Exhibit 99.1
ZANY BRAINY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Thirteen Weeks Ended Twenty Six Weeks Ended
-------------------------------------- --------------------------------------
August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000
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NET SALES $ 66,564 $ 71,724 $132,771 $135,159
COST OF GOODS SOLD, including occupancy 65,846 65,206 121,726 115,965
costs
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Gross profit 718 6,518 11,045 19,194
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 28,026 26,169 53,972 50,731
MERGER AND INTEGRATION COSTS (497) 9,830 (497) 9,830
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Operating loss (26,811) (29,481) (42,430) (41,367)
INTEREST EXPENSE, NET 4,349 841 5,961 1,114
EQUITY LOSS IN JOINT VENTURE - 5,789 - 5,789
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Loss before Chapter 11 reorganization costs
and income tax benefit (31,160) (36,111) (48,391) (48,270)
CHAPTER 11 REORGANIZATION COSTS 3,063 - 4,899 -
Loss before income tax benefit (34,223) (36,111) (53,290) (48,270)
INCOME TAX BENEFIT - 13,917 - 18,578
-------- --------
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NET LOSS $(34,223) $(22,194) $(53,290) $(29,692)
===============================================================================
NET LOSS PER SHARE: $(1.06) $(0.71) $(1.65) $(0.96)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 32,329 31,065 32,329 31,061
The accompanying notes are an integral part of these statements.
ZANY BRAINY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands except share data)
August 4, 2001 February 3, 2001
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ASSETS
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CURRENT ASSETS:
Cash and cash equivalents $ 3,980 $ 2,352
Receivables, net 4,799 2,270
Inventories, net 100,120 120,017
Prepaid expenses 21,064 6,874
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Total current assets 129,963 131,513
PROPERTY AND EQUIPMENT, net 59,023 66,153
OTHER ASSETS, net 2,901 1,497
------------------ -------------------
$ 191,887 $199,163
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
Bank overdraft $ 8,755 $ 7,314
Line of credit 54,705 52,723
Accounts payable 18,679 37,117
Accrued liabilities 9,405 18,081
Chapter 11 reorganization costs 3,375 -
------------------ -------------------
Current portion of long-term debt - 26
Capitalized lease obligations - 2,588
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Total current liabilities 94,919 117,849
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DEFERRED RENT - 8,868
------------------ -------------------
LONG TERM DEBT, net of current portion - 663
------------------ -------------------
CAPITALIZED LEASE OBLIGATIONS, net of current portion - 2,204
------------------ -------------------
LIABILITIES SUBJECT TO COMPROMISE (NOTE 4) 80,677 -
------------------ -------------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, 100,000,000 shares authorized at August 4,
2001, 32,329,420 shares issued and outstanding at August 4, 2001 and 323 323
February 2001
February 3, 2001
Additional paid-in capital 145,336 145,334
Accumulated deficit (129,368) (76,078)
------------------ -------------------
Total shareholders' equity 16,291 69,579
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$ 191,887 $199,163
================== ===================
The accompanying notes are an integral part of these statements.
2
ZANY BRAINY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Twenty-Six Weeks Ended
--------------------------------------
August 4, 2001 July 29, 2000
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(53,290) $(29,692)
Adjustments to reconcile net loss to net cash provided by (used in) operating
- -----------------------------------------------------------------------------
activities:
----------
Depreciation and amortization 9,257 7,434
Provision for deferred rent 15 688
Amortization of deferred compensation 2 -
Deferred income tax benefit - (19,028)
Equity loss in joint venture - 5,789
Inventory writedowns - 8,650
Loss on disposal of assets 77 -
(Increase) decrease in operating assets:
Receivables (2,529) 1,214
Inventories 19,897 (8,562)
Prepaid expenses (14,190) 548
Other assets 77 316
Increase (decrease) in operating liabilities:
Accounts payable 29,554 (2,573)
Accrued liabilities 14,352 (1,586)
Changes in liabilities subject to compromise (668) -
----------------- -----------------
Net cash provided by (used in) operating activities 2,554 (36,802)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (924) (9,602)
Investment in joint venture - (6,870)
----------------- -----------------
Net cash used in investing activities (924) (16,472)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit, net 1,982 32,889
Payments on capitalized lease obligations (664) (1,360)
Change in bank overdrafts 1,441 -
Debt issuance costs (2,761) (320)
Proceeds from exercise of stock options - 82
----------------- -----------------
Net cash provided by (used in) financing activities (2) 31,291
----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,628 (21,983)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,352 25,041
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,980 $ 3,058
================= =================
The accompanying notes are an integral part of these statements.
3
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 4, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
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The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and should be read in conjunction with the audited
financial statements as of February 3, 2001 included in the Zany Brainy, Inc.
and Subsidiaries (the "Company") annual report on Form 10-K for the fiscal year
ended February 3, 2001 as filed with the Securities and Exchange Commission (see
Note 2). Certain information and footnote disclosures required by accounting
principles generally accepted in the United States for complete financial
statements have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of the Company's
management, the accompanying unaudited financial statements contain all material
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial position, results of operations and cash flows
for the periods indicated, and have been prepared in a manner consistent with
the February 3, 2001 financial statements, except as described in Note 2 below.
In light of the seasonal nature of the Company's business, the results of
operations for the thirteen and twenty-six weeks ended August 4, 2001 are not
necessarily indicative of operating results for a full fiscal year.
2. CHAPTER 11 REORGANIZATION
- -----------------------------
On May 15, 2001 (the "Petition Date"), the Company, Children's Products, Inc.,
Children's Development, Inc., Noodle Kidoodle, Inc., Children's Distribution,
LLC and Zany Brainy Direct, LLC (collectively, the "Debtors"), filed voluntary
petitions (the "Filing") for relief under Chapter 11 of Title 11 of the United
States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court").
On August 16, 2001, pursuant to Bankruptcy Court approval, the Company announced
that it had agreed to sell substantially all of its assets to the Right Start,
Inc. (the "Right Start") and, in early September, the transaction (the "Right
Start Transaction") was completed and the Company ceased all operations.
Pursuant to the terms of the Right Start Transaction, the Right Start acquired
substantially all of the assets of the Company through its wholly-owned
subsidiary, ZB Company, Inc., including cash, inventory and accounts receivable,
in exchange for $11.7 million in cash, approximately $90 million in the
assumption of certain liabilities, and the issuance of 1.1 million shares of
Right Start common stock. The Company is in the process of preparing a plan of
liquidation to be filed with the Bankruptcy Court. It is anticipated that the
cash and the Right Start shares received by the Company in the Right Start
Transaction will be used by the Company to pay certain expenses of the Debtors,
with the balance to be distributed to prepetition creditors. It is anticipated
that existing shareholders of the Company will not receive any distributions in
connection with the Right Start Transaction or in connection with the Company's
liquidation.
In conjunction with the Right Start Transaction, the Company's DIP Facility was
repaid and terminated (see Note 9).
Bar Date for Filing Claims
- --------------------------
In connection with the Debtors bankruptcy proceedings, the Bankruptcy Court has
set November 23, 2001 (the "Bar Date") as the last date by which holders of
prepetition claims against the Debtors must file their claims. Any holder of a
claim that is required to file a claim by such deadline and does not do so will
be barred from asserting such claim against any of the Debtors and will not
participate in any distribution in any of the Chapter 11 cases on account of
such claim.
Accounting Impact
- -----------------
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidelines for entities that are reorganizing under the Bankruptcy
Code. The Company has implemented this guidance in the accompanying condensed
financial statements.
Pursuant to SOP 90-7, the Company is required to segregate prepetition
liabilities that are subject to compromise and report them separately on the
balance sheet. See Note 4 for detail of the liabilities subject to compromise
at August 4, 2001. Liabilities that may be affected by a plan of reorganization
or liquidation are recorded at the expected amount of the allowed claims, even
if they may be settled for lesser amounts.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
4
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs. Accordingly, the Company recorded a total of $4.9 million
as Chapter 11 reorganization costs during the twenty-six weeks ended August 4,
2001, consisting of (in thousands):
Professional Fees $4,819
Bankruptcy Court Costs 80
------
Total $4,899
======
Professional fees represent legal and financial advisory expenses directly
related to the Filing.
3. RECLASSIFICTIONS
- --------------------
Certain reclassifications have been made to the prior periods' financial
statements to conform to the current period presentation, which included the
breakout of Chapter 11 Reorganization Costs of approximately $1.8 million which
was included in Selling, General and Administrative expenses in the Company's
unaudited financial statements included in the Company's Form 10-Q for the
quarterly period ended May 5, 2001.
4. LIABILITIES SUBJECT TO COMPROMISE (in thousands)
- ----------------------------------------------------
As a result of the Filing (see Note 2), pursuant to SOP 90-7, the Company is
required to segregate prepetition liabilities that are subject to compromise and
report them separately on the condensed consolidated balance sheet. Liabilities
that may be affected by a plan of reorganization are recorded at the expected
amount of the allowed claims, even if they settle for lesser amounts.
Liabilities subject to compromise at August 4, 2001 are as follows:
Prepetition Trade Payables $47,992
Prepetition Non-Trade Payables 12,464
Deferred Rent 8,654
Capitalized Lease Obligations 4,589
Accrued Rent Expense 1,864
Other 5,114
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Total $80,677
=======
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims. The Company is reviewing
prepetition claims filed against the Debtors and will review all filed claims as
of the Bar Date. The Company's management believes that there are certain
significant discrepancies and that some of these claims are without merit. A
final determination with respect to disputed claims will be made by the
Bankruptcy Court.
5. SUPPLEMENTAL CASH FLOWS INFORMATION
- ---------------------------------------
For the twenty-six weeks ended August 4, 2001 and July 29, 2000, the Company
paid $2,991,000 and $688,000, respectively, for interest expense which includes
termination fees and other costs related to the change in debt during the
twenty-six weeks ended August 4, 2001 (see Note 9). For the twenty-six weeks
ended August 4, 2001 and July 29, 2000, the Company paid $0 and $691,000,
respectively, for income taxes. For the twenty-six weeks ended August 4, 2001,
the Company paid $1,524,000 in Chapter 11 Reorganization Costs (see Note 2).
5
6. THE MERGER
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Effective July 26, 2000, the Company and Noodle Kidoodle, Inc. ("Noodle") were
merged in a tax-free, stock-for-stock transaction that was accounted for as a
pooling of interests. Under the terms of the merger agreement, the Company
issued 1.233 shares of common stock of the Company for each outstanding share of
Noodle common stock for an aggregate issuance of approximately 9.4 million
shares of Company common stock to the former Noodle stockholders.
As a result of the merger with Noodle, the Company entered into a restructuring
and integration plan. Accruals were established for certain items related to
this plan.
The utilization of the initial accruals as of the date of the merger and changes
through August 4, 2001 is as follows (in thousands):
Balance as of Reversal Balance as of
July 29, 2000 Charges Utilized of Charges August 4, 2001
------------- ------- -------- ---------- --------------
Merger and Integration Costs
- ----------------------------
Inventory write-downs $ 8,650 $ - $ (7,019) $ - $ 1,631
Professional fees 5,025 - (5,018) (7) -
Store closures - 600 (490) (110) -
Other integration costs 905 350 (875) (380) -
Restructuring Costs
- -------------------
Severance and change in control costs 3,000 - (3,000) - -
Disposal of property 900 - (900) - -
------- ------ -------- --------- -------------
$18,480 $ 950 $(17,302) $ (497) $ 1,631
======= ====== ======== ========= =============
Charges of $497,000 that were reversed in the second quarter of fiscal year 2001
are included in Merger and Integration Costs on the Condensed Consolidated
Statement of Operations.
7. 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.
8. NET INCOME (LOSS) PER SHARE
- --------------------------------
Net income (loss) per share is calculated utilizing the principles of SFAS No.
128, "Earnings Per Share" ("EPS"). The weighted average impact of stock options
and warrants was excluded from the calculation of diluted loss per share for all
periods presented as they were anti-dilutive due to the net loss.
9. LINE OF CREDIT
- ------------------
In July 2000, the Company entered into a three-year credit facility (the "Credit
Facility") covering a maximum principal amount of $115.0 million, secured by
inventories and other assets, subject to a borrowing base, as defined as a
percentage of eligible inventories.
On February 28, 2001, the Company received a letter from the lender under the
Credit Facility notifying it that it failed to comply with a number of covenants
under the Credit Facility and that such failures constituted events of default
under the Credit Facility. On March 9, 2001, the lender notified the Company
that, as a result of the events of default, the Company's interest rate for the
loans under the Credit Facility was being increased to the default rate of
interest, which was the prime rate plus 200 basis points.
In connection with the Filing, the Company obtained a two-year, $115.0 million
debtor-in-possession credit facility from Wells Fargo Retail Finance, LLC, as
Agent for itself and other lenders that may join the credit facility from time-
to-time (the "DIP Facility"). The DIP Facility was secured by substantially all
of the Company's assets. The DIP Facility included a credit line of up to
$100.0 million bearing interest at the prime rate plus 1.75% or, if elected, at
an annual rate of LIBOR plus 3.5%, and an additional line of credit of $15.0
million bearing interest at 14.5% per annum.
The DIP Facility contained covenants that required the Company to satisfy
ongoing financial requirements and which limited its ability to borrow
additional money, pay dividends, divest assets, and make additional corporate
investments and increase compensation paid to directors, officers and senior
management employees. The DIP Facility also prohibited a change in control
without consent of the agent. In the event of default, the annual interest rate
would increase by 2.0%.
Under the DIP Facility, the Company's borrowing availability was tied to a
percentage of eligible inventories. Such formula included limitations based on
a percentage of the value of eligible inventory that adjusted seasonally and a
general limitation that the Company could not borrow any amounts that exceeded
100% of the liquidation value of eligible inventory. The amounts calculated
based on eligible inventory were subject to additional reserves imposed by the
bank.
In connection with the DIP Facility, the Company was required to pay an
origination and arrangement fee of $1.3 million or 1.25% on the credit line, an
origination fee of $450,000 or 3.0% on the maximum additional line, an annual
agent's fee of $200,000, certain unused credit line, collateral and letter of
credit fees, as defined in the agreement.
6
In conjunction with the institution of the DIP Facility, the Company repaid all
outstanding borrowings under its Credit Facility with Congress Financial
Corporation ("Congress") and terminated that facility on May 17, 2001. At the
time of termination, the Company was required to pay a $1.7 million termination
fee and wrote off approximately $932,000 of unamortized deferred financing costs
which are included in interest expense in the period of termination.
Borrowings under the DIP Facility were immediately reduced by transfers from the
Company's bank accounts, primarily including store retail receipts, on a daily
basis.
On September 5, 2001, the Company had an outstanding balance on the DIP facility
of approximately $64.5 million and remaining borrowing capacity of $5.9 million
which was repaid and the agreement terminated in connection with the Right Start
Transaction (see Note 2).
10. INCOME TAXES
- -----------------
As of August 4, 2001, the Company's management had provided a full valuation
reserve of approximately $53.0 million against its deferred tax assets. This is
based on the assessment of Company's management that it is not more likely than
not that the net deferred tax asset will be realized.
11. COMMON STOCK OPTIONS AND WARRANTS
- --------------------------------------
During the first quarter of fiscal 2001, the Company granted approximately 1.5
million options to employees. There were no exercises and minimal cancellations
during the thirteen and twenty-six weeks ended August 4, 2001. No options were
granted during the second quarter of fiscal 2001.
In fiscal year 2000, the Company granted warrants to Online Retail Partners,
Inc. in conjunction with the dissolution of the Internet joint venture, ZB
Holdings LLC, to purchase 1 million shares of the Company's common stock at an
exercise price of $6.00 per share. These warrants vest over five years and will
expire in 2010. In addition, warrants to purchase 15,000 shares of common stock
are outstanding. These warrants have an exercise price of $4.00 per share and
expire in January 2003.
12. COMMITMENTS AND CONTINGENCIES
- ----------------------------------
General
- -------
From time to time, the Company is named as a defendant in legal actions arising
from its normal business activities. In connection with the Company's inability
to pay creditors, the Company has been named in numerous prepetition lawsuits.
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 would not have a material adverse effect on the Company's financial
position or operating results.
Subsequent Events
- -----------------
In 1998, the Company entered into a Master Equipment Lease Agreement ("Master
Lease") with PNC Leasing LLC ("PNC"). During the prepetition period, the
Company did not make certain scheduled monthly rental payments. In addition,
during the postpetition period, the Company did not make any scheduled monthly
rental payments.
On September 5, 2001, the Company entered into an agreement with PNC whereby the
Company was authorized to sell the equipment included under the Master Lease
agreement to ZB Company, Inc. Under this agreement, the Company has agreed that
PNC has an allowed secured claim of $3.0 million and an allowed unsecured claim
of $1.8 million. In connection with the Right Start Transaction the PNC secured
claim was assumed by ZB Company, Inc. and the Company has no other liability to
PNC with the respect to the PNC secured claim.
The PNC allowed unsecured claim will be treated as any other nonpriority,
prepetition claim owed by the Company.
In addition and in conjunction with the Right Start Transaction, certain lease
agreements have been assumed, rejected and/or renegotiated. Right Start has
assumed all cure obligations with respect to assumed and/or renegotiated lease
agreements. Total cure amounts to be paid relating to lease agreements which
have been assumed by ZB Company, Inc. are $744,000. This amount relates to 81
Zany Brainy, Inc. stores. As of October 24, 2001, cure amounts related to 63 of
these leases have been paid in the amount of $562,000. This amount reduces the
amount of prepetition rent of approximately $1.9 million included in Liabilities
Subject to Compromise as of August 4, 2001.
7