SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-26185
ZANY BRAINY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2663337
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2520 Renaissance Boulevard
King of Prussia, Pennsylvania 19406
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 610-278-7800
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Title of Each Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of May 15, 2001, the aggregate market value of the Common Stock held by non-
affiliates of the registrant was $10,642,888. Such aggregate market value was
computed by reference to the closing sale price of the Common Stock as reported
on the Nasdaq National Market on such date.
As of May 15, 2001, there were 32,329,177 shares of the registrant's Common
Stock outstanding.
ZANY BRAINY, INC.
FORM 10-K
FISCAL YEAR ENDED FEBRUARY 3, 2001
INDEX
Number Page
- ------ ----
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 10
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 18
ITEM 11. EXECUTIVE COMPENSATION 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
PART I
ITEM 1: BUSINESS
GENERAL
Unless the context indicates otherwise, the terms "we," "our," "us" and "Zany
Brainy" refer to Zany Brainy, Inc. and, where appropriate, one or more of its
subsidiaries.
Zany Brainy is a leading specialty retailer of high quality toys, games, books
and multimedia products for kids. We sell products that entertain, educate and
spark the imaginations of children up to 12 years of age.
We were incorporated in 1991 and opened our first store in Wynnewood,
Pennsylvania in the same year. We opened 27 new stores during the year ended
February 3, 2001 and, as of the end of the fiscal year, we operated 188 stores
in 34 states.
RECENT DEVELOPMENTS
On February 28, 2001, we received a letter from our former lender under our old
credit facility notifying us that we failed to comply with a number of covenants
under the old credit facility and that such failures constituted events of
default under the credit facility. On March 9, 2001, our former lender sent us
another letter notifying us that as a result of the events of default, our
interest rate for the loans under the credit facility was being increased to the
default rate of interest, which is the prime rate plus 200 basis points, or 9%
as of May 17, 2001.
On May 1, 2001, we received a letter from The Nasdaq Stock Market, Inc.
indicating that we failed to meet the continued listing requirements for minimum
bid price under the Nasdaq National Market rules, specifically, our common stock
failed to maintain a minimum bid price of $1.00 over 30 consecutive trading days
as required by the Nasdaq National Market minimum bid price rules. Therefore,
our securities are subject to delisting from the Nasdaq
National Market. Zany Brainy has requested a hearing before a Nasdaq Listings
Qualifications Panel to appeal the staff determination.
On May 8, 2001, we suspended our offerings of product sales on
the internet site. We currently offer merchandise at either our retail locations
or through our catalogs with toll-free ordering.
On May 15, 2001 (the "Petition Date"), we and Children's Products, Inc.,
Children's Development, Inc., Noodle Kidoodle, Inc., Children's Distribution,
LLC and Zany Brainy Direct, LLC (collectively, the "Debtors"), filed voluntary
petitions for relief under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). We are managing our businesses as
debtors-in-possession. Our rapid growth this past year, which included the
acquisition of 60 Noodle Kidoodle stores, the opening of 25 new Zany Brainy
stores and substantial investment in our internet strategy presented significant
operational challenges. These factors, along with a difficult retail climate,
compounded by an absence of "hot" product, led to a decline in our sales which
caused liquidity issues that precipitated our filing for Chapter 11 protection.
Subsequent to the commencement of the Chapter 11 cases, the Debtors sought and
obtained several orders from the Bankruptcy Court which were intended to
stabilize their businesses and enable the Debtors to continue business
operations as debtors-in-possession. To date, the most significant of these
orders (i) permitted the Debtors to operate their consolidated cash management
system during the Chapter 11 cases in substantially the same manner as it was
operated prior to the commencement of the Chapter 11 cases; (ii) authorized
payment of pre-petition wages, vacation pay, and employee benefits and
reimbursement of employee business expenses; (iii) authorized payment of
pre-petition sales and use taxes owed by the Debtors; (iv) authorized the
Debtors to pay certain pre-petition obligations to critical vendors, common
carriers and workers' compensation insurance to aid the Debtors in maintaining
operation of their businesses; and (v) authorized the Debtors to obtain interim
and final Debtor-in-possession financing.
In bankruptcy, the rights of, and the Debtors' ultimate payments to, prepetition
creditors and our shareholders may be substantially altered. This could result
in claims being liquidated in the bankruptcy cases at less (and possibly
substantially less) than 100% of their face value, and the equity of our common
shareholders being diluted or cancelled. The Bankruptcy Code provides that the
Debtors have an exclusive period during which only they may propose and file and
solicit acceptances of a plan of reorganization. This period may be extended
upon request of the Debtors and subsequent Bankruptcy Court approval. If the
Debtors fail to file a plan of reorganization during the exclusive period, as
extended, or, after such plan has been filed, if the Debtors fail to obtain
acceptance of such plan from the requisite classes of creditors and equity
security holders during the exclusive solicitation period, any party in interest
may file their own plan or reorganization for the Debtors.
Due to material uncertainties, it is not possible to determine the additional
amount of claims that may arise or ultimately be filed, or to predict the length
of time the Debtors will operate under the protection of Chapter 11 of the
Bankruptcy Code, the outcome of the bankruptcy cases in general, whether the
Debtors will continue to operate under their current organizational structure,
or the effect of the cases on the Debtors' business or on the claims and
interests of the various creditors and security holders.
On May 16, 2001, the Bankruptcy Court approved, on an interim basis, our $115
million debtor-in-possession credit facility (the DIP Facility") with Wells
Fargo Retail Finance L.L.C. and on May 17, 2001, our former lender was paid for
all outstanding borrowings and our prior credit facility was terminated. On May
17, 2001, we had an outstanding balance on our DIP Facility of $46,592,027 and
remaining borrowing capacity of $17,229,635. The final hearing on the DIP
Facility is currently scheduled for June 6, 2001.
ZANY BRAINY STORES
Store Design
We design our stores to be bright, colorful and inviting for children and
adults. Our current store prototype is approximately 10,600 square feet and
contains 12 major categories of products. Large banners with unique graphics
identify each of these categories to enable customers to find specific items
quickly. Our stores are carpeted and have low shelving to encourage children to
see, touch and play with our products. Departments are located around the
perimeter of the store in a "racetrack" style to promote browsing and impulse
sales. We have a play center in our stores which provides seating so adults can
comfortably play with their children. We typically locate our Showtime Theater,
which is used to show the latest video releases, adjacent to the play center so
we can combine the two spaces to accommodate larger special events. A reading
area is situated next to our book department, and software demonstration
stations are placed near our multimedia department to encourage sampling of
these items.
Merchandise Selection
We strive to carry over 12,500 stock keeping units from more than 400 suppliers
in 20 different countries. While our products generally range in price from less
than one dollar up to $200, the average price paid for a single product is
approximately $10. We present our merchandise across 12 product categories to
satisfy a broad spectrum of customer needs. Our extensive selection of
merchandise includes:
Category Description
-------- -----------
Brainy Games and Puzzles Board games and puzzles
Bright Start Toys for ages up to three
Creativity Arts and crafts supplies and kits
Good Sports Indoor and outdoor sport-theme toys
Kidtronics Electronic learning aids and musical instruments
Let's Pretend Pretend play, dress up and doll houses
Our Planet Science-related toys
Plush and Dolls Stuffed animals and dolls
Young Builders Building toys and trains
Books Over 6,500 titles
Multimedia Software, audio and video
Video Games Video game software and hardware
We regularly offer numerous limited distribution, innovative products. We also
work closely with several specialty suppliers to secure exclusive product or
licensing arrangements. In addition, we supplement our merchandise offering with
our own product development efforts, including products under such brand names
as "Dream Dough," "Hugs-n-Snugs," "Ready, Set, Grow!" and "Kidstruments."
Store Associates
We actively recruit educators, child care providers and back-to-work parents as
store employees because we believe that these people are most likely to possess
respect and affection for children, and an appreciation of how children learn
through play. Our sales associates receive approximately 25 hours of training
within their first month of employment and are tested before they are designated
a "Certified Kidsultant." In addition, some of our sales associates receive
supplemental training to become specialists in various areas including books,
multimedia and
events.
After the merger with Noodle Kidoodle, all Noodle employees received a similar
level of training to offer consistent service across the chain.
Our stores generally are staffed with a general manager, three assistant
managers, four specialists, and a varying number of part-time sales associates,
depending on store volume and time of year. A general manager and three
assistant managers, who may be specialists, typically manage each store, and are
responsible for building relationships within the community. The operations of
each store are supervised by one of 17 district managers who each report to the
vice president of stores.
Store Locations
As of May 17, 2001, we operated 187 stores in 34 states. We select geographic
markets and store sites on the basis of demographic information, quality and
nature of co-tenants, store visibility and accessibility. Key demographics
include population density, household income, the number of households with
children and education level. We locate our stores primarily in suburban strip
or power centers as well as in selected freestanding locations. We typically
seek sites with co-tenants that are strong, destination and lifestyle-oriented
retailers or high quality supermarkets.
Competitive Pricing
We price our products competitively, but do not attempt to be the discount
leader in a given market. We do, however, maintain a policy of matching our
competitors' advertised prices.
Marketing
We use direct mail and newspaper advertising to promote Zany Brainy products and
to increase awareness of our stores and brand. We primarily rely on direct mail
advertising, which allows us to capitalize on our internally generated customer
database. A variety of direct mail pieces, including our large, color "Zany
Zone" catalog, are mailed throughout the year to both current and prospective
customers. We also use full color newspaper inserts for broader consumer reach
during our peak selling periods. We advertise most heavily during the Christmas
holiday and back-to school seasons; however, during the integration period, we
targeted the former Noodle stores with supplemental marketing materials to
support the integration of the stores into Zany Brainy and the name change of
those stores from Noodle Kidoodle to Zany Brainy. The majority of this activity
was in the third quarter.
Special Events Program
We publish a monthly calendar of free events for our stores. Each of our stores
hosts regular daily activities for kids, including creative arts and crafts
activities, character and author appearances and mini-concerts by nationally
known children's performers. Our stores also feature several interactive areas,
including play centers and software demonstration stations. In addition, we show
movies throughout the day at our Showtime Theater.
INTERNET SALES
In December, 2000, we entered into an agreement with Online Retail Partners,
Inc. ("ORP") to dissolve and liquidate our Internet joint venture, ZB Holdings
LLC and its wholly owned subsidiary, ZanyBrainy.com LLC. As a result, we assumed
full ownership and control of www.zanybrainy.com, our internet shopping Website,
and assumed all of the joint venture liabilities. On May 8, 2001, we suspended
our offering of product sales on the internet site until further notice. Future
availability for online shopping is subject to the outcome of the bankruptcy and
the availability of resources to support the site. Customers who connect to
Noodle Kidoodle, Inc.'s website are automatically linked to www.zanybrainy.com,
where shoppers are notified that the site has been suspended. The internet
operation has not been profitable since its launch in October 1999 and it is
anticipated to continue to incur losses when and if a re-launch takes place.
PURCHASING AND SUPPLIERS
We purchase merchandise from over 400 suppliers in 20 different countries. Our
central buying staff is comprised of one vice president, two divisional
merchandise managers and seven buyers, each of whom is
responsible for purchasing selected categories of our products. We also maintain
an in-house private label product development team that develops products that
are unique to Zany Brainy.
DISTRIBUTION
We currently operate three distribution centers that are located in Swedesboro,
New Jersey, Phillipsburg, New Jersey and Murfreesboro, Tennessee. The
distribution centers are approximately 250,000, 269,000 and 225,000 square feet,
respectively. Approximately 80% of our products are distributed through these
facilities and the balance is shipped to the stores directly by the manufacturer
or supplier. Our automated inventory replenishment system is designed to
optimize the inventory levels at each of our stores. This computerized system
retrieves sales information from our stores, enabling us to pick, price and ship
products to each of our stores on a weekly basis.
We are currently using a third party to process damaged inventory to be returned
to the vendor.
In addition, internet and catalog orders as well as some seasonal sales have
traditionally been handled by third party distributors. Before we suspended our
offering of product sales on our internet site, such sales were shipped by an
outside warehouse managed by SubmitOrder, Inc. in Columbus, Ohio. We are
currently continuing to fulfill catalog orders from this location. A
distribution center located in Cherry Hill, New Jersey was utilized in the past
during seasonal months to ship additional products and was managed by a third
party distributor.
COMPETITION
The toy retailing market is highly competitive and comprised of:
. mass market retailers, including superstores such as Toys
"R" Us and discounters such as Wal-Mart and Target;
. smaller format specialty educational and creative toy and
game retailers;
. non-toy specialty retailers, such as traditional book,
music, video and software retailers;
. Internet-only retailers such as SmarterKids.com; and
. a variety of other retailers offering a subset of our
products including card and gift shops, craft stores and
department stores.
MANAGEMENT INFORMATION SYSTEMS
In the first quarter of 2000, we completed the replacement of SFR, our existing
business-wide software package, with JDA, a business-wide software package that
supports our major back-office functions, including buying, replenishment,
physical distribution, general ledger and payables. JDA provides greater
forecasting capabilities and more advanced replenishment and trend algorithms
than SFR.
At the store level, we utilize a point-of-sale system to capture sales
transactions that include price look-up, UPC scanning, check and credit
authorization and zip code capture. Our store systems are designed to interface
with JDA to automatically replenish inventory, by stock-keeping unit, to each
store. We also analyze this information to tailor our merchandise assortment,
determine markdowns, generate forecasts and evaluate product and supplier
performance.
After the merger, Noodle Kidoodle Inc.'s systems, were converted to JDA, with
the exception of the former Noodle Kidoodle stores' point of sale systems, that
are designed to interface with JDA for reporting purposes.
PROPRIETARY RIGHTS
To protect our proprietary rights, we generally rely on copyright, trademark and
trade secret laws, and confidentiality agreements with employees and third
parties and license agreements with consultants and suppliers.
Each of "Zany Brainy," "A Zillion Neat Things for Kids," "Zany Brainy and
Design," "Zany Zone," "Price Chomper," "Noodle Kid Design," "Oodles and Oodles
of Fun Things to Learn," "Noodle Kidoodle," "Kids Learn Best When They're Having
Fun," "My Little Play Pals," "Dolls to Love," "Kidstruments," "Why Take an
Extraordinary Kid to an Ordinary Toy Store?," "Free Fun Every Day,"
"ZanyBrainy.com and Design," "Oceanmotion," "ZanyBrainy.com," "Dream Dough" and
"Kidsultant" have been registered as a service mark and/or trademark with the
United States Patent and Trademark Office. In addition, we have numerous pending
applications for trademarks. We have registered "zanybrainy.com," "zb.com" and
numerous other related URL's as Internet domain names.
BACKLOG AND SEASONALITY
Backlog is not considered relevant to an understanding of our business. Our
business is highly seasonal and approximately 47% of our revenue occurred in the
fourth quarter of fiscal 2000. As a result, we increase levels of inventory
during the months of August through November in order to meet seasonal
requirements.
EMPLOYEES
As of February 3, 2001, we employed approximately 4,000 employees, approximately
1,500 of whom were employed full-time. We also employ additional personnel
during peak selling periods. We consider our relationships with our employees to
be good. None of our employees are covered by collective bargaining agreements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Form 10-K
should be carefully considered. The risks and uncertainties described below are
not the only ones we confront. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occurs, our business,
financial condition and operating results could be materially adversely
affected.
Our bankruptcy filing may have detrimental effects on our business
Our bankruptcy filing could present us with additional challenges,
including: possible problems with our relationships with our creditors,
customers, suppliers and employees; the availability of inventory for
our stores; the ability to confirm and implement a plan of reorganization;
our ability to comply with covenants in our debtors-in-possession credit
facility; and the availability of financing and refinancing.
Due to the Chapter 11 filing, substantially all of our liabilities as of
the Petition Date are subject to compromise or other treatment under a plan
of reorganization. If it is determined that the liabilities subject to
compromise in the Chapter 11 cases exceed the fair value of the assets,
unsecured claims may be satisfied at less than 100% of their face value and
the equity interests of the Company's shareholders would be substantially
(if not completely) diluted or cancelled. It is impossible at this time to
predict the actual recovery, if any, to which creditors and shareholders
may be entitled.
The reaction to our bankruptcy by our vendors and creditors could also
greatly impact our business. We will strive to retain our strong
relationships with our vendors, but it is possible that should our vendors
continue to supply our business, they will do so on different terms than
they have in the past.
Our bankruptcy filing may also impact our ability to attract and retain
management and store personnel. While we intend to seek authority from the
Bankruptcy Court to implement a program to retain and provide incentives to
key executive management personnel, if one or more members of our executive
management team were unable or unwilling to continue in their present
positions due to concerns over our financial viability, our operations
could suffer. Our operations also depend on hiring and retaining quality
managers and sales associates in our stores. Because of the publicity over
our recent bankruptcy filing, it may become more difficult for us to hire
or retain store personnel. If we are unable to hire and retain sales
associates capable of providing a high level of customer service, our brand
and reputation could be damaged. If we are unable to attract and retain
management and store personnel, our sales could decline.
Because of the publicity surrounding our bankruptcy filing, our customers'
confidence in our viability going forward may decline and some of our
customers may choose not to shop in our stores.
Our ability to generate cash depends on many factors beyond our control.
Our ability to make scheduled payments of principal, to pay interest on and
to refinance our indebtedness, or to fund planned expenditures for
inventory and other business needs will depend upon our future performance.
Our future performance is, to a certain extent, subject to general
economic, financial, competitive and other factors that are beyond our
control.
Restrictive loan covenants may limit our ability to take various corporate
actions
The availability of capital will continue to be extremely limited while we
operate under the protection of Chapter 11. New sources of financing are
questionable and numerous uncertainties will continue to exist until the
Debtors have a confirmed plan or reorganization.
Our DIP Facility contains covenants that require us to satisfy ongoing
financial requirements and which limit our ability to borrow additional
money, pay dividends, divest assets, make additional corporate investments
and increase compensation paid to directors, officers and senior management
employees. Our DIP Facility also prohibits a change in control.
Under the DIP Facility, our borrowing availability is tied to a percentage
of eligible inventory. Such formula currently includes limitations based on
a percentage of the value of eligible inventory that adjusts seasonally,
and a general limitation that we cannot borrow any amounts that exceed 100%
of the liquidation value of eligible inventory. The amounts calculated
based on eligible inventory are subject to additional reserves imposed by
the bank.
Our common stock could be delisted
The shares of our common stock are currently listed on the Nasdaq National
Market. Because of a decline in the share price of our common stock, we
received a letter from Nasdaq stating that Nasdaq has determined that we
have failed to meet the minimum requirements for listing on the Nasdaq
National Market and that our common stock will be delisted. We have
requested a hearing before a Nasdaq Listing Qualifications Hearing Panel to
appeal the staff determination. We cannot assure you that the Panel will
grant our request for continued listing.
Nasdaq requirements for continued listing include minimum standards
relating to net tangible assets, public float, number of market makers and
shareholders and maintaining a minimum bid price of $1.00. Our bid price
has been below $1.00 for significantly more than 30 days, and the bid price
may never return to $1.00 or higher.
If our common stock is delisted from the Nasdaq National Market:
. Our common stock may be quoted in the non-Nasdaq over-the-counter
market on either NASD's OTC Bulletin Board or the "Pink Sheets;" and
. We would be subject to an SEC rule concerning the trading of so-
called penny stocks. Under this rule broker-dealers who sell
securities governed by the rule to persons who are not established
customers or accredited investors must make a special suitability
determination and must receive the purchaser's written consent to
the transaction prior to the sale.
Delisting could make trading our shares more difficult for
broker-dealers, shareholders and investors, potentially leading to
further declines in share price. It would also make it more difficult
for us to raise additional capital. As a result, an investor may find
it more difficult to sell our common stock or to obtain accurate
quotations of the share price of our common stock.
On May 15, 2001, Nasdaq has halted trading in our Common Stock due to our
Chapter 11 filing. Until we provide additional information to Nasdaq about the
reasons for our Chapter 11 filing and our current financial condition, it is
unlikely that trading will resume.
Our principal book distributor has provided notice of termination of our
relationship which may adversely affect our business.
In mid-1998 we entered into a relationship with a subsidiary of Ingram
Industries, Inc. ("Ingram") to be our principal book distributor. On
April 4, 2001, Ingram notified us that it intended to terminate our
relationship effective June 3, 2001.
We believe that we will be able to replace Ingram on comparable terms;
however, we have not entered into a new relationship or relationships and
cannot assure that we will be able to do so. Even if we do enter into a
new relationship or relationships, we cannot assure that we will have the
same product selection or that the relationship will be on the same
terms.
Our business is highly seasonal, and our annual results are highly dependent on
the success of our Christmas selling season
Seasonal shopping patterns affect our business. A significant portion of
our sales occurs in the fourth quarter (47% in fiscal 2000) coinciding
with the Christmas holiday shopping season. Therefore, our results of
operations for the entire year depend largely on our fourth quarter
results. Typically, we have not been profitable in any quarter other than
the fourth quarter of any fiscal year, and we expect this trend to
continue. Factors that could cause our sales and profitability to suffer
include:
. the availability of and customer demand for particular products;
. adverse weather conditions;
. unfavorable economic conditions;
. inability to hire adequate personnel;
. inability to maintain appropriate inventory levels; and
Our comparable store sales will fluctuate
Changes in our comparable store sales results could cause the price of our
common stock to fluctuate. A number of factors have historically affected,
and will continue to affect, our comparable store sales results, including:
. competition;
. general regional and national economic conditions;
. consumer trends and preferences;
. changes in our co-tenants;
. new product introductions and changes in our product mix;
. timing and effectiveness of promotional events;
. introduction of and continued demand for popular and fad products; and
. weather.
We may never relaunch www.zanybrainy.com which may negatively impact our brand
and sales.
Our operations could be disrupted if information systems fail
Our business depends on the efficient and uninterrupted operation of our
computer and communications software and hardware systems. We regularly
make investments to upgrade, enhance and replace our systems.
On May 8, 2001, we suspended our offering of product sales on our internet
site until further notice. We believe continued customers' access to
www.zanybrainy.com is important for our success and the perception of our
brand. Future availability for online shopping is subject to the outcome of
the bankruptcy and the availability of resources to support the site. There
can be no guarantee that a re-launch will be possible or successful. The
failure to maintain www.zanybrainy.com may cause us to lose customers and
may tarnish our brand. Should the re-launch occur, the Website may
experience occasional system interruptions that make the Website
unavailable or prevent us from efficiently fulfilling orders. These
interruptions may reduce the volume of goods sold, the attractiveness of
products and services offered and damage our reputation. Additional
software, hardware and other resources may be necessary to relaunch the
website. We cannot accurately project the timing of a relaunch or the costs
associated with a relaunch.
We have no formal disaster recovery plan to prevent delays or other
complications arising from information systems failure. Our business
interruption insurance may not adequately compensate us for losses that may
occur.
Competition from mass market retailers and discounters, which have greater brand
recognition and financial and other resources, may have a negative impact on our
sales
Many mass market retailers and discounters, such as Toys "R" Us, Wal-Mart
and Target, have much greater brand recognition and greater financial,
marketing and other resources than ours. We could be at a disadvantage in
responding to these competitors' merchandising and pricing strategies,
advertising campaigns and other initiatives. Several of these competitors,
including Toys "R" Us, have launched successful Internet shopping sites
which compete with our stores. In addition, an increase in focus on the
specialty retail market or the sale by these competitors of more products
similar to ours could cause us to lose market share.
Competition from smaller format, specialty educational and creative toy
retailers may impair our sales growth
Our direct competitors are smaller format, specialty educational and
creative toy and game retailers. These retailers could impede our ability
to increase our sales.
Competition from non-toy specialty retailers, which compete with our children's
book and software businesses, could limit our ability to expand in these
categories
Non-toy specialty retailers, such as Barnes & Noble and Best Buy, are
competing with our children's book and software businesses. We believe that
some of these competitors have exclusivity restrictions in their leases
that restrict co-tenants from selling similar products. Such restrictions
could significantly hinder our sales by limiting our ability to sell
certain products at those sites.
Competition from internet-only retailers, which may have a cost advantage and
reach a broader market, may have a negative impact on our business
We face competition from internet-only retailers, such as Amazon.com.
Competition from all of our competitors could cause our sales and profitability
to suffer.
With respect to all of our competitors, our sales and profitability could suffer
if:
. new competitors enter markets in which we are currently
operating;
. our competitors implement aggressive pricing strategies;
. our competitors expand their operations;
. our suppliers sell their products directly or enter into
exclusive arrangements with our competitors; or
. our competitors adopt innovative store formats, retail sales
methods or merchandising strategies that are similar to ours.
Our dependence on foreign manufacturers for our merchandise could cause our
sales to suffer
We do not own or operate any manufacturing facilities. Instead, we buy all
of our products from manufacturers and distributors. In 2000, we imported
approximately 14% of our purchases, including most of our private label
products, directly from foreign manufacturers. In addition, we believe that
a significant portion of the products that we purchase from domestic
suppliers is manufactured abroad. We anticipate that our dependence on
foreign-sourced merchandise will increase. We are subject to the following
risks inherent in relying on foreign manufacturers:
. the inability to return products;
. fluctuations in currency exchange rates;
. economic and political instability;
. transportation delays;
. restrictive actions by foreign governments;
. the laws and policies of the United States affecting importation
of goods, including duties, quotas and taxes;
. foreign trade and tax laws;
. foreign labor practices;
. trade infringement claims; and
. increased liability as importer of record.
Interruptions or delays in our imports could cause shortages in our product
inventory and a decline in our sales unless we secure alternative supply
arrangements. Even if we could locate alternative sources, their products
may be of lesser quality or more expensive than those we currently
purchase. Our sales could also suffer if our suppliers experience similar
problems with foreign manufacturers.
Customer loyalty to the Noodle Kidoodle, Inc. brand name could cause our
business to suffer
Customer loyalty to the Noodle Kidoodle, Inc. brand name presents a
continued risk associated with the awareness of Noodle Kidoodle customers
with the Zany Brainy brand, which could adversely affect sales.
If we are unable to predict or react to changes in consumer demand, we may lose
customers and our sales
may decline
Our success depends on our ability to anticipate and respond in a timely
manner to changing consumer demand and preferences. Our products must
appeal to a broad range of consumers whose preferences cannot be predicted
with certainty and are subject to change. If we misjudge the market for our
merchandise, we may overstock such products and be forced to take
significant inventory markdowns, which may have a negative impact on our
profitability, or return overstocked products to vendors, which may have a
negative impact on our relationships with our vendors.
It is also common in the toy industry for some popular products, such as
Pokemon and Beanie Babies, to achieve high sales, but for unpredictable
periods of time. Consumer demand for popular products can and does decrease
significantly without warning. If we are unable to identify new products
that will enjoy strong consumer demand, we may lose customers and reduce
customer traffic in our stores, which will result in a decline in sales.
The introduction of new products may also depress sales of existing
products. In addition, a decrease in the demand for popular products may
negatively effect comparable store sales. Moreover, because we sell only
those products that conform to our product mission, we may choose not to
sell some products that our customers desire and thus lose potential sales.
We may be unable to protect our intellectual property, which could impair our
brand and reputation
Our efforts to protect our proprietary rights may be inadequate. We regard
our intellectual property, particularly our trademark for "Zany Brainy," as
important to our marketing strategy. To protect our proprietary rights, we
rely generally on copyright, trademark and trade secret laws, and
confidentiality agreements with employees and third parties and license
agreements with consultants and suppliers. However, a third party could,
without authorization, copy or otherwise appropriate information from us.
Employees, consultants and others who participate in development activities
could breach their confidentiality agreements, and we may not have adequate
remedies for any such breach. Our failure or inability to protect our
proprietary rights could materially decrease their value, and our brand and
reputation could be impaired.
We may be exposed to product liability lawsuits and other claims if we fail to
comply with government and toy industry safety standards
Children can sustain injuries from toys. We may be subject to claims or
lawsuits resulting from such injuries. There is a risk that claims or
liabilities may exceed our insurance coverage. Moreover, we may be unable
to retain adequate liability insurance in the future. We are subject to
regulation by the Consumer Product Safety Commission and similar state
regulatory agencies. If we fail to comply with government and toy industry
safety standards, we may be subject to claims, lawsuits, fines and adverse
publicity.
ITEM 2: PROPERTIES
Our corporate headquarters is located at 2520 Renaissance Boulevard in King of
Prussia, Pennsylvania, where we lease approximately 52,000 square feet. We have
an option to lease another 10,000 square feet on this site. The lease has an
initial term of ten years with two five-year renewal options.
We also currently own one distribution center in Phillipsburg, New Jersey and
lease two distribution centers in Swedesboro, New Jersey and Murfreesboro,
Tennessee. The distribution centers are approximately 269,000, 250,000 and
225,000 square feet, respectively. The Swedesboro distribution center lease has
an initial term of five years with two five-year renewal options. There is also
an option to expand the distribution center by a minimum of 100,000 and up to
250,000 square feet. The Murfreesboro distribution center lease has an initial
term of 10 years with one five-year renewal option.
We lease all of our stores. Initial lease terms are generally for ten years, and
most leases contain multiple five-year renewal options. We generally select a
new store site 6-18 months before its opening. Our stores are primarily in
suburban strip or power shopping centers as well as in selected freestanding
locations. During 2000, we signed 27 new leases for stores we opened in 2000. We
plan to open no new stores in 2001.
On April 1, 2001, we closed one store location in Hartsdale, New York.
ITEM 3: LEGAL PROCEEDINGS
We are from time to time involved in litigation that we believe ordinarily
accompanies a retail business. In addition, in the months preceding our
bankruptcy filing, we became involved in numerous actions, including actions by
our two largest creditors, Valley Media and Ingram, relating to our nonpayment
for services or goods. Although the amount of any liability that could arise
with respect to currently pending actions cannot be estimated, we do not believe
that any of our pending or threatened litigation will result in an outcome that
would materially affect our business.
Bankruptcy Filings
On May 15, 2001, we and five of our subsidiaries filed voluntary petitions under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware.
Our Chapter 11 cases have been assigned Chapter 11 Case Nos. 01-1744 through
01-1749. The cases have been consolidated for procedural purposes only and are
being administered jointly pursuant to an order entered on May 16, 2001. Each of
the Debtors continues to operate its business and manage its property as a
debtor-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
As a result of the bankruptcy filings, litigation relating to prepetition claims
against the Debtors is stayed. The Chapter 11 case is discussed in greater
detail in Note 2 to the consolidated financial statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National market (ticker symbol: ZANYQ).
The following table sets forth the high and low sales prices of our common stock
as reported on Nasdaq since our initial public offering in June 1999. For
current price information, shareholders are urged to consult publicly available
sources.
As of May 15, 2001, there were approximately 1,118 holders of record of Zany
Brainy's common stock. On May 15, 2001, the closing price of our common stock on
the Nasdaq National Market was $0.33.
Fiscal year ended February 3, 2001 High Low
- ---------------------------------- ---- ---
First Quarter....................................... $ 7.13 $ 3.78
Second Quarter...................................... 3.88 2.44
Third Quarter....................................... 2.81 1.38
Fourth Quarter...................................... 2.13 0.41
Fiscal year ended January 29, 2000
- ----------------------------------
Second Quarter (beginning June 2, 1999)............. $11.94 $ 7.88
Third Quarter....................................... 14.06 7.06
Fourth Quarter...................................... 12.25 7.44
On May 1, 2001, we received a letter from Nasdaq indicating that we failed to
comply with the minimum bid price requirement for continued listing and that our
securities are, therefore, subject to delisting from the Nasdaq National Market.
Zany Brainy has requested a hearing before a Nasdaq Listings Qualifications
Panel to appeal the staff determination.
On May 15, 2001, Nasdaq halted trading in our common stock due to our Chapter 11
filing.
DIVIDEND POLICY
We have never paid any cash dividends on capital stock and are currently
restricted from doing so under the terms of our credit facility. We do not
expect to pay any dividends in the foreseeable future.
ITEM 6: SELECTED FINANCIAL DATA
Effective July 26, 2000, we merged (the "Merger") with Noodle Kidoodle, Inc.,
("Noodle") a specialty retailer of toys, games, books and multimedia for kids,
in a tax-free, stock-for-
10
stock transaction that was accounted for as a pooling of interests. Under the
terms of the Merger agreement, we issued 1.233 shares of Zany Brainy, Inc.
common stock for each outstanding share of Noodle common stock for an aggregate
issuance of approximately 9.4 million shares of our common stock to the former
Noodle stockholders. Subsequent to the Merger, Noodle Kidoodle, Inc. became a
wholly-owned subsidiary of Zany Brainy, Inc.
The accompanying historical financial statements of Zany Brainy, Inc. have been
retroactively restated to reflect the Merger of Zany Brainy and Noodle Kidoodle,
Inc., which was accounted for as a pooling of interests. The financial
statements for the year ended February 3, 2001 reflect the results of Zany
Brainy from the July 26, 2000 merger date through the February 3, 2001, in
addition to the combined results of Zany Brainy and Noodle from January 30, 2000
through the Merger. The financial statements for the years ended January 29,
2000, January 30, 1999, January 31, 1998 and February 1, 1997 combine the
results of the operations of Zany Brainy with the results of the operations of
Noodle for each of the years then ended. The following financial information
should be read in conjunction with the Company's financial statements and
related notes thereto and with "Management Discussions and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Annual Report on
Form 10-K.
When reading this data, you should be aware that:
- Our fiscal year consists of 52 or 53 weeks, ends on the Saturday
nearest January 31 and is named for the calendar year ending closest
to that date. All fiscal years presented include 52 weeks of
operations, except 2000, which includes 53 weeks.
- A store becomes comparable in the 14th full month of store operations.
Sales per square foot and average sales per store are based on stores
opened for the entire period.
11
Fiscal Year
-----------
2000 1999 1998 1997 1996
(in thousands, except per share, number of stores
and sales per square foot data)
Statement of Operations data:
Net sales $400,479 $376,232 $276,357 $205,009 $151,973
Cost of goods sold, including occupancy costs 312,529 267,849 198,953 153,913 115,562
-------- -------- -------- -------- --------
Gross profit 87,950 108,383 77,404 51,096 36,411
Selling, general and administrative expenses 123,036 93,126 69,813 52,833 49,672
Merger and integration costs 20,644 - - - -
-------- -------- -------- -------- --------
Operating income (loss) (55,730) 15,257 7,591 (1,737) (13,261)
Interest income (expense), net (4,498) (1,017) (1,055) (107) 115
Equity loss in joint venture (11,482) - - - -
-------- -------- -------- -------- --------
Income (loss) before taxes (71,710) 14,240 6,536 (1,844) (13,146)
Income tax benefit (expense) (8,989) 2,820 6,094 - -
-------- -------- -------- -------- --------
Income (loss) from continuing operations (80,699) 17,060 12,630 (1,844) (13,146)
Gain from disposal of discontinued operations - 1,550 - - -
-------- -------- -------- -------- --------
Net income (loss) $(80,699) $ 18,610 $ 12,630 $ (1,844) $(13,146)
======== ======== ======== ======== ========
Net income (loss) per common share:
Basic: $ (2.58)(a) $ 0.74(b) $ 0.86(c) $ (0.13) $ (0.92)
Diluted: $ (2.58)(a) $ 0.60(b) $ 0.46(c) $ (0.13) $ (0.92)
Weighted average shares outstanding:
Basic: 31,280 25,208 14,729 14,431 14,301
Diluted: 31,280 30,780 27,291 14,431 14,301
Store data:
Number of stores at end of fiscal year 188 161 117 84 74
Total square feet at end of fiscal year 1,989 1,721 1,300 964 858
Comparable store sales increase (decrease) (d) (10.0%) 2.8% 12.1% 11.7% 1.0%
Sales per square foot (d) $ 211 $ 241 $ 246 $ 218 $ 200
Average sales per store (d) 2,254 2,677 2,819 2,531 2,233
Operating data:
Gross profit margin 22.0% 28.8% 28.0% 24.9% 24.0%
Operating margin (loss) (13.9%) 4.1% 2.7% (0.8%) (8.7%)
Capital expenditures, net $ 20,294 $ 23,447 $ 14,627 $ 8,084 $ 15,673
Depreciation and amortization 15,940 12,485 9,791 7,507 5,639
Balance sheet data:
Inventories $120,017 $106,303 $ 65,428 $ 47,499 $ 42,461
Working capital 13,664 85,140 43,305 38,338 40,900
Total assets 199,163 217,647 140,472 109,523 106,970
Line of Credit 52,723 3,996 -- -- --
Long term debt, net of current portion (e) 2,867 4,544 3,572 2,140 3,373
Total shareholders' equity 69,579 148,436 86,272 73,492 74,506
(a) Includes the recording of a valuation allowance on deferred tax assets of
$33.9 million representing net loss per basic and diluted share of $1.08.
(b) Includes a tax benefit of $7.3 million recorded by Noodle Kidoodle due to
the recognition of a deferred tax asset representing net income per basic and
diluted share of $0.29 and $0.24, respectively.
(c) Includes a tax benefit of $7.2 million recorded by Zany Brainy due to
recognition of a deferred tax asset representing net income per basic and
diluted share of $0.49 and $0.26, respectively.
(d) Comparable store sales figures include only 52 weeks for fiscal year 2000,
which has a 53 week year. Sales per square foot and average sales per store
include 53 weeks for fiscal year 2000.
(e) Includes capitalized lease obligations.
12
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following provides information that management believes is relevant to an
assessment and understanding of Zany Brainy's consolidated results of operations
and financial condition. The discussion should be read in conjunction with the
Zany Brainy's consolidated financial statements and accompanying notes. All
references to 2000, 1999 and 1998 mean the fiscal years ended February 3, 2001,
January 29, 2000 and January 30, 1999, respectively. Our fiscal year consists of
52 or 53 weeks and ends on the Saturday nearest January 31. All fiscal years
presented include 52 weeks of operations, except 2000, which includes 53 weeks.
Overview
We are a specialty retailer of high quality toys, games, books and multimedia
products for children, operating 188 stores in 34 states as of February 3, 2001.
Our financial results in 2000 were affected by several significant factors,
including the acquisition of 60 Noodle Kidoodle stores (two of which were opened
subsequent to January 29, 2000, but prior to the Merger), the opening of 25 new
Zany Brainy stores and substantial investment in our Internet strategy. These
factors along with a difficult retail climate, compounded by an absence of "hot"
product, led to a decline in sales which caused liquidity issue that
precipitated in filing for Chapter 11.
Effective July 26, 2000, we merged with Noodle Kidoodle, Inc., a specialty
retailer of toys, games, books and multimedia for kids, in a tax-free,
stock-for-stock transaction that was accounted for as a pooling of interests.
Under the terms of the Merger agreement, we issued 1.233 shares of Zany Brainy,
Inc. common stock for each outstanding share of Noodle common stock for an
aggregate issuance of approximately 9.4 million shares of our common stock to
the former Noodle stockholders. Our historical financial information has been
retroactively restated to reflect the acquisition of Noodle as though they had
been combined from the beginning of each of the periods presented.
Our net sales increased 6.4% from $376.2 million in 1999 to $400.5 million in
2000, while our net income decreased from income of $18.6 million in 1999 to a
loss of ($80.7) million in 2000. The increase in net sales was primarily due to
the opening of new stores offset by comparable net sales declines. Our
comparable store net sales declined by 10% in 2000 compared to net sales growth
of 2.8% and 12.1% in 1999 and 1998, respectively. The net loss in 2000 was a
result primarily of a decrease in comparable net sales of 10%, charges
associated with the acquisition of Noodle Kidoodle of $29.4 million, losses from
ZanyBrainy.com of $11.5 million and a full valuation recorded against the
Company's deferred tax assets of $33.9 million. We opened 33 stores in 1998, 44
stores in 1999 and 27 stores in 2000 increasing our store base from 84 stores at
the end of 1997 to 188 stores at the end of 2000.
In 1999, two popular products, Beanie Babies and Pokemon, represented over 5%
and 6% of our sales respectively. Consumer demand for these products decreased
significantly in 2000. The decrease in demand led to negative comparisons during
2000. In addition, subsequent to our acquisition of 60 Noodle Kidoodle stores in
July 2000, those stores recognized a decline in comparable net sales, due to not
only a lack of hot product but also as a result of integration and transition
issues, including but not limited to the change in the names of the stores from
Noodle Kidoodle to Zany Brainy. Additionally, we experienced certain
difficulties with our conversion of the JDA merchandising module and the Noodle
conversion to Zany's system, which affected our ability to maintain an adequate
and appropriate merchandise mix at store locations.
Recent Developments
Bankruptcy
On May 15, 2001, we and five of our subsidiaries (collectively, the "Debtors")
filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in
the Bankruptcy Court.
We report our operating results and financial statements on a consolidated
basis. These public reports are available through the Securities and Exchange
Commission and other sources, and also are provided free of charge to investors
who contact us. However, under applicable bankruptcy law, we are now required to
file periodically with the Bankruptcy Court various documents, including certain
financial information on an unconsolidated basis. This information includes
statements, schedules, and monthly operating reports in forms prescribed by
federal bankruptcy law.
13
We caution that such materials are prepared according to requirements of federal
bankruptcy law. While they accurately provide then-current information required
under federal bankruptcy law, they are nonetheless unconsolidated, unaudited,
and are prepared in a format different from that used in our consolidated
financial statements filed under the securities laws. Accordingly, we believe
the substance and format do not allow meaningful comparison with our regular
publicly-disclosed consolidated financial statements.
The materials filed with the Bankruptcy Court are not prepared for the purpose
of providing a basis for an investment decision relating to our stock, or for
comparison with other financial information filed with the Securities and
Exchange Commission.
Notwithstanding, most of the Debtors' filings with the Court are available to
the public at the office of the Clerk of the Bankruptcy Court. Those filings may
also be obtained through private document retrieval services. We undertake no
obligation to make any further public announcement with respect to the documents
filed with the Court or any matters referred to in them.
Results of Operations
The following table sets forth our financial data expressed as a percentage of
net sales, and operating data for the periods indicated:
2000 1999 1998
Net sales 100.0% 100.0% 100.0%
Cost of goods sold, (1)
including occupancy costs 78.0% 71.2% 72.0%
----- ----- -----
Gross profit 22.0% 28.8% 28.0%
Selling, general and
administrative expenses 30.7% 24.7% 25.3%
Merger and integration costs 5.2% - -
----- - -
Operating income (loss) (13.9%) 4.1% 2.7%
Interest income (expense), net (1.1%) (0.3%) (0.3%)
Equity loss in joint venture (2.9%) - -
----- ----- -----
Income (loss) before taxes (17.9%) 3.8% 2.4%
Income tax benefit (expense) (2.3%) 0.7% 2.2%
----- ----- -----
Income (loss) from continuing operations (20.2%) 4.5% 4.6%
Gain from disposal of discontinued operations - 0.4% -
----- ----- -----
Net income (loss) (20.2%) 4.9% 4.6%
===== ===== =====
Comparable store net sales increase (decrease)(2) (10.0%) 2.8% 12.1%
Total number of stores at end of period 188 161 117
Stores opened during period 27 44 33
(1) Cost of sales includes buying, distribution and occupancy costs
(2) A store becomes comparable in the 14th full month of store operations.
Comparable store sales figures include only 52 weeks for fiscal 2000, which has
a 53-week year.
Year Ended February 3, 2001 compared to Year-Ended January 29, 2000
NET SALES. Net sales increased $24.3 million, or 6.4%, to $400.5 million in 2000
from $376.2 million in the comparable 1999 period. Sales for the 27 stores
opened in 2000 contributed $33.0 million of the increase in net sales.
Comparable store net sales decreased 10.0% from the prior year and offset the
increase in net sales due to new stores by $36.0 million. The decrease in
comparable net sales was due to a decrease in customer transactions partially as
a result of lower traffic in the stores due to lack of hot products, offset by
an increase in average customer purchases and the average retail price in our
stores. Sales were further affected due to certain difficulties we experienced
with our conversion of the JDA merchandising module and the Noodle conversion to
our system which affected our ability to maintain an adequate and appropriate
merchandise mix at store locations. Stores open prior to January 29, 2000 but
not qualifying as a comparable store contributed $22.0 million to the net sales
increase. The extra week in fiscal 2000 accounted for $4.6 million of the net
sales increase. Decreases in catalog sales of $0.8 million and Noodle Kidoodle,
Inc. internet sales of $0.9 million were offset by sales of $2.3 million related
to www.zanybrainy.com subsequent to us assuming full ownership of
www.zanybrainy.com. Sales of Pokemon and Beanie Babies declined from
approximately 6.2% and 5.2% of sales, respectively, in 1999, to 2.3% and less
than 2.0% of sales, respectively, for the comparable 2000
14
period.
GROSS PROFIT. Gross profit decreased by $20.4 million, or 18.9%, to $88.0
million in 2000, from $108.4 million in the comparable 1999 period. As a
percentage of net sales, gross profit decreased to 22.0% in 2000, from 28.8% in
1999. Buying and distribution costs increased 1.0% as a percentage of net sales.
Product margins as a percentage of net sales decreased by 4.7% due to changes in
product mix to merchandise with lower product margins, including the
introduction of video games, increases in inventory shrinkage and freight costs
and an inventory write-off of $8.8 million related to the Merger. Store
occupancy expense increased 1.1% as a percent of net sales, primarily due to
lower average sales per store.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $29.9 million, or 32.1%, to $123.0 million
in 2000, from $93.1 million in 1999. The dollar increase in these expenses was
due primarily to an increase of $21.5 million in store payroll, selling and
depreciation expenses primarily associated with the opening of 27 additional
stores following the end of 1999, an increase of $2.3 million in write-downs on
internet property under SFAS No. 121 and an increase of $4.3 million in
corporate expenses related to the Noodle acquisition were partially offset by a
decrease in preopening expenses of $0.8 million due to the opening of fewer
stores in 2000. Selling, general, and administrative expenses as a percentage of
net sales increased by 6.0% to 30.7% in 2000 from 24.7% in 1999 due primarily to
fixed costs spread over a lower comparable store sales base.
MERGER AND INTEGRATION COSTS. Merger and integration costs related to the Merger
with Noodle represented 5.2% of net sales during fiscal 2000. As the Merger took
place during fiscal 2000, there were no such costs in the comparable fiscal 1999
period. These costs include, professional fees, severance and change in control
costs, grand reopening and related costs, store closures, including a write down
for asset impairments under SFAS NO. 121 and other integration costs.
INTEREST EXPENSE, NET. Net interest expense was approximately $4.5 million for
2000, an increase of $3.5 million from 1999. The increase was due primarily to
an increase in borrowings under our credit facility and higher interest rates.
INCOME TAXES. For 2000, an income tax expense of $9.0 million was primarily
related to a valuation allowance recorded against all our deferred tax assets as
of the beginning of the fiscal year. In addition, a 100% valuation was recorded
against the tax benefit generated from the fiscal 2000 net loss of $71.7
million. This valuation allowance was recorded in the fourth quarter of fiscal
2000. For 1999, an income tax benefit of $2.8 million was recorded as a result
of a reversal of a valuation allowance in the amount of $7.3 million offset by
income tax expense of $4.5 million. See Note 11 of "Notes to Consolidated
Financial Statements."
DISCONTINUED OPERATIONS. In the third quarter ended October 30, 1999, we
adjusted the estimated gain on disposal of our discontinued wholesale operations
recognized in fiscal 1996. The adjustment resulted in an additional gain of $1.6
million, net of tax of $1.0 million. The additional gain arose from the sale of
our leasehold interest in its former distribution center in
Birmingham, Alabama and the settlement of liabilities related to its
discontinued operations. The leasehold interest in the Birmingham, Alabama
distribution center was sold on November 15, 1999. There were no similar charges
in the comparable fiscal 2000 period.
Year Ended January 29, 2000 Compared to Year Ended January 30, 1999
NET SALES. Net sales increased by $99.8 million, or 36.1%, to $376.2 million in
1999 from $276.4 million in 1998. Sales for the 44 stores opened in 1999
contributed $59.6 million of the increase in net sales. Comparable store net
sales increased 2.8% over the prior year and contributed $7.3 million of the
increase in net sales. The growth in comparable store sales was due primarily to
an increase in the average customer purchase. Stores open prior to January 31,
1999 but not qualifying as comparable stores contributed $29.7 million of the
increase in net sales. Sales of Pokemon products, which are represented in
several different departments including games, books, stationery, and plush,
represented approximately 6.2% of sales in 1999. Sales of Beanie Babies declined
from approximately 8% of sales in the 1998, to 5.2% of sales for the comparable
1999 period. Catalog sales accounted for an additional $2.5 million in sales.
GROSS PROFIT. Gross profit increased by $31.0 million to $108.4 million in 1999
from $77.4 million in 1998. As a percentage of net sales, gross profit increased
to 28.8% in 1999 from 28.0% in 1998. The increase in the gross profit percentage
was primarily attributable to improved product margins. Product margins as a
percent of sales increased 0.7% in 1999 primarily due to an increase in sales of
products with a higher gross margin and reduced inventory shrinkage, partially
offset by increased freight expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $23.3 million to $93.1 million in 1999 from
$69.8 million in 1998. The dollar increase in these expenses was primarily
related to an increase of $19.9 million in store payroll, selling and
depreciation expenses and an increase in property expenses of $0.9 million
incurred in 1999 associated with the opening of 44 additional stores
15
following the end of 1998 as well as an increase in corporate expenses of $2.5
million. As a percentage of net sales, selling, general and administrative
expenses were consistent from 1998 to 1999.
INTEREST EXPENSE, NET. Net interest expense decreased slightly to $1.0 million
in 1999 from $1.1 million in 1998.
INCOME TAXES. For 1999, an income tax benefit of $2.8 million was recorded as a
result of a reversal of a valuation allowance in the amount of $7.3 million
offset by income tax expense of $4.5 million. For 1998, an income tax benefit of
$6.1 million was recorded as a result of a reversal of a valuation allowance in
the amount of $7.2 million offset by income tax expense of $1.1 million. See
Note 11 of "Notes to Consolidated Financial Statements."
DISCONTINUED OPERATIONS. In the third quarter ended October 30, 1999, we
adjusted the estimated gain on disposal of our discontinued wholesale operations
previously recognized in fiscal 1996. The adjustment resulted in an additional
gain of $1.6 million, net of income tax expense of $1.0 million. The additional
gain arose from the sale of our leasehold interest in its former distribution
center in Birmingham, Alabama and the settlement of liabilities related to its
discontinued operations. The leasehold interest in the Birmingham, Alabama
distribution center was sold on November 15, 1999. There were no similar charges
in the comparable fiscal 1998 period.
Liquidity and Capital Resources
Our main sources of liquidity have been cash flows from operations, borrowing
under our credit facilities, and proceeds from our initial public offering (the
"Offering"). We require cash principally to finance capital investment in new
stores, new store inventories and seasonal working capital.
Cash flows used by operating activities were $50.4 million for fiscal 2000, an
increase of $46.2 million over the same period for the previous year. The
increase was primarily a result of a decrease in net income after the noncash
effect of deferred income taxes offset by the merger-related inventory write-
down of $8.8 million and the equity loss in our Internet joint venture of $11.5
million. Cash flows used in operating activities were $4.3 million in fiscal
1999 compared to cash provided by operating activities in fiscal year 1998 of
$12.2 million. This increase was primarily due to an increase in inventories net
of payables, offset by an increase in net income after the noncash effect of
deferred income taxes. The increase in inventories was due to the opening of 44
new stores in fiscal 1999.
Cash flows used in investing activities were $24.0 million for fiscal 2000, a
decrease of $4.4 million over the same period for the previous year. The
decrease was due to a decrease in purchases of property and equipment of $3.2
million and cash acquired for the liquidation of the joint venture of $3.1
million, partially offset by an increase in the investment in the joint venture.
Cash flows used in investing activities increased from fiscal 1998 to fiscal
1999 by $13.8 million primarily due to increased capital spending for the 44 new
stores, new enterprise software, a new distribution center and the investment of
$5.0 million in the internet joint venture.
Cash flows provided by financing activities during fiscal 2000 increased by $5.9
million from the previous year primarily due to an increase in borrowings under
the line of credit agreement of $44.7 million and an increase of bank overdrafts
of $6.3 million partially offset by a decrease in the exercise of stock options
of $0.8 million compared to 1999, an increase in debt issuance costs of $1.2
million in 2000 a decrease in net proceeds of $42.3 million from the sale of
common stock associated with the Offering in fiscal 1999. In fiscal 1999, cash
provided by financing activities was $45.9 million compared to cash used in
financing activities of $1.8 million in fiscal 1998. This change which reflected
the net proceeds from the sale of common stock associated with the Offering and
an increase in borrowings under the credit facility.
In July 1999, we entered into a master lease agreement with a bank which
provides for $5.0 million for leasing new and used equipment through June 30,
2000. The agreement requires that the leases be capital in nature and is subject
to certain covenants, as defined. In fiscal 2000 and 1999, we financed $1.0
million and $3.8 million, respectively, of equipment under the agreement. We are
required to make monthly payments, including interest, at an average rate of
9.9%. The equipment leased under the agreement is the collateral. This master
lease agreement was not renewed upon expiration, however, the existing capital
leases remain outstanding.
In July 2000, we entered into a three-year credit facility, with Congress
Financial Corporation ("Congress) (the "Credit Facility") covering a maximum
principal amount of $115.0 million, secured by our inventories and other assets,
subject to a borrowing base as defined as a percentage of eligible inventories
(see Note 10 of "Notes to Consolidated Financial Statements"). The Credit
Facility bore interest at the prime rate, the annual Federal funds rate plus 2.0
percent or, if the Company elected, at
16
an annual rate of LIBOR plus 2.0-2.5 percent (depending on availability). The
Credit Facility was completed in two parts. An initial $65.0 million portion was
completed on July 26, 2000 and replaced our $30.0 million bank line then
existing. The remaining $50.0 million portion was completed on October 12, 2000
and replaced Noodle Kidoodle's existing $50.0 million facility. The Credit
Facility required us to comply with various covenants, as defined, and
restricted the payment of dividends and our ability to divest assets and make
additional corporate investments. We had an outstanding balance on the line of
credit of $52.7 million as of February 3, 2001. At February 3, 2001 and January
29, 2000, there were $2.4 million and $2.1 million, respectively, in outstanding
letters of credit issued against the Credit Facility.
In January 2001, the appraiser retained by the bank appraised our inventory at a
value that significantly reduced our borrowing availability.
On February 28, 2001, the bank asserted that we were in default under the Credit
Facility. As a result of the defaults asserted by the bank, outstanding
borrowings under the Credit Facility began to accrue interest at a rate equal to
2% above the highest alternative pre-default rates (the "Default Rate"). Under
the Credit Facility, our borrowing availability was tied to a seasonal
percentage of eligible inventory. Such formula included a limitation that we
could not borrow any amounts that exceeded the lesser of (a) 65% of the cost of
eligible inventory or (b) 85% of the appraisal value of eligible inventory,
subject to additional reserves imposed by the bank.
In connection with the bankruptcy filing, the Debtors obtained a two year,
$115.0 million debtor-in-possession credit facility from Wells Fargo Retail
Finance, LLC, as Agent for itself and other lenders that may join the credit
facility from time-to-time (the "DIP Facility"). The DIP Facility is secured
with substantially all of our assets. The DIP Facility includes a credit line of
up to $100.0 million bearing interest at the prime rate plus 1.75% or, if we
elect, at an annual rate of LIBOR plus 3.5%, and an additional line of $15.0
million bearing interest at 14.5% per annum. The DIP Facility requires us to
comply with various financial covenants and contains certain restrictions upon
the operations of the business, including restrictions upon the ability to
borrow additional money, pay dividends, divest assets, make additional corporate
investments and increase compensation to directors, officers and senior
management employees. On May 17, 2001, we had an outstanding balance under the
DIP Facility of approximately $46.6 million ($10.0 million bearing interest at
14% and approximately $36.6 million bearing interest at 8.75%). Of this amount,
approximately $45.0 million, including a $1.7 million termination fee, was used
to repay the Credit Facility which has now been terminated.
As a consequence of the Filing and the impact of certain provisions in our DIP
Facility and in the interim order entered by the Bankruptcy Court, we are now
subject to certain restrictions, including a limitation in the aggregate
borrowings under the DIP Facility to approximately $63.8 million.
We believe, based on information presently available to us, that cash available
from operations and the DIP Facility will provide sufficient liquidity to allow
us to continue as a going concern for the foreseeable future. However, our
ability to continue as a going concern (including our ability to meet
post-petition obligations of the Debtors) and the appropriateness of using the
going concern basis for our financial statements are dependent upon, among other
things, (i) our ability to comply with the terms of the DIP Facility and any
cash management order entered by the Bankruptcy Court in connection with the
Chapter 11 cases, (ii) our ability to maintain adequate cash on hand, (iii) our
ability to generate cash from operations, (iv) entry by the Bankruptcy Court of
a final order approving the DIP Facility and the priority of the liens security
obligations, (v) confirmation of a plan of reorganization under the Bankruptcy
Code, and (vi) our ability to achieve profitability following such confirmation.
As a result of those uncertainties, there can be no assurance that existing or
future sources of liquidity will be adequate.
Seasonality of Business
Seasonal shopping patterns affect our business. A significant portion of our
sales occur in the fourth quarter, coinciding with the Christmas holiday
shopping season. Therefore, results of operations for the entire year depend
heavily on fourth quarter results and the success of the Christmas selling
season. Based upon previous experience, we do not expect to earn an operating
profit in the first three-quarters of a fiscal year in the foreseeable future.
Cautionary Statement Pursuant to Safe Harbor Provisions Of the Private
Securities Litigation Act of 1995
This report contains, in addition to historical information, forward-looking
statements by us with regard to the continued listing of our stock on the Nasdaq
National Market, an appeal and hearing of any Nasdaq delisting determination,
the success of any appeal and hearing, the postponement of any Nasdaq
determination, whether there will be a trading market for our common stock,
whether we will enter into a new relationship for book inventory in our
stores, losses that may be associated with any relaunched version of our
internet shopping site, the impact of
17
our bankruptcy filing on its relationships with our vendors, managers, employees
and customers, the effect of the outcome of any pending or threatened litigation
in which we are involved, our payment of dividends, our relationship with our
lenders, our pursuit of alternative solutions to our borrowing limitations, the
nature and import of credit or credit-related agreements under negotiation,
plans regarding meetings with trade and expense creditors, our ability to
continue as a going concern and our expected profit during the first three
quarters of a fiscal year, which may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as "may," "should," "anticipate," "believe," "plan," "estimate,"
"expect," and "intend," and other such similar expressions are intended to
identify forward-looking statements. These statements are based on management's
current expectations and are subject to a number of uncertainties and risks that
could cause actual results to differ materially from those described in the
forward-looking statements. Factors that may cause such difference include, but
are not limited to, our ability to relaunch our internet sales site, the sales
resulting from that site, the decision of the Nasdaq panel, an ability to enter
into a relationship for book inventory, the reaction of our vendors, managers,
employees and customers to our bankruptcy filing, our stock price, the
willingness of our bank to negotiate, the success of negotiations with the bank
and other potential lenders, the availability under the DIP Facility, the
development in and the outcome of the Chapter 11 proceeding, the availability of
additional capital and the adverse effects on our business as a result of
general economic conditions, as well as the risks set forth in our filings with
the Securities and Exchange Commission. All forward-looking statements included
in this document are based on information available to us as of the date of this
document, and we assume no obligation to update these cautionary statements or
any forward-looking statements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries and
supplementary data required by this item are attached to this annual report on
Form 10-K beginning on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Zany board of directors currently consists of five directors, each serving
until the 2001 annual meeting of shareholders and until such directors'
successors have been elected and qualified, except in the event of any such
director's earlier death, resignation or removal. The foregoing information has
been provided by each director at the request of Zany Brainy. The executive
officers and directors of Zany Brainy are:
Thomas G. Vellios has served as our Chief Executive Officer since May 2001 and
has served as one of our directors since September 2000. Mr. Vellios has served
as our President since January 1998 and also served as our Acting Chief
Executive Officer from September 2000 until May 2001. He joined Zany Brainy in
November 1995 as Executive Vice President of Merchandising and Marketing. Prior
to joining us, Mr. Vellios was at Caldor, Inc. for nine years, where he served
in various capacities, most recently as Senior Vice President and General
Merchandise Manager. Mr. Vellios is 46 years of age.
Robert A. Helpert has served as our Chief Financial Officer, Secretary and
Treasurer since May 1995. Prior to joining us, from February 1994 to May 1995,
Mr. Helpert was the Executive Vice President and Chief Financial Officer for
Trans World Entertainment Corporation. Prior to joining Trans World, from 1988
to 1994, he was President and Chief Operating Officer of W.H. Smith, Inc., an
operator of hotel and airport newsstands and gift shops. Mr. Helpert is 57 years
of age.
18
C. Donald Dorsey has served as one of Zany Brainy's directors since June 1994.
From March 1989 to August 1999, Mr. Dorsey was employed by PETsMART, Inc. where
he served in various capacities, most recently as Executive Vice President. From
1989 to 1998, Mr. Dorsey also served as PETsMART's Chief Financial Officer. Mr.
Dorsey is 59 years of age.
Henry Nasella has served as one of Zany Brainy's directors since October 1993.
From October 1999 to June 2000 and, Mr. Nasella was the Chief Executive Officer
of Online Retail Partners, an e-commerce venture capital and technology
operating business. From September 1994 to June 1999, Mr. Nasella was the
Chairman, Chief Executive Officer and President of Star Markets Company, Inc., a
Boston-based grocery retailer. From January 1994 to September 1994, he was a
principal of Phillips-Smith Specialty Retail Group, a venture capital firm. Mr.
Nasella formerly served as President and Chief Operating Officer of Staples Inc.
Mr. Nasella is 54 years of age.
Mary Ann Tocio has served as one of Zany Brainy's directors since July 2000.
Since July 1998, Ms. Tocio has served as the President and Chief Operating
Officer of Bright Horizons Family Solutions, Inc., a national provider of
workplace services for employers and families. From November 1993 until July
1998, she served as Chief Operating Officer of Bright Horizons, Inc. which
merged with Corporate Family Solutions, Inc. in July 1998 to form Bright
Horizons. Ms. Tocio is 53 years of age.
Stanley Greenman has served as one of Zany Brainy's directors since July 2000.
Mr. Greenman served as Noodle Kidoodle's Chairman of the Board, Chief Executive
Officer and Treasurer from 1990 until June 2000. Mr. Greenman is 52 years of
age.
Committees and Meetings
Our board of directors has an audit committee, a compensation committee and a
nominating committee. During the fiscal year ended February 3, 2001, the board
of directors held eight meetings (five by telephone conference), the audit
committee held two meetings, the compensation committee held five meetings (two
by telephone conference) and acted once by unanimous consent and the nominating
committee did not meet. Each director attended at least 75% of the aggregate of
the meetings of the board of directors and of the board committee or committees
on which he served during the fiscal year ended February 3, 2001.
The audit committee has the power and authority to:
. review our internal financial controls and accounting procedures and
reports with management;
. review the engagement of our independent auditors;
. make recommendations to the board of directors regarding the selection of
independent auditors; and
. review the scope, fees and results of any audit.
The compensation committee has the power and authority to administer our salary
and incentive compensation policies. The compensation committee also has the
power and authority to administer and interpret our 1998 Equity Compensation
Plan and the 1993 Incentive Stock Plan (which has expired but under which there
remain outstanding stock options) and establish the terms and conditions of all
stock option grants.
The nominating committee's duties are to evaluate board performance and
recommend to the board nominees for election as directors.
The current members of the audit committee are Mr. Dorsey (Chairman) and Ms.
Tocio; of the compensation committee, Messrs. Dorsey (Chairman) and Ms. Tocio;
and of the nominating committee, Mr. Nasella.
Standard Compensation Arrangements
Historically, directors did not receive any cash compensation for service as
directors, however, they were reimbursed for the expenses they incurred in
attending meetings of the board or board committees. In order to attract highly
qualified new directors to serve on our board of directors and to retain
existing members, in January 2000, we approved a compensation program that
included a one-time grant of options to purchase 25,000 shares of common stock
to new non-employee directors. Such options were granted on the date the
individual became a member of the
19
board of directors and would be granted under our 1998 Equity Compensation Plan.
Each such option would have an exercise price equal to the last reported sale
price on the date of the director's election, a ten-year term and vest in four
equal installments beginning on the first anniversary of the director's
election. In January 2000, our board of directors also agreed to use its best
efforts, in the event Mr. Greenman was elected to the board of directors at the
next annual meeting of shareholders, continued to serve as a director and was no
longer an employee of ours, to grant to Mr. Greenman a stock option to purchase
25,000 shares of our commmon stock. This grant would be made on the same terms
as a grant to a new director.
In addition, commencing with our 2000 annual meeting of shareholders, directors
who were not employees of ours would receive $500 for attendance at each meeting
of the board of directors or committee of the board of directors (including
meetings held by telephone conference) and the chairman of each committee of the
board of directors would receive an annual retainer of $2,500, based upon the
length of service of such committee chairman during the annual period commencing
on the annual meeting date.
In December 2000, in order to provide meaningful compensation to our outside
directors on an annual basis, incentivize the outside directors and align their
interests with our shareholders to a greater extent, we approved a compensation
program that awards each non-employee director an annual grant of options to
purchase that number of shares equal to $50,000 of our common stock. The actual
number of options shall be determined on the date each outside director is re-
elected as a director by taking $50,000 and dividing it by the exercise price of
the option. The option exercise price will be equal to the last reported sale
price share of our common stock on the Nasdaq National Market on the date of re-
election and, if the common stock is not listed on Nasdaq, then the exercise
price shall be the fair market value of our common stock as determined by the
board of directors.
Share Ownership Guideline
None.
20
ITEM 11: EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth certain information with respect to compensation
earned during the fiscal years ended February 3, 2001, January 29, 2000 and
January 30, 1999 by our chief executive officer, our other executive officer and
our former chief executive officer (the "Named Executive Officers").
Summary Compensation Table
Long Term
Annual Compensation Compensation
----------------------------------------- Award
Other Securities All Other
Name and Annual Underlying Compen-
Principal Position Year Ended Salary Bonus Compensation(1) Option sation
------------------ ---------- ------ ----- --------------- ------ ------
---------------
Thomas G. Vellios.............. Feb. 3, 2001 $338,250 $ 74,901(2) $2,559(3) 0 0
Chief Executive Jan. 29, 2000 307,500 102,900 2,333 125,000 0
Officer/President(1) Jan. 30, 1999 275,000 110,000 2,466 0 0
Robert A. Helpert.............. Feb. 3, 2001 $296,625 $ 29,961(2) $6,847(3) 0 0
Chief Financial Officer, Jan. 29, 2000 282,500 82,600 6,478 25,000 0
Treasurer and Secretary Jan. 30, 1999 262,500 91,875 6,666 0 0
Keith C. Spurgeon.............. Feb. 3, 2001 $248,868 $ 74,901(2) $2,906(3) 0 $84,563(5)
Chief Executive Officer Jan. 29, 2000 307,500 115,800 2,202 100,000 0
and Chairman of the Jan. 30, 1999 300,000 135,000 2,335 0 0
Board Directors(4)
(1) Mr. Vellios was appointed Chief Executive Officer in May 2001.
(2) Represents payments made to compensate the Named Executive Officers for tax
exposure relating to the purchase of shares of ZB Holdings, LLC from Zany
Brainy in April 2000.
(3) Represents premiums paid by Zany Brainy with respect to term life insurance
for the benefit of the Named Executive Officer.
(4) Mr. Spurgeon served as Chief Executive Officer and Chairman of the Board of
Directors until September 2000.
(5) Represents severance payments made to Mr. Spurgeon.
Option Grants
No options were granted to any Named Executive Officer during the fiscal year
ending February 3, 2001.
On March 26, 2001, options to purchase an aggregate of 2,000,000 shares of
common stock were granted to certain of our key employees, of which options to
purchase 500,000 shares and 350,000 shares were granted to Thomas G. Vellios and
Robert A. Helpert, respectively. All of these grants, including the grants to
Messrs. Vellios and
21
Helpert, have (i) an exercise price per share equal to $0.344, (ii) a ten-year
term and (iii) with the exception of Mr. Vellios, vest in four equal
installments commencing on the first anniversary of the date of grant. The
option grant to Mr. Vellios provided a vesting schedule as follows: (i) 201,250
shares on the first anniversary of the date of grant, (ii) 18,672 shares in
quarterly installments beginning on June 26, 2002 and terminating on December
26, 2004 and (iii) 18,670 shares on March 26, 2005; provided, however, that in
the event that Mr. Vellios provides written notice to us pursuant to the terms
of his employment agreement, then the vesting of the 201,250 shares, scheduled
to vest on March 26, 2002, shall be accelerated so that such shares vest on
December 31, 2001.
Aggregate Fiscal Year-End OptionValues
The following table sets forth certain information regarding the number and
value of stock options held at February 3, 2001 by the Named Executive Officers.
Aggregate Fiscal Year-End Option Values
Value of
Number of Unexercised Unexercised In-the-
Options at Money Options at
February 3, 2001 February 3, 2001(1)
--------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Thomas G. Vellios.................. 456,250 118,750 $0 $0
Robert A. Helpert.................. 272,500 27,500 0 0
Keith C. Spurgeon.................. 0 0 0 0
(1) Based on the closing price of Zany Brainy's common stock as reported on the
Nasdaq National Market on February 2, 2001 ($0.875 per share), net of the
option exercise price.
Employment Agreements
Messrs. Spurgeon, Vellios and Helpert were employed during the fiscal year ended
February 3, 2001 under employment agreements with us. Mr. Spurgeon resigned in
September 2000. Under these employment agreements, Messrs. Vellios and Helpert
are entitled, and Mr. Spurgeon was entitled prior to his resignation, to receive
a base salary, which may be increased from time to time, and such additional
compensation as may be awarded to them. During the fiscal year ended February 3,
2001, the annual base salaries for Messrs. Spurgeon, Vellios and Helpert were
$338,250, $338,250 and $296,625, respectively.
Each of the employment agreements contains the following principal terms:
. severance benefits equal to one year of the employee's base salary,
payment of any incentive bonus and continuation of health, life and
disability insurance for one year, if the employee is terminated
without cause or for good reason (each as defined in the employment
agreements).
. a three year term.
Mr. Spurgeon resigned in September 2000. According to the terms of Mr.
Spurgeon's employment agreement, he received severance payments of $84,563
during the fiscal year ended February 3, 2001.
In September 2000, Mr. Vellios entered into an amended and restated employment
agreement with us to be employed as our President and Acting Chief Executive
Officer. Mr. Vellios' employment agreement contain the following principal
terms:
. severance benefits equal to two years of the employee's base salary,
payment of any incentive bonus, and continuation of health, life and
disability insurance for one year, if the employee is terminated
without cause or for good reason (each as defined in the employment
agreements).
. termination on June 30, 2001, in the event that a new agreement between
us and Mr. Vellios was not entered into prior to February 15, 2001.
In May 2001, Mr. Vellios entered into an amended and restated employment
agreement with us to be employed as our President and Chief Executive Officer
until February 1, 2003. Mr. Vellios employment agreement contain the following
principal terms:
22
. annual base salary of $500,000;
. stay bonus of $1,000,000 to remain employed with us through February 2,
2002, payable as set forth in the terms of the agreement.
. severance benefits equal to 2.99 times his annual base salary, payment
of any unpaid stay bonus, payment of any incentive bonus if termination
occurs after February 3, 2002, and continuation of health, life and
disability insurance benefits for two years if the employee is
terminated without cause or for good reason (each as defined in the
agreement), provided, however, that any such payment shall be subject
to reduction so that the aggregate severance payment shall not
constitute an "excess parachute payment" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of May 15, 2001 (or as of
such other date as may be noted below) with respect to the beneficial ownership
of our common stock by (i) each Named Executive Officer, (ii) each of our
directors, (iii) each holder of 5% or more of our common stock outstanding and
(iv) all current directors and executive officers as a group.
Except as indicated below, we understand that the shareholders listed in such
table have sole voting and investment power with respect to the shares owned by
them. The number of shares in the table below includes shares issuable upon the
exercise of outstanding stock options to the extent that such options are
exercisable by the shareholder, director or executive officer on or within 60
days after May 15, 2001.
Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership of
Name of Individual or Identity of Group Common Stock
- -------------------------------------------------------------------------------------------------------------
Shares Percent
------------------------
Thomas G. Vellios (1).............................................................. 487,750 1.5%
Robert A. Helpert (1).............................................................. 278,750 *
Keith C. Spurgeon (1).............................................................. 0 *
C. Donald Dorsey (1)(2)............................................................ 53,512 *
Henry Nasella(1)................................................................... 52,336 *
Mary Ann Tocio..................................................................... 0 *
Fourcar, B.V. (3).................................................................. 2,437,204 7.5
Robert A. Fox (1)(4)............................................................... 1,750,896 5.4
All current directors and executive officers as a group (6 persons)(1)(2).......... 872,348 2.6
* Less than 1%.
(1) Includes with respect to Mr. Vellios 487,750 shares, Mr. Helpert
278,750 shares, Mr. Dorsey 34,000 shares and Mr. Nasella 44,000 shares,
all of which shares are subject to presently exercisable options.
(2) Includes 19,512 outstanding shares of common stock held by the C.
Donald Dorsey and Lydia Dorsey Family Trust Dated August 5, 1993.
(3) Outstanding shares include 414,119 shares of common stock held by
Lacomble Retailing, SA. The address for Fourcar B.V. is Gebouw Autumn,
Overschiestraate No. 184P, 1062XK Amsterdam Netherlands.
(4) Includes 4,000 shares subject to presently exercisable options and
200,000 shares held by RAF Foundation (RAF shares), of which RAF Shares
Mr. Fox disclaims beneficial ownership, except to the extent of his
pecuniary interest therein. Mr. Fox's address is One Pitcairn Place,
Suite 2100, 165 Township Line Road, Jenkintown, PA 19046.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1999, we formed ZB Holdings LLC, an internet joint venture with
Online Retail Partners, LLC. ZB Holdings was formed for the purpose of
developing and operating www.zanybrainy.com, an internet shopping Website. ZB
Holdings formed ZanyBrainy.com LLC, a wholly owned subsidiary, for the purpose
of developing and operating such a site. We initially contributed $5.0 million
and certain tangible and rights to intangible assets for the purchase of 100% of
the outstanding preferred interests of ZB Holdings and Online Retail Partners,
LLC contributed
23
a total of $5.0 million for the purchase of 100% of the common interests of ZB
Holdings. Online Retail Partners, LLC contributed another $10.0 million to the
joint venture in November 1999 for additional non-voting common interests.
In March 2000, we began and completed a second round of financing for ZB
Holdings with Online Retail Partners, Inc., successor to Online Retail Partners,
LLC. As part of this additional financing, we contributed $6,862,242 for the
purchase of an additional 7,002,288 non-voting preferred interests in ZB
Holdings and Online Retail Partners contributed $5,137,758 for the purchase of
an additional 5,242,610 non-voting common interests in ZB Holdings.
In April 2000, we sold Keith C. Spurgeon, our former Chief Executive Officer and
Chairman of the Board, Thomas G. Vellios, our President, and Robert A. Helpert,
our Chief Financial Officer, 102,500, 102,500 and 41,000 of its non-voting
preferred interests, respectively, in ZB Holdings, at a purchase price of $.001
per interest. The fair market value per interest was $0.98, resulting in
compensation expense to us of $100,347, $100,347 and $40,139 for the sale of the
interests to Messrs. Spurgeon, Vellios and Helpert, respectively. In addition,
in connection with the sale, we awarded bonuses in the amount of $74,901,
$74,901 and $29,961 to Messrs. Spurgeon, Vellios and Helpert, respectively, to
compensate them for the tax exposure of the transaction.
In April 2000, we formed Children's Equity LLC and contributed 533,500 of our
non-voting preferred interests of ZB Holdings, approximately 3.6% of our
interests, to Children's Equity. We owned the only voting units in Children's
Equity and were the sole manager of Children's Equity. There were 533,500 non-
voting units in Children's Equity that, in April 2000, were distributed to
certain of our employees, of which 102,500 units were given to each of Messrs.
Spurgeon and Vellios and 41,000 units were given to Mr. Helpert. The non-voting
members, including Messrs. Spurgeon, Vellios and Helpert, received their units
at no cost. All non-voting units were subject to forfeiture under certain
circumstances, including termination of employment with us. Forfeited units were
automatically reallocated to a charity that was also a member of Children's
Equity. The fair market value per non-voting unit on the date of gift was $0.98,
resulting in compensation expense to us of $100,450, $100,450 and $40,180 for
the units given to Messrs. Spurgeon, Vellios and Helpert, respectively.
We had entered into certain agreements with ZanyBrainy.com pursuant to which it
would provide services to, and act as an agent for, ZanyBrainy.com. Under the
terms of the agreements, the services were to be provided at cost to
ZanyBrainy.com. During the fiscal year ended February 3, 2001, we procured and
transferred, at cost, $2.9 million of merchandise, including freight and other
procurement costs, to ZanyBrainy.com. In addition, we transferred costs of $0
for the cost of production and marketing materials, and $250,000 for the cost of
other services rendered.
Additionally, ZanyBrainy.com had entered into certain agreements with Online
Retail Partners and its affiliates pursuant to which Online Retail Partners and
its affiliates would provide services and Internet infrastructure to, and act as
an agent for, ZanyBrainy.com. Under the terms of the agreements, services were
to be provided on a cost plus basis to ZanyBrainy.com. During the fiscal year
ended February 3, 2001, ZanyBrainy.com paid Online Retail Partners and its
affiliates $3.3 million under these agreements, including the amounts set forth
in the following paragraph.
In December 2000, we dissolved our Internet joint venture with Online Retail
Partners, Inc. and assumed full ownership of the electronic commerce site,
www.zanybrainy.com. We received substantially all of the assets and assumed all
of the liabilities of the joint venture. To satisfy outstanding joint venture
liabilities to Online Retail Partners and the pay Online Retail Partners for
continuing web site services through February 3, 2001, we issued 1.25 million
shares of our common stock and a five-year warrant to purchase an additional one
million shares at an exercise price of $6.00 and agreed to pay Online Retail
Partners $1 million pursuant to the terms of the transaction documents, of which
$350,000 was paid during the fiscal year ended February 3, 2001.
Thomas Vellios, our President and Chief Executive Officer, was on the board of
directors of ZB Holdings and ZanyBrainy.com. Henry Nasella, a member of our
board of directors, was Chairman of the Board of Online Retail Partners, Inc.
Keith Spurgeon, our former Chief Executive Officer, was the Chairman of the
Board of ZB Holdings and was on the board of directors of ZanyBrainy.com.
In January 2001, as a result of the liquidation of ZB Holdings, an aggregate of
$242,000 was distributed to ZB Holdings members, of which we received $232,000.
24
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that
directors and certain officers of Zany Brainy, and persons who own more than ten
percent of our common stock, file reports of ownership of company securities and
changes in ownership of our securities with the Securities and Exchange
Commission. We believe that all filings required to be made during the fiscal
year ended February 3, 2001 were made on a timely basis.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: Financial Statements listed in the
accompanying Index to Financial Statements appearing on page
F-1 are filed as part of this annual report on Form 10-K. The
Company is not required to file any supplemental schedules under
Regulation S-X.
2. Exhibits: (see (c) below).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by us during the last quarter of the
period covered by this report.
(c) Exhibits:
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated, exhibits, which were previously filed, are
incorporated by reference.
2.1 Amended and Restated Agreement and Plan of Merger dated
as of April 21, 2000 among Zany Brainy, Inc., Noodle
Kidoodle, Inc. and Night Owl Acquisition, Inc. (1)
2.2 Plan of Dissolution dated as of December 4, 2000 by and
among ZanyBrainy.com LLC, ZB Holdings LLC, Children's
Equity LLC, Zany Brainy Direct LLC, Zany Brainy, Inc.
and Online Retail Partners Inc. (4)
2.3 Stock Purchase Agreement dated as of December 4, 2000
by and between Zany Brainy, Inc. and Online Retail
Partners Inc. (4)
10.1 Employment Agreement with Keith C. Spurgeon dated June
6, 2000 (2)(3)
10.2 Employment Agreement with Robert A. Helpert dated June
6, 2000 (2)(3)
10.3 Amended and Restated Employment Agreement with Thomas
G. Vellios dated September 15, 2000 (3)(4)
10.4 Amendment to Incentive Stock Option Grants dated
September 15, 2000 between Zany Brainy, Inc. and Thomas
G. Vellios (3)(4)
10.5 Loan and Security Agreement dated July 25, 2000 by and
among First Union National Bank, Congress Financial
Corporation and Zany Brainy, Inc. (5)
21.1 Subsidiaries
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Janover Rubinroit, LLC
(1) Previously filed as an exhibit to our Current Report on Form 8-K filed
August 9, 2000 and incorporated herein by reference.
(2) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended April 29, 2000 and incorporated herein by
reference.
(3) Management contract or compensatory plan or arrangement required to be
filed or incorporated as an exhibit.
(4) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended October 28, 2000 and incorporated herein by
reference.
(5) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended July 29, 2000 and incorporated herein by
reference.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Zany Brainy, Inc.
Date: May 17, 2001 By: /s/ Thomas G. Vellios
- ------------------- -------------------------
Thomas G. Vellios
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: May 17, 2001 By: /s/ Thomas G. Vellios
---------------------
Thomas G. Vellios
President and Chief Executive Officer,
Director
(Principal Executive Officer)
Date: May 17, 2001 By: /s/ Robert A. Helpert
---------------------
Robert A. Helpert
Chief Financial Officer, Secretary and
Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Date: May 17, 2001 By: /s/ C. Donald Dorsey
--------------------
C. Donald Dorsey
Director
Date: May 17, 2001 By: /s/ Stanley Greenman
--------------------
Stanley Greenman
Director
Date: May 17, 2001 By: /s/ Henry Nasella
-----------------
Henry Nasella
Director
Date: May 17, 2001 By: /s/ Mary Ann Tocio
-------------------
Mary Ann Tocio
Director
26
ZANY BRAINY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants (Arthur Andersen LLP) Page F-2
Report of Independent Public Accountants (Janover Rubinroit, LLC) Page F-3
Consolidated Balance Sheet Page F-4
Consolidated Statements of Operations Page F-5
Consolidated Statements of Shareholders' Equity Page F-6
Consolidated Statements of Cash Flows Page F-7
Notes to Consolidated Financial Statements Page F-8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zany Brainy, Inc.:
We have audited the accompanying consolidated balance sheets of Zany Brainy,
Inc. (a Pennsylvania Corporation) and subsidiaries as of February 3, 2001 and
January 29, 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years for the period
ended February 3, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Noodle Kidoodle, Inc. and subsidiaries, as of January 29, 2000 and
for each of the two years for the period ended January 29, 2000, a company
acquired during the fiscal year ended February 3, 2001 in a transaction
accounted for as a pooling of interests, as discussed in Note 3 to the
consolidated financial statements. Such statements are included in the
consolidated financial statements of Zany Brainy, Inc. and reflect total assets
and total revenues of 34 percent and 36 percent, respectively, in the fiscal
year ended January 29, 2000 and 39 percent of total revenues in the fiscal year
ended January 30, 1999 of the related consolidated totals, after restatement to
reflect certain adjustments as set forth in Note 2 to the consolidated financial
statements. These statements were audited by other auditors whose report has
been furnished to us and our opinion, insofar as it relates to amounts included
for Noodle Kidoodle, Inc., is based solely upon the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States as well as evaluating the overall financial statement
presentation. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Zany Brainy, Inc. and
subsidiaries as of February 3, 2001 and January 29, 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended February 3, 2001, in conformity with generally accepted accounting
principles in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company voluntarily filed for Chapter 11
bankruptcy on May 15, 2001. This action, was taken as a result of the Company's
inability to pay creditors due to the defaults of debt covenants, as discussed
in Notes 2 and 10 to the consolidated financial statements and raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2 to
the consolidated financial statements. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
May 16, 2001
F-2
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Noodle Kidoodle, Inc.
We have audited the accompanying consolidated balance sheet of Noodle Kidoodle,
Inc. and Subsidiaries as of January 29, 2000 and the related consolidated
statements of operations, stockholders' equity and cash flows for the two years
in the period ended January 29, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Noodle Kidoodle,
Inc. and Subsidiaries as of January 29, 2000 and the results of their operations
and cash flows for each of the years in the two year period ended January 29,
2000 in conformity with generally accepted accounting principles.
Janover Rubinroit, LLC
/s/ Janover Rubinroit, LLC
Garden City, New York
March 15, 2000
F-3
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
February 3, January 29,
2001 2000
---- ----
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 2,352 $ 25,041
Receivables, net 2,270 4,880
Inventories, net 120,017 106,303
Deferred tax asset - 2,308
Prepaid expenses 6,874 3,942
--------- ---------
Total current assets 131,513 142,474
PROPERTY AND EQUIPMENT, net 66,153 63,533
DEFERRED TAX ASSET - 6,251
OTHER ASSETS, net 1,497 389
INVESTMENT IN JOINT VENTURE - 5,000
--------- ---------
$ 199,163 $ 217,647
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Bank overdrafts $ 7,314 $505
Line of credit 52,723 3,996
Accounts payable 37,117 29,396
Accrued liabilities 18,081 20,836
Current portion of long-term debt 26 23
Capitalized lease obligations 2,588 2,578
--------- ---------
Total current liabilities 117,849 57,334
--------- ---------
DEFERRED RENT 8,868 7,333
--------- ---------
LONG-TERM DEBT, net of current portion 663 689
--------- ---------
CAPITALIZED LEASE OBLIGATIONS, net of current portion 2,204 3,855
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
SHAREHOLDERS' EQUITY:
Convertible Preferred stock, $.01 par value, 5,000,000 shares
authorized at February 3, 2001; 0 shares issued and outstanding at
February 3, 2001 and January 29, 2000, respectively - -
Common stock, $.01 par value, 100,000,000 shares authorized at
February 3, 2001; 32,329,420 and 31,052,116 shares issued and
outstanding at February 3, 2001 and January 29, 2000, respectively 323 311
Additional paid-in capital 145,334 143,504
Retained earnings (deficit) (76,078) 4,621
--------- ---------
Total shareholders' equity 69,579 148,436
--------- ---------
$ 199,163 $ 217,647
========= =========
The accompanying notes are an integral part of these statements.
F-4
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Fiscal Year Ended
February 3, January 29, January 30,
----------- ----------- -----------
2001 2000 1999
---- ---- ----
NET SALES $ 400,479 $ 376,232 $ 276,357
COST OF GOODS SOLD, including
occupancy costs 312,529 267,849 198,953
--------- --------- ---------
Gross profit 87,950 108,383 77,404
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 123,036 93,126 69,813
MERGER AND INTEGRATION COSTS 20,644 - -
--------- --------- ---------
Operating income (loss) (55,730) 15,257 7,591
INTEREST INCOME 39 636 350
INTEREST EXPENSE (4,537) (1,653) (1,405)
EQUITY LOSS IN JOINT VENTURE (11,482) - -
--------- --------- ---------
Income (loss) before income tax benefit (expense) (71,710) 14,240 6,536
INCOME TAX BENEFIT (EXPENSE) (8,989) 2,820 6,094
--------- --------- ---------
Income (loss) from continuing operations (80,699) 17,060 12,630
GAIN FROM DISPOSAL OF DISCONTINUED OPERATIONS (net of income taxes of
$950) - 1,550 -
--------- --------- ---------
NET INCOME (LOSS) ($80,699) $ 18,610 $ 12,630
========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations ($2.58) $ 0.68 $ 0.86
Discontinued operations - 0.06 -
--------- --------- ---------
Net income (loss) per share ($2.58) $ 0.74 $ 0.86
========= ========= ========
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations ($2.58) $ 0.55 $ 0.46
Discontinued operations - 0.05 -
- ---- -
Net income (loss) per share ($2.58) $ 0.60 $ 0.46
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 31,280 25,208 14,729
Diluted 31,280 30,780 27,291
The accompanying notes are an integral part of these statements.
F-5
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Convertible Preferred Stock
---------------------------
Series Series Series Series
A B BB C Common Stock
- - -- - ------------
BALANCE, JANUARY 31, 1998 $ 8 $ 1 $ 7 $ 8 $ 148
Exercise of common stock options - - - - -
Net loss - - - - -
--- --- --- --- ---
BALANCE, JANUARY 30, 1999 8 1 7 8 148
Exercise of common stock options - - - - 4
Exercise of warrants - - - - -
Conversion of preferred stock (8) (1) (7) (8) 112
Initial public offering of common stock, net - - - - 47
Deferred compensation in connection with issuance
of Common stock options and amortization of
deferred compensation - - - - -
Income tax benefit from exercise of stock options - - - - -
Net income - - - - -
--- --- --- --- ---
BALANCE, JANUARY 29, 2000 - - - - 311
Exercise of common stock options - - - - -
Deferred compensation in connection with issuance
of Common
stock options and amortization of deferred
compensation - - - - -
Common stock and common stock warrant issued for
joint venture liabilities assumed - - - - 12
Net loss - - - - -
--- --- --- --- ---
BALANCE, FEBRUARY 3, 2001 $ - $ - $ - $ - $323
=== === === === ====
Additional
Paid- Retained
In Capital earnings (deficit) Total
---------- ------------------ -----
BALANCE, JANUARY 31, 1998 $99,939 ($26,619) $73,492
Exercise of common stock options 152 - 152
Net income - 12,630 12,630
--------- ---------- --------
BALANCE, JANUARY 30, 1999 100,091 (13,989) 86,274
Exercise of common stock options 844 - 848
Exercise of warrants 130 - 130
Conversion of preferred stock (88) - -
Initial public offering of Common stock, net 42,266 - 42,313
Deferred compensation in connection with issuance of Common stock
options and amortization of deferred compensation 19 - 19
Income tax benefit from exercise of stock options 242 - 242
Net income - 18,610 18,610
--------- ---------- --------
BALANCE, JANUARY 29, 2000 143,504 4,621 148,436
Exercise of common stock options 80 - 80
Deferred compensation in connection with issuance of common
stock options and amortization of deferred compensation 8 - 8
Common stock and common stock warrant issued for joint venture
liabilities assumed 1,742 - 1,754
Net loss - (80,699) (80,699)
--------- ---------- --------
BALANCE, FEBRUARY 3, 2001 $ 145,334 $ (76,078) $ 69,579
========= ========== ========
The accompanying notes are an integral part of these statements.
F-6
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Year Ended
February 3, 2001 January 29, 2000 January 30, 1999
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
CONTINUING OPERATIONS:
Net income (loss) from continuing operations ($80,699) $17,060 $12,630
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing operations:
Depreciation and amortization 15,940 12,485 9,791
Provision for deferred rent 1,535 2,402 1,289
Amortization of deferred compensation - 19 -
Merger-related inventory write-down 8,802 - -
Equity loss in joint venture 11,482 - -
Deferred income tax expense (benefit) 8,559 (2,640) (6,243)
Noncash compensation expense 342 - -
Tax benefit from exercise of stock options - 242 -
Loss on impairment and disposal of assets 5,858 17 -
Changes in assets and liabilities
(Increase) decrease in:
Receivables (1,362) (173) (1,782)
Inventories (19,151) (40,878) (17,926)
Prepaid expenses (2,785) (851) (875)
Other assets (263) 253 (123)
Increase (decrease) in:
Accounts payable 7,721 4,659 10,574
Accrued liabilities (6,414) 2,888 4,735
------- ----- ------
Net cash provided by (used in) continuing operations (50,435) (4,517) 12,070
DISCONTINUED OPERATIONS:
Gain from disposal of discontinued operating activities - 1,550 -
Change in net liabilities of discontinued operations - (1,303) 130
------- ------- ------
Net cash provided by (used in) operating activities (50,435) (4,270) 12,200
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (20,294) (23,447) (14,627)
Investment in joint venture (6,816) (5,000) -
Cash acquired upon liquidation of joint venture 3,081 - -
------- ------- ------
Net cash used in investing activities (24,029) (28,447) (14,627)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit, net 48,727 3,996 (20)
Change in bank overdrafts 6,809 501 (477)
Net proceeds from sale of Common stock - 42,313 -
Payments on capitalized lease obligations (2,660) (1,892) (1,379)
Payments on long-term debt (23) (21) -
Debt issuance costs (1,158) - (95)
Proceeds from exercise of stock options 80 848 152
Proceeds from exercise of warrants - 130 -
------- ------- -------
Net cash (used in) provided by financing activities 51,775 45,875 (1,819)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,689) 13,158 (4,246)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,041 11,883 16,129
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,352 $25,041 $11,883
======= ======= =======
The accompanying notes are an integral part of these statements.
F-7
ZANY BRAINY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 3, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- -----------------------------------------------
Background
- ----------
Zany Brainy, Inc. is a retailer of high quality toys, games, books, and
multimedia products for kids. Zany Brainy, Inc. was incorporated in Pennsylvania
on August 19, 1991. As of February 3, 2001, Zany Brainy, Inc. operated 188
stores in 34 states, under the name "Zany Brainy," offering educational products
for children. In addition, the Company sells its products through its internet
site at www.zanybrainy.com and through its catalog.
------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Zany Brainy, Inc.
its wholly owned subsidiaries, Children's Products, Inc., Children's
Development, Inc., Zany Brainy Direct, LLC ("ZB Direct"), Noodle Kidoodle, Inc.,
and Children's Distribution, LLC. and a majority owned partnership, Noodle
Kidoodle.com LLC (collectively, the "Company"). In July 2000, the Company
acquired Noodle Kidoodle, Inc. ("Noodle") in a pooling of interests transaction.
The activities of Noodle are fully consolidated with the Company for all periods
presented (see Note 3). In December of 2000, ZB Holdings LLC, the internet joint
venture between the Company and Online Retail Partners, LLC ("ORP") originally
formed to operate www.zanybrainy.com, accounted for by the Company under the
equity method of accounting, was dissolved (see Note 4). The Company assumed
full ownership of its E-commerce business and this business was fully
consolidated into the Company after the liquidation. All significant
intercompany transactions and accounts have been eliminated in consolidation.
The Company has reported 100% of its majority owned partnership's loss for the
year since the minority interest is limited to the extent of its equity capital.
Fiscal Year-End
- ---------------
The Company operates under a 52-53 week fiscal year ending the Saturday nearest
January 31. The financial statements for the years ended February 3, 2001
(fiscal 2000), January 29, 2000 (fiscal 1999) and January 30, 1999 (fiscal 1998)
include 53 weeks, 52 weeks and 52 weeks, respectively.
Bankruptcy Accounting
- ---------------------
On May 15, 2001, Zany Brainy Inc. and its wholly owned subsidiaries filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code (see Note 2). American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" (SOP 90-7) does not change the application of generally
accepted accounting policies in the preparation of financial statements,
however, it does require that the financial statements for periods including and
subsequent to the filing of the Chapter 11 petition distinguish transactions and
events that are directly associated with the reorganization from the ongoing
operations of the business.
Revenues, expenses (including professional fees), realized gains and losses, and
provisions for losses that can be directly associated with the reorganization
and restructuring of the business shall be reported separately as reorganization
items in the consolidated statements of operations.
The balance sheet should distinguish pre-petition liabilities subject to
compromise from those that are not and post-petition liabilities. Liabilities
that may be affected by the plan should be reported at the amounts expected to
be allowed, even if they may be settled for lesser amounts.
The Company adopted SOP 90-7 and will segregate those items as outlined above
for all reporting periods including and subsequent to the filing date of May 15,
2001.
F-8
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and debt
instruments. The carrying values of these assets and liabilities are considered
to be representative of their respective fair values, as of the fiscal year end.
Business and Credit Risk Concentration
- --------------------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk are cash and cash equivalents and accounts receivable. The Company
limits its credit risk associated with cash and cash equivalents by placing its
investments in highly liquid funds. Receivables associated with third party
credit cards are processed by financial institutions which are monitored for
financial stability. The Company is dependent on key suppliers to provide
sufficient quantities of inventory at competitive prices. No single supplier
represented 10% or more of net purchases in fiscal 2000, fiscal 1999 and fiscal
1998.
Use of Estimates
- ----------------
The presentation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Included in cash and cash
equivalents is $19,434,000 of overnight investments in repurchase agreements at
January 29, 2000.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method based on moving average and includes certain
buying and distribution costs relating to the processing of merchandise. Buying
and distribution costs charged to cost of goods sold were $21,409,000,
$16,518,000 and $11,581,000 during fiscal 2000, fiscal 1999 and fiscal 1998,
respectively. Buying and distribution costs remaining in inventories at February
3, 2001 and January 29, 2000 were $5,883,000 and $5,068,000, respectively. Store
occupancy costs, accounted for as cost of goods sold in the accompanying
statements of operations, include store rental, utilities and maintenance
expenditures and are included in cost of goods sold.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Additions and improvements are
capitalized, while repairs and maintenance are charged to expense as incurred.
The straight-line method of depreciation is used for financial reporting
purposes. The estimated useful lives are ten to forty years for buildings and
improvements, three to ten years for furniture and fixtures, computers and
equipment and the shorter of ten years, or the lease term, for leasehold
improvements. Certain personnel costs and out-of-pocket costs directly
associated with the construction or remodeling of stores are capitalized and
amortized over the lease term.
F-9
Long-Lived Assets
- -----------------
The Company follows Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Accordingly, in the event that facts and circumstances indicate
that property, equipment and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flow associated with the asset is
compared to the asset's carrying value to determine if a write-down to
recoverable value is necessary. During the fourth quarter of fiscal 2000, the
Company recorded a $2.3 million noncash impairment charge in conjunction with
management's plan to significantly alter its use of the assets assumed from the
dissolution of the internet joint venture. The impairment charge has been
included in selling, general and administrative expenses in the accompanying
consolidated statement of operations for the fiscal year ended February 3, 2001.
The Company calculated the present value of expected cash flows of the internet
site to determine the fair value of the assets. In connection with the merger
with Noodle (see Note 3), the Company recorded an impairment charge of $1.7
million related to assets to be disposed of for stores being closed as a result
of the merger. These costs have been included in merger and integration costs on
the accompanying consolidated statement of operations for the fiscal year ended
February 3, 2001 and charged against property in the accompanying consolidated
balance sheet at February 3, 2001. Management believes that there has been no
other impairment of the Company's long-lived assets.
Store Pre-opening Costs
- -----------------------
Pre-opening costs incurred at new store locations are charged to expensed as
incurred.
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. This method also
requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely
than not. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Deferred Rent
- -------------
Rent expense on leases is recorded on a straight-line basis over the lease
period. The excess of rent expense over the actual cash paid is recorded as
deferred rent.
Revenue Recognition
- -------------------
Revenue is recognized at the point of sale. For internet and catalog sales,
revenue is recognized when the product is shipped, net of an allowance for
estimated returns.
Advertising Costs
- -----------------
Advertising costs are charged to expense the first time the advertising takes
place. Advertising expense, including grand opening, was $14,529,000 and
$10,045,000 and $8,197,000, net of certain vendor reimbursements, in fiscal
2000, fiscal 1999 and fiscal 1998, respectively.
Supplemental Cash Flows Information
- -----------------------------------
For fiscal 2000, fiscal 1999 and fiscal 1998, the Company paid cash of
$4,518,000, $1,297,000 and $1,223,000, respectively, for interest expense. For
fiscal 2000, fiscal 1999 and fiscal 1998 the Company paid $850,000, $229,000 and
$57,000 for income taxes. Capital lease obligations of $1,019,000, $3,783,000
and $3,315,000 were incurred on equipment leases entered into in fiscal 2000,
1999 and 1998, respectively.
In fiscal 2000, the Company issued 1.25 million shares of Common stock and a
five-year warrant to purchase an additional one million shares of Common stock
at an exercise price of $6.00 per share valued at $117,000 to ORP in
F-10
a non-cash transaction in satisfaction of a $1.8 million assumed liability in
connection with the liquidation of ZB Holdings LLC (see Note 4).
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.
2. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
- ---------------------------------------------------
On May 15, 2001, the "Petition Date", Zany Brainy, Inc. and Children's Products,
Inc., Children's Development, Inc., Noodle Kidoodle, Inc., Children's
Distribution, LLC, and Zany Brainy Direct, LLC (collectively, the "Debtors"),
filed voluntary petitions for relief under Chapter 11 of the United States Code
(the "Bankruptcy Code") in the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court"). The Company is managing their business as
debtors-in-possession pursuant to the Bankruptcy Code Approval. The Company's
rapid growth in fiscal 2000, which included the acquisition of 60 Noodle
Kidoodle stores, the opening of 25 new Zany Brainy stores and substantial
investment in the Company's Internet strategy presented significant operational
challenges. These factors, along with a difficult retail climate, compounded by
an absence of "hot" product, led to a decline in sales which caused liquidity
issues which contributed to the Company's inability to pay creditors and
resulted in defaults of debt covenants. These factors precipitated the
Company's filing for Chapter 11 protection.
Subsequent to the commencement of the Chapter 11 cases, the Debtors sought and
obtained several orders from the Bankruptcy Court which were intended to
stabilize their businesses and enable the Debtors to continue business
operations as debtors-in-possession. To date, the most significant of these
orders (i) permitted the Debtors to operate their consolidated cash management
system during the Chapter 11 cases in substantially the same manner as it was
operated prior to the commencement of the Chapter 11 cases; (ii) authorized
payment of pre-petition wages, vacation pay, and employee benefits and
reimbursement of employee business expenses; (iii) authorized payment of
pre-petition sales and use taxes owed by the Debtors; (iv) authorized the
Debtors to pay certain pre-petition obligations to critical vendors, common
carriers and workers' compensation insurance to aid the Debtors in maintaining
operation of their businesses; and (v) authorized the Debtors to obtain interim
and final debtor-in-possession financing. On May 16, 2001, the Bankruptcy Court
approved, on an interim basis, the Company's $115.0 million debtor-in-possession
credit facility (the DIP facility") with Wells Fargo Retail Finance L.L.C.
In bankruptcy, the rights of, and the Debtors' ultimate payments to, prepetition
creditors and shareholders may be substantially altered. This could result
in claims being liquidated in the bankruptcy cases at less (and possibly
substantially less) than 100% of their face value, and the equity of common
shareholders being diluted or cancelled. The Bankruptcy Code provides that the
Debtors have an exclusive period during which only they may propose and file and
solicit acceptances of a plan of reorganization. This period may be extended
upon request of the Debtors and subsequent Bankruptcy Court approval. If the
Debtors fail to file a plan of reorganization during the exclusive period, as
extended, or, after such plan has been filed, if the Debtors fail to obtain
acceptance of such plan from the requisite classes of creditors and equity
security holders during the exclusive solicitation period, any party in interest
may file their own plan or reorganization for the Debtors.
Due to material uncertainties, it is not possible to determine the additional
amount of claims that may arise or ultimately be filed, or to predict the length
of time the Debtors will operate under the protection of Chapter 11 of the
Bankruptcy Code, the outcome of the bankruptcy cases in general, whether the
Debtors will continue to operate under their current organizational structure,
or the effect of the cases on the Debtors' business or on the claims and
interests of the various creditors and security holders.
The Chapter 11 cases have been assigned Chapter 11 Case Nos. 01-1744 through
01-1749. The cases have been consolidated for procedural purposes only and are
being administered jointly pursuant to an order entered on May 16, 2001. Each of
the Debtors continues to operate its business and manage its property as a
debtor-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
As a result of the bankruptcy filings, litigation relating to prepetition claims
against the Debtors is stayed.
Although the Chapter 11 bankruptcy filing raises substantial doubt about the
Company's ability to continue as a going-concern, the accompanying financial
statements have been prepared on a going-concern basis. This basis contemplates
the continuity of operations, realization of assets, and discharge of
liabilities in the ordinary course of business. The statements also present the
assets of the Company at historical cost. A plan of reorganization could
materially change the amounts currently disclosed in the financial statements.
F-11
The Company believes, based on information presently available to it, that cash
available from operations and the DIP Financing (see Note 10) will provide
sufficient liquidity to allow it to continue as a going concern for the
foreseeable future. However, the ability of the Company to continue as a going
concern (including its ability to meet post-petition obligations of the Debtors)
and the appropriateness of using the going concern basis for its financial
statements are dependent upon, among other things, (i) the Company's ability to
comply with the terms of the DIP Financing and any cash management order entered
by the Bankruptcy Court in connection with the Chapter 11 cases, (ii) the
ability of the Company to maintain adequate cash on hand, (iii) the ability of
the Company to generate cash from operations, (iv) confirmation of a plan of
reorganization under the Bankruptcy Code, and (v) the Company's ability to
achieve profitability following such confirmation.
3. THE MERGER
- --------------
Effective July 26, 2000, Night Owl Acquisition, Inc., our wholly owned
subsidiary, and Noodle were merged in a tax-free, stock-for-stock transaction
that was accounted for as a pooling of interests (the "Merger"). Under the terms
of the Merger agreement, the Company issued 1.233 shares of Zany Brainy, Inc.
Common Stock for each outstanding share of Noodle Common Stock for an aggregate
issuance of approximately 9.4 million shares of our Common Stock to the former
Noodle stockholders. Subsequent to the Merger, Noodle Kidoodle, Inc. became a
wholly owned subsidiary of Zany Brainy, Inc.
The Company's historical financial statements have been retroactively restated
to reflect the acquisition of Noodle as though they had been combined from the
beginning of each of the periods presented. Revenue and net income (loss) as
previously reported for the years ended January 29, 2000 and January 30, 1999
and as restated for the pooling of interests transaction is as follows (in
thousands):
Fiscal Year Ended
January 29, 2000 January 30, 1999
Revenues Net income Revenues Net income
Zany Brainy, Inc (as previously reported) $ 241,194 $ 6,904 $ 168,471 $ 8,999
Noodle Kidoodle, Inc. (as previously reported) 135,038 11,038 107,886 3,752
Adjustments - 668 (a) - (121) (a)
---------- -------- --------- --------
Restated $ 376,232 $ 18,610 $ 276,357 $ 12,630
========== ======== ========= ========
(a) Includes adjustments to conform Noodle's accounting policies for inventory
capitalization and pre-opening expenses to the Company's accounting policies.
Subsequent to the merger, the Company had recorded $29.4 million in expense for
merger, integration and restructuring. The breakdown of those costs is as
follows (in thousands):
Fiscal Year
Ended February 3, 2001
----------------------
As Part of Cost of Sales:
Inventory write-downs $ 8,802
As Part of SG&A Expense:
Professional fees 6,164
Severance and change in control costs 4,120
Grand reopening and related costs 1,935
Store closures, including $1.7 million of impairments under SFAS No. 121 2,300
Other integration costs 6,125
--------
Total $ 29,446
========
Management's restructuring and integration plan relates primarily to the
discontinuance and liquidation of product SKU's, and resulted in inventory
write-downs of $8.8 million for the year ended February 3, 2001. These costs
have been included in cost of goods sold on the accompanying consolidated
statements of operations. As of February 3, 2001, there was a $3.0 million
accrual remaining for these costs as an inventory reserve on the accompanying
F-12
consolidated balance sheet. Additionally, management has consolidated Noodle's
administrative functions into our headquarters in King of Prussia, PA and is in
the process of closing three stores identified as part of the restructuring
plan. Management expects the integration plan to be completed in the second
quarter of fiscal 2001.
The utilization of the initial accruals as of the date of the merger and changes
through February 3, 2001 is as follows (in thousands):
Accrual as of
Initial Accrual Charges Utilized February 3, 2001
--------------- ------- --------- ----------------
Merger and Integration Costs
- ----------------------------
Inventory write-downs $ 8,650 $ - $ (5,625) $ 3,025
Professional fees 5,025 - (4,956) 69
Store closures - 600 - 600
Other integration costs 905 350 (841) 414
Restructuring Costs
- -------------------
Severance and change in control costs 3,000 - (3,000) -
Disposal of property 900 - (900) -
------- ----- ---------- -------
$18,480 $ 950 $ (15,322) $ 4,108
======= ===== ========== =======
Charges during the period outlined above include $350,000 related to the closing
of Noodle's headquarters in Syosset, NY, and closing costs, including brokers
fees and additional rental payments through the date of closing for three
stores.
4. DISSOLUTION OF ZB HOLDINGS LLC
- ----------------------------------
In October 1999, the Company formed ZB Holdings LLC, a joint venture with OnLine
Retail Partners, LLC ("ORP") for the purpose of developing and operating
www.zanybrainy.com, an internet shopping website. The investment was accounted
for under the equity method of accounting and included an initial investment of
$5.0 million during fiscal 1999 for financial accounting purposes and certain
intangibles which were not recorded under accounting principles generally
accepted in the United States (collectively "the Company's Capital Account").
Losses were allocated first to ORP to the extent of its investment and then to
the Company to extent of the Company's Capital Account. The Company did not
record any equity losses in the joint venture during fiscal 1999.
During fiscal 2000, the Company contributed an additional $6.9 million in cash
which was added to the Company's Capital Account. Also during fiscal 2000
certain ownership interests were transferred to individuals and Children's
Equity LLC and accounted for a reduction in the Company's Capital Account of
$334,000. The Company recorded $11.4 million in an equity loss related to the
joint venture.
On December 4, 2000, the Company entered into an agreement with Online Retail
Partners ("ORP") to dissolve and liquidate the Internet joint venture, ZB
Holdings LLC and its wholly owned subsidiary, ZanyBrainy.com LLC. As a result,
the Company assumed full ownership and control of www.zanybrainy.com , the
internet shopping website, through the wholly-owned subsidiary, Zany Brainy
Direct LLC. Accordingly, the Company's consolidated statements of operations
include the operating results of the internet operations after December 4, 2000.
The assets acquired and liabilities assumed were recorded at estimated fair
values as determined by the Company's management based on information currently
available and on current assumptions as to future operations and the report of
an independent third party appraiser. A summary of the assets acquired and
liabilities assumed in the acquisition, which equaled the investment on the
Company's book at the date of dissolution follows (in thousands):
F-13
Estimated fair values:
Cash $ 3,081
Accounts receivable 292
Inventory 3,365
Prepaid expenses 147
Equipment 2,953
Other assets 71
Accrued liabilities (9,677)
-----------
Net investment at date of dissolution $ 232
===========
Included in accrued liabilities is $4.3 million due to Zany Brainy, Inc., which
was eliminated in consolidation on the date of dissolution against the
corresponding receivables on the Company's books. This amount has been treated
as a non-cash item in the accompanying consolidated statement of cash flows for
the fiscal year ended February 3, 2001.
Pursuant to the terms of the transaction, in satisfaction of approximately $3.4
million of ZanyBrainy.com payables to ORP for web site services through fiscal
year end, the Company issued to ORP 1.25 million shares of Common stock and a
five year warrant to purchase an additional one million shares of Common stock
at an exercise price of $6.00, which were valued in the Black-Scholes Option
Pricing Model at $117,000, and agreed to pay ORP $1 million. At February 3,
2001, $650,000 was included in accrued expenses related to this obligation.
The Company had entered into certain agreements with ZanyBrainy.com pursuant to
which it provided services to and acted as an agent for ZanyBrainy.com. Prior to
dissolution, the Company procured and transferred, at cost, $2.9 million and
$8.2 million during fiscal 2000 and fiscal 1999, respectively, of merchandise,
including freight and other procurement costs, to ZanyBrainy.com. In addition,
the Company transferred costs of $2.7 million for the cost of production and
marketing materials and $250,000 for the cost of services rendered during fiscal
1999. There were no such costs transferred during fiscal 2000.
On May 8, 2001, the Company suspended offering products for sale on the
internet.
5. DISCONTINUED OPERATIONS
- ---------------------------
During the third quarter of fiscal 1999, the Company adjusted the estimated gain
on disposal of the Noodle discontinued wholesale operations recognized in fiscal
1996. The adjustment, resulting in an additional net gain on disposal of
discontinued operations of approximately $1.6 million net of income taxes of
$950,000, arose from the sale of the Company's leasehold interest in its former
distribution center in Birmingham, Alabama and the finalization of liabilities
related to its discontinued wholesale operations.
6. INITIAL PUBLIC OFFERING AND SUBSEQUENT DELISTING NOTIFICATION
- -----------------------------------------------------------------
In June 1999, the Company sold 4,722,669 shares of Common stock at $10.00 per
share ($9.30 after an underwriting discount of $.70 per share) in an initial
public offering (the "Offering"). All shares of Preferred stock outstanding
prior to the Offering were converted into 11,250,273 shares of Common stock. The
Offering generated proceeds of $43.9 million ($42.3 million after deducting
transaction expenses of $1.6 million).
On May 1, 2001, the Company received a letter from the Nasdaq Market, Inc.
indicating that it failed to meet the continued listing requirements for
minimum bid price under the Nasdaq National Market rules, specifically, its
common stock failed to maintain a minimum bid price of $1.00 over 30 consecutive
trading days as required by the Nasdaq National Market minimum bid price rules.
Therefore, the Company's securities, are subject to delisting from The Nasdaq
National Market. Zany Brainy has requested a hearing before a Nasdaq Listings
Qualifications Panel to appeal the staff determination.
7. NET INCOME (LOSS) PER SHARE
- -------------------------------
Net income (loss) per share is calculated utilizing the principles of SFAS No.
128, "Earnings per Share" ("EPS"). Basic EPS excludes potentially dilutive
securities and is computed by dividing net income (loss) applicable to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is computed, using the treasury stock method, assuming the
conversion or exercise of all dilutive securities such as Preferred stock,
options and warrants.
Under SFAS No. 128, the Company's granting of certain stock options, warrants
and Preferred stock resulted in potential dilution of basic EPS. The following
table summarizes the differences between basic weighted average shares
outstanding and diluted weighted average shares outstanding used to compute
diluted EPS (in thousands).
February 3, January 29, January 30,
2001 2000 1999
---- ---- ----
Basic weighted average number of shares outstanding 31,280 25,208 14,729
Incremental shares from assumed exercise or conversion of:
Stock Options - 1,576 1,284
Warrants - 9 28
Preferred Stock - 3,987 11,250
------ ------ ------
Diluted weighted average number of shares outstanding 31,280 30,780 27,291
====== ====== ======
The number of incremental shares from the assumed exercise of stock options and
warrants is calculated applying
F-14
the treasury stock method. Stock options and warrants were excluded from the
fiscal 2000 calculation, as they were anti-dilutive.
8. PROPERTY, PLANT AND EQUIPMENT (in thousands)
- ------------------------------------------------
February 3,
-----------
2001 January 29, 2000
---- ----------------
Land $ 272 $ 272
Buildings and improvements 1,986 1,986
Furniture and fixtures 48,268 45,785
Computers and equipment 35,557 20,368
Leasehold improvements 38,978 35,390
--------- --------
125,061 103,801
Less- Accumulated depreciation and amortization (58,908) (40,268)
--------- --------
$ 66,153 $ 63,533
========= ========
9. ACCRUED LIABILITIES (in thousands)
- --------------------------------------
February 3, 2001 January 29, 2000
---------------- ----------------
Payroll and related expenses $ 3,121 $ 4,157
Merger related expenses 1,083 -
Accrued gift certificates 1,642 1,179
Accrued sales and use tax 1,298 1,751
Accrued advertising and marketing 100 4,169
Other 10,837 9,580
-------- -------
$ 18,081 $20,836
======== =======
10. LONG-TERM DEBT (in thousands)
- ----------------------------------
February 3, 2001 January 29, 2000
---------------- ----------------
Revolving credit facility $ 52,723 $ 3,996
8% unsecured promissory note, due
in quarterly installments through
2016 689 712
-------- -------
53,412 4,708
Less current maturities (52,749) (4,019)
-------- -------
Long-term debt $ 663 $ 689
======== =======
In July 1999, the Company entered into a master lease agreement with a bank
which provides for $5.0 million for leasing new and used equipment through June
30, 2000. The agreement requires that the leases be capital in nature and is
subject to certain covenants, as defined. In fiscal 2000 and 1999, the Company
financed $1.0 million and $3.8 million, respectively, of equipment under the
agreement. The Company is required to make monthly payments, including interest,
at an average rate of 9.9%. The equipment leased under the agreement is the
collateral. This agreement was not renewed upon expiration.
In July 2000, the Company entered into a three-year credit facility (the "Credit
Facility") covering a maximum principal amount of $115.0 million, secured by
inventories and other assets, subject to a borrowing base, as defined
F-15
as a percentage of eligible inventories. This secured credit facility bears
interest at the prime rate, the annual Federal funds rate plus 2.0 percent or,
if the Company elects, at an annual rate of LIBOR plus 2.0-2.5 percent
(depending on availability). The credit facility was completed in two parts. An
initial $65.0 million portion was completed on July 26, 2000 and replaced an
existing $30.0 million bank line. The remaining $50.0 million portion was
completed on October 12, 2000 and replaced Noodle's existing $50.0 million
facility. The Credit Facility requires the Company to comply with various
covenants, as defined, and restricts the payment of dividends. The Company had
an outstanding balance on the line of credit of $52.7 million as of February 3,
2001. At February 3, 2001 and January 29, 2000, there were $2.4 million and $2.1
million, respectively, in outstanding letters of credit issued against the
Credit Facility.
Deferred acquisition costs of $1,158,000 and amortization expense of $152,000
recorded during the year ended February 3, 2001 are included in the accompanying
consolidated financial statements.
Annual maturities of long-term debt are as follows (in thousands):
February 3,
2001
---------------
2001 $52,749
2002 26
2003 28
2004 31
2005 33
Thereafter 545
-------
$53,412
=======
The Company's lender has asserted that the Company is in default under its
Credit Facility, and all such debt has been classified as current. As a result
of the defaults asserted by the bank that are described below, outstanding
borrowings under the Credit Facility are accruing interest at a rate equal to 2%
above the highest alternative pre-default rates (the "Default Rate"). Under the
Credit Facility, the Company's borrowing availability is tied to a seasonal
percentage of eligible inventory. Such formula currently includes a limitation
that the Company cannot borrow any amounts that exceed the lesser of (a) 65% of
the cost of eligible inventory or (b) 85% of the appraisal value of eligible
inventory, subject to additional reserves imposed by the bank. In January 2001,
the appraiser retained by the bank appraised the Company's inventory at a value
that significantly reduced the Company's borrowing availability.
In connection with the Filing the Debtors obtained a two year, $115.0 million
debtor-in-possession credit facility from Wells Fargo Retail Finance, LLC, as
Agent for itself and other lenders that may join the credit facility from
time-to-time (the "DIP Facility"). The DIP Facility is secured with
substantially all of the Company's assets. The DIP Facility includes a credit
line of up to $100.0 million bearing interest at the prime rate plus 1.75 or, if
we elect, at an annual rate of LIBOR plus 3.5%, and an additional line of $15.0
million bearing interest at 14.5% per annum.
The Company's DIP Facility contains covenants that require them to satisfy
ongoing financial requirements and which limit their ability to borrow
additional money, pay dividends, divest assets, make additional corporate
investments and increase compensation paid to directors, officers and senior
management employees. The DIP Facility also prohibits a change in control. In
the event of default, the annual interest rate shall increase by 2.0%.
Under the DIP Facility, the Company's borrowing availability is tied to a
percentage of eligible inventory. Such formula currently includes limitations
based on a percentage of the value of eligible inventory that adjusts seasonally
and a general limitation that the Company cannot borrow any amounts that exceed
100% of the liquidation value of eligible inventory. The amounts calculated
based on eligible inventory are subject to additional reserves imposed by the
bank.
As a consequence of the Filing and the impact of certain provisions in our DIP
Facility and in the interim order entered by the Bankruptcy Court, we are now
subject to certain restrictions, including a limitation in the aggregate
borrowings under the DIP Facility to $63.8 million.
In connection with the DIP Facility the Company will be required to pay an
origination and arrangement fee of $1.3 million or 1.25% on the credit line, an
origination fee of $450,000 or 3.0% on the maximum additional line, an annual
agent's fee of $200,000, certain unused credit line, collateral and letter of
credit fees, as defined in the agreement.
In connection with the DIP Facility, the Company plans to terminate and repay
its existing Credit Facility. At the time of termination, the Company will be
required to pay a $1.7 million termination fee and will write off approximately
$932,000 of unamortized deferred financing costs which will be expensed in the
period of termination.
Borrowings under the DIP Facility are immediately reduced by transfers from the
Company's bank accounts, including store retail receipts, on a daily basis.
11. INCOME TAXES
- -----------------
The Company files a consolidated Federal income tax return. Short period returns
will be filed for the results of operations of Noodle prior to the merger. The
Company has adopted SFAS No. 109, "Accounting for Income Taxes." The effect of
this statement is to take principally a balance sheet approach to providing
deferred income taxes. Deferred tax balances are regularly adjusted through the
income statement to reflect the current year estimate of future tax payments.
Income tax expense (benefit) consists of the following components (in
thousands):
F-16
Fiscal Year Ended
February 3, 2001 January 29, 2000 January 30, 1998
---------------- ---------------- ----------------
Continuing Operations:
Current:
Federal $ - 282 236
State 250 458 14
------------- ---------------- --------------
250 740 250
Deferred:
Federal (25,142) 3,690 822
State - 84 -
------------- ---------------- --------------
(25,142) 3,774 822
Increase (decrease) in valuation allowance 33,881 (7,334) (7,166)
Income tax expense (benefit) 8,989 (2,820) (6,094)
Discontinued Operations- expense - 950 -
------------- ---------------- --------------
$ 8,989 $ (1,870) $ (6,094)
============= ================ ==============
The deferred tax effect of temporary differences giving rise to the Company's
deferred tax assets and liabilities consists of the following components (in
thousands):
February 3, 2001 January 29, 2000
Deferred tax assets:
Deferred rent $ 3,104 $ 1,751
Inventory reserves 2,286 495
Unicap 853 649
Other 1,628 714
Net operating loss carryforwards 28,142 6,758
AMT credit carryforwards 402 402
-------- --------
Gross deferred tax assets 36,415 10,769
-------- --------
Deferred tax liabilities:
Depreciation
(1,541) (1,235)
Other (376) (358)
-------- --------
Gross deferred tax liabilities (1,917) (1,593)
-------- --------
Net deferred tax asset, before valuation 34,498 9,176
Less-Valuation allowance (34,498) (617)
-------- --------
Net deferred tax asset $ - $ 8,559
======== ========
Valuation allowances, primarily attributable to the Federal net operating loss
carryforward, were established in fiscal 1996 and 1997 in accordance with the
provisions of FASB Statement No. 109, "Accounting for Income Taxes". The Company
reversed $7.3 million of Noodle's valuation allowance in fiscal 1999 and $7.2
million of Zany's valuation allowance in fiscal 1998 based on management's
assessment that it was more likely than not that the net deferred tax assets
would be realized through future taxable earnings. In fiscal 2000, management
has reassessed the realizability of the net deferred tax asset based on
operating results and determined that a full valuation reserve is appropriate at
February 3, 2001.
The reconciliation of the Federal statutory rate to the Company's effective
income tax rate is as follows:
Fiscal Year Ended
February 3, 2001 January 29, 2000 January 31, 1999
Tax provision (benefit) at Federal statutory rate (35.0)% 34.5% 34.0%
F-17
State taxes, net of Federal benefit 0.3 2.7 0.2
Other, including utilization of loss carryforwards - (4.6) (17.8)
Increase (decrease) in valuation allowance 47.2 (43.8) (109.6)
--------- ------- -------
12.5% (11.2)% (93.2)%
The Company has Federal net operating loss carryforwards of approximately $78.5
million which expire in 2011.
A provision of the Tax Reform Act of 1986 may limit the Company's ability to
utilize its net operating loss carryforwards, including those net operating loss
carryforwards acquired from Noodle, in future periods where significant
changes in ownership have occurred.
12. CONVERTIBLE PREFERRED STOCK
- --------------------------------
In June 1999, the Company converted all outstanding Preferred stock into
11,250,273 shares of Common stock. As of February 3, 2001, 5,000,000 shares of
Preferred stock were authorized, none of which is outstanding.
13. COMMON STOCK OPTIONS AND WARRANTS
- --------------------------------------
The Company's 1993 Stock Incentive Plan provides for the granting of Common
stock, Common stock options and stock appreciation rights to key employees and
members of the Board of Directors. The Company's 1998 Equity Compensation Plan
provides for the granting of Common stock options, restricted stock, stock
appreciation rights ("SARS")and performance units to employees, Board members
and consultants. Noodle's Stock Incentive Plan for key employees, directors and
consultants provided for the granting of stock options, stock appreciation
rights, dividend equivalent rights, restricted stock, unrestricted stock and
performance shares. At the effective date of the merger, each outstanding and
unexercised option or right to purchase shares of Noodle common stock granted
under the Noodle stock option plan was assumed by the Company and converted into
an option or a right to purchase shares of the Company's common stock under the
same terms and conditions as were applicable to the options as granted under the
Noodle stock plan. The number of shares of the Company's common stock that the
converted options are exercisable for, and the exercise price of the options
were adjusted to reflect the exchange ratio of 1.233. The Noodle Stock Incentive
Plan provided for the granting of stock options, stock appreciation rights
(SAR's), dividend equivalent rights, restricted stock, unrestricted stock and
performance shares to key employees, directors and consultants. Required
disclosure information regarding the 1993 Stock Incentive Plan, the 1998 Equity
Compensation Plan and the Noodle Stock Incentive Plan (collectively, the
"Plans") have been combined due to similarities in the Plans.
The Company reserved 5,500,000, 5,500,000 and 3,700,000 shares of its Common
stock for awards under the Plans as of February 3, 2001, January 29, 2000 and
January 30, 1999, respectively. The Company accounts for the Plans under
Accounting Principles Board Opinion No. 25. Had compensation cost for the
options issued under the Plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss),
basic EPS and diluted EPS would have been equal to the pro forma amounts
indicated below (in thousands except per share data):
Fiscal Year Ended
-----------------
February 3, 2001 January 29, 2000 January 30, 1999
---------------- ---------------- ----------------
Net income (loss) As reported $(80,699) $18,610 $12,630
Pro forma (82,541) 17,374 11,527
Basic EPS As reported $ (2.58) $ 0.74 $ 0.86
Pro forma (2.64) 0.69 0.78
Diluted EPS As reported $ (2.58) $ 0.60 $ 0.46
Pro forma (2.64) 0.56 0.42
The weighted average fair value of options granted in fiscal 2000, 1999 and 1998
was $2.96, $11.32 and $2.60, respectively. The fair value of each option grant
is estimated on the grant date using the Black-Scholes option pricing model. The
table below is based on historical information for both Zany and Noodle and have
been
F-18
retroactively restated to reflect the acquisition of Noodle as though they
had been combined from the beginning of each if the periods presented:
_________
Fiscal Year Ended
-----------------
February 3, 2001 January 29, 2000 January 30, 1999
---------------- ---------------- ----------------
Expected dividend rate - - -
Expected volatility 80% 45.0% - 53.8% 45.0% -50.1%
Weighted average risk-free interest rate 6.28% 5.33% - 6.77% 4.55% - 5.3%
Expected lives (years) 4 4-5 4-5
In fiscal 2000 and 1999, the Company granted 315,413 and 1,230,686 options,
respectively, under the Plans to employees and directors to purchase Common
stock at prices ranging from $0.84 to $11.75 per share. Options to purchase
400,000 shares of Common stock vest 100% after three years and remaining options
primarily vest over a four-year period from the date of grant. During 1999,
options to purchase 8,200 shares of Common Stock were granted with exercise
prices below the fair market value of the Company's Common Stock on the date of
grant. These options were valued at $43,000 and are being amortized as deferred
compensation expense over the vesting period. All other options were issued with
exercise prices equal to or greater than the fair market value on the grant
date. The options are exercisable over a maximum of 10 years.
Information with respect to all options outstanding, including options to
purchase 130,000 shares of Common stock issued outside the Plans prior to fiscal
1997, is as follows:
Option Price Per Weighted Average
Shares Share Price Per Share
Options outstanding, January 31, 1998 3,196,559 $0.67 -13.125 $3.52
Granted 831,939 4.00-9.00 5.25
Exercised (42,263) 3.00-7.13 3.61
Canceled (236,991) 3.00-13.13 3.98
------------
Options outstanding, January 30, 1999 3,749,244 0.67-13.13 3.88
Granted 1,230,686 3.33-11.75 9.08
Exercised (274,694) 0.67-6.69 3.09
Canceled (357,733) 3.00-11.75 5.81
------------
Options outstanding January 29, 2000 4,347,503 0.84-11.75 5.28
Granted 315,413 0.84-5.38 2.96
Exercised (27,314) 3.00-5.25 3.37
Canceled (1,551,410) 2.00-11.75 5.35
-----------
Options outstanding February 3, 2001
3,084,192 $0.84-11.75 $5.03
===========
Of the 130,000 shares of Common stock issued outside the Plans, none were
exercised in fiscal 2000.
At February 3, 2001, the weighted average contractual life of all options
outstanding was 5.5 years, there were 2,111,359 options vested at a weighted
average exercise price of $4.22 and there were 2,218,307 shares reserved under
the Plans which were not covered by stock options granted.
On March 26, 2001, options to purchase an aggregate of 2,000,000 shares of
common stock were granted to certain key employees at an exercise price equal to
the fair market value of the Company's common stock. Options to purchase
1,500,000 shares of common stock are for a ten-year term and vest in four equal
installments commencing on the first anniversary of the date of grant. Options
to purchase 500,000 shares of common stock are for a ten-year term with vesting
over a four-year period, as defined, with certain provisions for acceleration
pursuant to an employment agreement.
In fiscal 1996 and fiscal 1997, the Company granted warrants to purchase 15,000
shares and 32,550 shares of Common stock, respectively, to certain consultants.
The warrants have an exercise price of $4.00 per share and are exercisable on
various dates through January 2003. In June 1999, the warrants to purchase
32,550 shares of Common stock at $4.00 per share were exercised. In addition,
the agent who placed the Series A preferred purchased for $561 warrants to
purchase 56,073 shares of Common stock at $6.00 per share. These warrants were
exercised in conjunction with the Offering.
In 2000, the Company granted warrants to ORP in conjunction with the dissolution
of the joint venture (see Note 4), to purchase 1 million shares of the Company's
Common Stock at an exercise price of $6.00 per share. These warrants vest over
five years and will expire in 2010. The fair market value was determined using
the Black Scholes option pricing model.
F-19
14. COMMITMENTS AND CONTINGENCIES
- ----------------------------------
Leases
- ------
The Company leases retail, distribution and office space and equipment under
various operating leases. Most store leases typically have an average initial
term of ten years, with two five-year renewal options. Certain leases provide
for additional rent contingent upon store sales levels. Base rent expense,
including any required contingent payments, for fiscal 2000, 1999 and 1998 was
approximately $37,006,000, $30,642,000 and $21,780,000 respectively.
The Company has entered into several leases for store and distribution center
equipment and fixtures that have been accounted for as capital leases. The
capitalized cost of $8,266,000 and $10,130,000 and related accumulated
amortization of $3,538,000 and $4,044,000 has been included in property and
equipment at February 3, 2001 and January 29, 2000, respectively. The present
value of the minimum lease payments is as follows (in thousands):
As of
February 3,
2001
----
Total minimum lease payments $5,218
Less - Amount representing interest (426)
-----
Present value of minimum lease payments $4,792
======
Future minimum lease payments under the Company's operating and capital leases,
including leases for stores opening in fiscal 2000 which were entered into
before the period indicated, are as follows (in thousands):
As of February 3, 2001
Fiscal Operating Capital
- ------ --------- -------
2001 $38,981 $2,726
2002 39,275 1,741
2003 38,838 751
2004 37,666 -
2005 33,932 -
2006 and thereafter 97,624 -
-------- ------
$286,316 $5,218
======== ======
As debtors-in-possession, the Company has the right, subject to Bankruptcy Court
approval and certain other conditions, to assume or reject any pre-petition
executory contracts and unexpired leases. Parties affected by such rejections
may file pre-petition claims with the Bankruptcy Court in accordance with
bankruptcy procedures.
401(k) Plan
- -----------
On October 1, 1996, the Company adopted a 401(k) plan for its employees (the
Plan). The Plan allows participants to contribute up to 15% of their
compensation. As of August 1, 2000, the Company provides a match of 25% of the
first 6% contributed by employees.
Employer contributions vest 20% per year.
Prior to the merger, Noodle offered a 401(k) plan for its employees with a match
of 25% of the first 5% contributed by employees. As of the date of the merger,
the Noodle 401(k) plan was terminated and Noodle employees became participants
in the Company's 401(k) plan.
The employer contributions were $150,000 and $32,000 for 2000 and 1999,
respectively. The cost to administer the Plan was $29,000 and $19,000 for fiscal
2000 and 1999, respectively.
Employment Agreements
- ---------------------
Certain members of key management have employment agreements which would require
payments of $1,782,500,
F-20
$782,500 and $117,700 in fiscal 2001, 2002 and 2003, respectively. The
agreements also provide for other terms and conditions of employment including
termination payments.
General
- -------
From time to time, the Company is named as a defendant in legal actions arising
from its normal business activities. In connection with the Company's inability
to pay its creditors, the Company was named in numerous pre-petition lawsuits.
Although the amount of any liability that could arise with respect to currently
pending actions cannot be estimated, in the opinion of the Company, any such
liability will not have a material adverse effect on its financial position or
operating results.
F-21
16, QUARTERLY FINANCIAL DATA (UNAUDITED)
- -----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands except per share data)
Fiscal Year Ended February 3, 2001:
Sales $63,435 $71,723 $76,408 $ 188,913
Gross profit 12,677 8,154 17,002 50,117
Net loss: (7,497) (22,198) (13,284) (37,720)
Net loss per share:
Basic (0.24) (0.71) (0.43) (1.18)
Diluted (0.24) (0.71) (0.43) (1.18)
Weighted average shares:
Basic 31,056 31,065 31,079 31,857
Diluted 31,056 31,065 31,079 31,857
Fiscal Year Ended January 29, 2000:
Sales $63,467 $64,937 $73,902 $ 173,926
Gross profit 16,629 16,365 21,164 54,225
Net income (loss):
Continuing operations (2,284) (5,460) (4,241) 29,045
Discontinued operations - - 1,550 -
Net income (loss) (2,284) (5,460) (2,691) 29,045
Basic income (loss) per share:
Continuing operations $ (0.15) $ (0.23) $ (0.14) $ $0.94
Discontinued operations - - 0.05 -
Net income (loss) $ (0.15) $ (0.23) $ (0.09) $ $0.94
Diluted income (loss) per share:
Continuing operations $ (0.15) $ (0.23) $ (0.14) $ 0.90
Discontinued operations - - 0.05 -
Net income (loss) $ (0.15) $ (0.23) $ (0.09) $ 0.90
Weighted average shares:
Basic 14,754 24,124 30,904 30,986
Diluted 14,754 24,124 30,904 32,371
F-22
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Amended and Restated Agreement and Plan of Merger
dated as of April 21, 2000 among Zany Brainy,
Inc., Noodle Kidoodle, Inc. and Night Owl
Acquisition, Inc. (1)*
2.4 Plan of Dissolution dated as of December 4, 2000
by and among ZanyBrainy.com LLC, ZB Holdings LLC,
Children's Equity LLC, Zany Brainy Direct LLC,
Zany Brainy, Inc. and Online Retail Partners Inc.
(4)
2.5 Stock Purchase Agreement dated as of December 4,
2000 by and between Zany Brainy, Inc. and Online
Retail Partners Inc. (4)
10.6 Employment Agreement with Keith C. Spurgeon dated
June 6, 2000 (2)(3)
10.7 Employment Agreement with Robert A. Helpert dated
June 6, 2000 (2)(3)
10.8 Amended and Restated Employment Agreement with
Thomas G. Vellios dated September 15, 2000 (3)(4)
10.9 Amendment to Incentive Stock Option Grants
dated September 15, 2000 between Zany Brainy,
Inc. and Thomas G. Vellios (3)(4)
10.10 Loan and Security Agreement dated July 25, 2000
by and among First Union National Bank, Congress
Financial Corporation and Zany Brainy, Inc. (5)
21.2 Subsidiaries
23.3 Consent of Arthur Andersen LLP
23.4 Consent of Janover Rubinroit, LLC
(1) Previously filed as an exhibit to our Current Report on Form 8-K
filed August 9, 2000 and incorporated herein by reference.
(2) Previously filed as an exhibit to our quarterly report on Form
10-Q for the fiscal quarter ended April 29, 2000 and
incorporated herein by reference.
(3) Management contract or compensatory plan or arrangement required
to be filed or incorporated as an exhibit.
(4) Previously filed as an exhibit to our quarterly report on Form
10-Q for the fiscal quarter ended October 28, 2000 and
incorporated herein by reference.
(5) Previously filed as an exhibit to our quarterly report on Form
10-Q for the fiscal quarter ended July 29, 2000 and incorporated
herein by reference.
* The schedules to this document (which are listed on the table of
contents included in this document) have been omitted. The Company agrees to
furnish supplementally a copy of any of the omitted schedules to the Securities
and Exchange Commission upon request.