-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GytjD+5sgWYWP2Wy4OKvPX4eRhfEwNCEgundPUpFDfma/7MOIV1nfOwzON/ETiAX seBpb7wOOCqmqom0bTEiOA== 0000043837-98-000002.txt : 19980430 0000043837-98-000002.hdr.sgml : 19980430 ACCESSION NUMBER: 0000043837-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980429 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOODLE KIDOODLE INC CENTRAL INDEX KEY: 0000043837 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISC DURABLE GOODS [5090] IRS NUMBER: 111771705 STATE OF INCORPORATION: NY FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06083 FILM NUMBER: 98603998 BUSINESS ADDRESS: STREET 1: 105 PRICE PKWY CITY: FARMINGDALE STATE: NY ZIP: 11735 BUSINESS PHONE: 5162935300 MAIL ADDRESS: STREET 2: 105 PRICE PARKWAY CITY: FARMINGDALE STATE: NY ZIP: 11735 FORMER COMPANY: FORMER CONFORMED NAME: GREENMAN BROTHERS INC DATE OF NAME CHANGE: 19920703 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED). For the fiscal year ended January 31, 1998 Commission file number 1-6083 NOODLE KIDOODLE, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 11-1771705 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 6801 Jericho Turnpike, Syosset, NY 11791 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (516)-677-0500 Securities registered pursuant to Section 12 (b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common Stock, $.001 par value NASDAQ National Market Securities registered pursuant to Section 12 (g) of the Act: NONE 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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ 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. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of April 17, 1998 was $46,425,295 based on the closing price of same stock on that date. The number of shares of common stock outstanding as of April 17, 1998 was 7,579,640. -1- Documents Incorporated by reference: Certain portions of Registrant's definitive proxy statement with respect to its 1998 Annual Meeting of Stockholders to be filed, pursuant to Regulation 14A under the Securities Exchange Act of 1934, with the Commission within 120 days of the close of Registrant's fiscal year ended January 31, 1998 are incorporated by reference into Part III of this report. -2- TABLE OF CONTENTS Page PART I Item 1. Business 4 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Part II Item 5. Market for Registrant's Common Stock and Related Stockholders' Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of 11 Operations Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III Item 10. Directors and Executive Officers of the Registrant 16 Item 11. Executive Compensation 16 Item 12. Security Ownership of Certain Beneficial Owners and Management 16 Item 13. Certain Relationships and Related Transactions 16 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 17 -3- PART I ITEM 1. BUSINESS. (a) General Noodle Kidoodle, Inc., a Delaware corporation (the "Company" or "Registrant") is a specialty retailer of a broad assortment of educationally oriented, creative and non-violent children's products, including toys, books, games, video and audio tapes, computer software, crafts and other learning products. The Company was founded in 1946 and, doing business under its former name Greenman Bros. Inc., engaged in the retail toy business as well as the wholesale distribution of general merchandise, with an emphasis on toys, stationery and housewares. During the 1980s, the Company operated a number of retail toy stores, including a chain of 330 stores under the Circus World name located principally in shopping malls in approximately 30 states. The Company sold the Circus World stores in Fiscal 1991 but continued to operate a number of retail toy stores under the Playworld name. The Company opened its first Noodle Kidoodle store in November 1993, and opened three additional Noodle Kidoodle stores in Fiscal 1995. During Fiscal 1996, management determined that the Company should focus exclusively on its retail business by expanding and developing the Noodle Kidoodle retail concept. Accordingly, in August 1995, the Company adopted a new business plan and ceased operating its wholesale division. The Company, in December 1995, changed its name from Greenman Bros. Inc. to Noodle Kidoodle, Inc. and, in January 1996, changed its jurisdiction of incorporation to Delaware. The Company operated 32 Noodle Kidoodle stores at the close of the fiscal year ended January 31, 1998 ("Fiscal 1998") located in New York, New Jersey, Connecticut and the Boston, Chicago, and Detroit metropolitan areas. The Company also operated one other retail toy store under the Playworld name during Fiscal 1998 which was closed on October 31, 1997. (b) Financial Information About Industry Segments Registrant currently operates in an industry segment which involves the retail sales of children's toys and other products. In prior years it also operated in a second segment which was the wholesale distribution of general merchandise. This segment was discontinued in August 1995 and the results are disclosed in discontinued operations. See Note 2 (Discontinued Operations) of the Notes to Consolidated Financial Statements. (c) Narrative Description of Business Noodle Kidoodle, Inc. is a specialty retailer of a broad assortment of educationally oriented, creative and non-violent children's products. The Noodle Kidoodle concept offers -4- something new to parents and children by combining the attractive pricing and larger size of traditional toy stores with the more creative product selection and superior customer service of small boutiques, while providing an entertaining shopping environment through interactive play areas and frequent in-store events. The Company's stores range from approximately 6,100 to 13,300 square feet and average approximately 10,500 square feet. Each store offers customers a warm and inviting shopping environment with brightly lit spaces, colorful walls, ceilings and carpets, wide aisles for strollers and kid-level seating and product shelving. Each store typically carries approximately 20,000 stock-keeping units ("SKU's"), conveniently displayed in separate merchandise departments, such as "Science & Nature" and "Arts & Crafts", which are identified by eye-catching signs that are visual as well as verbal so that children can understand them. All of the products carried in Noodle Kidoodle stores conform to the Company's creative, non-violent and educational merchandising strategy. The Company generally does not carry mass market television advertised toys. However, in certain product categories, the Company does carry brand name products which fit the Noodle Kidoodle philosophy, such as Crayola, Lego, Playmobil, Mattel, the full line of Walt Disney video titles and the Goosebumps line of books. The Company purchases merchandise from over 550 suppliers. There is currently one supplier, Ty, Inc., which represents slightly more than 9% of total purchases. The Company operated 32 Noodle Kidoodle stores at the end of its 1998 fiscal year, located in New York, New Jersey, Connecticut and the Boston, Chicago and Detroit metropolitan areas. It has opened one store in fiscal 1999 in the Detroit metropolitan area and expects to open at least five additional stores during the year. As of April 20, 1998, the Company has signed six leases for new store locations. Five are scheduled to open this year and one next year. The Company plans to open stores in Dallas and Plano, TX in the Spring of 1998, in Austin, TX and Boca Raton, FL in the summer of 1998 and in Hartsdale, NY in the Fall of 1998. A store in Southlake, TX is scheduled to open in 1999. The Company believes that there are opportunities for nationwide expansion over the longer term. The Company believes that the following elements are important to its retailing concept: Interactive Shopping Environment - Each Noodle Kidoodle store is designed with children in mind. Each store has designated play areas where children and their parents are encouraged to explore toys and games in keeping with the Company's "try before you buy" philosophy. Among the key interactive features of each store are the Computer Center, "Kidoodle Theater" and the Electronic Learning Center. -5- Broad Assortment of Imaginative Products - Noodle Kidoodle stores offer a broad assortment of products designed to stimulate a child's imagination and contribute to his or her growth and development, consistent with the Company's slogan that "Kids learn best when they're having fun." To keep its merchandise mix fresh and exciting, the Company continually seeks innovative new products. In-Store Events - The Company provides without charge frequent in-store events such as personal appearances by authors and children's television personalities, arts and crafts workshops and readings from selected books to provide entertainment to its customers, increase store traffic and position Noodle Kidoodle as a destination store. Superior Customer Service - By providing knowledgeable and friendly customer service and selecting enthusiastic employees who enjoy working with children, the Company believes that it has a competitive advantage over lower-service superstores and mass merchandisers. Targeted Marketing - The Company conducts a targeted direct mail marketing program and continuously updates its customer database for this purpose. Competitive Pricing - Noodle Kidoodle offers everyday competitive pricing. Many products are regularly discounted and prices in general are believed to be competitive with those featured by superstores carrying similar lines of merchandise. Backlog is not considered relevant to an understanding of Registrant's business. Registrant is required to carry substantial amounts of inventory in the months of September through November of each year in order to meet holiday delivery requirements. Registrant did not have any customers that represented more than 10% of consolidated revenues for the year ended January 31, 1998. Registrant's business is highly seasonal and approximately 45% of its revenues occur in the fourth quarter. The retail toy business is highly competitive. The Company competes on the basis of its stores' interactive environment, broad merchandise selection, superior customer service and competitive pricing. The Company competes with a variety of mass merchandisers, superstores and other toy retailers, including Toys R Us and Kay Bee Toy Stores and other store formats selling children's products, such as discount stores and smaller specialty toy stores. Retailing of children's educational products is a relatively new concept. Included among the Company's direct competitors are Zany Brainy, Learningsmith, Store of Knowledge, Learning Express and Imaginarium. -6- Some of the Company's competitors are much larger in terms of sales volume and have more capital and greater management resources than the Company. If any of the Company's larger competitors were to increase their focus on the educational market or if any regional competitors were to expand their activities in the markets primarily served by the Company, it could be adversely affected. If any of the Company's major competitors seek to gain or retain market share by reducing prices, the Company may be required to reduce its prices on key items in order to remain competitive, which would have the effect of reducing its profitability. As of January 31, 1998, the Company employed 926 people, of whom 351 were employed full-time. The Company also employs additional part-time personnel during the pre-Christmas season. The Company believes that its relations with its employees are generally good. The Company has registered several service marks and trademarks with Federal and State authorities, including Noodle Kidoodle (registered), Oodles & Oodles of Fun Things to Learn (registered), Kidoodle Animation (registered), and the Company's slogan "Kids learn best when they're having fun" (registered). The Company believes it has all licenses necessary to conduct its business. ITEM 2. PROPERTIES. The Company leases all of its Noodle Kidoodle stores. Original lease terms generally are for ten years, and many leases contain renewal options. The Company's stores are generally located in either strip shopping centers or mall locations. The 32 stores operating at the end of Fiscal 1998 ranged in size from approximately 6,100 to 13,300 square feet. The Company currently supports its retail operations with an owned 269,000 square foot distribution center in Phillipsburg, New Jersey. The Company had previously supported its total retail and wholesale operations with three other distribution centers located in Farmingdale, New York, West Haven, Connecticut and Birmingham, Alabama. In conjunction with discontinuing its wholesale operations the Company has ceased operating the Farmingdale and West Haven distribution centers. The Company discontinued the use of the Birmingham center in 1989 and has been sub-leasing the space to third parties since such discontinuance. The Company sold the Farmingdale facility in July 1996. The lease for the West Haven center expired in March 1996. The Company does not believe that disposing of or discontinuing operations in any of these facilities will have a material adverse effect on its operations or financial condition. The Company's executive offices are located at Syosset, New York. The Company has a two-year lease for its executive offices which contains renewal options. -7- Registrant believes that the foregoing facilities are adequate for its present operations and such facilities are maintained in a good state of repair. See Note 6 (Commitments and Contingencies) of the Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any legal proceedings other than claims and lawsuits arising in the normal course of its business which, in the opinion of the Company's management, are not individually or in the aggregate material to its business. As disclosed last year, the Company was a defendant in a purported plantiffs' class action filed in August 1995, in the United States District Court for the Eastern District of New York against Playmobil USA, Inc., a toy manufacturer ("Playmobil"), and against the Company and another retailer, as defendant class representatives of a purported class of those toy retailers nationwide selling products manufactured by Playmobil. The case was later consolidated with two others pending against Playmobil. On October 23, 1996, plaintiffs filed an Amended Complaint dropping the Company as a defendant, but naming it and three other retailers as "Co-conspirators who were induced to participate and did participate in an alleged price fixing scheme organized by Playmobil." No damages or other forms of relief are requested against the Company. These developments confirm the Company's earlier view that this litigation was not material to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS' MATTERS. The Company's Common Stock is quoted on the NASDAQ National Market under the symbol "NKID". The following table sets forth, for the periods indicated, the high and low sales prices per share for the Common Stock for each of the fiscal quarters indicated for Fiscal 1998 and for the fiscal year ended February 1, 1997 ("Fiscal 1997"). -8- High Low
Fiscal 1998 First Quarter $ 3.88 $ 2.50 Second Quarter 4.50 2.38 Third Quarter 4.13 2.75 Fourth Quarter 5.13 3.69 Fiscal 1997 First Quarter $ 9.50 $ 6.25 Second Quarter 8.63 5.88 Third Quarter 8.00 5.38 Fourth Quarter 7.25 3.00
As of January 31, 1998 there were approximately 638 holders of record of Common Stock. The Company has not paid cash dividends on its Common Stock since 1969 and currently anticipates that it will retain all available funds generated by its operations for the development and growth of its business. Any future determination as to dividend policy will be made at the discretion of the Board of Directors of the Company and will depend on a number of factors, including the future earnings, capital requirements, financial condition and business prospects of the Company and such other factors as the Board of Directors may deem relevant. ITEM 6. SELECTED FINANCIAL DATA. The selected financial data presented below reflects the consolidated results of operations, financial condition and operating data of the Company for the periods indicated, after giving retroactive effect to the Company's discontinued wholesale business segment. This data should be read in conjunction with the Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. The consolidated financial data for the fifty-two weeks ended January 31, 1998, February 1, 1997, fifty-three weeks ended February 3, 1996, and the fifty-two weeks ended January 28, 1995, and January 29, 1994 are derived from the consolidated financial statements of the Company which have been audited by Janover Rubinroit, LLC, independent certified public accountants. -9- SELECTED FINANCIAL DATA
Fiscal Years Ended Jan. 31, Feb. 1, Feb. 3, Jan. 28, Jan. 29, 1998 1997 1996 1995 1994 (52 weeks)(52 weeks)(53 weeks) (52 weeks) (52 weeks) (In thousands except share data) STATEMENT OF OPERATIONS DATA: Net Sales $81,664 $59,410 $32,143 $23,308 $20,712 Net income (loss) from: Continuing operations $(1,918) $(7,492) $(5,272) $(4,490) $(1,180) Discontinued operations - - (9,059) 1,096 1,889 Net income (loss) $(1,918) $(7,492) $(14,331) $(3,394) $ 709 Basic and diluted income (loss) per share: Continuing operations $ (.25) $ (1.00) $ (.99) $ (.86) $ (.22) Discontinued operations - - (1.70) .21 .35 Net income (loss) per share $ (.25) $ (1.00) $ (2.69) $ (.65) $ .13 Weighted average shares: Basic 7,580 7,488 5,320 5,220 5,338 Diluted 7,587 7,601 5,498 5,361 5,368 BALANCE SHEET DATA: Working capital $15,977 $16,819 $14,031 $35,667 $39,810 Total assets 49,481 51,036 37,276 48,042 49,629 Stockholders' equity 33,781 35,699 27,080 40,870 44,064 Long term obligations 733 753 - - - Dividends per common share - - - - -
In accordance with FASB No. 128, as a result of losses from continuing operations, the inclusion of employee stock options were antidilutive and, therefore, were not utilized in the computation of diluted earnings per share. -10- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Fiscal Year Ended January 31, 1998 Compared to Fiscal Year Ended February 1, 1997. Continuing Operations Net sales increased a total of 37.5% to $81.7 million in Fiscal 1998 from $59.4 million in Fiscal 1997. Noodle Kidoodle sales increased $23.8 million or 41.2% to $81.5 million in Fiscal 1998 from $57.7 million in the prior year, primarily due to increased comparable store sales of 16%, the addition of one store during Fiscal 1998 and thirteen stores during Fiscal 1997. Other retail sales decreased 88.2% to $.2 million in Fiscal 1998 from $1.7 million in the prior year, primarily as a result of closing the last Playworld store on October 31, 1997. The Company operated 32 Noodle Kidoodle stores at January 31, 1998 compared to 31 Noodle Kidoodle stores and one Playworld store at February 1, 1997. Gross profit (derived from net sales less cost of products sold, which includes buying and warehousing costs) increased 36.7% to $31.3 million for Fiscal 1998 from $22.9 million in Fiscal 1997. Overall gross profit as a percent of net sales ("gross profit percentage") decreased to 38.3% in Fiscal 1998 from 38.5% in Fiscal 1997. The decrease in gross profit percentage was primarily attributable to increased markdowns of .7%, offset by lower merchandise costs, decreases in buying costs (including the salaries and related expenses of the Company's buyers) and greater sales leverage against warehousing costs which contain some fixed elements. Gross profit in the other retail store was immaterial to the overall gross profit percentage. Selling and administrative expenses increased 8.0% to $33.6 million in Fiscal 1998 from $31.1 million in the prior year. These increases resulted primarily from higher direct store expenses which increased $4.6 million due to change in the store base and higher sales levels, offset by a reduction in home office expenses of $1.9 million and a $.2 million reduction in store pre-opening costs. The reduction in home office expenses reflects steps taken last year to reduce administrative staff by approximately 20%. Selling and administrative expenses as a percentage of net sales decreased to 41.1% in Fiscal 1998 from 52.4% in the prior year, primarily as a result of leveraging selling and administrative expenses which did not rise commensurately with increased sales levels. Net loss from continuing operations decreased 74.7% to $1.9 million ($.25 per share) in Fiscal 1998 from $7.5 million ($1.00 per share) in the prior year. The net loss in both Fiscal 1998 and Fiscal 1997 did not include tax benefits. At January 31, -11- 1998, the Company had approximately $21.4 million of net operating loss carryforwards. Fiscal Year Ended February 1, 1997 Compared to Fiscal Year Ended February 3, 1996 Continuing Operations Net sales increased a total of 85.0% to $59.4 million in Fiscal 1997 from $32.1 million in fiscal year ended February 3, 1996 ("Fiscal 1996"). Noodle Kidoodle sales increased $30.0 million or 108.3% to $57.7 million in Fiscal 1997 from $27.7 million in the prior year, primarily due to the addition of thirteen Noodle Kidoodle stores during Fiscal 1997. Other retail sales decreased 61.4% to $1.7 million in Fiscal 1997 from $4.4 million in the prior year, primarily as a result of the closing of one Playworld store and two Toy Park stores in the first half of Fiscal 1997. Comparable store sales were virtually flat. The Company operated 31 Noodle Kidoodle stores and one Playworld store at February 1, 1997 compared to 18 Noodle Kidoodle stores, two Playworld stores and two Toy Park stores at February 3, 1996. Fiscal 1997 contained 52 weeks compared to 53 weeks in Fiscal 1996. Sales for the extra week in Fiscal 1996 represented 1.7% of annual sales. Gross profit (derived from net sales less cost of products sold, which includes buying and warehousing costs) increased 86.2% to $22.9 million for Fiscal 1997 from $12.3 million in Fiscal 1996. Overall gross profit as a percentage of net sales ("gross profit percentage") increased to 38.5% in Fiscal 1997 from 38.3% in Fiscal 1996. The increase in gross profit percentage was primarily attributable to the increased sales volume at Noodle Kidoodle stores, which generated higher margins, offset by decreased sales and margins at the other retail stores. Gross profit percentage at Noodle Kidoodle stores increased to 38.5% in Fiscal 1997 from 37.9% in the prior year, primarily as a result of leveraging buying costs (including the salaries and related expenses of the Company's buyers) partially offset by increases in the cost of merchandise. Warehousing costs, which contain some fixed elements remained flat and did not rise commensurately with the increased sales levels. Gross margin in the other retail stores decreased to 36.5% in Fiscal 1997 from 40.7% in the prior year, primarily due to markdowns taken to liquidate inventories in three stores that were closed in the first half of Fiscal 1997 offset by lower buying and warehousing costs. Selling and administrative expenses, excluding the provision for restructuring in Fiscal 1996, increased 75.7% to $31.1 million in Fiscal 1997 from $17.7 million in the prior year. These increases resulted primarily from; higher direct store expenses, which increased $9.1 million due to changes in the store base; non- recurring charges of $.6 million for upgrading the stores' point of sale system and a provision for severance costs related to a 20% administrative staff reduction; and higher home office expenses. Selling and administrative expenses as a percentage of -12- net sales decreased to 52.4% in Fiscal 1997 from 55.0% in the prior year, primarily as a result of increased sales due to an increased store base. Provision for restructured operations was $.5 million in Fiscal 1996 related to the closing of certain other retail stores. This included losses from store operations from the date of announcement until closing, employee severance costs, estimated lease liabilities, loss on liquidation of inventories and disposition of assets and other related restructuring costs. Net loss from continuing operations increased 41.5% to $7.5 million ($1.00 per share) in Fiscal 1997 from $5.3 million ($.99 per share) in the prior year. The net loss in both Fiscal 1997 and Fiscal 1996 did not include tax benefits. At February 1, 1997, the Company had approximately $18.0 million of net operating loss carryforwards. Discontinued Operations In Fiscal 1997 the Company's discontinued operations had no sales. No income or loss was recognized from these operations in Fiscal 1997. Net sales were $51.9 million in Fiscal 1996. Operating loss before provision for discontinued operations was $1.9 million in Fiscal 1996. Provision for loss on disposal of discontinued operations was $7.1 million in Fiscal 1996 related to the disposal of the wholesale business, including the estimated losses through the disposal period and the anticipated sale of two of the Company's distribution centers, net of income tax expense of $1.6 million. Net loss from discontinued operations was $9.1 million ($1.70 per share) in Fiscal 1996 including the $7.1 million ($1.34 per share) provision for loss on disposal of discontinued operations. LIQUIDITY AND CAPITAL RESOURCES During the past three fiscal years the Company satisfied the cash requirements for its continuing retail operations principally through the sale of securities, cash flows from discontinued wholesale operations and internal cash balances. These cash requirements principally include operating losses, working capital requirements and expenditures for new store openings. -13-
Fiscal Years Ended 1998 1997 1996 (In thousands) Net cash provided by (used in) Operating activities: Continuing operations $ 2,673 $(9,438) $(7,281) Discontinued operations (1,252) (1,585) 12,128 Investing activities (1,637) (1,798) (8,960) Financing activities (18) 16,882 477 Net increase (decrease) in cash and cash equivalents (234) 4,061 (3,636) Cash and cash equivalents - beginning of year 11,333 7,272 10,908 Cash and cash equivalents - end of year $11,099 $ 11,333 $ 7,272
During Fiscal 1998, the Company generated $2.7 million of cash from operating activities of its continuing operations, primarily from a net loss of $1.9 million offset by non-cash charges of $2.7 million and a decrease in working capital of $1.9 million. The net liabilities of discontinued operations were reduced by $1.3 million during the year. Net cash used in investing activities was $1.6 million, primarily to purchase fixed assets for new and remodeled stores. As a result of the foregoing, cash and cash equivalents decreased during the year by $.2 million. During Fiscal 1997, the Company generated $16.9 million of cash from financing activities, principally from the sale of new Common Stock, the net proceeds of which were approximately $16.0 million. Net cash used in investing activities was $1.8 million, composed of property additions for new stores and for upgrading the stores' point-of-sale computer system, which together totaled $9.4 million, offset by $7.6 million of proceeds from the sale of property from discontinued operations. Cash was also used to fund $9.4 million of cash requirements for continuing operations, attributable to a net loss of $7.5 million and increased working capital needs of $4.2 million due to new store openings and increased inventory levels, offset by non-cash charges of $2.3 million. Inventory increased from $10.3 million at February 3, 1996 to $17.3 million at February 1, 1997, primarily resulting from new store openings. As a result of the foregoing, cash and cash equivalents increased during the year by $4.1 million. During Fiscal 1996, the Company generated $12.1 million of cash from discontinued operations, primarily attributable to reductions in inventory and other working capital of $20.4 million and $.8 million of non-cash charges offset by a net loss of $9.1 million, which included a $7.1 million provision for the discontinuance of the wholesale operations. This cash was used primarily to fund $7.3 million of cash requirements for continuing retail operations, attributable to increases in working capital needs of $3.5 million due to new store openings and increased inventory levels as well as a net loss of $5.3 million. Inventory increased from $4.3 million at January 28, 1995 to $10.3 million at February 3, 1996 primarily as a result -14- of new store openings. The Company also used cash to fund investing activities of $9.0 million, primarily for the purchase of fixed assets for new stores. As a result of the foregoing, cash and cash equivalents decreased during the year by $3.6 million. During the past several fiscal years, the Company did not require any cash borrowings under its $10.0 million revolving credit line, which expired in June 1995. In February 1996 the Company obtained a line of credit from a bank which was unsecured and provided for maximum outstandings of $10.0 million in short-term loans and letters of credit. That line of credit expired on May 31, 1997. In June 1997 the Company entered into a $15.0 million, three-year revolving credit facility with the CIT Group/Business Credit, Inc. This facility may be used for direct borrowings and letters of credit, and is secured by the Company's inventory, receivables and certain other assets. The Company expects to fund its near-term cash requirements principally from its existing cash balances and its revolving credit facility. The Company expects to finance its long-term expansion plan with internally and externally generated funds, which may include borrowings under future credit facilities, and through the sale of equity, equity-related or debt securities. There can be no assurance that financing will be available in amounts, or at rates or on terms and conditions acceptable to the Company. The Company anticipates that capital expenditures in Fiscal 1999 will be approximately $3.2 million, primarily to finance new stores. The Company has available net operating loss carryforwards of approximately $21.4 million for income tax purposes. Seasonality The Company's operations are highly seasonal and approximately 45% of its revenues fall within the Company's fourth quarter which coincides with the Christmas selling season. New stores are expected to be opened throughout the year, but generally before the Christmas selling season, which will make the Company's fourth quarter revenues an even greater percentage of the total year's revenues. Operations during the first three quarters are not expected to be profitable for the foreseeable future. -15- Impact of Inflation The impact of inflation on the Company's results of operations has not been significant. The Company attempts to pass on increased costs by increasing product prices over time. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to Item 14. 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. Information with respect to directors and executive officers of the Company is incorporated herein by reference to the information set forth under the captions "Election of Directors", "Executive Officers", and "Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION. Information with respect to executive compensation is incorporated herein by reference to the information set forth under the captions, "Committees, Meetings, and Director Compensation" and "Executive Compensation", excluding the information under the captions "Executive Compensation - Compensation and Stock Option Committee Report on Executive Compensation" and "Executive Compensation - Performance Graph", in the Company's 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information with respect to security ownership is incorporated herein by reference to the information set forth under the caption "Security Ownership" in the Company's 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information with respect to certain relationships and related transactions is incorporated herein by reference to the information, if any, set forth under the caption "Certain Relationships and Related Transactions" in the Company's 1998 Proxy Statement. -16- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements Page Independent auditor's report F-1 Consolidated balance sheets at January 31, 1998 and February 1, 1997 F-2 Consolidated statements of operations for the years ended January 31, 1998, February 1, 1997 and February 3, 1996 F-3 Consolidated statements of stockholders' equity for the years ended January 31, 1998, February 1, 1997, and February 3, 1996 F-4 Consolidated statements of cash flows for the years ended January 31, 1998, February 1, 1997,and February 3, 1996 F-5 Notes to consolidated financial statements F-6 2. Schedules VIII. Valuation and qualifying accounts (available on request) All other schedules have been omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. The individual financial statements and schedules of Registrant have been omitted since consolidated financial statements have been filed and Registrant is primarily an operating company and all subsidiaries included in the consolidated financial statements filed are wholly-owned subsidiaries. Shareholders may obtain a copy of any exhibit not contained herein free of charge by writing to Kenneth S. Betuker, Vice President, Chief Financial Officer and Secretary, Noodle Kidoodle, Inc., 6801 Jericho Turnpike, Syosset, NY 11791. -17- 3. Index to Exhibits (a) The following documents are filed as Exhibits to this document: Exhibit Number Description of Document
3.1 Certificate of Incorporation of the Registrant currently in effect, with all amendments thereto (Incorporated by reference to Exhibit 3.1 to Registrant's Form S-1 Registration Statement (Commission File No. 33-65029), effective February 13, 1996) 3.2 (New York) Certificate of Merger of Noodle Kidoodle, Inc., a New York corporation, into Noodle Kidoodle, Inc., a Delaware corporation (Incorporated by reference to Exhibit 3.2 to Registrant's Form S-1 Registration Statement (Commission File No. 33-65029), effective February 13, 1996) 3.3 Agreement and Plan of Merger of Noodle Kidoodle, Inc., a New York corporation, and Noodle Kidoodle, Inc., a Delaware corporation (Incorporated by reference to Exhibit 3.3 to Registrant's Form S-1 Registration Statement (Commission File No. 33-65029), effective February 13, 1996) 3.4 By-laws of Registrant (Incorporated by reference to Exhibit 3.4 to Registrant's Form S-1 Registration Statement(Commission File No. 33- 65029), effective February 13, 1996) 3.5 (Delaware) Certificate of Merger of Noodle Kidoodle, Inc., a New York corporation into Noodle Kidoodle, Inc., a Delaware corporation (Incorporated by reference to Exhibit 3.5 to Registrant's Form S-1 Registration Statement (Commission File No. 33-65029), effective February 13, 1996) 3.6 Plan of Merger of C.W.P.W., Inc., a Michigan corporation, into Noodle Kidoodle, Inc., a Delaware corporation (Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended February 1, 1997.) 3.7 Certificate of Ownership and Merger of C.W.P.W., Inc., a Michigan corporation, into Noodle Kidoodle, Inc., a Delaware corporation (Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended February 1, 1997.) -18- 3.8 Amended and Restated By-Laws dated November 12, 1997 (Incorporated by reference to Exhibit 3.4 to Registrant's Form S-1 Registration Statement (Commission File No. 33-65029), effective February 13, 1996 and Registrant's Report on Form 8-K dated November 21, 1997) 4.1 Rights Agreement, dated as of May 6, 1988, between Registrant and Manufacturers Hanover Trust Company, as Rights Agent (Incorporated by reference to Registrant's Report on Form 8-K dated May 6, 1988 and the exhibits filed therewith) 4.2 First Amendment to Rights Agreement dated as of November 22, 1991 (Incorporated by reference to Registrant's Report on Form 8-K, dated November 22, 1991, and the exhibits filed therewith) 10.1 Stock Incentive Plan and Outside Directors Stock Option Plan, dated April 26, 1994 (Incorporated by reference to Registrant's Form S-8 Registration Statement (Commission File No. 33- 82104), effective July 26, 1994 and the exhibits filed therewith) 10.2* Employment Agreement by and between Registrant and Stanley Greenman dated as of February 1, 1998. 10.3* Employment Agreement by and between Registrant and Stewart Katz dated as of February 1, 1998. 10.4 Non-Contributory Insured Medical Reimbursement Plan (Incorporated by reference to Exhibit 10.05 to Registrant's Annual Report on Form 10-K for the fiscal year ended January 30, 1993) 10.5 Agreement and Plan of Merger dated February 1, 1994 by and between Registrant and certain wholly-owned subsidiaries of the Registrant (Incorporated by reference to Exhibit 10.08 to Registrant's Annual Report on Form 10-K for fiscal year ended January 29, 1994) 10.6 Amendment to Outside Directors Stock Option Plan, dated December 13, 1995 (Incorporated by reference to Exhibit 10.6 to Registrant's Form S- 1 Registration Statement (Commission File No. 33- 65029), effective February 13, 1996) -19- 10.7 Purchase and Sale Agreement - Farmingdale Facility (Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended February 1, 1997) 27.0* Financial Data Schedule
(b) The following documents are filed as Schedules to this Document: Schedule Number Description of Document VIII Valuation and Qualifying Accounts for the Fiscal Years Ended January 31, 1998, February 1, 1997 and February 3, 1996 (b) Reports on Form 8-K The Registrant filed a report on Form 8-K on November 21, 1997, reporting the amendment and restatement of the By-Laws of the Company. * Filed herewith -20- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOODLE KIDOODLE, INC. (Registrant) April 29, 1998 BY: /s/Stanley Greenman Stanley Greenman Chairman of the Board, 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 date indicated. /s/Stanley Greenman /s/Robin Farkas Stanley Greenman Robin Farkas, Director Chairman of the Board, Chief Executive Officer, and Treasurer /s/Lester Greenman (Principal Executive Officer) Lester Greenman, Director /s/Stewart Katz /s/Joseph Madenberg Stewart Katz, President, Joseph Madenberg, Director Chief Operating Officer, Assistant Secretary and Director /s/Melvin C. Redman Melvin C. Redman, Director /s/Kenneth S. Betuker Kenneth S. Betuker Vice President, /s/Barry W. Ridings Chief Financial Officer Barry W. Ridings, Director and Secretary (Principal Financial and Accounting Officer) /s/Robert Stokvis Robert Stokvis, Director -21- INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Noodle Kidoodle, Inc. We have audited the accompanying consolidated balance sheets of Noodle Kidoodle, Inc. and Subsidiaries as of January 31, 1998 and February 1, 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Noodle Kidoodle, Inc. and Subsidiaries as of January 31, 1998 and February 1, 1997 and the results of their operations and cash flows for each of the years in the three year period ended January 31, 1998 in conformity with generally accepted accounting principles. Janover Rubinroit, LLC /s/ Janover Rubinroit, LLC Garden City, New York March 17, 1998 F-1 NOODLE KIDOODLE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS January 31, 1998 and February 1, 1997
January 31, February 1, 1998 1997 (In thousands except share data) ASSETS Current assets: Cash and cash equivalents $11,099 $11,333 Merchandise inventories 16,821 17,318 Prepaid expenses and other current assets 3,024 2,752 Total current assets 30,944 31,403 Property, plant and equipment at cost 24,820 23,687 Less accumulated depreciation 6,306 4,104 18,514 19,583 Other assets 23 50 Total Assets $49,481 $51,036
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 20 $ 18 Trade accounts payable 6,048 5,049 Accrued expenses and taxes 7,726 7,092 Net liabilities of discontinued operations 1,173 2,425 Total current liabilities 14,967 14,584 Long-term debt 733 753 Commitments and contingencies - - Stockholders' equity: Preferred stock-authorized 1,000,000 shares, par value $.001 (none issued) - - Common stock-authorized 15,000,000 shares, par value $.001; issued 8,503,901 shares 9 9 Capital in excess of par value 43,063 43,063 Accumulated deficit (5,499) (3,581) 37,573 39,491 Less treasury stock, at cost, 924,261 shares 3,792 3,792 Total stockholders' equity 33,781 35,699 Total Liabilities and Stockholders' Equity $49,481 $51,036 The accompanying notes are an integral part of the financial statements.
F-2 NOODLE KIDOODLE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended January 31, 1998, February 1, 1997 and February 3, 1996
January 31, February 1, February 3, 1998 1997 1996 (In thousands except share data) Net sales $81,664 $59,410 $32,143 Costs and expenses: Cost of products sold including buying and warehousing costs 50,388 36,542 19,825 Selling and administrative expenses 33,552 31,124 17,680 Provision for restructured operations - - 500 83,940 67,666 38,005 Operating loss (2,276) (8,256) (5,862) Interest income 448 839 633 Interest expense (90) (75) (43) Loss from continuing operations before income taxes (1,918) (7,492) (5,272) Income taxes (benefit) - - - Net loss from continuing operations (1,918) (7,492) (5,272) Discontinued operations: Loss (no income tax) - - (1,914) Operating loss of $7,305 including gain from disposal of assets and income taxes of $1,602 - - (7,145) Net loss from discontinued operations - - (9,059) Net loss $(1,918) $(7,492) $(14,331) Basic and diluted loss per share: Continuing operations $ (.25) $ (1.00) $ (.99) Discontinued operations - - (1.70) Net loss per share $ (.25) $ (1.00) $ (2.69) The accompanying notes are an integral part of the financial statements.
F-3 NOODLE KIDOODLE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Fiscal Years Ended January 31, 1998, February 1, 1997, and February 3, 1996 (In thousands)
Capital in Retained Treasury Stock Common Stock Excess of Earnings (at Cost) Shares Amount Par Value (Deficit) Shares Amount Balance - January 28, 1995 6,185 $ 619 $25,801 $18,242 924 $ 3,792 Exercise of stock options 115 12 529 - - - Change in par value of common stock - (625) 625 - - - Net loss for the year - - - (14,331) - - Balance - February 3, 1996 6,300 6 26,955 3,911 924 3,792 Common stock offering, net 2,180 3 16,007 - - - Exercise of stock options 24 - 101 - - - Net loss for the year - - - (7,492) - - Balance - February 1, 1997 8,504 9 43,063 (3,581) 924 3,792 Net loss for the year - - - (1,918) - - Balance - January 31, 1998 8,504 $ 9 $43,063 $(5,499) 924 $ 3,792 The accompanying notes are an integral part of the financial statements.
F-4 NOODLE KIDOODLE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended January 31, 1998, February 1, 1997 and February 3, 1996 (In thousands)
January 31, February 1, February 3, 1998 1997 1996 Cash flows from operating activities: Net loss from continuing operations $(1,918) $(7,492) $(5,272) Adjustments to reconcile to net cash provided (used): Depreciation 2,490 1,926 1,028 Restructuring charges - non-cash portion - - 500 Loss on disposal of fixtures and equipment 243 327 - Decrease (increase) in non-cash working capital accounts: Merchandise inventories 497 (6,990) (5,998) Prepaid expenses and other current assets (272) 291 (63) Trade accounts payable 999 (234) 3,021 Accrued expenses and taxes 634 2,734 (497) Net cash provided by (used in) continuing operations 2,673 (9,438) (7,281) Net loss from discontinued operations - - (9,059) Adjustments to reconcile to net cash provided (used): Decrease (increase) in non-cash working capital accounts and other (1,252) (1,585) 21,187 Net cash provided by (used in) discontinued operations (1,252) (1,585) 12,128 Net cash provided by (used in) operating activities 1,421 (11,023) 4,847 Cash flows from investing activities: Proceeds from sales of property - discontinued operations - 7,594 - Property additions: Continuing operations (1,664) (9,397) (8,877) Discontinued operations - - (86) Other 27 5 3 Net cash used in investing activities (1,637) (1,798) (8,960) Cash flows from financing activities: Proceeds from sale of common stock - 16,010 - Increase in long-term debt - 780 - Maturities of long-term debt (18) (9) (64) Exercise of employee options - 101 541 Net cash provided by (used in) financing activities (18) 16,882 477 Net increase (decrease) in cash and cash equivalents (234) 4,061 (3,636) Cash and cash equivalents - beginning of year 11,333 7,272 10,908 Cash and cash equivalents - end of year $11,099 $11,333 $ 7,272 Supplemental cash flow information: Net cash paid (received) during the year for: Interest expense $ 91 $ 75 $ 43 Income taxes, net - - (1,512) The accompanying notes are an integral part of the financial statements.
F-5 NOODLE KIDOODLE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: The following summary of the Company's major accounting policies is presented to assist in the interpretation of the financial statements. Principles of consolidation The consolidated financial statements include the accounts of the parent company and all subsidiary companies. All significant intercompany balances and transactions are eliminated in consolidation. The Company and its subsidiaries are on a 52-53 week accounting period ending on the Saturday closest to January 31. Fiscal 1998 and 1997 each contained 52 weeks and Fiscal 1996 contained 53 weeks. Description of business The Company is a specialty retailer of a broad assortment of educationally oriented, creative and non-violent children's products, including toys, books, games, video and audio tapes, computer software, crafts, and other learning products. Cash and cash equivalents All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. The Company places its temporary cash investments in high grade instruments with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Earnings per share Effective December 15, 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share". Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Under the new requirements for calculating earnings per share, the dilutive effect of stock options will be excluded from basic earnings per share but included in the computation of diluted earnings per share. All earnings per share amounts have been restated as required to comply with Statement No. 128. Property, plant and equipment Plant and equipment is stated at cost and is depreciated on a straight-line basis over estimated useful lives. Repairs and maintenance are charged to expense as incurred; renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized. Leasehold improvements are amortized over the terms of the respective leases or over their useful lives, whichever is shorter. Useful lives of other plant and equipment vary among the classifications, but range for buildings and improvements from 10-40 years and for fixtures and equipment from 4-10 years. F-6 Pre-opening expenses Costs incurred in the opening of new stores are amortized over the first twelve months of Operations. Income taxes Deferred taxes provided under SFAS No. 109 result principally from temporary differences in depreciation, capitalized inventory costs, restructuring charges, and allowance for doubtful accounts. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Fair value disclosures The carrying amounts of cash and cash equivalents, other current assets, accounts payable and other current liabilities approximates fair value because of the short term maturity of these instruments. The stated value of long-term debt, including current maturities, approximates fair value. NOTE 2 - DISCONTINUED OPERATIONS: On August 30, 1995, the Company adopted a formal plan to discontinue its wholesale business segment. The plan provided for the sale of two of the Company's distribution centers and the disposition through sale or liquidation of substantially all of the operating assets of such segment. The operations and net liabilities of the wholesale business segment are being accounted for as a discontinued operation, and accordingly, its operating results and net liabilities are reported in this manner in all periods presented in the accompanying consolidated financial statements. In connection with discontinuing its wholesale operations, the Company recorded a provision of $7.1 million in the fiscal quarter ended July 29, 1995 for (i) estimated gains or losses on the sale or liquidation of wholesale assets and (ii) estimated losses until such disposal or liquidation is completed. F-7 Summary of operating results from discontinued operations are as follows:
Fiscal Year Ended February 3, 1996 (In thousands) Net sales $51,931 Gross profit 9,726 Operating loss (1,914) Provision for discontinued operations (7,145) Net loss (9,059)
Net liabilities of this segment at January 31, 1998 and February 1, 1997 consisted principally of accounts payable, accrued expenses and capitalized lease obligations of $2,350,000 and $3,712,000, respectively, less accounts receivable and properties of $1,177,000, and $1,287,000, respectively. NOTE 3 - PROPERTY, PLANT AND EQUIPMENT:
Fiscal Years Ended January 31, February 1, 1998 1997 (In thousands) Land $ 272 $ 272 Building and improvements 1,734 1,665 Fixtures and equipment 11,511 10,735 Leasehold improvements 11,303 11,015 24,820 23,687 Less accumulated depreciation (6,306) (4,104) $18,514 $19,583
F-8 NOTE 4 - ACCRUED EXPENSES AND TAXES:
Fiscal Years Ended January 31, February 1, 1998 1997 (In thousands) Payroll and related benefits $1,082 $ 752 Rent and occupancy 1,802 1,532 Insurance 472 312 Advertising 845 466 Restructuring charges 697 1,424 Fixtures and equipment 206 602 Other 2,622 2,004 $7,726 $7,092
F-9 NOTE 5 - LONG-TERM DEBT: Long-term debt consists of the following:
Fiscal Years Ended January 31, February 1, 1998 1997 (In thousands) Revolving credit facility $ - $ - 8% unsecured promissory note, due in quarterly installments through 2016 753 771 753 771 Less current maturities 20 18 $733 $753
The Company has a revolving credit agreement which provides for maximum borrowings of $15 million until June 27, 2000. Borrowings may not exceed certain percentages of, and are collateralized by, inventories, receivables, and certain other assets. The agreement provides for an annual collateral management fee and a commitment fee on the unused portion of the commitment. Outstanding borrowings bear interest, at the option of the Company, based on the prime rate or LIBOR. The agreement contains certain covenants which among other items, limits the payment of cash dividends when borrowings under the agreement are outstanding. Annual maturities of long-term debt during the next five years are $20,000, $21,000, $23,000, $25,000 and $26,000. NOTE 6 - COMMITMENTS AND CONTINGENCIES: Minimum annual commitments under non-cancelable leases in effect at January 31, 1998 are as follows (In thousands):
1999 $ 8,886 2000 8,918 2001 8,919 2002 9,041 2003 8,831 Thereafter 35,281 $79,876
At January 31, 1998, the Company and its subsidiaries were lessees of office space, stores and transportation equipment under various leases. In addition to fixed rents and rentals based on sales, certain of the leases require the payment of taxes and other costs. Some leases include renewal options. F-10 Rental expense (income) for operating leases was as follows: Fiscal Years Ended January 31, February 1, February 3, 1998 1997 1996 (In thousands)
Minimum rentals $6,979 $ 5,430 $3,089 Taxes and other costs 2,637 2,115 1,335 Sublease rentals - (295) (761) $9,616 $ 7,250 $3,663
Litigation The Company is not party to any legal proceedings other than claims and lawsuits arising in the normal course of its business which, in the opinion of the Company's management, are not individually or in the aggregate material to its business. Employment agreements The Company has employment agreements with certain officers. Those agreements provide for minimum salary levels as well as for incentive bonuses which are payable if specified performance goals are attained. NOTE 7 - CAPITAL STOCK: Common Stock On February 13, 1996, the Company completed a public offering of 2.18 million shares (including the over allotment option) of common stock at $8.00 per share. Proceeds from the offering, net of commissions and expenses, were approximately $16.0 million. The net proceeds from the offering were used primarily to finance the Company's store expansion plans as well as for general corporate purposes, including approximately $1.0 million to improve the Company's MIS systems capabilities. Preferred stock The Company has 1,000,000 authorized (non-issued) shares of preferred stock, par value $0.001, consisting of 440,000 shares of Series A Junior Participating Preferred reserved for use under the Stockholders' Rights Plan and the remainder for other unspecified purposes. Stockholders' rights plan Each outstanding share of the Company's common stock carries a stock purchase right. Under certain circumstances, as defined in a rights agreement, each right may be exercised to purchase 1/100 of a share of Series A Junior Participating Preferred Stock for $25.00, subject to certain anti-dilution adjustments. The rights are redeemable by the Company or, under certain circumstances, by a third party to whom the Company assigns its rights at $.01 each until a person or group acquires fifteen percent of the Company's common stock or until they expire on May 15, 1998. F-11 NOTE 8 - STOCK OPTIONS: Stock incentive plan The Company's Stock Incentive Plan (the "Plan") for key employees and consultants, reserves 500,000 shares of common stock for the issuance of stock options, stock appreciation rights (SAR's), dividend equivalent rights, restricted stock, unrestricted stock and performance shares and is administered by the Compensation and Stock Option Committee (the "Committee") of the Board of Directors of the Company. Under the terms of the Plan, options granted may be either non-qualified or incentive stock options and the exercise price, determined by the Committee, shall be at least 75% (100% in the case of an incentive stock option) of the fair market value of a share on the date of grant. SAR's may be granted (subject to specified restrictions) in connection with all or any part of, or independently of, any option granted under the Plan. No SAR's, dividend equivalent rights, restricted stock, unrestricted stock or performance shares have been granted to date under the Plan. Options granted under the Plan are exercisable in installments; however, no options are exercisable within one year or later than ten years from the date of grant. Stock option plan for outside directors The Company's Outside Directors Stock Option Plan reserves 125,000 shares of common stock for the issuance of stock options related to this plan. The Stock Option Plan for Outside Directors provides that upon the initial election to the Board, each eligible director is granted an option to purchase 5,000 shares of common stock and 4,000 shares each year thereafter at the fair market value on the date of grant. The options have a term of five years and become exercisable 50% on the first anniversary of the date of grant and 50% on the second anniversary of the date of grant. The following summary sets forth the activity under the Company's stock incentive plans:
Fiscal Years Ended January 31, 1998 February 1, 1997 Weighted Avg. Weighted Avg. Shares Exercise Price Shares Exercise Price Outstanding at beginning of year 630,859 $ 5.81 580,359 $ 7.52 Granted 247,000 $ 3.39 272,000 $ 7.52 Exercised - ( 23,500) $ 4.34 Terminated (358,034) $ 5.36 (198,000) $ 9.79 Outstanding at end of year 519,825 $ 4.97 630,859 $ 5.81 Exercisable at end of year 141,406 $ 6.01 312,609 $ 4.77 Available for grant at end of year 128,800 253,500
F-12 The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting For Stock Based Compensation", and, accordingly, no compensation cost has been recognized for the stock option plans. The fair value of options at date of grant was estimated using the Black- Scholes model with the following weighted average assumptions:
Fiscal Years Ended January 31, February 1, February 3, 1998 1997 1996 Expected life (years) 5 5 5 Risk-free interest rate 6.0% 6.0% 6.5% Expected volatility 44.7% 45.3% 35.4% Dividend yield 0.0% 0.0% 0.0%
Had compensation for options granted in Fiscal 1998, 1997 and 1996 been determined consistent with SFAS No. 123, the Company's net loss and net loss per share would approximate the pro-forma amounts indicated below (In thousands except share data).
Fiscal Years Ended January 31, February 1, February 3, 1998 1997 1996 Net loss $(2,042) $(7,558) $(14,400) Net loss per share $ (.27) $ (1.01) $ (2.71)
The effects of applying SFAS No. 123 in this pro-forma disclosure are not indicative of future effects. SFAS No. 123 does not apply to awards prior to Fiscal 1996, and additional awards in future years are anticipated. The weighted average fair value of options granted was $3.25, $4.09, and $5.17 for Fiscal 1998, 1997 and 1996 respectively. NOTE 9 - TAXES ON INCOME: Income taxes (benefit) consist of the following:
Fiscal Years Ended January 31, February 1, February 3, 1998 1997 1996 (In thousands) Current: Federal $ - $ - $ - State and local - - - - - - Deferred - - 1,602 - - 1,602 Discontinued operations - - 1,602 Continuing operations $ - $ - $ -
F-13 A reconciliation of the statutory federal income tax rate attributable to loss from continuing operations to the effective income tax rate is as follows:
Federal at statutory rates (34)% (34)% (34)% State and local taxes net of federal tax benefits (4) (4) (4) Losses with no current tax benefit 38 38 38 -% -% -%
Deferred income taxes result from temporary differences in the recognition of revenue and expense for tax and financial statement purposes. The components of deferred tax assets (liabilities) consist of the following:
Fiscal Years Ended January 31, February 1, 1998 1997 (In thousands) Net operating loss carryforward (expiring in 2011-2013) $ 8,133 $6,760 Capitalizable inventory costs 262 312 Discontinued operations 641 992 Allowance for doubtful accounts 485 485 Restructured operations and other 597 778 Gross deferred tax assets 10,118 9,327 Depreciation (508) (433) Gross deferred tax liabilities (508) (433) Net deferred tax assets 9,610 8,894 Valuation allowance 9,610 8,894 Net tax assets $ - $ -
NOTE 10 - EMPLOYEE RETIREMENT PLANS: The Company has a 401-k savings plan designed to provide additional financial security during retirement by providing eligible employees with an incentive to make regular savings contributions. The Company matches 10% of the first 4% of compensation contributed by the employee. The Company in the past participated in various multi-employer pension plans. Contributions and costs were determined in accordance with the F-14 provisions of negotiated labor contracts or terms of the plans. The Company does not administer or control the plans. One of the plans covering certain former employees, to which the Company and many other employers made contributions, has been terminated. The Employee Retirement Income Security Act ("ERISA") imposes certain liabilities upon employers who are contributors to a multi-employer pension plan in the event of withdrawal or termination of such a plan. During the year ended February 1, 1997 the Company agreed to settle its liability for approximately $780,000, payable in quarterly installments over 20 years, plus interest at 8% per annum. The liability was provided for in prior periods and was charged to discontinued operations in those periods. NOTE 11 - EARNINGS PER SHARE: The following table sets forth the computation of basic and diluted loss per share:
Fiscal Years Ended January 31, February 1, February 3, 1998 1997 1996 (In thousands except share data) Numerator Net loss from continuing operations - numerator for basic and diluted loss per share $ (1,918) $ (7,492) $ (5,272) Denominator Denominator for basic loss per share - weighted average shares 7,580 7,488 5,320 Effect of dilutive securities - employee stock options 7 113 178 Denominator for diluted earnings per share - weighted average shares and dilutive potential common shares 7,587 7,601 5,498 Loss per share: Basic $ (.25) $ (1.00) $ (.99) Diluted $ (.25) $ (1.00) $ (.99)
In accordance with FASB No. 128, as a result of losses from continuing operations, the inclusion of employee stock options were antidilutive and, therefore, were not utilized in the computation of diluted earnings per share. F-15 NOTE 12 - INDUSTRY SEGMENTS: The Company operates substantially in one industry segment which includes the retail sales of children's toys and other products. NOTE 13 - PROVISION FOR RESTRUCTURED OPERATIONS: On August 10, 1994, the Company announced the closing of stores operating under the name Playworld Toy Stores and a provision of $3,900,000 was recorded for restructuring costs. The Company provided an additional $500,000 ($.09 per share) in Fiscal 1996 primarily to reflect the closing of one additional store that was not anticipated previously. NOTE 14 - INTERIM FINANCIAL DATA (UNAUDITED):
First Second Third Fourth Quarter Quarter Quarter Quarter (In thousands except share data) Fiscal Year Ended January 31, 1998: Sales $15,535 $13,654 $15,641 $36,834 Gross profit 5,871 5,115 5,942 14,348 Net income (loss) $(2,003) $(2,719) $(2,399) $ 5,203 Net income (loss) per share: Basic $ (.26) $ (.36) $ (.32) $ .69 Assuming dilution $ (.26) $ (.36) $ (.32) $ .69 Weighted Average Shares: Basic 7,580 7,580 7,580 7,580 Assuming dilution 7,580 7,587 7,585 7,594 Fiscal Year Ended February 1, 1997: Sales $ 9,113 $ 9,531 $11,845 $28,921 Gross profit 3,186 3,446 4,604 11,632 Net income (loss) $(2,693) $(3,075) $(2,468) $ 744 Net income (loss) per share: Basic $ (.37) $ (.41) $ (.33) $ .10 Assuming dilution $ (.37) $ (.41) $ (.33) $ .10 Weighted Average Shares: Basic 7,239 7,558 7,574 7,580 Assuming dilution 7,401 7,691 7,692 7,617
The Company's sales are highly seasonal. Net income (loss) per share calculations for each of the quarters are based on the weighted average number of shares outstanding for each period and the sum of the quarters may not necessarily be equal to the full year income (loss) per share amount. F-16 SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS For the Fiscal Years Ended January 31, 1998, February 1, 1997 and February 3, 1996 (In thousands)
Column A Column B Column C Column D Column E Additions (1) (2) Balance at Charged to Charged to Deductions Balance at beginning of costs and other end of year expenses accounts year For estimated losses in collection: Year ended January 31, 1998 $ 1,277 $ - $ - $ - $ 1,277 Year ended February 1, 1997 $ 1,277 $ - $ - $ - $ 1,277 Year ended February 3, 1996 $ 983 $ 581 $ - $ 287 (a) $ 1,277
(a) Write-offs net of recoveries All amounts are included in discontinued operations. EX-27 2
5 1000 12-MOS JAN-31-1998 FEB-02-1997 JAN-31-1998 11,099 0 0 0 16,821 30,944 24,820 6,306 49,481 14,967 0 0 0 9 33,772 49,481 81,664 81,664 50,388 50,388 33,552 0 90 (1,918) 0 (1,918) 0 0 0 (1,918) (0.25) (0.25)
EX-99.10.2 3 EXHIBIT 10.2 EMPLOYMENT AGREEMENT AGREEMENT, dated as of February 1, 1998, between NOODLE KIDOODLE, INC., a Delaware corporation (the "Company"), and Stanley Greenman (the "Executive"). It is hereby agreed as follows: 1. Nature of Employment: the Company hereby employs Executive as its Chairman and Chief Executive Officer and confirms the election of Executive by the Company's Board of Directors as its Chairman and Chief Executive Officer, and agrees to use its best efforts to cause Executive to be reelected as during the term of this Agreement as its Chairman and Chief Executive Officer. Executive accepts employment upon the terms and conditions hereinafter set forth and agrees to serve the Company as its its Chairman and Chief Executive Officer and as a member of its Board of Directors so long as so elected during the term of this Agreement. The Executive shall report to the Board of Directors of the Company. The Executive shall also serve without additional compensation as an officer and director of all corporations from time to time owned or controlled by the Company if so elected or appointed. The Executive shall devote his full time, energies, skills and attention to the performance of his duties and responsibilities hereunder, and shall perform them faithfully and diligently. The office of the Executive shall be located within a 20 mile radius of the Executive's residence on the date of this Agreement and the Executive shall not be required to locate his office elsewhere without his prior written consent. 2. Term of Employment: The term of the Executive's employment under this Agreement shall be for the period commencing as of February 1, 1998 and terminating on January 31, 2001 unless sooner terminated by either party for cause or as hereinafter provided. (a) In the event of the death or "total disability" (as defined below) of the Executive, the Executive's employment shall terminate as of the date of his death or the date of his certification of total disability, in either of which events, Executive, his estate, legal representative or designee, as the case may be, shall receive the full salary compensation provided for the Executive in Section 3 below for a period of six (6) months from the date of the Executive's death or total disability. -1- (b) In the event the Board of Directors of the Company shall determine, as confirmed by competent medical evidence (which shall include a certificate from Executive's then personal physician) , that Executive has become "totally disabled" and, on the same or subsequent occasion, shall determine that such disability shall have continued for a period of three (3) consecutive months, then Executive's employment shall terminate thirtty (30) days after the date upon which the Company shall have given notice to the Executive of its election to terminate his employment because of such total disability, provided, however, that prior to termination the Board of Directors shall have received confirming competent medical evidence as to the existence of the Executive's total disability at such time. Any controversy arising in the determination of whether the Executive shall be deemed to be "totally disabled" for purposes of his being terminated as provided for herein shall be settled by an independent physician licensed to practice medicine selected by the Board of Directors of the Company and approved by the Executive. Prior to any such termination, the Company's obligations with respect to compensation and benefits shall continue during the period of disability. (c) In the event of a change in control (as defined herein) of the Company, which results in an actual or constructive termination of employment, the Executive shall have the right within six (6) months after any such termination, to terminate his employment hereunder and to receive an amount, payable in a lump sum as severance pay within 10 days after he shall have given notice of his election to terminate, equal to the amount by which two hundred ninety-nine percent (299%) of the base amount exceeds the present value of all other payments which would be considered as contingent on a change of ownership or control (other than payments which would not be treated as parachute payments) under section 280G of the Internal Revenue Code. The "base amount" for purposes of this subsection (c) shall mean the average annual compensation which was payable by the Company and was includable in the Executive's gross income for tax purposes for the most recent five (5) taxable years of the Executive ending before the date on which a change in control occurs. A "change in control" for purposes of this subsection (c) shall mean (i) the acquisition (directly or indirectly) by any person, entity or group of more than twenty-five percent (25%) of the outstanding voting stock of the Company (acquisition shall include accumulation in one or more transactions, including, without limitation, any issuance, transfer or purchase of stock., -2- reclassification of securities, stock split, stock dividend or distribution, reverse stock split, recapitalization, merger or consolidation with subsidiaries, and any transaction which has the direct or indirect effect of increasing the proportionate share of the outstanding voting stock of the Company held by such person, entity or group) , or (ii) the individuals who currently constitute the directors of the Company, or individuals elected by more than two-thirds of such current directors to replace any of such current directors, no longer constitute a majority of the directors of the Company. A "constructive termination of employment" for purposes of this subsection (c) shall mean any of the following, if done without the Executive's consent and having a material adverse effect on his employment or the conditions under which he works: (i) a change in the title, duties or responsibilities of the Executive, including the person or body to whom the Executive reports, (ii) a change in the location where the Executive's services are rendered, (iii) a change in the office or secretarial arrangements affecting the Executive, or (iv) any reduction in compensation or fringe benefits or change of any other term of this Agreement, or any other breach of this Agreement by the Company. A constructive termination shall be determined by the Executive in his sole, reasonable discretion. 3. Compensation: (a) Subject to the provisions of Section 2, as compensation for his services hereunder the Company agrees to pay the Executive a salary, payable at such times as may be customary for the payment of compensation to other the Company employees, or at such times as the Executive and the Company shall agree upon, at the rate of $300,000 per annum during the Term of this Agreement, or at such increased rate as the Board, with the advice of the Compensation Committee, may from time to time determine. (b) In addition to the salary to be paid pursuant to Section 3 (a) , the Executive shall be eligible to participate in the Company's Bonus Incentive Plan (the "Bonus Plan") or any successor plan thereto, pursuant to the terms of such Bonus Plan. (c) The Executive shall also be eligible for grants of stock options to acquire shares of Common Stock of the Company ("Options") pursuant to the Company's 1994 Stock Incentive Plan (the "Plan"), or any successor plan thereto, pursuant to the terms of the Plan. -3- 4. Additional Compensation; Benefits: The Board of Directors of the Company, in its sole and absolute discretion, may at any time and from time to time pay to the Executive such additional incentive payments, bonuses and/or profit sharing distributions, in addition to the compensation provided in Section 3, as the Board of Directors, with the advice of the Compensation Committee, may determine. The stock option and compensation committee of the Company in its sole and absolute discretion may at any time and from time to time award to the Executive such stock options or other stock based pay under the Company's stock option plan or otherwise, in addition to the compensation provided for in Section 3, as such committee or board may from time to time determine. The Executive shall, in any event, be entitled to the continuation of any employee benefits, including life, disability or accident insurance coverage, currently being received by the Executive, and shall be eligible to participate in any plan of the Company available to the employees of the Company and any other plan which may be adopted in the future with respect to employees or executives of the Company or any of its operating divisions if he shall be eligible under the terms of such plan without restriction or limitation by reason of this Agreement. The Executive shall also be entitled to paid vacation for such periods and times as have been heretofore customary for the Executive. 5. Expenses: the Company shall promptly reimburse the Executive for all specified items of travel, entertainment and miscellaneous expenses reasonably incurred by him in connection with the performance of his duties hereunder upon presentation of vouchers therefor in accordance with normal procedures and standards established by the Company for such purposes. the Company shall also, at its own expense, provide Executive with a new automobile of the Company's choice and shall bear all expenses of maintaining and insuring such automobile. 6. Nondisclosure; Noncompetition: (a) Executive shall not, at any time during or following expiration or termination of Executive's employment (regardless of the reason therefor), directly or indirectly, disclose to any person (except in the regular course of the Company's business), or use in competition with the Company, any of the Company's trade secrets or confidential information. -4- (b) For a period of one (1) year following expiration of his employment or termination of employment for any reason other than (i) termination by the Company without cause, or (ii) termination by the Executive in accordance with Section 2(c) hereof, the Executive shall not, without the Company's written consent, (A) enter into the employ of or render any services to any person, firm or corporation engaged in any "Competitive Business" (as defined below); (3) engage in any Competitive Business for his own account or (C) become interested in any Competitive Business as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, consultant, advisor or in any other relationship or capacity. As used herein, "Competitive Business" shall mean operating stores for the retail sale of educationally oriented products for children, including without limitation, toys, games, books, video and audio tapes, computer software, crafts, and science and construction merchandise. The geographic locations in which this covenant shall be operative shall include a fifty (50) mile radius of any Noodle Kidoodle store then operated by the Company, or then planned by the Company to be opened within a twelve month period. 7. Fees and_Expenses: the Company shall pay all legal fees and related expenses incurred by the Executive as a result of (i) termination of his employment following a change in control of the Company (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or incurred by the Executive in seeking advice with respect to tax matters relating thereto) or (ii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement, if the Company shall have denied such right or withheld such benefit, and if the Executive shall prevail in obtaining or enforcing it. 8. Miscellaneous: (a) the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business and/or assets, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. -5- (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there be no such designee, to the Executive's estate. (c) No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. (d) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. (e) In the event that any provision of this Agreement is held to be invalid or unenforceable in any jurisdiction for any reason unless narrowed by construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid or unenforceable provision had been more narrowly drawn so as not to be invalid or unenforceable; and such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provisions in any other jurisdiction. (f) The invalidity or unenforcibility of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. -6- (g) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York, New York in accordance with the rules of the American Arbitration Association then in effect. (h) The Executive or his estate or designee shall be entitled to receive reasonable attorneys' fees, costs and expenses incurred in enforcing the Executive's rights under this Agreement.. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. NOODLE KIDOODLE, INC. By:/s/ Stewart Katz ATTEST: Name: Stewart Katz Title: President By:/s/ Kenneth S. Betuker Name: Kenneth S. Betuker Executive: /s/ Stanley Greenman -7- EX-99.10.3 4 EXHIBIT 10.3 EMPLOYMENT AGREEMENT AGREEMENT, dated as of February 1, 1998, between NOODLE KIDOODLE, INC., a Delaware corporation (the "Company"), and Stewart Katz (the "Executive"). It is hereby agreed as follows: 1. Nature of Employment: the Company hereby employs Executive as its President and Chief Operating Officer and confirms the election of Executive by the Company's Board of Directors as its President and Chief Operating officer, and agrees to use its best efforts to cause Executive to be reelected as President and Chief Operating officer during the term of this Agreement. Executive accepts employment upon the terms and conditions hereinafter set forth and agrees to serve the Company as its President and Chief Operating Officer, and as a member of its Board of Directors so long as so elected during the term of this Agreement. The Executive shall report to the Board of Directors of the Company. The Executive shall also serve without additional compensation as an officer and director of all corporations from time to time owned or controlled by the Company if so elected or appointed. The Executive shall devote his full time, energies, skills and attention to the performance of his duties and responsibilities hereunder, and shall perform them faithfully and diligently. The office of the Executive shall be located within a 20 mile radius of the Executive's residence on the date of this Agreement and the Executive shall not be required to locate his office elsewhere without his prior written consent. 2. Term of Employment: The term of the Executive's employment under this Agreement shall be for the period commencing as of February 1, 1998 and terminating on January 31, 2001 unless sooner terminated by either party for cause or as hereinafter provided. (a) In the event of the death or "total disability" (as defined below) of the Executive, the Executive's employment shall terminate as of the date of his death or the date of his -1- certification of total disability, in either of which events, Executive, his estate, legal representative or designee, as the case may be, shall receive the full salary compensation provided for the Executive in Section 3 below for a period of six (6) months from the date of the Executive's death or total disability. (b) In the event the Board of Directors of the Company shall determine, as confirmed by competent medical evidence (which shall include a certificate from Executive's then personal physician) , that Executive has become "totally disabled" and, on the same or subsequent occasion, shall determine that such disability shall have continued for a period of three (3) consecutive months, then Executive's employment shall terminate thirtty (30) days after the date upon which the Company shall have given notice to the Executive of its election to terminate his employment because of such total disability, provided, however, that prior to termination the Board of Directors shall have received confirming competent medical evidence as to the existence of the Executive's total disability at such time. Any controversy arising in the determination of whether the Executive shall be deemed to be "totally disabled" for purposes of his being terminated as provided for herein shall be settled by an independent physician licensed to practice medicine selected by the Board of Directors of the Company and approved by the Executive. Prior to any such termination, the Company's obligations with respect to compensation and benefits shall continue during the period of disability. (c) In the event of a change in control (as defined herein) of the Company, which results in an actual or constructive termination of employment, the Executive shall have the right within six (6) months after any such termination, to terminate his employment hereunder and to receive an amount, payable in a lump sum as severance pay within 10 days after he shall have given notice of his election to terminate, equal to the amount by which two hundred ninety- -2- nine percent (299%) of the base amount exceeds the present value of all other payments which would be considered as contingent on a change of ownership or control (other than payments which would not be treated as parachute payments) under section 280G of the Internal Revenue Code. The "base amount" for purposes of this subsection (c) shall mean the average annual compensation which was payable by the Company and was includable in the Executive's gross income for tax purposes for the most recent five (5) taxable years of the Executive ending before the date on which a change in control occurs. A "change in control" for purposes of this subsection (c) shall mean (i) the acquisition (directly or indirectly) by any person, entity or group of more than twenty-five percent (25%) of the outstanding voting stock of the Company (acquisition shall include accumulation in one or more transactions, including, without limitation, any issuance, transfer or purchase of stock., reclassification of securities, stock split, stock dividend or distribution, reverse stock split, recapitalization, merger or consolidation with subsidiaries, and any transaction which has the direct or indirect effect of increasing the proportionate share of the outstanding voting stock of the Company held by such person, entity or group) , or (ii) the individuals who currently constitute the directors of the Company, or individuals elected by more than two-thirds of such current directors to replace any of such current directors, no longer constitute a majority of the directors of the Company. A "constructive termination of employment" for purposes of this subsection (c) shall mean any of the following, if done without the Executive's consent and having a material adverse effect on his employment or the conditions under which he works: (i) a change in the title, duties or responsibilities of the Executive, including the person or body to whom the Executive reports, (ii) a change in the location where the Executive's services are rendered, (iii) a change in the office or secretarial arrangements affecting the Executive, or (iv) any reduction in compensation or fringe -3- benefits or change of any other term of this Agreement, or any other breach of this Agreement by the Company. A constructive termination shall be determined by the Executive in his sole, reasonable discretion. 3. Compensation: (a) Subject to the provisions of Section 2, as compensation for his services hereunder the Company agrees to pay the Executive a salary, payable at such times as may be customary for the payment of compensation to other the Company employees, or at such times as the Executive and the Company shall agree upon, at the rate of $275,000 per annum during the Term of this Agreement, or at such increased rate as the Board, with the advice of the Compensation Committee, may from time to time determine. (b) In addition to the salary to be paid pursuant to Section 3 (a) , the Executive shall be eligible to participate in the Company's Bonus Incentive Plan (the "Bonus Plan") or any successor plan thereto, pursuant to the terms of such Bonus Plan. (c) The Executive shall also be eligible for grants of stock options to acquire shares of Common Stock of the Company ("Options") pursuant to the Company's 1994 Stock Incentive Plan (the "Plan"), or any successor plan thereto, pursuant to the terms of the Plan. 4. Additional Compensation; Benefits: The Board of Directors of the Company, in its sole and absolute discretion, may at any time and from time to time pay to the Executive such additional incentive payments, bonuses and/or profit sharing distributions, in addition to the compensation provided in Section 3, as the Board of Directors, with the advice of the Compensation Committee, may determine. The stock option and compensation committee of the Company in its sole and absolute discretion may at any time and from time to time award to the Executive such stock options or other stock based pay under the Company's stock option plan or otherwise, in addition to the -4- compensation provided for in Section 3, as such committee or board may from time to time determine. The Executive shall, in any event, be entitled to the continuation of any employee benefits, including life, disability or accident insurance coverage, currently being received by the Executive, and shall be eligible to participate in any plan of the Company available to the employees of the Company and any other plan which may be adopted in the future with respect to employees or executives of the Company or any of its operating divisions if he shall be eligible under the terms of such plan without restriction or limitation by reason of this Agreement. The Executive shall also be entitled to paid vacation for such periods and times as have been heretofore customary for the Executive. 5. Expenses: the Company shall promptly reimburse the Executive for all specified items of travel, entertainment and miscellaneous expenses reasonably incurred by him in connection with the performance of his duties hereunder upon presentation of vouchers therefor in accordance with normal procedures and standards established by the Company for such purposes. the Company shall also, at its own expense, provide Executive with a new automobile of the Company's choice and shall bear all expenses of maintaining and insuring such automobile. 6. Nondisclosure; Noncompetition: (a) Executive shall not, at any time during or following expiration or termination of Executive's employment (regardless of the reason therefor), directly or indirectly, disclose to any person (except in the regular course of the Company's business), or use in competition with the Company, any of the Company's trade secrets or confidential information. (b) For a period of one (1) year following expiration of his employment or termination of employment for any reason other than (i) termination by the Company without cause, or (ii) -5- termination by the Executive in accordance with Section 2(c) hereof, the Executive shall not, without the Company's written consent, (A) enter into the employ of or render any services to any person, firm or corporation engaged in any "Competitive Business" (as defined below); (3) engage in any Competitive Business for his own account or (C) become interested in any Competitive Business as an individual, partner, shareholder, creditor, director, officer, principal, agent, employee, consultant, advisor or in any other relationship or capacity. As used herein, "Competitive Business" shall mean operating stores for the retail sale of educationally oriented products for children, including without limitation, toys, games, books, video and audio tapes, computer software, crafts, and science and construction merchandise. The geographic locations in which this covenant shall be operative shall include a fifty (50) mile radius of any Noodle Kidoodle store then operated by the Company, or then planned by the Company to be opened within a twelve month period. 7. Fees and Expenses: the Company shall pay all legal fees and related expenses incurred by the Executive as a result of (i) termination of his employment following a change in control of the Company (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or incurred by the Executive in seeking advice with respect to tax matters relating thereto) or (ii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement, if the Company shall have denied such right or withheld such benefit, and if the Executive shall prevail in obtaining or enforcing it. 8. Miscellaneous: (a) the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business and/or assets, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the -6- same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there be no such designee, to the Executive's estate. (c) No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. (d) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. (e) In the event that any provision of this Agreement is held to be invalid or unenforceable in any jurisdiction for any reason unless narrowed by construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid or unenforceable provision had been more narrowly drawn so as not to be invalid or unenforceable; and such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or -7- unenforceability, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provisions in any other jurisdiction. (f) The invalidity or unenforcibility of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (g) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York, New York in accordance with the rules of the American Arbitration Association then in effect. (h) The Executive or his estate or designee shall be entitled to receive reasonable attorneys' fees, costs and expenses incurred in enforcing the Executive's rights under this Agreement.. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. NOODLE KIDOODLE, INC. By:/s/ Stanley Greenman ATTEST: Name: Stanley Greenman Title: Chairman and Chief Executive Officer By:/s/Kenneth S. Betuker Name:Kenneth S. Betuker Executive: /s/ Stewart Katz -8- -----END PRIVACY-ENHANCED MESSAGE-----