EXHIBIT 99.1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
IN RE: ) Chapter 11
)
ZANY BRAINY, INC., et al., ) Case No. 01-1749(SLR)
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)
Debtors. )
) Jointly Administered
)
)
JOINT DISCLOSURE STATEMENT PURSUANT TO SECTION 1125 OF THE
BANKRUPTCY CODE RELATING TO THE JOINT CONSOLIDATED
LIQUIDATING PLAN OF REORGANIZATION OF
ZANY BRAINY, INC., CHILDREN'S PRODUCTS, INC., CHILDREN'S
DEVELOPMENT INC., NOODLE KIDOODLE, INC., CHILDREN'S
DISTRIBUTION, LLC AND ZANY BRAINY DIRECT LLC
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DISCLAIMER AND ENDORSEMENT
THE DEBTORS AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS STRONGLY
RECOMMEND APPROVAL OF THE PLAN. THE INFORMATION CONTAINED IN THIS DISCLOSURE
STATEMENT IS INCLUDED HEREIN FOR PURPOSES OF SOLICITING ACCEPTANCES OF THE PLAN
AND MAY NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO DETERMINE HOW TO VOTE
ON THE PLAN. NO PERSON MAY GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS,
OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DISCLOSURE
STATEMENT, REGARDING THE PLAN OR THE SOLICITATION OF ACCEPTANCES OF THE PLAN.
ALL CREDITORS ARE ADVISED AND ENCOURAGED TO READ THIS DISCLOSURE STATEMENT
AND THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE PLAN. PLAN
SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT ARE QUALIFIED IN
THEIR ENTIRETY BY REFERENCE TO THE PLAN AND THE EXHIBITS ANNEXED TO THE PLAN AND
THIS DISCLOSURE STATEMENT. THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT
ARE MADE ONLY AS OF THE DATE HEREOF AND THERE CAN BE NO ASSURANCE THAT THE
STATEMENTS CONTAINED HEREIN WILL BE CORRECT AT ANY TIME AFTER THE DATE HEREOF.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION 1125
OF THE BANKRUPTCY CODE AND RULE 3001(c) OF THE FEDERAL RULES OF BANKRUPTCY
PROCEDURE AND NOT NECESSARILY IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES
LAWS OR OTHER APPLICABLE LAW. THIS DISCLOSURE STATEMENT HAS BEEN NEITHER
APPROVED NOR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"),
NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED
HEREIN. PERSONS OR ENTITIES TRADING IN OR OTHERWISE PURCHASING, SELLING OR
TRANSFERRING SECURITIES OF ZANY BRAINY, INC. OR ONE OF ITS DIRECT OR INDIRECT
SUBSIDIARIES SHOULD EVALUATE THIS DISCLOSURE STATEMENT AND THE PLAN IN LIGHT OF
THE PURPOSE FOR WHICH THEY WERE PREPARED.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR
THREATENED ACTIONS, THIS DISCLOSURE STATEMENT SHALL NOT CONSTITUTE OR BE
CONSTRUED AS AN ADMISSION OF ANY FACT OR LIABILITY, STIPULATION OR WAIVER, BUT
RATHER AS A STATEMENT MADE IN SETTLEMENT NEGOTIATIONS. THIS DISCLOSURE STATEMENT
SHALL NOT BE ADMISSIBLE IN ANY NONBANKRUPTCY PROCEEDING NOR SHALL IT BE
CONSTRUED TO BE CONCLUSIVE ADVICE ON THE TAX, SECURITIES OR OTHER LEGAL EFFECTS
OF THE REORGANIZATION AS TO HOLDERS OF
CLAIMS AGAINST, OR EQUITY INTERESTS IN, ZANY BRAINY, INC. OR ANY OF ITS DIRECT
OR INDIRECT SUBSIDIARIES.
TABLE OF CONTENTS
PAGE
I. INTRODUCTION.................................................................................... 1
II. THE BANKRUPTCY PLAN VOTING INSTRUCTIONS AND PROCEDURES.......................................... 2
A. Definitions............................................................................... 2
B. Notice to Holders of Claims and Holders of Interests...................................... 2
C. Solicitation Package...................................................................... 3
D. Voting Procedures, Ballots and Voting Deadline............................................ 3
E. Confirmation Hearing and Deadline for Objections to Confirmation.......................... 4
III. HISTORY OF ZANY BRAINY AND COMMENCEMENT OF THE CASE............................................. 5
A. Background and History.................................................................... 5
B. Events Leading to the Debtors' Bankruptcy................................................. 6
IV. THE CHAPTER 11 CASES............................................................................ 7
A. First Day Orders.......................................................................... 7
B. Appointment of Committee.................................................................. 8
C. Debtor-in-Possession Financing............................................................ 8
D. The Right Start Transaction............................................................... 9
E. Matters Relating to Unexpired Leases of Non-Residential Real Property..................... 11
F. Executory Contract Issues................................................................. 13
G. Establishment of Bar Date................................................................. 15
H. Substantive Consolidation................................................................. 15
I. 546(g)* Returns Program................................................................... 15
V. SUMMARY OF THE LIQUIDATION PLAN OF REORGANIZATION............................................... 17
A. Overall Structure of the Plan............................................................. 17
B. Classification and Treatment of Claims and Interests...................................... 17
C. Implementation of the Plan................................................................ 19
VI. PROVISIONS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN......................................... 23
A. Plan Funding.............................................................................. 23
B. Substantive Consolidation................................................................. 24
C. Officers and Directors.................................................................... 26
D. Bylaws and Articles of Incorporation...................................................... 26
E. Operations of the Debtors Between the Confirmation Date and the Final Payment Date........ 26
F. Dissolution of Committee and Formation of Liquidating Committee........................... 26
G. Distributions Under the Plan.............................................................. 26
H. Releases and Settlements of Claims........................................................ 29
I. Executory Contracts and Unexpired Leases.................................................. 31
J. Preservation of Causes of Action.......................................................... 32
K. Cancellation of Zany Brainy Common Stock and Agreements................................... 32
L. Exclusive Period.......................................................................... 33
M. Bankruptcy Code Exemption from Registration............................................... 33
VII. CERTAIN FACTORS TO BE CONSIDERED................................................................ 36
A. General Considerations.................................................................... 36
B. Certain Bankruptcy Considerations......................................................... 36
C. Sales of Right Start Shares in the Public Market Could Lower Stock Price.................. 36
D. Value of Right Start Shares Unknown....................................................... 37
E. Additional Risks Related to the Right Start Shares........................................ 37
F. Information About Right Start............................................................. 37
VIII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN............................................. 38
A. Federal Income Tax Consequences to the Debtors............................................ 38
B. Federal Income Tax Consequences to Holders of Claims...................................... 39
C. Federal Income Tax Consequences to Holders of Zany Brainy Common Stock Interests.......... 39
IX. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS..................................... 39
A. Feasibility of the Plan................................................................... 39
B. Acceptance of the Plan.................................................................... 39
C. Best Interest of Holders of Claims........................................................ 40
D. Liquidation Analysis...................................................................... 41
E. Confirmation Without Acceptance of All Impaired Classes: The "Cramdown" Alternative....... 41
F. Conditions to Confirmation and/or Consummation............................................ 42
G Waiver of Conditions to Confirmation and/or Consummation.................................. 43
H. Retention of Jurisdiction................................................................. 43
X. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN....................................... 44
A. Continuation of the Chapter 11 Cases...................................................... 44
B. Alternative Plans of Reorganization....................................................... 45
C. Liquidation Under Chapter 7 or Chapter 11................................................. 45
XI. VOTING REQUIREMENTS............................................................................. 45
A. Parties in Interest Entitled to Vote...................................................... 46
B. Classes Impaired Under the Plan........................................................... 47
XII. CONCLUSION...................................................................................... 48
A. Hearing on and Objections to Confirmation................................................. 48
B. Recommendation............................................................................ 49
APPENDICES
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Appendix A - Joint Consolidated Liquidating Plan of Reorganization
Appendix B - Historical Financial Information
Appendix C - Liquidation Analysis
Appendix D - Right Start Asset Purchase Agreement
Appendix E - Conditional Employment Agreement
Appendix F - PNC Stipulation
DISCLOSURE STATEMENT WITH RESPECT TO THE JOINT CONSOLIDATED
LIQUIDATING PLAN OF REORGANIZATION
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I. INTRODUCTION
Zany Brainy, Inc. ("Zany Brainy"), Children's Product, Inc., Children's
Development Inc., Noodle Kidoodle, Inc., Children's Distribution, LLC and Zany
Brainy Direct LLC (collectively, the "Debtors") and the Official Committee of
Unsecured Creditors (the "Committee") jointly submit this disclosure statement
(the "Disclosure Statement") pursuant to Section 1125 of the United States
Bankruptcy Code (the "Bankruptcy Code"), for use in the solicitation of votes on
the Joint Consolidated Liquidating Plan of Reorganization (the "Plan") proposed
by the Debtors and the Committee, that was filed with the United States District
Court for the District of Delaware (the "Bankruptcy Court") on December 17,
2001, a copy of the Plan is annexed to this Disclosure Statement as Appendix A.
This Disclosure Statement sets forth certain information regarding the
Debtors' pre-petition history, significant events that have occurred during the
Chapter 11 Cases and the anticipated liquidation of remaining assets. This
Disclosure Statement also describes the Plan, including certain alternatives to
the Plan, certain effects of confirmation of the Plan and the manner in which
distributions will be made under the Plan. In addition, this Disclosure
Statement discusses the confirmation process and the voting procedures that
holders of Claims as defined by reference below in impaired Classes as defined
by reference below must follow for their votes to be counted.
FOR A DESCRIPTION OF THE PLAN AND VARIOUS RISK AND OTHER FACTORS PERTAINING
TO THE PLAN AS IT RELATES TO HOLDERS OF CLAIMS AGAINST AND INTERESTS IN THE
DEBTORS, PLEASE SEE SECTION V "SUMMARY OF THE LIQUIDATING PLAN OF
REORGANIZATION" AND SECTION VII "CERTAIN FACTORS TO BE CONSIDERED."
THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF THE
PLAN, CERTAIN STATUTORY PROVISIONS, CERTAIN DOCUMENTS RELATED TO THE PLAN,
CERTAIN EVENTS IN THE CHAPTER 11 CASES AND CERTAIN FINANCIAL INFORMATION.
ALTHOUGH THE DEBTORS BELIEVE THAT THE PLAN AND RELATED DOCUMENT SUMMARIES ARE
FAIR AND ACCURATE, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT THEY DO NOT
SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS OR STATUTORY PROVISIONS. FACTUAL
INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS BEEN PROVIDED BY THE
DEBTORS' MANAGEMENT, EXCEPT WHERE OTHERWISE SPECIFICALLY NOTED. THE DEBTORS ARE
UNABLE TO WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED HEREIN, INCLUDING
THE FINANCIAL INFORMATION, IS WITHOUT ANY INACCURACY OR OMISSION.
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II. THE BANKRUPTCY PLAN VOTING INSTRUCTIONS AND PROCEDURES
A. Definitions
Except as otherwise provided herein, capitalized terms not otherwise
defined in this Disclosure Statement have the meanings ascribed to them in the
Plan.
B. Notice to Holders of Claims and Holders of Interests
This Disclosure Statement is being transmitted to certain holders of Claims
against, or Interests in, the Debtors. The purpose of this Disclosure Statement
is to provide adequate information to enable you, as the holder of a Claim
against, or Interest in, the Debtors to make a reasonably informed decision with
respect to the Plan prior to exercising your right to vote to accept or reject
the Plan.
On January 15, 2002, the Bankruptcy Court approved this Disclosure
Statement as containing information of a kind and in sufficient detail adequate
to enable the holders of Claims against, and Interests in, the Debtors to make
an informed judgment with respect to acceptance or rejection of the Plan. THE
BANKRUPTCY COURT'S APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE
EITHER A GUARANTY OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED
HEREIN OR AN ENDORSEMENT OF THE PLAN BY THE BANKRUPTCY COURT.
ALL HOLDERS OF CLAIMS AGAINST AND INTERESTS IN THE DEBTORS ARE ENCOURAGED
TO READ THIS DISCLOSURE STATEMENT AND ITS APPENDICES CAREFULLY AND IN THEIR
ENTIRETY BEFORE DECIDING TO VOTE EITHER TO ACCEPT OR REJECT THE PLAN. This
Disclosure Statement contains important information about the Plan,
considerations pertinent to acceptance or rejection of the Plan, and
developments concerning the Chapter 11 Cases.
THIS DISCLOSURE STATEMENT IS THE ONLY DOCUMENT AUTHORIZED BY THE BANKRUPTCY
COURT TO BE USED IN CONNECTION WITH THE SOLICITATION OF VOTES ON THE PLAN. No
solicitation of votes may be made except after distribution of this Disclosure
Statement, and no person has been authorized to distribute any information
concerning the Debtors other than the information contained herein.
CERTAIN OF THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS BY ITS
NATURE FORWARD LOOKING AND CONTAINS ESTIMATES, ASSUMPTIONS AND PROJECTIONS THAT
MAY BE MATERIALLY DIFFERENT FROM ACTUAL, FUTURE RESULTS. THE DEBTORS ASSUME NO
OBLIGATION TO UPDATE THE FORWARD LOOKING STATEMENTS INCLUDED IN THIS DISCLOSURE
STATEMENT.
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This Disclosure Statement does not reflect any events that may occur
subsequent to the date upon which the Bankruptcy Court approves it and that may
have a material impact on the information contained in this Disclosure
Statement. Further, neither the Debtors nor the Committee anticipate that any
amendments or supplements to this Disclosure Statement will be distributed to
reflect such occurrences. Accordingly, the delivery of this Disclosure Statement
shall not under any circumstance imply that the information herein is correct or
complete as of any time subsequent to the date upon which the Bankruptcy Court
approves the Disclosure Statement.
EXCEPT WHERE SPECIFICALLY NOTED, THE FINANCIAL INFORMATION CONTAINED HEREIN
HAS NOT BEEN AUDITED BY A CERTIFIED PUBLIC ACCOUNTANT AND HAS NOT BEEN PREPARED
IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
C. Solicitation Package
Accompanying this Disclosure Statement are copies of (i) the Plan, (ii) the
notice of, among other things, the time for submitting ballots to accept or
reject the Plan, the date, time and place of the hearing to consider the
confirmation of the Plan and related matters, and the time for filing objections
to the confirmation of the Plan (the "Confirmation Hearing Notice") and (iii)
one or more ballots (and return envelopes) to be used by you in voting to accept
or to reject the Plan.
D. Voting Procedures, Ballots and Voting Deadline
After carefully reviewing the Plan, this Disclosure Statement and the
detailed instructions accompanying your ballot, please indicate your acceptance
or rejection of the Plan by voting in favor of or against the Plan on the
enclosed ballot. Please complete and sign your original ballot (copies will not
be accepted) and return it in the envelope provided.
Each ballot has been coded to reflect the Class of Claims or Class of
Interests it represents. Accordingly, in voting to accept or reject the Plan,
you must use only the coded ballot or ballots sent to you with this Disclosure
Statement.
IN ORDER FOR YOUR VOTE TO BE COUNTED, YOUR BALLOT MUST BE PROPERLY
COMPLETED AS SET FORTH ABOVE AND IN ACCORDANCE WITH THE VOTING INSTRUCTIONS ON
THE BALLOT AND RECEIVED NO LATER THAN FEBRUARY 26, 2002, at 5:00 P.M. EASTERN
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TIME (THE "VOTING DEADLINE") BY BANKRUPTCY SERVICES, LLC (THE "VOTING AGENT" OR
"BSI"). DO NOT RETURN ANY STOCK CERTIFICATES OR DEBT INSTRUMENTS WITH YOUR
BALLOT.
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If you have any questions about (i) the procedure for voting your Claim or
Interest or with respect to the packet of materials that you have received or
(ii) the amount of your Claim, or if you wish to obtain, at your expense, unless
otherwise specifically required by Federal Rule of Bankruptcy Procedure 3017(d),
an additional copy of the Plan, this Disclosure Statement or any appendices or
exhibits to such documents, please contact:
Bankruptcy Services, LLC
70 East 55th Street, 6th Floor
New York, New York 10022
Attention: Kathy Gerber
FOR FURTHER INFORMATION AND INSTRUCTION ON VOTING TO
ACCEPT OR REJECT THE PLAN, SEE SECTION XI "VOTING REQUIREMENTS."
E. Confirmation Hearing and Deadline for Objections to Confirmation
Pursuant to Section 1128 of the Bankruptcy Code and Federal Rule of
Bankruptcy Procedure 3017(c), the Bankruptcy Court has scheduled the
Confirmation Hearing for March 6, 2002, at 5:00 p.m. before the Honorable Sue L.
Robinson, Chief United States District Judge at the J. Caleb Boggs Federal
Building, 844 North King Street, Wilmington, Delaware 19801. The Confirmation
Hearing may be adjourned from time to time by the Bankruptcy Court without
further notice except for the announcement of the adjournment date made at the
Confirmation Hearing or at any subsequent adjourned Confirmation Hearing. The
Bankruptcy Court has directed that objections, if any, to confirmation of the
Plan be filed with the Clerk of the Bankruptcy Court and served so that they are
RECEIVED on or before February 26, 2002, at 4:00 p.m. by:
Counsel for the Debtors
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Michael A. Bloom, Esquire
and
Richards, Layton & Finger, P.A.
One Rodney Square
920 North King Street
Wilmington, DE 19801
Attention: Mark D. Collins, Esquire
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Counsel for the Committee/Liquidating Committee
Traub, Bonaquist & Fox LLP
655 Third Avenue, 21st Floor
New York, NY 10017
Attention: Michael S. Fox, Esquire
and
Reed Smith, LLP
1201 Market Street, Suite 1500
Wilmington, DE 19801
Attention: Kurt Gwynn, Esquire
United States Trustee
United States Trustee's Office
The Curtis Center
601 Walnut Street, Suite 950 West
Philadelphia, PA 19106
Attention: David L. Buchbinder, Esquire
III. HISTORY OF THE DEBTORS AND COMMENCEMENT OF THE CHAPTER 11 CASES
A. Background and History
Zany Brainy was a leading specialty retailer of high quality toys, games,
books and multimedia products for kids. It sold products that entertained,
educated and sparked the imaginations of children up to 12 years of age. Zany
Brainy was incorporated in 1991 and opened its first store in Wynnewood,
Pennsylvania in the same year. Zany Brainy opened 27 new stores during the year
ended February 3, 2001 and, as of May 17, 2001, it operated 187 stores in 34
states.
The Debtors had a significant presence in the mid-Atlantic region,
including Delaware, Pennsylvania, Maryland, New Jersey and New York with 52
retail stores in these states. The Debtors derived significant sales from these
stores. Additionally, as of April 25, 2001, the Debtors employed 1,147 people in
these states, including those working in retail stores, the distribution centers
and the corporate center.
For the fiscal year ended February 3, 2001, on a consolidated basis, Zany
Brainy reported net sales of approximately $400.5 million. As of February 3,
2001, its books and records reflected, on a book value basis, approximate total
assets of $200.9 million and liabilities of $119.5 million.
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B. Events Leading to the Debtors' Bankruptcy
1. Zany Brainy's Disappointing Financial Performance
The Debtors' rapid growth in fiscal 2000, which included the acquisition of
60 Noodle Kidoodle stores, the opening of 25 new Zany Brainy stores and a
substantial investment in the Debtors' internet strategy presented significant
operational challenges. These factors, along with a difficult retail climate,
compounded by an absence of a "hot" product, led to a decline in sales which
caused liquidity issues which contributed to the Debtors' inability to pay
creditors and resulted in defaults of debt covenants.
2. Defaults Under the Pre-Petition Credit Facility
In July 2000, the Debtors entered into a three-year credit facility (the
"Credit Facility") with Congress Financial Corporation ("Congress") 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.
Under the Credit Facility, the Debtors' borrowing availability was tied to
a seasonal percentage of eligible inventory. Such formula included a limitation
that the Debtors could not borrow any amounts that exceeded the lessor of (a)
65% of eligible inventory or (b) 85% of the appraisal value of eligible
inventory, subject to additional reserves imposed by Congress.
In January 2001, the appraiser retained by Congress appraised the Debtors'
inventory at a value which adversely impacted the borrowing availability of the
Debtors. In response, the Debtors attempted to negotiate with the bank to allow
them greater borrowing availability under the Credit Facility.
On February 28, 2001, Zany Brainy received a letter from Congress 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, Congress notified Zany Brainy that,
as a result of the events of default, the 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. This increase in interest rate together
with the reduction of borrowing availability and the above-stated inability to
pay debts caused the Debtors ultimately to seek Bankruptcy Court protection.
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For a further description of the Debtors' historical operations and
financial results, reference should be made to Zany Brainy's 10-K for the fiscal
year ended February 3, 2001. Also included as Appendix B to the Disclosure
Statement are balance sheets, profit and loss statements and statements of cash
flows from Zany Brainy's Annual Reports on Form10-K covering the fiscal years
ended 1999 and 2000.
3. The Standstill Agreement
Zany Brainy began to experience financial trouble, and found that it was
becoming more difficult to meet debts as they became due. On March 15, 2001, the
Debtors held a meeting with their largest trade and expense creditors. Following
the meeting, an informal committee of creditors was formed (the "Informal
Committee"). All members of the Informal Committee agreed to a standstill
agreement pursuant to which they agreed to forebear from taking any action to
collect on their past due debts for a period of two weeks. The standstill
agreement was extended three times, until May 7, 2001.
IV. THE CHAPTER 11 CASES
On May 15, 2001 (the "Petition Date"), the Debtors filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code in the United
States District Court for the District of Delaware. Since the Petition Date, the
Debtors have continued to operate as debtors-in-possession subject to the
supervision of the Bankruptcy Court and in accordance with the Bankruptcy Code.
While the Debtors are authorized to operate in the ordinary course of business,
transactions out of the ordinary course of business have required Bankruptcy
Court approval. In addition, the Bankruptcy Court has supervised the Debtors'
employment of attorneys, accountants, financial advisors and other
professionals.
An immediate effect of the filing of the Debtors' bankruptcy petitions was
the imposition of the automatic stay under the Bankruptcy Code which, with
limited exceptions, enjoined the commencement or continuation of all collection
efforts by creditors, the enforcement of liens against the Debtors' property and
the continuation of litigation against the Debtors. This relief provided the
Debtors with the "breathing room" necessary to assess and reorganize their
businesses and identify potential purchasers of Assets. The automatic stay
remains in effect, unless modified by the Bankruptcy Court, until consummation
of the Plan.
A. First Day Orders
The Debtors filed numerous motions on the Petition Date seeking the relief
provided by certain so-called "first day orders" (the "First Day Orders"). First
Day Orders are intended to ensure a seamless transition between a debtor's pre-
petition and post-petition business operations by approving certain normal
business conduct that may not be specifically authorized under the Bankruptcy
Code or as to which the Bankruptcy Code requires prior approval by the
Bankruptcy Court. The First Day Orders in these Chapter 11 Cases authorized,
among other relief:
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. the maintenance of the Debtors' bank accounts and cash management
systems substantially as they existed prior to the Petition Date;
. the payment of accrued pre-petition wages and employee benefit claims;
. the Debtors' right to obtain interim and final debtor-in-possession
financing;
. the continuation of utility services during the pendency of the
Chapter 11 Cases and establishing procedures for determining requests
for additional assurance in the form of security deposits.
. the continuation of certain customer programs;
. the joint administration of each of the Debtors' bankruptcy cases;
. the payment of pre-petition sales and use taxes; and
. the extension of time within which to file schedules, lists and
statements of financial affairs.
The Debtors retained the law firms of Morgan, Lewis & Bockius LLP and
Richards, Layton & Finger, P.A. as co-counsel, which retentions were approved by
the Bankruptcy Court on June 15, 2001. The Debtors also retained, with
Bankruptcy Court approval, FTI/Policano & Manzo, LLC as their financial advisors
and Arthur Andersen LLP as auditor and tax consultant.
B. Appointment of Committee
On May 25, 2001, the Office of the United States Trustee (the "United
States Trustee") convened a meeting of creditors for the purpose of forming a
committee of the Debtors' unsecured creditors. On that date, the United States
Trustee approved the formation of the Official Committee of Unsecured Creditors
of Zany Brainy, et al. (the "Committee"). The Committee currently is comprised
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of the following members: Ingram Book Group Inc.; Learning Curve International;
Lego Systems, Inc.; Mattel, Inc.; Valley Media, Inc.; Ty Inc. and Infograms,
Inc.
The Committee retained the law firms of Traub, Bonacquist & Fox, LLP and
Reed Smith, LLP as co-counsel, which retentions were approved by the Bankruptcy
Court on June 27, 2001 and June 29, 2001, respectively. The Committee also
retained, with Bankruptcy Court approval, Richard Cartoon, LLC as its financial
advisors.
C. Debtor-in-Possession Financing
In connection with the Chapter 11 filing, and in an effort to maintain the
business as a going concern, the Debtors obtained a two-year $115.0 million
debtor-in-possession credit facility (the "DIP Facility") from Wells Fargo
Retail Finance, LLC, as Agent for itself and
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other lenders that may join the credit facility from time-to-time (the "DIP
Lender"). The DIP Facility was secured by substantially all of the Debtors'
Assets. The DIP Facility included a credit line of up to $100 million bearing
interest at the prime rate plus 1.75% or 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.
In conjunction with the institution of the DIP Facility, the Debtors repaid
all outstanding borrowings under its Credit Facility with Congress, and
terminated that facility on May 17, 2001.
D. The Right Start Transaction
1. The Waterton Offer
On July 10, 2001, Zany Brainy announced that it had entered into an
agreement with Waterton Management, LLC ("Waterton"). Under the terms of the
agreement, upon receiving Bankruptcy Court approval, the Debtors would transfer
substantially all of their employees, Assets and certain liabilities, including
post-petition trade payables and store leases, to a newly created subsidiary
whose operations were not subject to the Bankruptcy Court proceedings (the
"Waterton Transaction"). Waterton was to arrange for a new secured loan facility
for this subsidiary. The Debtors planned to utilize Cash received from the new
subsidiary to pay off its DIP Facility, to pay certain other expenses and
obligations and to fund payments to their unsecured creditors.
2. The Competing Overbid
On August 13, 2001, the Debtors received from The Right Start, Inc. ("Right
Start") a competing overbid to purchase all of the Assets which were the subject
of the Waterton transaction. Right Start is a publicly traded company which, at
an earlier point in negotiations, had negotiated jointly with Waterton to
effectuate a purchase of Zany Brainy or all or substantially all of its Assets.
3. The Right Start Offer
On August 16, 2001, the Bankruptcy Court approved a sale of substantially
all of the Debtors' Assets and the assumption of certain of the Debtors'
liabilities (including performance under the 546(g)* program discussed below) to
ZB Company, Inc. ("ZBCI"), an affiliate of Right Start (the "Right Start
Transaction"). Although the Debtors had announced their intention to proceed
with the Waterton Transaction, the Bankruptcy Court determined that the proposed
Right Start Transaction represented the highest and best offer for the Debtors'
Assets and ordered the sale of the Debtors' Assets to ZBCI.
On September 6, 2001, the Debtors completed the sale of substantially all
of their Assets to ZBCI through a sale of Assets and assignment of liabilities
pursuant to Sections 363 and 365 of the Bankruptcy Code. Pursuant to the Asset
Purchase Agreement dated August 31, 2001 by and among the Debtors, Right Start,
and ZBCI, (the "Right Start Asset
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Purchase Agreement"), ZBCI and Right Start agreed to pay the following
consideration: $7.5 million in cash and 1.1 million shares (the "Right Start
Shares") of Common Stock of Right Start (the "Right Start Common Stock") to the
Debtors' estates for the benefit of the unsecured creditors (the cash portion
will be paid in three equal installments); $65.8 million (excluding renewed
letters of credit) to the DIP Lender, which amount was the full repayment of all
outstanding borrowings under the DIP Facility and the DIP Facility was
terminated; $4.2 million which was offset by payments due to investors; $2.1
million paid into an escrow at the closing for Zany Brainy employees' retention
bonuses; and certain other amounts. Additionally, ZBCI assumed certain other
liabilities estimated at $30.7 million consisting of post-petition trade
payables, settlement amounts, bankruptcy-related, pre-closing professional and
transaction fees, sales and payroll taxes, accrued salaries and employee benefit
obligations and customer gift certificates and merchandise credits. A true and
correct copy of the Right Start Asset Purchase Agreement is attached hereto and
incorporated herein as Appendix D.
As a result of the Right Start Transaction, the majority of the Debtors'
employees were hired by Right Start. The acquisition was financed with the
proceeds of certain investments and the Loan and Security Agreement between
Wells Fargo Retail Finance, LLC and ZBCI, dated September 5, 2001 (the "ZB
Credit Facility").
4. The Right Start
The following information about Right Start has been provided by the Right
Start for inclusion in the Disclosure Statement.
Right Start is a specialty retailer of high quality developmental,
educational and care products for infants and children. Through its acquisition
of substantially all the assets of Zany Brainy, Right Start has expanded its
business to include educational products, toys, games, books and multimedia
products for children up to age 12. In addition, on January 7, 2002, Right Start
purchased certain assets and assumed certain liabilities of F.A.O. Schwarz and
its online and catalog affiliate, Quality Fulfillment Services, Inc.
(collectively, "FAO"). F.A.O. is a premier upscale retailer of toys in the
United States. Established in 1862, FAO has focused its efforts on being a
retailer of unique, high quality, exclusive products in playful, interactive,
fun selling environments staffed with knowledgeable and attentive sales
personnel.
Retail store sales for Right Start for the thirteen-week period ending
November 3, 2001, were $57.2 million versus retail store sales of $9.9 million
for the thirteen weeks ended October 28, 2000. Same store sales, or sales for
stores open at least 14 months, decreased 5.8% for the Right Start division,
while the Zany Brainy division reported a same-store sales decline of 6.4% for
the period of September 5, 2001, to November 3, 2001.
Retail store sales for Right Start for the thirty-nine weeks ended
November 3, 2001, were $80.2 million versus retail store sales of $31.0 million
last year. For the thirty-nine-week period, same store sales for the Right Start
division decreased 3.5%, while the Zany Brainy division reported a same-store
sales decline of 11.0% on a pro-forma basis, assuming the Zany Brainy
acquisition had been completed at the beginning of the fiscal year.
10
For the three months ended November 3, 2001, Right Start reported a
consolidated operating loss of $7.7 million consisting of an operating loss of
$1.7 million for the Right Start division and an operating loss of $6.0 million
for the Zany Brainy division for the period from September 5, 2001, to November
3, 2001. Included in the operating loss for the Zany Brainy division was a loss
of $0.8 million related to the closing of 15 stores and costs and expenses of
$0.1 million related to the integration of Zany Brainy with the Right Start.
Included in Right Start's consolidated net loss of $9.9 million was $1.4 million
in cash interest expense and an additional $0.8 million in non-cash interest
amortization for the period in connection with the issuance of junior
subordinated convertible pay-in-kind notes.
For the nine months ended November 3, 2001, Right Start reported a
consolidated operating loss of $9.9 million consisting of an operating loss of
$4.0 million for the Right Start division and an operating loss of $6.0 million
for the Zany Brainy division for the period from September 5, 2001 to November
3, 2001. Included in the operating loss for the Zany Brainy division were losses
of $0.8 million related to the closing of 15 stores and costs and expenses of
$0.1 million related to the integration of Zany Brainy with Right Start.
Included in Right Start's consolidated net loss of $12.6 million was $1.8
million in cash interest expense and an additional $0.8 million in non-cash
interest amortization for the period in connection with the issuance of junior
subordinated convertible pay-in-kind notes.
For the three and nine month periods ending November 3, 2001, Right Start
reported a net loss attributable to common shares of $4.07 and $5.29 per share,
respectively. Under generally accepted accounting principles, Right Start is
required to reflect the calculated value of the conversion feature of its
contingently convertible preferred stock as a dividend, which increases the loss
attributable to common shares. This calculation increased the loss per share for
the quarter and nine months by $2.67 and $3.15, respectively. Right Start noted
that there is no net impact on Right Start's net worth in connection with this
accounting requirement as it only affects the calculation of loss attributable
to common shares.
Please see Section VII(F) for information on where you can find out more
about Right Start.
E. Matters Relating to Unexpired Leases of Non-Residential Real Property
1. Rejection and Sublease of Unexpired Nonresidential Real Property
Leases and Store Closing
Since the Petition Date, and continuing in connection with the Right Start
Transaction, the Debtors have performed an extensive ongoing review and analysis
of the operations and profitability of each of their stores, each real property
lease and the geographic markets in which the Debtors operate (the "Real Estate
Review"). In connection with the Real Estate Review and the Right Start
Transaction, the Debtors assumed and assigned 97 of their retail locations,
including their corporate offices and distribution centers, to ZBCI, pursuant to
the Amended Order (A) Approving the Transfer of Substantially all of the
Debtors' Assets Free and Clear of All Liens and Encumbrances and Exempt from any
Stamp, Transfer, Recording or Similar Tax; and (B) Authorizing the Debtors
Assumption of Certain Designated Liabilities and Assignment of the Assigned
11
Contracts and Leases Pursuant to Sections 105, 363, 365, and 1146(c) of the
Bankruptcy Code and Bankruptcy Rules 6004 and 6006 (the "Sale Order"). The
Debtors remaining retail locations, by virtue of an order dated August 15, 2001
(the "Sublease Order"), were subleased to ZBCI, through and including September
30, 2001.
In accordance with the Sublease Order, on or before September 30, 2001, the
Debtors informed 14 landlords that they would not be assuming and assigning
their leases to ZBCI. Contemporaneously therewith the Debtors sought and
obtained Bankruptcy Court approval to conduct going-out-of-business sales at
those 14 locations. Pursuant to the Order Pursuant to Sections 363(b) and 365(a)
of the Bankruptcy Code (A) Authorizing ZB Company, Inc. to Conduct Store Closing
Sales at Certain Designated Store Locations, (B) Approving Agency Agreement, (C)
Extending the Sublease Period with Respect to Such Stores, and (D) Approving
Lease Rejection Procedures with Respect to Such Stores (the "GOB Order"), the
Debtors are authorized to reject any of the leases covering any of the stores
subject to the GOB Order (the "GOB Leases"), which rejection shall become
effective upon the seventh business day following the date on which the Debtors
or ZBCI provide written notice of the rejection to the affected landlord (the
"Effective Date of Rejection"). The GOB Order extended the subleases relating to
each of the GOB Leases through and including the earlier of the Effective Date
of Rejection or December 30, 2001. The GOB Order provides that the Debtors may
seek to further extend this sublease period by filing a motion with the
Bankruptcy Court on or before December 30, 2001. Pursuant to the GOB Order, the
Debtors have no liability in connection with the Agency Agreement (as that term
is defined in the GOB Order), nor any ongoing liability for rent or other
charges arising under the GOB Leases.
In connection with the Order Pursuant to Section 365 of the Bankruptcy Code
Authorizing the Debtors to Assume and Assign to ZB Company Certain Leases of
Nonresidential Real Property and Establishing Cure Amounts with Respect Thereto
(the "First Assumption Order"), the Bankruptcy Court approved the assumption and
assignment of 28 of those retail locations. Disputes relating to pre-petition
amounts due and owing to the landlords have not been resolved with respect to 11
of those 28 retail locations. With respect to the remaining retail locations,
which were not subject to the GOB Order or the First Assumption Order, Right
Start and/or ZBCI is currently operating those locations pursuant to consensual
subleases between Right Start, ZBCI and the Debtors, which subleases are set to
expire at various dates.
2. Rent Reduction Agreements and Rejection Damages
In addition to closing under-performing stores, the Debtors, Right Start
and ZBCI, with the assistance of Retail Consulting Services, have diligently
been negotiating with their landlords in an effort to obtain rent reductions and
concessions, including claims waivers. As a result of the agreements reached
through these negotiations, several of the leases assumed and assigned to ZBCI
were "assumed as modified" by the terms of the negotiations.
12
3. Extensions of Time to Assume or Reject Leases
Pursuant to Section 365(d)(4) of the Bankruptcy Code, the Debtors were
required to assume or reject their nonresidential real property leases on or
before July 13, 2001, absent an extension of such time period by the Bankruptcy
Court (the "Assumption/Rejection Period"). The Bankruptcy Court has from time to
time extended such Assumption/Rejection Period. Most recently, on October 1,
2001, the Debtors filed the Motion of the Debtors and Debtors in Possession for
an Order Extending the Period to Assume or Reject Unexpired Leases of
Nonresidential Real Property Pursuant to Section 365(d)(4) of the Bankruptcy
Code (the "Assumption/Rejection Motion"). Pursuant to the Assumption/Rejection
Motion, the Debtors have requested that the Bankruptcy Court extend their
Assumption/Rejection Period through and including January 7, 2002. Pursuant to
the Right Start Asset Purchase Agreement annexed hereto, Right Start or ZBCI may
direct the Debtors to reject a portion of the remaining retail leases on or
before the expiration of the Assumption/Rejection Period.
Any and all leases of the Debtors that have not been assumed or rejected
prior to the Confirmation Date shall be deemed rejected on the Confirmation Date
unless a motion to assume and assign, or to reject is pending. If such motion is
pending, the lease(s) shall be treated in the manner described in Section 9.1 of
the Plan.
F. Executory Contracts
1. Assumption and Rejection of Certain Executory Contracts
Since the Petition Date, and continuing in connection with the Right Start
Transaction, the Debtors have performed an extensive ongoing review and analysis
of their executory contracts, including whether the goods and services provided
under each contract were necessary to the Debtors' business operations or could
be obtained at a better price (the "Contract Review"). In connection with the
Contract Review and the Right Start Transaction, the Debtors assumed and
assigned 42 executory contracts to ZBCI pursuant to the Sale Order. Pursuant to
the Order Authorizing the Rejection of Certain Executory Contracts Pursuant to
Section 365(a) of the Bankruptcy Code and Rule 6006 of the Federal Rules of
Bankruptcy Procedure (the "First Contract Rejection Order"), the Debtors
rejected 34 of the Debtors' executory contracts. Additionally, on October 26,
2001, the Debtors filed and served the Motion of the Debtors and Debtors in
Possession for an Order Authorizing the Rejection of Certain Executory Contracts
(the "Second Contract Rejection Motion"), which seeks to reject an additional 17
of the Debtors' executory contracts.
Additionally, pursuant to a settlement agreement between the Debtors and
SubmitOrder, Inc., which was approved by the Bankruptcy Court by order dated
October 15, 2001, the Debtors rejected that certain Services Agreement between
the Debtors and SubmitOrder, Inc. as of August 3, 2001.
The Debtors believe they are a party to no more than 60 executory contracts
that were not assumed and assigned to ZBCI in connection with the Sale Order or
rejected by the Debtors in connection with the First Contract Rejection Order or
the Second Contract
13
Rejection Motion. Pursuant to the Right Start Asset Purchase Agreement annexed
hereto, Right Start or ZBCI may direct the Debtors to reject a portion of the
remaining executory contracts on or before the Confirmation Date. Any and all
executory contracts of the Debtors that have not been assumed or rejected prior
to the Confirmation Date shall be deemed rejected on the Confirmation Date
unless a motion to assume and assign, or to reject is pending. If such motion is
pending, the executory contract(s) shall be treated in the manner described in
Section 9.1 of the Plan.
2. Equipment Leases
As of the Petition Date the Debtors' only equipment leases were with PNC
Leasing, LLC ("PNC"). On or about June 26, 1998, Zany Brainy and PNC entered
into the PNC Master Lease (the "Master Lease"). In conjunction with the Master
Lease, PNC and Zany Brainy entered into the six leases (the "PNC Leases") that
each incorporated the terms of the PNC Master Lease and provided for the lease
of furnishings, fixtures and equipment (the "PNC Equipment") by PNC to Zany
Brainy.
On July 30, 2001, PNC filed a Motion for an Order (A) Granting Relief From
the Automatic Stay in Respect of Certain Equipment Leases Pursuant to 11 U.S.C.
ss. 362(d)(1) and (2), or, in the Alternative, (B) Compelling Zany Brainy to
Assume or Reject Certain Unexpired Equipment Leases Pursuant to Section
365(d)(2) (the "PNC Stay Relief Motion"). In connection with the PNC Stay Relief
Motion, PNC asserted a claim in the amount of $4,904,529.80 with respect to the
PNC Leases. On August 3, 2001, PNC filed an objection to the Debtors' motion to
approve the Waterton Transaction.
On August 8, 2001, the Debtors filed their objection to the PNC Stay Relief
Motion. In that objection, the Debtors asserted that the PNC Leases were
disguised secured sale transactions and not true leases.
When the Bankruptcy Court entered the Order approving the transfer of all
or substantially all of the Debtors' Assets to Right Start, it expressly
excluded the PNC Equipment. The following day, the Debtors filed a motion which
sought authority to lease the PNC Equipment to ZBCI.
On September 5, 2001, the Debtors, Right Start, ZBCI, PNC, Wells Fargo and
the Committee entered into Stipulation and Order Pursuant to Sections 362, 363
and 365 of the Bankruptcy Code Authorizing Sale of Certain Equipment and
Resolving (1) Motion of PNC Leasing, LLC for an Order (A) Granting PNC Leasing,
LLC Relief from the Automatic Stay in Respect of Certain Equipment Leases
Pursuant to 11 U.S.C. ss. 362(d)(1) and (2), or, in the Alternative, (B)
Compelling Zany Brainy to Assume or Reject Certain Unexpired Equipment Leases
Pursuant to 11 U.S.C. ss. 365(d)(2), and (2) Debtors' Motion to Enter into a
Lease of Certain Fixtures, Furniture and Equipment (the "PNC Stipulation"). The
Bankruptcy Court approved the PNC Stipulation on the same day. The PNC
Stipulation authorized the Debtors to sell the PNC Equipment to ZBCI, subject to
a security interest in favor of PNC to secure the PNC secured claim of $3
million. Under the terms of the PNC Stipulation, the Debtors have no liability
on account of this secured claim. The PNC
14
Stipulation also fixed the PNC unsecured claim at $1.8 million. The PNC
Stipulation further provided for a general mutual release of claims between PNC
and the Debtors. Finally, the PNC Stipulation provided that any plan of
reorganization must incorporate the terms of the PNC Stipulation./1/
The sale of the PNC Equipment to ZBCI closed on September 6, 2001.
G. Establishment of Bar Date
On September 20, 2001, the Bankruptcy Court entered an order (the "Bar
Date Order") that established 4:00 p.m. Eastern Time on November 23, 2001 (the
"Bar Date") as the deadline for filing proofs of claim against the Debtors. For
claims arising from the Debtors' rejection of leases or contracts before
September 7, 2001, the Bar Date Order fixed the Bar Date as a deadline for
filing proofs of claim. For those claims arising after September 7, 2001, the
Bar Date Order fixed the deadline for filing proofs of claim the later of the
Bar Date or 30 days after rejection of the lease or contract. The Debtors, with
approval of the Bankruptcy Court, have retained Bankruptcy Services LLC ("BSI")
as the estates' notice and claims agent (the "Claims Agent" or "BSI"). BSI has
received, cataloged and processed all proofs of claim, and will assist the
estates and their representatives in the claims review and resolution process.
H. Substantive Consolidation
The Plan contemplates and is predicated upon entry of an Order
substantively consolidating these Chapter 11 Cases which shall effectively
consolidate these Chapter 11 Cases into a single Chapter 11 case. The purpose of
this substantive consolidation is solely for the purposes of all actions
associated with confirmation and consummation of the Plan. For further
discussion, see Section VI (B) infra.
---
I. 546(g)* Returns Program
In order to preserve one of the Debtors' primary competitive strategies,
the Debtors needed to ensure constant availability of the most popular
educational toys and books. A key to achieving this goal and to running their
businesses involved establishing a returns/credit program with vendors now that
the Debtors were in bankruptcy. In certain segments of the toy industry,
products such as books, videos and software are universally sold by
manufacturers to distributors and suppliers with certain product return rights.
Of the approximately $105 million of merchandise inventory held by the
Debtors on the Petition Date, a substantial amount of goods, approximately $9
million at cost of goods, was identified as being potentially returnable to
vendors in accordance with the Debtors' pre-petition practice. Prior to the
institution of a 546(g)* returns program, the Debtors had to rely upon cash
sales and cash in advance arrangements with many of its vendors that placed the
Debtors at a substantial competitive disadvantage. Such arrangements tend to
result in ordering and delivery delays, lack of product availability, increased
costs attributable to
_______
1/ The PNC Stipulation is attached hereto and incorporated herein as Appendix F.
15
greater administrative burdens and increased working capital in order to fund
required deposits and compensate for lost trade credit. Accordingly, the right
to return merchandise for immediate post-petition credit against past or future
purchases enables the Debtors to maintain appropriate inventory levels without
undue financial risk.
A returns agreement was reached with Ingram Book Group Inc. ("Ingram"), the
Debtors' largest book supplier. In order to provide an adequate credit cushion
while addressing certain inventory concerns, and in the interest of continuing
the current relationship between the Debtors and Ingram, the Debtors entered
into a 546(g)* agreement with Ingram (the "546(g)* Agreement"). The terms of
this agreement were substantially as follows:
. Ingram agreed to make $1,500,000 of credit immediately available to
the Debtors, upon entry of an order of the Bankruptcy Court
. Ingram agreed to provide 1.2 dollars of credit for every one dollar of
inventory returned and to sell and deliver merchandise to the Debtors
on an open account with ninety (90) day credit terms according to
Ingram's terms of sale and policies and procedures, including to the
extent negotiated, application of all standard discounts and
allowances.
. Ingram agreed to accept returns of any and all pre-petition
merchandise for credit at invoice price for every dollar of inventory
returned against Ingram's pre-petition claim up to a credit amount of
$1,500,000. In addition to the Pre-petition Returns (as defined in the
546(g)* Agreement), upon conclusion of the Pre-petition Return Period
(as defined in the 546(g)* Agreement), Ingram agreed to permit the
Debtors to return post-petition merchandise in accordance with its
normal approval policy and practice, as may be amended from time to
time, with respect to others in the same class of trade as the
Debtors.
As part of the Right Start Transaction, Right Start assumed the Debtors'
obligations and liabilities under the 546(g)* Agreement.
Ingram has alleged that it is entitled to a super-priority claim of
$394,272.43 pursuant to the terms of the 546(g)* Agreement. Although this
obligation, if any, was assumed by Right Start under the Right Start Asset
Purchase Agreement, both the Debtors and Right Start believe that Ingram's claim
is without merit.
16
V. SUMMARY OF THE LIQUIDATING PLAN OF REORGANIZATION
THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE, CLASSIFICATION,
TREATMENT AND IMPLEMENTATION OF THE PLAN, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PLAN, WHICH ACCOMPANIES THIS DISCLOSURE STATEMENT, AND TO THE
EXHIBITS ATTACHED THERETO.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT INCLUDE SUMMARIES
OF THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS REFERRED TO THEREIN.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT DO NOT PURPORT TO BE
PRECISE OR COMPLETE STATEMENTS OF ALL THE TERMS AND PROVISIONS OF THE PLAN OR
DOCUMENTS REFERRED TO THEREIN, AND REFERENCE IS MADE TO THE PLAN AND TO SUCH
DOCUMENTS FOR THE FULL AND COMPLETE STATEMENTS OF SUCH TERMS AND PROVISIONS.
THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN, WHICH ARE OR
WILL HAVE BEEN FILED PRIOR TO THE HEARING ON APPROVAL OF THIS DISCLOSURE
STATEMENT, WILL CONTROL THE TREATMENT OF CREDITORS AND EQUITY SECURITY HOLDERS
UNDER THE PLAN AND WILL, UPON THE CONFIRMATION DATE, BE BINDING UPON HOLDERS OF
CLAIMS AGAINST, OR INTERESTS IN, THE DEBTORS AND OTHER PARTIES IN INTEREST.
A. Overall Structure of the Plan
Under the Plan, Claims against, and Interests in, the Debtors are
divided into Classes according to their relative priority and other criteria. If
the Plan is confirmed by the Bankruptcy Court and consummated, (i) the holders
of Claims in certain Classes will be modified and receive distributions
constituting a partial recovery on such Claims, and (ii) in some cases, the
holders of Claims and Interests in other Classes will receive no distribution.
On the Effective Date, the Initial Payment Date and at certain times thereafter,
the Disbursing Agent (as defined in the Plan) will distribute Cash and Right
Start Common Stock in respect of certain Classes of Claims as provided in the
Plan. The Classes of Claims against, and Interests in, the Debtors created under
the Plan, the treatment of those Classes under the Plan and the securities and
other property to be distributed under the Plan are described below.
B. Classification and Treatment of Claims and Interests Under the
Plan
Under the Plan, Claims against, and Interests in the Debtors are
divided into six (6) Classes or Categories. The table below summarizes the
classification and treatment of the principal pre-petition Claims and Interests
under the Plan. Although the proof of claim Bar
17
Date was on November 23, 2001, the Debtors still are examining all Claims to
determine allowed amounts. The Debtors shall supplement this Disclosure
Statement as necessary.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
18
Class Description Treatment Under Plan
----------------- --------------------
- -------------------------------------------- -----------------------------------
Unclassified Claims - Consists of On the Effective Date, each holder of an
Administrative Claims Allowed Unclassified Claim shall receive
Estimated allowed amount: (i) Cash equal to the allowed Amount of
[TBD] such Unclassified Claim, or (ii) such other
treatment as to which the Debtors and such
holder shall have agreed upon in writing.
Unclassified Claims are unimpaired.
- ------------------------------------------------ -------------------------------
Class 1 - Consists of Priority and On the Effective Date, each holder
Tax Claims of an Allowed Class 1 shall receive (i)
Estimated allowed amount: Cash equal to the allowed Amount of such
[TBD] Class 1 Claim, or (ii) such other treatment
as to which the Debtors and such holder
shall have agreed upon in writing. Tax
claims shall be payable in installments
over six (6) years as provided below. The
Class 1 Claims are unimpaired.
- ----------------------------------------------- --------------------------------
Class 2 - Consists of Secured On the Effective Date, the holder of an
Claims Allowed Class 2 Claim, if any shall receive
Estimated allowed amount: (i) Cash equal to the allowed Amount of
The Debtors do not believe that such Class 2 Claim, or (ii) such other
any creditors hold Secured Claims. treatment as to which hold Secured Claims.
the Debtors and such holder shall have
agreed upon in writing. The Class 2 Claims
are unimpaired.
- ----------------------------------------------- --------------------------------
Class 3 - Consists of Convenience On the Effective Date, the holder of
Claims Allowed Class 3 Claims shall receive the
Estimated allowed amount: lesser of (i) the full Allowed Claim
[TBD] amount; or (ii) $250. Class 3 Claims are
unimpaired.
- ----------------------------------------------- --------------------------------
Class 4 -Consists of General On the Initial Payment Date and Subsequent
Unsecured Claims Payment Dates, the holder of Allowed Class
Estimated allowed amount: 4 Claims shall receive a Pro Rata share of
[TBD] the remaining Available Cash after
Unclassified, Class 1, 2 and 3 Claims have
been satisfied in full. Allowed Class 4
Claims also shall receive a Pro Rata share
of Seven Million Five Hundred Thousand
Dollars ($7,500,000) in Cash and One
Million One Hundred Thousand Shares
(1,100,000) of Right Start Common Stock or
the proceeds from any sale of such Right
Start Common Stock. Class 4 Claims are
impaired.
- ----------------------------------------------- --------------------------------
Class 5 - Consists of holders of The holders of Allowed Class 5 Zany Brainy
Zany Brainy Common Stock Interests Common Stock Interests will not receive any
Estimated allowed amount: distribution of property under the Plan on
$0 account of their Interests. Class 5
Interests are impaired.
- ----------------------------------------------- --------------------------------
C. Implementation of the Plan
The Debtors will use the Cash and Right Start Shares from the sale of
all or substantially all of the Debtors' Assets to make the Cash and Right Start
Common Stock distributions required under the Plan and to maintain working
capital for post-petition operations.
Section 1122 of the Bankruptcy Code requires that a plan of
reorganization classify the claims of a debtor's creditors and the interests of
its equity holders. The Bankruptcy
19
Code also provides that, except for certain claims classified for administrative
convenience, a plan of reorganization may place a claim of a creditor or an
interest of an equity holder in a particular class only if such claim or
interest is substantially similar to the other claims or interests of such
class. The Plan places (i) Unclassified Claims (Administrative Claims), (ii)
Priority Claims, (iii) Secured Claims, (iv) Convenience Claims, (v) General
Unsecured Claims, and (vi) Zany Brainy Common Stock Interests into separate
Classes.
The Debtors believe that they have classified all Claims and Interests
in compliance with the requirements of Section 1122 of the Bankruptcy Code. If a
Creditor or Interest holder challenges such classification of Claims or
Interests and the Bankruptcy Court finds that a different classification is
required for the Plan to be confirmed, the Debtors, to the extent permitted by
the Bankruptcy Court, intend to make such reasonable modifications to the
classifications of Claims or Interests under the Plan to provide for whatever
classification might be required by the Bankruptcy Court for confirmation.
EXCEPT TO THE EXTENT THAT SUCH MODIFICATION OF CLASSIFICATION ADVERSELY AFFECTS
THE TREATMENT OF A HOLDER OF A CLAIM OR INTEREST AND REQUIRES RESOLICITATION,
ACCEPTANCE OF THE PLAN BY ANY HOLDER OF A CLAIM PURSUANT TO THIS SOLICITATION
WILL BE DEEMED TO BE A CONSENT TO THE PLAN'S TREATMENT OF SUCH HOLDER OF A CLAIM
REGARDLESS OF THE CLASS AS TO WHICH SUCH HOLDER IS ULTIMATELY DEEMED TO BE A
MEMBER.
The Bankruptcy Code also requires that a plan of reorganization provide
the same treatment for each claim or interest of a particular class unless the
holder of a particular claim or interest agrees to a less favorable treatment of
its claim or interest. The Debtors believe that they have complied with such
standard. If the Bankruptcy Court finds otherwise, it could deny confirmation of
the Plan if the holders of Claims or Interests affected do not consent to the
treatment afforded them under the Plan.
1. Treatment of Unclassified Claims
Administrative Claims
---------------------
Administrative Claims consist of the costs and expenses of
administration of the Chapter 11 Cases. They include, but are not limited to,
the cost of operating the Debtors' businesses since the Petition Date and
outstanding unpaid fees and expenses of the Professional Persons retained by the
Debtors, the Committee and other professionals as approved by the Bankruptcy
Court./2// In connection with the Right Start Transaction, Right Start assumed
all post-petition professional fees and other case administrative costs and
expenses incurred through the closing date in excess of professional retainers.
On the Effective Date, or as soon thereafter as practicable, a holder
of an Allowed Administrative Claim shall receive, in full satisfaction,
settlement and release of and in
______________
2/ This also includes budgeted post-closing costs associated with the
administrative and operational expenses following the Right Start Transaction,
and may include bonuses that the duly retained professionals may seek from the
Debtors.
20
exchange for such Allowed Administrative Claim, (a) Cash equal to the unpaid
portion of such Allowed Administrative Claim, or (b) such other treatment as to
which the Debtors and such holder shall have agreed upon in writing; provided,
--------
however, that Allowed Administrative Claims with respect to liabilities incurred
- -------
by the Debtors following the transfer of all or substantially all of the
Debtors' Assets to Right Start shall be paid in the ordinary course of business
by Right Start in accordance with the terms and conditions of any agreements
relating thereto.
All payments to professionals in connection with the Chapter 11 Cases
for compensation and reimbursement of expenses and all payments to reimburse
expenses of members of the Committee will be made in accordance with the
procedures established by the Bankruptcy Code and the Bankruptcy Rules and are
subject to approval of the Bankruptcy Court as being reasonable. For further
explanation of the treatment of Unclassified Claims, see Section 4.1 of the
---
Plan.
2. Treatment of Unimpaired Classes of Claims
(a) Class 1: Priority Tax Claims
-----------------------------
Class 1 consists of Priority Tax Claims entitled to priority under
Section 507(a) of the Bankruptcy Code. With respect to each Allowed Priority Tax
Claim, at the sole option of the Debtors, the holder of an Allowed Priority Tax
Claim shall be entitled to receive on account of such Allowed Priority Tax
Claim, in full satisfaction, settlement and release of and in exchange for such
Allowed Priority Tax Claim, (a) equal Cash payments made on the last Business
Day of every three-month period following the Effective Date, over a period not
exceeding six years after the assessment of the tax with interest from the
Effective Date calculated at the rate available on ninety (90) day United States
treasury securities on the Effective Date, (b) such other treatment agreed to by
the holder of such Allowed Priority Tax Claim and the Debtors, provided such
treatment is on more favorable terms to the Debtors, as the case may be, than
the treatment set forth in clause (a) hereof, or (c) payment in full; provided
--------
that, with respect to clauses (b) and (c) hereof, such treatment is approved by
the Bankruptcy Court; and provided further that any payments made to the holder
-------- -------
of an Allowed Priority Tax Claim shall be applied first to the so-called "trust
fund" portion of such claim for which any of the Debtors' officers, directors,
employees or agents may be liable under applicable law.
(b) Class 1: Other Priority Claims
-------------------------------
Class 1 also consists of Claims other than Administrative Claims
entitled to priority under Section 507(a) of the Bankruptcy Code. Other Priority
Claims include (i) up to $4,300 of wage (including vacation and severance)
Claims of employees earned within 90 days before the Petition Date, and (ii)
payments on account of any Bankruptcy Court approved severance or retention
bonus program not already assumed by Right Start as part of its purchase of all
or substantially all of the Debtors' Assets and obligations.
21
On the Effective Date, or as soon as practicable thereafter, each
holder of an Allowed Class 1 Priority Claim shall receive, in full satisfaction,
settlement and release of and in exchange for such Allowed Class 1 Claim, (a)
Cash equal to the amount of such Allowed Class 1, or (b) such other treatment as
to which the Debtors and such holder shall have agreed upon in writing. For
further explanation of the treatment of Priority Claims, see Section 4.2 of the
Plan.
(c) Class 2: Secured Claims
-----------------------
Class 2 consists of Claims, if any, of creditors with properly
perfected security interests in the Debtors' Assets. The DIP Lender's Secured
Claim already was satisfied from the Cash received from Right Start's purchase
of all or substantially all of the Debtors' Assets. The DIP Lender shall have no
further claims against the Debtors' estates. The Debtors do not believe that any
creditors hold Secured Claims.
If any creditor does hold a valid Allowed Secured Claim on the
Effective Date, or as soon as practicable thereafter, each holder of an Allowed
Class 2 Claim shall receive, in full satisfaction, settlement and release of and
in exchange for such Allowed Class 2 Claim, (a) Cash equal to the amount of such
Allowed Class 2, or (b) such other treatment as to which the Debtors and such
holder shall have agreed upon in writing. The Debtors also may take such other
action(s) as may be necessary to make such Allowed Secured Claim not impaired
within the meaning of Section 1124 of the Bankruptcy Code. For further
explanation of the treatment of Secured Claims, see Section 4.3 of the Plan.
---
(d) Class 3: Convenience Claims
---------------------------
On the Effective Date, the holder of Allowed Class 3 Claims shall
receive the lesser of (i) the full Allowed Claim amount; or (ii) $250. Class 3
consists of de minimus Claims that are based upon amounts reflected in the
-- -------
Debtors' books and records, and a preliminary review of Claims filed on or
before the Bar Date. This Class also is comprised of holders of Allowed Claims
in excess of $250 who have elected to reduce their Claims to $250. For further
discussion of the treatment of Convenience Claims, see Section 4.4 of the Plan.
---
3. Impaired Classes of Claims and Interests
(a) Class 4: General Unsecured Claims
---------------------------------
On or after the Initial Payment Date and on each Subsequent Payment
Date, and provided that holders of Unclassified Claims and Claims in Classes 1,
2 and 3 have been paid in full, each holder of an Allowed Class 4 Unsecured
Claim shall receive, in full satisfaction, settlement and release of and in
exchange for such Claim, distributions of Cash equal to such holder's Pro Rata
share of Seven Million Five Hundred Thousand Dollars ($7,500,000)/3// and Right
Start Common Stock equal to such holder's Pro Rata share of the Right Start
Shares or the proceeds from any sale of such Right Start Shares. For further
______________
3/ This amount could decrease in the event that Cash is not available to fully
satisfy Unclassified, Priority, Secured or Convenience Claims.
22
explanation of the treatment of General Unsecured Creditors, see Section 5.1 of
---
the Plan.
(b) Class 5: Existing Zany Brainy Common Stock
-------------------------------------------
Class 5 consists of all Interests in the Debtors as represented by
outstanding shares of Zany Brainy Common Stock as of the Petition Date, and
options, warrants and other rights to acquire such stock. The holders of Allowed
Class 5 Zany Brainy Common Stock will not receive any distribution under the
Plan on account of their Interests and, on the Effective Date, all Zany Brainy
Common Stock shall be cancelled. For further explanation of the treatment of the
Zany Brainy Common Stock Interests, see Section 5.2 of the Plan.
---
VI. PROVISIONS FOR THE EXECUTION AND IMPLEMENTATION OF THE PLAN
A. Plan Funding
On the Effective Date, the Debtors will utilize the Cash, Right Start
Shares paid as part of the Right Start Transaction and other consideration
offered as part of the purchase of all or substantially all of the Debtors'
Assets to fund the Plan. In addition, the Debtors will distribute any other
funds received from the further liquidation of any remaining Assets and any
recovery received in the prosecution of preference actions. For further
discussion of funds received as part of the Right Start Transaction, see Section
---
IV(D)(3) hereof.
Right Start has advised the Debtors that it has requested a "no action
letter" from the SEC. If the SEC issues the requested no action letter, the
Right Start Shares will be delivered in reliance on Section 1145 of the
Bankruptcy Code. Subject to certain exceptions described in Section IV.M. of
this Disclosure Statement, this means that the Right Start Shares delivered
under the Plan may be resold by the creditors without complying with the
registration requirements of the Securities Act of 1933, (the "Securities Act").
In the event that creditors are unable to resell the Right Start Shares in
reliance on Section 1145, the Right Start Asset Purchase Agreement requires that
Right Start use its best efforts to file and have declared effective a
registration statement permitting resale of the Right Start Shares on or before
the Effective Date. An effective registration statement generally would allow
the resale of the Right Start Shares by creditors subject to prospectus delivery
requirements. In the event that creditors are unable to resell the Right Start
Shares in reliance on Section 1145 or pursuant to an effective registration
statement, such creditors would be permitted to resell the Right Start Shares
only in conformity with exemptions under the Securities Act and applicable
registration requirements under state law.
The Right Start's common stock is quoted on the Nasdaq Stock Market
under the symbol "RTST." The following table sets forth the range of high and
low bid prices on the Nasdaq National Market for Right Start's common stock for
Fiscal 2000 and Fiscal 2001 and has been provided by Right Start for inclusion
in this Disclosure Statement.
23
2000 High Low
First Quarter $18.6875 $4.375
Second Quarter 5.9375 3.75
Third Quarter 4.0625 1.375
Fourth Quarter 2.875 0.875
2001
First Quarter 2.7188 1.51
Second Quarter 2.60 1.55
Third Quarter 5.05 2.45
Fourth Quarter (November 4, 2001 to 6.05 4.45
January 9, 2002).
As of January 10, 2002, Right Start has advised the Debtors that it had
approximately 13.0 million shares of Right Start common stock outstanding and
34.3 million shares of Right Start common stock outstanding on a fully-diluted
basis before accounting for options. As a result of the Plan, in the event that
the SEC issues the requested no action letter or the registration statement has
been declared, and remains, effective, the Right Start Shares will be freely
tradeable. Right Start has advised the Debtors that the average weekly trading
volume of Right Start's common stock during the fourth fiscal quarter of 2001
was 155,300 shares per week. Right Start has advised the Debtors that the
average closing price of Right Start's common stock over the 30 days ending
January 9, 2002, was $4.78 per share. The price of Right Start's common stock is
subject to fluctuation. The price of Right Start Shares at the time the Right
Start Shares are distributed to creditors and the amount for which they could be
sold, if at all, is unknown and may be materially different then the average
closing price of Right Start's common stock over the last 30 days.
B. Substantive Consolidation
The Plan shall constitute a motion pursuant to Section 105 of the
Bankruptcy Code to substantively consolidate the estate of each Debtor. On the
Effective Date: (i) all property of each of the Debtors' Estates shall merge
into and be consolidated with the estate of Zany Brainy, (ii) any and all Claims
against each Debtor other than Zany Brainy shall be deemed to be Claims against
Zany Brainy, (iii) all claims by one Debtor against another Debtor shall be
extinguished, and (iv) any and all Claims against the Debtors shall be satisfied
in accordance with the terms of the Plan.
24
The doctrine of substantive consolidation permits a court in a
bankruptcy case involving one or more related corporate entities to disregard
the separateness of the corporate entities and to consolidate and pool the
entities' assets and liabilities and treat them as though held and incurred by
one entity. Substantive consolidation creates a single estate for the benefit of
all creditors of all the consolidated corporations and combines all creditors of
the various corporations into one creditor body.
Bankruptcy Courts determine whether substantive consolidation is
appropriate on a case by case basis. Bankruptcy Courts look at a variety of
factors concerning the interrelationship between the entities seeking
consolidation, including, but not limited to the following: (i) assumption by
the parent of contractual obligations of its subsidiaries; (ii) the sharing of
overhead, management, accounting, and all other related expenses among the
different corporate entities; (iii) failure to maintain individual book entries
for income receivables and payables for each company; (iv) receipts of all
companies deposited in, and disbursements withdrawn from, one operating account;
(v) the existence of intercompany guaranties on loans; (vi) shifting of funds
from one company to another without observing corporate formalities (vii) the
parent owning all or a majority of the capital stock of a subsidiary; and (viii)
the parent, its affiliates and the subsidiary having common directors or
officers.
Bankruptcy Courts also compare the impact of substantive consolidation on
the creditors to see if the prejudice they might suffer is outweighed by the
benefits of consolidation. In order to prevent consolidation, a creditor must
show that it has relied on the separate credit of one of the entities, and that
it will be prejudiced by the proposed consolidation. Moreover, a court must
determine whether consolidation will enhance debtor rehabilitation and thereby
produce a reorganized enterprise with greater profit potential. Substantive
consolidation may be warranted where the moving party establishes that (i) there
is substantial identity among the parties, and (ii) consolidation is necessary
in order to avoid some harm or realize some benefit.
The Debtors believe that all of the above-stated factors weigh in favor
of consolidating the estates of Zany Brainy and its subsidiaries. Zany Brainy
controls and manages all of the Debtors' Assets, including all operating
accounts. Furthermore, Zany Brainy incurs all necessary day-to-day expenses for
each Debtor and provides management, financial and other essential services for
each Debtor and pays each Debtor's ordinary liabilities. Few, if any, creditors
transact business with a Debtor other than Zany Brainy. For all of these
reasons, and because creditors will suffer no prejudice by the consolidation,
the Debtors believe that substantive consolidation of Zany Brainy and each other
Debtor is appropriate.
The substantive consolidation provided for herein shall not affect any
obligations to pay quarterly fees to the Office of the United States Trustee
that may have come due prior to the Effective Date.
25
C. Officers and Directors
On the closing date of the Right Start Transaction, the former officers and
directors of each of the Debtors resigned, with the exception of Susanne Hay who
serves as a director for Children's Products, Inc. and Children's Development,
Inc., and John Reilly who became a director and the President, Secretary and
Treasurer of each of the Debtors, and serves as Chief Liquidating Officer for
the Debtors.
D. Bylaws and Articles of Incorporation
To the extent required by applicable law, the certificates or articles of
incorporation and bylaws of Zany Brainy and the other Debtors shall be amended
as necessary to satisfy the provisions of the Plan and the Bankruptcy Code.
E. Operations of the Debtors Between the Confirmation Date and the Final
Payment Date
The Debtors will continue to operate as debtors-in-possession, subject to
the supervision of the Bankruptcy Court, under the Bankruptcy Code during the
period from the Confirmation Date through the Final Payment Date. Any obligation
incurred by the Debtors during that period for the purchase of inventory in the
ordinary course of business will constitute an Administrative Claim and be
treated accordingly. However, nothing in the Plan precludes the Debtors from
taking any steps that they deem necessary or desirable to prepare for and
consummate the Plan.
F. Dissolution of Committee and Formation of Liquidating Committee
Upon the Effective Date, the Committee shall be dissolved and its members
shall be deemed released of all their duties, responsibilities and obligations
in connection with the Chapter 11 Cases or the Plan. Upon the Effective Date, a
Liquidating Committee (the "Liquidating Committee") shall be formed and
constituted. The Liquidating Committee, consisting of three (3) members
appointed by the Committee from the current members of the Committee, shall
continue in existence to the extent necessary to effectuate the provisions of
the Plan or until the Final Payment Date. The members of the Liquidating
Committee shall serve without compensation, except that they shall be entitled
to reimbursement of reasonable expenses by the Debtors. The Professional Persons
appointed to represent the Committee shall continue to represent the Liquidating
Committee.
G. Distributions Under the Plan
1. Allowance of Administrative Claims
Professional Fees. All final requests for payment of professional fees must
-----------------
be filed no later than sixty (60) days after the Effective Date unless such
Professional Person continues to provide services to the Debtors or their
estates after such date. After notice and
26
a hearing in accordance with the procedures established by the Bankruptcy Code
and the Bankruptcy Court, the Allowed Claims of such professional fees shall be
determined by the Bankruptcy Court. For Professional Persons who continue to
provide services post-Confirmation, fees and expenses shall be paid in
accordance with Section 7.7 of the Plan.
Other Administrative Fees. All other requests for payment of an
-------------------------
Administrative Claim must be filed with the Bankruptcy Court and served on
counsel for the Debtors, the Committee, the Disbursing Agent and the United
States Trustee no later than sixty (60) days after the Effective Date. Unless
the Debtors, the Committee, the Disbursing Agent or the United States Trustee
object to an Administrative Claim within thirty (30) days after receipt, such
Administrative Claim shall be deemed Allowed in the amount requested. In the
event that the Debtors, the Committee, the Disbursing Agent or United States
Trustee object to an Administrative Claim, the Bankruptcy Court shall determine
the allowed amount of such Administrative Claim.
Severance and Retention Benefits for Certain Corporate Employees. Pursuant
----------------------------------------------------------------
to the Right Start Transaction, Right Start assumed all of the obligations under
the Zany Brainy Severance Pay and Retention Bonus Plan, which was approved by
order of the Bankruptcy Court dated June 29, 2001 (the "Severance and Retention
Plan").
John Reilly is the only corporate officer who shall remain with the Debtors
until consummation of the Plan. Mr. Reilly shall oversee the orderly liquidation
of the Debtors' remaining Assets and shall assist the Disbursing Agent with
tasks necessary to wind down operations. Mr. Reilly shall receive an annual
salary of $110,000 payable in bi-weekly installments, certain employment
benefits and a stay bonus of $20,000 pursuant to that certain Conditional
Employment Agreement between John Reilly and Zany Brainy dated September 4, 2001
(the "Conditional Employment Agreement") in return for his services and
retention. A true and correct copy of the Conditional Employment Agreement is
attached hereto and incorporated herein and Appendix E. The Conditional
Employment Agreement was approved by the Bankruptcy Court on October 15, 2001.
2. Time of Distributions
Except as otherwise provided for in the Plan or ordered by the Bankruptcy
Court, distributions under the Plan shall be made on the Effective Date or the
Initial Payment Date, or as soon thereafter as is practicable, to holders of all
Allowed Claims entitled to receive a distribution under the Plan.
3. Interest on Claims
Unless otherwise specifically provided for in the Plan, the Confirmation
Order or as may be required by applicable law, post-petition interest shall not
accrue or be paid on account of any Allowed Claims, and no holder of a Claim
shall be entitled to interest accruing on or after the Petition Date on any
Claim. Interest shall not accrue or be paid upon any Disputed Claim in respect
of the period from the Petition Date to the date a final distribution is made
thereon.
27
4. Disbursing Agent
The Disbursing Agent, ACL Adjustments, Inc. (the "Disbursing Agent"), shall
make all distributions required under the Plan.
5. Delivery of Distributions
Distributions to holders of Allowed Claims shall be made by the Disbursing
Agent in the following manner:
. at the addresses set forth on the proofs of claim filed by such Claim
holder (or at the last known addresses of such holders);
. if no proof of claim is filed or if the Debtors have been notified of a
change of address, at the addresses set forth in any written notices of
address changes delivered to the Disbursing Agent after the date of any
related proof of claim; or
. if no proof of claim has been filed and the Disbursing Agent has not
received a written notice of change of address, at the addresses
reflected in the Schedules and Statements of Financial Affairs.
If any holder's distribution is returned as undeliverable, no further
distributions to such holder shall be made unless and until the Disbursing Agent
is notified of such holder's then current address, at which time all missed
distributions shall be made to such holder without interest. Notwithstanding the
foregoing, and pursuant to Section 7.5 of the Plan, any checks that are not
negotiated within 60 days from the mailing date shall be returned to the Debtors
for further distribution by the Disbursing Agent to the other members of the
Class of Claims to which the holder of such Claim belonged, and the claim of any
holder or successor to such holder with respect to such property shall be
forever barred and enjoined notwithstanding any federal or state escheat laws to
the contrary.
6. Procedures for Treating and Resolving Disputed and Contingent
Claims
(a) No Distributions Pending Allowance
----------------------------------
No payments or distributions will be made with respect to all or any
portion of a Disputed Claim unless and until all objections to such Disputed
Claim have been settled or withdrawn or have been determined by Final Order and
the Disputed Claim has become an Allowed Claim. All objections to Claims must be
filed on or before the date set for objections to Claims.
28
(b) Distribution Reserve
--------------------
The Disbursing Agent will withhold a distribution reserve (the "Reserve
Fund") from the property to be distributed under the Plan. As to any Disputed
Claim, upon a request for estimation by the Debtors, the Bankruptcy Court will
determine what amount is sufficient to withhold as the Reserve Fund. The Debtors
may request estimation for every Disputed Claim that is unliquidated and the
Disbursing Agent will withhold the appropriate amount(s) in the Reserve Fund
based upon the estimated amount of each such Claim as set forth in a Final
Order. The Debtors also may request estimation of a Disputed Claim that is
liquidated. If the Debtors elect not to request such an estimation from the
Bankruptcy Court with respect to a Disputed Claim that is liquidated, the
Disbursing Agent will withhold the amount for the Reserve Fund based upon the
face amount of such Claim. The Disbursing Agent also will place in the Reserve
Fund any dividends, payments or other distributions made on account of, as well
as any obligations arising from, the property withheld as the amount for the
Reserve Fund, to the extent that such property continues to be withheld as the
part of the Reserve Fund at the time such distributions are made or such
obligations arise. Nothing in the Plan or herein will be deemed to entitle the
holder of a Disputed Claim to post-petition interest on such Claim. See Sections
---
4.1, 4.2, 5.1 and 7.7 of the Plan for further discussion concerning the relevant
Reserve Funds.
H. Releases and Settlements of Claims
1. Release of Debtors and Committee
(a) All consideration distributed under the Plan shall be in
exchange for, and in complete satisfaction, settlement and release of, all
claims of any nature whatsoever against the Debtors and the Committee or any of
their assets or properties, and, except as otherwise provided herein or in the
Confirmation Order, and regardless of whether any money or property shall have
been distributed or retained pursuant to the Plan on account of such claims,
upon the Effective Date, the Debtors and the Committee shall be deemed released
from any and all claims, including, but not limited to, demands and liabilities
that arose on or after the Petition Date. The Confirmation Order shall
constitute judicial determination of all liabilities of the Debtors, subject to
the Effective Date occurring.
(b) Except as otherwise specifically provided in the Plan, the
distributions and rights that are provided in the Plan shall be in complete
satisfaction and release, effective as of the Confirmation Date (but subject to
the occurrence of the Effective Date) of (i) claims and causes of action,
whether known or unknown, against, liabilities of, liens on, obligations of and
interests in the Debtors or the Committee and (ii) all causes of action (whether
known or unknown, either directly or derivatively through the Debtors or the
Committee) against, claims against, liabilities of, liens on the direct or
indirect assets and properties of, and obligations of the Debtors and the
Committee and such parties' respective present or former members, officers,
directors, employees, advisors, attorneys, representatives, financial advisors,
investment bankers or agents or any of such parties'
29
successors or assigns, based (x) on the same subject matter as any Claim or
Interest, in each case regardless of whether a proof of Claim or Interest was
filed, whether or not allowed and whether or not the holder of the Claim or
Interest has voted on this Plan, or (y) on any act or omission, transaction or
other activity or security, instrument or other agreement of any kind or nature
occurring, arising or existing on or after the Petition Date that was or could
have been the subject of any Claim or Interest, in each case regardless of
whether a proof of Caim or Interest was filed, whether or not allowed and
whether or not the holder of the Claim or Interest has voted on this Plan;
provided, however, that no Person or Entity shall be entitled to a release
- -------- -------
hereunder in which it ultimately is determined by a court of competent
jurisdiction that such Person or Entity committed gross negligence or willful
misconduct in performing such Person's or Entity's duties hereunder or under any
Order of the Bankruptcy Court or applicable law.
2. Compromises and Settlements
Pursuant to Bankruptcy Rule 9019(a), the Debtors or their designee or the
Disbursing Agent may compromise and settle various Claims (a) against them and
(b) that each of them has or have against other Persons. The Debtors expressly
reserve the right to compromise and settle Claims that they may have against
other Persons or Entities up to and including the Effective Date upon
consultation with the Committee / Liquidating Committee in an amount less than
or equal to $25,000.
3. Setoffs
The Debtors, their designee or the Disbursing Agent may, but shall not be
required to, set off against any Claim, and the payments or other distributions
to be made pursuant to the Plan in respect of such Claim, claims of any nature
whatsoever that the Debtors may have against the holder of such Claim; but
neither the failure to do so nor the allowance of any Claim hereunder shall
constitute a waiver or release by the Debtors of any such claim that the Debtors
may have against such holder.
4. Exculpation and Limitation of Liability
Except as otherwise specifically provided in the Plan, the Debtors, the
Committee and the Disbursing Agent, and any and all of such parties' respective
present or former members, officers, directors, shareholders, employees,
advisors, attorneys, accountants, representatives, financial advisors,
investment bankers or agents and any and all of such parties' successors,
assigns and affiliates, shall not have or incur, and are hereby held harmless
and released from, any and all claims, obligations, cause of action or
liabilities to one another or to any holder of a Claim or an Interest or any
other party in interest, or any of their respective agents, employees,
shareholders, members, general partners, limited partners, representatives,
financial advisors, attorneys or affiliates, or any of their successors or
assigns, for any act or omission in connection with, relating to, or arising out
of, the Chapter 11 Cases, the pursuit of confirmation of the Plan, the
consummation of the Plan, or the administration of the Plan or the property to
be distributed under the Plan, except for their willful misconduct, and in all
respects shall be entitled to reasonably rely upon the
30
advice of counsel with respect to their duties and responsibilities under the
Plan; provided, however, that no Person or Entity shall be entitled to a release
-------- -------
hereunder in which it ultimately is determined by a court of competent
jurisdiction that such Person or Entity committed gross negligence or willful
misconduct in performing such Person's or Entity's duties hereunder or under any
Order of the Bankruptcy Court or applicable law.
5. Indemnification Obligations
Any Person or Entity holding a Claim against or Interest in the Debtors,
whether or not such Person or Entity received a distribution under the Plan,
shall indemnify the Debtors and the Disbursing Agent against all costs and
expenses (including attorneys' fees) incurred by any of them in defending
against post-confirmation claims that are based on actions allegedly taken (or
not taken) by them in their respective capacities; provided, however, that no
-------- -------
Person or Entity shall be entitled to indemnification hereunder for the costs of
defending against a cause of action in which it is ultimately determined by a
court of competent jurisdiction that such Person or Entity committed gross
negligence or willful misconduct in performing such Person's or Entity's duties
hereunder or under any Order of the Bankruptcy Court or applicable law. Any
party entitled to indemnification under Section 8.3 of the Plan shall have a
-----------
lien (to the extent of such party's indemnification claim) on the corpus of the
Debtors' Assets pari passu with other parties entitled to indemnification
---- -----
hereunder, but prior to any right of payment of any other holder of a Claim.
6. Injunction
As of the Confirmation Date, all Persons or Entities that have held,
currently hold, or may hold a Claim, Interest, or other debt or liability that
is addressed in the Plan or otherwise arises out of or relates to these Chapter
11 Cases are permanently enjoined from taking any of the following actions on
account of such Claims, Interests, debts or liabilities, other than actions
brought to enforce rights or obligations under the Plan: (i) commencing or
continuing in any manner any action or other proceeding against the Debtors or
the Committee or their respective properties; (ii) enforcing, attaching,
collecting or recovering in any manner any judgment, award, decree or order
against the Debtors or the Committee or their respective properties; (iii)
creating, perfecting or enforcing any lien or encumbrance against the Debtors or
the Committee or their respective properties; (iv) asserting a setoff, right of
subrogation or recoupment of any kind against any debt, liability or obligations
due to the Debtors or the Committee or their respective properties; and (v)
commencing or continuing, in any manner or any place, any action that does not
comply with or is inconsistent with the provisions of the Plan or the
Confirmation Order.
I. Executory Contracts and Unexpired Leases
1. Rejected Contracts and Leases
Any and all executory contracts and unexpired leases of the Debtors that
have not already been assumed or rejected prior to the Confirmation Date, shall
be deemed rejected on the Confirmation Date. In the event a motion to assume and
assign, or to reject an
31
executory contract or unexpired lease is pending and undetermined on the
Confirmation Date but not yet resolved, the automatic rejection provisions of
Section 9.1 of the Plan shall not apply and the determination of the status of
- -----------
the executory contract or unexpired lease shall be determined when a Final Order
is entered on the respective motion. The Debtors, upon notice to the non-Debtor
party to such executory contract or unexpired lease, may request an extension of
time to elect to assume or reject any of the Debtors' executory contracts or
unexpired leases to a date after the Confirmation Date.
2. Rejection Damages Bar Date
Any Entity or Person who has a Claim against the Debtors by virtue of the
rejection of an executory contract or unexpired lease pursuant to Article IX of
the Plan or a Final Order entered after the Confirmation Date, shall file a
Claim with the Clerk of the Bankruptcy Court within the earlier of thirty (30)
days following the Confirmation Date or the time set forth for the filing of
such Claim in said Final Order. If such Claim is not so filed, it shall be
forever barred from assertion against the Debtors or their property. Nothing in
Section 9.3 of the Plan shall affect the right of any party in interest to
- -----------
object to any Claim which has been improperly filed or not filed on a timely
basis.
J. Preservation of Causes of Action
In accordance with Section 1123(b)(3) of the Bankruptcy Code, and except as
otherwise set forth below and as provided in the Plan, the Debtors or their
designee shall retain and may enforce all claims, rights of action, suits and
proceedings, whether in law or in equity, whether known or unknown, which the
Debtors may hold against any Entity or Persons, including, without limitation,
any Causes of Action brought prior to the Petition Date, actions against any
Persons for failure to pay for products or services rendered by the Debtors, all
claims, Causes of Action, suits and proceedings relating to strict enforcement
of the Debtors' intellectual property rights, including patents, copyrights and
trademarks and all causes of action which may exist under Sections 510, 542, 544
through 550, and 553 of the Bankruptcy Code or under similar state laws,
including, without limitation, fraudulent conveyance claims and preferential
transfers, if any, and all other causes of action of a trustee and debtor-in-
possession under the Bankruptcy Code. The Debtors or their designee, in the
exercise of their business judgment, in consultation with the Committee or the
Liquidating Committee, will determine whether to enforce such rights. The
Debtors or any successors may pursue such litigation claims in accordance with
the best interests of the Debtors.
K. Cancellation of Zany Brainy Common Stock and Agreements
On the Effective Date, except as otherwise provided for herein, (a) the
Zany Brainy Common Stock and any other note, bond, indenture, or other
instrument or document evidencing or creating any indebtedness or obligation of
the Debtors shall be cancelled, and (b) the obligations of, and/or Claims
against, the Debtors under, relating or pertaining to any agreements, indentures
or certificates of designations governing the Zany Brainy Common
32
Stock and any other note, bond, indenture or other instrument or document
evidencing or creating any indebtedness or obligation of the Debtors shall be
released.
L. Exclusive Period
The Debtors shall retain the exclusive right to amend or modify the Plan
and to solicit acceptances of any amendments to or modifications of the Plan,
through and until the Effective Date.
M. Bankruptcy Code Exemption From Registration
The following information has been provided by Right Start for inclusion in
this Disclosure Statement.
Right Start has requested a "no action letter" from the SEC. If the SEC
issues the requested no action letter, the Right Start Shares will be delivered
in reliance on Section 1145 of the Bankruptcy Code. Subject to certain
exceptions, including those described below, this means that the Right Start
Shares delivered under the Plan will be exempt from the registration
requirements of the Securities Act and equivalent provisions in state securities
laws. Section 1145(a) of the Bankruptcy Code generally exempts from such
registration the issuance of securities if the following conditions are
satisfied: (i) the securities are issued by a debtor (or its successor) under a
plan of reorganization; (ii) the recipients of the securities hold a claim
against, an interest in, or a claim for an administrative expense against the
debtor; and (iii) the securities are issued entirely in exchange for the
recipient's claim against or interest in the debtor, or are issued principally
in such exchange and partly for cash or property. The Debtors believe that the
delivery of the Right Start Shares under the circumstances provided in the Plan
satisfy the requirements of Section 1145(a) of the Bankruptcy Code.
If the SEC issues the requested no action letter, the Right Start Shares to
be delivered to creditors pursuant to the Plan on the Effective Date generally
may be resold by any holder thereof without registration under the Securities
Act unless the holder is an "underwriter" with respect to such securities, as
that term is defined in Section 1145(b)(1) of the Bankruptcy Code (a "statutory
underwriter"). In addition, such securities generally would be able to be resold
by the recipients thereof without registration under state securities or "blue
sky" laws pursuant to various exemptions provided by the respective laws of the
individual states. However, recipients of securities issued under the Plan are
advised to consult with their own counsel as to the availability of any such
exemption from registration under federal securities laws and any relevant state
securities laws in any given instance and as to any applicable requirements or
conditions to the availability thereof. Section 1145(b)(1) of the Bankruptcy
Code defines "underwriter" for purposes of the Securities Act as one who (a)
purchases a claim with a view to distribution of any security to be received in
exchange for the claim, or (b) offers to sell securities issued under a plan for
the holders of such securities, or (c) offers to buy securities issued under a
plan from persons receiving such securities, if the offer to buy is made with a
view to distribution of such
33
securities, or (d) is an issuer of the securities within the meaning of Section
2(11) of the Securities Act.
The term "issuer" is defined in Section 2(4) of the Securities Act;
however, the reference contained in Section 1145(b)(1)(D) of the Bankruptcy Code
to Section 2(11) of the Securities Act purports to include as statutory
underwriters all persons who, directly or indirectly, through one or more
intermediaries, control, are controlled by, or are under common control with, an
issuer of securities. "Control" (as defined in Rule 405 under the Securities
Act) means the possession, direct or indirect, of the power to direct or cause
the direction of the policies of a person, whether through the ownership of
voting securities, by contract, or otherwise. Accordingly, an officer or
director of a debtor's successor under a plan of reorganization may be deemed to
be a "control person" of such successor, particularly if the management position
or directorship is coupled with ownership of a significant percentage of the
reorganized debtor's or its successor's voting securities. Moreover, the
legislative history of Section 1145 of the Bankruptcy Code suggests that a
creditor who owns at least ten percent (10%) of the voting securities of such
successor may be presumed to be a "control person."
To the extent that persons deemed to be "underwriters" receive Right Start
Shares pursuant to the Plan (collectively, "Restricted Holders"), resales by
Restricted Holders would not be exempted by Section 1145 of the Bankruptcy Code
from registration under the Securities Act or other applicable laws. Restricted
Holders may, however, be able, at a future time and under certain conditions
described below, to sell securities without registration pursuant to the resale
provisions of Rule 144 under the Securities Act. Under certain circumstances,
Restricted Holders may be entitled to resell their securities pursuant to the
limited safe harbor resale provisions of Rule 144. Generally, Rule 144 provides
that if certain conditions are met (e.g., the availability of current public
information with respect to the issuer, volume limitations and notice and manner
of sale requirements), specified persons who resell Right Start Shares which are
not restricted but who are "affiliates" of the issuer of the securities sought
to be resold, will not be deemed to be "underwriters" as defined in Section 2(1)
of the Securities Act. Under paragraph (k) of rule 144, the aforementioned
conditions will not limit the resale of restricted securities that are sold for
the account of a holder who is not an affiliate of the company at the time of
such resale and was not an affiliate of the company during the three (3) month
period preceding such sale, so long as a period of at least two years has
elapsed since the Effective Date.
Pursuant to the Plan, certificates evidencing Right Start Shares received by
Restricted Holders will bear a legend substantially in the form below:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF
ANY STATE OR OTHER JURISDICTION AND MAY NOT BE
SOLD, OFFERED FOR SALE OR OTHERWISE TRANSFERRED
UNLESS REGISTERED OR QUALIFIED UNDER SAID ACT AND
34
APPLICABLE STATE SECURITIES LAWS OR UNLESS THE
COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IT THAT SUCH REGISTRATION OR
QUALIFICATION IS NOT REQUIRED.
Any person or entity that would receive legended securities as provided
above may instead receive certificates without such legend if, prior to the
Effective Date, such person or entity delivers to Right Start (i) an opinion of
counsel reasonably satisfactory to Right Start to the effect that the shares to
be received by such person or entity are not subject to the restriction
applicable to "underwriters" under Section 1145 of the Bankruptcy Code and may
be sold without registration under the Securities Act and (ii) a certification
that such person or entity is not an "underwriter" with the meaning of Section
1145 of the Bankruptcy Code. Any holder of a certificate bearing such legend may
present such certificate to the transfer agent for the shares of Right Start
Shares for exchange for one or more new certificates not bearing such legend or
for transfer to a new holder without such legend at such time as (a) such
securities are sold pursuant to an effective registration statement under the
Securities Act or (b) such holder delivers to Right Start an opinion of counsel
reasonably satisfactory to Right Start to the effect that such securities are no
longer subject to the restrictions applicable to "underwriters" under Section
1145 of the Bankruptcy Code or (c) such holder delivers to Right Start an
opinion of counsel reasonably satisfactory to Right Start to the effect that
such securities are no longer subject to the restrictions pursuant to an
exemption under the Securities Act or the Exchange Act and such securities may
be sold without registration under the Securities Act or to the effect that such
transfer is exempt from registration under the Securities Act, in which event
the certificate issued to the transferee shall not bear such legend.
If the no-action letter is not issued by the SEC, and Right Start files and
has declared effective a registration statement permitting resale, then
creditors would be required to deliver a valid current prospectus as part of any
such resale. The Right Start Shares would be legended as follows:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, BUT NOT UNDER THE SECURITIES LAWS OF
ANY STATE OR OTHER JURISDICTION AND MAY BE SOLD,
OFFERED FOR SALE OR OTHERWISE TRANSFERRED ONLY
WITH A VALID AND CURRENT PROSPECTUS AND MAY NOT BE
SOLD, OFFERED FOR SALE OR OTHERWISE TRANSFERRED
UNLESS REGISTERED OR QUALIFIED UNDER SAID
APPLICABLE STATE SECURITIES LAWS OR UNLESS THE
COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IT THAT SUCH REGISTRATION OR
QUALIFICATION IS NOT REQUIRED.
35
IN VIEW OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A RECIPIENT
OF SECURITIES MAY BE AN UNDERWRITER OR AN AFFILIATE OF RIGHT START, DEBTORS'
MAKE NO REPRESENTATIONS CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN
SECURITIES TO BE DISTRIBUTED PURSUANT TO THE PLAN. ACCORDINGLY, DEBTORS
RECOMMEND THAT POTENTIAL RECIPIENTS OF SECURITIES CONSULT THEIR OWN COUNSEL
CONCERNING WHETHER THEY MAY FREELY TRADE SUCH SECURITIES.
VII. CERTAIN FACTORS TO BE CONSIDERED
The holder of a Claim against or Interest in the Debtors should read and
carefully consider the following factors, as well as the other information set
forth in this Disclosure Statement (and the documents delivered together
herewith and/or incorporated by reference herein), before deciding whether to
vote to accept or to reject the Plan.
A. General Considerations
The formulation of a reorganization plan is the principal purpose of a
Chapter 11 case. The Plan sets forth the means for satisfying the holders of
Claims against, or Interests in, the Debtors. Certain Claims and Interests
receive no distributions pursuant to the Plan.
B. Certain Bankruptcy Considerations
If the Plan is not confirmed and consummated, there can be no assurance
that the Chapter 11 Cases will continue rather than be converted to a Chapter 7
liquidation, or that any alternative plan of reorganization would be proposed on
terms as favorable to the holders of the impaired Claims as the terms of the
Plan. If a liquidation or protracted reorganization were to occur, there is a
substantial risk that there would be little, if any, value available for
distribution to the holders of Claims. See Appendix C annexed to the Disclosure
---
Statement for a liquidation analysis.
C. Sales of Right Start Shares in the Public Market Could Lower Stock
Price
As of January 10, 2002, Right Start has advised the Debtors that it had
approximately 13.0 million shares of common stock outstanding. In the event that
the SEC issues the requested no action letter or the registration statement has
been declared, and remains, effective, the Right Start Shares will be freely
tradeable. Right Start has advised the Debtors that the average weekly trading
volume of Right Start's common stock during the fourth quarter of 2001 was
155,300 shares per week. There can be no assurance that a more active trading
market for Right Start's common stock will develop. Future sales and issuances
of Right Start's common stock, or merely the perception that such sales may
occur, could adversely affect the market price for its common stock,
particularly in light of the historically limited trading volume for Right
Start's common stock.
36
D. Value of Right Start Shares Unknown
Right Start's common stock is listed on the Nasdaq National Market and in
the event the SEC issues the requested no action letter or the Registration
Statement is declared effective, the Right Start Shares to be received pursuant
to the Plan may be, subject to certain exceptions, resold by the recipient.
Right Start has advised the Debtors that the average closing price of Right
Start's common stock over the 30 days ending January 9, 2002, was $4.78 per
share. The price of the Right Start Shares at the time it is distributed and the
amount for which is could be sold, if at all, is unknown.
The Right Start has advised that a variety of factors could cause the price
of the Right Start Shares to fluctuate, making the Right Start Shares to be
received under the Plan difficult to value. Factors that could cause significant
fluctuations include:
. quarterly operating results of Right Start and others in its industry;
. public reaction to announcements or filings made by Right Start;
. changes in earnings estimates or recommendations by research analysts;
. changes it the U.S. economy, financial markets or Right Start's
industry;
. developments affecting Right Start's competitors.
In recent years, the market for Right Start's common stock and the stock
market generally have been very volatile and subject to extreme price and volume
fluctuations. There can be no assurance that the market price for the Right
Start Shares will be at or near the average closing price over the last 30 days,
and the price of Right Start's common stock at the time the Right Start Shares
are distributed to creditors, and the amount for which they could be sold, if at
all, is unknown.
E. Additional Risks Related to the Right Start Shares
Right Start's business and its common stock are subject to a number of
significant risks in addition to those described in paragraphs C and D above.
You should carefully consider these additional risks as described in Right
Start's public filings including Exhibit 99.1 to Right Start's Current Report on
Form 8-K filed September 20, 2001.
F. Information About Right Start
The information regarding Right Start, including, without limitation,
information regarding recent acquisitions, Right Start's market, Right Start's
no action request and the price and volume of Right Start's common stock on the
Nasdaq National Market has all been provided to the Debtors by Right Start. The
Debtors recommend that the creditors review Right Start's publicly filed
documents, including, without limitation, Right Start's Annual Report on Form
10-K for the year ended February 3, 2001, Quarterly Report on Form 10-Q for the
nine months ended November 3, 2001, most recent proxy statement, and four
Current Reports on Form 8-K or Form 8-K/A filed September 20, 2001, November 19,
2001, and December 4, 2001. Creditors can obtain a free copy of Right Start's
publicly filed
37
documents at the SEC's web site at www.sec.gov. The documents filed with the SEC
by Right Start also may be obtained for free from the Right Start by directing a
request to Right Start, 26610 Agoura Road, Suite 250, Calabasas, California
91302, Attention: Judy Groner.
VIII. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following is a general summary of certain material federal income tax
consequences of the Plan and the distributions provided thereunder for the
Debtors' creditors and their shareholders. This summary does not discuss all
aspects of federal income taxation that may be relevant to a particular creditor
or shareholder in light of its individual investment circumstances or to certain
creditors or shareholders subject to special treatment under the federal income
tax laws (for example, tax-exempt organizations, foreign corporations, or
individuals who are not citizens or residents of the United States). This
summary also does not discuss any aspects of state, local or foreign taxation.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), the Treasury regulations (including temporary regulations)
promulgated thereunder, judicial authorities and current administrative rulings,
all as in effect on the date hereof and all of which are subject to change
(possibly with retroactive effect) by legislation, administrative action or
judicial decision. Moreover, due to a lack of definitive judicial or
administrative authority or interpretation, substantial uncertainties exist with
respect to various tax consequences of the Plan as discussed herein. The Debtors
have not requested a ruling from the Internal Revenue Service with respect to
these matters and no opinion of counsel has been sought or obtained by the
Debtors with respect thereto. FOR THE FOREGOING REASONS, CREDITORS AND
SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES (FEDERAL, STATE, LOCAL, AND FOREIGN) TO THEM OF THE PLAN. THE
DEBTORS ARE NOT MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX
CONSEQUENCES OF THE CONFIRMATION AND CONSUMMATION OF THE PLAN AS TO ANY CREDITOR
OR SHAREHOLDER, NOR ARE THE DEBTORS RENDERING ANY FORM OF LEGAL OPINION AS TO
SUCH TAX CONSEQUENCES.
A. Federal Income Tax Consequences to the Debtors
Under general tax principles, the Debtors will realize cancellation of debt
("COD") income to the extent that the Debtors pay a creditor pursuant to the
Plan an amount of consideration in respect of a Claim against the Debtors that
is less than the amount of such Claim. For this purpose, the amount of
consideration paid to a creditor generally will equal the amount of cash and the
fair market value of property paid to such creditor. Because the Debtors will be
in a bankruptcy case at the time the COD income is realized, however, under
Section 108 of the Code, the Debtors will not be required to recognize the COD
income in taxable income, but rather will be required to reduce certain tax
attributes by the amount of COD income. The Debtors anticipate that after the
reduction of tax attributes as a consequence of the recognition of COD income,
the Debtors may have remaining NOL's, built-in losses and credits.
38
B. Federal Income Tax Consequences to Holders of Claims
The federal income tax consequences of the implementation of the Plan to a
creditor will depend upon a number of factors, including when the holder's Claim
becomes an Allowed Claim, when the holder receives payment in respect of such
Claim, whether the holder reports income using the accrual or cash method of
accounting, and whether the holder has taken a bad debt deduction or worthless
security deduction with respect to such Claim.
Generally, a holder whose Claim is paid in full or otherwise released or
enjoined on the Effective Date will recognize gain or loss on the exchange of
its Allowed Claim for the payment made by the Debtor in an amount equal to the
difference between (i) the sum of the amount of cash and fair market value of
any other property received by the holder (other than any consideration
attributable to a Claim for accrued but unpaid interest) and (ii) the holder's
adjusted tax basis in the Allowed Claim exchanged therefor (other than basis
attributable to accrued but unpaid interest previously included in income). A
holder will also recognize interest income, taxable at ordinary income rates, to
the extent that (i) any amounts received are paid to such holder in respect of
any claim for accrued but unpaid interest and (ii) such holder has not
previously included such amount in income.
C. Federal Income Tax Consequences to Holders of Zany Brainy Common Stock
Interests
Holders of Zany Brainy Common Stock will not receive any distribution or
property under the Plan, and will not retain such Interests. Each such holder
will generally recognize a loss in an amount equal to such holder's adjusted tax
basis, if any, in his or her Zany Brainy Common Stock Interests, unless such
holder has previously taken a worthless stock deduction with respect to such
Interest.
IX. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS
A. Feasibility of the Plan
In connection with confirmation of the Plan, the Bankruptcy Court will have
to determine that the Plan is feasible pursuant to Section 1129(a)(11) of the
Bankruptcy Code, which means that the confirmation of the Plan is not likely to
be followed by the liquidation or the need for further financial reorganization
of the Debtors.
B. Acceptance of the Plan
As a condition to Confirmation, the Bankruptcy Code requires that each
Class of impaired Claims or Interests vote to accept the Plan, except under
certain circumstances.
39
Section 1126(c) of the Bankruptcy Code defines acceptance of a plan by a
class of impaired claims or interests as acceptance by holders of at least two-
thirds in dollar amount and more than one-half in number of claims or interests
in that class, but for that purpose counts only those who actually vote to
accept or to reject the plan. Thus, a Class will have voted to accept the Plan
only if two-thirds in amount and a majority in number actually voting cast their
ballots in favor of acceptance. Holders of Claims or Interests who fail to vote
are not counted as either accepting or rejecting the Plan. See Section XI of
---
this Disclosure Statement for further information concerning voting
requirements.
C. Best Interests of Holders of Claims
As noted above, even if a plan is accepted by each class of holders of
claims, the Bankruptcy Code requires a bankruptcy court to determine that the
plan is in the best interests of all holders of claims that are impaired by the
plan and that have not accepted the plan. The "best interests" test, as set
forth in Section 1129(a)(7) of the Bankruptcy Code, requires a bankruptcy court
to find either that all members of an impaired class of claims have accepted the
plan or that the plan will provide a member who has not accepted the plan with a
recovery of property of a value, as of the effective date of the plan, that is
not less than the amount that such holder would recover if the debtor were
liquidated under Chapter 7 of the Bankruptcy Code.
To calculate the probable distribution to members of each impaired Class of
holders of Claims if the Debtors were liquidated under Chapter 7, the Bankruptcy
Court must first determine the aggregate dollar amount that would be generated
from the Debtors' Assets if the Chapter 11 Cases were converted to a Chapter 7
case under the Bankruptcy Code. This "liquidation value" would consist primarily
of the proceeds from a forced sale of the Debtors' remaining Assets by a Chapter
7 trustee.
The amount of liquidation value available to unsecured creditors would be
reduced first, by the claims of secured creditors to the extent of the value of
their collateral, and, second, by the costs and expenses of liquidation, as well
as by other administrative expenses and costs of both the Chapter 7 case and the
Chapter 11 Cases. Costs of liquidation under Chapter 7 of the Bankruptcy Code
would include the compensation of a trustee, as well as of counsel and other
professionals retained by the trustee, asset disposition expenses, all unpaid
expenses incurred by the Debtors in the Chapter 11 Cases (such as compensation
of attorneys, financial advisors and accountants) that are allowed in the
Chapter 7 case, litigation costs, and claims arising from the operations of the
Debtors during the pendency of the Chapter 11 Cases. The liquidation itself
would trigger certain priority payments that otherwise would be due in the
ordinary course of business. Those priority claims would be paid in full from
the liquidation proceeds before the balance would be made available to pay
general claims or to make any distribution in respect of equity interests. The
liquidation would also prompt the rejection of a large number of executory
contracts and unexpired leases and thereby create a significantly higher number
of unsecured creditors and Claims.
40
Once the Bankruptcy Court ascertains the recoveries in liquidation of
secured creditors, administrative creditors and priority claimants, it must
determine the probable distribution to general unsecured creditors from the
remaining available proceeds in liquidation. If such probable distribution has a
value greater than the distributions to be received by such creditors under the
Plan, then the Plan is not in the best interests of creditors. As further
discussed below, the Debtors believe, and the attached liquidation analysis (the
"Liquidation Analysis") illustrates, that the members of each Class of impaired
Claims will receive more under the Plan than they would receive if the Debtors
were liquidated. The Liquidation Analysis is attached hereto and incorporated
herein as Appendix C.
D. Liquidation Analysis
The Debtors believe that the Plan meets the "best interests of creditors"
test of Section 1129(a)(7) of the Bankruptcy Code. More specifically, the
Debtors believe that the members of each impaired Class will receive more under
the Plan than they would in a Chapter 7 liquidation.
If confirmed, the Plan will result in all of the Debtors' Class 4 creditors
receiving a reasonable recovery on account of their pre-petition Claims. It is
the opinion of the Debtors and Committee, therefore, that the reorganization
proposed by the Plan represents a much more favorable outcome for all creditors
than any available alternative.
E. Confirmation Without Acceptance of All Impaired Classes: The
"Cramdown" Alternative
Section 1129(b) of the Bankruptcy Code provides that a plan can be
confirmed even if the plan is not accepted by all impaired classes, as long as
at least one impaired class of Claims has accepted it. The Bankruptcy Court may
confirm the Plan at the request of the Debtors if the Plan "does not
discriminate unfairly" and is "fair and equitable" as to each impaired class
that has not accepted the Plan. A plan does not discriminate unfairly within the
meaning of the Bankruptcy Code if a dissenting class is treated equally with
respect to other classes of equal rank.
A plan is fair and equitable as to a class of unsecured claims which
rejects a plan if the plan provides (a) for each holder of a claim included in
the rejecting class to receive or retain on account of that claim property that
has a value, as of the effective date of the plan, an amount equal to the
allowed amount of such claim; or (b) that the holder of any claim or interest
that is junior to the claims of such class will not receive or retain on account
of such junior claim or interest any property at all.
A plan is fair and equitable as to a class of equity interests that rejects
a plan if the plan provides (a) that each holder of an interest included in the
rejecting class to receive or retain on account of that interest property that
has a value, as of the effective date of the plan, an amount equal to the
greatest of (i) the allowed amount of any fixed liquidation
41
preference to which such holder is entitled, (ii) the fixed redemption price to
which such holder is entitled or (iii) the value of such interest; or (b) that
the holder of any interest that is junior to the interest of such class will not
receive or retain on account of such junior interest any property at all.
The Debtors and Committee believe that the Plan does not discriminate
unfairly and that it is fair and equitable with respect to all Classes of
impaired Claims. Thus, the Debtors and Committee believe that the Plan will be
confirmed notwithstanding the rejection of the Plan by one or more Classes of
impaired Claims.
F. Conditions to Confirmation and/or Consummation
1. Conditions to Confirmation
The Bankruptcy Court shall have approved by Final Order the Disclosure
Statement with respect to the Plan in a form and substance reasonably acceptable
to the Debtors and Committee.
2. Conditions to Consummation
The following are conditions precedent to the occurrence of the Effective
Date, each of which may be satisfied or waived:
(a) The Confirmation Order shall have been entered by the Bankruptcy
Court, shall be a Final Order and no request for revocation of the
Confirmation Order under Section 1144 of the Bankruptcy Code shall
have been made or, if made, shall remain pending.
(b) The Confirmation Date shall have occurred and the Confirmation
Order shall, among other things, provide that:
(i) The provisions of the Confirmation Order are non-severable
and mutually dependent;
(ii) Except as expressly provided in the Plan, the Debtors are
released effective upon the Effective Date from any "debt" (as
that term is defined in Section 101(12) of the Bankruptcy Code),
and the Debtors' liability in respect thereof is extinguished
completely, whether reduced to judgment or not, liquidated or
unliquidated, contingent or noncontingent, asserted or
unasserted, fixed or unfixed, matured or unmatured, disputed or
undisputed, legal or equitable, known or unknown, or that arose
from any agreement of the Debtors entered into or obligation of
the Debtors incurred before the Effective Date, or from any
conduct of the Debtors prior to the Effective Date, or that
otherwise arose before the Effective Date, including, without
42
limitation, all interest, if any, on any such debts, whether such
interest accrued before or after the Petition Date; and
(iii) Except as expressly provided in the Plan, all Interests
shall be terminated effective upon the Effective Date.
G. Waiver of Conditions to Confirmation and/or Consummation
The requirements that the Confirmation Order or any order referred to in
the Plan become a Final Order may be waived by the Debtors in their sole
discretion without notice or a hearing. The requirement that any other condition
be satisfied may be waived in whole or in part by the Debtors after notice and a
hearing. The failure to satisfy or waive any condition may be asserted by the
Debtors regardless of the circumstances giving rise to the failure of such
condition to be satisfied (including any action or inaction by the Debtors).
The failure of the Debtors to exercise any of the foregoing rights shall
not be deemed a waiver of any other rights, and each such right shall be deemed
an ongoing right, which may be asserted at any time.
H. Retention of Jurisdiction
Pursuant to Sections 105(a) and 1142 of the Bankruptcy Code, and as more
particularly described in Article XII of the Plan, the Bankruptcy Court shall
have exclusive jurisdiction of all matters arising out of, and related to, the
Chapter 11 Cases and the Plan, including, among other things, (a) to hear and
determine any objections to the allowance of Claims; (b) to determine any and
all applications for compensation for professional and similar fees; (c) to
determine any and all applications for the rejection or assumption of executory
contracts or for the rejection or assumption and assignment, as the case may be,
of unexpired leases to which any of the Debtors is a party or with respect to
which any of the Debtors may be liable that have not otherwise been assigned to
Right Start, and to hear and determine, and if need be to liquidate, any and all
Claims arising therefrom; (d) to determine any and all disputes which may arise
between the Debtors and Right Start or relate to the Right Start Asset Purchase
Agreement; (e) to determine any and all applications, adversary proceedings, and
contested or litigated matters properly before the Bankruptcy Court; (f) to
modify the Plan pursuant to Section 1127 of the Bankruptcy Code or to remedy any
defect or omission or reconcile any inconsistency in the Order of the Bankruptcy
Court confirming the Plan to the extent authorized by the Bankruptcy Code; (g)
to hear and determine all controversies, suits and disputes, if any, as may
arise in connection with the interpretation or enforcement of the Plan
(including disputes pertaining to any indemnification rights asserted under
Section 8.3 hereof), any agreements or instruments issued under or relating to
the Plan or any other documentation evidencing the terms of the Plan; (h) to
hear and determine all controversies, suits and disputes, if any, as may arise
with regard to Orders of this Bankruptcy Court in these Chapter 11 Cases; (i) to
adjudicate all controversies concerning the classification of any Claim; (j) to
liquidate damages in connection with any disputed, contingent or unliquidated
Claims; (k) to adjudicate all Claims to a security or ownership interest in any
property of the Debtors or in any proceeds thereof and for adequate protection
43
claimed by the holder of any of the Debtors during the pendency of the Chapter
11 Cases; (l) to determine all questions and disputes regarding recovery of and
entitlement to the Assets and determine all Claims and disputes between or among
the Debtors and any other entity, whether or not subject to an action pending as
of the Confirmation Date; (m) to adjudicate all Avoidance Actions and other
Causes of Action whether or not such claim or controversy is raised or filed
before or after the Confirmation Date; (n) to determine issues and disputes
concerning entitlement to distributions to be made under and pursuant to the
Plan; (o) to enter any Order, including injunctions, necessary to enforce the
title, rights and powers of the Debtors and to impose such limitations,
restrictions, terms and conditions on such title, rights and powers as the
Bankruptcy Court may deem necessary or appropriate; (p) to determine such other
matters as may be provided for in the Confirmation Order, or as may from time to
time be authorized under the provisions of the Bankruptcy Code or any other
applicable law; (q) to make such orders as are necessary or appropriate to carry
out the provisions of the Plan, including but not limited to orders
interpreting, clarifying or enforcing the provisions thereof; (r) determination
of matters under Sections 346, 505 and 1146 of the Bankruptcy Code with respect
to any tax, fine, penalty or addition to tax, including determinations regarding
any tax liability arising in connection with the liquidation of assets of the
estates pursuant to the Plan (including with respect to any request pursuant to
Section 505(b) of the Bankruptcy Code for such period); (s) determination of
compromises and settlements of Claims against the Debtors or the estates; (t)
determination of all questions and disputes regarding title to the assets of the
Debtors, the Liquidating Debtor, or the Estates; and (u) to enter a final decree
closing the Chapter 11 Cases.
All parties in interest that are and shall be subject to the exclusive
jurisdiction of the Bankruptcy Court in accordance with Article XII of the Plan
shall, under the Confirmation Order, be permanently enjoined from bringing any
controversy subject to such exclusive jurisdiction of the Bankruptcy Court
before or in any other forum, including, but limited to, any state or federal
courts.
X. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
The Debtors and Committee believe that the Plan affords holders of Claims
the potential for the greatest realization on the Debtors' Assets and,
therefore, is in the best interests of such holders.
If the Plan is not confirmed, however, the theoretical alternatives include
(a) continuation of the pending Chapter 11 Cases; (b) an alternative plan or
plans of reorganization; or (c) liquidation of the Debtors under Chapter 7 of
the Bankruptcy Code.
A. Continuation of the Chapter 11 Cases
If they remain in Chapter 11, the Debtors could continue to manage their
remaining properties as debtor-in-possession, but would remain subject to the
restrictions imposed by the Bankruptcy Code. Since all or substantially all of
the Debtors' Assets have been sold to Right Start, the Debtors lack sufficient
revenues, inventory and employees to survive and
44
operate as a going concern in an extended Chapter 11 case.
B. Alternative Plans of Reorganization
If the Plan is not confirmed, the Debtors, or, if the Bankruptcy Court did
not grant further extensions of the Debtor's exclusive period in which to
solicit a reorganization plan, any other party in interest in the Chapter 11
Cases, could propose a different plan or plans. Such plans might involve either
a reorganization and continuation of the Debtors' business, an orderly
liquidation of their assets, or a combination of both. Both the Debtors and
Committee believe that this Plan represents the best option and recovery for
creditors, and is in the best interest of the estate.
C. Liquidation Under Chapter 7
If no plan is confirmed, the Debtors' Chapter 11 Cases may be converted to
a case under Chapter 7 of the Bankruptcy Code. In a Chapter 7 case, a trustee or
trustees would be appointed to liquidate the Debtors' assets. It is impossible
to predict precisely how the proceeds of the liquidation would be distributed to
the respective holders of Claims against or Interests in the Debtors.
The Debtors and Committee believe that in liquidation under Chapter 7,
before creditors receive any distribution, additional administrative expenses
involved in the appointment of a trustee or trustees and attorneys, accountants
and other professionals to assist such trustees would cause a substantial
diminution in the value of the estate. The Assets available for distribution to
creditors would be reduced by such additional expenses and by Claims, some of
which would be entitled to priority, which would arise by reason of the
liquidation and from the rejection of remaining leases and other executory
contracts in connection with the cessation of the Debtors' operations and the
failure to realize the greater going concern value of the Debtors' Assets.
The Debtors' Liquidation Analysis, prepared with the assistance of its
professional advisors, is premised upon a liquidation in a Chapter 7 case and is
annexed as Appendix C to this Disclosure Statement. In the analysis, the Debtors
have taken into account the nature, status and underlying value of their assets,
the ultimate realizable value of their assets, and the extent to which such
assets are subject to liens and security interests. In the Debtors' and
Committee's opinion, the recoveries projected to be available in a Chapter 7
liquidation are not likely to afford holders of Claims as great a realization
potential as does the Plan.
XI. VOTING REQUIREMENTS
On January 18, 2002, the Bankruptcy Court entered a procedures Order, among
other things, approving this Disclosure Statement, setting voting procedures and
scheduling the hearing on confirmation of the Plan (the "Confirmation Hearing").
A copy of the notice of the Confirmation Hearing is enclosed with this
Disclosure Statement. The notice of the Confirmation Hearing sets forth in
detail, among other things, the voting deadlines and
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objection deadlines. The notice of Confirmation Hearing and the instructions
attached to the ballot should be read in connection with this Section of this
Disclosure Statement.
If you have any questions about the procedure for voting your Claim or
Interest or with respect to the packet of materials that you have received or
about the amount of your Claim, please contact:
Bankruptcy Services, LLC
70 East 55th Street, 6th Floor
New York, New York 10022
Attention: Kathy Gerber
You may use the above contact information if you wish to obtain, at your
own expense, unless otherwise specifically required by Bankruptcy Rule 3017(d),
an additional copy of the Plan, this Disclosure Statement or any appendices or
exhibits to such documents.
The Bankruptcy Court may confirm the Plan only if it determines that the
Plan complies with the technical requirements of Chapter 11 of the Bankruptcy
Code and that the disclosures by the Debtors concerning the Plan have been
adequate and have included information concerning all payments made or promised
by the Debtors in connection with the Plan and the Chapter 11 Cases. In
addition, the Bankruptcy Court must determine that the Plan has been proposed in
good faith and not by any means forbidden by law, and under Bankruptcy Rule
3020(b)(2), it may do so without receiving evidence if no objection is timely
filed.
In particular, the Bankruptcy Code requires the Bankruptcy Court to find,
among other things, that (a) the Plan has been accepted by the requisite votes
of all Classes of impaired Claims and Interest unless approval will be sought
under Section 1129(b) of the Bankruptcy Code in spite of the dissent of one or
more such Classes, (b) the Plan is "feasible", which means that there is a
reasonable probability that the Debtors will be able to perform their
obligations under the Plan and continue to operate their business without
further financial reorganization or liquidation, and (c) the Plan is in the
"best interests" of all holders of Claims or Interests, which means that such
holders will receive at least as much under the Plan as they would receive in a
liquidation under Chapter 7 of the Bankruptcy Code. The Bankruptcy Court must
find that all conditions mentioned above are met before it can confirm the Plan.
Thus, even if all the Classes of impaired Claims against the Debtors accept the
Plan by the requisite votes, the Bankruptcy Court must make an independent
finding that the Plan conforms to the requirements of the Bankruptcy Code, that
the Plan is feasible, and that the Plan is in the best interests of the holders
of Claims against the Debtors. These statutory conditions to confirmation are
discussed above.
A. Parties in Interest Entitled to Vote
Under Section 1124 of the Bankruptcy Code, a class of claims or interests
is deemed to be "impaired" under a plan unless (a) the plan leaves unaltered the
legal, equitable and contractual rights to which such claim or interest entitles
the holder thereof or (b)
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notwithstanding any legal right to an accelerated payment of such claim or
interest, the plan cures all existing defaults (other than defaults resulting
from the occurrence of events of bankruptcy) and reinstates the maturity of such
claim or interest as it existed before the default.
In general, a holder of a claim or interest may vote to accept or to reject
a plan if (a) the claim or interest is "allowed," which means generally that no
party in interest has objected to such claims or interest, and (b) the claim or
interest is impaired by the plan. If the holder of an impaired claim or interest
will not receive any distribution under the plan in respect of such claim or
interest, the Bankruptcy Code deems such holder to have rejected the plan. If
the claim or interest is not impaired, the Bankruptcy Code deems that the holder
of such claim or interest has accepted the plan and the plan proponent and need
not solicit such holder's vote.
The holder of a Claim against the Debtors that is "impaired" under the Plan
is entitled to vote to accept or reject the Plan if (a) the Plan provides a
distribution in respect of such Claim, and (b)(i) the Claim has been scheduled
by the Debtors (and such claim is not scheduled as disputed, contingent or
unliquidated), or (ii) it has filed a proof of claim on or before the Bar Date
applicable to such holder, pursuant to Sections 502(a) and 1126(a) of the
Bankruptcy Code and Bankruptcy Rule 3018(a), upon application of the holder of
the Claim with respect to which there has been objection, temporarily allows the
Claim in an amount that the Bankruptcy Court deems proper for the purpose of
accepting or rejecting the Plan.
A vote may be disregarded if the Bankruptcy Court determines, pursuant to
Section 1126(e) of the Bankruptcy Code, that it was not solicited or procured in
good faith or in accordance with the provisions of the Bankruptcy Code. The
Procedures Order also sets forth assumptions and procedures for tabulating
ballots that are not compiled fully or correctly.
B. Classes Impaired Under the Plan
Class 4 is impaired under, and entitled to vote on, the Plan. The Class 5
Zany Brainy Common Stock will not receive a distribution under the Plan. They
are deemed to have rejected the Plan under Section 1126(g) of the Bankruptcy
Code and their votes will not be solicited.
All other classes of Claims are unimpaired under the Plan, are deemed under
Section 1126(f) of the Bankruptcy Code to have accepted the Plan, and their
votes to accept or to reject the Plan will not be solicited. Acceptances of the
Plan are being solicited only from those who hold Claims or Interests in an
impaired Class whose members will receive a distribution under the Plan.
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XII. CONCLUSION
This Disclosure Statement was approved by the Bankruptcy Court after notice
and a hearing. The Bankruptcy Court has determined that this Disclosure
Statement contains information adequate to permit holders of Claims and holders
of Interests to make an informed judgment about the Plan. Such approval,
however, does not mean that the Bankruptcy Court recommends either acceptance or
rejection of the Plan.
A. Hearing on and Objections to Confirmation
1. Confirmation Hearing
The hearing on confirmation of the Plan has been scheduled for March 6,
2002, at 5:00 p.m. Such hearing may be adjourned from time to time by announcing
such adjournment in open court, all without further notice to parties in
interest, and the Plan may be modified by the Debtors pursuant to Section 1127
of the Bankruptcy Code prior to, during, or as a result of that hearing, without
further notice to parties in interest.
2. Date Set for Filing Objections to Confirmation
The time by which all objections to confirmation of the Plan must be
filed with the Bankruptcy Court and received by the parties listed in the Notice
of the Confirmation Hearing has been set for February 26, 2002, at 4:00 p.m. A
copy of that Notice has been transmitted with this Disclosure Statement.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
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B. Recommendation
The Plan provides for an equitable distribution to creditors, and provides
the largest recovery for all creditors. The Debtors and Committee believe that
any alternative to confirmation of the Plan, such as Chapter 7 liquidation or
attempts by another party in interest to file a plan, would not generate better
returns to any Class of creditors than such creditors will receive under the
Plan. FOR THESE REASONS, THE DEBTORS AND COMMITTEE URGE YOU TO RETURN YOUR
BALLOT ACCEPTING THE PLAN.
Dated: January 18, 2002
The Debtors
By: /s/ John Reilly
---------------------------
John Reilly
Chief Liquidating Officer
The Committee
By: /s/ John Lee
---------------------------
John Lee
Committee Co-Chair
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