately 528 holders of record of
Zany Brainy's Common Stock. The following table sets forth, for the fiscal
quarters indicated, the high and low sales prices per share for the Company's
common stock, as reported on the Nasdaq National Market:
Fiscal 1999 High Low
----------- ---- ---
Second Quarter (beginning June 2, 1999) $11.94 $7.88
Third Quarter $14.06 $7.06
Fourth Quarter $12.25 $7.44
DIVIDEND POLICY
Zany Brainy has never paid any cash dividends on its capital stock and is
currently restricted from doing so under the terms of our credit facility. Zany
Brainy currently intends to retain any future earnings for funding growth and,
therefore does not expect to pay any dividends in the foreseeable future. The
declaration and payment of dividends in the future will be determined by the
Board of Directors in light of conditions then existing, including the Company's
earnings, financial condition, capital requirements and other factors.
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data as of the end of January
29, 2000, January 30, 1999, January 31, 1998, February 1, 1997 and February 3,
1996 have been derived from the Company's audited consolidated financial
statements. The information set forth below should be read in conjunction with
the Financial Statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
When reading this data, you should be aware that:
. Our fiscal year consists of 52 or 53 weeks, ends on the Saturday
nearest January 31 and is named for the calendar year ending closest
to that date. All fiscal years presented include 52 weeks of
operations, except 1995, which includes 53 weeks.
. A store becomes comparable in the 14th full month of store operations.
. Sales per square foot and average sales per store are based on stores
opened for the entire period.
10
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------------------------------------
1999 1998 1997 1996 1995
(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 $241,194 $168,471 $123,345 $ 92,563 $ 54,372
Cost of goods sold,
including occupancy costs 165,950 118,153 89,452 69,205 40,972
---------------------------------------------------------------------
Gross profit 75,244 50,318 33,893 23,358 13,400
Selling, general and
administrative expenses 63,592 46,376 33,581 28,732 21,110
---------------------------------------------------------------------
Operating income (loss) 11,652 3,942 312 (5,374) (7,710)
Interest income (expense), net (517) (1,130) (465) (649) (118)
---------------------------------------------------------------------
Income (loss) before taxes 11,135 2,812 (153) (6,023) (7,828)
Income tax benefit (expense) (4,231) 6,187 - - -
---------------------------------------------------------------------
Net income (loss) $ 6,904 $ 8,999 (a) $ (153) $ (6,023) $ (7,828)
=====================================================================
Net income (loss) per
common share:
Basic: $ 0.44 $ 1.67 (a) $ (0.03) $ (1.19) $ (1.55)
Diluted: 0.33 0.51 (a) (0.03) (1.19) (1.55)
Weighted average shares
outstanding:
Basic: 15,834 5,373 5,085 5,068 5,065
Diluted: 21,211 17,770 5,085 5,068 5,065
Store data:
Number of stores at end of
fiscal year 103 75 52 43 31
Total square feet at end of
fiscal year 1,159 868 630 538 387
Comparable store sales
increase 4.0% 9.9% 9.1% 4.3% 0.3%
Sales per square foot $ 227 $ 227 $ 203 $ 183 $ 202
Average sales per store 2,625 2,746 2,523 2,286 2,382
Operating data:
Gross profit margin 31.2% 29.9% 27.5% 25.2% 24.6%
Operating margin (loss) 4.8 2.3 0.3 (5.8) (14.2)
Capital expenditures $ 13,612 $ 7,309 $ 6,420 $ 6,276 $ 7,377
Depreciation and
amortization 8,698 6,859 5,017 3,713 2,115
Balance sheet data:
Inventories $ 71,020 $ 43,252 $ 29,822 $ 24,278 $ 20,538
Working capital 66,470 25,542 20,085 21,599 15,220
Total assets 143,726 82,141 59,552 56,376 41,393
Capitalized lease obligations,
less current portion 3,855 2,860 1,407 2,620 2,231
Total shareholders' equity 98,697 48,291 39,219 38,547 28,372
</TABLE>
(a) Net income for 1998 includes a net income tax benefit of $6,187 due to the
$7,166 benefit recorded for our net operating loss carryforward, partially
offset by income tax expense of $979.
11
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following provides information which management believes is relevant to
an assessment and understanding of the Company's consolidated results of
operations and financial condition. The discussion should be read in conjunction
with the Company's consolidated financial statements and accompanying notes. All
references to 1999, 1998 and 1997 mean the fiscal years ended January 29, 2000,
January 30, 1999 and January 31, 1998, respectively.
Overview
We are 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 April 17, 2000, we have opened one additional store.
From 1997 to 1999, our net sales grew at a compound annual growth rate of 45.3%,
while our 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. We achieved comparable store net sales growth of
9.1%, 9.9% and 4.0% in 1997, 1998 and 1999, respectively. We opened nine stores
in 1997, 23 in 1998 and 28 in 1999, increasing our store base from 43 stores at
the end of 1997 to 103 stores at the end of 1999. We plan 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 our 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 these
difficult sales comparisons greater than last year's first quarter loss. We
expect these difficult comparisons to continue into the second quarter of 2000
as sales of these popular products accounted for over 10% of second quarter
sales last year.
Recent Developments
In the event the Merger with Noodle Kidoodle is consummated, we will
acquire the 58 stores Noodle Kidoodle operated as of January 29, 2000 and the
one additional store it opened as of April 17, 2000. In addition, we will
commence operations in six states in which we previously did not have stores.
Results of Operations
The following table sets forth our financial data expressed as a percentage
of net sales, and operating data for the periods indicated:
12
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 1 68.8 70.1 72.5
----------- ----------- -----------
Gross profit 31.2 29.9 27.5
Selling, general and administrative
expenses 26.4 27.6 27.2
----------- ----------- -----------
Operating income 4.8 2.3 0.3
Interest expense, net (0.2) (0.6) (0.4)
----------- ----------- -----------
Income/(loss) before income taxes 4.6 1.7 (0.1)
Income tax benefit/(expense) (1.7) 3.6 -
----------- ----------- -----------
Net income/(loss) 2.9% 5.3% (0.1%)
=========== =========== ===========
Comparable store net sales increase 2 4% 10% 9%
=========== =========== ===========
Total number of stores at
end of period 103 75 52
=========== =========== ===========
Stores opened during period 28 23 9
=========== =========== ===========
</TABLE>
/1/ Cost of sales includes buying, distribution and occupancy costs
/2/ A store becomes comparable in the 14th full month of store
operations
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 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 EXPENSES. 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 our line of credit.
13
<PAGE>
INCOME TAXES. For 1999, we 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 our net operating loss carryforward.
The effective tax rate for 1999 was 38.0%. See Note 7 of "Notes to Consolidated
Financial Statements" for the reconciliation of the statutory federal income tax
rate to the Company'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 is primarily due to the 9.9% increase in
comparable store sales and the timing of new store openings. The decrease in the
buying and distribution costs of 0.6% of net sales was due to the application of
fixed costs over a higher revenue base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $12.8 million to $46.4 million in 1998 from
$33.6 million in 1997. The dollar increase in these expenses was principally
from an increase of $4.3 million in store payroll and $1.2 million in store
preopening costs primarily due to the increase in number of stores in 1998, an
increase of $2.7 million in corporate expenses associated with the expansion of
our store base and corporate infrastructure to support our continued growth and
an increase of $1.9 million in marketing and promotion expenditures primarily
related to the opening of stores in new market areas. As a percentage of net
sales, selling, general and administrative expenses increased by 0.4% to 27.6%
of net sales in 1998 from 27.2% of net sales in 1997. This percentage increase
was primarily related to an increase of 0.7% of net sales in marketing and
promotion and an increase of 0.5% of net sales in store preopening expenses
associated with opening 23 stores in 1998 versus nine stores in 1997. These were
partially offset by a decrease of 0.5% of net sales in store payroll and other
selling expenses due to an increase in comparable store sales during 1998.
INTEREST EXPENSE, NET. Net interest expense, principally attributable to
borrowings under our credit facility, increased by $665,000 to $1.1 million in
1998 from $465,000 in 1997, due to an increase in the average outstanding loan
balance to $6.4 million in 1998 from $1.5 million in 1997. The increase in
average borrowings in 1998 reflected the opening of 23 new stores and additional
working capital requirements to support those stores.
INCOME TAX BENEFIT. In 1998, we recorded a net income tax benefit of $6.2
million due to the $7.2 million benefit recorded for our net operating loss
carryforward, partially offset by the 1998 income tax expense of $979,000. In
previous years, no benefit was recorded with respect to the net operating loss
carryforward because we established a valuation allowance. We reversed the
valuation allowance as a result of management's assessment that it is more
likely than not that our net deferred tax assets will be realized through future
taxable earnings. Management's assessment was based on the trend toward income
in 1996 and 1997, the utilization of $5.8 million of the net operating loss
carryforward in 1997 and 1998 together with 1999 financial projections.
Liquidity and Capital Resources
Our main sources of liquidity have been cash flows from operations,
borrowing under our credit facilities, and proceeds from our initial public
offering (the "Offering"). We require cash principally to finance capital
investment in new stores, new store inventories and seasonal working capital. We
opened 28 stores in fiscal 1999.
14
<PAGE>
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 our 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 Offering, and proceeds
for the exercise of stock options, partially offset by capital lease
obligations.
On June 14, 1999, we entered into a new three-year credit facility with our
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 we
had no outstanding borrowings under the credit facility. However, as of April
26, 2000, we had $4,500,000 of outstanding borrowings under the credit facility
at the prime rate. We terminated, without penalty, a credit facility with a
different bank upon completion of the Offering. Additionally, on August 25,
1999, we 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.
We believe that our operating cash flow together with the unused portion of
our credit facility and other financing arrangements will be sufficient to
finance current operating requirements including capital expenditures and new
store openings for at least the next twelve months. However, as a result of the
additional $6.8 million investment in ZanyBrainy.com, our Internet joint
venture, we may seek to increase our credit facility.
Seasonality of Business
Seasonal shopping patterns affect our business. A significant portion of
our sales occur in the fourth quarter, coinciding with the Christmas holiday
shopping season. Therefore, results of operations for the entire year depend
heavily on fourth quarter results and the success of the Christmas selling
season. Based upon previous experience, we do not expect to earn a profit in the
first three-quarters of a fiscal year in the foreseeable future.
Two New Sales Channels
During the third quarter of 1999, we implemented an Internet shopping site
(www.zanybrainy.com) through a joint venture with Online Retail Partners, Inc.
------------------
We each initially contributed $5.0 million to this joint venture. Online Retail
Partners contributed an additional $10.0 million to the joint venture in
November 1999. In March 2000, Online Retail Partners and Zany Brainy agreed to
contribute another $12.0 million in the joint venture over a three month period
on a pro rata basis. Zany Brainy's share of this investment is approximately
$6.8 million. As of April 2, 2000 we owned approximately 51% of the joint
venture.
We also expect that ZanyBrainy.com will continue to require cash investment
or financing prior to its profitability. We also expect that ZanyBrainy.com will
continue to incur losses for the foreseeable future.
As of April 26, 2000, our 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 us to recognize losses up to the amount of our investment. We
would also have to recognize losses if our investment were to become materially
impaired, up to the amount of our investment. In the event ZanyBrainy.com is
unable to raise additional capital, we expect to commence incurring losses
during the first half of 2000.
During the third quarter of 1999, we also introduced toll-free telephone
ordering through our Holiday catalog. This past holiday season, in a six-week
period ending on December 25, 1999, we generated over $2.5
15
<PAGE>
million in sales through our 877-WOW-KIDS number. We intend to integrate toll-
free telephone ordering into our year-round promotional efforts.
Cautionary Statement Pursuant To Safe Harbor Provisions Of The Private
Securities Litigation Act Of 1995
This report and the documents incorporated by reference herein contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. When used in this report and the documents incorporated herein by
reference, the words "anticipate," "believe," "estimate," and similar
expressions are generally intended to identify forward-looking statements.
Forward-looking statements include, among others, the statements about the
following: the timing of the Merger and its impact on revenue growth and
earnings; the accounting treatment for the Merger; our schedule for new store
openings; the sufficiency of our operating cash flow over the next 12 months;
our expectations with respect to our inability to earn a profit in the first
three quarters of a fiscal year; the impact that future investments in the
Internet joint venture would have on our equity ownership of the Internet
business and our financial statements; our expectations with respect to sales of
popular products and negative comparable store sales for the first and second
quarter of this year; the potential negative effects selling our products on the
Internet could have on our existing store sales and our customer base; our
expectations with respect to implementing a profitable Internet shopping site
and the ability to raise additional capital for the site; the impact of any
losses associated with the Internet business; and our expectations with respect
to the opening of new stores.
There are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements
including, but not limited to, the following: a decline in the level of demand
for our products, including popular products; actions by our competitors; a
decline in general economic and business conditions and in the specialty retail
or toy industry in particular; our inability to manage our growth, open new
stores on a timely basis and expand in new and existing markets; our ability to
successfully market and expand the Internet shopping site and successfully work
with Online Retail Partners; the availability of product and our ability to
replenish product on a timely basis; our ability to successfully manage our
inventory; unanticipated cash requirements to support current operations or
expansion of our business; the availability and cost of additional capital to
fund our operations or that of ZanyBrainy.com; and our ability to attract, train
and retain highly qualified associates. These and other risks and uncertainties
affecting Zany Brainy are discussed in greater detail in this report and in
other filings by Zany Brainy with the Securities and Exchange Commission.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries
and supplementary data required by this item are attached to this annual report
on Form 10-K beginning on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and compliance with Section 16(a) of
the Securities Exchange Act of 1934 called for by Item 10 of Form 10-K will be
set forth under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive proxy
statement, to be filed within 120 days after the end of the fiscal year covered
by this annual report on Form 10-K, and is incorporated herein by reference. The
required information as to executive officers is set forth in Part I hereof and
incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Items 11 and 12 of Form 10-K will be set
forth under the captions "Executive Compensation" and "Security Ownership of
Certain Beneficial Owners and Management," respectively, in the Company's
definitive proxy statement, to be filed within 120 days after the end of the
fiscal year covered by this annual report on Form 10-K, and is incorporated
herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 of Form 10-K is incorporated herein
by reference to the Company's definitive proxy statement, to be filed within 120
days after the end of the fiscal year covered by this annual report on Form 10-
K.
17
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: Financial Statements listed in the
-------------------- accompanying Index to Financial
Statements and Financial Statement
Schedules appearing on page F-1 are
filed as part of this annual report
on Form 10-K.
2. Financial Statement Schedules: Financial Statement Schedules
------------------------------
listed in the accompanying Index to
Financial Statements and Financial
Statement Schedules appearing on
page F-1 are filed as part of this
annual report on Form 10-K.
3. Exhibits: (see (c) below).
---------
(b) Reports on Form 8-K:
-------------------
The Company did not file a report on Form 8-K during the year ended
January 29, 2000.
(c) Exhibits:
--------
The following is a list of exhibits filed as part of this annual
report on Form 10-K. Where so indicated, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parentheses.
2 Agreement and Plan of Merger dated as of April 21, 2000 among
Zany Brainy, Inc., Noodle Kidoodle, Inc. and Night Owl
Acquisition, Inc.
3.1 Amended and Restated Articles of Incorporation of Zany Brainy,
Inc.(1)
3.2 Amended and Restated Bylaws of Zany Brainy, Inc.(1)
10.1 1993 Stock Incentive Plan(1)(3)
10.2 1998 Equity Compensation Plan(1)(3)
10.3 Form of Stock Purchase Agreement providing registration rights
to certain shareholders (1)
10.4 Employment Agreement with Keith C. Spurgeon(1)(3)
10.5 Employment Agreement with Thomas G. Vellios(1)(3)
10.6 Employment Agreement with Robert A. Helpert(1)(3)
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
10.8 Amended and Restated Limited Liability Company Agreement of ZB
Holdings LLC dated as of March 20, 2000
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)
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
21.1 Subsidiaries
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (Included on Signature Page)
27.1 Financial Data Schedule
(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) Management contract or compensatory plan or arrangement required to be
filed or incorporated as an exhibit.
(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.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Zany Brainy, Inc.
Date: April 26, 2000 By: /s/ Keith C. Spurgeon
-------------- ----------------------
Keith C. Spurgeon
Chairman & Chief
Executive Officer,
Director
Each person in so signing also makes, constitutes and appoints Keith C.
Spurgeon, Chairman and Chief Executive Officer of Zany Brainy, Inc., and Robert
A. Helpert, Chief Financial Officer, Secretary and Treasurer of Zany Brainy,
Inc., and each of them acting alone, as his true and lawful attorneys-in-fact,
in his name, place and stead, to execute and cause to be filed with the
Securities and Exchange Commission any or all amendments to this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 26, 2000 By: /s/ Keith C. Spurgeon
----------------------
Keith C. Spurgeon
Principal Executive
Officer and Chairman of
the Board of Directors
Date: April 26, 2000 By: /s/ Robert A. Helpert
----------------------
Robert A. Helpert
Principal Financial Officer
Date: April 26, 2000 By: /s/ C. Donald Dorsey
---------------------
C. Donald Dorsey
Director
Date: April 26, 2000 By: /s/ Robert A. Fox
------------------
Robert A. Fox
Director
Date: April 26, 2000 By: /s/ Gerald R. Gallagher
------------------------
Gerald R. Gallagher
Director
Date: April 26, 2000 By: /s/ Henry Nasella
------------------
Henry Nasella
Director
Date: April 26, 2000 By: /s/ Yves B. Sisteron
---------------------
Yves B. Sisteron
Director
Date: April 26, 2000 By: /s/ David V. Wachs
-------------------
David V. Wachs
Director
19
<PAGE>
ZANY BRAINY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants Page F-2
Consolidated Balance Sheets Page F-3
Consolidated Statements of Operations Page F-4
Consolidated Statements of Shareholders' Equity Page F-5
Consolidated Statements of Cash Flows Page F-6
Notes to Consolidated Financial Statements Page F-7
</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 $2,923,000 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>
EXHIBIT INDEX
Exhibit
Number 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.*
3.1 Amended and Restated Articles of Incorporation of Zany Brainy,
Inc.(1)
3.2 Amended and Restated Bylaws of Zany Brainy, Inc.(1)
10.1 1993 Stock Incentive Plan(1)(3)
10.2 1998 Equity Compensation Plan(1)(3)
10.3 Form of Stock Purchase Agreement providing registration rights to
certain shareholders (1)
10.4 Employment Agreement with Keith C. Spurgeon(1)(3)
10.5 Employment Agreement with Thomas G. Vellios(1)(3)
10.6 Employment Agreement with Robert A. Helpert(1)(3)
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
10.8 Amended and Restated Limited Liability Company Agreement of ZB
Holdings LLC dated as of March 20, 2000
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)
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
21.1 Subsidiaries
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (Included on Signature Page)
27.1 Financial Data Schedule
(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) Management contract or compensatory plan or arrangement required to be
filed or incorporated as an exhibit.
(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.
* The schedules to this document (which are listed on the table of contents
included in this document) have been omitted. The Company agrees to furnish
supplementally a copy of any of the omitted schedules to the Securities and
Exchange Commission upon request.
<PAGE>
EXHIBIT 2
================================================================================
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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
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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
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<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
34
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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
<PAGE>
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
37
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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
<PAGE>
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.
42
<PAGE>
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.
43
<PAGE>
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
<PAGE>
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.
45
<PAGE>
(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
<PAGE>
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
47
<PAGE>
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>
EXHIBIT 10.7
CREDIT AGREEMENT
among
ZANY BRAINY, INC.,
the Subsidiaries of Zany Brainy, Inc.
set forth on Schedule 1 hereto
("Borrowers")
and
FIRST UNION NATIONAL BANK
("Bank")
June 14, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1 - DEFINITIONS.................................................. 1
1.1. Definitions.................................................. 1
1.2. Accounting Principles........................................ 11
SECTION 2 - CREDIT FACILITY.............................................. 11
2.1. The Facility................................................. 11
2.2. Promissory Note.............................................. 12
2.3. Use of Proceeds.............................................. 12
2.4. Repayment.................................................... 12
2.5. Interest..................................................... 12
2.6. Advances..................................................... 15
2.7. Reduction and Termination of Commitment...................... 16
2.8. Prepayment................................................... 17
2.9. Payments..................................................... 17
2.10. Commitment Fee............................................... 17
2.11. Closing Fee.................................................. 18
2.12. Regulatory Changes in Capital Requirements................... 18
SECTION 2A - LETTERS OF CREDIT........................................... 19
2A.1. Availability of Credits...................................... 19
2A.2. Commitment Availability...................................... 20
2A.3. Approval and Issuance........................................ 20
2A.4. Obligations of the Borrower.................................. 20
2A.5. Collateral Security.......................................... 21
2A.6. General Terms of Credits..................................... 22
SECTION 3 - REPRESENTATIONS AND WARRANTIES............................... 23
3.1. Organization and Good Standing............................... 23
3.2. Power and Authority; Validity of Agreement................... 24
3.3. No Violation of Laws or Agreements........................... 24
3.4. Material Contracts........................................... 24
3.5. Compliance................................................... 24
3.6. Litigation................................................... 25
3.7. Title to Assets.............................................. 25
3.8. Accuracy of Information; Full Disclosure..................... 25
3.9. Taxes and Assessments........................................ 26
3.10. Indebtedness................................................. 26
3.11. Management Agreements........................................ 26
3.12. Investments; Capital Structure............................... 26
3.13. ERISA........................................................ 27
3.14. Fees and Commissions......................................... 27
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.15. No Extension of Credit for Securities....................... 27
3.16. Hazardous Wastes, Substances and Petroleum Products......... 28
3.17. Solvency.................................................... 28
3.18. Employee Controversies...................................... 29
3.19. Year 2000 Compliance........................................ 29
3.20. Intellectual Property....................................... 29
3.21. Foreign Assets Control Regulations.......................... 29
3.22. Investment Company Act...................................... 29
3.23. Public Utility Holding Company Act.......................... 29
SECTION 4 - CONDITIONS.................................................. 30
4.1. Effectiveness............................................... 30
4.2. Advances.................................................... 31
SECTION 5 - AFFIRMATIVE COVENANTS....................................... 31
5.1. Existence and Good Standing................................. 31
5.2. Interim Financial Statements................................ 32
5.3. Annual Financial Statements................................. 32
5.4. Compliance Certificate...................................... 32
5.5. Borrowing Base Certificate.................................. 32
5.6. Additional Information...................................... 32
5.7. Books and Records........................................... 33
5.8. Insurance................................................... 33
5.9. Litigation; Event of Default................................ 33
5.10. Taxes....................................................... 33
5.11. Costs and Expenses.......................................... 33
5.12. Compliance; Notification.................................... 33
5.13. ERISA....................................................... 34
5.14. Fixed Charge Coverage Ratio................................. 34
5.15. Leverage Ratio.............................................. 35
5.16. Minimum Tangible Net Worth.................................. 35
5.17. Borrowing Base.............................................. 35
5.18. Management Changes.......................................... 35
5.19. Transactions Among Affiliates............................... 35
5.20. Joinders.................................................... 35
5.21. Year 2000 Compliance........................................ 36
5.22. Conduct of Business......................................... 36
5.23. Zany.com Sublimit........................................... 36
5.24. Other Information........................................... 36
SECTION 6 - NEGATIVE COVENANTS.......................................... 36
6.1. Indebtedness................................................. 37
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.2. Guaranties.................................................... 37
6.3. Loans......................................................... 37
6.4. Liens and Encumbrances........................................ 37
6.5. Additional Negative Pledge.................................... 38
6.6. Restricted Payments........................................... 38
6.7. Transfer of Assets; Liquidation............................... 38
6.8. Acquisitions and Investments.................................. 38
6.9. Payments to Affiliates........................................ 39
6.10. Use of Proceeds............................................... 39
6.11. Maximum Capital Expenditures.................................. 39
SECTION 7 - RIGHT OF SET-OFF............................................. 39
7.1. Funds of Borrowers in Possession of Bank...................... 39
7.2. Right of Set-off.............................................. 39
SECTION 8 - DEFAULT...................................................... 40
8.1. Events of Default............................................. 40
8.2. Remedies...................................................... 41
SECTION 9 - MISCELLANEOUS................................................ 42
9.1. Indemnification and Release Provisions........................ 42
9.2. Participations and Assignments................................ 42
9.3. Binding and Governing Law..................................... 43
9.4. Survival...................................................... 43
9.5. No Waiver; Delay.............................................. 43
9.6. Modification.................................................. 43
9.7. Headings...................................................... 43
9.8. Notices....................................................... 43
9.9. Payment on Non-Business Days.................................. 45
9.10. Time of Day................................................... 45
9.11. Severability.................................................. 45
9.12. Counterparts.................................................. 45
9.13. Arbitration................................................... 45
9.14. Consent to Jurisdiction and Service of Process................ 45
9.15. WAIVER OF JURY TRIAL.......................................... 46
9.16. ACKNOWLEDGMENTS............................................... 47
</TABLE>
-iii
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
------------------------------
Schedule 1: Borrowers
Schedule 2: Existing Letters of Credit
Exhibit A: Advance Request Form
Exhibit B: Form of Note
Exhibit C: Disclosure Pursuant to Representations and Warranties
Exhibit D: Funding Costs and Loss of Earnings Calculation
Exhibit E: Form of Compliance Certificate
Exhibit F: Form of Borrowing Base Certificate
Exhibit G-1: Form of Master L/C Agreement
Exhibit G-2: Form of Electronic L/C Agreement
-iv-
<PAGE>
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT (this "Agreement") is made the 14th day of June,
1999, by and among ZANY BRAINY, INC., a Pennsylvania corporation ("Zany Brainy")
and the Subsidiaries of Zany Brainy set forth on Schedule 1 attached hereto
(such Subsidiaries, together with Zany Brainy and Zany.com, if joined as
provided in Paragraph 5.20(b) below, each individually a "Borrower" and
individually and collectively, "Borrowers"); and FIRST UNION NATIONAL BANK, a
national banking association ("Bank").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Borrowers wish to borrow, on a joint and several basis, up to
Thirty Million Dollars ($30,000,000) from Bank on a revolving credit basis for
the refinancing of existing indebtedness, for the funding of permitted
acquisitions, for the general corporate purposes of Borrowers, including working
capital, and to provide for the issuance of letters of credit; and
WHEREAS, Bank wishes to lend to Borrowers, on a joint and several
basis, up to Thirty Million Dollars ($30,000,000) on a revolving credit basis,
for such purposes, subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements hereinafter set forth, and intending to be legally bound, the parties
hereto hereby agree as follows:
SECTION 1
DEFINITIONS
-----------
1.1 Definitions. When used in this Agreement, the following terms
-----------
shall have the respective meanings set forth below.
"Adjusted Libor Rate" means, for any Interest Period, as applied to a
-------------------
Portion, the rate per annum (rounded upwards, if necessary to the next 1/100 of
1%) determined pursuant to the following formula:
Adjusted Libor Rate = Libor Rate
--------------------------
[1 - Reserve Percentage]
For purposes hereof, "Libor Rate" means, as applied to a Portion, the rate which
appears on the Telerate Page 3750 at approximately 9:00 a.m. Philadelphia time
two London Business Days prior to the commencement of such Interest Period for
the offering to leading banks in the London Interbank Market of deposits in
United States dollars ("Eurodollars") or, if such rate does not appear on the
Telerate page 3750, the rate which appears (or, if two or more such rates
appear, the average rounded up to the nearest 1/100 of 1% of the rates which
appear) on the Reuters Screen LIBO Page as of 9:00 a.m. Philadelphia time two
London Business Days prior to
<PAGE>
the commencement of the Interest Period, in either case for an amount
substantially equal to such Portion as to which Borrowers may elect the Adjusted
Libor Rate to be applicable with a maturity of comparable duration to the
Interest Period selected by Borrowers for such Portion, as may be adjusted from
time to time in accordance with Paragraph 2.5(e) hereof.
"Advance" means a borrowing under the Commitment pursuant to Paragraph
-------
2.6 hereof.
"Advance Request Form" means the certificate in the form attached
--------------------
hereto as Exhibit A to be delivered by Borrowers to Bank as a condition of each
Advance hereunder.
"Affiliate" means as to any party: (i) any person who or entity which
---------
directly or indirectly owns, controls or holds ten percent (10%) or more of the
outstanding beneficial interests in such party; (ii) any entity of which ten
percent (10%) or more of the outstanding beneficial interest is directly or
indirectly owned, controlled, or held by such party; (iii) any entity which
directly or indirectly is under common control with such party; (iv) any
director or general partner of such party or any Affiliate; or (v) any immediate
family member of any person who is an Affiliate. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of an entity,
whether through the ownership of voting securities, by contract, or otherwise.
"Agreement" means this Credit Agreement and all exhibits hereto, as
---------
each may be amended, modified, extended, consolidated or restated from time to
time.
"Bank" means First Union National Bank, a national banking
----
association.
"Base Rate" means the higher of (a) the Federal Funds Rate plus one
---------
half of one percent ( 1/2%) per annum or (b) the Prime Rate.
"Base Rate Portion" means a Portion as to which Borrowers have elected
-----------------
the rate of interest based on the Base Rate to be applicable.
"Borrower" means individually, and "Borrowers" means individually and
-------- ---------
collectively, Zany Brainy and the direct and indirect Subsidiaries of Zany
Brainy listed on Schedule 1 attached hereto and Zany.com and any additional
Subsidiaries of Zany Brainy which may join in this Agreement pursuant to
Paragraph 5.20 hereof from time to time.
"Borrowing Base" means as of any date of determination without
--------------
duplication the sum of (i) fifty percent (50%) of Eligible Inventory and (ii)
fifty percent (50%) of the undrawn face amount of all outstanding documentary
Letters of Credit.
"Borrowing Base Certificate" means a certificate in the form of
--------------------------
Exhibit F attached hereto delivered by Borrowers to Bank pursuant to Paragraph
4.1 or 5.5 hereof.
"Business Day" means any day not a Saturday, Sunday or a day on which
------------
banks are required or permitted to be closed under the laws of the Commonwealth
of Pennsylvania.
-2-
<PAGE>
"Capital Expenditures" means expenditures for any fixed assets or
--------------------
improvements, replacements, substitutions or additions thereto, which have a
useful life of more than one (1) year, including direct or indirect acquisition
of such assets, provided that expenditures made pursuant to acquisition
transactions permitted by Section 6.8 hereof shall be excluded from the
calculation of Capital Expenditures.
"Capital Leases" means capital leases and subleases, as defined in
--------------
Statement 13 of the Financial Accounting Standards Board dated November 1976, as
amended and updated from time to time.
"CERCLA" means the Comprehensive Environmental Response, Compensation,
------
and Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, as amended from time to time, and all rules and
regulations promulgated in connection therewith.
"Change of Control" means (i) if any person or group within the
-----------------
meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and the rules and regulations promulgated thereunder (other
than Robert A. Fox and Fourcar, B.V.), shall have beneficial ownership (within
the meaning of Rule 13d-3 of the 1934 Act), directly or indirectly, of
securities of Zany Brainy (or other securities convertible into such securities)
representing fifty percent (50%) of the combined voting power of all securities
of Zany Brainy entitled to vote in the election of directors (hereinafter called
a "Controlling Person"); or (ii) a majority of the Board of Directors of Zany
Brainy shall cease for any reason to consist of: (A) individuals who on the date
of this Agreement were serving as directors of Zany Brainy or (B) individuals
who subsequently become members of the Board if such individuals' nomination for
election or election to the Board is recommended or approved by a majority of
the Board of Directors of Zany Brainy. For purposes of clause (i) above, a
person or group shall not be a Controlling Person if such person or group holds
voting power in good faith and not for the purpose of circumventing this
definition as an agent, bank, broker, nominee, trustee, or holder of revocable
proxies given in response to a solicitation pursuant to the 1934 Act, for one or
more beneficial owners who do not individually, or, if they are a group acting
in concert, as a group, have the voting power specified in clause (i) above.
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and regulations with respect thereto in effect from time to time.
"Commitment" means at any time the maximum aggregate principal amount
----------
up to which Bank has agreed to make Advances under Paragraph 2.1 hereof and/or
issue Letters of Credit under Section 2A hereof, being Thirty Million Dollars
($30,000,000) on the date of this Agreement.
"Compliance Certificate" means a certificate in the form of Exhibit E
----------------------
attached hereto delivered by Borrowers to Bank pursuant to Paragraph 4.1 or 5.5
hereof.
"Default" means an event, condition or circumstance the occurrence of
-------
which would, with the giving of notice or the passage of time or both,
constitute an Event of Default.
-3-
<PAGE>
"EBITDAR" means, for any period, net income for such period as defined
-------
in accordance with GAAP, plus interest expense, provisions for federal, state,
local and foreign income taxes, depreciation and amortization expense, Rents,
non-cash expense with respect to options or rights to acquire common stock of
Zany Brainy or any of its consolidated Subsidiaries as reflected on the
financial statements of Zany Brainy and its consolidated Subsidiaries, and non-
cash, non-recurring extraordinary items, in each case as defined in accordance
with GAAP and to the extent each has been deducted in determining net income.
"Electronic L/C Agreement" means the Import Express Electronic Letter
------------------------
of Credit Service Agreement in the form of Exhibit G-2 attached hereto, to be
executed and delivered pursuant to Paragraph 4.1 hereof.
"Eligible Inventory" means all finished goods inventory of Zany Brainy
------------------
and its consolidated Subsidiaries, at book value determined in accordance with
GAAP, net of any reserves and allowances required by GAAP, excluding, without
duplication:
(a) any inventory located outside of the United States;
(b) any inventory of a Subsidiary that is not a Borrower;
(c) any inventory in the possession of a contract manufacturer, or in
the possession of a third party on consignment or pursuant to a sale on approval
or sale or return, or otherwise located at the place of business of a third
party at which such party deals in goods of that kind or under other
circumstances in which such third party or creditors of such third party may be
able to assert rights in the inventory;
(d) any inventory represented by warehouse receipts or other documents
of title;
(e) any inventory sold on lay-away or any similar arrangement valued
in the aggregate in excess of $25,000; and
(f) any inventory that is damaged, obsolete, defective or otherwise
not salable in the ordinary course of business;
"Environmental Control Statutes" means any federal, state, county,
------------------------------
regional or local laws governing the control, storage, removal, spill, release
or discharge of Hazardous Substances, including without limitation CERCLA, the
Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery
Act of 1976 and the Hazardous and Solid Waste Amendments of 1984, the Federal
Water Pollution Control Act, as amended by the Clean Water Act of 1976, the
Hazardous Materials Transportation Act, the Emergency Planning and Community
Right to Know Act of 1986, the National Environmental Policy Act of 1975, the
Oil Pollution Act of 1990, any similar or implementing state law, and in each
case including all amendments thereto and all rules and regulations promulgated
thereunder and permits issued in connection therewith.
-4-
<PAGE>
"EPA" means the United States Environmental Protection Agency, or any
---
successor thereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, all
-----
amendments thereto and all rules and regulations in effect at any time
thereunder.
"ERISA Affiliate" means, when used with respect to any Plan, ERISA,
---------------
the PBGC or a provision of the Code pertaining to employee benefit plans, any
person or entity that is a member of any group or organization within the
meaning of Code Sections 414(b), (c), (m) or (o) of which any Borrower is a
member.
"Event of Default" means an event described in Paragraph 8.1 hereof.
----------------
"Federal Funds Rate" means, for any day, the effective rate of
------------------
interest for such day, as announced from time to time by the Board of Governors
of the Federal Reserve System as shown in publication H.15 as the "Federal Funds
Rate."
"Fixed Charge Coverage Ratio" means, as of any date of determination,
---------------------------
with respect to Zany Brainy and its consolidated Subsidiaries (other than
Zany.com), the ratio of (i) EBITDAR, for the most recent Rolling Period, to (ii)
the sum of interest expense and Rents, for the most recent Rolling Period, in
each case as determined in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
----
Opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants and in statements of the Financial Accounting
Standards Board, which are applicable in the circumstances as of the date in
question, subject to Paragraph 1.2 hereof; and such principles observed in a
current period shall be comparable in all material respects to those applied in
a preceding period, subject to Paragraph 1.2 hereof.
"Hazardous Substance" means petroleum products and items defined in
-------------------
the Environmental Control Statutes as "hazardous substances," "hazardous
wastes," "pollutants" or "contaminants" and any other toxic, reactive,
corrosive, carcinogenic, flammable or hazardous substance or other pollutant
regulated under any Environmental Control Statutes.
"Indebtedness" of any person as of any date of determination means and
------------
includes all obligations of such person which, in accordance with GAAP, shall be
classified on a balance sheet of such person as liabilities of such person and
in any event shall include, without duplication, all (i) obligations of such
person for borrowed money or which have been incurred in connection with
acquisition of property or assets, (ii) obligations secured by any lien upon
property or assets owned by such person, notwithstanding that such person has
not assumed or become liable for the payment of such obligations, to the extent
of the fair market value of such property, (iii) obligations created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such person, notwithstanding the fact that the rights and
remedies of the seller, lender or lessor under such agreement in the event of
default are limited to repossession or sale of property, (iv) Capital Leases,
(v) guarantees and (vi) letters of credit and letter of credit reimbursement
obligations.
-5-
<PAGE>
"Intangible Assets" means for Zany Brainy and its consolidated
-----------------
Subsidiaries (other than Zany.com), all assets which would be classified in
accordance with GAAP as intangible assets, including without limitation, all
franchises, licenses, permits, patents, patent applications, copyrights,
trademarks, tradenames, goodwill, experimental or organization expenses and
other like intangibles, the cash surrender value and other like intangibles of
any life insurance policy, treasury stock and unamortized debt discount.
"Interest Period" means, with respect to any Libor Portion, a period
---------------
of one (1), two (2), three (3) or six (6) months' duration, as Borrowers may
elect, during which the Adjusted Libor Rate is applicable; provided, however,
that (a) if any Interest Period would otherwise end on a day which shall not be
a London Business Day, such Interest Period shall be extended to the next
succeeding London Business Day, unless such London Business Day falls in another
calendar month, in which case such Interest Period shall end on the next
preceding London Business Day, subject to clause (c) below; (b) interest shall
accrue from and including the first day of each Interest Period to, but
excluding, the day on which any Interest Period expires; (c) with respect to an
Interest Period which begins on the last London Business Day of a calendar month
(or on a day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period), the Interest Period shall end on the
last London Business Day of a calendar month; and (d) Borrowers may not elect an
Interest Period that would extend past the Termination Date.
"Lease" means a lease of real property to which any Borrower is a
-----
party.
"Letter of Credit" means individually, and "Letters of Credit" means
---------------- -----------------
individually and collectively, the letter(s) of credit issued from time to time
by Bank pursuant to the terms and conditions of Section 2A hereof.
"Leverage Ratio" means, as of any date of determination, with respect
--------------
to Zany Brainy and its consolidated Subsidiaries (other than Zany.com), the
ratio of Total Funded Debt plus the face amount of all letters of credit issued
and outstanding for the benefit of Zany Brainy or any of its consolidated
Subsidiaries (other than Zany.com), each as of such date of determination, to
Total Capitalization as of such date of determination.
"Libor Portion" means a Portion as to which Borrowers have elected the
-------------
rate of interest based on the Adjusted Libor Rate to be applicable.
"Loan" means the aggregate outstanding principal balance of
----
Indebtedness advanced and the undrawn face amount of all Letters of Credit
issued under the Commitment, and. without duplication, the amount of all
unreimbursed draws under Letters of Credit, together with interest accrued
thereon and fees and expenses incurred in connection with any of the foregoing.
"Loan Documents" means this Agreement, the Note, the Master L/C
--------------
Agreement, the Electronic L/C Agreement and the other documents and agreements
executed and delivered in connection with this Agreement.
-6-
<PAGE>
"Local Authorities" means individually and collectively the state and
-----------------
local governmental authorities and administrative agencies which govern the
business, commercial activities or facilities owned or operated by any Company.
"London Business Day" means any Business Day on which banks in London,
-------------------
England are open for business.
"Master L/C Agreement" means the Master Letter of Credit Agreement in
--------------------
the form of Exhibit G-1 attached hereto, executed and delivered pursuant to
Paragraph 4.1 hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
-----------------------
business, assets, prospects or financial condition of Zany Brainy and its
consolidated Subsidiaries taken as a whole or (ii) the ability of Zany Brainy,
or the Borrowers taken as a whole, to perform its or their respective
obligations under any Loan Document.
"Net Proceeds" means, with respect to any Sale of Material Assets, the
------------
gross cash proceeds received by a Borrower from such sale, less the sum of (i)
all income taxes and other taxes assessed by a governmental authority as a
result of such sale and any other reasonable fees and expenses incurred in
connection therewith, (ii) the principal amount of, premium, if any, and
interest on Indebtedness secured by a Lien on the assets (or a portion thereof)
sold, which Indebtedness is required to be repaid in connection with such sale,
and (iii) with respect to any offering of capital stock or issuance of
Indebtedness, the gross cash proceeds received by the Borrower or any of its
Subsidiaries therefrom less all legal, underwriting and other reasonable fees
and expenses incurred in connection therewith.
"Note" means the promissory note in the form of Exhibit B attached
----
hereto delivered by Borrowers to Bank, as may be amended, modified, extended,
consolidated or restated from time to time.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
----
successor thereto.
"Permitted Acquisitions" means, after ten (10) Business Days prior
----------------------
written notice to Bank, an acquisition of the stock or assets of any entity the
business of which is engaged in a business directly related to a business of
Borrowers as set forth in Paragraph 5.24 hereof and which acquisitions, either
singly or in the aggregate after the date hereof, involve total consideration
(including contingent payments, and cash and non-cash consideration) of not more
than Five Million Dollars ($5,000,000), and such other acquisitions to which the
Bank shall consent in writing.
"Permitted Investments" means:
---------------------
(a) investments in commercial paper;
(b) investments in direct obligations of the United States of
America or obligations of any agency thereof which are guaranteed by the United
States of America;
-7-
<PAGE>
(c) obligations issued or guaranteed by any State or political
subdivision thereof:
(d) investments in certificates of deposit maturing within one
(1) year from the date of acquisition thereof issued by a bank or trust company
organized under the laws of the United States or any state thereof, having
capital, surplus and undivided profits aggregating at least $500,000,000 and the
long-term deposits of which are rated A1 or better by Moody's Investor Service,
Inc. or equivalent by Standard & Poor's Corporation;
(e) investments in money market funds which invest solely in any
of the foregoing (a) through (d) above; and
(f) repurchase agreements with a bank or trust company (including
Bank) or recognized securities dealer having capital and surplus in excess of
$500,000,000 for direct obligations issued or fully guaranteed by the United
States of America in which Borrower has a perfected first priority security
interest (subject to no other liens or encumbrances) and having, on the date of
purchase thereof, a fair market value of at least 100% of the amount of the
repurchase obligations;
provided that the investments described in (a) - (c) above which
are: (i) rated "AA" (or the equivalent thereof) or better by Standard & Poor's
Corporation shall mature within three (3) years of the acquisition thereof; and
(ii) rated "A-1" (or the equivalent thereof) or better by Standard & Poor's
Corporation shall mature within one (1) year of the acquisition thereof.
"Plan" means any employee pension benefit or employee welfare benefit
----
plan as defined in Sections 3(1) or (2) of ERISA maintained or sponsored by,
contributed to, or covering employees of any Borrower or any ERISA Affiliate.
"Portion" means a portion of the Loan as to which a specific interest
-------
rate and, in the case of a Libor Portion, an Interest Period, has been elected
by Borrower.
"Prime Rate" means the rate of interest announced by Bank from time to
----------
time as its prime rate.
"Regulation D" means Regulation D of the Board of Governors of the
------------
Federal Reserve System, comprising Part 204 of Title 12 Code of Federal
Regulations, as amended, and any successor thereto.
"Release" means any spill, leak, emission, discharge or the pumping,
-------
pouring, emptying, disposing, injecting, escaping, leaching or dumping of a
Hazardous Substance.
"Rents" means all payments made to a landlord in connection with a
-----
lease of real property, including without limitation, payments for rent,
utilities and taxes.
-8-
<PAGE>
"Reserve" means, for any day, that reserve (expressed as a decimal)
-------
which is in effect (whether or not actually incurred) with respect to Bank on
such day, as prescribed by the Board of Governors of the Federal Reserve System
(or any successor or any other banking authority to which Bank is subject
including any board or governmental or administrative agency of the United
States or any other jurisdiction to which Bank is subject) for determining the
maximum reserve requirement (including without limitation any basic,
supplemental, marginal or emergency reserves) for Eurocurrency liabilities as
defined in Regulation D.
"Reserve Percentage" means, for Bank on any day, that percentage
------------------
(expressed as a decimal) prescribed by the Board of Governors of the Federal
Reserve System (or any successor or any other banking authority to which Bank is
subject, including any board or governmental or administrative agency of the
United States or any other jurisdiction to which Bank is subject), for
determining the reserve requirement (including without limitation any basic,
supplemental, marginal or emergency reserves) for (i) deposits of United States
dollars or (ii) Eurocurrency liabilities as defined in Regulation D, in each
case used to fund a Libor Portion. The Adjusted Libor Rate shall be adjusted on
and as of the effective day of any change in the Reserve Percentage. Bank
hereby acknowledges that on the date of this Agreement the Reserve Percentage is
zero (0).
"Restricted Payments" means: redemptions, repurchases, and
-------------------
distributions of any kind in respect of Zany Brainy's capital stock.
"Rolling Period" means a period of four consecutive fiscal quarters
--------------
for which income statements have been (or are required to have been) delivered
hereunder.
"Subsidiary" means any corporation, partnership or other legal entity
----------
of which any Borrower, directly or indirectly (including as beneficiary of a
business trust), owns more than fifty percent (50%) of any class or classes of
securities or partnership interests, and any partnership in which a Borrower is
a general partner. Unless otherwise specified, references to "Subsidiaries"
herein shall mean direct and indirect Subsidiaries of Zany Brainy.
"Tangible Net Worth" means, as of the date of determination,
------------------
stockholders' equity of Zany Brainy and its consolidated Subsidiaries (other
than Zany.com), in accordance with GAAP, minus Intangible Assets.
"Termination Date" means the earlier of (i) June 14, 2002, or (ii) the
----------------
date on which the Commitment is terminated pursuant to Paragraph 2.7 hereof.
"Total Capitalization" means stockholders' equity of Zany Brainy and
--------------------
its consolidated Subsidiaries (other than Zany.com) plus Total Funded Debt plus
the face amount of all letters of credit issued and outstanding for the benefit
of Zany Brainy or any of its consolidated Subsidiaries (other than Zany.com).
-9-
<PAGE>
"Total Funded Debt" means, as of the date of determination, the
-----------------
aggregate principal amount of all Indebtedness of Zany Brainy and its
consolidated Subsidiaries (other than Zany.com) for:
(i) borrowed money other than trade indebtedness incurred
in the normal and ordinary course of business for value received having a final
maturity of one year or more from the date of determination;
(ii) installment purchases of real or personal property;
(iii) Capital Leases;
(iv) all obligations under "synthetic" or similar leases;
and
(v) guaranties of Total Funded Debt or any portion of
Total Funded Debt of others, without duplication.
"Year 2000 Compliant" means, as to any computer system or application
-------------------
or micro-processor dependent good or equipment, that it is designed and intended
to be used prior to, during and after the calendar year 2000 AD and that it will
operate as designed and intended during each such time period without error
relating to date data or date information, specifically including any error
relating to, or the product of, date data or date information that represents or
references different centuries or more than one century.
"Zany Brainy" means Zany Brainy, Inc., a Pennsylvania corporation and
-----------
a Borrower under this Agreement.
"Zany.com" means the Internet subsidiary or joint venture to be formed
--------
by Zany Brainy and to be added as a Borrower under this Agreement pursuant to
Paragraph 5.20 hereof.
"Zany.com Sublimit" means the portion of the Commitment up to which
-----------------
Bank has agreed to make loans to Zany.com, being One Million Dollars
($1,000,000) on the date hereof.
1.2 Accounting Principles. Except as otherwise provided herein,
---------------------
financial and accounting terms used in the foregoing definitions or elsewhere in
this Agreement, shall be defined in accordance with GAAP. If Borrowers or Bank
determine that a change in GAAP from that in effect on the date hereof has
altered the treatment of certain financial data to its detriment under this
Agreement, such party may, by written notice to the other within thirty (30)
days after the effective date of such change in GAAP, require renegotiation of
the financial covenants affected by such change to modify such covenants as
necessary to equitably reflect such change in GAAP. If Borrowers and Bank have
not agreed on revised covenants within thirty (30) days after the delivery of
such notice, then, for purposes of this Agreement, GAAP will mean generally
accepted accounting principles on the date just prior to the date on which the
change occurred that gave rise to the notice.
-10-
<PAGE>
SECTION 2
CREDIT FACILITY
---------------
2.1. The Facility.
------------
(a) Commitment. From time to time prior to the Termination
----------
Date, subject to the provisions below, Bank agrees to make Advances to
Borrowers, jointly and severally, which Borrowers may repay and reborrow prior
to the Termination Date, for purposes specified in Paragraph 2.3 hereof;
provided, however, that: (i) the aggregate outstanding principal amount of such
Advances shall not exceed at any time the lesser of the Commitment or the
Borrowing Base as from time to time in effect, (ii) the aggregate outstanding
principal amount of Advances made to Zany.com (including Letters of Credit
issued for the benefit of Zany.com) shall not exceed at any time the Zany.com
Sublimit, (iii) Zany.com shall be liable for principal of up to a limit of One
Million Dollars ($1,000,000) plus interest, expenses and fees, all relating to
Advances made to, and for reimbursement of amounts paid by Bank and fees and
expenses related to Letters of Credit issued for the benefit of, Zany.com, and
(iv) during the period from December 1 through January 31 of each fiscal year of
Borrowers, beginning with the fiscal year ending in January, 2000, for a period
of twenty (20) consecutive calendar days, Borrowers may not request, nor shall
there be outstanding, any Advances (but Borrowers may request the issuance of
Letters of Credit, and Letters of Credit may remain issued.)
(b) Joint and Several Obligation. The obligations of
----------------------------
Borrowers hereunder are and shall be joint and several, provided however, that
the obligations of Zany.com shall be as set forth in Paragraph 2.1(a) above.
(c) Authority of Zany Brainy. Each of the Borrowers hereby
------------------------
irrevocably authorizes and requests that Zany Brainy execute all Advance Request
Forms, make all elections as to interest rates and take any other actions
required or permitted of Borrowers under this Agreement, on its respective
behalf, in each case with the same force and effect as if such Borrower had
executed such Advance Request Form, made such election or taken such other
action itself. All requests for Advances and the issuance of Letters of Credit
by or for the benefit of Zany.com shall also require the signature of Zany
Brainy. Any request, application or other communication by Zany Brainy may be
relied on by Bank, and any communication by Bank shall be made to Zany Brainy,
and shall be binding on each Borrower, jointly and severally, as fully as if
such request, application or other communication were made directly by or to
each such Borrower.
2.2. Promissory Note. The Indebtedness of the Borrowers to Bank under
---------------
the Loan will be evidenced by a Note executed by Borrowers in favor of Bank.
The original principal amount of the Note will be in the amount of the
Commitment; provided, however, that notwithstanding the face amount of such
Note, Borrowers' liability thereunder shall be limited at all times to the
actual Indebtedness, principal, interest, fees and expenses then outstanding to
Bank under the Loan.
-11-
<PAGE>
2.3. Use of Proceeds. Funds advanced under the Loan shall be used
---------------
solely: (i) for the refinancing of existing Indebtedness of Borrowers; (ii) for
Permitted Acquisitions; (iii) for Borrowers' working capital needs and general
corporate purposes and (iv) for the reimbursement of draws under Letters of
Credit in accordance with Paragraph 2A.4 hereof.
2.4. Repayment. The aggregate outstanding principal balance under the
---------
Loan, together with all interest, fees and costs due hereunder, shall be due and
payable in full on the Termination Date. Notwithstanding the immediately
preceding sentence, the aggregate outstanding balance of the Loan shall be due
and payable immediately upon acceleration of the Loan in accordance with
Paragraph 8.2 hereof.
2.5. Interest. Portions of the Loan shall bear interest on the
--------
outstanding principal amount thereof in accordance with the following
provisions:
(a) Interest on Loan.
----------------
(i) At the Borrowers' election in accordance with the
provisions of Paragraph 2.5(b) below, in the absence of an Event of Default
hereunder and prior to maturity or judgment, and subject to clause (ii) below,
any Portion of the Loan (which shall not include the undrawn face amount of
Letters of Credit, as to which the fees set forth in Paragraph 2A.4 shall be
applicable) shall bear interest at either of the following rates:
(A) Base Rate. The Base Rate.
---------
(B) Adjusted Libor Rate. The Adjusted Libor Rate
-------------------
plus one and three-fourths percent (1 3/4%) per annum.
(ii) Notwithstanding the foregoing, upon the occurrence
and during the continuance of an Event of Default hereunder, including after
maturity and upon judgment, Borrowers hereby agree to pay to Bank interest on
the outstanding principal balance of the Loan at the rate of two percent (2%)
per annum in excess of the rate then available to and elected by the Borrowers
for each Portion then outstanding, and with respect to Portions bearing interest
based on the Adjusted Libor Rate, at the end of the applicable Interest Period
and thereafter, such Portions shall bear interest at the rate of two percent
(2%) per annum in excess of the Base Rate, such rate to change when and as the
Base Rate changes.
(b) Procedure for Determining Interest Periods and Rates of
-------------------------------------------------------
Interest.
- --------
(i) If Borrowers elect the rate based on the Base Rate to be
applicable to a Portion, Borrowers must notify Bank of such election in writing
prior to eleven o'clock (11:00) a.m. Philadelphia time one (1) Business Day
prior to the proposed application of such rate. If Borrowers elect the rate
based on the Adjusted Libor Rate to be applicable to a Portion, Borrowers must
notify Bank of such election and the Interest Period selected prior to eleven
o'clock (11:00) a.m. Philadelphia time at least two (2) London Business Days
prior to the commencement of the proposed Interest Period. If Borrowers do not
provide notice for the rate based on the Adjusted Libor Rate, then Borrowers
shall be deemed to have requested that the rate
-12-
<PAGE>
based on the Base Rate shall apply to any Portion as to which the Interest
Period is expiring and to any new Advance of the Loan until Borrowers shall have
given proper notice of a change in or determination of the rate of interest in
accordance with this Paragraph 2.5(b).
(ii) Borrowers shall not elect more than five (5) different
Libor Portions to be applicable to the Loan at one time, and any Portion shall
be in an even multiple of One Hundred Thousand Dollars ($100,000).
(c) Payment and Calculation of Interest. With respect to Libor
-----------------------------------
Portions, interest shall be due and payable on the last day of each Interest
Period for each such Portion, and, in the case of a Libor Portion with an
Interest Period of six (6) months, on the ninetieth (90th) day after the
commencement of such Interest Period and on the last day of the Interest Period.
With respect to Base Rate Portions, interest shall be due and payable on the
last Business Day of each March, June, September and December commencing on the
first such date after the first Advance which bears interest at the Base Rate.
Interest shall be calculated in accordance with the provisions of Paragraph
2.5(a) hereof; all interest based on the Adjusted Libor Rate shall be calculated
on the basis of the actual number of days elapsed over a year of three hundred
sixty (360) days, and interest based on the Base Rate shall be calculated on the
basis of the actual number of days elapsed over a year of three hundred sixty-
five (365) or three hundred sixty-six (366) days, as applicable.
(d) Reserves. If at any time when a Libor Portion is outstanding,
--------
Bank (or a bank Affiliate of Bank) is subject to and incurs a Reserve, Borrowers
hereby agree to pay within five (5) Business Days of demand thereof from time to
time, as billed by Bank, such additional amount as is necessary to reimburse
Bank for its costs in maintaining such Reserve to the extent that such costs are
not reflected in the Reserve Percentage used to determine the Adjusted Libor
Rate. Such amount shall be computed by taking into account the cost incurred by
Bank in maintaining such Reserve in an amount equal to the Portion on which such
Reserve is incurred, which computation shall be set forth in any such demand by
Bank. The determination by Bank of such costs incurred and the allocation of
such costs among Borrowers and other customers which have similar arrangements
with Bank shall be prima facie evidence of the correctness of the fact and the
amount of such additional costs, if calculated in a manner consistent with
similar charges made by Bank to its other customers having similar arrangements
with Bank. Upon notification to Borrowers of any payment required pursuant to
this Paragraph 2.5(d), Borrowers (A) shall make such payment in accordance with
the provisions hereof and (B) may repay the Portion of the Loan with respect to
which such payment is required, subject to the requirements of Paragraph 2.8 and
2.5(f) hereof.
(e) Special Provisions Applicable to Adjusted Libor Rate. The
----------------------------------------------------
following special provisions shall apply to the Adjusted Libor Rate:
(i) Change of Adjusted Libor Rate. The Adjusted Libor Rate may
-----------------------------
be automatically adjusted by Bank on a prospective basis to take into account
the additional or increased cost of maintaining any necessary reserves for
Eurodollar deposits or increased costs due to changes in applicable law or
regulation or the interpretation thereof occurring subsequent to the
commencement of the then applicable Interest Period, including but not limited
to changes
-13-
<PAGE>
in tax laws (except changes of general applicability in corporate income tax
laws) and changes in the reserve requirements imposed by the Board of Governors
of the Federal Reserve System (or any successor), excluding the Reserve
Percentage and any Reserve which has resulted in a payment pursuant to
subparagraph (e) above, that increase the cost to Bank of funding the Loan or a
portion thereof bearing interest based on the Adjusted Libor Rate. Bank shall
give Borrowers notice of such a determination and adjustment, which
determination shall be prima facie evidence of the correctness of the fact and
the amount of such adjustment. Borrowers may, by notice to Bank, (A) request
Bank to furnish to Borrowers a statement setting forth the basis for adjusting
such Adjusted Libor Rate and the method for determining the amount of such
adjustment; and/or (B) repay the Portion of the Loan with respect to which such
adjustment is made, subject to the requirements of Paragraph 2.8 and 2.5(f)
hereof.
(ii) Unavailability of Eurodollar Funds. In the event that
----------------------------------
Borrowers shall have requested the rate based on the Adjusted Libor Rate in
accordance with Paragraph 2.5(b) and Bank shall have reasonably determined that
Eurodollar deposits equal to the amount of the principal of the Portion and for
the Interest Period specified are unavailable, or that the rate based on the
Adjusted Libor Rate will not adequately and fairly reflect the cost of making or
maintaining the principal amount of the Portion specified by Borrowers during
the Interest Period specified, or that by reason of circumstances affecting
Eurodollar markets, adequate and reasonable means do not exist for ascertaining
the rate based on the Adjusted Libor Rate applicable to the specified Interest
Period, Bank shall give notice of such determination to Borrowers that the rate
based on the Adjusted Libor Rate is not available. A determination by Bank
hereunder shall be prima facie evidence of the correctness of the fact and
amount of such additional costs or unavailability. Upon such a determination,
(i) the obligation to advance or maintain Libor Portions shall be suspended
until Bank shall have notified Borrowers that such conditions shall have ceased
to exist, and (ii) the rate based on the Base Rate shall be applicable to all
Portions.
(iii) Illegality. In the event that it becomes unlawful for
----------
Bank (or Bank's bank Affiliate) to maintain Eurodollar liabilities sufficient to
fund any Portion of the Loan subject to the rate based on the Adjusted Libor
Rate, then Bank shall immediately notify Borrowers thereof and Bank's
obligations hereunder to advance or maintain Advances at the rate based on the
Adjusted Libor Rate shall be suspended until such time as Bank (or Bank's bank
Affiliate) may again cause the rate based on the Adjusted Libor Rate to be
applicable to any Portion of the outstanding principal balance of the Loan, and
any Portion shall then be subject to the rate based on the Base Rate.
(f) Funding Costs and Loss of Earnings. In the event that
----------------------------------
Borrowers shall have requested the Adjusted Libor Rate to be applicable to a
Portion to be advanced and Borrowers shall revoke the request for such Advance
or shall fail to meet the conditions to such Advance as set forth in Section
Four hereof, and in connection with any prepayment or repayment of a Libor
Portion made on other than the last day of the applicable Interest Period,
whether such prepayment or repayment is voluntary, mandatory, by demand,
acceleration or otherwise, Borrowers shall pay to Bank all reasonable funding
costs and loss of earnings which may arise in connection with such revocation of
request for or failure to meet the conditions to
-14-
<PAGE>
such Advance or such prepayment or repayment, as calculated by Bank in
accordance with Exhibit D hereto.
2.6. Advances.
--------
(a) Advance Request. Borrowers shall give Bank written
---------------
notice of each requested Advance under the Commitment, not later than eleven
o'clock (11:00) a.m. Philadelphia time, on the day of the proposed Advance in
the case of an Advance of a Base Rate Portion, and two (2) Business Days prior
to an Advance of a Libor Portion, specifying the date, amount and purpose
thereof. Such notice shall be in the form of the Advance Request Form attached
hereto as Exhibit A, shall be certified by the chief financial officer,
controller or assistant controller of Zany Brainy, and, in the case of Advances
to Zany.com, by the chief financial officer, controller or assistant controller
of Zany.com, and shall contain the following information and representations,
which shall be deemed affirmed and true and correct as of and upon receipt of
the date of and upon receipt of the requested Advance:
(i) the aggregate amount of the requested Advance,
which shall be an even multiple of $100,000;
(ii) the Borrower for whose benefit the Advance is
requested;
(iii) confirmation of compliance with Paragraphs 5.14
through 5.17 hereof as of the most recent date for which a Compliance
Certificate or Borrowing Base Certificate, as applicable, has been (or is
required to have been) delivered, and taking into account any Advances,
including the requested Advance, and payments since such date; and
(iv) statements that the representations and
warranties set forth herein and in the other Loan Documents are true and correct
in all material respects as of the date thereof (or if such representation or
warranty is expressly stated to have been made as of a specific date, such
date), provided that the representations and warranties insofar as they refer to
the accuracy of matters set forth in Exhibit C may be amended (i) by the
Borrowers to reflect any transaction expressly permitted under Article 5 or 6
hereof or (ii) with the written consent of Bank; no Event of Default or Default
hereunder has occurred and is then continuing or will be caused by the requested
Advance; and there has been no Material Adverse Effect since the date of the
most-recently delivered audited financial statements pursuant to Paragraph 5.3
hereof; and no event or circumstance (or combination of events or circumstances)
has occurred which is reasonably likely to have a Material Adverse Effect.
(b) Procedures. Upon receiving a request for an Advance in
----------
accordance with subparagraph (a) above, subject to the satisfaction of the terms
and conditions hereof, Bank shall make the requested Advance available to
Borrowers by crediting such amount to Borrowers' deposit account with Bank as
designated by Zany Brainy from time to time not later than one o'clock (1:00)
p.m. on the day of the requested Advance.
(c) Requests Irrevocable. Each request for an Advance pursuant
--------------------
to this Paragraph 2.6 shall be irrevocable and binding on Borrowers. In the case
of any Advance
-15-
<PAGE>
bearing interest at the rate based upon the Adjusted Libor Rate, Borrowers shall
indemnify Bank against any loss, cost or expense incurred by Bank as a result of
not borrowing such funds on the requested Advance date, including as a result of
any failure to fulfill on or before the date specified in such request for an
Advance the applicable conditions set forth in Section Four hereof, including,
without limitation, any loss, cost or expense incurred by reason of the
liquidation or redeployment of deposits or other funds acquired by Bank to fund
the Advance to be made by Bank when such Advance, as a result of such failure,
is not made on such date, as calculated by Bank in accordance with Exhibit D
attached hereto.
2.7. Reduction and Termination of Commitment.
---------------------------------------
(a) Borrowers. Borrowers shall have the right at any time
---------
and from time to time, upon three (3) Business Days' prior written notice to
Bank, to reduce the Commitment in increments of $1,000,000 or multiples thereof
without penalty or premium, provided that on the effective date of such
reduction Borrowers shall make a prepayment of the Loan in an amount, if any, by
which the aggregate outstanding principal balance of the Loan exceeds the amount
of the Commitment as then so reduced, together with accrued interest on the
amount so prepaid and any amounts due pursuant to Paragraph 2.5(f) hereof.
(b) Bank. Bank shall have the right to terminate the
----
Commitment at any time, in its discretion and upon notice to Borrowers, upon the
occurrence and during the continuation of any Event of Default hereunder (except
if an Event of Default described in Paragraph 8.1(i) shall occur with respect to
any Borrower, in which case termination of the Commitment shall occur
automatically without notice).
(c) Restoration Only With Consent. Any termination or
-----------------------------
reduction of the Commitment pursuant to subparagraphs 2.7(a) and (b) hereof
shall be permanent, and such Commitment cannot thereafter be restored or
increased without the written consent of Bank.
2.8. Prepayment.
----------
(a) Borrowers may repay all or any portion of the
outstanding principal balance under the Loan without premium or penalty,
provided that any such payment shall include all accrued interest on the amount
prepaid plus any amounts which may be due pursuant to Paragraph 2.5(f) hereof.
(b) If at any time the aggregate outstanding principal
balance of the Loan, including without duplication the undrawn amount of all
outstanding Letters of Credit, is in excess of the Borrowing Base, Borrowers
shall promptly make a prepayment of the Loan in accordance with subparagraph (a)
above in an amount sufficient to reduce the balance of the Loan, including
without duplication the undrawn amount of all outstanding Letters of Credit, to
an amount less than or equal to the Borrowing Base, together with interest on
the amount prepaid through the date of prepayment and any amounts owed pursuant
to Paragraph 2.5(f) hereof.
(c) If at any time the aggregate outstanding principal
balance of the Loans to Zany.com, including, without duplication, the undrawn
amount of all outstanding
-16-
<PAGE>
Letters of Credit for the benefit of Zany.com, exceeds the Zany.com Sublimit,
Borrowers shall promptly make a prepayment of the Loan in accordance with
subparagraph (a) above in an amount sufficient to reduce the balance of the
Loans to and, without duplication, the undrawn amounts of Letters of Credit for
the benefit of Zany.com, to an amount less than or equal to the Zany.com
Sublimit, together with interest on the amount prepaid through the date of
prepayment and any amounts owed pursuant to Paragraph 2.5(f) hereof.
(d) Mandatory prepayments made pursuant to Paragraph 2.8 hereof
shall not reduce the Commitment and may be reborrowed.
2.9. Payments. All payments of principal, interest, fees and other
--------
amounts due hereunder, including any prepayments thereof, shall be made by
Borrowers to Bank in immediately available funds before twelve o'clock (12:00)
noon, Philadelphia time, on any Business Day at the office of Bank at One South
Penn Square, Philadelphia, PA 19107. Borrowers hereby authorize Bank to charge
Borrowers' accounts with Bank for all payments of principal, interest and fees,
if not paid when due.
2.10. Commitment Fee. Borrowers shall pay to Bank a non-refundable
--------------
commitment fee at the rate of one-fourth of one percent ( 1/4%) per annum on the
unborrowed portion of the Commitment from the date hereof through the
Termination Date, which fees shall be payable at the offices of Bank quarterly
in arrears on the last day of each March, June, September and December and on
the applicable Termination Date. The commitment fee shall be calculated on the
basis of the actual number of days elapsed over a year of three hundred sixty
five (365) days.
Borrowers and Bank hereby agree that for purposes of calculating the
commitment fee to be paid from time to time under this Paragraph 2.10, the
unborrowed portion of the Commitment (on which such fee is calculated) shall be
reduced by the amount available to be drawn under outstanding Letters of Credit.
2.11. Closing Fee. On the date of execution of this Agreement,
-----------
Borrowers shall pay to Bank the unpaid balance of a total closing fee of Twenty-
Five Thousand Dollars ($25,000).
2.12. Regulatory Changes in Capital Requirements. If Bank shall have
------------------------------------------
determined that the adoption or the effectiveness after the date hereof of any
law, rule, regulation or guideline regarding capital adequacy, or any change in
any of the foregoing or in the interpretation or administration of any of the
foregoing by any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by Bank
(or any lending office of Bank) or Bank's holding company with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency which is generally
applicable to banks comparable to Bank, has or would have the effect of reducing
the rate of return on Bank's capital or on the capital of Bank's holding
company, as a consequence of this Agreement, the Commitment, Advances, Letters
of Credit or the Loan made by Bank pursuant hereto, to a level below that which
Bank or its holding company could have achieved but for such adoption,
-17-
<PAGE>
change or compliance (taking into consideration Bank's policies and the policies
of Bank's holding company with respect to capital adequacy) by an amount deemed
by Bank to be material, then from time to time Borrowers shall pay to Bank such
additional amount or amounts as will compensate Bank or its holding company for
any such reduction suffered together with interest on each such amount from the
date due until payment in full thereof at the rate provided in Paragraph
2.5(a)(ii) hereof with respect to amounts not paid when due. Bank will notify
Borrowers of any event occurring after the date of this Agreement that will
entitle Bank to compensation pursuant to this Paragraph 2.12 as promptly as
practicable after it obtains knowledge thereof and determines to request such
compensation.
A certificate of Bank setting forth such amount or amounts as shall be
necessary to compensate Bank or its holding company as specified above and
describing the calculation of such amount shall be delivered to Borrowers and
shall be conclusive absent manifest error, if calculated and charged in a manner
consistent with similar charges made by Bank to its other customers having
similar arrangements with Bank. Borrowers shall pay Bank the amount shown as
due on any such certificate delivered by Bank within ten (10) days after its
receipt of the same.
Failure on the part of Bank to demand compensation for increased costs
or reduction in amounts received or receivable or reductions in return on
capital with respect to any period shall not constitute a waiver of Bank's right
to demand compensation with respect to any other period except as otherwise
limited by the terms of this Paragraph 2.12.
SECTION 2A
LETTERS OF CREDIT
-----------------
2A.1. Availability of Credits.
-----------------------
(a) Terms of Letters of Credit. Subject to the terms and
--------------------------
conditions set forth herein, Bank shall from time to time prior to the
Termination Date issue Letters of Credit for the account of one or more
Borrowers on the following terms and conditions:
(i) at the time of issuance of the Letter of Credit, the
sum of the amount available to be drawn under such Letter of Credit and all
other Letters of Credit then outstanding hereunder plus any unreimbursed draws
under Letters of Credit, plus the outstanding principal balance of the Loan, all
without duplication, shall not exceed the lesser of the Commitment or the
Borrowing Base;
(ii) at the time of issuance of the Letter of Credit, if
such Letter of Credit is for the benefit of Zany.com, the sum of the amount
available to be drawn under such Letter of Credit and all other Letters of
Credit then outstanding hereunder for the benefit of Zany.com plus any
unreimbursed draws under Letters of Credit for the benefit of Zany.com, plus the
outstanding principal balance of Loans to Zany.com, all without duplication,
shall not exceed the Zany.com Sublimit.
-18-
<PAGE>
(iii) the final expiration date of each Letter of Credit
shall be on or before the earlier of (i) one year, in the case of standby
Letters of Credit, and one hundred eighty (180) days, in the case of documentary
Letters of Credit, from the date of issuance thereof or (ii) the Termination
Date;
(iv) there shall not exist at the time of issuance of
the Letter of Credit, or as a result thereof, any Default or Event of Default
hereunder; and
(v) each Letter of Credit issued under this Section 2A
shall be utilized by a Borrower for legitimate purposes in the ordinary course
of its business.
(b) Extension of Letters of Credit. Notwithstanding the provisions
------------------------------
of this Paragraph 2A.1 requiring that the final expiry of each Letter of Credit
be on or before the Termination Date, Bank hereby agrees that it may issue, upon
Borrowers' request if required by a proposed beneficiary, a Letter of Credit
which by its terms may be extended beyond the Termination Date. With respect to
any such Letter of Credit issued hereunder, Borrowers hereby agree that they
will deliver on or before the Termination Date cash collateral in an amount
equal to one hundred five percent (105%) of the outstanding undrawn amount of
each such Letter of Credit pursuant to Paragraph 2A.5 hereof.
(c) Letters of Credit issued by CoreStates/First Union. Reference is
--------------------------------------------------
made to the letters of credit issued by CoreStates Bank, N.A., predecessor by
merger to Bank, or Bank, in its individual capacity, the face amount,
beneficiary and number of which are listed on Schedule 2 attached hereto (the
"Existing Letters of Credit"). The Borrowers and Bank hereby agree that as of
the date of this Agreement all such Existing Letters of Credit shall hereinafter
be Letters of Credit, as if originally issued hereunder and the Bank shall
participate in such Letters of Credit as provided herein, provided Borrowers
will not be obligated to pay any additional issuance fees in connection with
such Letters of Credit.
2A.2. Commitment Availability. The amount available under the
-----------------------
Commitment as from time to time in effect shall be reduced by the amount
available to be drawn under all outstanding Letters of Credit and unreimbursed
amounts of any draws under Letters of Credit. The amount by which the
availability of the Commitment is so reduced shall not be available for Advances
under Paragraph 2.6 hereof, except Advances thereunder which are made to
reimburse Bank for draws under the Letters of Credit as permitted pursuant to
Paragraph 2A.3 hereof.
2A.3. Approval and Issuance.
---------------------
(a) Whenever a Borrower desires that a Letter of Credit be
issued for its account, or that an outstanding Letter of Credit issued for its
account be amended, such Borrower shall give Bank: (i) in the case of a standby
Letter of Credit, written request therefor (or an electronic request pursuant to
procedures established between Borrowers and Bank) at least six (6) Business
Days prior to issuance and (ii) in the case of a documentary Letter of Credit,
written request therefor (or an electronic request pursuant to procedures
established between Borrowers and Bank) one (1) Business Day prior to issuance.
-19-
<PAGE>
(b) Letters of Credit and amendments thereto shall be requested,
processed and issued, and draws thereon shall be negotiated, processed and paid,
in accordance with and subject to the terms and procedures of the Master L/C
Agreement and the Electronic L/C Agreement entered into between Borrowers and
Bank.
(c) It shall be a condition to the issuance of any Letter of
Credit that the conditions set forth in Paragraphs 2A.1(a) and 4.2 hereof shall
be satisfied.
2A.4. Obligations of the Borrower. Borrowers agree to pay to Bank in
---------------------------
connection with each Letter of Credit issued hereunder:
(a) immediately upon the demand of Bank, the amount paid by Bank
with respect to such Letter of Credit;
(b) immediately upon demand of Bank, the amount of any draft
presented purporting to be drawn under such Letter of Credit provided that the
draft and accompanying documents conform to the terms of the Letter of Credit
but subject to the terms of Paragraph 2A.6 and any other amounts paid thereunder
(it being understood that Bank is not required to make demand upon or proceed
against any other party or to resort to any Collateral before obtaining payment
from Borrowers);
(c) quarterly in arrears on the last Business Day of each March,
June, September and December: (i) a fee calculated on the average outstanding
amount of all documentary Letters of Credit for such period at a rate per annum
equal to one percent (1%) and (ii) a fee calculated on the average outstanding
amount of all standby Letters of Credit for such period at a rate per annum
equal to one and three fourths percent (1 3/4%) per annum, together with any
Letter of Credit fees customarily charged by Bank;
(d) interest on any Indebtedness outstanding with respect to
such Letter of Credit, whether for funds paid on drafts on such Letter of Credit
or otherwise (but such indebtedness shall not include undrawn balances of such
Letter of Credit issued hereunder) at the rate set forth in Paragraph
2.5(a)(i)(A) hereof from the date of payment by Bank (if not reimbursed by
Borrowers on the same day) to the date one (1) Business Day after notice to
Borrowers of such payment, and thereafter at the rate applicable to Portions
bearing interest based on the Base Rate under Paragraph 2.5(a)(ii) hereof;
interest under this subparagraph (d) shall be paid at the times and in the
manner set forth in Paragraph 2.5 hereof, and shall accrue on amounts paid on a
Letter of Credit (if not reimbursed by Borrowers on the same day) from the date
of payment by Bank, whether or not demand is made, until such amounts are
reimbursed by Borrowers whether before, at or after demand.
(e) On or before the Termination Date, in the absence of a
Default or Event of Default at such time, and subject to the provisions of
Paragraph 2.6 hereof, Bank hereby agrees to advance funds to Borrowers under the
Loan to make the payments required under Paragraphs 2A.4(a) and (b) hereof. If
any payment by Bank of a draft drawn under a Letter of Credit is for any reason
(including without limitation the occurrence or continuation of a Default or
Event of Default hereunder) not reimbursed prior to or on the date of such
payment, the
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<PAGE>
amount of such payment shall thereupon be deemed for purposes hereof an Advance
under Paragraph 2.6 hereof. Such reimbursement obligation shall be repayable,
prepayable, and otherwise subject to all the terms and conditions thereof as if
advanced by Bank pursuant to Paragraph 2.6 hereof (but without duplication).
2A.5. Collateral Security.
-------------------
(a) On the termination of the Commitment or the occurrence of
an Event of Default, Bank may require (and in the case of an Event of Default
occurring under Paragraph 8.1(i) it shall be required automatically) that
Borrowers deliver to Bank cash or U.S. Treasury Bills with maturities of not
more than 90 days from the date of delivery (discounted in accordance with
customary banking practice to present value to determine amount) in an amount
equal at all times to one hundred five percent (105%) of the outstanding undrawn
amount of all Letters of Credit, such cash or U.S. Treasury Bills and all
interest earned thereon to constitute cash collateral for all such Letters of
Credit. At such time as such collateral is required to be and has not been
deposited, Bank shall be entitled to liquidate such of the other collateral for
the Loan (if any) as is necessary or appropriate in its sole judgment so as to
create such cash collateral.
(b) Any cash collateral deposited under subparagraph (a)
above, and all interest earned thereon, shall be held by Bank and invested and
reinvested at the expense and the written direction of Borrowers, in U.S.
Treasury Bills with maturities of no more than ninety (90) days from the date of
investment.
2A.6. General Terms of Credits. The following terms and conditions
------------------------
apply with respect to each Letter of Credit notwithstanding anything to the
contrary contained herein:
(a) Borrowers assume all risks of the acts or omissions of the
beneficiary of each Letter of Credit with respect to the use of the Letter of
Credit or with respect to the beneficiary's obligations to Borrowers. Neither
Bank nor any of its officers or directors shall be liable or responsible for,
and Borrowers hereby agree to indemnify and hold Bank harmless (except for the
issuer's gross negligence or willful misconduct) with respect to: (i) the use
which may be made of the Letter of Credit or for any acts or omissions of the
beneficiary in connection therewith; (ii) the accuracy, truth, validity,
sufficiency or genuineness of documents, or of any endorsement thereon, even if
such documents should in fact prove to be in any or all respects false,
misleading, inaccurate, invalid, insufficient, fraudulent, or forged; (iii) the
payment by Bank against presentation of facially conforming documents; (iv) any
other circumstances whatsoever in making or failing to make payment under a
Letter of Credit; or (v) any inaccuracy, interruption, error or delay in
transmission or delivery of correspondence or documents by post, telegraph or
otherwise. In furtherance and not in limitation of the foregoing, Bank may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary.
(b) To the extent any failure to comply with the provisions of
this Paragraph 2A.5(b) would, either individually or in the aggregate, result in
a Material Adverse Effect, Borrowers agree to procure or to cause the
beneficiaries of each documentary Letter of
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Credit to procure promptly any necessary import and export or other licenses for
the import or export or shipping of any goods referred to in or pursuant to a
Letter of Credit and to comply and to cause the beneficiaries to comply with all
foreign and domestic governmental regulations with respect to the shipment and
warehousing of such goods or otherwise relating to or affecting such Letter of
Credit, including governmental regulations pertaining to transactions involving
designated foreign countries or their nationals, and to furnish such
certificates in that respect as Bank may at any time reasonably require, and to
keep such goods adequately covered by insurance in amounts, with carriers and
for such risks as shall be customary in the industry and to cause Bank's
interest to be endorsed on such insurance and to furnish bank at its request
with reasonable evidence thereof. Should such insurance (or lack thereof) upon
said goods for any reason not be reasonably satisfactory to Bank, Bank may (but
is not obligated to) obtain, after notice, at Borrowers' expense, insurance
satisfactory to Bank.
(c) In connection with each Letter of Credit, neither Bank nor any
correspondent shall be responsible for: (i) the existence, character, quality,
quantity, condition, packing, value or delivery of the property purporting to be
represented by documents; (ii) any difference in character, quality, condition
or value of the property from that expressed in documents; (iii) the time,
place, manner or order in which shipment of the property is made; (iv) partial
or incomplete shipment referred to in such Letter of Credit; (v) the character,
adequacy or responsibility of any insurer, or any other risk connected with
insurance other than insurance procured by the Bank; (vi) any deviation from
instructions, delay, default or fraud by the beneficiary or anyone else in
connection with the property or the shipping thereof; (vii) the solvency,
responsibility or relationship to the property of any party issuing any
documents in connection with the property; (viii) delay in arrival or failure to
arrive of either the property or any of the documents relating thereto; (ix)
delay in giving or failure to give notice of arrival or any other notice; (x)
any breach of contract between the Letter of Credit beneficiaries and Borrowers;
(xi) any laws, customs, and regulations which may be effective in any
jurisdiction where any negotiation and/or payment of such Letter of Credit
occurs; (xii) failure of documents (other than documents required by the terms
of the Letter of Credit) to accompany any draft at negotiation; or (xiii)
failure of any entity to note the amount of any document or draft on the reverse
of such Letter of Credit or to surrender or to take up such Letter of Credit or
to forward documents other than documents required by the terms of the Letter of
Credit. In connection with each Letter of Credit, Bank shall not be responsible
for any error, neglect or default of any of their correspondents. None of the
above shall affect, impair or prevent the vesting of any of the Bank's rights or
powers hereunder. If a Letter of Credit provides that payment is to be made by
Bank's correspondent, neither Bank nor such correspondent shall be responsible
for the failure of any of the documents specified in such Letter of Credit to
come into the Bank's hands, or for any delay in connection therewith, and
Borrowers' obligation to make reimbursements shall not be affected by such
failure or delay in the receipt of any such documents.
(d) Notwithstanding but without limiting the foregoing, with respect
to any Letter of Credit, Borrowers shall have a claim against Bank, and Bank
shall be liable to Borrowers, to the extent, but only to the extent, of any
direct, as opposed to indirect or consequential, damages suffered by Borrowers
caused by the Bank's willful misconduct or gross negligence.
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<PAGE>
(e) To the extent not inconsistent with this Agreement, the
Uniform Customs and Practices for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500, are hereby made a part of
this Agreement with respect to obligations in connection with each Letter of
Credit.
SECTION 3
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrowers represent and warrant to Bank as follows:
3.1 Organization and Good Standing. Each Borrower is a corporation,
------------------------------
partnership or other legal entity as set forth on Exhibit C attached hereto,
duly formed and validly existing under the laws of its state of formation as set
forth on Exhibit C attached hereto, and each has the power and authority to
carry on its business as now conducted, is qualified to do business in all other
states in which the nature of its business or the ownership of its properties
requires such qualification, except where the failure to so qualify would not
cause a Material Adverse Effect.
3.2 Power and Authority; Validity of Agreement. Each Borrower has
------------------------------------------
the power and authority under applicable law and under its articles or
certificate of incorporation and bylaws or other organizational documents to
enter into and perform the Loan Documents to the extent that it is a party
thereto; and all actions necessary or appropriate for the execution and
performance by such Borrower of the Loan Documents have been taken, and, upon
their execution, the same will constitute the valid and binding obligations of
each Borrower to the extent it is a party thereto, enforceable in accordance
with their terms.
3.3 No Violation of Laws or Agreements. The making and performance
----------------------------------
of the Loan Documents by each Borrower will not violate any provisions of any
law or regulation, federal, state, local, or foreign or any Borrower's
respective articles or certificate of incorporation and bylaws or other
organizational documents, or result in any breach or violation of, or constitute
a default under, any agreement or instrument by which any Borrower or its
property may be bound.
3.4 Material Contracts. There exists no default by any Borrower
------------------
under any contracts material to the business(es) of each Borrower which default,
or defaults taken as a whole, is or are reasonably likely to have a Material
Adverse Effect.
3.5 Compliance.
----------
(a) Each Borrower is in material compliance with all applicable
laws and regulations, federal, state, local or foreign (including without
limitation those administered by the Local Authorities);
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<PAGE>
(b) Each Borrower possesses all the franchises, permits,
licenses, certificates of compliance and approval and grants of authority,
necessary or required in the conduct of its respective business(es) as of the
date hereof; and as of the date hereof all such franchises, permits, licenses,
certificates and grants are valid, binding, enforceable and subsisting without
any defaults thereunder or enforceable adverse limitations thereon and are not
subject to any proceedings or asserted claims opposing the issuance, development
or use thereof or contesting the validity thereof, except to the extent that the
failure to obtain or maintain any of the foregoing is not, either singly or in
the aggregate, reasonably likely to have a Material Adverse Effect;
(c) No authorization, consent, approval, waiver, license or
formal exemptions from, nor any filing, declaration or registration with, any
court, governmental agency or regulatory authority (federal, state or local) or
non-governmental entity, under the terms of contracts or otherwise, is required
by any Borrower by reason of or in connection with such Borrower's execution and
performance of the Loan Documents, except those which have been obtained; and
(d) Since January 31, 1997, to the best of each Borrower's
knowledge, no employee of any Borrower, or any supplier of any of them, has been
employed in violation of Section 6 or Section 7 of the Fair Labor Standards Act
(29 U.S.C. (S)201 et seq.) (the "FLSA"), or in violation of any regulation or
-- ---
order of the Secretary of Labor of the United States under Section 14 of the
FLSA, except to the extent that any such violation, either singly or in the
aggregate, is not reasonably likely to have a Material Adverse Effect.
3.6 Litigation. Except as set forth on Exhibit C attached hereto,
----------
there are no actions, suits, proceedings or claims which are pending or, to the
best knowledge of any member of Borrowers' senior management, threatened,
against any Borrower which, if adversely resolved, are reasonably likely to have
a Material Adverse Effect.
3.7 Title to Assets. Each Borrower has good and marketable title to,
---------------
or a valid leasehold interest in or a license to use, all of the properties and
assets material to the conduct of its business, free and clear of any liens and
encumbrances, except liens and encumbrances permitted pursuant to Paragraph 6.4
hereof and the liens and security interests identified on Exhibit C attached
hereto. All such assets are materially covered by the insurance required under
Paragraph 5.8 hereof.
3.8 Accuracy of Information; Full Disclosure.
----------------------------------------
(a) Zany Brainy's annual consolidated financial statements for
the period ended January 30, 1999, a copy of which has been furnished to Bank,
have been prepared in accordance with GAAP and fairly present in all material
respects the financial condition of Zany Brainy and its consolidated
Subsidiaries as of the dates and for the periods covered and disclose all
liabilities of Zany Brainy and its consolidated Subsidiaries required to be
disclosed in accordance with GAAP, and there has been no material adverse change
in the financial condition or business of Zany Brainy and its consolidated
Subsidiaries taken as a whole from the date of such statements to the date
hereof.
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<PAGE>
(b) Upon its joinder to this Agreement, Zany.com's most
recently delivered financial statements a copy of which have been furnished to
Bank, have been prepared in accordance with GAAP and fairly present in all
material respects the financial condition of Zany.com and any consolidated
Subsidiaries of Zany.com as of the dates and for the periods covered and
disclose all liabilities of Zany.com and its consolidated Subsidiaries required
to be disclosed in accordance with GAAP, and there has been no material adverse
change in the financial condition or business of Zany.com and any consolidated
Subsidiaries of Zany.com taken as a whole from the date of such statements to
the date hereof.
(c) All financial statements and other documents furnished by
each Borrower to Bank pursuant to this Agreement and the other Loan Documents do
not and will not contain any untrue statement of material fact or omit to state
a material fact necessary in order to make the statements contained herein and
therein not misleading in light of the circumstances in which they were made.
There is no fact presently actually known to the Borrowers which has not been
disclosed to Bank in writing which materially and adversely affects the
business, operations or conditions (financial or otherwise) of the Borrowers.
3.9 Taxes and Assessments.
---------------------
(a) Except as set forth on Exhibit C, each Borrower has duly
and timely filed all information and tax returns and reports with any federal,
state, or local governmental taxing authority, body or agency, except for any
such returns or reports as to which the consequences of any failure to file
would not cause an adverse effect to the Borrowers in an amount greater than Two
Hundred Fifty Thousand Dollars ($250,000). All taxes, including without
limitation income, gross receipts, sales, use, excise, withholding and any other
taxes, and any governmental charges, penalties, interest or fines with respect
thereto, due and payable by any Borrower, have been paid, withheld or reserved
for in accordance with GAAP or, to the extent they relate to periods on or prior
to the date of the financial statements referenced in Paragraphs 5.2 and 5.3
hereof, are reflected as a liability on the financial statements in accordance
with GAAP, except for such failures to pay, withhold or reserve for as do not
involve amounts in excess of Fifty Thousand Dollars ($50,000), including all
penalties, interest and fines with respect thereto.
(b) Each Borrower has properly withheld all amounts required by
law to be withheld for income taxes and unemployment taxes, including without
limitation, all amounts required with respect to social security and
unemployment compensation, relating to its employees, and has remitted such
withheld amounts in a timely manner to the appropriate taxing authority, agency
or body.
3.10. Indebtedness. No Borrower has any presently outstanding
------------
Indebtedness or obligations, including contingent obligations and obligations
under leases of property from others, except the Indebtedness and obligations
described in Exhibit C hereto or in Borrowers' financial statements which have
been furnished to Bank pursuant to Paragraph 3.8, 5.2 or 5.3 hereof, and
Indebtedness permitted pursuant to Paragraph 6.1 hereof.
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<PAGE>
3.11. Management Agreements. Except as set forth on Exhibit C attached
---------------------
hereto, no Borrower is a party to any management or consulting agreements for
the provision of senior executive services to such Borrower other than
employment agreements.
3.12. Investments; Capital Structure. Each direct and indirect
------------------------------
Subsidiary of Zany Brainy is identified on Exhibit C attached hereto, which
indicates the number of shares and classes of the capital stock or partnership
interests, as applicable, of each such Subsidiary and the ownership thereof.
All such shares are validly issued, fully paid and non-assessable, and the
issuance and sale thereof are in compliance with all applicable federal and
state securities and other applicable laws; and the shareholders' ownership of
such shares of each Subsidiary is free and clear of any liens or encumbrances or
other contractual restrictions. All such partnership interests are validly
existing and the creation and sale thereof are in compliance with all applicable
federal and state securities and other applicable laws; and the partners'
ownership thereof is free and clear of any liens or encumbrances or other
contractual restrictions. No Borrower has any other Subsidiaries or any
investments in or loans to any other individuals or business entities except for
loans and investments permitted pursuant to Paragraph 6.3 or 6.8 hereof and
identified on Exhibit C hereto.
3.13. ERISA. Each Borrower and each ERISA Affiliate is in compliance
-----
in all material respects with all applicable provisions of ERISA and the
regulations promulgated thereunder; and,
(a) No Borrower nor any ERISA Affiliate maintains or contributes
to or has maintained or contributed to any multiemployer plan (as defined in
section 4001 of ERISA) under which any Borrower or any ERISA affiliate could
have any withdrawal liability which is reasonably likely to have a Material
Adverse Effect;
(b) No Borrower nor any ERISA Affiliate sponsors or maintains any
Plan under which there is an accumulated funding deficiency within the meaning
of (S)412 of the Code, whether or not waived, which is reasonably likely to have
a Material Adverse Effect;
(c) The aggregate liability for accrued benefits and other
ancillary benefits under each defined benefit pension Plan that is sponsored or
maintained by any Borrower or any ERISA Affiliate (determined on the basis of
the actuarial assumptions prescribed for valuing benefits under terminating
single-employer defined benefit plans under Title IV of ERISA) does not exceed
the aggregate fair market value of the assets under each such defined benefit
pension Plan by an amount which is reasonably likely to have a Material Adverse
Effect;
(d) The aggregate liability of each Borrower and each ERISA
Affiliate arising out of or relating to a failure of any Plan to comply with the
provisions of ERISA or the Code, is not an amount which is reasonably likely to
have a Material Adverse Effect; and
(e) There does not exist any unfunded liability (determined on
the basis of actuarial assumptions utilized by the actuary for the Plan in
preparing the most recent
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Annual Report) of any Borrower or ERISA Affiliate under any Plan providing post-
retirement life or health benefits which is reasonably likely to have a Material
Adverse Effect.
3.14. Fees and Commissions. No Borrower owes any brokers' or finders'
--------------------
fees or commissions of any kind, or knows of any claim for any brokers' or
finders' fees or commissions, in connection with any Borrower's obtaining the
Commitment or the Loan or Letters of Credit from Bank, except those provided
herein.
3.15. No Extension of Credit for Securities. No Borrower is now, nor
-------------------------------------
at any time has it been engaged principally, or as one of its principal
activities, in the business of extending or arranging for the extension of
credit for the purpose of purchasing or carrying any margin stock or margin
securities within the meaning of the regulations of the Board of Governors of
the Federal Reserve System, nor will the proceeds of the Loan be used by any
Borrower, directly or indirectly, for such purposes except those permitted
hereunder.
3.16. Hazardous Wastes, Substances and Petroleum Products.
---------------------------------------------------
(a) Each Borrower (i) has received all material permits and filed
all notifications required by the Environmental Control Statutes to carry on its
respective business(es); and (ii) is in compliance in all material respects with
all Environmental Control Statutes.
(b) Each Borrower has given any written or oral notice to the EPA
or any state or local agency with regard to any actual or imminently threatened
Release of Hazardous Substances of which such Borrower has knowledge on
properties owned, leased or operated by such Borrower or used in connection with
the conduct of its business and operations as are required under any applicable
Environmental Control Statutes.
(c) No Borrower has received written notice that it is
potentially responsible for clean-up, remediation, costs of clean-up or
remediation, fines or penalties with respect to any actual or imminently
threatened Release of Hazardous Substances pursuant to any Environmental Control
Statute.
3.17. Solvency. To the best of each Borrower's knowledge, excluding
--------
intercompany indebtedness, each Borrower other than Zany.com is and after
receipt and application of the first Advance under this Agreement will be,
solvent such that (i) the fair value of its assets (including without limitation
the fair salable value of the goodwill and other intangible property of such
Borrower) is greater than the total amount of its liabilities, including without
limitation, contingent liabilities, (ii) the present fair salable value of its
assets (including without limitation the fair salable value of the goodwill and
other intangible property of such Borrower) is not less than the amount that
will be required to pay the probable liability on their debts as they become
absolute and matured, and (iii) they are able to realize upon their assets and
pay their debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business. No Borrower
intends to, nor believes that it will, incur debts or liabilities beyond its
ability to pay as such debts and liabilities mature, and no Borrower is engaged
in a business or transaction, or about to engage in a business or transaction,
for which
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its property would constitute unreasonably small capital after giving due
consideration to the prevailing practice and industry in which it is engaged.
For purposes of this Paragraph 3.17, in computing the amount of contingent
liabilities at any time, it is intended that such liabilities will be computed
at the amount which, in light of all the facts and circumstances existing at
such time, represents the amount that reasonably can be expected to become an
actual matured liability of the applicable Borrower.
Each Borrower hereby agrees that to the extent a Borrower shall have
paid more than its proportionate share of any payment made hereunder, such
Borrower shall be entitled to seek and receive contribution from and against any
other Borrower which has not paid its proportionate share of such payment;
provided however such Borrower shall not seek any such contribution from any
other Borrower until the Loan has been paid in full in cash and the Commitment
of the Bank hereunder has been terminated. The provisions of this paragraph
shall in no respect limit the obligations and liabilities of any Borrower to
Bank, and each Borrower shall remain liable to Bank, jointly and severally, for
the full amount of Borrowers' obligations hereunder and under the other Loan
Documents.
3.18. Employee Controversies. There are no material controversies
----------------------
pending or, to the knowledge of any Borrower, threatened or anticipated between
any Borrower and any of its respective employees, and there are no labor
disputes, grievances, arbitration proceedings or any strikes, work stoppages or
slowdowns pending, or to any Borrower's knowledge, threatened between any
Borrower and its respective employees and representatives, which in either event
or which is reasonably likely to have a Material Adverse Effect.
3.19. Year 2000 Compliance. Borrowers have conducted a comprehensive
--------------------
review and assessment of their computer systems and applications, micro-
processor based goods and equipment owned or used by them in their business, and
all products currently sold by them, and are making inquiry of their material
suppliers, vendors and customers, with respect to functionality before, during
and after the year 2000 (the "Year 2000 Problem"). Borrowers have prepared a
plan to ensure that all such systems, goods, equipment and products owned or
used by them and material to the conduct of their business will be Year 2000
Compliant in a timely manner, and have provided a copy of such plan to Bank.
Borrowers reasonably believe, based on the foregoing review, assessment and
inquiry that the Year 2000 Problem will not result in a Material Adverse Effect.
3.20. Intellectual Property. Each Borrower owns, or is licensed to
---------------------
use, all trademarks, trade names, copyrights, patents and other intellectual
property material to its business, and the use thereof by Borrowers does not
infringe upon the rights of any other Person, except for any such infringements
that, individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect.
3.21. Foreign Assets Control Regulations. Neither the borrowing by
----------------------------------
Borrowers nor their use of the proceeds thereof will violate the Foreign Assets
Control Regulations, the Foreign Funds Control Regulations, the Transactions
Control Regulations, the Cuban Assets Control Regulations, the Iranian
Transaction Regulations, or the Iraqi Sanctions Regulations of the United States
Treasury Department (31 C.F.R. Subtitle B, Chapter V, as amended).
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<PAGE>
3.22. Investment Company Act. No Borrower is directly or indirectly
----------------------
controlled by or acting on behalf of any person which is an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
3.23. Public Utility Holding Company Act. No Borrower is a "public
----------------------------------
utility holding company" within the meaning of the Public Utility Holding
Company Act of 1935, as amended (the "1935 Act"), nor does the execution,
delivery and performance of this Agreement or the Note require any filing,
authorization or consent under the 1935 Act.
SECTION 4
CONDITIONS
----------
4.1. Effectiveness. The effectiveness of this Agreement shall be
-------------
subject to Bank's receipt of the following documents and satisfaction of the
following conditions, each in form and substance satisfactory to Bank:
(a) Promissory Note. The Note duly executed by Borrowers.
---------------
(b) Authorization Documents. A certificate of the secretary
-----------------------
of each Borrower attaching and certifying as to (i) the certificate or articles
of incorporation and bylaws of such Borrower; (ii) resolutions or other evidence
of authorization by the board of directors of such Borrower authorizing its
execution and full performance of this Agreement, the Note, the other Loan
Documents and all other documents and actions required hereunder; and (iii) an
incumbency certificate setting forth the name, title and specimen signature of
each officer of such Borrower who is authorized to execute the Loan Documents
and any requests or communications hereunder on behalf of such entity.
(c) Good Standing. Certificates of good standing or the
-------------
equivalent for each Borrower in its state of formation.
(d) Opinion(s) of Counsel. Opinion letter(s) from counsel
---------------------
for the Borrowers as may be reasonably satisfactory to Bank.
(e) Compliance and Borrowing Base Certificates. A completed
------------------------------------------
Compliance Certificate in the form of Exhibit E attached hereto and a completed
Borrowing Base certificate in the form of Exhibit F attached hereto, calculated
as of the end of the most recent month or most recent fiscal quarter of
Borrowers, as applicable, for which such certificates would be required
hereunder.
(f) Completion of IPO. A certificate from the chief
-----------------
financial officer of Zany Brainy stating that Zany Brainy has received at least
$35,000,000 of the proceeds of the initial public offering of 19% of shares of
common stock of Zany Brainy.
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<PAGE>
(g) Payment of Fees. Payment of all fees required by
---------------
Paragraphs 2.10 and 2.11 hereof.
(h) Payoff Letter. A payoff letter from Congress Financial
-------------
Corp. together with executed UCC-3 termination statements and other documents
relating to the release liens.
(i) L/C Agreements. The Master L/C Agreement in the form of
--------------
Exhibit G-1 attached hereto and the Electronic L/C Agreement in the form of
Exhibit G-2 attached hereto, each executed by Borrowers and Bank.
(j) Initial Advance Request. A completed Advance Form
-----------------------
pursuant to Paragraph 2.6 hereof.
(k) Insurance Certificates. Certificates of insurance with
----------------------
respect to Borrowers' and the Subsidiaries' property, casualty and liability
insurance undertaking to furnish Bank with reasonable notice and opportunity to
cure any non-payment of premiums prior to termination of coverage.
(l) Consents. Receipt of all required consents and
--------
approvals under applicable law or contract.
(m) Lien Searches. UCC, tax, lien, and judgment searches
-------------
against Borrowers in those offices and jurisdictions as Bank shall reasonably
request.
(n) Other Documents. Such additional documents as Bank
---------------
reasonably may request.
4.2. Advances. The obligation of Bank to make Advances under the
--------
Commitment shall be subject to Borrowers' compliance with Paragraph 2.6 hereof
and it shall be a condition to Bank's obligation hereunder to make any such
Advance that (a) the representations and warranties set forth herein and in the
other Loan Documents shall be true and correct in all material respects as if
made on the date of such Advance, (b) no Event of Default or Default shall have
occurred and not have been waived on the date of such Advance or be caused by
such Advance, (c) all fees required pursuant to Paragraphs 2.10 and 2.11 hereof
have been paid as and when due, and (d) there shall have been no Material
Adverse Effect since the date of the audited financial statements of Zany Brainy
and its consolidated Subsidiaries most recently delivered pursuant to this
Agreement, and no event or circumstance (or combination of events or
circumstances) shall have occurred which is reasonably likely to have a Material
Adverse Effect.
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<PAGE>
SECTION 5
AFFIRMATIVE COVENANTS
---------------------
Borrowers covenant and agree that so long as the Commitment of Bank to
Borrowers or any Indebtedness of Borrowers to Bank is outstanding, each of the
Borrowers will and will cause each Subsidiary to (and with respect to Paragraph
5.13, will cause each ERISA Affiliate to):
5.1. Existence and Good Standing. Preserve and maintain (a) its
---------------------------
existence as a corporation, partnership or other legal entity, as specified in
Exhibit C attached hereto (provided, however, that Subsidiaries may merge with
and into Zany Brainy or other Subsidiaries), and its good standing in all states
in which the nature of its business or assets requires such qualification except
for such lapses in qualification which are not, either singly or in the
aggregate, reasonably likely to have a Material Adverse Effect; and (b) the
effectiveness and validity of all its franchises, licenses, permits,
certificates of compliance or grants of authority required in the conduct of its
business, except for such instances of ineffectiveness or invalidity as would
not, either singly or in the aggregate, have a Material Adverse Effect.
5.2. Interim Financial Statements. Furnish to Bank within forty-five
----------------------------
(45) days of the end of each of the first three quarterly periods in each fiscal
year of Borrowers and Zany.com, if joined as provided in Paragraph 5.20(b)
hereof, unaudited quarterly consolidated financial statements, as applicable, in
form and substance as reasonably required by Bank, including (i) a consolidated
balance sheet, (ii) a consolidated statement of income, and (iii) a statement of
cash flows, prepared in accordance with GAAP consistently applied (except that
such interim statements need not contain footnotes and may be subject to year-
end adjustments).
5.3. Annual Financial Statements. Furnish to Bank within ninety (90)
---------------------------
days after the close of each fiscal year audited consolidated annual financial
statements, including the information required under Paragraph 5.2 hereof, which
financial statements shall be prepared in accordance with GAAP and shall be
certified without qualification (except with respect to changes in GAAP as to
which Borrowers', or Zany.com's, if applicable, independent certified public
accountants have concurred) by any one of the "big five" accounting firms or an
independent certified public accounting firm reasonably satisfactory to Bank;
and cause Bank to be furnished, at the time of the completion of the annual
audit, with copies of any management letters prepared by such accountants and
with a certificate signed by such accountants to the effect that during the
course of such audit, such accountants have discovered no information which
would lead them to believe that Borrowers, either singly or in the aggregate,
are not in compliance with any covenant set forth herein.
5.4. Compliance Certificate. At the time of delivery of quarterly and
----------------------
annual financial statements pursuant to Paragraph 5.2 and 5.3 hereof, deliver to
Bank a certificate in the form of Exhibit E attached hereto executed by the
chief financial officer or controller of Zany Brainy, showing the calculation of
the covenants set forth in Paragraph 5.14 through 5.16 hereof, and upon and
after the joinder of Zany.com pursuant to Paragraph 5.20 hereof, compliance with
the Zany.com Sublimit.
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<PAGE>
5.5. Borrowing Base Certificate. Within fifteen (15) days after the
--------------------------
end of each month or upon request by Bank at any other time, furnish to Bank a
Borrowing Base Certificate in the form of Exhibit F attached hereto executed by
the chief financial officer or controller of Zany Brainy.
5.6. Additional Information. Deliver to Bank promptly upon
----------------------
transmission thereof copies of all financial statements, proxy statements,
notices and reports sent to shareholders of Borrowers and Zany.com, and copies
of any registration statements (without exhibits), filed with the Securities and
Exchange Commission (or any governmental body or agency succeeding to the
functions of the Securities and Exchange Commission), including without
limitation, Forms 10Q and Forms 10K, and copies of all auditors' annual
management letters delivered to Borrowers.
5.7. Books and Records. Keep and maintain adequate books and records
-----------------
of account in accordance with GAAP and make or cause the same to be made
available to Bank or its agents or nominees at any reasonable time during normal
business hours upon reasonable notice for inspection and to make extracts
thereof and permit bank or its agents or nominees to discuss contents of same
with senior officers of Borrowers and also with outside auditors and accountants
of Borrowers.
5.8. Insurance. Keep and maintain all of their property and assets in
---------
good order and repair (and make such property available to Bank or its agents or
nominees at any reasonable time during normal business hours upon reasonable
notice for inspection) and keep such property and assets covered by insurance
with reputable and financially sound insurance companies against such hazards
and in such amounts as is customary in the industry, under policies requiring
the insurer to furnish reasonable notice to Bank and opportunity to cure any
non-payment of premiums prior to termination of coverage.
5.9. Litigation; Event of Default. Notify Bank in writing immediately
----------------------------
of: (i) the institution of any litigation, the commencement of any
administrative proceedings, the happening of any event or the assertion or
threat of any claim, to the extent that any of the foregoing could reasonably be
expected to have a Material Adverse Effect and (ii) the occurrence of any Event
of Default or Default hereunder.
5.10. Taxes. Pay and discharge all taxes, assessments or other
-----
governmental charges or levies imposed on it or any of its property or assets
prior to the date on which any material penalty for non-payment or late payment
is incurred, unless the same are currently being contested in good faith by
appropriate proceedings, diligently prosecuted and covered by appropriate
reserves maintained in accordance with GAAP.
5.11. Costs and Expenses. Pay or reimburse Bank for all costs and
------------------
expenses (including but not limited to reasonable attorneys' fees and
disbursements) Bank may pay or incur in connection with the preparation and
review of this Agreement and all other documentation related thereto, and pay or
reimburse Bank for all costs, liabilities and expenses (including but not
limited to reasonable attorneys' fees and disbursements) associated with all
waivers, consents and amendments in connection therewith, and collection or
enforcement of the
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<PAGE>
Loan, including without limitation any fees and disbursements incurred in
defense of or to retain amounts of principal, interest or fees paid or in
connection with any audit or examination of the Borrowers. All obligations
provided for in this Paragraph 5.11 shall survive any termination of this
Agreement or the Commitment and the repayment of the Loan.
5.12. Compliance; Notification.
------------------------
(a) Comply in all material respects with all local, state and
federal laws and regulations applicable to its business (including the
Environmental Control Statutes), including without limitation all laws and
regulations of the Local Authorities, and with the provisions and requirements
of all franchises, permits, certificates of compliance, approval and need issued
by regulatory authorities and with other like grants of authority held by any
Borrower; and notify Bank immediately in detail of any actual or alleged failure
to comply with or perform, breach, violation or default under any such laws or
regulations or under the terms of any of such franchises, licenses or grants of
authority, or of the occurrence or existence of any facts or circumstances which
with the passage of time, the giving of notice or otherwise could create such a
breach, violation or default or could occasion the termination of any of such
franchises, licenses or grants of authority, to the extent that any of the
foregoing could reasonably be expected to have a Material Adverse Effect.
(b) With respect to the Environmental Control Statutes,
promptly notify Bank when, in connection with the conduct of any Borrower's
business or operations, any person (including, without limitation, EPA or any
state or local agency) provides oral or written notification to any Borrower, or
any Borrower otherwise becomes aware, of a condition with regard to an actual or
imminently threatened Release of Hazardous Substances which could reasonably be
expected to have a Material Adverse Effect; and notify Bank in detail promptly
upon the receipt by a Borrower of an assertion of liability under the
Environmental Control Statutes, of any actual or alleged failure to comply with,
failure to perform, breach, violation or default under any such statutes or
regulations which could reasonably be expected to have a Material Adverse Effect
or of the occurrence or existence of any facts, events or circumstances which
with the passage of time, the giving of notice, or both, could create such a
failure to perform, breach, violation or default.
5.13. ERISA. (a) Comply in all material respects with the provisions
-----
of ERISA to the extent applicable to any Plan maintained for the employees of
any Borrower or any ERISA Affiliate; (b) do or cause to be done all such acts
and things that are required to maintain the qualified status of each Plan and
tax exempt status of each trust forming part of such Plan; (c) not incur any
material accumulated funding deficiency (within the meaning of ERISA and the
regulations promulgated thereunder), or any material liability to the PBGC (as
established by ERISA); (d) not permit any event to occur with respect to any
Plan sponsored by any Borrower or any ERISA Affiliate (i) as described in
Section 4042 of ERISA or (ii) which may result in the imposition of a lien on
its properties or assets; and (e) notify Bank in writing promptly after it has
come to the attention of senior management of any Borrower of the written
assertion or threat of any event described in Section 4042 of ERISA (relating to
the soundness of a Plan) (including any "reportable event" described in Section
4042(a)(3) of ERISA to the extent the notice requirement is not waived by the
PBGC) or the PBGC's ability to assert a material liability
-33-
<PAGE>
against it or impose a lien on any Borrower's, or any ERISA Affiliate's
properties or assets; and (f) refrain from engaging in any prohibited
transactions or actions causing possible liability under Section 502 of ERISA.
5.14. Fixed Charge Coverage Ratio. Maintain as of the last day of each
---------------------------
Rolling Period a Fixed Charge Coverage Ratio for Zany Brainy and its
consolidated Subsidiaries (other than Zany.com) of not less than the ratio set
forth below for the corresponding periods set forth below:
Period Minimum Ratio
------ -------------
Date of Agreement through the
third quarter of 1999 1.10 to 1.0
The fourth quarter of 1999
through the third quarter of
2000 1.25 to 1.0
The fourth quarter of 2000 and
the last day of each Rolling
Period thereafter 1.50 to 1.0
5.15. Leverage Ratio. Maintain as of the last day of each fiscal
--------------
quarter a Leverage Ratio for Zany Brainy and its consolidated Subsidiaries
(other than Zany.com) of not more than .40 to 1.0.
5.16. Minimum Tangible Net Worth. Maintain as of the date of the
--------------------------
initial Advance a Minimum Tangible Net Worth of Zany Brainy and its consolidated
Subsidiaries (other than Zany.com) of not less than Seventy Million Dollars
($70,000,000), and for each fiscal year of Borrowers' ending after January,
1999, maintain as of the last day of each fiscal year a Minimum Tangible Net
Worth of not less than the required Minimum Tangible Net Worth for such fiscal
year plus seventy-five percent (75%) of net income for Zany Brainy and its
consolidated Subsidiaries (other than Zany.com) for such fiscal year, without
deduction for losses.
5.17. Borrowing Base. Maintain at all times the outstanding principal
--------------
balance of the Loan plus, without duplication, the amount available to be drawn
under all outstanding Letters of Credit and the amount of any unreimbursed draws
for Letter of Credit, in an amount less than or equal to the Borrowing Base.
5.18. Management Changes. Notify Bank in writing within ten (10)
------------------
Business Days after the death, disability, dismissal or voluntary resignation of
Zany Brainy senior executive officers.
5.19. Transactions Among Affiliates. Cause all transactions between
-----------------------------
and among it and its Affiliates, other than transactions among the Borrowers, to
be on an arms-length basis
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<PAGE>
and on such terms and conditions as are customary in the applicable industry
between and among unrelated entities.
5.20. Joinders.
--------
(a) If any Subsidiary is formed or acquired, cause such
Subsidiary to become a Borrower hereunder by the execution of a joinder to this
Agreement and the Note, together with updates to the applicable disclosure
exhibits to reflect such Subsidiary (which disclosure shall be in form and
substance satisfactory to Bank) and deliver such other documents as Bank may
reasonably require in connection therewith, including without limitation
secretary's certificates, lien searches and opinions of counsel; and
(b) not less than ten (10) Business Days prior to the request
for an Advance or issuance of a Letter of Credit by or for the benefit of
Zany.com, Zany.com shall become a Borrower hereunder by the execution of a
joinder to this Agreement and the Note, together with updates to the applicable
disclosure exhibits to reflect Zany.com matters (which disclosure shall be in
form and substance satisfactory to Bank) and shall deliver such other documents
as Bank may reasonably require in connection therewith, including without
limitation secretary's certificates, lien searches and opinions of counsel.
5.21. Year 2000 Compliance. Take all action necessary to assure that
--------------------
Borrowers' computer systems and applications, micro-processor based goods and
equipment owned or used by them in their business, and all products sold by them
will be Year 2000 Compliant in a timely manner; and use reasonable best efforts
to assure the Year 2000 Compliance of their material vendors and suppliers or to
assure that failures to be Year 2000 Compliant by such vendors and suppliers
will not have a Material Adverse Effect. Borrowers shall provide to Bank any
material updates or revisions to its plan for Year 2000 Compliance delivered
pursuant to Paragraph 3.19 and notice of any material increase in the estimated
costs to Borrowers of achieving Year 2000 Compliance in accordance with such
plan; and, at the request of Bank, Borrowers shall provide Bank assurances
acceptable to Bank regarding the Year 2000 Compliance and/or contingency plans
related thereto, of Borrowers and their material vendors and suppliers.
5.22. Conduct of Business. Continue to conduct its business(es)
-------------------
principally in retailing services.
5.23. Zany.com Sublimit. Maintain at all times the outstanding
-----------------
principal balance of Loans to Zany.com plus, without duplication, the amount
available to be drawn under all outstanding Letters of Credit for the benefit of
Zany.com and the amount of unreimbursed draws for Letters of Credit for the
benefit of Zany.com, in an amount less than or equal to the Zany.com Sublimit.
5.24. Other Information. Provide Bank with any other documents and
-----------------
information, financial or otherwise, reasonably requested by Bank from time to
time.
SECTION 6
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<PAGE>
NEGATIVE COVENANTS
------------------
So long as any Commitment or any Indebtedness of Borrowers to Bank
remains outstanding hereunder, Borrowers covenant and agree that without Bank's
prior written consent, each Borrower will not, and will not permit any
Subsidiary to:
6.1. Indebtedness. Borrow any monies or create any Indebtedness
------------
except: (i) borrowings from Bank hereunder; (ii) trade Indebtedness in the
normal and ordinary course of business for value received; (iii) Indebtedness
incurred to purchase or lease fixed or capital assets, provided, that the
aggregate original principal amount of such Indebtedness incurred in any fiscal
year shall not exceed in the aggregate Five Million Dollars ($5,000,000); (iv)
guaranties permitted pursuant to Paragraph 6.2 hereof; (v) Indebtedness due to
other Borrowers and Subsidiaries, provided however, that Indebtedness of
Zany.com to Zany Brainy, together with investments in Zany.com by Zany Brainy,
shall not exceed: (A) in any twelve (12) month period, Five Million Dollars
($5,000,000); and (B) in the aggregate, Ten Million Dollars ($10,000,000).
6.2. Guaranties. Guarantee or assume or agree to become liable in any
----------
way, either directly or indirectly, for any Indebtedness or liability of others,
whether or not contingent, except (i) to endorse checks or drafts in the
ordinary course of business and (ii) any Borrower may guaranty Indebtedness of
another Borrower which is permitted pursuant to Paragraph 6.1 hereof.
6.3. Loans. Make any loans or advances to others, other than: (i)
-----
investments and advances permitted by Paragraph 6.8 hereof; (ii) loans or
advances to employees of Borrowers not to exceed in the aggregate $1,000,000;
(iii) loans by and among Borrowers and Subsidiaries, provided however, that
loans from Zany Brainy to Zany.com, together with investments in Zany.com by
Zany Brainy, shall not exceed: (A) in any twelve (12) month period, Five Million
Dollars ($5,000,000); and (B) in the aggregate, Ten Million Dollars.
6.4. Liens and Encumbrances. Create, permit or suffer the creation of
----------------------
any liens, security interests, or any other encumbrances on (including any
conditional sales arrangement with respect to) any of its property, real or
personal, except (i) liens arising in favor of sellers or lessors for
Indebtedness and obligations incurred to purchase or lease fixed or capital
assets permitted under Paragraph 6.1(iii) hereof, provided, however, that such
liens secure only the indebtedness and obligations created thereunder and are
limited to the assets purchased or leased pursuant thereto and the proceeds
thereof; (ii) mechanic's and workman's liens, liens for taxes, assessments or
other governmental charges, federal, state or local, which are then being
currently contested in good faith by appropriate proceedings and are covered by
appropriate reserves maintained in accordance with GAAP; (iii) pledges or
deposits to secure obligations under workmen's compensation, unemployment
insurance or social security laws or similar legislation; (iv) deposits to
secure performance or payment bonds, bids, tenders, contracts, leases,
franchises, or public and statutory obligations required in the ordinary course
of business; (v) deposits to secure surety, appeal or custom bonds required in
the ordinary course of business; (vi) deposits to secure Leases; (vii) sales on
lay-away or similar arrangements in the ordinary course of business; (viii)
liens existing on the date hereof and set forth on Exhibit C attached hereto;
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<PAGE>
(ix) notwithstanding anything to the contrary contained in any Loan Document,
each Borrower may enter into Leases which create security interests in or liens
on (A) such Borrower's interest in such Leases and (B) such Borrower's personal
property located within the underlying real property in favor of the landlord
and/or mortgagee of such underlying real property; (x) liens constituting
encumbrances in the nature of zoning restrictions, easements, rights of way and
rights of access and rights or restrictions of record on the use of real
property, which in the aggregate are not substantial in amount and which do not,
in any case, detract from the value of such property or impair these thereof in
the ordinary conduct of business and (xi) judgment or similar liens arising in
connection with court proceedings, provided that the execution or enforcement of
such liens is effectively stayed, the claims secured thereby are not in excess
of $1,000,000 and are being actively contested in good faith and by appropriate
proceedings and such reserve or appropriate provision, if any, as shall be
required by GAAP shall have been made therefor.
6.5. Additional Negative Pledge. Agree or covenant with or promise
--------------------------
any person or entity other than Bank that it will not pledge its assets or
properties or otherwise grant any liens, security interests or encumbrances on
its property other than in favor of persons benefitting from a Lien permitted by
Section 6.4(i) and which negative pledge is limited to the assets subject to
such Lien.
6.6. Restricted Payments. Make any Restricted Payments.
-------------------
6.7. Transfer of Assets; Liquidation.
-------------------------------
(a) Sell, lease, transfer or otherwise dispose of all or
substantially all of its assets, real or personal, other than: (i) to another
Borrower; (ii) in transactions in the normal and ordinary course of business for
value received; or (iii) a sale of assets no longer used or usable in the
business of such Borrower; or
(b) Discontinue, liquidate, or change in any material
respect any substantial part of its operations or business(es).
6.8. Acquisitions and Investments. Purchase or otherwise
----------------------------
acquire (including without limitation by way of share exchange) any part or
amount of the capital stock, partnership interests, or assets of, or make any
investments in, any other firm or corporation, other than Permitted Investments;
or enter into any new business activities or ventures not reasonably related to
its present business; or merge or consolidate with or into any other firm or
corporation which is not a Borrower; or create any Subsidiary; provided, however
that in the absence of a Default or an Event of Default at such time and if such
transaction will not give rise to a Default or an Event of Default: (A)
Borrowers may create additional Subsidiaries, provided that (i) all of the
outstanding capital stock of such Subsidiary is owned by a Borrower or
wholly-owned Subsidiary, (ii) Borrowers provide to Bank, with a copy to its
counsel, not less than thirty (30) days prior written notice of the proposed
Subsidiary creation, indicating the purpose thereof and any supplemental
disclosure that will be required pursuant to the representations and warranties
set forth herein, (iii) Borrowers comply with the terms and conditions of
Paragraph 5.20 hereof, and (iv) taking into account any supplement or amendment
to Exhibit C hereto which is
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<PAGE>
acceptable to Bank, all of the representations and warranties set forth herein
are true and correct in all material respects prior to and following the
acquisition or creation of such Subsidiary; (B) Borrowers may make Permitted
Acquisitions; and (C) Zany Brainy may make investments in Zany.com which,
together will all loans and advances from Zany Brainy to Zany.com, shall not
exceed: (i) in any twelve month period, Five Million Dollars ($5,000,000), and
(ii) the aggregate, Ten Million Dollars ($10,000,000).
6.9. Payments to Affiliates. Pay any salaries, compensation,
----------------------
management fees, consulting fees, service fees, licensing fees, or other similar
payments to Affiliates of any Borrower (except other Borrowers) other than on
terms and conditions substantially as favorable to the Borrowers as would be
obtainable by it in a comparable arm's length transaction with a person other
than an Affiliate.
6.10. Use of Proceeds. Except as permitted by Paragraph 6.6 hereof,
---------------
use any of the proceeds of the Loan, directly or indirectly, to purchase or
carry margin securities within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System; or engage as its principal business in
the extension of credit for purchasing or carrying such securities.
6.11. Maximum Capital Expenditures. Make Capital Expenditures in any
----------------------------
fiscal year in excess of Twenty-Five Million Dollars ($25,000,000). Amounts not
expended in any fiscal year may be expended in the following fiscal year.
SECTION 7
RIGHT OF SET-OFF
----------------
7.1. Funds of Borrowers in Possession of Bank. As security for the
----------------------------------------
payment of any and all of Borrowers' Indebtedness and obligations to Bank,
whether matured or unmatured, now existing or hereafter incurred or created
hereunder or otherwise, Borrowers hereby grant to Bank a security interest in
and lien upon all funds, balances or other property of any kind of the
Borrowers, or in which the Borrowers have an interest, limited to the interest
of the Borrowers therein, whether now or hereafter in the possession, custody or
control of Bank.
7.2. Right of Set-off. Bank is hereby authorized at any time and from
----------------
time to time, to set-off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other Indebtedness at
any time owing by Bank to or for the credit or the account of a Borrower against
any and all of the obligations of a Borrower now or hereafter existing under
this Agreement, the Note or any other Loan Document, irrespective of whether
Bank shall have made any demand under this Agreement, or the Note or such other
Loan Document and although such obligations may be unmatured and irrespective of
whether Bank is otherwise fully secured. Bank agrees promptly to notify the
applicable Borrower after any such set-off and application made by Bank;
provided, however, that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of Bank under this Section
7 are in addition to other rights and remedies (including, without limitation,
other rights of set-off) which Bank may have.
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<PAGE>
SECTION 8
DEFAULT
-------
8.1. Events of Default. Each of the following events shall be an
-----------------
Event of Default hereunder:
(a) If Borrowers shall fail to pay when due any installment
of principal or any interest, fees, costs, expenses or any other sum payable to
Bank hereunder and, in the case of interest or non-principal payments, such
failure shall remain unremedied for five (5) days after the date due; or
(b) If any representation or warranty made herein or in any
other Loan Document or in connection herewith or therewith or in any statement,
certificate or other document furnished hereunder or thereunder is false or
misleading in any material respect when made; or
(c) If any Borrower shall default (after expiration of any
applicable cure or grace periods) in the payment or performance of any
Indebtedness for borrowed money to another either singly or in the aggregate in
excess of Five Hundred Thousand Dollars ($500,000) whether now or hereafter
incurred, or shall default (after expiration of any applicable cure or grace
periods) in the payment or performance of any other Indebtedness or obligation
which is reasonably likely to result in an obligation in excess of Five Hundred
Thousand Dollars ($500,000); or
(d) If there shall be a default in or failure to observe
the covenants set forth in Paragraphs 5.14 through 5.17 hereof or in Section 6
hereof; or
(e) If any Borrower shall default in the performance of any
other agreement or covenant contained herein or in any other Loan Document
(other than as provided in subparagraphs (a), (b) or (d) above) or in any
document executed or delivered in connection herewith or therewith, and such
default shall continue uncured for thirty (30) days after notice thereof to
Borrowers given by Bank; or
(f) If a Change of Control shall occur; or
(g) If Zany Brainy ceases to own, directly or indirectly
100% of the outstanding capital stock of each Subsidiary other than Zany.com or
(h) If custody or control of any substantial part of the
property of any Borrower or Subsidiary shall be assumed by any governmental
agency or any court of competent jurisdiction at the instance of any
governmental agency; if any license, franchise or agreement of a Borrower or
Subsidiary shall be suspended, revoked, not renewed or otherwise terminated, the
loss of which would reasonably be expected to have a Material Adverse Effect; or
if any governmental regulatory authority or judicial body shall make any other
final non-appealable determination the effect of which would have Material
Adverse Effect; or
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<PAGE>
(i) If any Borrower or Subsidiary becomes insolvent,
bankrupt or generally fails to pay its debts as such debts become due; is
adjudicated insolvent or bankrupt; admits in writing its inability to pay its
debts; or shall suffer a custodian, receiver or trustee for it or substantially
all of its property to be appointed and if appointed without its consent, not be
discharged within sixty (60) days; makes a general assignment for the benefit of
creditors; or suffers proceedings under any law related to bankruptcy,
insolvency, liquidation or the reorganization, readjustment or the release of
debtors to be instituted against it and if contested by it not dismissed or
stayed within sixty (60) days; if proceedings under any law related to
bankruptcy, insolvency, liquidation, or the reorganization, readjustment or the
release of debtors is instituted or commenced by any Borrower or Subsidiary; if
any order for relief is entered relating to any of the foregoing proceedings; if
any Borrower or Subsidiary shall call a meeting of its creditors with a view to
arranging a composition or adjustment of its debts; or if any Borrower or
Subsidiary shall by any act or failure to act indicate its consent to, approval
of or acquiescence in any of the foregoing; or
(j) any event or condition shall occur or exist with
respect to any activity or substance regulated under the Environmental Control
Statutes and as a result of such event or condition, Borrowers have incurred or
in the opinion of Borrowers are reasonably likely to incur liabilities that
exceed by Five Hundred Thousand Dollars ($500,000) or more the insurance
proceeds received or to be received in connection with such liability; or
(k) if any judgment, writ, warrant or attachment or
execution or similar process which calls for payment or presents liability that
exceeds by Five Hundred Thousand Dollars ($500,000) or more the insurance
proceeds received or to be received in connection with such liability shall be
rendered, issued or levied against any Borrower or its respective property and
such process shall not be paid, waived, stayed, vacated, discharged, settled,
satisfied or fully bonded within sixty (60) days after its issuance or levy
unless such judgment is covered by insurance and the insurer has acknowledged
coverage in writing with respect thereto; or
(l) the aggregate liability of one or more Plans has
increased after the date of this Agreement in an amount in excess of Five
Hundred Thousand Dollars ($500,000) due to any "reportable event" described in
Section 4043 of ERISA..
8.2. Remedies. Upon the happening of any Event of Default and at any
--------
time thereafter, and by notice by Bank to Borrowers (except if an Event of
Default described in Paragraph 8.1(i) shall occur with respect to any Borrower,
in which case acceleration of the Loan and termination of the Commitment shall
occur automatically without notice), Bank may (i) terminate the Commitment, and
(ii) declare the entire unpaid balance, principal, interest, fees, and other
amounts of all Indebtedness of Borrowers to Bank, hereunder or otherwise, to be
immediately due and payable. Upon such declaration, Bank shall have the
immediate right to enforce or realize on any collateral security granted
therefor in any manner or order it deems expedient without regard to any
equitable principles of marshaling or otherwise. In addition to any rights
granted hereunder or in any of the Loan Documents delivered in connection
herewith, Bank shall have all the rights and remedies granted by any applicable
law, all of which shall be cumulative in nature.
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<PAGE>
SECTION 9
MISCELLANEOUS
-------------
9.1. Indemnification and Release Provisions. Borrowers hereby agree
--------------------------------------
to defend Bank and its directors, officers, agents, employees and counsel from,
and hold each of them harmless against, any and all losses, liabilities
(including without limitation settlement costs and amounts, transfer taxes,
documentary taxes, or assessments or charges made by any governmental
authority), claims, damages, interest judgments, costs, or expenses, including
without limitation reasonable fees and disbursements of counsel, incurred by any
of them arising out of claims by any third party relating to or in connection
with or by reason of this Agreement or any other Loan Document, the Commitment,
the issuance or negotiation of any Letters of Credit, or the making of the Loan,
other than those resulting primarily from any such party's own wilful misconduct
or gross negligence, including without limitation, any and all losses,
liabilities, claims, damages, interests, judgments, costs or expenses relating
to or arising under any Environmental Control Statute or the application of any
such Statute to any Borrower's properties or assets. Borrowers hereby release
Bank and its directors, officers, agents, employees and counsel from any and all
claims for loss, damages, costs or expenses caused or alleged to be caused by
any act or omission on the part of any of them other than those resulting
primarily from any such party's own wilful misconduct or gross negligence. All
obligations provided for in this Paragraph 9.1 shall survive any termination of
this Agreement or the Commitment and the repayment of the Loan.
9.2. Participations and Assignments. Borrowers hereby acknowledge and
------------------------------
agree that Bank may at any time: (a) grant participations in all or any portion
the Commitment or the Loan or the Note or of its right, title and interest
therein or in or to this Agreement (collectively, "Participations") to any other
lending office or to any other bank, lending institution or other entity which
has the requisite sophistication to evaluate the merits and risks of investments
in Participations ("Participants"); provided, however, that: (i) all amounts
payable by Borrowers hereunder shall be determined as if Bank had not granted
such Participation; and (ii) any agreement pursuant to which Bank may grant a
Participation: (x) shall provide that Bank shall retain the sole right and
responsibility to enforce the obligations of Borrowers hereunder including,
without limitation, the right to approve any amendment, modification or waiver
of any provisions of this Agreement; (y) such participation agreement may
provide that Bank will not agree to any modification, amendment or waiver of
this Agreement without the consent of the Participant if such modification,
amendment or waiver would reduce the principal of or rate of interest on the
Loan or postpone the date fixed for any payment of principal of or interest on
the Loan; and (z) shall not relieve Bank from its obligations, which shall
remain absolute, to make Advances hereunder; and (b) assign all or any portion
of its rights under the Loan, including an assignment to a Federal Reserve Bank.
Borrowers may not assign or transfer their rights or obligations hereunder to
any other party, including by operation of law, without the express written
consent of Bank.
-41-
<PAGE>
9.3. Binding and Governing Law. This Agreement and all documents
-------------------------
executed hereunder shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns and, except as may be
required by mandatory provisions of applicable law, shall be governed as to
their validity, interpretation and effect by the laws of the Commonwealth of
Pennsylvania without reference to conflict of laws principles.
9.4. Survival. All agreements, representations, warranties and
--------
covenants of Borrowers contained herein or in any documentation required
hereunder shall survive the execution of this Agreement and the making of the
Loan hereunder, and except for Paragraphs 5.11 and 9.1 which provide otherwise,
will continue in full force and effect as long as the Commitment or any Letter
of Credit remains in effect or any Indebtedness or other obligation of Borrowers
to Bank remains outstanding.
9.5. No Waiver; Delay. If Bank shall waive any power, right or remedy
----------------
arising hereunder or under any applicable law, such waiver shall not be deemed
to be a waiver upon the later occurrence or recurrence of any of said events
with respect to Bank. No delay by Bank in the exercise of any power, right or
remedy shall, under any circumstances, constitute or be deemed to be a waiver,
express or implied, of the same and no course of dealing between the parties
hereto shall constitute a waiver of Bank's powers, rights or remedies. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
9.6. Modification; Waiver. Except as otherwise provided in this
--------------------
Agreement, no modification or amendment hereof, or waiver or consent hereunder,
shall be effective unless made in a writing signed by appropriate officers of
the parties hereto.
9.7. Headings. The various headings in this Agreement are inserted
--------
for convenience only and shall not affect the meaning or interpretation of this
Agreement or any provision hereof.
9.8. Notices. Any notice, request or consent required hereunder or in
-------
connection herewith shall be deemed satisfactorily given when received if in
writing and delivered by hand, mailed (registered or certified mail) or sent by
facsimile transmission (with confirmation of transmission) to Bank or to any
Borrower at the respective addresses or telecopier numbers set forth below, or
to any party at such other addresses or telecopier numbers as may be given by
any party to the others in writing:
If to any Borrower:
Zany Brainy, Inc.
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attention: Howard B. Cates, III
Telecopier: 610-896-3684
with a copy to:
-42-
<PAGE>
Zany Brainy Legal Department
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attention: Dan Kaufman, Esq.
Telecopier: 610-896-3684
and:
Morgan, Lewis & Bockius, LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Michael J. Pedrick, Esq.
Telecopier: 215-963-5299
if to Bank:
First Union National Bank
One South Penn Square
PA 4819
Philadelphia, PA 19107-7618
Attention: Irene Rosen Marks
Telecopier: 215-973-7671
with a copy to:
Pepper Hamilton LLP
3000 Two Logan Square
18th & Arch Streets
Philadelphia, PA 19103-2799
Attention: Lisa D. Kabnick, Esq.
Telecopier: 215-981-4750
Failure to provide a copy of any notice or other communication to counsel as
provided above shall not affect the validity or effect of such notice or other
communication.
9.9. Payment on Non-Business Days. Whenever any payment to be made
----------------------------
hereunder shall be stated to be due on a day other than a Business Day, such
payment may be made on the next succeeding Business Day, provided however that
such extension of time shall be included in the computation of interest due in
conjunction with such payment or other fees due hereunder, as the case may be.
9.10. Time of Day. All time of day restrictions imposed herein shall
-----------
be calculated using Bank's local time.
9.11. Severability. If any provision of this Agreement or the
------------
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of
-43-
<PAGE>
this Agreement and the application of such provisions to other persons or
circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.
9.12. Counterparts. This Agreement may be executed in any number of
------------
counterparts with the same effect as if all the signatures on such counterparts
appeared on one document, and each such counterpart shall be deemed to be an
original.
9.13. Arbitration. Upon demand of any party hereto, whether made
-----------
before or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to this Agreement or any
other Loan Document ("Disputes") between or among parties to this Agreement
shall be resolved by binding arbitration as provided herein. Institution of a
judicial proceeding by a party does not waive the right of that party to demand
arbitration hereunder. Disputes may include, without limitation, tort claims,
counterclaims, disputes as to whether a matter is subject to arbitration, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims arising out of or connected with the transaction reflected by
this Agreement.
Arbitration shall be conducted under and governed by the Commercial
Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All
arbitration hearings shall be conducted in the city in which the office of Bank
first stated above is located. The expedited procedures set forth in Rule 53,
et seq. of the Arbitration Rules shall be applicable to claims of less than
- -- ---
$1,000,000. All applicable statutes of limitation shall apply to any Dispute. A
judgment upon the award may be entered in any court having jurisdiction. The
panel from which all arbitrators are selected shall be comprised of licensed
attorneys. The single arbitrator selected for expedited procedure shall be a
retired judge from the highest court of general jurisdiction, state or federal,
of the state where the hearing will be conducted or if such person is not
available to serve, the single arbitrator may be a licensed attorney.
9.14. Consent to Jurisdiction and Service of Process. Each Borrower
----------------------------------------------
irrevocably appoints each officer of Zany Brainy as its attorney upon whom may
be served any notice, process or pleading in any action or proceeding against it
arising out of or in connection with this Agreement, the Note, any other Loan
Document or any Letter of Credit; each Borrower hereby consents that any action
or proceeding against it be commenced and maintained in any court within the
Commonwealth of Pennsylvania or in the United States District Court for the
Eastern District of Pennsylvania by service of process on any officer of Zany
Brainy; and each Borrower agrees that the courts of the Commonwealth of
Pennsylvania and the United States District Court for the Eastern District of
Pennsylvania shall have jurisdiction with respect to the subject matter hereof
and the person of each Borrower.
Notwithstanding the foregoing, Bank, in its absolute discretion, may also
initiate proceedings in the courts of any other jurisdiction in which any
Borrower may be found or in which any of its properties may be located.
9.15. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
--------------------
KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY
-44-
<PAGE>
RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON
OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE NOTE, OR
ANY OTHER LOAN DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF BANK. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR BANK'S ENTERING INTO THIS AGREEMENT.
-45-
<PAGE>
9.16. ACKNOWLEDGMENTS. EACH BORROWER ACKNOWLEDGES THAT IT HAS HAD THE
---------------
ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS AGREEMENT AND,
SPECIFICALLY, PARAGRAPH 9.14 HEREOF, AND FURTHER ACKNOWLEDGES THAT THE MEANING
AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL HAVE BEEN FULLY EXPLAINED TO
SUCH BORROWER BY SUCH COUNSEL.
IN WITNESS WHEREOF, the undersigned, by their duly authorized
officers, as applicable, have executed this Agreement the day and year first
above written.
ATTEST: ZANY BRAINY, INC.
By: _______________________ By: ___________________________
Name: Name:
Title: Title:
ATTEST: CHILDREN'S PRODUCTS, INC.
By: _______________________ By: ___________________________
Name: Name:
Title: Title:
ATTEST: CHILDREN'S DEVELOPMENT INC.
By: _______________________ By: ___________________________
Name: Name:
Title: Title:
ATTEST: CHILDREN'S DISTRIBUTION, L.L.C.
By: _______________________ By: ___________________________
Name: Name:
Title: Title:
FIRST UNION NATIONAL BANK
By: ___________________________
Name:
Title:
-46-
<PAGE>
AMENDMENT NO. 1 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT (this "Amendment No. 1") is
made this 7th day of March, 2000 by and among ZANY BRAINY, INC., a Pennsylvania
corporation ("Zany Brainy"), the Subsidiaries of Zany Brainy signatory hereto
(individually and collectively, together with Zany Brainy, the "Borrowers") and
FIRST UNION NATIONAL BANK, a national banking association ("Bank").
BACKGROUND
----------
Borrowers and Bank entered into a Credit Agreement dated June 14, 1999
(as amended hereby and as may be further amended from time to time, the "Credit
Agreement"). Sections 6.1, 6.3 and 6.8 of the Credit Agreement prohibit Zany
Brainy from making loans to or investments in Zany.com in excess of Five Million
Dollars ($5,000,000) in any twelve month period or in excess of Ten Million
Dollars ($10,000,000) in the aggregate. In October of 1999, Zany Brainy invested
Five Million Dollars in Zany.com. Zany Brainy has informed Bank that it wishes
to invest up to an additional Seven Million Dollars ($7,000,000) to Zany.com
during the first quarter of 2000. In order to permit such additional investment,
Borrowers and Bank have agreed to make certain amendments to the Credit
Agreement as set forth herein and subject to the terms and conditions hereof.
In consideration of the foregoing and the premises and the agreements
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Definitions
-----------
a. General Rule. Unless otherwise defined herein, terms used
------------
herein which are defined in the Credit Agreement shall have the meanings
assigned to them in the Credit Agreement.
b. Additional Definitions. The following definitions are
----------------------
hereby added to Section 1 of the Credit Agreement to read in their entirety as
follows:
"Amendment No. 1" means the Amendment No. 1 to and Consent under
---------------
Credit Agreement by and among Borrowers and Bank dated March 7, 2000.
"Amendment No. 1 Effective Date" means the date on which the
------------------------------
conditions set forth in Paragraph 5 of Amendment No. 1 have been
satisfied.
<PAGE>
2. Amendment to Sections 6.1 (Indebtedness) and 6.3 (Loans) of the
---------------------------------------------------------------
Credit Agreement. Sections 6.1 and 6.3 of the Credit Agreement are each amended
- ----------------
so as to strike the words in the proviso of each section reading: ":(A) in any
twelve (12) month period, Five Million Dollars ($5,000,000); and (B) in the
aggregate, Ten Million Dollars ($10,000,000)"and to replace such words with: ",
in the aggregate, Twelve Million Dollars ($12,000,000)."
3. Amendment to Section 6.8(C) (Acquisitions and Investments) of the
-----------------------------------------------------------------
Credit Agreement. Sections 6.8(C) of the Credit Agreement is amended so as to
- ----------------
strike the words reading: ":(i) in any twelve (12) month period, Five Million
Dollars ($5,000,000), and (ii) the aggregate, Ten Million Dollars ($10,000,000)"
and replace such words with: ", in the aggregate, Twelve Million Dollars
($12,000,000)."
4. Representations and Warranties. Borrowers hereby represent and
------------------------------
warrant to Bank as follows:
a. Representations. The representations and warranties set
---------------
forth in Section 3 of the Credit Agreement are true and correct in all material
respects as of the date hereof; there is no Event of Default or Default under
the Credit Agreement, as amended hereby; and there has been no material adverse
change in the financial condition or business of any Borrower from the date on
which Borrower last delivered financial statements to Bank.
b. Power and Authority. Each Borrower has the power and
-------------------
authority under the laws of its state of incorporation and under its articles or
certificate of incorporation and bylaws or other formation documents to enter
into and perform this Amendment No. 1 and the other documents and agreements
required hereunder (collectively, the "Amendment Documents"); all actions
(corporate or otherwise) necessary or appropriate for the execution and
performance by each Borrower of the Amendment Documents have been taken; and the
Amendment Documents and the Credit Agreement, as amended, each constitute the
valid and binding obligations of each Borrower, enforceable in accordance with
their respective terms.
c. No Violations of Law or Agreements. The making and
----------------------------------
performance of the Amendment Documents by each Borrower will not (i) violate any
provisions of any law or regulation, federal, state or local, or the articles or
certificate of incorporation or bylaws or other formation documents of any
Borrower or (ii) result in any breach or violation of, or constitute a default
or require the obtaining of any consent under, any agreement or instrument by
which any Borrower or its property may be bound.
5. Conditions to Effectiveness of Amendment. This Amendment No. 1
----------------------------------------
shall be effective upon Bank's receipt of the following documents, each in form
and substance satisfactory to Bank:
a. Amendment No. 1. This Amendment No. 1 duly executed by
---------------
Borrowers and Bank.
<PAGE>
b. Other Documents. Such additional documents as Bank may
---------------
reasonably request.
6. Affirmations. Each Borrower hereby: (i) affirms all the
------------
provisions of the Credit Agreement, as amended by this Amendment No. 1, and (ii)
agrees that the terms and conditions of the Credit Agreement, as amended by this
Amendment No. 1, shall continue in full force and effect as supplemented and
amended hereby.
7. Miscellaneous.
-------------
a. Each Borrower agrees to pay or reimburse Bank for all
reasonable fees and expenses (including without limitation reasonable fees and
expenses of counsel) incurred by Bank in connection with the preparation,
execution and delivery of this Amendment No. 1.
b. This Amendment No. 1 shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without regard to
conflicts of law or choice of law principles.
c. All terms and provisions of this Amendment No. 1 shall be
for the benefit of and be binding upon and enforceable by the respective
successors and assigns of the parties hereto.
d. This Amendment No. 1 may be executed in any number of
counterparts with the same effect as if all the signatures on such counterparts
appeared on one document and each such counterpart shall be deemed an original.
e. Except as expressly set forth herein, neither the execution,
delivery or performance of this Amendment No. 1, any consent or waiver set forth
herein, nor anything
<PAGE>
contained herein shall be construed as or shall operate as a consent to or
waiver of any provision of, or any right, power or remedy of Bank under the
Credit Agreement and the agreements and documents executed in connection
therewith.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1
the day and year first above written.
BORROWERS:
ATTEST: ZANY BRAINY, INC.
By: _______________________ By: ________________________
Name: Name:
Title: Title:
ATTEST: CHILDREN'S PRODUCTS, INC.
By: _______________________ By: ________________________
Name: Name:
Title: Title:
ATTEST: CHILDREN'S DEVELOPMENT INC.
By: _______________________ By: ________________________
Name: Name:
Title: Title:
[EXECUTIONS CONTINUED]
<PAGE>
ATTEST: CHILDREN'S DISTRIBUTION, L.L.C.
By: _________________________ By: _______________________
Name: Name:
Title: Title:
BANK:
FIRST UNION NATIONAL BANK
By: ___________________________
Name:
Title:
<PAGE>
EXHIBIT 10.8
================================================================================
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY
AGREEMENT
OF
ZB HOLDINGS LLC
a Delaware Limited Liability Company
Dated as of March 20, 2000
================================================================================
<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
OF
ZB HOLDINGS LLC
THIS LIMITED LIABILITY COMPANY AGREEMENT OF ZB HOLDINGS LLC (the
"Agreement") is made and entered into as of the 20/th/ day of March, 2000 (the
---------
"Effective Date"), by and between Online Retail Partners Inc., a Delaware
--------------
corporation f/k/a Online Retail Partners LLC, a Delaware limited liability
company ("ONRP"), Zany Brainy, Inc., a Pennsylvania corporation ("Retail
---- ------
Sponsor"), (Retail Sponsor together with ONRP, the "Members", with each being
- ------- -------
referred to, individually, as a "Member"), for the purpose of setting forth the
------
rights and obligations of the Members of ZB Holdings LLC (the "Company"), a
-------
limited liability company formed under the Delaware Limited Liability Company
Act, 6 Del. C. (S) 18-101 et seq., as amended from time to time, (the "Act").
---
RECITALS
--------
WHEREAS, Zany Brainy.com, a Delaware limited liability company
("ZB.com") was formed by Zany Brainy on September 7, 1999; and
------
WHEREAS, Zany Brainy, ONRP, ONRP Services LLC, a Delaware limited
liability company and a wholly-owned Subsidiary of ONRP ("ONRPS"), the Company,
-----
and ZB.com entered into a series of Operating Agreements, and ONRP, Zany Brainy
and the Company entered into the ZB Holdings Limited Liability Company Agreement
(the "Original Holdings Operating Agreement") to form a joint venture for the
-------------------------------------
purpose of operating an e-commerce site on the World Wide Web, all effective as
of October 20, 1999. The establishment of the joint venture shall be referred to
herein as the "Transaction"; and
WHEREAS, as part of the Transaction, all interests in ZB.com were
transferred to the Company, pursuant to a Contribution and Interest Purchase
Agreement dated as of October 20, 1999 ("Original Contribution Agreement"); and
-------------------------------
WHEREAS, pursuant to the Original Contribution Agreement, the Company
also (i) received $5 million in cash from each of Zany Brainy and ONRP
(collectively, the "Funds"), (ii) received certain assets (the "Assets") of Zany
----- ------
Brainy as set forth in Section 1 of Schedule 1.1(b) thereto, and (iii) assumed
certain rights (the "Rights") and liabilities (the "Liabilities") from Zany
------ -----------
Brainy as set forth in Schedule 1.1(d) thereto; and
WHEREAS, the Company, entered into an Interim Limited Liability
Operating Agreement dated as of November 11, 1999 ("Interim Agreement") which
-----------------
set forth the preliminary rights, obligations and duties of members of ZB.com;
and
WHEREAS, pursuant to the Interim Agreement, the Company also assigned
and transferred to the ZB.com, and ZB.com accepted, all of the Funds, Assets
(including all
<PAGE>
intellectual property rights appurtenant thereto), Rights and Liabilities
received by the Company under the Original Contribution Agreement; and
WHEREAS, ONRP contributed an additional $10 million to the Company in
exchange for additional Interests in the Company on November 15, 1999 as part of
the Follow-On Subscription (as defined in the Original Holdings Operating
Agreement) which funds were contributed to ZB.com; and
WHEREAS, the Members declared a ten-for-one split of the Membership
Interests in the Company on March 17, 2000; and
WHEREAS, the Members desire to Amended and Restate the Original
Operating Agreement as set forth herein.
NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members hereby agree as
follows:
ARTICLE 1
---------
ORGANIZATIONAL MATTERS
----------------------
1.1 Formation. The Company was formed under the Act for the purposes and upon
the terms and conditions hereinafter set forth. The rights and liabilities of
the Members of the Company shall be as provided in the Act, except as otherwise
expressly provided herein. In the event of any inconsistency between any terms
and conditions contained in this Agreement and any non-mandatory provisions of
the Act, the terms and conditions contained in this Agreement shall govern.
1.2 Name. The name of the Company formed hereby shall be ZB Holdings LLC. The
Company may also conduct business at the same time under one or more fictitious
names if the Board determines that such is in the best interests of the Company.
The Board may change the name of the Company, from time to time, in accordance
with applicable law.
1.3 Principal Place of Business; Other Places of Business. The principal place
of business of the Company will initially be located at 47 East 11/th/ Street,
10/th/ Floor, New York, New York 10003, or such other place within or outside
the State of Delaware as the Board may from time to time designate. The Company
may maintain offices and places of business at such other place or places within
or outside the State of Delaware as the Board deems advisable.
1.4 Business Purpose. The Company is formed for the object and purpose of, and
the nature of the business to be conducted and promoted by the Company is,
engaging in any lawful business, purpose or activity for which limited liability
companies may be formed under the Act and engaging in any and all activities
necessary, convenient, desirable or incidental to the foregoing, including,
without limitation, developing and operating an Internet commerce website (the
"Site") offering its customers comprehensive content, leading product assortment
----
in its category and related value-added online services. It is the objective of
the Members that the Site be ready for initial testing by October 15, 1999 and
become fully operational by November 1, 1999.
2
<PAGE>
1.5 Certificate of Formation; Filings. A Certificate of Formation of the
Company (the "Certificate") was executed and filed in the office of the Delaware
-----------
Secretary of State as required by the Act on October 4, 1999. Amendments to the
Certificate may be executed and filed from time to time in a form prescribed by
the Act as authorized by the Board, provided that if any such amendments alter
the rights and obligations of the parties herein, the approval of a Majority in
Interest will be required. The Board shall also cause to be made, on behalf of
the Company, such additional filings and recordings as the Board shall deem
necessary or advisable.
1.6 Fictitious Business Name Statements. Following the execution of this
Agreement, fictitious business name statements shall be filed and published when
and if the Board determines it necessary. Any such statement shall be renewed as
required by applicable law, unless the Board determines otherwise.
1.7 Designated Agent for Service of Process. The Company shall continuously
maintain a registered office and a designated and duly qualified agent for
service of process on the Company in the State of Delaware.
1.8 Term. The term of the Company commenced on the date that the Certificate
was filed with the Office of the Delaware Secretary of State, and shall continue
until the Company is dissolved pursuant to this Agreement. The existence of the
Company as a separate legal entity shall continue until cancellation of the
Certificate in the manner required by the Act.
1.9 Title to Company Property. All property owned by the Company, whether real
or personal, tangible or intangible, shall be deemed to be owned by the Company,
and no Member individually shall have any interest in such property. Title to
all such property may be held in the name of the Company or a designee, which
designee may be a Member or its Affiliate.
1.10 Membership Interests Uncertificated. The interests of the Members of the
Company shall not be certificated.
ARTICLE 2
---------
DEFINITIONS
-----------
Capitalized words and phrases used and not otherwise defined elsewhere
in this Agreement shall have the following meanings:
2.1 "Act" is defined in the Preamble.
2.2 "Additional Members" means those Persons admitted to the Company as Members
of the Company pursuant to Paragraph 3.4 of the Agreement.
2.3 "Additional ROFR Membership Interests" is defined in Paragraph 7.2.2 of
this Agreement.
2.4 "Adjusted Capital Account Deficit" means, with respect to any Member, the
deficit balance, if any, in such Member's Capital Account as of the end of the
relevant fiscal year, after giving effect to the following adjustments:
3
<PAGE>
2.4.1 Add to such Capital Account the following items:
(a) The amount, if any, that such Member is obligated to contribute
to the Company upon liquidation of such Member's Membership Interest, pursuant
to the terms of this Agreement; and
(b) The amount that such Member is obligated to restore or is
deemed to be obligated to restore pursuant to Regulations Section 1.704-
1(b)(2)(ii)(c) or the penultimate sentence of each of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5); and
2.4.2 Subtract from such Capital Account such Member's share of the items
described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall
be interpreted consistently therewith.
2.5 "Affected Membership Interests" is defined in Paragraph 7.2.1 of this
Agreement.
2.6 "Affiliate" means, with reference to a specified Person: (a) a Person that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the specified Person, (b) any
Person that is a director, executive officer, general partner, manager or
trustee of, or serves in a similar capacity with respect to, the specified
Person, or for which the specified Person is a director, executive officer,
general partner, manager or trustee, or serves in a similar capacity, or (c) any
member of the Immediate Family of the specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with") as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided, however, that a Person which owns less than twenty percent (20%) of
the outstanding equity interests of a specified Person shall not be deemed to be
an Affiliate of the specified Person solely by reason of such equity ownership.
2.7 "Agreement" is defined in the Preamble.
2.8 "Assignee" means any Person (a) to whom a Member (or assignee thereof)
Transfers all or any part of its interest in the Company, and (b) which has not
been admitted to the Company as a Substitute Member pursuant to Paragraph 7.7 of
this Agreement.
2.9 "Board" shall mean the board of managers of the Company. The Board shall be
composed of seven members, including (a) the Chief Executive Officer of the
Company, (b) three individuals designated by ONRP and (c) three individuals
designated by Retail Sponsor. To the extent that ZB.com or any other Subsidiary
of the Company has a board of managers, such Subsidiary's board of managers
shall be composed of the same individuals as the Board. Each member of the Board
(i) shall be a natural person who need not be resident of the State of Delaware
and (ii) is hereby designated as a "manager" of the Company within the meaning
of the Act.
4
<PAGE>
2.10 "Capital Account" means the Capital Account maintained for each Member on
the Company's books and records in accordance with the following provisions:
2.10.1 To each Member's Capital Account there shall be added (a) such
Member's Capital Contributions, (b) such Member's allocable share of Net Profits
and any items in the nature of income or gain that are specially allocated to
such Member pursuant to Article 5 hereof or other provisions of this Agreement,
and (c) the amount of any Company liabilities assumed by such Member or which
are secured by any Company Assets distributed to such Member.
2.10.2 From each Member's Capital Account there shall be subtracted (a)
the amount of (i) cash and (ii) the Gross Asset Value of any Company Assets
(other than cash) distributed to such Member (other than any payment of
principal and/or interest to such Member pursuant to the terms of a loan made by
the Member to the Company) pursuant to any provision of this Agreement, (b) such
Member's allocable share of Net Losses and any other items in the nature of
expenses or losses that are specially allocated to such Member pursuant to
Article 5 or other provisions of this Agreement, and (c) liabilities of such
Member assumed by the Company or which are secured by any property contributed
by such Member to the Company.
2.10.3 In the event any interest in the Company is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent it relates to the transferred
interest.
2.10.4 In determining the amount of any liability for purposes of
Paragraphs 2.10.1 and 2.10.2 hereof, there shall be taken into account Code
Section 752(c) and any other applicable provisions of the Code and Regulations.
2.10.5 The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Sections 1.704-1(b) and 1.704-2 and shall be interpreted and applied
in a manner consistent with such Regulations. In the event that the Board shall,
upon the advice of counsel, determine that it is necessary to modify the manner
in which the Capital Accounts, or any additions or subtractions thereto, are
computed in order to comply with such Regulations, the Board may make such
modification, provided that it will not have a material effect on the amounts
distributable to any Member pursuant to Article 9 hereof upon the dissolution of
the Company. The Board shall also, upon the advice of counsel, make (a) any
adjustments that are necessary in cases as to which guidance under Regulations
Section 1.704-1(b)(2)(iv) is lacking to maintain equality between the Capital
Accounts of the Members and the amount of Company capital reflected on the
Company's balance sheet, as computed for book purposes, in accordance with
Regulations Section 1.704-1(b)(2)(iv)(q), and (b) any appropriate modifications
in the event that unanticipated events might otherwise cause this Agreement not
to comply with Regulations Sections 1.704-1(b) and 1.704-2.
2.11 "Capital Contribution Agreement" means the Contribution and Interest
Purchase Agreement, dated as of October 15, 1999, by and among the Retail
Sponsor, ONRP and the Company.
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2.12 "Capital Contributions" means, with respect to any Member, the total amount
of cash and the initial Gross Asset Value of property (other than cash)
contributed to the capital of the Company by such Member, whether as an initial
Capital Contribution or as an additional Capital Contribution.
2.13 "Cash Available for Distribution" means, with respect to any fiscal year,
all Company cash receipts (excluding the proceeds from any Terminating Capital
Transaction), after deducting payments for Operating Cash Expenses, payments
required to be made in connection with any loan to the Company or any other loan
secured by a lien on any Company Assets, capital expenditures and any other
amounts set aside for the restoration, increase or creation of reasonable
Reserves.
2.14 "Certificate" means the Certificate of Formation of the Company filed under
the Act in the Office of the Delaware Secretary of State for the purpose of
forming the Company as a Delaware limited liability company, and any duly
authorized, executed and filed amendments or restatements thereof.
2.16 "Code" means the Internal Revenue Code of 1986, as amended from time to
time (or any corresponding provisions of succeeding law).
2.17 "Common Interest" means the Voting Common Interests and the Non-Voting
Common Interests.
2.18 "Company" is defined in the Preamble.
2.19 "Company Minimum Gain" has the meaning set forth in Regulations Sections
1.704-2(b)(2) and 1.704-2(d)(1) for the phrase "partnership minimum gain."
2.20 "Company Assets" means all direct and indirect interests in real and
personal property owned by the Company from time to time, and shall include both
tangible and intangible property (including cash).
2.21 "Confidential Information" means all non-public information, including,
without limitation, data, customer lists or other customer-specific or marketing
information, customer buying patterns, algorithms, know-how, ideas and all
business, technical, pricing, cost and financial information, provided to the
other party and any other information marked or disclosed as being confidential
information that is obtained by the other party. Without limitation of the
foregoing, this Agreement and the Operating Agreements shall be deemed to be
Confidential Information.
2.22 "Conversion Corporation" is defined in Paragraph 8.3.2.
2.23 "Converting Subsidiary" is defined in Paragraph 8.3.1.
2.24 "Corporate Conversion" is defined in Paragraph 8.3.2.
2.25 "Cutoff Date" is defined in Paragraph 7.2.3.
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2.26 "Depreciation" means, for each fiscal year or other period, an amount equal
to the federal income tax depreciation, amortization or other cost recovery
deduction allowable with respect to an asset for such year or other period,
except that if the Gross Asset Value of an asset differs from its adjusted basis
for federal income tax purposes at the beginning of such year or other period,
Depreciation shall be an amount that bears the same ratio to such beginning
Gross Asset Value as the federal income tax depreciation, amortization or other
cost recovery deduction for such year or other period bears to such beginning
adjusted tax basis; provided, however, that (a) if the federal income tax
depreciation, amortization or other cost recovery deduction for such year or
other period is zero, Depreciation shall be determined with reference to such
beginning Gross Asset Value using any reasonable method selected by the Board
and (b) for any asset with respect to which the Company uses the "remedial
allocation method" under Regulations Section 1.704-3(d), Depreciation shall be
determined in accordance with Regulations Section 1.704-3(d)(2).
2.27 "Director" means a manager of the Company who is a member of the Board.
2.28 "Economic Interest" means a Person's right to share in the Net Profits, Net
Losses, or similar items of, and to receive distributions from, the Company, but
does not include any other rights of a Member including, without limitation, the
right to vote or to participate in the management of the Company, or, except as
specifically provided in this Agreement or required under the Act, any right to
information concerning the business and affairs of the Company.
2.29 "Effective Date" is defined in the Preamble.
2.30 "Gross Asset Value" means, with respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:
2.30.1 The initial Gross Asset Value of any asset contributed by a Member
to the Company shall be the gross fair market value of such asset set forth in
Exhibit A.
2.30.2 The Gross Asset Values of all Company Assets immediately prior to
the occurrence of any event described in subparagraph (a), subparagraph (b),
subparagraph (c) or subparagraph (d) hereof shall be adjusted to equal their
respective gross fair market values, as determined by the Board using such
reasonable method of valuation as it may adopt, as of the following times:
(a) the acquisition of an additional interest in the Company (other
than in connection with the execution of this Agreement) by a new or existing
Member in exchange for more than a de minimis Capital Contribution, if the Board
reasonably determines that such adjustment is necessary or appropriate to
reflect the relative Economic Interests of the Members in the Company;
(b) the distribution by the Company to a Member of more than a de
minimis amount of Company Assets as consideration for an interest in the
Company, if the Board reasonably determines that such adjustment is necessary or
appropriate to reflect the relative Economic Interests of the Members in the
Company;
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(c) the liquidation of the Company within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g); and
(d) at such other times as the Board shall reasonably determine
necessary or advisable in order to comply with Regulations Sections 1.704-1(b)
and 1.704-2.
2.30.3 The Gross Asset Value of any Company Asset distributed to a
Member shall be the gross fair market value of such asset on the date of
distribution as determined by the Board.
2.30.4 The Gross Asset Values of Company Assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that
Gross Asset Values shall not be adjusted pursuant to this Paragraph 2.30.4 to
the extent that the Board reasonably determines that an adjustment pursuant to
Paragraph 2.30.2 above is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to this
Paragraph 2.30.4.
2.30.5 If the Gross Asset Value of a Company Asset has been determined
or adjusted pursuant to Paragraph 2.30.1, Paragraph 2.30.2 or Paragraph 2.30.4
hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation
taken into account with respect to such Company Asset for purposes of computing
Net Profits and Net Losses.
2.31 "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
2.32 "Immediate Family" means, and is limited to, an individual Member's
current spouse, parents, parents-in-law, grandparents, children, siblings, and
grandchildren, or a trust or estate all of the beneficiaries of which consist
of, or an entity controlled by, such Member or any of the foregoing individuals.
2.33 "Incapacity" means the entry of an order of incompetence or of insanity,
or the death, dissolution, bankruptcy (as defined in the Act) or termination
(other than by merger or consolidation) of any Person.
2.34 "Indemnitee" is defined in Paragraph 6.6.1.
2.35 "Initial Assets" is defined in Paragraph 3.1.
2.36 "IPO" means any underwritten public offering of equity securities.
2.37 "Issuer" is defined in Paragraph 8.4.1.
2.38 "Issuer Securities" is defined in Paragraph 8.4.1.
2.39 "Liquidator" is defined in Paragraph 9.5.1.
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2.40 "Majority in Interest" means Members holding a majority of the aggregate
of the Voting Common Interests and Voting Preferred Interests held by all
Members of the Company.
2.41 "Maximum Allowed Exchange" is defined in Paragraph 8.4.3.
2.42 "Member" means each of ONRP and Retail Sponsor and includes any Person
admitted as an Additional Member or a Substitute Member pursuant to the
provisions of this Agreement, in such Person's capacity as a member of the
Company, and "Members" means two (2) or more of such Persons when acting in
their capacity as members of the Company. For purposes of the Act, the Members
shall constitute one (1) class or group of members.
2.43 "Member Minimum Gain" means an amount, with respect to each Member
Nonrecourse Debt, equal to the Company Minimum Gain that would result if such
Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in
accordance with Regulations Section 1.704-2(i) with respect to "partner
non-recourse debt minimum gain."
2.44 "Member Nonrecourse Debt" has the meaning set forth in Regulations
Section 1.704-2(b)(4) for the phrase "partner nonrecourse debt."
2.45 "Member Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(i) for the phrase "partner nonrecourse deductions."
2.46 "Membership Interest" means the Common Interests and the Preferred
Interests and refers to the interest of a Member in the Company at any
particular time, including, without limitation, the Member's Economic Interest,
any and all rights to participate in the Company's affairs and the rights to any
and all benefits to which a Member may be entitled as provided in this
Agreement, together with the obligations of such Member to comply with all of
the terms and provisions of this Agreement. The initial Membership Interests of
the Members are set forth in Exhibit A.
2.47 "Membership Interest Transfer" means any Transfer of Membership
Interests, other than a Permitted Transfer.
2.48 "Net Profits" or "Net Losses" means, for each fiscal year or other
period, an amount equal to the Company's taxable income or loss for such year or
period determined in accordance with Code Section 703(a) (for this purpose, all
items of income, gain, loss or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss),
with the following adjustments:
2.48.1 Any income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Net Profits or Net Losses
pursuant to this Paragraph 2.46 shall be added to such taxable income or loss;
2.48.2 Any expenditure of the Company described in Code Section
705(a)(2)(B) or treated as a Code Section 705(a)(2)(B) expenditure pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Net Profits or Net Losses pursuant to this Paragraph 2.48, shall be
subtracted from such taxable income or loss;
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2.48.3 Gain or loss resulting from any disposition of Company Assets
where such gain or loss is recognized for federal income tax purposes shall be
computed by reference to the Gross Asset Value of the Company Assets disposed
of, notwithstanding that the adjusted tax basis of such Company Assets differs
from its Gross Asset Value;
2.48.4 In lieu of the depreciation, amortization and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account Depreciation for such fiscal year or other periods;
2.48.5 To the extent an adjustment to the adjusted tax basis of any
asset included in Company Assets pursuant to Code Section 734(b) or Code Section
743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be
taken into account in determining Capital Accounts as a result of a distribution
other than in liquidation of a Member's Membership Interest, the amount of such
adjustment shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases the basis of the asset)
from the disposition of the asset and shall be taken into account for the
purposes of computing Net Profits and Net Losses;
2.48.6 If the Gross Asset Value of any Company Asset is adjusted in
accordance with Paragraph 2.30.2 or Paragraph 2.30.3 of this Agreement, the
amount of such adjustment shall be taken into account in the taxable year of
such adjustment as gain or loss from the disposition of such asset for purposes
of computing Net Profits or Net Losses; and
2.48.7 Notwithstanding any other provision of this Paragraph 2.48, any
items that are specially allocated pursuant to Paragraph 5.2 or Paragraph 5.3.2
hereof shall not be taken into account in computing Net Profits or Net Losses.
2.49 "Nonrecourse Deductions" has the meaning set forth in Regulations
Sections 1.704-2(b)(1) and 1.704-2(c).
2.50 "Nonrecourse Liability" has the meaning set forth in Regulations Sections
1.704-2(b)(3) and 1.752-1(a)(2).
2.51 "Non-Voting Common Interest" means a Common Interest in the Company (a)
having the right to receive allocations of Net Profits or Net Losses,
distributions and proceeds of liquidation in the manner specified for Common
Interests in this Agreement but (b) which is not entitled to vote on any matter
submitted to the Members for approval in accordance with Paragraph 6.2 of this
Agreement.
2.52 "Non-Voting Preferred Interest" means a Preferred Interest in the Company
(a) having the right to receive allocations of Net Profits or Net Losses,
distributions and proceeds of liquidation in the manner specified for Preferred
Interests in this Agreement but (b) which is not entitled to vote on any matter
submitted to the Members for approval in accordance with Paragraph 6.2 of this
Agreement.
2.53 "Non-Voting Stock" is defined in Paragraph 8.4.4 of this Agreement.
2.54 "Offer Notice" is defined in Paragraph 7.2.1.
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2.55 "Offering Member" is defined in Paragraph 7.2.1 of this Agreement.
2.56 "Officers" is defined in Paragraph 6.9.
2.57 "ONRP" is defined in the Preamble.
2.58 "ONRPS" is defined in the Recitals.
2.59 "Operating Agreements" means (i) the Services Agreement, dated as of
October 15, 1999, by and between Retail Sponsor and ZB.com, (ii) the Trademark
License Agreement, dated as of October 15, 1999, by and between Retail Sponsor
and ZB.com, (iii) the Supply Agreement, dated as of October 15, 1999, by and
between Retail Sponsor and ZB.com, (iv) the Data Sharing/License Agreement,
dated as of October 15, 1999, by and among ONRPS, Retail Sponsor and ZB.com, and
(v) the Web Site Services Agreement, dated as of October 15, 1999, by and
between ONRPS and ZB.com.
2.60 "Operating Cash Expenses" means, with respect to any fiscal period, the
amount of cash disbursed or owed in the ordinary course of business during the
period, including without limitation, all cash expenses, such as advertising,
promotion, property management, insurance premiums, taxes, utilities, repair,
maintenance, legal, accounting, bookkeeping, computing, equipment use, travel on
Company business, telephone expenses and salaries, and direct expenses of
Company employees (if any) and agents while engaged in Company business.
Operating Cash Expenses shall include fees paid by the Company to the Board or
any Affiliate thereof permitted by this Agreement, and the actual cost of goods,
materials and administrative services used for or by the Company, whether
incurred by the Board, any Affiliate thereof or any non-Affiliate in performing
functions set forth in this Agreement reasonably requiring the use of such
goods, materials or administrative services. Operating Cash Expenses shall not
include expenditures paid from Reserves.
2.61 "Ownership Percentage" means the ownership percentage of the Membership
Interests of a Member in the Company as determined by dividing the number of
Membership Interests held by such Member by the total number of Membership
Interests then outstanding. The initial Ownership Percentage for each Member is
set forth in Exhibit A.
2.62 "Permitted Transfer" means any Transfer of Membership Interests: (i) made
by a Member to one or more of such Member's Affiliates or, if such Member is a
partnership or limited liability company, to its partners or members; (ii) made
by any Member to the Company, subject to Paragraph 6.2.1(1); (iii) made by a
Member to his or her Immediate Family; (iv) made by a Member pursuant to
testamentary or intestate disposition; or (v) made by Retail Sponsor of
Non-Voting Preferred Interests to no more than 10 of its employees, officers or
members of the Board of Directors of Retail Sponsor, provided that the Transfer
set forth in subsection 2.62 (v) shall not relate to more than a total of
666,670 of such Non-Voting Preferred Interests.
2.63 "Person" means and includes an individual, a corporation, a partnership
(general or limited), a limited liability company, a trust, an unincorporated
organization, a government or any department or agency thereof, or any entity
similar to any of the foregoing.
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2.64 "Plan" means any stock option or similar equity incentive plan of ZB.com,
as adopted and as amended from time to time with the approval of a Majority in
Interest.
2.65 "Preference Amount" means, with respect to each Membership Interest, an
amount equal to $10.00.
2.66 "Preferred Interest" means the Voting Preferred Interests and the Non-
Voting Preferred Interests.
2.67 "Purchasers" is defined in Paragraph 7.2.4.
2.68 "Recourse Liability" has the meaning set forth in Regulations Section
1.752-1(a)(1).
2.69 "Regulations" means proposed, temporary and final Treasury Regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding Treasury Regulations).
2.70 "Regulatory Allocations" is defined in Paragraph 5.2.8.
2.71 "Reserves" means funds set aside or amounts allocated to reserves that
shall be maintained in amounts deemed sufficient by the Board for working
capital, to pay taxes, insurance, debt service, and other costs or expenses
incident to the conduct of business by the Company as contemplated hereunder.
2.72 "Responsible Party" is defined in Paragraph 6.6.6.
2.73 "Retailer" means any Person with which ONRP has formed a limited
liability company or other joint ventures for the purpose of developing and
operating an Internet commerce website.
2.74 "Retail Sponsor" is defined in the Preamble.
2.75 "ROFR Acceptance Notice" is defined in Paragraph 7.2.2.
2.76 "ROFR Allotment" means for any Member the product of (A) the total number
of Affected Membership Interests available for purchase thereunder multiplied by
(B) a fraction, the numerator of which is the number of Membership Interests
owned by such Member and the denominator of which is the total number of issued
and outstanding Membership Interests excluding the Affected Membership
Interests. 2.77 "Same Category" means children's (i) toys (including games,
dolls, plush toys, electronic toys, puzzles and arts and crafts), (ii) audio and
video tapes and other multimedia products, (iii) books, (iv) software, (v)
juvenile furniture (excluding newborn and infant furniture) and (vi) educational
resource products, which, in each case, are targeted to children age 12 and
under.
2.78 "Site" is defined in Paragraph 1.4.
2.79 "Subscription Agreement" means the Contribution and Interest Purchase
Agreement, dated as of October 18, 1999, by and among the Company, ONRP and
Retail Sponsor.
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2.80 "Subsequent Financing" is defined in Paragraph 3.2.3.
2.81 "Subsidiary" means any and all corporations, partnerships, limited
liability companies and other entities with respect to which either the Company
or the Retail Sponsor, directly or indirectly, own 50% or more of the securities
having the power to elect members of the board of directors or similar body
governing the affairs of such entity.
2.82 "Substitute Member" means any Person (a) to whom a Member (or assignee
thereof) Transfers all or any part of its interest in the Company, and (b) which
has been admitted to the Company as a Substitute Member pursuant to Paragraph
7.7 of this Agreement.
2.83 "Tax Distribution" is defined in Paragraph 4.3.
2.84 "Terminating Capital Transaction" means any sale or other disposition of
all or substantially all of the assets of the Company or a related series of
transactions that, taken together, result in the sale or other disposition of
all or substantially all of the assets of the Company.
2.85 "Termination Payment" is defined in Paragraph 7.6.
2.86 "Trade Secrets" means the "trade secrets" as defined under applicable
law.
2.87 "Transfer" means, with respect to any Membership Interest, or any part
thereof, in the Company, a sale, conveyance, exchange, assignment, pledge,
encumbrance, gift, bequest, hypothecation or other transfer or disposition by
any other means, whether for value or no value and whether voluntary or
involuntary (including, without limitation, by operation of law), or an
agreement to do any of the foregoing.
2.88 "Transfer Period Termination Date" is defined in Paragraph 7.2.5.
2.89 "Voting Common Interest" means a Common Interest in the Company having
(a) the right to receive allocations of Net Losses and Net Profits,
distributions and proceeds of liquidation in the manner specified for Common
Interests in this Agreement and (b) the right to vote on any matter submitted to
the Members for approval in accordance with Paragraph 6.2.3 of this Agreement.
2.90 "Voting Preferred Interest" means a Preferred Interest in the Company
having (a) the right to receive allocations of Net Losses and Net Profits,
distributions and proceeds of liquidation in the manner specified for Preferred
Interests in this Agreement and (b) the right to vote on any matter submitted to
the Members for approval in accordance with Paragraph 6.2.3.
2.91 "ZB.com" means ZanyBrainy.com LLC, a Delaware limited liability company
and, upon the execution of the Capital Contribution Agreement, a wholly-owned
Subsidiary of the Company.
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ARTICLE 3
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CAPITAL; CAPITAL ACCOUNTS AND MEMBERS
-------------------------------------
3.1 Initial Capital Contributions of Members. At the date hereof, the
authorized Membership Interests are as follows: 5,000,000 Voting Common
Interests; 3,734,830 Non-Voting Common Interests; 5,000,000 Voting Preferred
Interests; and 6,666,670 Non-Voting Preferred Interests. The names, addresses,
initial Capital Contributions (the "Initial Assets") Membership Interests and
--------------
Ownership Percentages of the Members are set forth on Exhibit A attached hereto
and incorporated herein. All Members acknowledge and agree that the initial
Capital Contributions set forth in Exhibit A represent the amount of money and
the Gross Asset Value of all property (other than money) initially contributed
by the Members. The Board shall be required to update Exhibit A from time to
time as necessary to accurately reflect the information therein. Any amendment
to Exhibit A shall not be deemed an amendment to this Agreement. Any reference
in this Agreement to Exhibit A shall be deemed to be a reference to Exhibit A as
amended and in effect from time to time.
3.2 Additional Capital Contributions by Members
3.2.1 No Member shall be (a) required or (b) except as provided in this
Paragraph 3.2 or as otherwise approved by a Majority in Interest, permitted, to
make any additional Capital Contributions to the Company.
3.2.2 ONRP shall make an additional Capital Contribution of $5,137,758
in consideration of the issuance of an additional 5,242,610 Non-Voting Common
Interests and Retail Sponsor shall make an additional Capital Contribution of
$6,862,242 in consideration of the issuance of an additional 7,002,288 Non-
Voting Preferred Interests (the "Third Subscription"), all of which interests
------------------
are hereby authorized, provided, however, that neither ONRP nor Retail Sponsor
shall have the obligation to make the Third Subscription unless (a) the other
Member has, in all material respects, complied with its obligations under the
Operating Agreements and (b) the representations and warranties of the Company
and the other Member contained in the Third Subscription Agreement are true and
correct at the time the Subscription is consummated. The Capital Contributions
to be made by ONRP and Retail Sponsor pursuant to this Paragraph 3.2.2 shall be
made in three monthly installments, the first of which shall occur on March __,
2000, the amount of each installment shall be determined by the Board, provided
that each Capital Contribution installment made by ONRP and Retail Sponsor shall
be made in the same proportion as the aggregate total Capital Contribution
required by each party pursuant to this Paragraph 3.2.2. The total amount of
Interests to be provided to ONRP and Retail Sponsor under this Paragraph 3.2.2
shall all be issued concurrently with the payment of the initial installment on
March 7, 2000.
3.2.3 In the event of any future equity financing by the Company,
including an initial public offering of equity securities by the Company, (each,
a "Subsequent Financing"), each of the Members shall have the right to
--------------------
subscribe, to the extent of its then-current Ownership Percentage, to such
Subsequent Financing unless in the case of any such Subsequent Financing that is
an underwritten public offering of common stock, (a) the managing underwriter in
connection with such Subsequent Financing advises that a full or partial waiver
of such right is required in order to consummate such Subsequent Financing and
(b) such waiver would not
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materially prejudice either Retail Sponsor or ONRP. In the event of any future
equity financing by ZB.com or any other Subsidiary of the Company, each of the
Members shall be afforded the ratable right to purchase additional Non-Voting
Common Interests or Non-Voting Preferred Interests (which shall be determined
based on the type of Membership Interests already owned by each such Member) in
the Company in an amount sufficient to permit the Company to purchase a
sufficient number of equity securities of ZB.com or such other Subsidiary to
permit the Company to maintain its ratable ownership percentage therein.
3.2.4 Notwithstanding anything to the contrary in Section 3.2.3, if any
Member who holds Non-Voting Preferred Interests fails to participate with
respect to its Non-Voting Preferred Interests in any Subsequent financing by the
Company, ZB.com or any other Subsidiary as set forth in Section 3.2.3, Retail
Sponsor shall have the right to additionally participate in any such equity
financing to the extent that the Members who hold Non-Voting Preferred Interests
did not participate with respect to their Non-Voting Preferred Interests.
3.3 Capital Accounts. A Capital Account shall be established and maintained for
each Member in accordance with the terms of this Agreement.
3.4 Additional Members. Following formation of the Company, the Board is hereby
authorized, upon receipt of approval of a Majority in Interest, to issue
interests in the Company directly from the Company, and to admit one or more
recipients of such interests as additional Members ("Additional Members") from
------------------
time to time, on such terms and conditions and for such Capital Contributions,
if any, as the Board may determine with the approval of a Majority in Interest.
No action or consent by any Person other than a Majority in Interest shall be
required in connection with the admission of an Additional Member. As a
condition to being admitted to the Company, each Additional Member shall execute
an agreement to be bound by the terms and conditions of this Agreement.
3.5 Member Capital. Except as otherwise provided in this Agreement or with the
prior written consent of a Majority in Interest: (a) no Member shall demand or
be entitled to receive a return of or interest on its Capital Contributions or
Capital Account, (b) no Member shall withdraw any portion of its Capital
Contributions or receive any distributions from the Company as a return of
capital on account of such Capital Contributions, and (c) the Company shall not
redeem or repurchase the Membership Interest, or any portion thereof, of any
Member.
3.6 Member Loans. No Member shall be required or permitted to make any loans or
otherwise lend any funds to the Company, except with the consent of a Majority
in Interest. Notwithstanding the foregoing, the Members shall be permitted (but
not required) to make loans to the Company to the extent a Majority in Interest
reasonably determines that such loans are necessary, advisable or convenient for
the business of the Company, provided that any such loans shall be unsecured and
on terms that are no less favorable to the Company as may be available from
independent third parties. No loan made by any Member to the Company shall have
any effect on such Member's Membership Interests, any such loans representing a
debt of the Company payable or collectible solely from the assets of the Company
in accordance with the terms and conditions upon which such loan was made.
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3.7 Liability of Members. Except as otherwise required by an express provision
of this Agreement or any non-waivable provision of the Act or other applicable
law: (a) no Member shall be personally liable in any manner whatsoever for any
debt, liability or other obligation of the Company, whether such debt, liability
or other obligation arises in contract, tort, or otherwise; and (b) no Member
shall in any event have any liability whatsoever in excess of (i) the amount of
its Capital Contributions, (ii) its share of any assets and undistributed
profits of the Company, and (iii) the amount of any wrongful distribution to
such Member, if, and only to the extent, such Member has actual knowledge (at
the time of the distribution) that such distribution is made in violation of
Section 18-607 of the Act. Except as expressly provided herein, no Member, in
its capacity as such, shall have liability to the Company, any other Member or
the creditors of the Company.
3.8 ZB.com.
3.8.1 Contributions to ZB.com. Except as otherwise determined by the
Board, all assets received by the Company will be contributed to ZB.com. ZB.com
will have two types of membership interests: (i) voting preferred interests and
(ii) non-voting common interests. In exchange for its contribution of the
Initial Assets to ZB.com, the Company will receive 20,401,500 (post-split)
voting preferred interests of ZB.com. The Company will contribute the proceeds
of the Third Subscription to ZB.com in exchange for the issuance of 12,244,898
additional voting preferred interests of ZB.com.
3.8.2 3,032,140 (post-split) non-voting common interests of ZB.com will
be reserved for option grants to employees of the Company and/or its
subsidiaries, including ZB.com. Initially, 2,627,850 (post-split) of these non-
voting common interests of ZB.com will be reserved for option grants to
employees of the Company and ZB.com and 404,290 (post-split) non-voting common
interests of ZB.com will be reserved for option grants to employees of ONRP and
Retail Sponsor. The grants of options to employees of the Company and/or its
subsidiaries, ONRP and/or Retail Sponsor shall be made by the Board (in its sole
and absolute discretion) in accordance with the provisions of the Plan.
3.8.3 Warrants to purchase 515,460 (post-split) non-voting common
interests of ZB.com will be reserved for issuance to Ramsey/Beirne Associates,
Inc. for their services in conducting certain executive search services on
behalf of the Company and ZB.com.
3.8.4 The Members anticipate that ZB.com would be the site of any
initial public offering with respect to the business of the Site. Prior to an
initial public offering, upon the receipt of approval of a Majority in Interest,
ZB.com shall be converted into a Delaware corporation in accordance with
Paragraph 8.3 of this Agreement.
3.8.5 The Chief Executive Officer of the Company shall also be the
Chief Executive Officer of ZB.com. The Board shall also constitute the board of
managers of ZB.com.
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ARTICLE 4
---------
DISTRIBUTIONS
-------------
4.1 Distributions of Cash Available for Distribution.
4.1.1 Except as otherwise provided in Paragraph 4.3 and Article 9
and subject to the provisions of Paragraph 6.2, Cash Available for Distribution
shall be distributed to the Members only at such times as may be determined in
the sole discretion of the Board.
4.1.2 Subject to Paragraph 4.3 and Article 9 hereof, all
distributions of Cash Available for Distribution shall be distributed to the
Members in accordance with the priorities set forth in Paragraph 4.4.
4.2 Distributions Upon Liquidation. Distributions made in conjunction with the
final liquidation of the Company, including, without limitation, the net
proceeds of a Terminating Capital Transaction, shall be applied or distributed
as provided in Article 9 hereof.
4.3 Tax Distributions. With respect to each fiscal year, the Company shall
distribute to the Members, to the extent of Cash Available for Distribution,
amounts intended to enable the Members to discharge their United States federal,
state and local income tax liabilities arising from the allocations made
pursuant to Article 5, (each, a "Tax Distribution"). The amount of any such Tax
----------------
Distribution shall be determined by the Board in its reasonable discretion
taking into account (a) the maximum combined United States and state tax rate
applicable to individuals or corporations (whichever is higher) on ordinary
income and net short-term capital gain or on net long-term capital gain, as
applicable, and taking into account the deductibility of state and local income
taxes for United States federal income tax purposes (and the deductibility of
local income taxes for state tax purposes, if applicable), and (b) the amounts
so allocated pursuant to Article 5 to each Member, and otherwise based on such
reasonable assumptions as the Board determines in good faith to be appropriate.
Tax Distributions shall be made to the Members pro rata in accordance with their
respective allocation of the corresponding items of gain or income, and shall be
treated as advances with respect to amounts otherwise to be received by such
Members pursuant to this Article 4 or Article 9.
4.4 Distributions. Subject to the provisions of Article 9 and Paragraph 4.3
hereof, and subject to the rights and preferences of any classes of Membership
Interests approved in accordance with the provisions of this Agreement and
issued by the Company from time to time, Cash Available for Distribution and
distributions in kind of Company Assets shall be distributed:
4.4.1 First, to the Members holding Preferred Interests, in
proportion to the number of their Preferred Interests, until an amount equal to
the Preference Amount has been paid with respect to such Preferred Interests;
4.4.2 Second, to the Members holding Common Interests, in
proportion to the number of their Common Interests, until an amount equal to the
Preference Amount has been paid with respect to such Common Interests; and
4.4.3 Thereafter, to the Members in proportion to their respective
Ownership Percentages.
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4.5 Distributions in Kind. No right is given to any Member to demand or receive
property other than cash as provided in this Agreement. The Board may determine
to make a distribution in kind of Company Assets to the Members, and such
Company Assets shall be distributed in such a fashion as to ensure that the fair
market value thereof is distributed and allocated in accordance with this
Article 4 and Articles 5 and 9 hereof; provided, however, that no Member may be
compelled to accept a distribution consisting, in whole or in part, of any
Company Assets in kind unless the ratio that the fair market value of such
distribution in kind bears to such Member's total distribution does not exceed
the ratio that the fair market value of similar distributions in kind bear to
the total distributions of other Members receiving distributions concurrently
therewith (if any), except upon a dissolution and winding up of the Company.
4.6 Withholding. The Company may withhold distributions or portions thereof if
it is required to do so by any applicable rule, regulation, or law, and each
Member hereby authorizes the Company to withhold from or pay on behalf of or
with respect to such Member any amount of federal, state, local or foreign taxes
that the Board determines that the Company is required to withhold or pay with
respect to any amount distributable or allocable to such Member pursuant to this
Agreement. Any amount paid on behalf of or with respect to a Member pursuant to
this Paragraph 4.6 shall constitute a loan by the Company to such Member, which
loan shall be repaid by such Member within fifteen (15) days after notice from
the Company that such payment must be made; provided, however, that there shall
be no such loan treatment if (a) the Company withholds such payment from a
distribution which would otherwise be made to the Member or (b) the Board
determines, in its sole and absolute discretion, that such payment may be
satisfied out of Cash Available For Distribution which would, but for such
payment, be distributed to the Member. Any amounts withheld pursuant to this
Paragraph 4.6 shall be treated as having been distributed to such Member. Each
Member hereby unconditionally and irrevocably grants to the Company a security
interest in such Member's Membership Interests in the Company to secure such
Member's obligation to pay to the Company any amounts required to be paid
pursuant to this Paragraph 4.6. In the event that a Member fails to pay any
amounts owed to the Company pursuant to this Paragraph 4.6 when due, the
remaining Member(s) may, in their respective sole and absolute discretion, elect
to make the payment to the Company on behalf of such defaulting Member, and in
such event shall be deemed to have loaned such amount to such defaulting Member
and shall succeed to all rights and remedies of the Company as against such
defaulting Member (including, without limitation, the right to receive
distributions). Any amounts payable by a Member hereunder shall bear interest at
12.0% from the date such amount is due (i.e., 15 days after demand) until such
amount is paid in full. Each Member shall take such actions as the Company shall
request in order to perfect or enforce the security interest created hereunder.
A Member's obligations hereunder shall survive the dissolution, liquidation, or
winding up of the Company.
4.7 Limitations on Distributions. Notwithstanding any provision to the contrary
contained in this Agreement, neither the Company nor the Board, on behalf of the
Company, shall knowingly make a distribution to any Member or the holder of any
interest in the Company on account of its Membership Interest or Economic
Interest in the Company (as applicable) in violation of Section 18-607 of the
Act.
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ARTICLE 5
---------
ALLOCATIONS OF NET PROFITS AND NET LOSSES
-----------------------------------------
5.1 General Allocation of Net Profits and Losses.
5.1.1 Net Profits and Net Losses shall be determined and allocated
with respect to each fiscal year of the Company as of the end of such fiscal
year. Subject to the other provisions of this Agreement, an allocation to a
Member of a share of Net Profits or Net Losses shall be treated as an allocation
of the same share of each item of income, gain, loss or deduction that is taken
into account in computing Net Profits or Net Losses.
5.1.2 Subject to the other provisions of this Article 5, Net
Profits shall be allocated in the following order of priority:
(a) First, to the Members, in proportion to their respective
Ownership Percentages, until an amount equal to the amount of Net Losses
previously allocated to such Membership Interests pursuant to Paragraph
5.1.3(d), if any, has been allocated with respect to such Membership Interests;
(b) Second, to the Members holding Preferred Interests, in
proportion to the number of their Preferred Interests, until an amount equal to
the amount of Net Losses previously allocated to such Preferred Interests
pursuant to Paragraph 5.1.3(c), if any, has been allocated with respect to such
Preferred Interests;
(c) Third, to the Members holding Common Interests, in
proportion to the number of their Common Interests, until an amount equal to the
amount of Net Losses previously allocated to such Common Interests pursuant to
Paragraph 5.1.3(b), if any, has been allocated with respect to such Common
Interests; and
(d) Thereafter, to the Members in proportion to their
respective Ownership Percentages.
5.1.3 Subject to the other provisions of this Article 5, Net
Losses shall be allocated in the following order of priority:
(a) First, to the Members, in proportion to their respective
Ownership Percentages, until each such Membership Interest has been allocated an
amount equal to the amount of Net Profits previously allocated to such
Membership Interest pursuant to Paragraph 5.1.2(d), if any;
(b) Second, to the Members holding Common Interests, in
proportion to the number of their Common Interests, until each such Member's
Capital Account has been reduced to zero, provided that with respect to any
Member holding Common Interests and Preferred Interests, this clause (b) shall
reduce such Member's Capital Account only to the extent of such Member's Common
Interests;
(c) Third, to any Member holding Preferred Interests, in
proportion to the number of their Preferred Interests, until each such Capital
Account has been reduced to zero,
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provided that with respect to any Member holding Common Interests and Preferred
Interests, this clause (c) shall reduce such Member's Capital Account only to
the extent of such Member's Preferred Interests; and
(d) Thereafter, to the Members pro rata in proportion to
their respective Ownership Percentages.
5.2 Regulatory Allocations. Notwithstanding the foregoing provisions of this
Article 5, the following special allocations shall be made in the following
order of priority:
5.2.1 If there is a net decrease in Company Minimum Gain during a
Company taxable year, then each Member shall be allocated items of Company
income and gain for such taxable year (and, if necessary, for subsequent years)
in an amount equal to such Member's share of the net decrease in Company Minimum
Gain, determined in accordance with Regulations Section 1.704-2(g)(2). This
Paragraph 5.2.1 is intended to comply with the minimum gain chargeback
requirement of Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith.
5.2.2 If there is a net decrease in Member Minimum Gain
attributable to a Member Nonrecourse Debt during any Company taxable year, each
Member who has a share of the Member Minimum Gain attributable to such Member
Nonrecourse Debt, determined in accordance with Regulations Section 1.704-
2(i)(5), shall be specially allocated items of Company income and gain for such
taxable year (and, if necessary, subsequent years) in an amount equal to such
Member's share of the net decrease in Member Minimum Gain attributable to such
Member Nonrecourse Debt, determined in a manner consistent with the provisions
of Regulations Section 1.704-2(g)(2). This Paragraph 5.2.2 is intended to comply
with the partner nonrecourse debt minimum gain chargeback requirement of
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
5.2.3 If any Member unexpectedly receives an adjustment,
allocation, or distribution of the type contemplated by Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of income and gain shall be allocated
to all such Members (in proportion to the amounts of their respective Adjusted
Capital Account Deficits) in an amount and manner sufficient to eliminate the
Adjusted Capital Account Deficit of such Member as quickly as possible. It is
intended that this Paragraph 5.2.3 qualify and be construed as a "qualified
income offset" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(d).
5.2.4 If the allocation of Net Loss to a Member as provided in
Paragraph 5.1 hereof would create or increase an Adjusted Capital Account
Deficit, there shall be allocated to such Member only that amount of Net Loss as
will not create or increase an Adjusted Capital Account Deficit. The Net Loss
that would, absent the application of the preceding sentence, otherwise be
allocated to such Member shall be allocated to the other Members in accordance
with their relative Economic Interests, subject to the limitations of this
Paragraph 5.2.4.
5.2.5 To the extent that an adjustment to the adjusted tax basis
of any Company Asset pursuant to Code Section 734(b) or Code Section 743(b) is
required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations
Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital
Accounts as the result of a distribution to a Member in complete
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liquidation of its Membership Interests in the Company, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such gain or loss shall be specially allocated to the
Members in accordance with their Economic Interests in the Company in the event
that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Members to
whom such distribution was made in the event that Regulations Section 1.704-
1(b)(2)(iv)(m)(4) applies.
5.2.6 The Nonrecourse Deductions for each taxable year of the Company
shall be allocated to the Members in proportion to their respective Ownership
Percentages.
5.2.7 The Member Nonrecourse Deductions shall be allocated each year to
the Member that bears the economic risk of loss (within the meaning of
Regulations Section 1.752-2) for the Member Nonrecourse Debt to which such
Member Nonrecourse Deductions are attributable.
5.2.8 The allocations set forth in Paragraphs 5.2.1, 5.2.2, 5.2.3, 5.2.4,
5.2.5, 5.2.6 and 5.2.7 hereof (the "Regulatory Allocations") are intended to
----------------------
comply with certain requirements of Regulations Sections 1.704-1(b) and 1.704-2.
Notwithstanding the provisions of Paragraph 5.1.2 or 5.1.3, the Regulatory
Allocations shall be taken into account in allocating other items of income,
gain, loss and deduction among the Members so that, to the extent possible, the
net amount of such allocations of other items and the Regulatory Allocations to
each Member shall be equal to the net amount that would have been allocated to
each such Member if the Regulatory Allocations had not occurred.
5.3 Tax Allocations.
5.3.1 Except as provided in Paragraph 5.3.2 hereof, for income tax
purposes under the Code and the Regulations each Company item of income, gain,
loss and deduction shall be allocated among the Members as its correlative item
of book income, gain, loss or deduction is allocated pursuant to this Article 5.
5.3.2 Tax items with respect to Company Assets that are contributed to
the Company with a Gross Asset Value that varies from its basis in the hands of
the contributing Member immediately preceding the date of contribution shall be
allocated among the Members for income tax purposes pursuant to Regulations
promulgated under Code Section 704(c) so as to take into account such variation.
The Company shall account for such variation under any method approved under
Code Section 704(c) and the applicable Regulations as chosen by the Board,
including, without limitation, the "traditional method" as described in
Regulations Section 1.704-3(b). If the Gross Asset Value of any Company Asset is
adjusted pursuant to Paragraph 2.30, subsequent allocations of income, gain,
loss and deduction with respect to such Company Asset shall take account of any
variation between the adjusted basis of such Company Asset for federal income
tax purposes and its Gross Asset Value in the same manner as under Code Section
704(c) and the Regulations promulgated thereunder under any method approved
under Code Section 704(c) and the applicable Regulations as chosen by the Board.
Allocations pursuant to this Paragraph 5.3.2 are solely for purposes of federal,
state and local taxes and shall not affect, or in any way be taken into account
in computing, any Member's Capital Account or share of Net Profits, Net Losses
and any other items or distributions pursuant to any provision of this
Agreement.
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5.4 Other Provisions.
5.4.1 For any fiscal year during which any part of a Membership Interest
is transferred between Members or to another Person, the portion of the Net
Profits, Net Losses and other items of income, gain, loss, deduction and credit
that are allocable with respect to such part of a Membership Interest shall be
apportioned between the transferor and the transferee under any method allowed
pursuant to Section 706 of the Code and the applicable Regulations as determined
by the Board.
5.4.2 In the event that the Code or any Regulations require allocations
of items of income, gain, loss, deduction or credit different from those set
forth in this Article 5, the Board is hereby authorized to make new allocations
in reliance on the Code and such Regulations, and no such new allocation shall
give rise to any claim or cause of action by any Member.
5.4.3 For purposes of determining a Member's proportional share of the
Company's "excess nonrecourse liabilities" within the meaning of Regulations
Section 1.752-3(a)(3), each Member's interest in profits shall be in proportion
to the Ownership Percentage of such Member.
5.4.4 The Members acknowledge and are aware of the income tax
consequences of the allocations made by this Article 5 and hereby agree to be
bound by the provisions of this Article 5 in reporting their shares of Net
Profits, Net Losses and other items of income, gain, loss, deduction and credit
for federal, state and local income tax purposes.
ARTICLE 6
---------
OPERATIONS
----------
6.1 Management.
6.1.1 Except as otherwise expressly provided in this Agreement or
required by applicable law, the Board shall have sole and complete charge and
management of all the affairs and business of the Company, in all respects and
in all matters. The Board or any individual Director to whom the Board has
delegated specific authority shall be agents of the Company's business, and the
actions of the Board or such Director taken in such capacity and in accordance
with this Agreement shall bind the Company. Except as otherwise expressly
provided in this Agreement, the Members shall not participate in the control of
the Company, and shall have no right, power or authority to act for or on behalf
of, or otherwise bind, the Company. Except as expressly provided in this
Agreement or required by any non-waivable provisions of applicable law, Members
shall have no right to vote on or consent to any other matter, act, decision, or
document involving the Company or its business.
6.1.2 Except as otherwise expressly provided in this Agreement, the Board
shall have full, exclusive and complete discretion to manage and control the
business and affairs of the Company, to make all decisions affecting the
business and affairs of the Company and to take all such actions as it deems
necessary, appropriate, convenient or incidental to accomplish the purposes and
direct the affairs of the Company. The Board shall have the sole power and
authority to bind the Company, except as otherwise expressly provided in this
Agreement and/or to the extent that such power is expressly delegated in writing
to officers of the Company or any
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other Person by the Board, and such delegation shall not cause the Board to
cease to be the Board of the Company.
6.1.3 The Board shall also have the exclusive right, power and
authority, in the management of the business and affairs of the Company, to do
or cause to be done any and all acts, at the expense of the Company, deemed by
the Board to be necessary, appropriate, convenient or incidental to effectuate
the business of the Company. Without limiting the generality of the foregoing,
the Board shall have full and complete power and authority, without the approval
of any Member and, with respect to clauses (a) through (d), in the ordinary
course of the business of the Company:
(a) to conduct any business, and exercise any rights and powers,
permitted of a limited liability company organized under the laws of the state
of Delaware, in any state, territory, district or foreign country;
(b) subject to the terms and conditions of the Operating
Agreements and Paragraph 6.2.1, to acquire by purchase, lease, contribution or
otherwise, and/or to otherwise own, hold, operate, maintain, improve, lease,
sell, convey, mortgage, transfer or dispose of any property or other assets
(real or personal, tangible or intangible);
(c) subject to Paragraph 6.2.1, and the terms and conditions of
the Operating Agreements, to negotiate, enter into, perform, modify, extend,
terminate, amend, waive, renegotiate and/or carry out any contracts and
agreements;
(d) subject to Paragraph 6.2.1, to lend money, to invest and
reinvest its funds, and to take and hold real and/or personal property for the
payment of funds so loaned or invested;
(e) to sue and be sued, complain and defend, and participate in
administrative, judicial and other proceedings, in the name of, and behalf of,
the Company;
(f) to pay, collect, compromise, arbitrate or otherwise adjust or
settle any and all claims or demands of or against the Company, in such amounts
and upon such terms and conditions, provided that the foregoing do not
materially prejudice a Member;
(g) subject to Paragraph 6.2.1, (a) to, from time to time, employ,
engage, hire or otherwise secure or terminate the services of such Persons,
including any Member or Assignee, or any Persons related thereto or Affiliates
thereof, and (b) to, from time to time, appoint such officers and agents of the
Company as the Board deems necessary or advisable, define and modify, from time
to time, such officers' and agents' duties, and fix and adjust, as appropriate,
such officers' and agents' compensation;
(h) subject to Paragraph 6.6, to cause the Company to indemnify
any Person in accordance with, and to the fullest extent permitted by,
applicable law, and to obtain, for or on behalf of the Company, any and all
types of insurance;
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(i) subject to Paragraph 6.2.1, to borrow money and issue
evidences of indebtedness necessary, convenient or incidental to the business of
the Company, and secure the same by mortgage, pledge or other lien on any
Company Assets or other assets of the Company;
(j) to prepare, execute, file, record, publish and deliver any and
all instruments, documents or statements necessary or convenient to effectuate
any and all actions that the Board is authorized to take on behalf of the
Company;
(k) subject to Paragraph 6.2.1(i), to merge the Company with, or
consolidate the Company with or into, any other corporation, partnership,
limited liability company or other business entity (as defined in Section
18-209(a) of the Act) (whether domestic or foreign);
(l) subject to Paragraph 6.2.1, to deal with, or otherwise engage
in business with, or provide services to and receive compensation therefor from,
any Person who has provided or may in the future provide services to, lend money
to, sell property to, or purchase property from the Company, the Members or any
Affiliate of the Members; and
(m) to establish and maintain Reserves for such purposes and in
such amounts as the Board deems appropriate from time to time.
6.1.4 Subject to the provisions of Paragraph 6.2, the Board may commence
a voluntary case on behalf of, or an involuntary case against, the Company under
a chapter of Title 11 U.S.C. by the filing of a "petition" (as defined in 11
U.S.C. 101(42)) with the United States Bankruptcy Court. The unanimous approval
of the Board shall be required in connection with the commencement of such a
voluntary bankruptcy. Any such petition filed by any Member or other Person
shall be deemed an unauthorized and bad faith filing and all parties to this
Agreement shall use their best efforts to cause such petition to be dismissed.
6.1.5 The Company, and any member of the Board on behalf of
the Company, may enter into and perform the Capital Contribution
Agreement without any further act, vote or approval of any Member
notwithstanding any other provision of this Agreement (including, without
limitation, Paragraph 6.2 hereof), the Act or other applicable law. Any
member of the Board is hereby authorized to enter into and perform on
behalf of the Company the documents described in the immediately
preceding sentence, but such authorization shall not be deemed a
restriction in the power of the Board to enter into other documents on
behalf of the Company to the extent provided for in this Agreement.
Subject to the terms of this Agreement, the Board may authorize any
Person (including, without limitation, any Member or Officer (as defined
below) to enter into and perform any other document on behalf of the
Company.
6.2 Limitations on Authority of Board.
6.2.1 Notwithstanding any contrary provision of this Agreement, without
either the approval of a Majority in Interest or the unanimous approval of the
Board, the Board shall not have the authority to:
(a) Amend this Agreement or the operating agreement of ZB.com or
any other Subsidiary of the Company or create any additional Subsidiary of the
Company or of ZB.com;
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(b) Appoint or remove the executive officers of the Company or ZB.com
or any other Subsidiary of the Company (including, without limitation, a
President and/or Chief Executive Officer);
(c) Establish or modify the compensation of the executive officers
referred to in subparagraph (b) above;
(d) Cause the Company or ZB.com or any other Subsidiary of the Company
to enter into any new agreement, or to materially amend the terms of any
existing agreement, with Retail Sponsor or ONRP or an Affiliate of any of the
foregoing;
(e) Approve the annual operating budget, including spending, of the
Company or ZB.com or any other Subsidiary of the Company;
(f) Admit any Person or an Additional Member or admit any Person as a
member, partner, shareholder or other equity holder in ZB.com or any other
Subsidiary of the Company;
(g) Pledge the assets of the Company or ZB.com or any other Subsidiary
of the Company;
(h) Approve any Terminating Capital Transaction;
(i) Merge the Company with, or consolidate the Company with or into,
any other corporation, partnership, limited liability company or other business
entity (as defined in Section 18-209(a) of the Act) (whether domestic or
foreign);
(j) Borrow money or issue evidences or guarantees of indebtedness;
(k) Commence a voluntary cause on behalf of, or an involuntary case
against, the Company under a chapter of Title 11 U.S.C. by the filing of a
"petition" (as defined in 11 U.S.C. 101 (42)) with the United States Bankruptcy
Court;
(l) Except as expressly provided for herein, declare, set aside or pay
any dividend or make any other distribution of cash or property, or redeem,
repurchase or make any similar payments in connection with the retirement of any
Membership Interests; or
(m) Dissolve the Company.
6.2.2 Notwithstanding any contrary provision of this Agreement, without the
written consent of all Members, the Board shall not have the authority to:
(a) Do any act in contravention of the Agreement; or
(b) Knowingly perform any act that would subject any Member to
liability for the debts, liabilities or obligations of the Company or any other
Member.
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6.2.3 Each Member shall be entitled to one vote for each (a) Voting
Preferred Interest and (b) Voting Common Interest held by such Member on any
matter submitted to the Members for approval. Non-Voting Common Interests and
Non-Voting Preferred Interests shall not be entitled to vote on any matter.
Members holding Voting Common Interests and Voting Preferred Interests shall
vote together as one class on all matters. The voting rights of any additional
classes of interests in the Company created after the date hereof shall be
determined by a Majority in Interest.
6.3 Reliance By Third Parties. Any Person dealing with the Company or the Board
may rely upon a certificate signed by the Board as to:
(a) the identity of the Board or any Member of the Company;
(b) the existence or non-existence of any fact or facts which
constitute a condition precedent to acts by the Board or in any other manner
germane to the affairs of the Company;
(c) the Persons who are authorized to execute and deliver any
instrument or document for or on behalf of the Company; or
(d) any act or failure to act by the Company or as to any other
matter whatsoever involving the Company or any Member.
6.4 Compensation of Directors.
6.4.1 The Directors shall not receive any fees for its services in
administering the officers of the Company.
6.4.2 The Directors shall be entitled to reimbursement on a monthly basis
from the Company for all out-of-pocket costs and expenses incurred by them, in
their reasonable discretion and in accordance with policies and procedures
adopted by the Board from time to time, for or on behalf of the Company.
6.5 Records and Reports.
6.5.1 The Board shall cause to be kept, at the principal place of
business of the Company, or at such other location as the Board shall reasonably
deem appropriate, full and proper ledgers, other books of account, and records
of all receipts and disbursements, other financial activities, and the internal
affairs of the Company for at least the current and past four fiscal years.
6.5.2 The Board shall also cause to be sent to each Member of the
Company, the following:
(a) within ninety (90) days following the end of each fiscal year
of the Company, a report that shall include all necessary information required
by the Members for preparation of its federal, state and local income or
franchise tax or information returns,
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including each Member's share of Net Profits, Net Losses and any other items of
income, gain, loss and deduction for such fiscal year; and
(b) a copy of the Company's federal, state and local income tax or
information returns for each fiscal year, concurrent with the filing of such
returns.
6.5.3 Members may, for purposes reasonably related to their Membership
Interests, examine and copy (at their own cost and expense) the books and
records of the Company at all reasonable business hours.
6.6 Indemnification and Liability.
6.6.1 The Company shall indemnify and hold harmless each member of the
Board and all officers, employees, agents and Affiliates of the Company
(individually, an "Indemnitee") to the full extent permitted by law from and
----------
against any and all losses, claims, demands, costs, damages, liabilities, joint
and several, expenses of any nature (including reasonable attorneys' fees and
disbursements), judgments, fines, settlements and other amounts arising from any
and all claims, demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, in which the Indemnitee may be involved, or
threatened to be involved as a party or otherwise, relating to the performance
or nonperformance of any act concerning the activities of the Company, if (a)
the Indemnitee acted in good faith and in a manner it reasonably believed to be
in, or not contrary to, the best interests of the Company, (b) the Indemnitee's
conduct did not constitute gross negligence or willful misconduct and (c) the
Indemnitee's conduct is not based upon or attributable to the receipt by the
Indemnitee of a personal benefit to which the Indemnitee is not entitled. The
termination of an action, suit or proceeding by judgment, order, settlement, or
upon a plea of nolo contendere or its equivalent, shall not, in and of itself,
create a presumption or otherwise constitute evidence that the Indemnitee acted
in a manner contrary to that specified in clauses (a) or (b) above.
6.6.2 Expenses incurred by an Indemnitee in defending any claim, demand,
action, suit or proceeding subject to this Paragraph 6.6 shall be advanced by
the Company prior to the final disposition of such claim, demand, action, suit,
or proceeding upon receipt by the Company of a written commitment by or on
behalf of the Indemnitee to repay such amount if it shall be determined that
such Indemnitee is not entitled to be indemnified as authorized in this
Paragraph 6.6.
6.6.3 Any indemnification provided hereunder shall be satisfied solely
out of the assets of the Company, as an expense of the Company. No Member shall
be subject to personal liability by reason of these indemnification provisions.
6.6.4 The provisions of this Paragraph 6.6 are for the benefit of the
Indemnitees and shall not be deemed to create any rights for the benefit of any
other Person.
6.6.5 Neither the Board nor the officers of the Company shall be liable
to the Company or to a Member for any losses sustained or liabilities incurred
as a result of any act or omission of the Board or any such officer if (a) the
act or failure to act of the Board or such officer was in good faith and in a
manner it reasonably believed to be in, or not contrary to, the best interests
of the Company, (b) the conduct of the Board or such officer did not constitute
gross negligence or
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willful misconduct and (c) the Indemnitee's conduct is not based upon or
attributable to the receipt by the Indemnitee of a personal benefit to which the
Indemnitee is not entitled.
6.6.6 To the extent that any Director or any officer of the Company
(each, a "Responsible Party") has, at law or in equity, duties (including,
-----------------
without limitation, fiduciary duties) to the Company or any Member or other
Person bound by the terms of this Agreement, such Responsible Parties shall not
be liable to the Company, any Member, or any such other Person for its good
faith reliance on the provisions of this Agreement so long as such Responsible
Parties act in accordance with this Agreement and exercise such standard of care
applicable to a director or any officer, as applicable, of a corporation
incorporated in the State of Delaware. The provisions of this Agreement, to the
extent, if any, that they restrict the duties of a Responsible Party otherwise
existing at law or in equity, are agreed by all parties hereto to replace such
other duties to the greatest extent permitted under applicable law.
6.6.7 Whenever a Responsible Party is required or permitted to make a
decision, take or approve an action, or omit to do any of the foregoing (a) in
its discretion, (b) under a similar grant of authority or latitude or (c)
without an express standard of behavior (including, without limitation,
standards such as "reasonable" or "good faith"), then such Responsible Party
shall be subject to the standard of care applicable to a director or any
officer, as applicable, of a corporation incorporated in the State of Delaware.
6.7 Removal and Withdrawal of Directors.
6.7.1 A Director may not be removed as a Director at any time except (a)
by the Person that designated such Director or (b) for cause. For purposes of
this Paragraph 6.7.1, "cause" shall mean a finding by a majority of the Board
that the Director has engaged in conduct that is fraudulent, disloyal, criminal
or injurious to the Company, including, without limitation, embezzlement, theft,
commission of a felony or proven dishonesty in the course of his or her service,
or that the Director has disclosed trade secrets or confidential information of
the Company to any Persons not entitled to receive such information. Upon (i)
the removal of a Director pursuant to this Paragraph 6.7.1, (ii) the withdrawal
of a Director pursuant to Paragraph 6.7.2, or (iii) the death or Incapacity of a
Director, the Member that designated such Director shall be entitled to
designate a replacement Director.
6.7.2 Any Director may withdraw as a Director at any time without the
prior consent of any Person by providing the Board written notice thereof.
6.8 Other Activities. Subject to the provisions of this Article and Paragraph
10.1 (and any employment or other agreement with the Company or ZB.com to which
such Member may be a party), any members of the Board may engage or invest in,
and devote their time to, any other business venture or activity of any nature
and description (independently or with others), including, without limitation,
the business of Retail Sponsor and ONRP, as applicable, whether or not such
other activity may be deemed or construed to be in competition with the Company.
Neither the Company nor any other Member shall have any right by virtue of this
Agreement or the relationship created hereby in or to such other venture or
activity of any Member (or to the income or proceeds derived therefrom), and the
pursuit thereof, shall not be deemed wrongful or
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improper. Notwithstanding the foregoing, the Board shall devote such time to the
Company as it deems reasonably necessary for the proper performance of its
obligations and duties hereunder.
6.9 Officers. The Board may select natural persons who are agents or employees
of the Company to be designated as officers of the Company (the "Officers"),
--------
with such titles as the Board shall determine. Any number of offices may be held
by the same person. Any such Officer chosen by the Board shall be a "manager"
(within the meaning of the Act) of the Company. The Board may choose a "Chairman
of the Board," a "President," a "Vice President," a "Secretary," a "Treasurer"
and such other Officers as it shall deem necessary who shall hold their offices
for such terms and shall exercise such powers and perform such duties as shall
be determined from time to time by the Board. The salaries of all Officers shall
be fixed in a manner prescribed by the Board. The Officers shall hold office
until their successors are chosen and qualify. Any Officer elected or appointed
by the Board may be removed at any time by the affirmative vote of a majority of
the Board. Any vacancy occurring in any office of the Company shall be filled by
the Board.
6.10 The Chairman of the Board. The Chairman of the Board shall be elected from
among the Directors. The Chairman shall preside at all meetings of the Members
and of the Board as provided herein.
6.11 The President. The President shall be the chief executive officer of the
Company, shall have general active management of the business of the Company and
shall see that all orders and resolutions of the Board are carried into effect.
The President shall execute bonds, mortgages and other contracts, except where
required or permitted by law to be otherwise signed and executed and except
where signing and execution thereof shall be expressly delegated by the Board to
some other Officer or except as otherwise permitted in Paragraph 6.11. In the
absence of the Chairman or in the event of the Chairman's inability to act, the
President shall perform the duties of the Chairman.
6.12 The Vice President. In the absence of the President or in the event of the
President's inability to act, the Vice President, if any, (or in the event there
be more than one Vice President, the Vice Presidents in the order designated by
the Board, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents, if any, shall perform such other duties and have
such other powers as the Board may from time to time prescribe.
6.13 The Secretary and Assistant Secretary. The Secretary shall attend all
meetings of the Board and all meetings of the Members and record all the
proceedings of the meetings of the Members and of the Board in a book to be kept
for that purpose. The Secretary shall give, or cause to be given, notice of all
meetings of the Members and Board, and shall perform such other duties as may be
prescribed by the Board or the President, under whose supervision the Secretary
shall be. The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board (or if there be no such
determination, then in order of their election) shall, in the absence of the
Secretary or in the event of the Secretary's inability to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
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<PAGE>
6.14 The Treasurer and Assistant Treasurer. The Treasurer shall have the custody
of the Company funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all moneys and other valuable effects in the name and to the credit of the
Company in such depositories as may be designated by the Board. The Treasurer
shall disburse the funds of the Company as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the President or the
Board (when the Board so requires) an account of all of the Treasurer's
transactions and of the financial condition of the Company. The Assistant
Treasurer, or if there shall be more than one, the Assistant Treasurers in the
order determined by the Board (or if there be no such determination, then in the
order of their election), shall, in the absence of the Treasurer or in the event
of the Treasurer's inability to act, perform the duties and exercise the powers
of the Treasurer and shall perform such other duties and have such other powers
as the Board may from time to time prescribe.
6.15 Officers as Agents. The Officers, to the extent of their powers set forth
in this Agreement, are agents of the Company for the purpose of the Company's
business, and the actions of the Officers taken in accordance with such powers
shall bind the Company.
ARTICLE 7
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TRANSFERS OF Interests; RIGHT OF FIRST REFUSAL
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7.1 Transfers. No Member or Assignee may make any Membership Interest Transfer
of all or any portion of its Membership Interest (or beneficial interest
therein) without the prior written consent of a Majority in Interest, which
consent may be given or withheld in a Majority in Interests' sole and absolute
discretion, for a period of three years commencing on the Effective Date.
7.1.1 No Member shall make any Membership Interest Transfer or Permitted
Transfer except as specifically permitted under the terms of this Agreement. Any
Membership Interest Transfer or attempted Membership Interest Transfer not in
accordance herewith shall be null and void and of no force or effect.
7.1.2 Prior to an IPO, ONRP may not Transfer its Membership Interests, in
whole or in part, to another Person which derived 10% or more of its
consolidated revenues (as measured in the most recent full fiscal year) from the
sale of products in the Same Category.
7.1.3 Subject to Paragraphs 7.1.1 or 7.1.2 and to the following sentence,
any Member may make a Transfer of Membership Interests which constitutes a
Permitted Transfer. Notwithstanding anything else contained herein to the
contrary, any Membership Interests Transferred pursuant to this Agreement
(including in a Permitted Transfer) shall nevertheless remain subject to the
provisions of this Agreement, and the transferee (if not already a Party) of any
such Membership Interests which remain subject to the provisions of this
Agreement shall execute and deliver to each Party, as a condition precedent to
such Transfer, documents reasonably satisfactory to the Company confirming that
it agrees to be bound by the terms of this Agreement in the same manner as its
transferor, except as otherwise specifically provided in this Agreement.
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7.1.4 The Company generally will not request an opinion of counsel with
respect to a Transfer by any Member to one of its Affiliates, provided that such
Member delivers to the Company such certificates executed by an officer of such
Member as the Company shall reasonably request that such Transfer is exempt from
the registration requirements of the Securities Act.
7.1.5 The provisions of this Paragraph 7.1 shall terminate on the day
which is 180 days after the date on which an IPO is consummated, except for
Paragraph 7.1.2 above which shall terminate on the date on which the IPO is
consummated.
7.2 Right of First Refusal.
7.2.1 In the event any Member (an "Offering Member") desires to make a
---------------
Membership Interest Transfer, it must first deliver written notice thereof (an
"Offer Notice") to the Company and the other Members. The Offer Notice must
------------
contain a full description of the proposed Membership Interest Transfer,
including, without limitation, the type of Membership Interest Transfer, the
number of Membership Interests to be Transferred (the "Affected Membership
-------------------
Interests"), the proposed per Membership Interest purchase price and terms of
- ---------
payment for the Affected Membership Interests, the proposed date of such
Transfer and the identity of the proposed transferee, and must be accompanied by
a copy of the proposed transferee's offer to acquire the Affected Membership
Interests. An Offer Notice shall constitute the Offering Member's binding
agreement to sell the applicable number of Affected Membership Interests to each
of the other Members and the Company on the terms and conditions specified
therein.
7.2.2 Each of the other Members shall have twenty (20) days after its
receipt of the Offer Notice to elect, by delivering a written acceptance to the
Offering Member and the Company (an "ROFR Acceptance Notice"), to purchase up to
its ROFR Allotment of the Affected Membership Interests; provided, however, in
the event any such other Member specifies a number of Affected Membership
Interests in excess of its ROFR Allotment, such other Member shall be deemed to
have specified its ROFR Allotment and such excess Affected Membership Interests
shall be treated as Additional ROFR Membership Interests (as defined below). The
ROFR Acceptance Notice shall also specify the aggregate number of additional
Affected Membership Interests, if any, which such other Member would agree to
purchase ("Additional ROFR Membership Interests") in the event any of such other
------------------------------------
Members fail to subscribe for their respective ROFR Allotments of the Affected
Membership Interests. Upon such an occurrence, the Offering Member shall
apportion the unsubscribed ROFR Allotments of the other Members among those
Members whose ROFR Acceptance Notices specified (or was deemed to specify) an
amount of Additional ROFR Membership Interests on a pro rata basis among such
Members in accordance with the number of Additional ROFR Membership Interests
specified by all such Members in their ROFR Acceptance Notices. A ROFR
Acceptance Notice shall constitute a Member's binding agreement (subject to any
closing conditions specified in the Offer Notice or otherwise specifically
provided for in Paragraph 7.2.4 below) to purchase the number of Affected
Membership Interests set forth therein (including any Additional ROFR Membership
Interests) on the terms and conditions specified in the Offer Notice.
7.2.3 In the event the Members do not exercise their option to purchase all
of the Affected Membership Interests in accordance herewith, the Company shall
have the option (but
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not the obligation) to purchase all (but not less than all) of the remaining
Affected Membership Interests by delivering a written acceptance to the Offering
Member within 10 days after receipt of the ROFR Acceptance Notices (the "Cutoff
------
Date"). The Offering Member shall have no obligation to sell any Affected
- ----
Membership Interests to the other Members or to the Company pursuant to this
Paragraph 7.2 unless all of the Affected Membership Interests have been
subscribed for in accordance with Paragraph 7.2.2 above and this Paragraph
7.2.3.
7.2.4 With respect to any purchase of Affected Membership Interests
pursuant to Paragraphs 7.2.2 and 7.2.3 above, the purchase price for the
Affected Membership Interests and the other terms of transfer shall be as set
forth in the Offer Notice. The closing of such Transfer shall take place at the
Company's principal office at 10:00 a.m. local time on the tenth (10th) business
day after the Offering Member receives its last written acceptance pursuant to
this Paragraph 7.2 (or, if applicable, on the third business day following the
date on which any required governmental approvals for such Transfer are obtained
or the expiration of any waiting period under the HSR Act), or at such other
place, time or date as the Offering Member and the purchaser(s) of Affected
Membership Interests (the "Purchasers") mutually agree. At the closing, the
----------
Offering Member shall deliver to each Purchaser its confirmation that it has
transferred the Affected Membership Interests free and clear of any and all
pledges, liens, claims, security interests or other encumbrances (other than
restrictions imposed by this Agreement) and the Purchaser shall pay to the
Offering Member the consideration set forth in the Offer Notice in accordance
with the terms described therein. In the event any Purchaser fails to obtain any
such required governmental consent or approval (or the expiration of any waiting
period under the HSR Act) prior to the 60th day following the Cutoff Date (or
such later date as may be agreed to by the Offering Member), after having
attempted in good faith, using commercially reasonable efforts, to obtain such
consent or approval (or such expiration), such Purchaser shall be released from
its obligation to purchase any Affected Membership Interests in excess of the
amount for which such governmental consent or approval is required (or which
could be purchased without any filing under the HSR Act). Such excess Membership
Interests shall be reallocated as Additional ROFR Membership Interests pursuant
to the provisions of Paragraphs 7.2.2 and 7.2.3 above.
7.2.5 Subject to the provisions of Paragraphs 7.2.2 and 7.2.3, in the event
that all of the Affected Membership Interests are not purchased pursuant to this
Paragraph 7.2, the Offering Member shall be free to Transfer the Affected
Membership Interests in strict accordance with the terms set forth in the Offer
Notice at any time within sixty (60) days after the Cutoff Date (the "Transfer
--------
Period Termination Date"), provided that if the Offering Member has executed a
- -----------------------
definitive agreement for the sale of all of the Affected Membership Interests
within thirty (30) days after the Cutoff Date, then the Offering Member shall be
entitled to extend the Transfer Period Termination Date for up to an additional
thirty (30) days to effect the closing of such sale, or, if any required
governmental approval (or expiration of any waiting period) has not been
obtained by such date, to such date (not more than 120 days after the Cutoff
Date) as may be required for any necessary governmental approvals (or expiration
of any waiting period) for such Transfer to be obtained. In the event that the
Offering Member does not sell or otherwise dispose of all of such Affected
Membership Interests in the manner set forth in the immediately preceding
sentence prior to the Transfer Period Termination Date, the right of first
refusal provided for in this Paragraph 7.2 shall continue to be applicable to
any subsequent disposition of such Membership Interests.
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7.2.6 The provisions of this Paragraph 7.2 shall terminate on the day on
which an IPO is consummated.
7.3 Further Restrictions. Notwithstanding any contrary provision in this
Agreement, any otherwise permitted Transfer shall be null and void if:
(a) such Transfer would cause a termination of the Company for
federal income tax purposes;
(b) such Transfer would, in the written opinion of counsel to the
Company, cause the Company to cease to be classified as a partnership for
federal income tax purposes;
(c) such Transfer requires the registration of such Transferred
Membership Interests pursuant to any applicable federal or state securities
laws;
(d) such Transfer causes the Company to become a "publicly traded
partnership," as such term is defined in Sections 469(k)(2) or 7704(b) of the
Code;
(e) such Transfer subjects the Company to regulation under the
Investment Company Act of 1940, the Investment Advisers Act of 1940 or the
Employee Retirement Income Security Act of 1974, each as amended;
(f) such Transfer results in a violation of applicable laws;
(g) such Transfer causes the revaluation or reassessment of the
value of any Company Asset resulting in any material federal, state or local tax
liability;
(h) such Transfer is made to any Person who lacks the legal right,
power or capacity to own such Membership Interest; or
(i) the Company does not receive original copies of (i) any
instruments of Transfer and (ii) such Assignee's consent to be bound by this
Agreement as an Assignee, in each case in form and substance satisfactory to the
Board (as determined in the Board's sole and absolute discretion).
7.4 Rights of Assignees. Until such time, if any, as a transferee of any
permitted Transfer pursuant to this Article 7 is admitted to the Company as a
Substitute Member pursuant to Paragraph 7.7: (a) such transferee shall be an
Assignee only, and only shall receive, to the extent Transferred, the
distributions and allocations of income, gain, loss, deduction, credit, or
similar item to which the Member which Transferred its Membership Interests
would be entitled, and (b) such Assignee shall not be entitled or enabled to
exercise any other rights or powers of a Member, such other rights remaining
with the transferring Member. In such a case, the transferring Member shall
remain a Member even if he has transferred his entire Membership Interest, in
whole or in part, in the Company to one or more Assignees. In the event any
Assignee desires to make a further assignment of any Membership Interest in the
Company, such Assignee shall be subject to all of the provisions of this
Agreement to the same extent and in the same manner as any Member desiring to
make such an assignment.
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7.5 Admissions, Withdrawals and Removals. No Person shall be admitted to the
Company as a Member except in accordance with Paragraph 3.4 (in the case of
Persons obtaining an interest in the Company directly from the Company) or
Paragraph 7.7 (in the case of transferees of a Permitted Transfer of a
Membership Interest in the Company from another Person). Except as otherwise
specifically set forth in Paragraphs 7.8 or upon the admission of a Substitute
Member pursuant to Paragraph 7.6, no Member shall be entitled to resign or
withdraw from being a Member of the Company without the written consent of a
Majority in Interest, which consent may be given or withheld at its sole and
absolute discretion. No Member shall be subject to removal. No admission,
withdrawal or removal of a Member shall, in and of itself, cause the dissolution
of the Company. Any purported admission or resignation which is not in
accordance with this Agreement shall be null and void.
7.6 Payment Upon Resignation of Member. If any Member resigns from the Company
with the consent of a Majority in Interest (other than pursuant to Paragraph
7.8) then such Member automatically shall receive from the Company a payment
equal to the Member's Capital Account balance as adjusted as of the effective
date of the written election of resignation (the "Termination Payment"). The
-------------------
Termination Payment shall be paid on the effective date of the written
resignation. If any Member attempts to resign from the Company (other than
pursuant to Paragraph 7.8) without the consent of a Majority in Interest or the
remaining Members, then, notwithstanding the last sentence of Paragraph 7.5, a
Majority in Interest may, in its sole and absolute discretion, permit such
resignation (without waiving, in any manner, any other rights available to it or
the Company at law or in equity and in addition to, and not in lieu of, any
other remedies to which it or the Company may be entitled), provided that such
resigning Member shall not be entitled to any Termination Payment or any other
compensation whatsoever in consideration for its terminated Membership Interest,
such Membership Interest shall be cancelled and such resigning Member shall have
no further rights or interests in the Company. Notwithstanding anything to the
foregoing in this Paragraph 7.6, if ONRP resigns from the Company without the
consent of all of the Members prior to November 15, 1999, ONRP shall make the
Follow-On Subscription payment upon its withdrawal.
7.7 Admission of Assignees as Substitute Members.
7.7.1 An Assignee shall become a Substitute Member only if all of the
requirements of this Article 7 have been met and when each of the following
conditions are satisfied:
(a) the assignor of the Membership Interests transferred sends
written notice to the Board requesting the admission of the Assignee as a
Substitute Member and setting forth the name and address of the Assignee, the
Membership Interest transferred, and the effective date of the Transfer;
(b) the Board consents in writing to such admission, which consent
may be given or withheld in the Board's sole and absolute discretion; and
(c) the Board receives from the Assignee (i) such information
concerning the Assignee's financial capacities and investment experience as may
reasonably be requested by the Board, and (ii) (x) copies of any instruments of
Transfer, (y) such Assignee's consent to be bound by this Agreement as a
Substitute Member, in each case in form and substance
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<PAGE>
satisfactory to the Board (as determined in the Board's sole and absolute
discretion), and (z) the assignment agreement shall contain a covenant that the
Assignee will not take any direct or indirect action affecting the Membership
Interests held by it which would cause any of the effects specified in Sections
7.3(a) through (h) above.
7.7.2 Upon the admission of any Substitute Member, Exhibit A shall be
amended to reflect the name, address, Membership Interests and Ownership
Percentage of such Substitute Member and to eliminate or adjust, if necessary,
the name, address, Membership Interests and Ownership Percentage of the
predecessor of such Substitute Member.
7.8 Resignation of Members. If a Member has transferred all of its Membership
Interests to one or more Assignees, then such Member shall resign from the
Company if and when all such Assignees have been admitted as Substitute Members
in accordance with this Agreement.
7.9 Conversion of Membership Interest. Upon the Incapacity of a Member, such
Incapacitated Member shall be entitled to receive only the allocations and
distributions attributable to the Member's Membership Interest in the Company,
if any, but shall not be entitled to any other rights of a Member. Such
Incapacitated Member (or its executor, administrator, trustee or receiver, as
applicable) shall thereafter be deemed an Assignee for all purposes hereunder
unless the Member of such Membership Interest is admitted as a Substitute Member
pursuant to Paragraph 7.7.
7.10 Compliance With IRS Safe Harbor. The Board shall monitor the transfers of
interests in the Company to determine (i) if such interests are being traded on
an "established securities market" or a "secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code, and (ii)
whether additional transfers of interests would result in the Company being
unable to qualify for at least one of the "safe harbors" set forth in
Regulations Section 1.7704-1 (or such other guidance subsequently published by
the Internal Revenue Service setting forth safe harbors under which interests
will not be treated as "readily tradable on a secondary market (or the
substantial equivalent thereof)" within the meaning of Section 7704 of the Code)
(the "Safe Harbors"). The Board shall take all steps reasonably necessary or
------------
appropriate to prevent any trading of interests or any recognition by the
Company of transfers made on such markets and, except as otherwise provided
herein, to ensure that at least one of the Safe Harbors is met.
ARTICLE 8
---------
CONVERSION AND EXCHANGE OF INTERESTS
------------------------------------
8.1 Conversion of Preferred Interests. Each Member that holds Voting Preferred
Interests or Non-Voting Preferred Interests may, at the election of such Member,
convert all or any part of such Preferred Interests into an equal number of
Voting Common Interests or Non-Voting Common Interests, as applicable. If any
Member elects to convert Preferred Interests into Common Interests pursuant to
this Paragraph 8.1, such Member shall deliver a written notice to the Company
specifying the number of Preferred Interests to be converted into Common
Interests. Upon receipt of such notice by the Company, the Board will take all
actions as may be
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necessary to reflect such conversion of Interests on the books and records of
the Company, including, without limitation, on Exhibit A attached hereto.
8.2 Restrictions on Conversion of Interests. No Member shall have the right to
convert (a) Common Interests into Preferred Interests, (b) Non-Voting Preferred
Interests into Voting Common Interests, (c) Non-Voting Preferred Interests into
Voting Preferred Interests or (d) Non-Voting Common Interests into Voting Common
Interests.
8.3 Corporate Conversion.
8.3.1 It is the intent of the Members that in the event the Board
determines to cause ZB.com or another Subsidiary of the Company to pursue a
public offering of equity securities which is expected to constitute an IPO (the
"Converting Subsidiary"), the Converting Subsidiary will be reorganized as a
---------------------
corporation incorporated under the laws of the State of Delaware in accordance
with the provisions of this Paragraph 8.3. The Members acknowledge that there is
no specific date by which the Company anticipates causing ZB.com or another
Subsidiary of the Company to consummate a Corporate Conversion (as defined
below) and/or an IPO.
8.3.2 In connection with an IPO by the Converting Subsidiary, the Board
and each of the Members agree to take such actions as may be reasonably
necessary to cause the Converting Subsidiary to be reorganized (by merger,
conversion or otherwise) as, or its assets and liabilities to be contributed to,
a newly-formed Delaware corporation which, immediately prior to such
reorganization, has no material assets or liabilities (any such transaction
being referred to herein as a "Corporate Conversion"), and that upon such
--------------------
Corporate Conversion, the Delaware corporation succeeding to the Converting
Subsidiary's assets and liabilities (the "Conversion Corporation") shall succeed
----------------------
to and specifically assume all of the rights, obligations, benefits and
liabilities of the Converting Subsidiary and shall be deemed the successor of
the Converting Subsidiary for all purposes under the Capital Contribution
Agreement. Subject to Paragraph 8.3, upon the occurrence of any such Corporate
Conversion, the membership interests of the Converting Subsidiary shall, to the
extent feasible based on the advice of the underwriters, be converted into, or
exchanged for, on a one-for-one basis, shares of super-voting common stock of
the Conversion Corporation; provided, however, that if the amount a holder would
receive upon a liquidation is less than the liquidation amount as set forth in
the operating agreement of the Conversion Corporation with respect to such
converted preferred interests and common interests of the Conversion
Corporation, then the Board of Directors of the Conversion Corporation shall
adjust the conversion ratio for the common interests to provide that the holders
thereof shall receive less than one share per converted common interest to the
extent necessary to preserve the amount that a holder of the preferred interests
would receive upon a liquidation of the Converting Subsidiary.
8.3.3 Conversion Procedures. The Company shall promptly notify each Member
of its intention to effect a Corporate Conversion of the Converting Subsidiary,
which notice shall specify the manner in which such Corporate Conversion is to
take place, together with a description of the anticipated tax treatment and
consequences of such Corporate Conversion.
8.3.4 The parties acknowledge and agree that the Corporate Conversion
should be accomplished in a tax free transaction, or if such tax free
transaction is not reasonably available,
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in the most tax efficient manner possible. In the event that (i) any Member
reasonably believes that the structure selected by the Board to effect the
Corporate Conversion would result in the incurrence of tax liability by the
Member in connection with such Corporate Conversion and (ii) such Member
believes that a different structure for such Corporate Conversion would result
in the incurrence of lesser tax liability, then the Company agrees to act in
good faith and in the best interests of the Members in revising the proposed
structure of such Corporate Conversion so as to minimize such tax liability.
8.3.5 Following notice of a proposed Corporate Conversion, the Converting
Subsidiary and each Member shall use their respective commercially reasonable
efforts to seek and obtain any required governmental consents and approvals and
to make all filings required under the HSR Act (to the extent the Board or such
Member reasonably determines such filings are necessary in connection with the
Corporate Conversion) and cause the termination or expiration of the waiting
period applicable thereto; provided, that no Member shall be required, as a
condition of the receipt of any such consent or approval or expiration of any
such waiting period, to agree to dispose of any of its assets or any equity
interest in the Converting Subsidiary.
8.4 Exchange of Interests.
8.4.1 In the event of an IPO by ZB.com or another subsidiary of the
Company (the "Issuer"), each Member may at the time of the IPO or thereafter, at
------
the election of such Member, exchange all or any part of such Member's
Membership Interests (whether voting, non-voting, common or preferred) for
equity securities of the Issuer of the kind sold by the Issuer in such offering
which are held by (or are issuable upon conversion of any securities held by)
the Company (the "Issuer Securities"), subject to the provisions of Paragraph
-----------------
8.4.2. The number of Issuer Securities to be received in exchange for such
Member's Membership Interest shall be equal to the Ownership Percentage
represented by the Membership Interests to be exchanged multiplied by the total
number of Issuer Securities then held by the Company. If any Member elects to
exchange Membership Interests for Issuer Securities pursuant to this Paragraph
8.4, such Member shall deliver a written notice to the Company specifying the
number of Membership Interest to be exchanged. Upon receipt of such notice by
the Company, the Board will take all actions as may be necessary to reflect such
exchange (and the reduction of the exchanging Member's Ownership Percentage) on
the books and records of the Company, including, without limitation, on Exhibit
A attached hereto. Any Member electing to exchange Membership Interest for
Issuer Securities pursuant to this Paragraph 8.4 at the time of an IPO shall
receive registration rights with respect to such equity securities such that the
Issuer shall register such converted member shares for resale as promptly as the
Board deems practicable, and to the extent that such Interests have not vested
at such time, will file a subsequent registration on form S-3 when the Board
deems practicable after vesting. The consummation of any exchange pursuant to
this Paragraph 8.4 shall be subject to receipt by the Company of all documents
in a form reasonably satisfactory to the Company which in the opinion of the
Company's counsel are necessary or advisable to complete such exchange.
8.4.2 Upon consummation of any exchange of Membership Interests pursuant
to Paragraph 8.4.1, the exchanging Member's Membership Interests shall, to the
extent exchanged, be canceled. If a Member has exchanged all of its interests
for Issuer Securities, then such Member shall withdraw from the Company. Any
such cancellation of Membership Interests
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and/or withdrawal from the Company shall be acknowledged in writing in a form
reasonably acceptable to the Company by the applicable Member.
8.4.3 Notwithstanding any provision contained in Paragraph 8.4.1, no
Member shall have the right to exchange any of such Member's Membership
Interests for Issuer Securities if such exchange would result in the Company
owning less than 51% of the outstanding voting rights of the Issuer. In the
event that more than one Member desires to exchange Membership Interests
pursuant to this Paragraph 8.4, and the result of such exchanges would result in
the Company owning less than 51% of the outstanding voting rights of the Issuer,
then the number of Membership Interests to be exchanged by each Member shall be
as follows: each Member may exchange up to an amount equal to the maximum number
of Membership Interests which can be exchanged without reducing the Company's
ownership of voting rights in the Issuer below 51% ("Maximum Allowed Exchange")
------------------------
multiplied by the Member's Ownership Percentage, provided that if the preceding
formula is applied and the total number of Interests which the Members desire to
be exchanged thereby are less than the Maximum Allowed Exchange, then the
Members may exchange additional Interests in the amount of such shortfall in
accordance with their Ownership Percentage.
8.4.4 In the event that any Member's acquisition of Issuer Securities may
not be effected because the waiting period under the HSR Act has not expired,
then such Member shall be entitled to request, instead of the Issuer Securities,
non-voting common stock of the Converting Subsidiary ("Non-Voting Stock");
----------------
provided, however, that the terms of such Non-Voting Stock shall provide that
(i) such Non-Voting Stock would convert (on a share for share basis) into Issuer
Securities, upon the expiration of the waiting period under the HSR Act or the
Transfer to any third party whose ownership of Issuer Securities does not
require any consent, approval or filing (or where such has been obtained), (ii)
such Non-Voting Stock would be subject to adjustments such that, upon
conversion, a holder would receive such cash, securities or other property as it
would have been entitled had such holder received Issuer Securities, (iii) the
Conversion Corporation would not effect any stock split, stock dividend or
recapitalization affecting the Issuer Securities unless a corresponding stock
split, stock dividend or recapitalization were effected with respect to the Non-
Voting Stock and (iv) the Issuer Securities and Non-Voting Stock would otherwise
have identical terms and conditions, except that the holders of Non-Voting Stock
would not be entitled to vote on matters presented to stockholders except as
otherwise provided under Delaware law.
8.4.5 Lock-Up. Each Member agrees, if so requested by the Company and an
-------
underwriter of securities of the Issuer, not to sell, grant any option or right
to buy or sell, or otherwise transfer or dispose of in any manner, whether in
privately-negotiated or open-market transactions, any Issued Securities in the
Issuer or other securities of the Issuer held by it during the 180-day period
following the effective date of a registration statement filed pursuant to the
IPO.
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ARTICLE 9
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DISSOLUTION, LIQUIDATION, AND TERMINATION OF THE COMPANY
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9.1 Limitations. The Company may be dissolved, liquidated, and terminated only
pursuant to the provisions of this Article 9, and the parties hereto do hereby
irrevocably waive, to the fullest extent permitted by applicable law, any and
all other rights they may have to cause a dissolution of the Company (including,
without limitation, pursuant to Section 18-801(a)(3) of the Act) or a sale or
partition of any or all of the Company Assets.
9.2 Exclusive Causes. The following and only the following events shall cause
the Company to be dissolved:
(a) the occurrence of a Terminating Capital Transaction;
(b) by the election of a Majority in Interest;
(c) the entry of a decree of judicial dissolution under Section 18-
802 of the Act; or
(d) the termination of the legal existence of the last remaining
member of the Company or the occurrence of any other event which
terminates the continued membership of the last remaining member of
the Company in the Company in accordance with Paragraph 6.2.1(m)
unless the business of the Company is continued in a manner permitted
by this Agreement or the Act.
Any dissolution of the Company other than as provided in this Paragraph 9.2
shall be a dissolution in contravention of this Agreement.
9.3 Effect of Dissolution. The dissolution of the Company shall be effective on
the day on which the event occurs giving rise to the dissolution, but the
Company shall not terminate until it has been wound up and its assets have been
distributed as provided in Paragraph 9.5 of this Agreement. Notwithstanding the
dissolution of the Company, prior to the termination of the Company, the
business of the Company and the affairs of the Members, as such, shall continue
to be governed by this Agreement.
9.4 No Capital Contribution Upon Dissolution. Each Member shall look solely to
the assets of the Company for all distributions with respect to the Company, its
Capital Contribution thereto, its Capital Account and its share of Net Profits
or Net Losses, and shall have no recourse therefor (upon dissolution or
otherwise) against any other Member. Accordingly, if any Member has a deficit
balance in its Capital Account (after giving effect to all contributions,
distributions and allocations for all taxable years, including the year during
which the liquidation occurs), then such Member shall have no obligation to make
any Capital Contribution with respect to such deficit, and such deficit shall
not be considered a debt owed to the Company or to any other person for any
purpose whatsoever.
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9.5 Liquidation.
9.5.1 Upon dissolution of the Company, the Board shall act as the
"Liquidator" of the Company. The Liquidator shall liquidate the assets of the
Company, and after allocating (pursuant to Article 5 of this Agreement) all
income, gain, loss and deductions resulting therefrom, shall, subject to the
rights and preferences of any classes of interests approved by the Board and
issued by the Company from time to time, apply and distribute the proceeds
thereof as follows:
(a) First, to the payment of the obligations of the Company, to the
expenses of liquidation, and to the setting up of any Reserves for contingencies
which the Board may consider necessary; and
(b) Thereafter, to the Members in proportion to the positive
Capital Account balances in the Members' respective Capital Accounts determined
after giving effect to all contributions and distributions for all periods, and
after taking into account all Capital Account adjustments for the Company
taxable year during which the liquidation occurs by the end of the taxable year
in which such liquidation occurs, or, if later, within 90 days after the date of
the liquidation.
9.5.2 Notwithstanding Paragraph 9.5.1 of this Agreement, in the event that
the Board determines that an immediate sale of all or any portion of the Company
Assets would cause undue loss to the Members, the Board, in order to avoid such
loss to the extent not then prohibited by the Act, may either defer liquidation
of and withhold from distribution for a reasonable time any Company Assets
except those necessary to satisfy the Company's debts and obligations, or
distribute the Company Assets to the Members in kind.
ARTICLE 10
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EXCLUSIVITY; NON-SOLICITATION
-----------------------------
10.1 Exclusivity. Except through the Company and ZB.com, neither Retail Sponsor
nor ONRP (nor any of their respective Permitted Transferees who are Members)
will, directly or indirectly, establish or acquire any equity interest in, or
provide support or services to, any other online business which (either alone or
when combined with its Affiliates or sponsoring "bricks and mortar" retailer),
at the time such interest is acquired or such support or services are agreed to
be provided, derives a majority of its consolidated revenues from the retail
sale of (a) products in the Same Category, or (b) products targeted to children
age 12 and under and also offers products in the Same Category if such products
in the Same Category constitute more than 10% of its consolidated revenues,
unless such business agrees to limit its online offering of products in the same
categories as those sold by ZB.com to less than 10% of the total number of SKU's
offered by such business to its online customers, or (c) other products and also
offers products in the Same Category if such products in the Same Category
constitute more than 20% of its consolidated revenues, unless such business
agrees to limit its online offering of products in the same categories as those
sold by ZB.com to less than 20% of the total number of SKU's offered by such
business to its online customers. The Members acknowledge that the provisions of
the preceding sentence are applicable to Retail Sponsor and ONRP and their
respective Subsidiaries
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but not to any other Affiliate of either of them (to the extent that any such
Affiliate is not directly or indirectly controlled by ONRP with respect to any
such investment or services). The foregoing provisions shall not be deemed to
prohibit Retail Sponsor or any of its Subsidiaries from acquiring any other
"bricks and mortar" business which has an ownership interest in an online
business which Retail Sponsor would otherwise be prohibited from acquiring
pursuant to the provisions of this Paragraph; provided, however, that the
exception provided in this sentence shall only be operative if, following any
such acquisition, any such online business which has been so acquired is either
(i) dissolved or otherwise terminated or (ii) conducted exclusively through the
Company or ZB.com.
10.2 Change of Business Model. The Company agrees that it will not, and will not
permit ZB.com or any of its other Subsidiaries to change its primary business
model to one other than a model primarily focused on the online sale of products
in the Same Category, without the prior written consent of each of ONRP and the
Retail Sponsor. ONRP agrees not to permit any other .com Company to change its
primary business model to a model that is primarily focused on the online sale
of products in the Same Category, without the prior written consent of the
Company.
10.3 Non-Solicitation. For so long as it holds any Membership Interest in the
Company and for a one-year period thereafter, each of Retail Sponsor and ONRP
agrees that it shall not, directly or indirectly, hire, solicit or attempt to
solicit the services or business of any employee of the other party or ZB.com,
or any of the other Retailers or .com Companies, without the prior written
consent of the other party. ONRP will require each of the other Retailers and
.com Companies to enter into equivalent agreements with respect to ZB.com and
Retail Sponsor.
ARTICLE 11
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MISCELLANEOUS
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11.1 Appointment of Board as Attorney-in-Fact.
11.1.1 Each Member, including each Additional Member, by its execution of
this Agreement, irrevocably constitutes and appoints the Board or any individual
Director to whom the Board has delegated specific authority (only to the extent
of such authority), as its true and lawful attorney-in-fact with full power and
authority in its name, place and stead to execute, acknowledge, deliver, swear
to, file and record at the appropriate public offices such documents as may be
necessary or appropriate to carry out the provisions of this Agreement,
including but not limited to:
(a) All certificates and other instruments (including counterparts
of this Agreement), and all amendments thereto, which the Board deems
appropriate or convenient to form, qualify, continue or otherwise operate the
Company as a limited liability company (or other entity in which the Members
will have limited liability comparable to that provided in the Act), in the
jurisdictions in which the Company may conduct business or in which such
formation, qualification or continuation is, in the opinion of the Board,
necessary or desirable to protect the limited liability of the Members.
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(b) All amendments to this Agreement adopted in accordance with the
terms hereof, and all instruments which the Board deems appropriate or
convenient to reflect a change or modification of the Company in accordance with
the terms of this Agreement.
(c) All conveyances of Company Assets, and other instruments which
the Board reasonably deems necessary in order to complete a dissolution, winding
up and termination of the Company pursuant to this Agreement.
11.1.2 The appointment by all Members of the Board or any individual
Director to whom the Board has delegated specific authority, as attorney-in-fact
shall be deemed to be a power coupled with an interest, in recognition of the
fact that each of the Members under this Agreement will be relying upon the
power of the Board to act as contemplated by this Agreement in any filing and
other action by it on behalf of the Company, shall survive the Incapacity of any
Person hereby giving such power, and the transfer or assignment of all or any
portion of the Membership Interest of such Person in the Company, and shall not
be affected by the subsequent Incapacity of the principal; provided, however,
that in the event of the assignment by a Member of all of its Membership
Interest in the Company, the foregoing power of attorney of an assignor Member
shall survive such assignment only until such time as the Assignee shall have
been admitted to the Company as a Substitute Member and all required documents
and instruments shall have been duly executed, filed and recorded to effect such
substitution.
11.2 Amendments.
11.2.1 Each Additional Member and Substitute Member shall become a
signatory hereto by signing such number of counterpart signature pages to this
Agreement, a power of attorney to the Board, and such other instruments, in such
manner, as the Board shall determine. By so signing, each Additional Member and
Substitute Member, as the case may be, shall be deemed to have adopted and to
have agreed to be bound by all of the provisions of this Agreement.
11.2.2 Other than amendments specifically authorized herein, no amendment
to this Agreement or to the operating agreement of any Subsidiary of the Company
may be made without the consent a Majority in Interest.
11.2.3 In addition to other amendments authorized herein, amendments may
be made to this Agreement from time to time by the Board, without the consent of
any Member: (a) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to make any
other provisions with respect to matters or questions arising under this
Agreement that are not inconsistent with the provisions of this Agreement; (b)
to delete or add any provision of this Agreement required to be so deleted or
added by any federal or state official, which addition or deletion is deemed by
such official to be for the benefit or protection of all of the Members; and (c)
to take such actions as may be necessary (if any) to insure that the Company
will be treated as a partnership for federal income tax purposes.
11.2.4 In making any amendments, there shall be prepared and filed by, or
for, the Board such documents and certificates as may be required under the Act
and under the laws of any other jurisdiction applicable to the Company.
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11.3 Accounting and Fiscal Year. Subject to Code Section 448, the books of the
Company shall be kept on such method of accounting for tax and financial
reporting purposes as may be determined by the Board. The fiscal year of the
Company shall end on the Saturday nearest January 31/st/ of each year.
11.4 Meetings. A meeting of the Members shall be held at least once a year. At
any time, and from time to time, the Board and/or a holder of at least 25% of
the Voting Interests may call meetings of the Members. Each Member may authorize
any other Person (whether or not such other Person is a Member) to act for it or
on its behalf on all matters in which the Member is entitled to participate.
Each proxy must be signed by the Member or such Member's attorney-in-fact.
11.4.1 Manner of Giving Notice.
(a) A notice of meeting shall specify the place, day and hour of
the meeting and any other information required by any provision of the Act,
or this Agreement.
(b) When a meeting is adjourned, it shall not be necessary to
give any notice of the adjourned meeting or of the business to be
transacted at an adjourned meeting, other than by announcement at the
meeting at which the adjournment is taken, unless the adjournment is for
more than 60 days or the Members or the Board fix a new record date for the
adjourned meeting in which event notice shall be given in accordance with
Paragraphs 11.4.2 or 11.4.3, as applicable.
11.4.2 Notice of Meetings of Directors.
Notice of every meeting of the Board shall be given to each
Director by telephone or in writing not less than two (2) nor more than
forty-five (45) days prior to the date of such meeting before the time at
which the meeting is to be held. Every such notice shall state the time and
place of the meeting. Neither the business to be transacted at, nor the
purpose of, any meeting of the Board need be specified in a notice of the
meeting.
11.4.3 Notice of Meetings of Members.
Written notice of every meeting of the Members shall be given to
each Member of record entitled to vote at the meeting at least ten (10)
days prior to the day named for a meeting called to consider a merger,
consolidation or sale of all or substantially all of the assets of the
Company or five (5) days prior to the day named for the meeting in any
other case. If the Board neglects or refuses to give notice of a meeting,
the person or persons calling the meeting may do so.
11.4.4 Waiver Notice.
(a) Whenever any written notice is required to be given under the
provisions of the Act or this Operating Agreement, a waiver thereof in writing,
signed by the person or persons entitled to the notice, whether before or after
the time stated therein, shall be deemed
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equivalent to the giving of the notice. Neither the business to be transacted
at, nor the purpose of, a meeting need be specified in the waiver of notice of
the meeting.
(b) Attendance of a person at any meeting shall constitute a waiver
of notice of the meeting except where a person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting was not lawfully called or convened.
11.4.5 Exception to Requirement of Notice.
Whenever any notice or communication is required to be given to any
person under the provisions of the Act or this Operating Agreement or by the
terms of any agreement or other instrument or as a condition precedent to taking
any Company action and communication with that person is then unlawful, the
giving of the notice or communication to that person shall not be required.
11.4.6 Use of Conference Telephone and Similar Equipment.
Any Director may participate in any meeting of the Directors, and
any Member may participate in any meeting of the Members, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this section shall constitute presence in person at the meeting.
11.4.7 Consent in Lieu of Meeting.
(a) Any action required or permitted to be taken at a meeting of
the Board or the Members may be taken without a meeting if, prior or subsequent
to the action, written consents describing the action to be taken are signed by
each Director or Member, respectively, entitled to vote thereon.
(b) Any action required or permitted to be taken at a meeting of
the Board or Members may be taken without a meeting if, prior or subsequent to
the action, written consents describing the action to be taken are signed by the
minimum number of Directors or Members that would be necessary to authorize the
action at a meeting at which all Directors or Members entitled to vote thereon
were present and voting. The consents shall be filed with the Directors. Prompt
notice of the taking of the Company action without a meeting by less than
unanimous written consent shall be given to those Members who have not consented
in writing.
11.4.8 Organization.
At every meeting of the Members or Board, the Chairman, if there be
one, or, in the case of vacancy in office or absence of the Chairman, one of the
following officers, if there be any, present in the order stated: the vice
chairman, the Chief Executive Officer, president, the vice presidents in their
order of rank and seniority, or a person chosen by vote of the Members or
Directors present, shall act as chairman of the meeting. The Secretary, if there
be one, or, in the absence of the secretary, an assistant secretary, if there be
one, or, in the absence of both the
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secretary and assistant secretaries, a person appointed by the chairman of the
meeting, shall act as secretary of the meeting.
11.4.9 Quorum.
Five of the Directors of the Company then in office shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board. A Majority in Interest shall be necessary to constitute a quorum
for the transaction of business at any meeting of the Members.
11.5 Entire Agreement. This Agreement and the Capital Contribution Agreement
constitute the entire agreement between the parties hereto pertaining to the
subject matter hereof and fully supersedes any and all prior or contemporaneous
agreements or understandings between the parties hereto pertaining to the
subject matter hereof.
11.6 Further Assurances. Each of the parties hereto does hereby covenant and
agree on behalf of itself, its successors, and its assigns, without further
consideration, to prepare, execute, acknowledge, file, record, publish, and
deliver such other instruments, documents and statements, and to take such other
action as may be required by law or reasonably necessary to effectively carry
out the purposes of this Agreement.
11.7 Notices. Any notice, consent, payment, demand, or communication required or
permitted to be given by any provision of this Agreement shall be in writing and
shall be (a) delivered personally to the Person or to an officer of the Person
to whom the same is directed, or (b) sent by facsimile or registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
if to the Company, to the Company at the address set forth in Paragraph 1.3
hereof, or to such other address as the Company may from time to time specify by
notice to the Members; if to a Member, to such Member at the address set forth
in Exhibit A, or to such other address as such Member may from time to time
specify by notice to the Company. Any such notice shall be deemed to be
delivered, given and received for all purposes as of: (i) the date so delivered,
if delivered personally, (ii) upon receipt, if sent by facsimile, or (iii) on
the date of receipt or refusal indicated on the return receipt, if sent by
registered or certified mail, return receipt requested, postage and charges
prepaid and properly addressed.
11.8 Tax Matters.
11.8.1 The Retail Sponsor shall be designated and shall operate as "tax
matters partner" (as defined in Code Section 6231), to oversee or handle matters
relating to the taxation of the Company until the end of the full tax year after
the date of this Agreement. For all subsequent tax years of the Company, the
"tax matters partner" shall be designated by the Majority in Interest. The tax
matters partner shall not extend the statute of limitations on behalf of the
Company, submit any written material to any taxing authority, settle or offer to
settle any controversy, select the Company's choice of litigation forum in a tax
controversy, or take any other action in its capacity as a tax matters partner
without the consent of the Board. The tax matters partner shall keep the Board
fully advised of the progress of any audit and shall supply the Board with
copies of any written communications received from the Internal Revenue Service
or other taxing authority relating to any audit within ten (10) days of receipt
hereof, and
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shall at least ten (10) business days prior to submitting any materials to the
Internal Revenue Service, or other taxing authority, provide such materials to
the Board. The tax matters partner shall be reimbursed by the Company for any
reasonable expenses incurred in its capacity as a tax matters partner.
11.8.2 The Member designated as "tax matters partner" may make all
elections for federal income and all other tax purposes (including, without
limitation, pursuant to Section 754 of the Code).
11.8.3 Income tax returns of the Company shall be prepared by such
certified public accountant(s) as the Board shall retain at the expense of the
Company.
11.9 Jurisdiction. Each Member hereby submits to the jurisdiction of any state
or federal court sitting in the state of Delaware in any action arising out of
or relating to this Agreement or the transactions contemplated therein.
11.10 Governing Law. This Agreement, including its existence, validity,
construction, and operating effect, and the rights of each of the parties
hereto, shall be governed by and construed in accordance with the laws of the
State of Delaware without regard to otherwise governing principles of conflicts
of law.
11.11 Construction. This Agreement shall be construed as if all parties prepared
this Agreement.
11.12 Captions - Pronouns. Any titles or captions contained in this Agreement
are for convenience only and shall not be deemed part of the text of this
Agreement. All pronouns and any variations thereof shall be deemed to refer to
the masculine, feminine, neuter, singular or plural as appropriate.
11.13 Binding Effect. Except as otherwise expressly provided herein, this
Agreement shall be binding on and inure to the benefit of the Members, their
heirs, executors, administrators, successors and all other Persons hereafter
holding, having or receiving an interest in the Company, whether as Assignees,
Substitute Members or otherwise.
11.14 Severability. In the event that any provision of this Agreement as applied
to any party or to any circumstance, shall be adjudged by a court to be void,
unenforceable or inoperative as a matter of law, then the same shall in no way
affect any other provision in this Agreement, the application of such provision
in any other circumstance or with respect to any other party, or the validity or
enforceability of the Agreement as a whole.
11.15 Confidentiality. Each party agrees that all Confidential Information is
the confidential property of the disclosing party. The party receiving such
Confidential Information shall: (a) limit access to any Confidential Information
of the other party received by it to its employees, contractors, consultants and
agents who have a need-to-know in connection with the performance of such
party's duties and obligations under this Agreement; (b) advise its employees,
contractors, consultants and agents having access to the Confidential
Information of the confidential nature thereof and of the obligations set forth
in this Agreement and similarly bind them in writing; (c) safeguard all
Confidential Information using a reasonable degree of
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care, but not less than that degree of care used by it in safeguarding its own
similar information or material; and (d) not disclose any Confidential
Information of the other party received by it to third parties otherwise than in
conformity with the provisions of this Agreement. Confidential Information shall
not include information the receiving party can document (i) was or has become
readily publicly available without restriction through no fault of the receiving
party or its employees or agents; (ii) is received without restriction from a
third party lawfully in possession of such information and lawfully empowered to
disclose such information; or (iii) was rightfully in possession of the
receiving party without restriction prior to its disclosure by the other party.
A party may disclose Confidential Information of the other party to the extent
required to be disclosed under applicable law or by a governmental order,
decree, regulation, rule or process (provided that the receiving party gives
written notice to the disclosing party as far in advance as reasonably possible
prior to disclosure and the receiving party reasonably cooperates in seeking to
dispute such disclosure and/or receive confidential treatment for the disclosed
information). Each party acknowledges that the breach by any party of its
obligations pursuant to this Section 11.15 will result in irreparable injury to
the other parties, and in such event the exact amount of damages is now and will
be difficult to ascertain and the remedies at law for any such failure would not
be reasonable or adequate compensation. Accordingly, each Member agrees that, in
addition to any other remedy that may be available at law, in equity or
hereunder, the Company shall be entitled to injunctive relief, without posting a
bond or other security, to enforce or prevent any violation of this Paragraph
11.15 by it.
11.16 Counterparts. This Agreement may be executed in any number of multiple
counterparts, each of which shall be deemed to be an original copy and all of
which shall constitute one agreement, binding on all parties hereto.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
ONLINE RETAIL PARTNERS INC.
By:___________________________
Name: ________________________
Title: _______________________
ZANY BRAINY, INC.
By:___________________________
Name: ________________________
Title: _______________________
<PAGE>
EXHIBIT 10.10
SECOND CONTRIBUTION AND INTEREST PURCHASE AGREEMENT
by and among
ZANY BRAINY, INC.,
ONLINE RETAIL PARTNERS INC.
and
ZB HOLDINGS LLC
As of March 20, 2000
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This SECOND CONTRIBUTION AND INTEREST PURCHASE AGREEMENT (this "Agreement")
---------
is entered into as of this 20/th/ day of March, 2000 by and among Zany Brainy,
Inc., a Pennsylvania corporation ("Zany Brainy"), Online Retail Partners Inc., a
-----------
Delaware corporation f/k/a Online Retail Partners LLC, a Delaware limited
liability company ("ONRP"), and ZB Holdings LLC, a Delaware limited liability
----
company (the "Company"). Each of Zany Brainy and ONRP is hereinafter referred
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to as a "Contributor" and together, the "Contributors."
----------- ------------
RECITALS
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WHEREAS, Zany Brainy.com, a Delaware limited liability company
("ZB.com") was formed by its sole member, Zany Brainy on September 7, 1999; and
WHEREAS, Zany Brainy, ONRP, the Company and ZB.com entered into a
series of agreements effective as of October 20, 1999 to form a joint venture
for the purpose of operating an e-commerce site on the World Wide Web. The
establishment of the joint venture shall be referred to herein as the
"Transaction"; and
WHEREAS, as part of the Transaction, Zany Brainy, ONRP and the Company
entered into the ZB Holdings Limited Liability Company Agreement (the "Holdings
--------
Operating Agreement"); and
- -------------------
WHEREAS, as part of the Transaction, all interests in ZB.com were
transferred to the Company, pursuant to a Contribution and Interest Purchase
Agreement dated as of October 20, 1999 ("Original Contribution Agreement"); and
-------------------------------
WHEREAS, pursuant to the Original Contribution Agreement, the Company
also (i) received $5 million in cash from each of Zany Brainy and ONRP
(collectively, the "Funds"), (ii) received certain assets (the "Assets") of Zany
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Brainy as set forth in Section 1 of Schedule 1.1(b) thereto, and (iii) assumed
certain rights (the "Rights") and liabilities (the "Liabilities") from Zany
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Brainy as set forth in Schedule 1.1(d) thereto; and
WHEREAS, the Company, entered into an Interim Limited Liability
Operating Agreement as of November 11, 1999 ("Interim Agreement") which set
-----------------
forth the preliminary rights, obligations and duties of members of ZB.com; and
WHEREAS, pursuant to the Interim Agreement, the Company also assigned
and transferred to ZB.com, and ZB.com accepted, all of the Funds, Assets
(including all intellectual property rights appurtenant thereto), Rights and
Liabilities received by Company under the Original Contribution Agreement; and
WHEREAS, ONRP contributed an additional $10 million to the Company in
exchange for additional Interests in the Company on November 15, 1999 as part of
the Follow-On Subscription (as defined in the Holdings Operating Agreement)
which funds were contributed to ZB.com; and
WHEREAS, the Members declared a ten-for-one split of the Membership
Interests in the Company on March 17, 2000; and
WHEREAS, the Members executed an Amended and Restated Operating
Agreement for Holdings on March 20, 2000 ("Amended and Restated Operating
Agreement"); and
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WHEREAS, Zany Brainy has agreed to contribute an additional $6,862,242
of cash to the Company in exchange for 7,002,288 Non-Voting Preferred Interests
(as such terms are defined in the Amended and Restated Operating Agreement); and
WHEREAS, ONRP has agreed to contribute an additional $5,137,758 of
cash to the Company in exchange for 5,242,610 Non-Voting Common Interests (as
such term is defined in the Amended and Restated Operating Agreement); and
WHEREAS, The Company has agreed to accept the foregoing contributions
and has agreed to issue Interests of the Company as set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants, and agreements herein contained, and for
other good and valuable consideration mutually exchanged by the parties hereto,
the receipt and sufficiency of which are hereby acknowledged, Zany Brainy, ONRP
and the Company agree as follows:
AGREEMENT
---------
SECTION 1 - CONTRIBUTION OF CAPITAL
SECTION 1.1 Contribution by Zany Brainy. Upon the terms and subject to
---------------------------
the conditions set forth in this Agreement, Zany Brainy hereby agrees to
transfer and deliver to the Company, as an additional capital contribution, SIX
MILLION EIGHT HUNDRED SIXTY-TWO THOUSAND TWO HUNDRED FORTY-TWO DOLLARS
($6,862,242) of cash (the "Zany Brainy Cash Contribution"). Zany Brainy agrees
-----------------------------
to make the Zany Brainy Cash Contribution by wire transfer of immediately
available funds in three monthly installments, the first of which shall occur on
the Closing Date, the amount of each installment shall be determined by the
Board of the Company, provided that each capital contribution installment made
by ONRP and Retail Sponsor shall be made in the same proportion as the aggregate
total Capital Contribution required by each party pursuant to this Section 1.
SECTION 1.2 Contribution by ONRP. Upon the terms and subject to the
--------------------
conditions set forth in this Agreement, ONRP hereby agrees to transfer and
deliver to the Company, as an additional capital contribution, FIVE MILLION ONE
HUNDRED THIRTY-SEVEN THOUSAND SEVEN HUNDRED FIFTY-EIGHT DOLLARS ($5,137,758) of
cash (the "ONRP Cash Contribution"). ONRP agrees to make the ONRP Cash
----------------------
Contribution by wire transfer of immediately available funds in three monthly
installments, the first of which shall occur on the Closing Date, the amount of
each installment shall be determined by the Board of the Company, provided that
each capital contribution installment made by ONRP and Retail Sponsor shall be
made in the same proportion as the aggregate total Capital Contribution required
by each party pursuant to this Section 1.
SECTION 1.3 Issuance of Interests by the Company in Consideration for
---------------------------------------------------------
Contributions.
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(a) Zany Brainy. In consideration for the Zany Brainy Cash
-----------
Contribution, upon the terms and subject to the conditions set forth in this
Agreement, on the Closing Date, the Company shall issue to Zany Brainy 7,002,288
Non-Voting Preferred Interests.
(b) ONRP. In consideration for the ONRP Cash Contribution, upon the
----
terms and subject to the conditions set forth in this Agreement, on the Closing
Date, the Company shall issue to ONRP 5,242,610 Non-Voting Common Interests.
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SECTION 1.4 Time and Place of Closing. The closing of the contributions
-------------------------
of assets and purchases and sales of the Interests provided for in this
Agreement (the "Closing") shall be held at the offices of Latham & Watkins
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located at 885 Third Avenue, Suite 1000, New York, New York 10022, on March 20,
2000 (the "Closing Date") or at such other place or earlier or later date or
------------
time as may be fixed by mutual agreement of all parties hereto. For purposes of
interpreting this Agreement, the Closing shall be deemed to have been effective
as of the close of business on the Closing Date.
SECTION 1.5 Further Assurances. Each party hereto shall execute and
------------------
deliver after the date hereof such instruments and take such other actions as
any other party may reasonably request in order to carry the intent of this
Agreement or to better evidence or effectuate the transactions contemplated
herein.
SECTION 2 - CLOSING CONDITIONS
SECTION 2.1 The respective obligations of each party to effect this
Agreement shall be subject to the satisfaction or waiver, where permissible,
prior to or on the Closing Date, of the following conditions:
(a) All representations and warranties of the parties contained in
this Agreement shall be true and correct, in all material respects, as if made
on the Closing Date. In addition, all covenants of the parties contained herein
which are to be performed on or prior to the Closing Date shall have been
complied with in all material respects.
SECTION 3 - EVENTS OCCURRING ON THE CLOSING DATE
SECTION 3.1 Deliveries by Zany Brainy. On the Closing Date, Zany Brainy
-------------------------
shall deliver the following:
(a) Funds. The Zany Brainy Cash Contribution by wire transfer of
-----
immediately available funds.
SECTION 3.2 Deliveries by ONRP. On the Closing Date, ONRP shall deliver
------------------
the following:
(a) Funds. The ONRP Cash Contribution by wire transfer of immediately
-----
available funds.
SECTION 3.3 Deliveries by the Company. On the Closing Date, the Company
-------------------------
shall not be required to make any delivery.
SECTION 4 - REPRESENTATIONS AND WARRANTIES OF ZANY BRAINY
Zany Brainy represents and warrants to the Company as follows:
SECTION 4.1 Investment Status. Zany Brainy is an "accredited investor" as
-----------------
such term is defined in Rule 501 under the Securities Act of 1933, as amended
(the "Securities Act"). Zany Brainy is purchasing the Preferred Interests for
--------------
its own account, for investment only and not with a view to, or any
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present intention of, effecting a distribution of such securities or any part
thereof except pursuant to a registration or an available exemption under
applicable law. Zany Brainy acknowledges that its Preferred Interests have not
been registered under the Securities Act or the securities laws of any state or
other jurisdiction and cannot be disposed of unless they are subsequently
registered under the Securities Act and any applicable state laws or exemption
from such registration is available.
SECTION 4.2 Authority. Zany Brainy has full legal right, authority and
---------
power to enter into this Agreement and each agreement, document and instrument
to be executed and delivered by or on behalf of Zany Brainy pursuant to or as
contemplated by this Agreement and to carry out the transactions and perform
fully its obligations contemplated hereby and thereby, and the execution,
delivery and performance by Zany Brainy of this Agreement and each such other
agreement, document and instrument have been duly authorized by all necessary
action under Zany Brainy's articles of incorporation, as amended, and by-laws.
This Agreement, when executed and delivered, will constitute a valid and binding
obligation of Zany Brainy enforceable against it, in accordance with its terms
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally, and general principles of equity.
SECTION 4.3 Investment Banking; Brokerage Fees. Zany Brainy has not
----------------------------------
incurred or become liable for any broker's or finder's fee, banking fees or
similar compensation relating to or in connection with this Agreement or the
transactions contemplated hereby.
SECTION 4.4 Non-Contravention. The execution, delivery and performance by
-----------------
Zany Brainy of this Agreement and the related documents to be executed and
delivered by Zany Brainy, do not: (i) violate or result in a default (whether
after the giving of notice, lapse of time or both) under any contract or
obligation to which Zany Brainy is a party or by which Zany Brainy is bound
(including, without limitation, any contracts, or any provision of Zany Brainy's
articles of incorporation, as amended, or by-laws or; (ii) violate or result in
a violation of, or constitute a default under, any provision of any law,
regulation or rule, or any order of, or any restriction imposed by, any court or
governmental agency applicable to Zany Brainy; (iii) require from Zany Brainy
any notice to, declaration or filing with, or consent or approval of, any
governmental authority or other third party; or (iv) accelerate any obligation
under or give rise to a right of termination or result in the loss of benefit
under any indenture or loan or credit agreement or any other material agreement,
contract, instrument, mortgage, lien, lease, permit, authorization, order, writ,
judgment, injunction, decree, determination or arbitration award to which Zany
Brainy or is a party or by which the property of Zany Brainy is bound or
affected or result in the creation or imposition of any mortgage, pledge, lien,
security interest or other charge or encumbrance on any of the assets or
properties of Zany Brainy.
SECTION 4.5 Organization and Good Standing. Zany Brainy is a corporation
------------------------------
duly organized, validly existing under the corporate laws of the Commonwealth of
Pennsylvania. Zany Brainy is duly licensed or qualified to transact business as
a foreign corporation and is in good standing in each jurisdiction in which the
nature of the business or the character of the properties owned or leased by
Zany Brainy requires such licensing or qualification, except where the failure
to so qualify would not have a material adverse effect on Zany Brainy or the
Company.
SECTION 5 - REPRESENTATIONS AND WARRANTIES OF ONRP
ONRP represents and warrants to the Company as follows:
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SECTION 5.1 Investment Status. ONRP is an "accredited investor" as such
-----------------
term is defined in Rule 501 under the Securities Act. ONRP is purchasing the
Non-Voting Common Interests for its own account, for investment only and not
with a view to, or any present intention of, effecting a distribution of such
securities or any part thereof except pursuant to a registration or an available
exemption under applicable law. ONRP acknowledges that its Non-Voting Common
Interests have not been registered under the Securities Act or the securities
laws of any state or other jurisdiction and cannot be disposed of unless they
are subsequently registered under the Securities Act and any applicable state
laws or exemption from such registration is available.
SECTION 5.2 Authority. ONRP has full legal right, authority and power to
---------
enter into this Agreement and each agreement, document and instrument to be
executed and delivered by or on behalf of ONRP pursuant to or as contemplated by
this Agreement and to carry out the transactions and to perform fully its
obligations contemplated hereby and thereby, and the execution, delivery and
performance by ONRP of this Agreement and each such other agreement, document
and instrument have been duly authorized by all necessary action under ONRP's
Certificate of Incorporation as filed with the Secretary of State of the State
of Delaware on February 7, 2000, as amended on March 9, 2000, and Bylaws
(together, the "ONRP Governing Documents"). This Agreement and each agreement,
------------------------
document and instrument executed and delivered by ONRP pursuant to or as
contemplated by this Agreement constitute, or when executed and delivered will
constitute, valid and binding obligations of ONRP enforceable in accordance with
their respective terms subject to applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally, and general principles of equity.
SECTION 5.3 Investment Banking; Brokerage Fees. ONRP has not incurred or
----------------------------------
become liable for any broker's or finder's fee, banking fees or similar
compensation relating to or in connection with this Agreement or the
transactions contemplated hereby.
SECTION 5.4 Non-Contravention. The execution, delivery and performance by
-----------------
ONRP of this Agreement and the related documents to be executed and delivered by
ONRP do not: (i) violate or result in a default (whether after the giving of
notice, lapse of time or both) under any contract or obligation to which ONRP is
a party or by which ONRP is bound, or any provision of the ONRP Governing
Documents; (ii) violate or result in a violation of, or constitute a default
under, any provision of any law, regulation or rule, or any order of, or any
restriction imposed by, any court or governmental agency applicable to ONRP;
(iii) require from ONRP any notice to, declaration or filing with, or consent or
approval of, any governmental authority or other third party; or (iv) accelerate
any obligation under or give rise to a right of termination or result in the
loss of benefit under any indenture or loan or credit agreement or any other
material agreement, contract, instrument, mortgage, lien, lease, permit,
authorization, order, writ, judgment, injunction, decree, determination or
arbitration award to which ONRP is a party or by which the property of ONRP is
bound or affected, or result in the creation or imposition of any mortgage,
pledge, lien, security interest or other charge or encumbrance on any of the
assets or properties of ONRP, in each of clauses (i) through (iv) except as
would not, individually or in the aggregate, have a material adverse effect on
ONRP or the Company.
SECTION 5.5 Organization and Good Standing. ONRP is a corporation duly
------------------------------
formed, validly existing and in good standing under the laws of the State of
Delaware. ONRP is duly licensed or qualified to transact business in each
jurisdiction in which the nature of the business or the character of the
properties owned or leased by ONRP requires such licensing or qualification,
except where the failure to so qualify would not have a material adverse impact
on ONRP or the Company.
5
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SECTION 6 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each of the Contributors as follows:
SECTION 6.1 Organization and Good Standing. The Company is a limited
------------------------------
liability company duly formed and validly existing under the laws of the State
of Delaware. The Company is duly licensed or qualified to transact business in
each jurisdiction in which the nature of the business or the character of the
properties owned or leased by the Company requires such licensing or
qualification, except where the failure to so qualify would not have a material
adverse impact on the Company.
SECTION 6.2 Authorization and Enforceability. The Company has full, legal
--------------------------------
right, authority and power to enter into this Agreement and each agreement,
document and instrument to be executed and delivered by or on behalf of the
Company pursuant to or as contemplated by this Agreement and to carry out the
transactions and to perform fully its obligations contemplated hereby and
thereby, and the execution, delivery and performance by the Company of this
Agreement and each such other agreement, document and instrument have been duly
authorized by all necessary action under the Company's certificate of formation
and the Operating Agreement. This Agreement and each agreement, document and
instrument executed and delivered by the Company pursuant to or as contemplated
by this Agreement constitute, or when executed and delivered will constitute,
valid and binding obligations of the Company enforceable in accordance with
their respective terms subject to applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally, and general principles of equity.
Upon consummation of the transactions contemplated hereby, all of the Interests
issued pursuant to this Agreement (i) will have been duly authorized and validly
issued to each of the Contributors, (ii) will be fully paid and nonassessable,
and (iii) will have been issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
SECTION 6.3 Investment Banking; Brokerage. The Company has not incurred
-----------------------------
or become liable for any broker's or finder's fee, banking fees or similar
compensation relating to or in connection with this Agreement or the
transactions contemplated hereby.
SECTION 6.4 Capital Structure. As of the date hereof, the Board of
-----------------
Directors of the Company has authorized the issuance of 14,000,136 Common
Interests, (of which 5,000,000 are Voting Common Interests and 9,000,136 are
Non-Voting Common Interests) and 18,646,262 Preferred Interests (of which
5,000,000 are Voting Preferred Interests, and 13,646,260 are Non-Voting
Preferred).
SECTION 7 - RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING
SECTION 7.1 Survival of Warranties. Each of the representations,
----------------------
warranties, agreements, covenants and obligations herein or certificate
delivered by any party to the other party incident to the transactions
contemplated hereby are material, shall be deemed to have been relied upon by
the other party and shall survive the Closing for the applicable surviving
period set forth below regardless of any investigation and shall not merge in
the performance of any obligation by either party hereto. Each of the
representations and warranties set forth in this Agreement shall survive the
Closing for a period of two (2) years.
SECTION 7.2 Expenses. Each party shall pay its own costs and expenses
--------
incurred or to be incurred by it in negotiating and preparing this Agreement and
the other documents contemplated hereby, and in carrying out and completing the
transactions contemplated by this Agreement and such other documents.
6
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SECTION 7.3 Notice of Default. Promptly upon the occurrence of, or
-----------------
promptly upon any party hereto becoming aware of the impending or threatened
occurrence of, any event which would cause or constitute a breach or default, or
would have caused or constituted a breach or default had such event occurred or
been known to such party prior to the date hereof, of any of the
representations, warranties or covenants of such party contained in or referred
to in this Agreement, such party shall give detailed written notice thereof to
each of the other parties hereto and shall use its best efforts to prevent or
promptly remedy the same.
SECTION 8 - INDEMNIFICATION.
SECTION 8.1 Indemnification by Zany Brainy. Zany Brainy agrees to
------------------------------
indemnify and hold the Company and its subsidiaries and affiliates and persons
serving as officers, directors, partners or employees thereof (individually, a
"Zany Brainy Indemnified Party" and, collectively, the "Zany Brainy Indemnified
----------------------------- -----------------------
Parties") harmless from and against any damages, liabilities, losses, taxes,
- -------
fines, penalties, costs, and expenses (including, without limitation, reasonable
fees of counsel) of any kind or nature whatsoever (whether or not arising out of
third-party claims and including all amounts paid in investigation, defense or
settlement of the foregoing) which may be sustained or suffered by any of them
arising out of or based upon any of the following matters:
(a) any breach of any representation or warranty of Zany Brainy under
this Agreement or in any certificate delivered pursuant hereto, or by reason of
any claim, action or proceeding asserted or instituted growing out of any matter
or thing constituting a breach of such representations or warranties; or
(b) any other breach of any covenant of Zany Brainy under this
Agreement or in any certificate delivered pursuant hereto, or by reason of any
claim, action or proceeding asserted or instituted growing out of any matter or
thing constituting a breach of such covenants.
SECTION 8.2 Limitations on Indemnification by Zany Brainy.
---------------------------------------------
Notwithstanding the foregoing, the right of the Zany Brainy Indemnified Parties
to indemnification under Section 8.1 shall be subject to the following
provisions:
(a) No indemnification shall be payable pursuant to Section 8.1 above
to any Zany Brainy Indemnified Party, unless the total of all claims for
indemnification pursuant to Section 8.3 shall exceed $500,000 in the aggregate,
whereupon the full amount of such claims shall be recoverable in accordance with
the terms hereof; and
(b) The maximum aggregate liability of Zany Brainy, and the maximum
amount of damages which may be recovered by the Zany Brainy Indemnified Parties
from Zany Brainy pursuant to Section 8.1 shall not exceed FIVE MILLION DOLLARS
($5,000,000).
SECTION 8.3 Indemnification by ONRP. ONRP agrees to indemnify and hold
-----------------------
the Company and its subsidiaries and affiliates and persons serving as officers,
directors, partners or employees thereof (individually, an "ONRP Indemnified
----------------
Party" and, collectively, the "ONRP Indemnified Parties") harmless from and
- ----- ------------------------
against any damages, liabilities, losses, taxes, fines, penalties, costs, and
expenses (including, without limitation, reasonable fees of counsel) of any kind
or nature whatsoever (whether or not arising out of third-party claims and
including all amounts paid in
7
<PAGE>
investigation, defense or settlement of the foregoing) which may be sustained or
suffered by any of them arising out of or based upon any of the following
matters:
(a) any other breach of any representation or warranty of ONRP under
this Agreement or in any certificate, delivered pursuant hereto, or by reason of
any claim, action or proceeding asserted or instituted growing out of any matter
or thing constituting a breach of such representations or warranties; or
(b) any other breach of any covenant of ONRP under this Agreement or
in any certificate delivered pursuant hereto, or by reason of any claim, action
or proceeding asserted or instituted growing out of any matter or thing
constituting a breach of such covenants.
SECTION 8.4 Limitations on Indemnification by ONRP. Notwithstanding the
--------------------------------------
foregoing, the right of the ONRP Indemnified Parties to indemnification under
Section 8.3 shall be subject to the following provisions:
(a) No indemnification shall be payable pursuant to Subsection 8.3
above to any ONRP Indemnified Party, unless the total of all claims for
indemnification pursuant to Section 8.3 shall exceed $500,000 in the aggregate,
whereupon the full amount of such claims shall be recoverable in accordance with
the terms hereof; and
(b) The maximum aggregate liability of ONRP, and the maximum amount
of damages which may be recovered by the ONRP Indemnified Parties from ONRP
pursuant to Section 8.3 shall not exceed FIVE MILLION DOLLARS ($5,000,000).
SECTION 8.5 Indemnification by the Company. The Company agrees to
------------------------------
indemnify and hold each of the Contributors and their respective subsidiaries
and affiliates and persons serving as officers, directors, partners or employees
thereof (individually, a "Company Indemnified Party" and, collectively, the
-------------------------
"Company Indemnified Parties") harmless from and against any damages,
- ----------------------------
liabilities, losses, taxes, fines, penalties, costs, and expenses (including,
without limitation, reasonable fees of counsel) of any kind or nature whatsoever
(whether or not arising out of third-party claims and including all amounts paid
in investigation, defense or settlement of the foregoing) which may be sustained
or suffered by any of them arising out of or based upon any of the following
matters:
(a) any breach of any representation or warranty of the Company under
this Agreement or in any certificate delivered pursuant hereto, or by reason of
any claim, action or proceeding asserted or instituted growing out of any matter
or thing constituting a breach of such representations or warranties; or
(b) any breach of any other covenant of the Company under this
Agreement or in any certificate delivered pursuant hereto, or by reason of any
claim, action or proceeding asserted or instituted growing out of any matter or
thing constituting a breach of such covenants.
SECTION 8.6 Limitations on Indemnification by the Company.
---------------------------------------------
Notwithstanding the foregoing, the right of the Company Indemnified Parties to
indemnification under Section 8.5 shall be subject to the following provisions:
(a) no indemnification shall be payable pursuant to Section 8.5 above
to any Company Indemnified Party, unless the total of all claims for
indemnification pursuant to Section 8.5
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shall exceed $500,000 in the aggregate, whereupon the full amount of such claims
shall be recoverable in accordance with the terms hereof; and
(b) the maximum aggregate liability of the Company, and the maximum
amount of damages which may be recovered by the Company Indemnified Parties from
the Company pursuant to Section 8.5 shall not exceed FIVE MILLION DOLLARS
($5,000,000).
SECTION 8.7 Notice; Defense of Claims. An indemnified party may make
-------------------------
claims for indemnification hereunder by giving written notice thereof to the
indemnifying party within the period in which indemnification claims can be made
hereunder. If indemnification is sought for a claim or liability asserted by a
third party, the indemnified party shall also give written notice thereof to the
indemnifying party promptly after it receives notice of the claim or liability
being asserted (and in any event within 15 calendar days after the service of
the citation or sermons), but the failure to do so shall not relieve the
indemnifying party from any liability except to the extent that it is prejudiced
by the failure or delay in giving such notice. Such notice shall summarize the
bases for the claim for indemnification and any claim or liability being
asserted by a third party. Within 20 days after receiving such notice the
indemnifying party shall give written notice to the indemnified party stating
whether it disputes the claim for indemnification and whether it will defend
against any third party claim or liability at its own cost and expense. The
indemnifying party shall be entitled to direct the defense against a third party
claim or liability with counsel selected by it (subject to the consent of the
indemnified party, which consent shall not be unreasonably withheld) as long as
the indemnifying party is conducting a good faith and diligent defense. The
indemnified party shall at all times have the right to fully participate in the
defense of a third party claim or liability at its own expense directly or
through counsel; provided, however, that if the named parties to the action or
proceeding include both the indemnifying party and the indemnified party and the
indemnified party is advised in writing by the indemnifying party's counsel that
representation of both parties by the same counsel would be inappropriate under
applicable standards of professional conduct, the indemnified party may engage
separate counsel at the expense of the indemnifying party. If no such notice of
intent to dispute and defend a third party claim or liability is given by the
indemnifying party, or if such good faith and diligent defense is not being or
ceases to be conducted by the indemnifying party, the indemnified party shall
have the right, at the expense of the indemnifying party, to undertake the
defense of such claim or liability (with counsel selected by the indemnified
party), provided, however, that such claim or liability shall not be compromised
or settled without the written consent of the indemnifying party, which consent
shall not be unreasonably withheld. If the indemnified party settles or
compromises such claim or liability without the prior written consent of the
indemnifying party, the indemnifying party will bear no liability hereunder for
or with respect to such claim or liability. In the event the indemnified party
assumes the defense of the claim or liability, the indemnified party will keep
the indemnifying party reasonably informed of the progress of any such defense,
compromise or settlement. If the third party claim or liability is one that by
its nature cannot be defended solely by the indemnifying party, then the
indemnified party shall make available such information and assistance as the
indemnifying party may reasonably request and shall cooperate with the
indemnifying party in such defense, at the expense of the indemnifying party.
SECTION 9 - CERTAIN DEFINITIONS
"Assets" shall have the meaning set forth in the Recitals.
"Agreement" shall have the meaning set forth in the Preamble.
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"Amended and Restated Operating Agreement" shall have the meaning set forth
in the Recitals.
"Non-Voting Preferred Interests" shall have the meaning set forth in the
Amended and Restated Operating Agreement.
"Closing" shall have the meaning set forth in Section 1.4.
"Closing Date" shall have the meaning set forth in Section 1.4.
"Common Interests" shall have the meaning set forth in the Amended and
Restated Operating Agreement.
"Company" shall have the meaning set forth in the Preamble.
"Company Indemnified Party" shall have the meaning set forth in Section
8.5.
"Contributor" shall have the meaning set forth in the Preamble.
"Funds" shall have the meaning set forth in the Recitals.
"Interests" shall have the meaning set forth in the Amended and Restated
Operating Agreement.
"Interim Agreement" shall have the meaning set forth in the Recitals.
"Liabilities" shall have the meaning set forth in the Recitals.
"Non-Voting Common Interests" is defined in the Amended and Restated
Operating Agreement.
"ONRP" shall have the meaning set forth in the Preamble.
"ONRP Cash Contribution" shall have the meaning set forth in Section 1.2.
"ONRP Governing Documents" shall have the meaning set forth in Section 5.2.
"ONRP Indemnified Party" shall have the meaning set forth in Section 8.3.
"Original Contribution Agreement" shall have the meaning set forth in the
Recitals.
"Participating Ownership Percentage" is defined in the Amended and Restated
Operating Agreement.
"Preferred Interests" shall have the meaning set forth in the Amended and
Restated Operating Agreement.
"Rights" shall have the meaning set forth in the Recitals.
"Securities Act" shall have the meaning set forth in Section 4.1.
10
<PAGE>
"Zany Brainy" shall have the meaning set forth in the Preamble.
"Zany Brainy Cash Contribution" shall have the meaning set forth in Section
1.1(a).
"Zany Brainy Indemnified Party" shall have the meaning set forth in Section
8.1.
"ZB.com" shall have the meaning set forth in the Recitals.
SECTION 10 - MISCELLANEOUS
SECTION 10.1 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware (without regard
to its conflicts of law doctrines).
SECTION 10.2 Dispute Resolution. All disputes, claims, or controversies
------------------
arising out of or relating to this Agreement or the negotiation, validity or
performance hereof that are not resolved by mutual agreement shall be resolved
solely and exclusively by binding arbitration to be held in Delaware before a
single arbitrator who is reasonably acceptable to each of the parties. Each of
the parties hereto irrevocably and unconditionally consents to the exclusive
jurisdiction of Delaware to resolve all disputes, claims or controversies
arising out of or relating to this Agreement or the negotiation, validity or
performance hereof, and further consents to the jurisdiction of the courts of
Delaware for the purposes of enforcing the arbitration provisions of Section
10.2 of this Agreement
The parties covenant and agree that they will participate in the
arbitration in good faith and that they will share equally its costs, except as
otherwise provided below. The arbitrator may in his or her discretion assess
costs and expenses (including the reasonable legal fees and expenses of the
prevailing party) against any party to a proceeding. Any party unsuccessfully
refusing to comply with an order of the arbitrators shall be liable for costs
and expenses, including attorneys' fees, incurred by the other party in
enforcing the award. The provisions of this Section 10.2 shall be enforceable in
any court of competent jurisdiction.
SECTION 10.3 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument and shall become a binding Agreement when
the counterparts have been signed by each of the parties and delivered to the
other party.
SECTION 10.4 Headings. The section headings contained in this Agreement
--------
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 10.5 Entire Agreement. This Agreement, including the other
----------------
documents and instruments referred to herein, embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
SECTION 10.6 Severability. If any one or more provisions contained in this
------------
Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal, or unenforceable provision had never
been contained herein.
11
<PAGE>
SECTION 10.7 Modifications and Amendments. The terms and provisions of
----------------------------
this Agreement may be modified or amended only by written agreement executed by
all parties hereto.
SECTION 10.8 [Intentionally left blank]
SECTION 10.9 No Reliance on Other Information. Except for the
--------------------------------
representations and warranties contained in this Agreement and in the other
documents executed and delivered in connection with the execution and delivery
of this Agreement, no party or other person acting for any of them makes any
other representation or warranty, express or implied, with respect to the
transactions contemplated hereby, and the parties hereby disclaim any such
representation or warranty, whether oral or written, whether by a party to this
Agreement or any of their respective representatives or affiliates or any other
person.
SECTION 10.10 Notices. Any notice, request, demand or other communication
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when received if personally delivered; when transmitted, if
transmitted by telecopy, electronic or digital transmission method; the day
after it is sent if sent for next day delivery to a domestic address by a
recognized overnight delivery service. All notices to a party will be sent to
the addresses set forth below or to such other address or person as such party
may designate by notice to each other party hereunder:
TO ZANY BRAINY: Zany Brainy, Inc.
- --------------
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attn.: Legal Department
Facsimile No.: (610) 278-7804
With a copy to: Morgan, Lewis & Bockius LLP
One Oxford Centre
301 Grand Street, 32/nd/ Floor
Pittsburgh, PA 15219
Attn.: Peter Watt-Morse, Esq.
Facsimile No.: (412) 560-3399
TO ONRP: Online Retail Partners Inc.
- -------
47 East 11/th/ Street, 10/th/ Floor
New York, NY 10003
Attn.: Henry Nasella
Facsimile No.: (212) 331-1106
With a copy to: Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
Attn.: Thomas C. Sadler, Esq.
Facsimile No.: (213) 891-8763
TO COMPANY: At such address as the Company may
- ----------
specify in writing to the other parties
from time to time.
12
<PAGE>
Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
(Signature Page Follows)
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
ZANY BRAINY, INC.
By:__________________________________________
Name:________________________________________
Title:_______________________________________
ONLINE RETAIL PARTNERS INC.
By:__________________________________________
Name:________________________________________
Title:_______________________________________
ZB HOLDINGS LLC
By:__________________________________________
Name:________________________________________
Title:_______________________________________
<PAGE>
EXHIBIT 21.1
Zany Brainy, Inc.
List of Subsidiaries
Name of Subsidiary State or Jurisdiction of Incorporation
- ------------------ --------------------------------------
Children's Products, Inc. Delaware
Children's Development, Inc. Delaware
Children's Distribution, LLC New Jersey
Children's Equity, LLC Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zany Brainy, Inc.:
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 File No. 333-82961.
April 26, 2000 By: /s/ Arthur Andersen LLP
Philadelphia, Pa. ---------------------------------
Arthur Andersen LLP
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 24,550
<SECURITIES> 0
<RECEIVABLES> 4,118
<ALLOWANCES> 0
<INVENTORY> 71,020
<CURRENT-ASSETS> 102,642
<PP&E> 34,602
<DEPRECIATION> 27,325
<TOTAL-ASSETS> 143,726
<CURRENT-LIABILITIES> 36,172
<BONDS> 3,855
0
0
<COMMON> 216
<OTHER-SE> 98,481
<TOTAL-LIABILITY-AND-EQUITY> 143,726
<SALES> 241,194
<TOTAL-REVENUES> 241,194
<CGS> 229,542
<TOTAL-COSTS> 229,542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 517
<INCOME-PRETAX> 11,135
<INCOME-TAX> (4,231)
<INCOME-CONTINUING> 6,904
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,904
<EPS-BASIC> .44
<EPS-DILUTED> .33
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