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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KBKIDS.COM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 5945 84-1528837
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1099 EIGHTEENTH STREET
SUITE 1000
DENVER, COLORADO 80202
(303) 228-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SRIKANT SRINIVASAN, CHIEF EXECUTIVE OFFICER
KBKIDS.COM INC.
1099 EIGHTEENTH STREET
SUITE 1000
DENVER, COLORADO 80202
(303) 228-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
MICHAEL WAGER, ESQ. SARAH BESHAR, ESQ.
BENESCH, FRIEDLANDER, COPLAN DAVIS POLK & WARDWELL
& ARONOFF LLP 450 LEXINGTON AVENUE
2300 BP TOWER NEW YORK, NEW YORK 10017
200 PUBLIC SQUARE (212) 450-4000
CLEVELAND, OHIO 44114-2378
(216) 363-4500
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) AMOUNT OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock, $.01 par value........................ $210,000,000 $55,440
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</TABLE>
(1) Includes common stock which may be purchased by the underwriters to cover
over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee. In
accordance with Rule 457(o) under the Securities Act of 1933, as amended,
the number of shares being registered and the proposed maximum offering
price per share are not included in this table.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 27, 2000
Shares
[KBKIDS.COM LOGO]
Class A Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the Class A common stock is expected
to be between $ and $ per share. We intend to apply to list our
Class A common stock on The Nasdaq Stock Market's National Market under the
symbol "KBKD."
The underwriters have an option to purchase a maximum of
additional shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
10.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS KBKIDS.COM
--------- ------------- -----------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of Class A common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
E*OFFERING
The date of this prospectus is , 2000.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 10
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 27
USE OF PROCEEDS....................... 27
DIVIDEND POLICY....................... 28
CAPITALIZATION........................ 29
DILUTION.............................. 30
CORPORATE HISTORY AND STRUCTURE....... 31
SELECTED FINANCIAL DATA............... 32
PRO FORMA FINANCIAL DATA.............. 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 34
OUR BUSINESS.......................... 41
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MANAGEMENT............................ 55
PRINCIPAL STOCKHOLDERS................ 65
CERTAIN TRANSACTIONS.................. 66
DESCRIPTION OF CAPITAL STOCK AND
MEMBERSHIP UNITS.................... 69
CERTAIN U.S. FEDERAL TAX
CONSIDERATIONS FOR NON-U.S. HOLDERS
OF COMMON STOCK..................... 74
UNDERWRITING.......................... 76
NOTICE TO CANADIAN RESIDENTS.......... 78
LEGAL MATTERS......................... 79
EXPERTS............................... 79
WHERE YOU CAN FIND MORE INFORMATION... 79
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
For a more comprehensive understanding of this offering, you should read the
more detailed information contained in this prospectus including, but not
limited to, the information contained in the section entitled "Risk Factors."
In this prospectus, we refer to Consolidated Stores Corporation and all of
its direct and indirect subsidiaries, including KB Online Holdings LLC, as
"Consolidated." "KB Toys" refers to Consolidated's retail toy store operations
and includes KB Online Holdings LLC. KB Online refers only to KB Online Holdings
LLC. References to "KBkids," "we," "us," and "our" are to KBkids.com Inc.,
except that those terms refer to KBkids.com LLC when discussing the online store
and its operations.
KBKIDS
We are one of the fastest growing online retailers with an exclusive focus
on children's products. In only our first holiday season, Media Metrix ranked us
twelfth overall among all online retail sites for unique visitors during the
five week holiday season ended December 26, 1999. For the same five week holiday
period, Media Metrix ranked us among the top three toy sales in traffic.
Currently, we sell toys, video games, software and videos, and we intend to
expand our product offerings in the future.
The market for children's products encompasses numerous categories, such as
traditional toys, books, video games and educational software. Toy Manufacturers
of America estimates that the domestic toy and video game market had retail
sales in excess of $27 billion in 1998. There is a significantly larger market
if we include international markets. For example, according to Toy Manufacturers
of America, sales in the international toy and video game market were
approximately $68 billion in 1998. In addition, we believe that businesses' and
consumers' rapid acceptance of the Internet has created the foundation for
significant growth in business-to-consumer electronic commerce. Forrester
Research estimates that online purchases by U.S. consumers will grow from
approximately $20 billion in 1999 to $184 billion by 2004.
We believe that no traditional children's products retailer offers an
effective combination of a broad selection of popular brand name products, a
convenient shopping experience, detailed product information, expert advice and
personalized service. We also believe that other online children's products
retailers face challenges such as developing a brand name, establishing vendor
relationships and developing their merchandising and retailing expertise. Our
online store is designed to address the limitations of both traditional and
online children's products retailers.
Our ability to combine KB Toys' toy retailing experience and infrastructure
with our entrepreneurial culture and Internet expertise has allowed us to employ
a superior business model that delivers a rewarding customer experience
combining the convenience and flexibility of a leading online shopping site with
the benefits of a retail toy store. KB Toys is the second largest specialty toy
retailer in the United States, operating approximately 1,300 stores nationwide.
We believe that the brand name, cross-marketing advantages and store-based
synergies that we have with KB Toys give us a strategic advantage in the area of
customer acquisition. We also benefit from numerous merchandising synergies with
KB Toys such as favorable allocations of popular products and cost-effective
purchasing.
Our online store provides a rewarding shopping experience by emphasizing
the following:
- CONVENIENCE AND SELECTION. Our online store provides a wide selection of
products to our customers through an easy-to-use website that is
available 24 hours a day, 7 days a week.
- VALUE. Our customers save time and money by using our online store to
purchase children's products. Through our purchasing leverage with KB
Toys, we can pass on the benefits of volume discounts to our customers in
the form of lower prices.
- PURCHASING ADVICE. To assist our customers in selecting products, we
provide consumer reviews and comments, daily spotlight products,
favorites by age, special offers and featured products. In
3
<PAGE> 5
addition, we release new articles weekly to highlight toy developments
observed by our editorial team and other experts.
- CUSTOMER SERVICE. We emphasize customer service during all phases of a
customer's shopping experience, including a toll-free pre-sale and
post-sale customer service center, an integrated inventory control system
designed to reflect accurately a product's availability and a product
returns procedure that enables customers to return our products to us
directly or to any KB Toys store nationwide.
- COMMUNITY. To foster interaction among our community of customers, we
host message board discussions regarding relevant topics such as video
games, popular seasonal toys, collectibles and parenting. In addition, we
host ask-the-experts message boards for customers to ask our editorial
staff specific questions.
Our goal is to become the premier online destination for purchasing a wide
range of children's products. We intend to achieve this goal by pursuing the
following strategies:
- INCREASE ACQUISITION OF CUSTOMERS. We intend to combine our strong brand
recognition and cross-marketing synergies with KB Toys and expanded
online and offline marketing media to continue to aggressively acquire
customers for our online store.
- PROMOTE REPEAT BUSINESS FROM EXISTING CUSTOMERS. We intend to promote
customer loyalty and build relationships with our customers to drive
repeat sales. We plan to accomplish this by continually seeking input
from our customers to enhance our online store and its features, thereby
making it more attractive to them.
- EXPAND OUR PRODUCT OFFERINGS. To increase our customer base and counter
the seasonality of the toy business, we intend to expand our product
offerings, examine geographic expansion and pursue alternative selling
formats.
- ENHANCE OUR TECHNOLOGY. To remain competitive, we plan to continue to
augment and improve the functionality and features of our online store.
We intend to incorporate features that provide customer interaction to
personalize our customers' shopping experience. In addition, we intend to
enhance our technology to continue to minimize downtime and support
increasing levels of online traffic.
- EXPAND OUR FULFILLMENT AND CUSTOMER CARE CAPABILITIES. We are examining
our fulfillment and customer care operations to determine how to become
the best in our class in terms of warehousing, packaging, delivery and
customer service. This may result in our purchasing or leasing dedicated
fulfillment centers and customer service call centers.
CORPORATE INFORMATION
Our executive offices are located at 1099 Eighteenth Street, Suite 1000,
Denver, Colorado 80202 and our telephone number is (303) 228-9000. Our online
store is located at www.kbkids.com. The information contained on our website is
not a prospectus and does not constitute part of this prospectus.
CORPORATE HISTORY AND STRUCTURE
KBKIDS.COM LLC FORMATION
On June 25, 1999, KB Online, a wholly-owned subsidiary of Consolidated, and
BrainPlay.com, Inc. entered into a contribution agreement to form KBkids.com LLC
as a joint venture. Under the contribution agreement, KB Online received 80% of
the membership units in KBkids.com LLC in exchange for contributing cash and
property valued at $80,000,000 and intangibles valued at $4,000,000.
BrainPlay.com received the remaining 20% of the membership units in exchange for
contributing substantially all of its assets and liabilities.
4
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REORGANIZATION
In connection with this offering, KBkids.com Inc. was formed, and in
addition, a subsidiary of KBkids.com Inc. was formed to be merged into
BrainPlay.com.
Simultaneously with the consummation of this offering, we will reorganize
as follows:
- KBkids.com Inc. will invest the net proceeds of this offering in
KBkids.com LLC, and in return KBkids.com Inc. will receive
membership units in KBkids.com LLC. These units will
represent % of the then outstanding equity of KBkids.com LLC.
- KB Online will contribute one membership unit in KBkids.com LLC to
KBkids.com Inc. in exchange for one share of Class B common stock of
KBkids.com Inc.
- The newly formed subsidiary of KBkids.com Inc. will merge into
BrainPlay.com resulting in BrainPlay.com becoming a wholly-owned
subsidiary of KBkids.com Inc. As a result of this merger, KBkids.com Inc.
will indirectly own membership units held by BrainPlay.com representing
% of the then outstanding equity of KBkids.com LLC, and the
equityholders of BrainPlay.com will receive, in the aggregate,
shares, and/or options to acquire shares, of Class A common stock in
KBkids.com Inc. based on an exchange ratio of shares, or
options to acquire shares, of Class A common stock for each share of
BrainPlay.com common stock and each option to acquire common stock.
- KBkids.com Inc. will become the sole manager of KBkids.com LLC. Through
our board of directors and our officers, we will be responsible for all
operational and administrative decisions of KBkids.com LLC and the
day-to-day management of its business.
- KB Online's membership units will represent % of the then outstanding
equity of KBkids.com LLC. KB Online will have the right to exchange its
membership units in KBkids.com LLC and its share of Class B common stock
into an equivalent number of shares of Class A common stock. For more
detailed information regarding KB Online's exchange rights, you should
read the information contained in "Description of Capital Stock and
Membership Units."
5
<PAGE> 7
After this offering, each of the public stockholders, the former
BrainPlay.com equityholders and Consolidated will have a direct or indirect
economic interest in KBkids.com LLC equal to the respective percentage of the
aggregate voting power in KBkids.com Inc. held by each of them. The following
chart illustrates our structure, and the structure of KBkids.com LLC, upon
completion of this offering.
[KBkids.com Inc. Flowchart]
After this offering:
- The public stockholders purchasing stock in this offering will own
shares of Class A common stock in the aggregate, which
will represent % of the total issued and outstanding Class A and Class
B common stock and % of the aggregate voting power.
- The former equityholders of BrainPlay.com will beneficially own
shares of Class A common stock in the aggregate, which will represent %
of the total issued and outstanding Class A and Class B common stock and
% of the aggregate voting power.
- Consolidated will indirectly own 100% of the Class B common stock, which
will represent less than 1% of the total issued and outstanding Class A
and Class B common stock, but by reason of its ownership of the Class B
common stock will control % of the aggregate voting power of
KBkids.com Inc.
6
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THE OFFERING
Unless otherwise indicated, information in this prospectus assumes the
underwriters' over-allotment option is not exercised. As used in this prospectus
and unless otherwise specified, "common stock" means our Class A common stock.
Common stock offered................ shares of Class A common
stock
Common stock to be outstanding after
this offering....................... shares of Class A common
stock and one share of Class B common
stock
Common stock to be outstanding after
this offering assuming exchange of
Consolidated's membership units in
KBkids.com LLC for, and conversion
of its Class B common stock into,
shares of Class A common stock.... shares of Class A common
stock and no shares of Class B common
stock
Use of proceeds..................... We plan to use the net proceeds from
this offering for general corporate
purposes, principally working capital,
capital expenditures, marketing and
sales activity and product development.
We may also use a portion of the
proceeds for strategic acquisitions.
See "Use of Proceeds."
Voting rights....................... The holders of Class A common stock
generally have rights identical to
holders of Class B common stock, except
that each holder of Class A common
stock is entitled to one vote per share
and each holder of Class B common stock
is entitled to the number of votes per
share equal to the total number of
shares of Class B common stock owned by
that holder plus the total number of
membership units in KBkids.com LLC
owned by that holder.
The holders of Class A common stock and
Class B common stock vote together as a
single class on all matters, including
the election of directors, except as
otherwise required by applicable
Delaware law.
Membership units in KBkids.com LLC
to be outstanding after this
offering.......................... membership units. Membership
units in KBkids.com LLC are
exchangeable for shares of Class A
common stock at any time by the holder
on a one-for-one basis. If, immediately
following this offering, Consolidated
converted its Class B common share and
exchanged all of its membership units,
it would own approximately % of
the outstanding Class A common stock.
Proposed Nasdaq National Market
symbol.............................. KBKD
Unless otherwise specified, the number of shares of Class A common stock to be
outstanding after this offering does not include:
- shares issuable upon exercise of options outstanding as of
, 2000 at a weighted average exercise price of $ per
share;
- shares issuable upon exercise of options to be granted to our
executive officers at the closing of this offering at an exercise price
equal to the initial public offering price per share;
- additional shares that could be issued under our stock option
plan; and
- shares issuable upon conversion of Consolidated's one share of
Class B common stock and all of its membership units in KBkids.com LLC.
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SUMMARY FINANCIAL DATA
The following tables show summary financial information and other
information about us and our predecessor, BrainPlay.com. You should read this
summary information in conjunction with the more detailed financial statements
and related notes in this prospectus. Our fiscal year ends on March 31 of each
year.
<TABLE>
<CAPTION>
KBKIDS.COM LLC
BRAINPLAY.COM, -------------------------------------
INC. PRO FORMA
BRAINPLAY.COM, INC. ------------------ PRO FORMA COMBINED, AS
------------------------- COMBINED FOR ADJUSTED, FOR
YEAR ENDED MARCH 31, SIX MONTHS THE SIX MONTHS THE SIX MONTHS
------------------------- ENDED ENDED ENDED
1997 1998 1999 SEPT. 30, 1998 SEPT. 30, 1999(2) SEPT. 30, 1999(3)
----- ------- ------- ------------------ ----------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net sales........................ $ 2 $ 71 $ 596 $ 91 $ 1,545
Cost of products sold............ 2 65 675 109 2,098
----- ------- ------- ------- -------- --------
Gross profit(loss)............... -- 6 (79) (18) (553)
Total operating expenses......... 319 1,103 4,729 1,632 13,774
----- ------- ------- ------- -------- --------
Loss from operations............. $(319) $(1,097) $(4,808) $(1,650) $(14,327)
Loss before minority interest.... (314) (1,047) (4,756) (1,603) (14,138)
----- ------- ------- ------- -------- --------
Minority interest................ -- -- -- -- --
----- ------- ------- ------- -------- --------
Net loss......................... $(314) $(1,047) $(4,756) $(1,603) $(14,138)
===== ======= ======= ======= ======== ========
Basic and diluted loss before
minority interest per share on
a fully converted basis........
Basic and diluted weighted
average shares outstanding on a
fully converted basis(1).......
Basic and diluted net loss per
share..........................
Basic and diluted weighted
average shares outstanding.....
</TABLE>
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(1) Represents total shares outstanding assuming conversion of Consolidated's
membership units in KBkids.com LLC and its one share of Class B common
stock.
(2) Reflects the combined operations of BrainPlay.com for the period April 1,
1999 to June 25, 1999, and KBkids.com LLC for the period from June 26, 1999
to September 30, 1999; however, no adjustments have been made for
amortization of intangibles.
(3) Reflects the combined operations of BrainPlay.com for the period from April
1, 1999 to June 25, 1999, and KBkids.com LLC for the period from June 26,
1999 to September 30, 1999, as adjusted to reflect our receipt of the
estimated net proceeds from this offering, the merger of a wholly-owned
subsidiary of KBkids.com with and into BrainPlay.com and the issuance of one
share of Class B common stock to KB Online.
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KBKIDS.COM LLC KBKIDS.COM INC.
--------------- ---------------
AS OF SEPT. 30, AS OF SEPT. 30,
1999 1999
--------------- ---------------
PRO FORMA,
ACTUAL AS ADJUSTED
--------------- ---------------
(UNAUDITED)
(IN THOUSANDS)
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BALANCE SHEET:
Cash and cash equivalents................................... $ 34,939
Working capital............................................. 30,493
Total assets................................................ 73,425
Long-term liabilities....................................... 372
Minority interest........................................... --
Members'/stockholders' equity............................... 54,249
</TABLE>
The balance sheet data as of September 30, 1999 is presented:
- on an actual basis, and
- on a pro forma, as adjusted basis to reflect the reorganization and our
receipt of the estimated net proceeds from the sale of shares
of common stock offered in this offering at an assumed initial public
offering price of $ per share, after deducting underwriting discounts
and commissions and estimated offering expenses.
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described below and the
other information in this prospectus before deciding whether to invest in shares
of our common stock. If any of the following risks actually occur, our business,
operating results and financial condition could be materially adversely
affected. This could cause the trading price of our common stock to decline and
you may lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED OPERATING LOSSES, EXPECT CONTINUED LOSSES AND MAY NOT EVER
ACHIEVE PROFITABILITY. IF WE CONTINUE TO LOSE MONEY, WE MAY HAVE TO CURTAIL OR
CEASE OUR OPERATIONS.
We have not been profitable and we may continue to lose money for the
foreseeable future. Although our quarterly revenue has experienced growth,
historically we have incurred losses and experienced negative cash flow. We may
continue to incur losses and may never achieve or sustain profitability. An
extended period of losses and negative cash flow may prevent us from operating
and expanding our business which could materially adversely affect our business.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE WE HAVE A LIMITED
OPERATING HISTORY.
As a company in the early stages of development, we take risks and there
are uncertainties relating to our ability to successfully implement our business
plan. If we are unable to successfully accomplish our business objectives, our
business could be materially harmed and the value of your investment may
decline. Our business and prospects must be considered in light of the risks,
expenses and difficulties encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such as
Internet retailing. The risks and uncertainties include, among other things, the
following:
- we may not be able to anticipate and adapt to the changing market for
Internet retailing and e-commerce;
- we may not be able to maintain our sales and marketing efforts;
- we may not be able to continue to upgrade and enhance our technologies to
accommodate expanded service offerings; and
- we may not successfully respond to competitive developments.
OUR FUTURE REVENUE IS UNPREDICTABLE AND OUR QUARTERLY OPERATING RESULTS MAY
FLUCTUATE.
We have experienced, and expect to continue to experience, quarterly
fluctuations in our operating results. Many factors affecting our business may
cause these quarterly fluctuations, including:
- our ability to maintain customer satisfaction, retain existing customers
or encourage repeat purchases;
- the announcement or introduction of new or enhanced sites, services and
products by our competitors;
- general economic conditions and economic conditions specific to the
Internet, online commerce or the retail children's products industry;
- seasonality;
- our ability to manage or effectively outsource our distribution and order
fulfillment operations;
- our ability to introduce new products that are favorably received by
consumers;
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- the usage levels of online services and consumer acceptance of the
Internet and commercial online services for the purchase of our consumer
products and services;
- the ability to upgrade and develop systems and infrastructure and to
attract new personnel in a timely and effective manner;
- the level of traffic to our website and other sites that refer traffic to
our website;
- technical difficulties, system downtime or Internet brownouts, such as
the system downtime we experienced through Thanksgiving weekend, 1999;
- the amount and timing of operating costs and capital expenditures
relating to expansion of the business, operations and infrastructure;
- price competition;
- the unexpected increases in the costs of, or less than favorable results
from, our marketing efforts;
- changes in consumer tastes, spending and in the demand for children's
products associated with movies, television and other entertainment
events;
- our inability to obtain popular children's products from our vendors;
- unexpected increases in shipping costs or delivery times, particularly
during the holiday season; and
- governmental regulation.
Period-to-period comparisons of our operating results are not a good
indication of our future performance. It is also possible that our operating
results in one or more quarters may fall below the expectations of securities
analysts and investors. In this event, the price of our common stock is likely
to decline.
BECAUSE WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES, OUR ANNUAL
OPERATING RESULTS COULD FALL BELOW EXPECTATIONS.
A disproportionate amount of our net sales have been realized during the
fourth calendar quarter as a result of our year-end holiday sales, and we expect
this trend to continue in the future. In anticipation of this increased sales
activity during the fourth calendar quarter, we require the services of a
significant number of temporary employees to bolster permanent staff, and we
significantly increase our inventory levels. For this reason, if our net sales
were to fall below seasonal expectations during the fourth quarter, our annual
operating results could fall below the expectations of securities analysts and
investors, which could cause a decrease in the price of our common stock.
Due to our limited operating history, it is difficult to predict the impact
of seasonality on our business and financial results. In the future, our
seasonal sales patterns may become more pronounced, may strain our personnel and
warehousing and order shipment activities and may cause a shortfall in net sales
as compared to expenses in a given period.
WE MAY BE SUBJECT TO LIABILITY FOR BACK SALES TAXES.
Because of the high level of uncertainty regarding the imposition of taxes
on electronic commerce, a number of states and a Congressional advisory
commission are reviewing the appropriate tax treatment for online retail
companies. It is possible that one or more states or local or foreign
jurisdictions may assert claims under current law for taxes owed on sales prior
to as well as following this offering. We have received an inquiry regarding
state sales tax issues from the State of California and in addition, the State
of Connecticut has preliminarily requested that we register for sales and use
taxation. If one or more such states prevail, we may be exposed to a tax
liability that could materially harm our business.
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WE WILL LIKELY BE REQUIRED TO SEEK ADDITIONAL DEBT OR EQUITY FINANCING AFTER
THIS OFFERING. IF ADEQUATE FINANCING IS NOT AVAILABLE TO US, WE MAY HAVE TO
CURTAIL OUR OPERATIONS.
Our capital requirements have been and will continue to be significant. To
date, we have funded our operations with cash contributed by Consolidated under
the contribution agreement. We currently do not have a committed credit
facility. If our capital requirements or cash flow vary materially from our
current expectations or if unforeseen circumstances occur, we may require
additional financing sooner than we anticipate. Failure to raise these funds
may:
- restrict our growth and limit expansion of our business; or
- hinder our ability to compete.
Additional financing may not be available to us when needed or, if
available, may not be obtained on commercially reasonable terms. In addition,
any equity financing may involve substantial dilution to our then-existing
stockholders.
WE MAY NOT BE ABLE TO SUCCESSFULLY OPERATE OUR BUSINESS IF WE ARE UNABLE TO
ATTRACT, TRAIN AND RETAIN ADDITIONAL HIGHLY QUALIFIED SALES AND MARKETING,
MANAGERIAL AND TECHNICAL PERSONNEL OR IF WE LOSE KEY PERSONNEL.
Our future success depends on our ability to identify, hire, train and
retain highly qualified sales and marketing, managerial and technical personnel.
In addition, our fourth calendar quarter sales may suffer if we are unable to
obtain the services of a significant number of qualified, temporary employees to
bolster our permanent staff during the holiday season. Competition for personnel
is intense and we may not be able to attract, assimilate or retain qualified
personnel in the future. The inability to attract and retain the necessary
managerial, technical and sales and marketing personnel or to hire adequate
temporary employees during our peak season could have a material adverse effect
on our business.
Our business and operations are substantially dependent on the performance
of our executive officers and key employees, particularly Srikant Srinivasan,
our Chief Executive Officer, and Michael Wagner, our Chief Financial Officer.
The loss of the services of any of our executive officers or key employees could
have a material adverse effect on our business. We have not obtained key person
life insurance on any of our key employees. We have employment contracts with
all of our executive officers and key employees. Generally, these agreements
contain covenants not to compete during the employee's term of employment and
for a period of time after termination of the agreement. For a description of
these agreements you should read "Management -- Employment Arrangements." If any
of our key employees left or were seriously injured and unable to work and we
were unable to find a qualified replacement, our business could be harmed.
WE EXPECT THAT OUR RAPID EXPANSION PLANS WILL STRAIN OUR RESOURCES AND, IF WE
FAIL TO MANAGE OUR GROWTH EFFECTIVELY, COULD HARM OUR BUSINESS.
Our rapid growth and plans for further expansion have placed, and are
expected to continue to place, a significant strain on our administrative,
operational and financial resources. The failure to grow these resources, as
well as our technology base, along with the rest of our business may have a
negative impact on our financial performance.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO SUCCESSFULLY
INTEGRATE ANY FUTURE ACQUISITIONS.
We intend to pursue acquisitions or investments in complementary companies,
products or technologies as part of our growth strategy. Acquisitions and
investments involve numerous risks, including:
- difficulties in integrating operations, technologies, products and
personnel;
- diversion of financial and management resources from existing operations;
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- risks of entering new markets;
- lack of familiarity with new product categories;
- potential loss of key employees; and
- inability to generate sufficient revenues to offset acquisition or
investment costs.
These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations.
THE COSTS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR STRATEGIC ALLIANCES COULD
DILUTE YOUR INVESTMENT OR ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
To pay for an acquisition or to enter into a strategic alliance, we may use
equity securities, debt, cash, including the proceeds from this offering, or a
combination of the foregoing. If we use equity securities, our stockholders may
experience dilution. In addition, an acquisition may involve non-recurring
charges or involve amortization of significant amounts of goodwill. The related
increases in expenses could adversely affect our results of operations. Any such
acquisitions or strategic alliances may require us to obtain additional equity
or debt financing, which may not be available on commercially acceptable terms,
if at all.
WE FACE SIGNIFICANT INVENTORY RISK BECAUSE CONSUMER DEMAND CAN CHANGE FOR
PRODUCTS BETWEEN THE TIME THAT WE ORDER PRODUCTS AND THE TIME THAT WE RECEIVE
THEM.
We carry a significant level of inventory. As a result, the rapidly
changing trends in consumer tastes in the market for children's products,
including toys, video games, software and videos, subject us to significant
inventory risks. It is critical to our success that we accurately predict these
trends and do not overstock unpopular products. The demand for specific products
can change between the time the products are ordered and the date of receipt. We
are particularly exposed to this risk because we derive a majority of our net
sales in the fourth calendar quarter of each year. Our failure to sufficiently
stock popular toys and other products in advance of the fourth calendar quarter
or the stocking of products that prove to be unpopular would harm our operating
results for the entire fiscal year.
In the event that one or more products does not achieve widespread consumer
acceptance, we may be required to take significant inventory markdowns, which
could reduce our net sales and gross margins. This risk may be greatest in the
first calendar quarter of each year, after we have significantly increased
inventory levels for the holiday season. We believe that this risk will increase
as we open new departments or enter new product categories due to our lack of
experience in purchasing products for these categories. In addition, to the
extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any such increase would subject us to additional
inventory risks.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The online commerce market is new, rapidly evolving and intensely
competitive. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could seriously
harm our net sales and results of operations. We expect competition to intensify
in the future because current and new competitors can enter our market with
little difficulty and can launch new websites at a relatively low cost. In
addition, the children's toy, video game, software and video retailing
industries are intensely competitive, and we will face new competition as we
expand our product offerings into new product categories or if we expand
internationally.
We currently or potentially compete with a variety of other companies,
including:
- traditional store-based toy and children's product retailers such as KB
Toys, Toys "R" Us, FAO Schwarz, Zany Brainy and Noodle Kidoodle;
- major discount retailers such as Wal-Mart, Kmart and Target;
- traditional software and video game retailers such as CompUSA, Best Buy
and Circuit City;
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- online efforts of traditional store-based retailers, including the online
stores operated by Toys "R" Us, Wal-Mart, Kmart and FAO Schwarz;
- other online retailers that sell children's products, such as eToys.com,
Amazon.com, Barnesandnoble.com, Beyond.com, Reel.com and online auction
sites;
- physical and online stores of entertainment entities that sell and
license children's products, such as The Walt Disney Company and Warner
Bros.;
- catalog retailers of children's products, such as FAO Schwarz and Learn
and Play;
- vendors or manufacturers of children's products that currently sell or
may in the future sell some or all of their products directly online,
such as Mattel and Hasbro;
- Internet portals and online service providers that feature shopping
services that include children's products, such as AOL, Yahoo!,
Excite@Home and Lycos; and
- various smaller online retailers of children's specialty products, such
as Red Rocket, Toysmart.com and SmarterKids.com.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors can devote substantially more resources to website
development than we can. In addition, other large, well-established and
well-financed entities may join with online competitors or children's toy, video
game, software and video publishers or suppliers as the use of the Internet and
other online services increases.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently or adopt more
aggressive pricing or inventory availability policies than we can. In addition,
traditional store-based retailers enable customers to see and feel products in a
manner that is not possible over the Internet. Traditional catalog retailers
also provide customers with convenient service. Additionally, increased
competition may stem from the announcement or introduction of new or enhanced
sites, services and products by our competitors, from new technologies or the
expansion of existing technologies or from our expansion into new product
categories. Finally, vendors and manufacturers of toys, including some of those
that do business with us, may compete directly with us online.
BECAUSE WE DO NOT HAVE LONG-TERM OR EXCLUSIVE VENDOR CONTRACTS, WE MAY NOT BE
ABLE TO GET SUFFICIENT QUANTITIES OF POPULAR CHILDREN'S PRODUCTS IN A TIMELY
MANNER. AS A RESULT, WE COULD LOSE CUSTOMERS.
If we are not able to offer our customers sufficient quantities of toys or
other products in a timely manner, we could lose customers and our net sales
could be below expectations. Our success depends on our ability to purchase
products in sufficient quantities at competitive prices, particularly for the
holiday shopping season. As is common in the industry, we do not have long-term
or exclusive arrangements with any vendor or distributor that guarantees the
availability of toys or other children's products for resale. Therefore, we do
not have a predictable or guaranteed supply of children's products.
IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BRAND AND REPUTATION COULD BE DAMAGED AND WE COULD LOSE OR FAIL TO ATTRACT NEW
CUSTOMERS.
Any new product category that is launched or acquired by us that is not
favorably received by consumers could damage our brand or reputation. This
damage could impair our ability to retain current or to attract new customers,
which could cause our net sales to fall below expectations.
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A HIGH VOLUME OF MERCHANDISE RETURNS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We allow our customers to return our products within 30 days of receipt of
shipment for a full refund or exchange. During the holiday season, our customers
may return products purchased by them during November and December at any time
prior to January 10 of the following year. We make allowances in our financial
statements for anticipated merchandise returns based on historical return rates
for traditional retailers in the industry. However, actual returns may exceed
our allowances. If merchandise returns increase significantly or exceed our
allowances, our financial condition and results of operations would be adversely
affected.
WE DEPEND ON THIRD PARTIES TO PROVIDE OUR WAREHOUSING, FULFILLMENT AND
DISTRIBUTION SERVICES AND SYSTEM FAILURES OR OTHER PROBLEMS WITH THESE PARTIES
COULD CAUSE US TO LOSE CUSTOMERS OR REVENUES AND COULD MATERIALLY ADVERSELY
AFFECT OUR BUSINESS.
We rely primarily on Keystone Internet Services, Inc. to fulfill our
customer orders. We have a direct marketing services agreement with Keystone to
receive, warehouse and ship our products until July 1, 2001. Keystone may
suspend any of the services provided under the agreement, including suspending
shipping of customer orders, if we do not pay any invoice for its services
within seven days of notice to us by Keystone of our failure to pay by the due
date unless we have disputed the invoice in writing prior to its due date.
Keystone may continue this suspension until we pay the invoice.
If Keystone's ability to provide us with these services in a timely
fashion, or at all, is suspended or impaired, whether through labor shortage,
slowdown or stoppage, deteriorating financial or business condition, system
failures or for any other reason, we would not be able to sell or ship our
products to our customers until we had replaced Keystone. Further, if our
services agreement with KB Toys is terminated, our primary replacement for
Keystone would be eliminated. We may be unable to engage alternative
warehousing, fulfillment and distribution services on a timely basis or upon
terms equally as favorable to us.
Our experience with Keystone as a warehousing, fulfillment and distribution
service provider is limited. In connection with our transition to Keystone as
our primary fulfillment provider, we have experienced slowdowns during our peak
holiday season due primarily to a lack of historical information to predict
demand. Although the agreement provides for service standards for Keystone to
follow, these standards were not consistently met during the 1999 holiday
season. We are unable to predict whether we will have similar problems in the
future. These problems could damage our reputation or brand and could cause us
to lose customers and revenues.
Our distribution network is dependent upon two third-party carriers, United
Parcel Service and the United States Postal Service, for product shipments. UPS
and USPS accounted for all of our customer shipments by units in the six months
ended December 31, 1999. We are therefore subject to the risk that labor
shortages, strikes, inclement weather or other factors may limit the ability of
UPS and USPS to meet our shipping needs. Our shippers' failure to deliver
products to our customers in a timely manner would damage our brand and
adversely affect our operating results. If UPS or USPS are unable or unwilling
to deliver our products to our customers, we would need to arrange for
alternative carriers. We may be unable to engage an alternative carrier on a
timely basis or upon terms equally as favorable to us. In addition, changing
carriers would likely disrupt our business.
IF WE FAIL TO EXPAND OUR FULFILLMENT OPERATIONS SUCCESSFULLY, SALES COULD FALL
BELOW EXPECTATIONS AND WE COULD INCUR UNEXPECTED COSTS.
We must be able to fill customer orders quickly and efficiently. If we do
not expand our fulfillment operations and systems to accommodate increases in
demand, particularly during the peak holiday selling season, we will not be able
to increase our net sales in accordance with our projections. We intend to add
to the capacity of our distribution network in the near future by entering into
agreements with additional fulfillment partners or an agreement with Keystone
Fulfillment to increase our distribution capacity
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through Keystone. It may be difficult for us to assimilate new partners into our
distribution system or to increase our distribution capacity through Keystone.
We may be unable to secure additional partners or integrate their systems and
technologies into ours or to secure additional capacity through Keystone
Fulfillment.
In addition, we intend to expand our fulfillment capabilities in the future
by purchasing or leasing dedicated fulfillment centers. We may be unable to
lease or purchase these fulfillment centers, to install the necessary automation
in that facility or to hire the necessary personnel to operate that facility, in
each case at a reasonable cost or at all. If we fail to expand our fulfillment
operations successfully, we may lose sales and our reputation for prompt
delivery and customer service would suffer. Even if we are successful in
expanding our distribution network, our planned expansion may cause disruptions
in our business and may cause us to incur unexpected costs, and our fulfillment
operations may be inadequate to accommodate increases in customer demand.
WE RELY ON THIRD PARTIES TO PROVIDE RELIABLE SOFTWARE, SYSTEMS AND RELATED
SERVICES TO US AND FAILURES OR OTHER PROBLEMS WITH THESE PARTIES COULD CAUSE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We are dependent on various third parties for software, systems and related
services in connection with our commerce platform and enterprise systems.
Several of the third parties that provide software and services to us have a
limited operating history and have relatively new technology. These third
parties are dependent on reliable delivery of services from others. To date, we
have not experienced significant problems with the services that these third
parties provide to us. If our current providers were to experience prolonged
systems failures or delays, we would need to pursue alternative sources of
services. Although alternative sources of these services are available, we may
be unable to secure such services on a timely basis or on terms equally as
favorable to us. As a result, we may experience business disruptions if these
third parties fail to provide reliable software, systems and related services to
us.
OUR DEPENDENCE UPON VULNERABLE STRATEGIC ALLIANCES COULD RESULT IN A DECREASE IN
CUSTOMER TRAFFIC ON OUR WEBSITE.
We rely on strategic alliances with third-party websites and content
providers to attract users to our online store. We have entered into various
agreements with companies to attract users from numerous other websites or
online service providers, including AOL, Yahoo!, Excite@Home and NetZero. We
believe that such alliances result in increased traffic to our online store. Our
ability to generate revenues from online commerce depends on the increased
traffic, purchases, advertising and sponsorships that we expect to generate
through these strategic alliances. However, these relationships are generally
one-year arrangements and are frequently terminable upon short notice. In
addition, some of our significant strategic alliance agreements are exclusive
arrangements. We cannot assure you that these agreements will be maintained
beyond their initial terms or that additional third-party agreements will be
available to us on acceptable commercial terms or at all. The loss of one or
more of these agreements could significantly reduce traffic to our online store.
The inability to enter into new, and to maintain any one or more of our
existing, significant strategic alliances could have a material adverse effect
on our business and financial condition.
IF WE DO NOT SUCCESSFULLY EXPAND OUR WEBSITE AND THE SYSTEMS THAT PROCESS
CUSTOMERS' ORDERS, WE COULD LOSE CUSTOMERS AND OUR NET SALES COULD BE REDUCED.
If we fail to rapidly upgrade our website in order to accommodate increased
traffic, we may lose customers, which would reduce our net sales. For example,
during Thanksgiving weekend 1999, we experienced significantly slower system
response and some system downtime due to significantly higher than expected
traffic. Furthermore, if we fail to rapidly expand the computer systems that we
use to process and ship customer orders and process payments, we may not be able
to successfully distribute customer orders. As a result, we could lose customers
and our net sales could be reduced. In addition, our failure to rapidly upgrade
our website or expand these computer systems without system downtime,
particularly during the fourth calendar quarter, would further reduce our net
sales. We may experience
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difficulty in improving and maintaining these systems if our employees or
contractors that develop or maintain our computer systems become unavailable to
us. We have experienced periodic systems interruptions in connection with
network upgrades, which we believe will continue to occur while enhancing and
expanding these computer systems.
WE HAVE INSTALLED, AND WILL CONTINUE TO INSTALL, NEW HARDWARE AND SOFTWARE
SYSTEMS FOR OUR WEBSITE AND WE MAY NOT BE ABLE TO EFFECTIVELY IMPLEMENT THESE
SYSTEMS.
We have recently upgraded and expanded our hardware and software systems to
service the increased levels of traffic on our website. In addition, we plan to
continue to upgrade and expand these systems to support increasing levels of
traffic on our website. We have relied upon, and will continue to rely upon,
third-party consultants for some of this work. We may not be able to complete
new systems installations in a timely manner, and our personnel may be unable to
manage the new systems effectively. Any delay in installing new systems or in
our ability to integrate the systems into our operations could delay our
offering of new products and services. Additionally, the new systems may fail to
perform as we expect. Material deviations from our expectations could require us
to incur significant expenses to correct, upgrade or replace the new systems.
WE MAY EXPERIENCE CAPACITY CONSTRAINTS OR SYSTEM FAILURES THAT COULD DAMAGE OUR
BUSINESS.
If our systems cannot be expanded to cope with increased demand or fail to
perform effectively, we could experience:
- disruptions in service;
- slower response times;
- reduced customer satisfaction;
- overloaded customer service lines; or
- delays in the introduction of new products and services,
any of which could impair our reputation, damage the KBkids brand or materially
and adversely affect our business, operating results and financial condition.
Our ability to provide high quality customer service also depends on the
efficient and uninterrupted operation of our computer and communications
hardware systems. We experienced one major interruption due to significantly
higher than expected customer traffic over Thanksgiving weekend 1999. As a
result of this interruption, we have significantly increased the capacity of our
commerce platform by adding additional web servers and high performance caching
devices. We have also experienced minor interruptions due to software bugs and
system upgrades. These minor interruptions temporarily limited the capacity of
our current technology infrastructure and resulted in increased calls to our
customer service personnel. We host our website on servers located at a
third-party data center in Sunnyvale, California. We cannot control the
maintenance and operation of this location. While we maintain backup servers in
Denver, Colorado, this backup system requires manual intervention in the event
of systems failures.
Our systems and operations also are vulnerable to damage or interruption
from human error, natural disasters, telecommunication failures, break-ins,
sabotage, computer viruses, intentional acts of vandalism and similar events. We
are still developing a formal disaster recovery plan. We cannot assure you that
any plan we adopt will be sufficient. If we experience significant system
disruptions, our business and financial condition would be materially adversely
affected. In addition, any interruption could cause damage to our reputation,
which could further harm our business. Our business interruption insurance may
not be adequate to compensate for losses that could occur.
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WE RELY ON E-MAIL AND OTHER FORMS OF DIRECT ONLINE MARKETING. OUR BUSINESS COULD
SUFFER IF THESE MARKETING TECHNIQUES ENCOUNTER CONSUMER RESISTANCE OR INCREASED
GOVERNMENTAL REGULATION.
We send e-mails to our registered users to obtain feedback about our online
store, to provide order information and to promote repeat sales. We may expand
our use of e-mail and other direct online marketing techniques. If consumers
resist these forms of communication due to concerns about privacy, computer
viruses or the proliferation of commercial e-mail, our business and reputation
could be damaged. We also anticipate that our use of e-mail and other direct
online marketing techniques will be subject to increasingly stringent
regulation. For example, several states have passed laws limiting the use of
e-mail for marketing purposes. To date, these laws have not had a significant
effect on us because they focus primarily on unsolicited e-mail marketing and we
currently ask for our customers' permission before sending them e-mail. However,
other states and Congress have begun to consider placing restrictions on e-mail
marketing. This additional legislation could hamper our ability to provide
effective customer service and generate repeat sales.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS OR OTHER CLAIMS RELATING TO THE
PRODUCTS WE SELL THAT COULD BE COSTLY AND TIME CONSUMING.
We sell products manufactured by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or injury
to property, the injured party or parties could bring claims against us as the
retailer of the product. Our insurance coverage may not be adequate to cover
every claim that could be asserted against us. Similarly, we could be subject to
claims that users of the site were harmed due to their reliance on our product
information, product selection guides and configurations, advice or instruction.
If a successful claim were brought against us in excess of our insurance
coverage, it could materially harm our business. Even unsuccessful claims could
result in the expenditure of funds and management time and could have a negative
impact on our business.
WE MAY BE SUBJECT TO CLAIMS RELATING TO FAILURE TO DELIVER PRODUCTS BY THEIR
EXPECTED DELIVERY DATES THAT COULD MATERIALLY HARM OUR BUSINESS AND REPUTATION.
The products that are purchased from our online store may not always be
delivered by their anticipated delivery dates. In particular, we have
experienced slowdowns during our peak holiday season due primarily to a lack of
historical information to predict demand and insufficient time to engineer our
fulfillment operations. In addition, we are dependent upon third-party carriers
for product shipments. These third parties may not be able to meet our shipping
needs. If products are not delivered timely, we could be subject to claims by
customers whose delivery expectations were not met. If a successful claim were
brought against us, it would not be covered by our general business insurance
and could materially harm our business and reputation. Even unsuccessful claims
could result in the expenditure of funds and management time and could have a
negative impact on our business.
WE HAVE SUBSTANTIAL DISCRETION AS TO THE USE OF PROCEEDS OF THIS OFFERING.
Our management may spend the proceeds from this offering in ways which
differ from the possible uses described in this prospectus. We have also
allocated a large portion of the proceeds from this offering to discretionary
uses, including possible acquisitions or the expansion of product categories or
departments. Our stockholders may not agree with our spending decisions. You
should read "Use of Proceeds" for more information regarding the use of
proceeds.
BECAUSE OF OUR HOLDING COMPANY STRUCTURE, OUR ASSETS ARE LIMITED TO EQUITY
INTERESTS IN KBKIDS.COM LLC, AND WE HAVE NO INDEPENDENT MEANS OF GENERATING
REVENUES.
We are a holding company and, following this offering, our only assets will
be our equity interest in KBkids.com LLC and our equity interest in
BrainPlay.com, whose sole asset will in turn be its equity interest in
KBkids.com LLC. We have no independent means of generating revenues. As a member
of KBkids.com LLC, we will incur income taxes on our share of any net taxable
income of KBkids.com
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LLC. Under its amended and restated operating agreement, KBkids.com LLC is
required to distribute cash to its members in amounts sufficient to cover their
tax liabilities, if any. To the extent we need funds to pay those taxes or for
any other purpose and KBkids.com LLC is unable to provide funds to cover those
taxes, it could have a material adverse effect on our results of operations.
THE ACQUISITION OF BRAINPLAY.COM WILL SUBJECT US TO LIABILITY FOR THE
PRE-EXISTING OBLIGATIONS OF BRAINPLAY.COM TO THE EXTENT OF BRAINPLAY.COM'S
ASSETS.
Simultaneously with the completion of this offering, a wholly-owned
subsidiary of ours will merge into BrainPlay.com. As a result of the merger,
BrainPlay.com will become our wholly-owned subsidiary. BrainPlay.com's sole
asset is its membership interest in KBkids.com LLC. Accordingly, we will be
indirectly liable for any outstanding pre-existing obligations of BrainPlay.com,
but only to the extent of the BrainPlay.com assets received by the surviving
subsidiary, or % of the KBkids.com LLC equity interests at the time of this
offering. Currently, we believe that the outstanding obligations of
BrainPlay.com consist of approximately $27,000 in outstanding contractual
obligations, plus attorney's fees in connection with this offering.
IF WE EXPERIENCE SIGNIFICANT INVENTORY THEFT, OUR GROSS MARGIN MAY DECREASE.
If the security measures used at any distribution facility we use, or
eventually may operate, do not significantly reduce or prevent inventory theft,
our gross margin may significantly decrease. Inventory theft may increase as we
expand our fulfillment operations and distribution network or as we in-source
more of these operations. If measures we take to address inventory theft do not
reduce or prevent inventory theft, our gross margin and results of operations
could be significantly below expectations in future periods.
WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER
RISKS IF WE DECIDE TO EXPAND INTERNATIONALLY.
We intend to expand internationally. To date, we have no experience in
developing localized versions of our online store for international markets and
in marketing and selling internationally. If we decide to expand internationally
and we cannot overcome these challenges, our business will suffer. There are
additional risks related to doing business in international markets, including
changes in regulatory requirements, tariffs and other trade barriers,
fluctuations in currency exchange rates, adverse tax consequences and political
instability. In addition, there are likely to be different consumer preferences
and requirements in such markets. We also may face difficulties in staffing and
managing any foreign operations. We cannot assure you that one or more of these
factors will not harm any future international operations.
RISKS RELATED TO OUR RELATIONSHIP WITH CONSOLIDATED
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR RELATIONSHIP WITH CONSOLIDATED
TERMINATES OR IF CONSOLIDATED'S RELATIONSHIP WITH KB TOYS TERMINATES FOR ANY
REASON.
TERMINATION OF INTERCOMPANY AGREEMENTS. We obtain products and services
from Consolidated and its subsidiaries, in particular KB Toys. Our inability to
obtain these products or services for any reason, including any termination of
our agreements with KB Toys, could have a material adverse effect on our
business and financial condition. These products and services include the
availability of KB Toys' inventory and the benefits of KB Toys' purchasing
expertise, as well as discounts, and the promotion of the online store in KB
Toys' advertising materials and national store network. In addition, our
contractual relationship with KB Toys allows our customers to return products
purchased online at any KB Toys store location. We believe that we significantly
benefit from KB Toys' purchasing leverage with vendors, including vendors from
whom we purchase directly. The loss of this relationship could harm our
business.
We have entered into several agreements with KB Toys, including a supply
agreement under which KB Toys has agreed to supply merchandise to us, and the
agreements under which we license the
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kbkids.com and kbtoys.com domain names and the KBkids and KB Toys trade names.
Under a services agreement with KB Toys, we may use various services from KB
Toys and its affiliates including services for advertising, store returns,
inventory liquidation, defective merchandise disposal, payroll processing, data
access, tax and accounting. These agreements each terminate when Consolidated no
longer owns at least 10% of either KBkids.com LLC or our common stock and when
Consolidated no longer owns securities of KBKids.com with a market value of at
least $100,000,000 and may be terminated earlier in other circumstances. Upon
termination of the licensing and domain name arrangements, we have the option to
purchase the KBkids trade name and the kbkids.com domain name from KB Toys for
$100,000. We do not have the option to purchase the KB Toys trade name or the
kbtoys.com domain name.
The supply and services agreements are more favorable to us than we would
have been able to obtain from an unrelated third party. If KB Toys terminates
either of these agreements, we will be unable to replace them on as favorable
terms and our expenses relating to these supplies and services will increase.
TERMINATION OF RELATIONSHIP. We cannot assure that our relationship with
KB Toys will continue. Although Consolidated has advised us that it currently
intends to continue to have KB Toys hold its Class B common stock and membership
units in KBkids.com LLC upon completion of this offering, there is no agreement
restricting Consolidated from selling its shares or units. Except for
restrictions in the lock-up agreements delivered to the underwriters in
connection with this offering, there is no guarantee of the period of time
during which Consolidated will maintain its equity ownership interests.
Moreover, we have agreed to use our best efforts, upon the request of
Consolidated, to effect the registration under the applicable federal and state
securities laws of the shares of common stock held by Consolidated.
If our relationship with Consolidated terminates, and we lose the benefits
of the foregoing agreements and cannot negotiate replacement agreements, our
business could be adversely affected. Even if replacement agreements are
available with unrelated third parties, there could be significantly higher
costs associated with these replacement agreements. In addition, if Consolidated
ceases to control KB Toys and KB Toys becomes a separate, stand-alone company,
our relationship with KB Toys could be negatively impacted, which could have an
adverse effect on our business and financial condition. For a description of our
agreements with KB Toys, you should read "Our Business -- Related Party
Agreements" and "Certain Transactions -- Arrangements with Consolidated."
OUR DEPENDENCE ON KB TOYS FOR A SIGNIFICANT PORTION OF OUR PURCHASES MAY RESULT
IN INSUFFICIENT QUANTITIES OF PRODUCTS CAUSING SALES TO DECLINE.
A significant portion of our aggregate purchases are made directly or
indirectly from KB Toys. Under our supply agreement with KB Toys, we may place
toy orders with KB Toys and KB Toys has agreed to use its best commercially
reasonable efforts to fill those orders. Purchases of popular toy products of
limited availability under the supply agreement are allocated between us and KB
Toys according to an agreed-upon formula set forth in the agreement. If we are
unable to obtain sufficient quantities of products from KB Toys or to obtain the
most popular toy products in a timely manner, we could lose customers and our
net sales could fall below expectations.
This supply agreement terminates when Consolidated no longer owns at least
10% of KBkids.com LLC or our common stock and when Consolidated no longer owns
securities of KBKids.com with a market value of at least $100,000,000 and may be
terminated earlier in other circumstances. If we lose the benefits available
under our supply agreement with KB Toys, we would not be able to obtain equally
favorable terms from an unrelated third party. For a description of the
agreement, you should read "Our Business -- Related Party Agreements."
POTENTIAL CONFLICTS OF INTEREST WITH CONSOLIDATED MAY HAVE AN ADVERSE EFFECT ON
OUR BUSINESS.
CONTROLLING STOCKHOLDER. Following this offering, Consolidated will have
% of our voting power. Consolidated will be able to significantly influence
all matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions, the acquisition or disposition of assets, the incurrence of
indebtedness, the issuance of additional capital
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<PAGE> 22
stock, the payment of dividends and other decisions affecting us. This control
by Consolidated could delay or prevent a change in our corporate control
supported by our other stockholders and would allow Consolidated to take other
actions that might be unfavorable to us.
CROSS-DIRECTORSHIPS, CONSULTANCY AND STOCK OWNERSHIP. Michael Glazer, who
serves as Chief Executive Officer, President and a director of KB Toys, Albert
Bell who serves as Executive Vice President, Secretary and General Counsel of
Consolidated and KB Toys and as a director of KB Toys, and Michael Potter who
serves as Executive Vice President and Chief Financial Officer of Consolidated
and as Executive Vice President of KB Toys and as a director of KB Toys, each
serve as directors on our board and currently beneficially own 488,320 shares,
138,553 shares and 159,582 shares, respectively, of Consolidated's common stock,
including options to purchase shares of Consolidated common stock, each of which
represents less than 1% of Consolidated's outstanding common stock. Michael
Wagner, who serves as our Chief Financial Officer, Treasurer and Secretary,
beneficially owns less than 1% of Consolidated's outstanding common stock,
including options to purchase shares of Consolidated's common stock. In
addition, Mr. Wagner currently receives an annual fee of $10,000 per year under
a consulting agreement with Consolidated to provide investor relations services
for Consolidated as requested by them. Mr. William Kelley, who serves as Chief
Executive Officer and a director of Consolidated, will serve under a consulting
agreement with us to provide strategic planning services as requested by our
Chief Executive Officer. Consolidated's continuing ownership of % of our
voting power, the ownership of Consolidated common stock by our directors and
officers and their officers' service as directors or officers of both of
Consolidated and KBkids.com could create, or appear to create, conflicts of
interest when those directors and officers are faced with decisions that could
have different implications for Consolidated and us, including potential
acquisitions of businesses, effects of competition, the issuance or disposition
of our securities, the election of new or additional directors, the payment of
dividends and other matters.
ABILITY TO RAISE EQUITY CAPITAL. In addition, because Consolidated may
seek to maintain its beneficial ownership percentage of our common stock and may
not desire to acquire additional shares in connection with a future issuance of
our shares, we may be limited in our ability to raise equity capital in the
future or to issue common stock in connection with acquisitions. To date, we
have not adopted any formal procedures to resolve potential conflicts of
interest between us, Consolidated or affiliates.
COMPETITION WITH KB TOYS. We currently compete with KB Toys. KB Toys is
one of the largest toy retailers in the United States, with approximately 1,300
toy stores located in the United States, Guam and Puerto Rico. KB Toys stores
offer merchandise selections that include toys, video games, software and videos
in direct competition with us. KB Toys has agreed that as long as Consolidated
owns a majority of the membership interests of KBkids.com LLC or of our common
stock, none of KB Toys or its affiliates will sell any toy products on the
Internet, unless they are "closeouts." Consolidated does not currently, but at
any time could, compete with us online by offering online sales of closeout
toys.
RISKS RELATED TO OUR INDUSTRY
IF THE ASSUMPTIONS THAT WE USE REGARDING THE GROWTH OF E-COMMERCE AND THE
INTERNET ARE INCORRECT, THEN THE FINANCIAL PROJECTIONS WE INCLUDE IN THIS
PROSPECTUS MAY BE MATERIALLY DIFFERENT FROM ACTUAL RESULTS.
This prospectus contains various third-party data and projections related
to our business and the Internet, including those relating to revenue generated
by e-commerce, the number of Internet users and the amount spent on Internet
advertising. These data and projections have been included in studies prepared
by independent market research firms, and the projections are based on surveys,
financial reports and models used by these firms, as well as a number of
assumptions.
If the underlying data or any of the assumptions contained in these reports
turns out to be incorrect, actual results or circumstances may be materially
different from the projections included in this prospectus. Any difference could
reduce our revenue and harm our results of operations.
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<PAGE> 23
OUR SUCCESS WILL LARGELY BE A FUNCTION OF THE OVERALL STRENGTH OF THE RETAIL
CHILDREN'S PRODUCTS INDUSTRY.
The overall strength of the retail children's products industry, especially
toys and video games, will significantly impact the revenue we derive from our
online store. The children's products retail industry is dependent on a variety
of factors relating to discretionary consumer spending and affecting disposable
consumer income, such as employment, wages and salaries, business conditions,
interest rates, exchange rates, availability of credit and taxation. There is no
assurance that sales of toys and children's products will remain at their
current levels. A decrease in the current level of children's products sales
could negatively impact our financial condition.
OUR NET SALES COULD DECREASE IF WE BECOME OBLIGATED TO COLLECT SALES AND OTHER
TAXES.
If one or more local, state or foreign jurisdictions successfully asserts
that we should collect sales or other taxes on the sale of our products, our net
sales and results of operations could be harmed. We do not currently collect
sales or other similar taxes for physical shipments of goods into states other
than Colorado, where our principal place of business is located, Virginia, where
our third-party fulfillment center is located, and Massachusetts, where a
majority of our merchandise buyers are located. However, one or more local,
state or foreign jurisdictions may assert that we have a sales tax collections
obligation under the current law. We have received an inquiry regarding state
sales tax issues from the State of California and in addition, the State of
Connecticut has preliminarily requested that we register for sales and use
taxation. If we are required to collect sales taxes in additional states, we may
update our system that processes customers' orders to calculate the appropriate
sales tax for each customer order and to remit the collected sales taxes to the
appropriate authorities. These upgrades would increase our operating expenses.
In addition, our customers may be discouraged from purchasing products from us
because they would have to pay sales tax, which would cause our net sales to
decrease. As a result, we may need to lower prices to retain these customers.
Recent federal legislation limits the imposition of new state and local
taxes on Internet-related sales. In 1998, Congress passed the Internet Tax
Freedom Act, which places a three-year moratorium on discriminatory state and
local taxes on electronic commerce. There is a possibility that Congress may not
renew this legislation in 2001. If Congress chooses not to renew this
legislation, state and local governments would be free to impose new and
discriminatory taxes on electronically purchased goods. This could materially
harm our business.
INTERNET COMMERCE HAS YET TO ATTRACT SIGNIFICANT REGULATION. GOVERNMENT
REGULATION MAY RESULT IN FINES, PENALTIES, TAXES OR OTHER COSTS THAT MAY REDUCE
OUR FUTURE EARNINGS.
We currently are not directly regulated by any governmental agency, other
than having to comply with regulations applicable to business generally.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted relating to the
Internet, covering, among other things, the following issues:
- advertising;
- user privacy;
- unsolicited marketing;
- pricing;
- quality of products and services;
- intellectual property;
- information security; and
- anti-competitive practices.
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Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The United States Congress recently
enacted Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. As directed by Congress in the
Children's Online Privacy Protection Act, the Federal Trade Commission recently
adopted regulations, effective April 21, 2000, prohibiting unfair and deceptive
acts and practices in connection with the collection and use of personal
information from children under 13 years old on the Internet. The adoption of
these laws or regulations may decrease the growth of Internet commerce. These
laws could decrease the demand for our products and services, increase our cost
of doing business, or otherwise have an adverse effect on our business.
Moreover, the applicability to the Internet of existing laws governing
issues including real and intellectual property ownership, libel and personal
privacy is uncertain. If these existing laws were to be applied to the Internet,
our business may be harmed.
CREDIT CARD FRAUD COULD ADVERSELY AFFECT OUR BUSINESS.
A failure to adequately control fraudulent credit card transactions could
reduce our net revenues and our gross margin because we do not carry insurance
against this risk. We have put in place technology to help us detect the
fraudulent use of credit card information and have not suffered material losses
to date. However, we may in the future suffer losses as a result of orders
placed with fraudulent credit card data even though the associated financial
institution approved payment of the orders. Under current credit card practices,
we are liable for fraudulent credit card transactions because we do not obtain a
cardholder's signature.
OUR INABILITY TO SECURELY TRANSMIT CONFIDENTIAL INFORMATION OVER PUBLIC NETWORKS
MAY HARM OUR BUSINESS AND CAUSE OUR STOCK PRICE TO DECLINE.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. We rely upon
encryption and authentication technology licensed from third parties to effect
the secure transmission of confidential information, such as customer credit
card numbers. Advances in computer capabilities, new discoveries in the field of
cryptography or other events may result in a compromise or breach of the systems
that we use to protect customer transaction data. A party who is able to
circumvent our security measures may misappropriate proprietary information or
customers' personal data such as credit card numbers, and could interrupt our
operations. We may be required to expend significant capital and other resources
to protect against such security breaches or to alleviate problems caused by
these breaches. In addition, security breaches may damage our reputation and
cause our stock price to decline.
WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.
As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. If we face liability, our reputation and our business may suffer. In
the past, plaintiffs have brought these types of claims and sometimes
successfully litigated them against online services. Although we carry general
liability insurance, our insurance currently does not cover all of these types
of claims. There can be no assurance that it will be adequate to indemnify us
for all liability that may be imposed on us.
WE MAY UNINTENTIONALLY INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS WHICH MAY
RESULT IN COSTLY LITIGATION AND LOSS OF THE RIGHT TO USE THOSE PROPRIETARY
RIGHTS.
We may be subject to claims alleging that we have infringed upon third
party proprietary rights which may result in significant damages. Even if a
claim ultimately proves to be meritless, the time that management spends
addressing the claim and the legal costs associated with the claim could harm
our business.
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We license technology and content from third parties, and it is possible
that we could become a party to infringement actions based upon the licenses
from those third parties. We generally obtain representations as to the origin
and ownership of all licensed technology and content; however, this may not
adequately protect us. Any of these claims, regardless of merit, could subject
us to costly litigation and distract our technical and management personnel.
MISAPPROPRIATION OR LOSS OF OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
COULD IMPAIR OUR COMPETITIVE POSITION.
Our ability to compete depends upon our proprietary rights. In June 1999,
we entered into an exclusive domain name agreement with KB Toys to use the
kbkids.com and kbtoys.com Internet domain names. We also have a non-exclusive
sublicense from KB Toys to use the trademarks KBkids and KB Toys for Internet
sales of children's products. Because our license of the KBkids trademark is
non-exclusive, KB Toys could license the use of its KBkids trademark to other
parties who could compete with us. The domain name agreement and sublicense
agreement each terminate when Consolidated no longer owns at least 10% of
KBkids.com LLC or our common stock and when Consolidated no longer own
securities of KBkids.com with a market value of at least $100,000,000, and may
also be terminated earlier upon events of bankruptcy or insolvency, material
breaches of the agreement that are not cured upon 30 days written notice or a
merger, consolidation or dissolution resulting in a termination of the corporate
existence. Upon termination of these agreements, we have the option to purchase
the www.kbkids.com domain name and the KBkids trade name from KB Toys for
$100,000.
Despite efforts by KB Toys to protect these proprietary rights through the
use of trademarks, trade secrets and copyright law, and our efforts to protect
our proprietary rights through confidentiality agreements and technical
measures, unauthorized parties may attempt to copy aspects of our online store
or obtain and use information that we regard as proprietary. Policing
unauthorized use of proprietary rights is difficult. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which our online store is available. In addition, the
relationship between regulations governing domain names and laws protecting
trademarks and other proprietary rights is unclear. Thus, we may be unable to
prevent third parties from acquiring domain names that are similar to, infringe
upon or otherwise decrease the value of our intellectual property and our online
store reputation. Litigation may be necessary in the future to enforce or
protect our intellectual property rights or to defend against claims of
infringement or invalidity.
As part of our confidentiality procedures, we generally enter into
confidentiality agreements with our employees and consultants and limit access
to our trade secrets and technology. We cannot be sure that the steps taken by
us will prevent misappropriation of technology or that the agreements entered
into for that purpose will be enforceable. Misappropriation of our intellectual
property or potential litigation could have a negative impact on our business.
IF THE INTERNET DOES NOT CONTINUE TO TECHNOLOGICALLY IMPROVE, IT MAY BE UNABLE
TO SUPPORT INCREASED LEVELS OF ACTIVITY. WITHOUT THE INCREASED CAPACITY OF THE
INTERNET AND OUR SYSTEMS, OUR REVENUE MAY NOT INCREASE AND OUR OPERATIONS MAY BE
HARMED.
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it by this potential growth. In
addition, the Internet could lose its viability as a commercial medium due to
delays in the development or adoption of new standards and protocols required to
handle increased levels of Internet activity, or due to increased governmental
regulation. Changes in, or the insufficient availability of, communications
services to support the Internet also could result in slower response times and
adversely affect usage of the Internet generally. Consequently, our revenue and
operations would be harmed.
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<PAGE> 26
WE MAY NOT BE ABLE TO ACQUIRE OR MAINTAIN EFFECTIVE WEB ADDRESSES, WHICH MAY
ALLOW COMPETITORS TO GAIN AN ADVANTAGE.
We currently hold various web addresses relating to our brand names,
including www.kbkids.com. We may not be able to prevent third parties, including
direct competitors, from acquiring web addresses that are similar to our
addresses, which could harm our business. The acquisition and maintenance of web
addresses is generally regulated by governmental agencies and their designees.
However, the regulation of web addresses in the United States and in foreign
countries may change. As a result, we may not be able to acquire or maintain
relevant web addresses where we conduct business. Further, the relationship
between regulations governing web addresses and laws protecting trademarks is
unclear.
RISKS RELATED TO OUR COMMON STOCK
AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP.
Before this offering, there has been no public market for our common stock.
Although we have filed an application to have the common stock listed on the
Nasdaq National Market, our application may not be approved and an active public
market may not develop for the common stock. The initial public offering price
will be determined through negotiations between us and the underwriters. The
negotiated initial public offering price may not be indicative of the market
price of the common stock after this offering. Investors may encounter
difficulties in selling our common stock.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE LAW PROVISIONS AND THE POSSIBLE ISSUANCE OF PREFERRED STOCK COULD DELAY
OR PREVENT A CHANGE OF CONTROL AND ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK.
Following this offering, the ownership of the outstanding Class B common
stock by Consolidated will give it voting control of us and will have the effect
of preventing a change in control of us without their consent. Additionally,
following this offering, our board of directors will have the authority to issue
up to shares of preferred stock without any further vote or action by the
stockholders and to determine the price, rights, preferences, privileges and
restrictions, including voting rights of such shares. Since the preferred stock
could be issued with voting, liquidation, dividend and other rights superior to
those of the common stock, the rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
such preferred stock. The issuance of preferred stock could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
Further, the provisions of our certificate of incorporation, bylaws and
Delaware law could have the effect of delaying or preventing a change in our
corporate control. Under Delaware law we can opt out of Section 203 of the
Delaware General Corporation Law, which makes it more difficult for an
interested stockholder to affect a business combination with us for a three-year
period. Currently, we have not elected to opt out of Section 203. However, our
board has approved measures that make Section 203 inapplicable to any business
combination or transaction with KB Online or its affiliates. In addition, our
certificate of incorporation and bylaws do not provide our stockholders with the
right to act by written consent without a meeting or for cumulative voting in
the election of directors. Also, our board of directors is authorized to fill
vacant directorships and to increase the size of the board of directors. These
provisions, which require a majority vote of stockholders to amend, may have the
effect of deterring hostile takeovers or delaying changes in our management.
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT
OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of
a substantial number of shares of our common stock in the market after this
offering, or the perception that such sales could occur. These sales might make
it more difficult for us to sell equity securities in the future at a time and
at a price that we deem appropriate. After this offering, we will have
outstanding shares of common
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<PAGE> 27
stock. The shares of common stock being offered by this prospectus, as well
as up to an additional shares that may be issued to cover any underwriters'
over-allotments, will be freely tradeable.
An additional shares of Class A common stock will be issuable upon the
conversion of the Class B common stock and of KB Online's membership units in
KBkids.com LLC. All of these shares entitle their holders to certain demand and
piggyback registration rights. In addition, shares of Class A common stock
which will be held by the BrainPlay.com equityholders after this offering
entitle their holders to piggyback registration rights. For more information
about these registration rights, see "Description of Capital Stock and
Membership Units -- Registration Rights."
In addition, our stock option plan provides for the grant of replacement
options to persons who received options under the KBkids.com LLC 1999 option
plan and to persons who received options under BrainPlay.com's stock option
plan. In connection with the consummation of this offering, we will issue
replacement options to all holders of outstanding options under the KBkids.com
LLC option plan and the BrainPlay.com stock option plan. shares of common
stock underlying these options will be eligible for sale in the public markets,
subject to the lock-up agreements described below.
Our directors and officers, who have beneficial ownership of shares in
the aggregate and of the outstanding options, have entered into
lock-up agreements in which they have agreed that they will not sell, directly
or indirectly, any shares of common stock without the prior written consent of
Credit Suisse First Boston for a period of 180 days from the date of this
prospectus.
THE PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE AND MAY BE AFFECTED BY
NUMEROUS MARKET CONDITIONS BEYOND OUR CONTROL.
Our stock price is likely to be volatile in the future due to the
volatility of the stock market in general and a variety of factors, including:
- quarterly variations in actual or anticipated results of our operations;
- changes in our earnings estimates by securities analysts;
- announcements of technological innovations or new product or service
offerings by us or our competitors;
- general conditions or trends in the Internet or other high technology
industries;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
- changes in the market valuations of other Internet companies;
- our capital commitments;
- additions or departures of our key personnel;
- sales of our common stock; and
- general economic conditions.
Many of these factors are beyond our control. These factors may decrease
the market price of our common stock, regardless of our operating performance.
In addition, the securities markets frequently experience extreme price and
volume fluctuations which affect market prices for securities of companies
generally, and technology companies in particular. These fluctuations are often
unrelated to the operating performance of the affected companies. Broad market
fluctuations may adversely affect the market price of our common stock, and you
could lose all or part of your investment in our common stock.
The trading prices of many technology and Internet-related companies'
stocks have reached historical highs within the last 52 weeks and have reflected
relative valuations substantially above historical levels.
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During the same period, those companies' stocks have also been highly volatile
and have recorded lows well below those historical highs. We cannot assure you
that our stock will trade at the same levels of other Internet stocks or that
Internet stocks in general will sustain their current market prices.
In the past, following periods of high volatility in a particular company's
securities, securities class action litigation has been brought against the
company. We may become involved in this type of litigation in the future.
Litigation is often expensive and diverts management's attention and resources,
which could have a material adverse effect on our business.
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION.
Based on an assumed initial public offering price of $ , the price
per share in this offering will exceed the pro forma net tangible book value per
share. Accordingly, investors purchasing shares in this offering will incur
immediate and substantial dilution of approximately $ in the pro forma
net tangible book value per share of the common stock from the $ price
per share paid for the common stock. To the extent outstanding options to
purchase common stock are exercised, there will be further dilution. You should
read "Dilution" for a more in-depth description of the dilutive effects of this
offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Our Business" and elsewhere in this
prospectus. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including "could," "may," "will," "should," "anticipate," "predict,"
"believe," "plan," "expect," "estimate," "future," "intend," "potential" or
"continue," the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks described in "Risk Factors" above and in other
parts of this prospectus. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform them to
our actual results or to changes in our expectations.
USE OF PROCEEDS
The net proceeds to us from the sale of our common stock in this offering
are estimated to be $ , assuming an initial public offering price of
$ per share and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, or $ if the
underwriters' over-allotment option is exercised in full.
The key purposes of this offering are to increase our working capital, to
create a public market for our common stock, to facilitate our future access to
the public capital markets and to increase our visibility in the retail
marketplace. We expect to use up to approximately $40 million of the net
proceeds of this offering for capital expenditures associated with technology
and system upgrades, including the addition of our own distribution facility. We
may also use up to approximately $100 million of the net proceeds for marketing
and sales efforts, which includes advertising efforts and fulfillment and
customer service operations. A portion of the balance of the proceeds may be
used for product development, including potentially acquiring or investing in
businesses, technologies or products that are complementary to our business.
However, we have no present plans or commitments and are not currently engaged
in any
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negotiations with respect to such strategic acquisitions. We have no specific
plans for the remaining proceeds, but intend to use them for general corporate
purposes and working capital.
This allocation is only an estimate, and we may adjust it as necessary to
address our operational needs in the future. Pending use of the net proceeds of
this offering, we intend to invest them in short-term, interest-bearing,
investment grade securities.
DIVIDEND POLICY
We do not anticipate declaring or paying any cash dividends on our common
stock in the foreseeable future. KBkids.com LLC does not expect to pay any cash
distributions for the foreseeable future, except that KBkids.com LLC pursuant to
its amended and restated operating agreement, is required to pay distributions
to its members to the extent necessary to enable the members, including us, to
pay taxes incurred with respect to KBkids.com LLC's taxable income. We currently
intend to cause KBkids.com LLC to retain future earnings, if any, to finance the
expansion of its business. Any future determination with respect to the payment
of cash dividends on our common stock or directing the payment of cash
distributions by KBkids.com LLC will be at the discretion of our board of
directors and will depend on factors that our board deems relevant.
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CAPITALIZATION
The following table shows our capitalization as of September 30, 1999 on
the following three bases:
- on an actual basis for KBkids.com LLC;
- on a pro forma basis for KBkids.com Inc., as if it were incorporated on
September 30, 1999; and
- on a pro forma, as adjusted basis to reflect the contribution by KB
Online of one membership unit in KBkids.com LLC in exchange for one share
of Class B common stock, the merger of a wholly-owned subsidiary of
KBkids.com Inc. with and into BrainPlay.com and our receipt of the
estimated net proceeds from the sale of shares of common stock
offered in this offering at an assumed initial public offering price of
$ per share, after deducting underwriting discounts and
commissions and estimated offering expenses and the application of those
proceeds to the purchase of membership units.
You should read this table in conjunction with our financial statements and
the notes to our financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------------------------
KBKIDS.COM LLC KBKIDS.COM INC. AS
ACTUAL PRO FORMA ADJUSTED
-------------- --------------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................... $ 34,939
========
Capital lease obligations, net of current portion....... 372
--------
Members'/stockholders' equity:
Class A common stock, $.01 par value per share,
shares authorized; outstanding, actual;
outstanding, pro forma; and outstanding, pro
forma as adjusted(1)................................ --
--------
Class B common stock, $.01 par value per share, one
share authorized; none issued and outstanding on an
actual basis, one share issued and outstanding on a
pro forma basis..................................... --
Members' equity-membership units........................ 65,000
Accumulated deficit................................... (10,751)
--------
Total members'/stockholders' equity................. 54,249
--------
Total capitalization............................. $ 54,621
========
</TABLE>
- ---------------
(1) The number of shares of Class A common stock outstanding as of September 30,
1999 excludes:
- shares of Class A common stock issuable upon the exchange of
Consolidated's membership units in KBkids.com LLC and the conversion of
its one share of Class B common stock;
- shares issuable upon exercise of options to be granted to our
executive officers at the closing of this offering at an exercise price
equal to the initial public offering price per share;
- shares issuable upon exercise of options outstanding as of
, 2000 at a weighted average exercise price of $ per
share; and
- additional shares that could be issued under our stock option
plan.
29
<PAGE> 31
DILUTION
Our net tangible book value at , 2000 was $ million, or
$ per share. Net tangible book value is determined by dividing our net
tangible book value, which is tangible assets less liabilities, by the number of
shares of common stock outstanding on that date. Without taking into account any
other changes in our net tangible book value after , 2000, other than
to give effect to the sale of the shares offered by this prospectus at
an assumed initial public offering price of $ per share and the
application of the estimated net proceeds as described under "Use of Proceeds,"
our pro forma net tangible book value at , 2000 would have been
approximately $ million or $ per share. This represents an
immediate increase in the net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share $
Net tangible book value per share at , 2000 $
Pro forma net tangible book value per share
Increase per share attributable to existing
stockholders
Pro forma net tangible book value per share after this
offering
Net tangible book value dilution per share to new
investors $
</TABLE>
As of , 2000, we had outstanding stock options exercisable for
shares of common stock at a weighted average exercise price of
$ per share. In addition, upon consummation of this offering, we will
issue stock options for shares of common stock to our executive officers at
an exercise price equal to the initial public offering price per share. If these
options are exercised, further dilution to new investors will occur. We may also
issue additional stock to effect future potential business acquisitions or upon
exercise of future stock option grants or equity awards, which could also result
in additional dilution to then existing stockholders.
30
<PAGE> 32
CORPORATE HISTORY AND STRUCTURE
KBKIDS.COM LLC FORMATION
On June 25, 1999, KB Online and BrainPlay.com entered into a contribution
agreement to form KBkids.com LLC as a joint venture. Under the contribution
agreement, KB Online received 80% of the membership units in KBkids.com LLC in
exchange for contributing cash and property valued at $80,000,000 and
intangibles valued at $4,000,000. BrainPlay.com received the remaining 20% of
the membership units of KBkids.com LLC in exchange for contributing
substantially all of its assets and liabilities. You should read "Our
Business -- Related Party Agreements" for a description of the contribution
agreement.
REORGANIZATION
KB Online currently owns 80% of the outstanding units of membership
interest of KBkids.com LLC and BrainPlay.com owns 20% of the outstanding units
of membership interest. In connection with this offering, KBkids.com Inc. was
formed, and in addition, a subsidiary of KBkids.com Inc. was formed to be merged
with and into BrainPlay.com.
Simultaneously with the consummation of this offering, we will reorganize
as follows:
- KBkids.com Inc. will invest the net proceeds of this offering in
KBkids.com LLC, and in return KBkids.com Inc. will receive membership
units in KBkids.com LLC. These units will represent % of the then
outstanding equity of KBkids.com LLC.
- KB Online will contribute one membership unit in KBkids.com LLC to
KBkids.com Inc. in exchange for one share of Class B common stock of
KBkids.com Inc.
- The newly formed subsidiary of KBkids.com Inc. will merge into
BrainPlay.com resulting in BrainPlay.com becoming a wholly-owned
subsidiary of KBkids.com Inc. As a result of the merger, KBkids.com Inc.
will indirectly own membership units held by BrainPlay.com representing
% of the then outstanding equity of KBkids.com LLC, and the
equityholders of BrainPlay.com will receive, in the aggregate,
shares, and/or options to acquire shares, of Class A common stock in
KBkids.com Inc. based on an exchange ratio of shares, or options to
acquire shares, of Class A common stock for each share of BrainPlay.com
common stock and each option to acquire common stock.
- KBkids.com Inc. will become the sole manager of KBkids.com LLC. Through
our board of directors and our officers, we will be responsible for all
operational and administrative decisions of KBkids.com LLC and the
day-to-day management of its business.
- KB Online's membership units will represent % of the then outstanding
equity of KBkids.com LLC. KB Online will have the right to exchange its
membership units in KBkids.com LLC and its share of Class B common stock
into an equivalent number of shares of Class A common stock. For more
detailed information regarding KB Online's exchange rights, you should
read the information contained in "Description of Capital Stock and
Membership Units."
After this offering, each of the public stockholders, the former
BrainPlay.com equityholders and Consolidated will have a direct or indirect
economic interest in KBkids.com LLC equal to the respective percentage of the
aggregate voting power in KBkids.com Inc. held by each of them. For more
detailed information regarding voting rights, you should read the information
contained in "Prospectus Summary -- Corporate History and
Structure -- Reorganization."
OPERATING AGREEMENT
In connection with this offering, KBkids.com Inc., KB Online and
BrainPlay.com will enter into an amended and restated operating agreement,
pursuant to which we will become the sole manager of KBkids.com LLC. As sole
manager of KBkids.com LLC, we will have control over all of the affairs and
decision making of KBkids.com LLC. Through our board of directors and our
officers, we will be responsible for all operational and administrative
decisions of KBkids.com LLC and the day-to-day management of its business. Under
the operating agreement, cash will be distributed to members, and profits and
losses will be allocated among members in proportion to their number of
membership units in KBkids.com LLC. The operating agreement requires KBkids.com
LLC to make distributions to its members to cover any tax liabilities incurred
by them as a result of their ownership of membership units and contains no
limitations on distributions for any other purpose.
31
<PAGE> 33
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing elsewhere
in this prospectus. The balance sheet data of BrainPlay.com as of March 31, 1998
and 1999 and the BrainPlay.com statement of operations data for each of the
three fiscal years ended March 31, 1999 has been derived from financial
statements, which have been audited by Arthur Andersen LLP, independent
certified public accountants, and are included elsewhere in this prospectus.
Additionally, presented below is the unaudited BrainPlay.com statement of
operations data for the three month periods ending June 30, 1998 and September
30, 1998, and the period from April 1, 1999 to June 25, 1999. The KBkids.com LLC
unaudited balance sheet data as of September 30, 1999 and unaudited statement of
operations data for the period from June 26, 1999 (date of inception) to
September 30, 1999 is also included in this table and has been derived from the
financial statements appearing elsewhere in this prospectus. In the opinion of
management, the unaudited financial data includes all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations for the periods presented. The
operating results are not necessarily indicative of the operating results for
any future period.
<TABLE>
<CAPTION>
BRAINPLAY.COM KBKIDS.COM LLC
-------------------------------------------------------------------------- --------------
PERIOD FROM PERIOD FROM
YEAR ENDED MARCH 31, THREE MONTHS APRIL 1, 1999 THREE MONTHS JUNE 26, 1999
------------------------- ENDED THROUGH ENDED THROUGH
1997 1998 1999 JUNE 30, 1998 JUNE 25, 1999 SEPT. 30, 1998 SEPT. 30, 1999
----- ------- ------- ------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net sales........................... $ 2 $ 71 $ 596 $ 34 $ 499 $ 57 $ 1,046
Cost of products sold............... 2 65 675 36 850 73 1,248
----- ------- ------- ----- ------- ------- --------
Gross profit (loss)................. -- 6 (79) (2) (351) (16) (202)
Cost and expenses:
Sales and marketing 35 112 2,626 275 1,541 547 5,164
Product development and support.... 82 338 1,192 186 745 307 1,247
General and administrative......... 202 653 911 111 747 205 1,332
Amortization of intangibles........ -- -- -- -- -- -- 3,000
----- ------- ------- ----- ------- ------- --------
Total operating expenses.......... 319 1,103 4,729 572 3,033 1,059 10,743
----- ------- ------- ----- ------- ------- --------
Loss from operations................ (319) (1,097) (4,808) (574) (3,384) (1,075) (10,945)
Interest income (expense) -- net.... 5 50 52 29 (4) 17 194
----- ------- ------- ----- ------- ------- --------
Income taxes........................ -- -- -- -- -- -- --
----- ------- ------- ----- ------- ------- --------
Net loss............................ $(314) $(1,047) $(4,756) $(545) $(3,388) $(1,058) $(10,751)
===== ======= ======= ===== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
BRAINPLAY.COM KBKIDS.COM LLC
----------------- ---------------
AS OF MARCH 31,
----------------- AS OF SEPT. 30,
1998 1999 1999
------- ------- ---------------
(UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Cash and cash equivalents.......... $ 2,448 $ 5,089 $ 34,939
Working capital.................... 2,295 3,924 30,493
Total assets....................... 2,495 5,743 73,425
Long-term liabilities.............. -- 288 372
Stockholders' (deficit)/members'
equity........................... (768) (5,522) 54,249
</TABLE>
32
<PAGE> 34
PRO FORMA FINANCIAL DATA
The pro forma financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto appearing elsewhere
in this prospectus. Presented below is the unaudited pro forma BrainPlay.com
statement of operations data for the six month period ended September 30, 1998
and the fiscal year ended March 31, 1999 and the KBkids.com LLC unaudited pro
forma combined statement of operations data for the six months ended September
30, 1999 which has been prepared by combining the statement of operations of
BrainPlay.com, Inc. for the period April 1, 1999 through June 25, 1999 with the
statement of operations of KBkids.com LLC for the period June 26, 1999 through
September 30, 1999 appearing elsewhere in this prospectus. The only pro forma
adjustment required as a part of this presentation is the amortization of the
intangible assets as a result of the combination of the two entities. For the
fiscal year ended March 31, 1999 and the six month periods ended September 30,
1998 and 1999, the amortization adjustments were $12,000,000, $6,000,000 and
$3,000,000 respectively. The effects of this transaction are reflected in the
September 30, 1999 balance sheet presented on F-2. The pro forma combined data
is also presented on an as adjusted basis to reflect the combined operations of
BrainPlay.com and KBkids.com LLC for the period presented, the reorganization
and our receipt of the estimated net proceeds from the sale of shares of
common stock at an assumed initial public offering price of $ per share,
after deducting underwriting discounts and commissions and estimated offering
expenses, the merger of a wholly-owned subsidiary of KBkids.com with and into
BrainPlay.com and the issuance of one share of Class B common stock to KB
Online. In the opinion of management, the unaudited pro forma financial data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the financial position and results of
operations for the periods presented. The operating results are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
BRAINPLAY.COM KBKIDS.COM LLC
-------------------------------- -----------------------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
FOR THE FOR THE COMBINED FOR COMBINED, AS
FISCAL YEAR SIX MONTHS THE SIX ADJUSTED, FOR THE
ENDED ENDED MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1999 SEPT. 30, 1998 SEPT. 30, 1999 SEPT. 30, 1999
-------------- -------------- -------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net sales.............................................. $ 596 $ 91 $ 1,545
Cost of products sold.................................. 675 109 2,098
------- ------- -------- --------
Gross profit (loss).................................... (79) (18) (553)
Cost and expenses:
Sales and marketing................................... 2,626 823 6,705
Product development and support....................... 1,192 493 1,991
General and administrative............................ 911 316 2,079
Amortization of intangibles........................... 12,000 6,000 6,000
------- ------- -------- --------
Total operating expenses............................. 16,729 7,632 16,775
------- ------- -------- --------
Loss from operations................................... (16,808) (7,650) (17,328)
Interest income (expense) -- net....................... 52 47 189
Income taxes........................................... -- -- --
------- ------- -------- --------
Loss before minority interest.......................... (16,756) $(7,603) $(17,139)
------- ------- -------- --------
Minority interest...................................... -- -- --
------- ------- -------- --------
Net loss............................................... (16,756) $(7,603) $(17,139)
======= ======= ======== ========
Basic and diluted loss before minority interest per
share on a fully converted basis.....................
Basic and diluted weighted average shares outstanding
on a fully converted basis(1)........................
Basic and diluted net loss per share...................
Basic and diluted weighted average shares
outstanding..........................................
</TABLE>
- ---------------
(1) Represents total shares outstanding assuming conversion of Consolidated's
membership units in KBkids.com LLC and its one share of Class B common
stock.
<TABLE>
<CAPTION>
KBKIDS.COM LLC KBKIDS.COM INC.
-------------------- ----------------------
AS OF SEPT. 30, 1999 AS OF SEPT. 30, 1999
-------------------- ----------------------
ACTUAL PRO FORMA, AS ADJUSTED
-------------------- ----------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET:
Cash and cash equivalents................................... $34,939
Working capital............................................. 30,493
Total assets................................................ 73,425
Long-term liabilities....................................... 372
Minority interest........................................... --
Members'/stockholders' equity............................... 54,249
</TABLE>
33
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the operations of KBkids.com
Inc. and KBkids.com LLC, including its predecessor, BrainPlay.com, and should be
read in conjunction with "Selected Financial Data" and "Selected Pro Forma
Financial Data" and the consolidated financial statements and notes included
elsewhere in this prospectus. In the following discussion and analysis, the year
ended March 31, 1999 may be referred to as "fiscal 1999," the year ended March
31, 1998 may be referred to as "fiscal 1998" and the year ended March 31, 1997
may be referred to as "fiscal 1997." Actual results could differ materially from
those anticipated or implied by the forward-looking statements discussed here.
Factors that could cause or contribute to differences include those discussed in
"Risk Factors" as well as those discussed elsewhere in this prospectus. We urge
prospective investors to exercise caution and not to place undue reliance on any
such forward-looking statements. Forward-looking statements contained in this
prospectus speak only as of the date made, and we do not intend to update such
information after this offering.
OVERVIEW
We are one of the fastest growing online retailers with an exclusive focus
on children's products, including toys, video games, software and videos. We
currently offer an extensive selection of over 9,000 traditional and specialty
items representing more than 100 brands.
We derive our revenue from the sale of children's products from our
website. We recognize merchandise revenue when goods are shipped to our
customers from our fulfillment or warehouse partner, which occurs only after
credit card authorization. For sales of merchandise, we are responsible for
pricing, processing and fulfilling the orders. We process merchandise returns
and bear the credit risk for these transactions. We generally allow returns for
any reason within 30 days of receipt of shipment. Accordingly, we provide
allowances for estimated future returns at the time of shipment based on our own
historical data. From our inception through December 31, 1999, our rate of
product returns has been approximately 3.5% of total revenues, but our future
return rates could differ significantly from our historical averages.
Since our inception, we have not been profitable, and we may never achieve
or sustain profitability. Although we have experienced growth in our quarterly
revenues, historically we have incurred losses and experienced negative cash
flow. From inception through September 30, 1999, total accumulated net losses of
$20.3 million have been recognized primarily as a result of product development
costs associated with opening our website and our sales and marketing efforts,
which include payments to strategic alliance partners and for advertising. As we
expand our business, we believe that our operating expenses will significantly
increase as a result of financial commitments related to expansion of marketing
channels, capital expenditures and administration of and enhancements to our
website.
Due to the rapidly changing nature of our business and to our limited
operating history, period-to-period comparisons of our operating results, profit
margins and operating expenses as a percentage of sales are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Also, the financial information included herein may not necessarily be
indicative of the financial position, results of operations and cash flows we
would have had if KBkids.com LLC had been operating as a separate, stand-alone
company during the periods presented.
Our business is the successor to the business of BrainPlay.com, an online
specialty toy retailer that was founded in August 1995. On June 25, 1999,
Consolidated and BrainPlay.com formed KBkids.com LLC as a joint venture in order
to accelerate KB Toys entrance into the online market and to expand the business
of BrainPlay.com. Substantially all of the assets and liabilities of
BrainPlay.com were contributed to KBkids.com LLC along with cash and property
valued at $80 million and intangibles valued at $4 million from Consolidated in
connection with the formation of the joint venture.
In connection with this offering, we are reorganizing our corporate
structure. As a part of this reorganization, KBkids.com Inc. was incorporated in
January 2000 as a holding company whose sole asset following this offering will
be its % direct and indirect equity interest in KBkids.com LLC. Because
34
<PAGE> 36
KBkids.com Inc. will also act as the sole manager for KBkids.com LLC, its
financial statements will present KBkids.com LLC as a consolidated operating
subsidiary, with appropriate adjustments for Consolidated's % "minority"
interest. See "Corporate History and Structure."
Consequently, our historical financial statements for the periods prior to
June 26, 1999 included in this prospectus are the historical financial
statements of BrainPlay.com. Our historical financial statements included in
this prospectus for the periods from June 26, 1999 up to the completion of this
offering are the financial statements of KBkids.com LLC. Following this
offering, we will present the financial statements of KBkids.com Inc. on a
consolidated basis with KBkids.com LLC, reflecting a minority interest for
Consolidated.
The comparisons contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are of BrainPlay.com's historical
results for the years ended March 31, 1999, 1998 and 1997. The comparison of the
six month period ended September 30, 1999, on a pro forma basis, to the six
month period ended September 30, 1998, compares a combination of BrainPlay.com's
and KBkids.com LLC's historical results for the 1999 period to the historical
results for BrainPlay.com for the 1998 period.
RESULTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1999 ON A PRO FORMA COMBINED BASIS COMPARED TO
THE RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 ON A PRO FORMA BASIS
The six-month period ended September 30, 1998 consists solely of the
operations of BrainPlay.com. The six-month period ended September 30, 1999
includes approximately three months of operations of BrainPlay.com and
approximately three months of operations of KBkids.com LLC presented on a pro
forma basis. Business activity increased significantly immediately after the
formation of the joint venture on June 25, 1999. We increased our spending for
items such as salaries for new hires, marketing activities, website development
and other capital improvements. As a result, revenue increased significantly
later in the period.
NET SALES. Net sales consists of product sales to customers plus charges
to customers for outbound shipping and is net of product returns, promotional
discounts and coupons. Net sales increased to $1.5 million for the six months
ended September 30, 1999 on a pro forma basis, from $0.1 million for the six
months ended September 30, 1998. This reflects the significant growth of our
customer base and an increase in repeat purchases from our existing customers,
resulting from the redesign and expansion of our website and our increased
marketing expenditures.
COST OF PRODUCTS SOLD. Cost of products sold consists primarily of product
costs and outbound and inbound shipping costs. Cost of products sold increased
to $2.1 million for the six months ended September 30, 1999 on a pro forma
basis, from $0.1 million for the six months ended September 30, 1998. This
increase was primarily attributable to our increased sales volume. We expect
cost of products sold to increase in future periods to the extent that our sales
volume increases. Our gross loss increased to $(553,000) for the six months
ended September 30, 1999 on a pro forma basis, from $(17,000) for the six months
ended September 30, 1998. This increase was primarily due to greater discounts
and coupons, in addition to a promotional offer of free shipping to customers.
We took these pricing actions in order to quickly increase our customer base. We
intend to continue these promotional activities at reduced levels for the
foreseeable future.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of advertising and promotional expenditures, distribution facility
expenses and payroll and related expenses for personnel engaged in marketing,
customer service and distribution activities. Marketing and sales expenses
increased to $6.7 million for the six months ended September 30, 1999 on a pro
forma basis, from $0.8 million for the six months ended September 30, 1998. This
increase was due to the expansion of our online and offline advertising,
including a comprehensive television advertising and public relations campaign,
as well as increases for personnel and related expenses required to implement
our marketing strategy. In addition, because of the significant increase in our
inventory and sales volume, we experienced higher distribution
35
<PAGE> 37
and customer service expenses. As we pursue our branding and marketing campaign
and to the extent future sales volumes increase, we anticipate that marketing
and sales expenses will increase significantly in future periods.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses consist
primarily of payroll and related expenses for merchandising, website development
and information technology personnel plus Internet access and hosting charges
and web content and design expenses. Product development expenses increased to
$2.0 million for the six months ended September 30, 1999 on a pro forma basis,
from $0.5 million for the six months ended September 30, 1998. This increase
resulted primarily from increased staffing and associated costs in connection
with enhancing the features, content and functionality of our website and
increasing the capacity of our systems utilized to process customers' orders and
payments. Our continued investment in product development is critical to
attaining our strategic objectives and, as a result, we expect that product
development expenses will increase significantly in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist of payroll and related expenses for executive and administrative
personnel, facilities and equipment depreciation expenses, professional services
expenses, recruiting and relocation expenses, travel expenses and other general
corporate expenses. General and administrative expenses increased to $2.1
million for the six months ended September 30, 1999 on a pro forma basis, from
$0.3 million for the six months ended September 30, 1998. This increase was
primarily attributable to increased salary and related expenses associated with
the hiring of additional personnel and to increased professional services
expenses. We expect that general and administrative expenses will increase as we
expand our staff and incur additional costs related to the growth of our
business and operations as a public company.
AMORTIZATION OF INTANGIBLES. Amortization expense was $6 million for the
six months ended September 30, 1999 and 1998, on a pro forma basis. The
intangible assets have not been formally allocated because the intangible assets
are undergoing a valuation study. The study is expected to be completed in the
first calendar quarter of 2000 and value will be assigned to each of the
components. The intangible assets are being amortized over their estimated
useful lives, which is expected to be two years.
FISCAL YEAR 1999 COMPARED TO THE RESULTS FOR FISCAL YEAR 1998
NET SALES. Net sales increased to $0.6 million for fiscal year 1999, from
$0.1 million for fiscal year 1998. This reflects the significant growth of our
customer base and an increase in repeat purchases from existing customers,
resulting from increased marketing activities and the addition of new product
lines.
COST OF PRODUCTS SOLD. Cost of products sold increased to $0.7 million for
fiscal year 1999, from $0.1 million for fiscal year 1998. This increase was
primarily attributable to the increase in sales volume. Our gross profit (loss)
decreased to $(79,000) for fiscal year 1999 from $6,000 for fiscal year 1998.
This decrease was primarily due to greater discounts and coupons, in addition to
promotional offers of free shipping to customers.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2.6 million for fiscal year 1999, from $0.1 million for fiscal year 1998. This
increase was primarily associated with the expansion of offline and online
advertising, including extensive banner advertising and public relations
campaigns, in addition to increased personnel and related expenses required to
implement our marketing strategy.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased to
$1.2 million for fiscal year 1999, from $0.3 million for fiscal year 1998. This
increase reflects increased staffing and associated costs related to enhancing
the features, content and functionality of our website.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $0.9 million for fiscal year 1999, from $0.7 million for fiscal
year 1998. This increase was primarily attributable to increased headcount and
related expenses associated with the hiring of additional personnel and
increased professional services expenses.
36
<PAGE> 38
FISCAL YEAR 1998 COMPARED TO THE RESULTS FOR FISCAL YEAR 1997
NET SALES. Net sales increased to $0.1 million for fiscal year 1998, from
less than $0.1 million for fiscal year 1997. The increase in net sales reflects
the effects of a complete year of sales volume in 1998, the corresponding growth
of our customer base and repeat purchases from our existing customers.
COST OF PRODUCTS SOLD. Cost of products sold increased to $0.1 million for
fiscal year 1998, from less than $0.1 million for fiscal year 1997. This
increase was primarily attributable to the effects of a complete year of sales
volume in 1998. Gross profit was $6,000 for fiscal year 1998, and was
approximately zero for fiscal year 1997.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$0.1 million for fiscal year 1998, from less than $0.1 million for fiscal year
1997. This increase was primarily attributable to increased personnel and
related expenses required to implement our marketing strategy.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased to
$0.3 million for fiscal year 1998, from $0.1 million for fiscal year 1997. This
increase is associated with increased staffing and related costs for the
enhancement of features, content and functionality of our website.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $0.7 million for fiscal year 1998, from $0.2 million for fiscal
year 1997. This increase was primarily attributable to increased salary and
related expenses associated with the hiring of additional personnel and
increased professional services expenses.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table sets forth a summary of BrainPlay.com's unaudited
quarterly operating results for each of the seven quarters in the period ended
June 25, 1999 and KBkids.com LLC's unaudited quarterly operating results for the
quarter ended September 30, 1999. This information has been derived from
unaudited financial statements which, in our opinion, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of this information and, with respect to the operating results of BrainPlay.com,
have been prepared on a basis consistent with the audited financial statements
contained elsewhere in this prospectus. Our revenue and operating results are
difficult to forecast and will fluctuate. The amount and timing of our operating
expenses generally will vary from quarter to quarter depending on our level of
actual and anticipated business activities. Period-to-period comparisons of our
operating results are not a good indication of our future performance. As a
result, you should not rely upon them as an indication of future performance.
37
<PAGE> 39
<TABLE>
<CAPTION>
QUARTER ENDED (UNAUDITED)
-----------------------------------------------------------------------------------------------------
31-DEC. 97 31-MAR. 98 30-JUN. 98 30-SEP. 98 31-DEC. 98 31-MAR. 99 25-JUN. 99 30-SEP. 99
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $ 37 $ 24 $ 34 $ 57 $ 392 $ 113 $ 499 $ 1,046
Cost of products sold.... 33 22 36 73 411 155 850 1,248
----- ----- ----- ------- ------- ------- ------- --------
Gross profit (loss)...... 4 2 (2) (16) (19) (42) (351) (202)
Cost and expenses:
Sales and marketing.... 26 71 275 547 938 865 1,541 5,164
Product development and
support.............. 69 179 186 307 402 297 745 1,247
General and
administrative....... 81 501 111 205 186 409 747 1,332
Amortization of
intangibles.......... -- -- -- -- -- -- -- 3,000
----- ----- ----- ------- ------- ------- ------- --------
Total operating
expenses...... 176 751 572 1,059 1,526 1,571 3,033 10,743
----- ----- ----- ------- ------- ------- ------- --------
Loss from operations..... (172) (749) (574) (1,075) (1,545) (1,613) (3,384) (10,945)
Interest income
(expense) -- net....... 13 34 29 17 (5) 11 (4) 194
Income taxes............. -- -- -- -- -- -- -- --
----- ----- ----- ------- ------- ------- ------- --------
Net loss................. $(159) $(715) $(545) $(1,058) $(1,550) $(1,602) $(3,388) $(10,751)
===== ===== ===== ======= ======= ======= ======= ========
</TABLE>
Since the commencement of shipments to customers in November 1996, our net
sales have increased. These increases resulted from growth of our customer base,
repeat purchases from existing customers and most recently the expanded mix of
merchandise available for sale on our website.
Cost of products sold has increased proportionately due to the increase in
sales volume and due to promotional offers of free shipping to customers.
Operating expenses have increased reflecting our increased handling charges
for a higher sales volume and our commitment to expand our website through
promotional campaigns, customer service and technological improvements.
The market for children's toys, video games, software, and videos is highly
seasonal. A disproportionate amount of our net sales have been realized during
our third fiscal quarter, and we expect this trend to continue in future
periods. Accordingly, we significantly increase our purchases of inventory and
spending on advertising during our third fiscal quarter. As a result, accounts
payable are at their highest levels during our third fiscal quarter. It is also
likely that our operating results in some quarters will fall below market
expectations. We expect to continue to experience significant fluctuations in
future quarterly operating results due to a variety of factors, many of which
are outside of our control.
INCOME TAXES
Simultaneously with the offering, BrainPlay.com will become a wholly-owned
subsidiary of KBkids.com Inc. Accordingly, KBkids.com Inc. will file a
consolidated U.S. income tax return with BrainPlay.com. The net operating loss
carryforwards, or NOLs, for federal income tax purposes of BrainPlay.com, for
periods up to the time of this offering, will be available on this consolidated
return, but could be restricted as to their usage by certain provisions of the
Internal Revenue Code of 1986, as amended. Such restrictions may have the effect
of limiting the tax benefit of any carryforward losses of BrainPlay.com. In
accordance with Statement of Financial Accounting Standards No. 109, a valuation
allowance must be recorded against a company's deferred tax assets unless it is
more likely than not that those assets will be realized. Accordingly, a
valuation reserve representing 100% of the tax benefit of the NOLs has been
recorded against BrainPlay.com's deferred tax assets relative to the anticipated
restricted usage of the NOLs.
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KBkids.com LLC, as a limited liability company, is not considered a taxable
entity for federal income tax purposes and most state income tax purposes. Any
items of taxable income or loss from KBkids.com LLC flow through to the
respective members of KBkids.com LLC generally based upon their pro rata
ownership of units. Thus, KBkids.com Inc. will report for tax purposes its
direct and indirect share of KBkids.com LLC's items of taxable income or loss
generated after this offering. The amended and restated operating agreement of
KBkids.com LLC requires that a distribution of cash to KBkids.com Inc. be made
if KBkids.com Inc. is required to pay any taxes on KBkids.com LLC's taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
Since BrainPlay.com's inception in August 1995, it has financed its
operations primarily by private sales of its equity securities, including
convertible preferred stock. Through June 25, 1999, private sales of equity in
BrainPlay.com totaled $10.0 million. Since June 25, 1999, we have financed our
operations primarily from the cash contributed by Consolidated under the
contribution agreement.
Net cash used in operating activities was $6.7 million in the six months
ended September 30, 1999 on a pro forma basis, and $1.6 million in the six
months ended September 30, 1998. Net cash used in operating activities for each
of these periods primarily consisted of increases in inventory, as well as net
losses and prepaid expenses, partially offset by increases in accounts payable,
accrued expenses and depreciation. The significant increase in working capital
during the six months ended September 30, 1999 on a pro forma basis was
primarily due to the cash contributed by Consolidated under the contribution
agreement.
Net cash used in investing activities was $3.7 million for the six months
ended September 30, 1999 on a pro forma basis, and $0.8 million for the six
months ended September 30, 1998. Net cash used in investing activities for each
of these periods primarily consisted of computer equipment and systems, as well
as leasehold improvements and fixtures and furniture.
Net cash provided by financing activities was $40.7 million for the six
months ended September 30, 1999 on a pro forma basis, compared to zero for the
six months ended September 30, 1998. Net cash provided by financing activities
during the six months ended September 30, 1999 on a pro forma basis primarily
consisted of $40 million cash equity contribution by Consolidated under the
contribution agreement.
As of September 30, 1999, cash and cash equivalents totaled $34.9 million.
At that time, our principal commitments consisted of merchandise payables and
online and offline advertising commitments. Although we have no material
commitments for capital expenditures, we anticipate a substantial increase in
our capital expenditures and lease commitments consistent with anticipated
growth in our operations, infrastructure and personnel. We plan to open an
additional distribution facility during fiscal 2000, which may require us to
purchase real estate or commit to additional lease obligations and to purchase
equipment and install leasehold improvements.
In September 1999, we entered into a marketing agreement with AOL. Under
this agreement, we are featured as a provider of children's toy products on the
AOL Network and AOL's website, www.aol.com. The agreement requires us to pay up
to $3 million over a one-year period.
During the six months ended September 30, 1999, we spent approximately $3.5
million for online and traditional offline advertising. In addition, as of
September 30, 1999, we had approximately $43 million in online and offline
advertising commitments through December 31, 1999. As of September 30, 1999, we
were a guarantor of Consolidated's $700 million revolving credit facility,
however, upon completion of this offering, we will be released from this
guaranty. The amendment to Consolidated's credit facility in January 2000
provides that upon completion of this offering, Consolidated may, at its option,
lend, on a secured basis, up to $100 million to us at market rates, subject to
the requirement that we pay down any outstanding balance on this line of credit
in full for at least one consecutive 30-day period during each year.
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We currently anticipate that the net proceeds of this offering, together
with our other available funds, will be sufficient to meet our anticipated needs
for working capital and capital expenditures through the next twelve months.
Although we have no present understandings, commitments or agreements with
respect to any acquisition of other businesses, products or technologies, we
may, from time to time, evaluate potential acquisitions of other businesses,
products and technologies. In order to consummate potential acquisitions, we may
issue additional securities or need additional equity or debt financings and
these financings may be dilutive to existing stockholders and such securities
may have rights, preferences or privileges senior to those of the rights of our
common stock. We cannot be certain that additional financing will be available
to us when required, on commercially favorable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for other hedging activities. SFAS No. 133 is
effective for all fiscal quarters beginning with the quarter ending June 30,
1999. In July 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities Deferral of
the Effective Date of FASB Statement No. 133." SFAS 137 deferred the effective
date until the first fiscal quarter ending June 30, 2000. We will adopt FAS 133
in our quarter ending June 30, 2000. We do not currently engage in hedging
activities or invest in derivative instruments.
On April 3, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." The Statement provides guidance on the financial reporting of
start-up costs and organization costs and requires costs of start-up activities
and organization costs to be expensed as incurred. The adoption of the Statement
did not have a material impact on us.
On March 4, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 established standards for the
capitalization of costs related to internal use software. In general, costs
incurred during the development stage are capitalized, and costs incurred during
the preliminary project and post-implementation stages are expensed. The
adoption of SOP 98-1 did not have a material effect on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We currently market our merchandise in the United States and anticipate
expanding our marketing efforts to foreign markets. As a result, our financial
results could be affected by factors including changes in foreign currency
exchange rates or weak economic conditions in foreign markets. As all of our
sales are currently made in U.S. dollars, a strengthening of the dollar could
make our products less competitive in foreign markets. Our interest income is
sensitive to changes in the general level of U.S. interest rates, particularly
since the majority of our investments are in short-term instruments. Due to the
short-term nature of our investments, we believe that we have no material
exposure.
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OUR BUSINESS
KBKIDS
We are one of the fastest growing online retailers with an exclusive focus
on children's products. Our goal is to become the premier online destination for
purchasing children's products. Currently, we sell toys, video games, software
and videos, and we intend to expand our product offerings in the future.
Our relationship with KB Toys allows us to employ a superior business model
that delivers a rewarding customer experience combining the convenience and
flexibility of a leading online shopping site with the benefits of a retail toy
store. We believe that the brand name, cross-marketing advantages and
store-based synergies that we have with KB Toys give us a strategic advantage in
the area of customer acquisition. We also benefit from numerous merchandising
synergies with KB Toys such as favorable allocations of popular products and
cost effective purchasing.
Customers can enjoy the convenience and flexibility of shopping at our
online store 24 hours a day, 7 days a week, with access to over 9,000
traditional and specialty items. We combine this offering with excellent value,
strong customer service and relevant content that helps to inform our customers
and creates a sense of community. We believe these attributes provide our
customers with a superior shopping experience.
From our inception through December 31, 1999, we had approximately 417,000
unique customers who purchased from our online store. From June 26, 1999, the
date we began operating our online store, to September 30, 1999, we generated
net revenues of $1,046,000. In only our first holiday season, Media Metrix
ranked us twelfth overall among all online retail sites for unique visitors
during the five week holiday season ended December 26, 1999. For the same five
week holiday period, Media Metrix ranked us among the top three toy sites in
traffic, with approximately 799,000 average weekly unique visitors. In a similar
survey, NextCard rated us second among toy sites and in the top ten online
retailers in terms of transaction volume for the six week holiday shopping
season ended December 31, 1999. NextCard also rated us second in sales growth
among all online retailers in all product categories for the months of October
and November 1999, and on December 3, 1999, the Wall Street Journal rated us the
best overall online toy retailer.
INDUSTRY OVERVIEW
ELECTRONIC COMMERCE. The Internet has emerged as one of the
fastest-growing communications, information and commerce mediums in history.
International Data Corporation estimates that there were 142 million Internet
users worldwide at the end of 1998 and expects this number to grow to
approximately 502 million by the end of 2003. Businesses' and consumers' rapid
acceptance of the Internet as a communications, information and commerce
platform has created the foundation for significant growth in
business-to-consumer electronic commerce. Forrester Research estimates that
online purchases by U.S. consumers will grow from approximately $20 billion in
1999 to $184 billion by 2004.
The Internet provides a number of advantages for online retailers. Unlike
traditional retail channels, online retailers do not incur the burdensome costs
of managing and maintaining a retail store base or the significant printing and
mailing costs of catalogs. Because online retailers are not constrained by shelf
space or catalog print limitations, they are able to display a larger number of
products at a lower cost than traditional retail channels. Online retailers also
benefit from the ability to reach a large group of customers from a central
location and, accordingly, can more easily obtain specific demographic and
behavioral data about a diversified base of consumers, increasing their
opportunities for targeted marketing and personalized services.
TRADITIONAL CHILDREN'S PRODUCTS MARKET. The traditional children's
products retail industry includes mass market retailers, discount stores,
specialty retailers and mail order catalogers. The market for children's
products encompasses numerous categories, such as traditional toys, books, video
games and educational software. Toy Manufacturers of America estimates that the
domestic toy and video game
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market had retail sales in excess of $27 billion in 1998. There is a
significantly larger market if we include international markets. According to
Toy Manufacturers of America, sales in the international toy and video game
market were approximately $68 billion in 1998.
CHALLENGES IN TRADITIONAL CHILDREN'S PRODUCTS RETAILING. We believe that
traditional children's products retailers are confronted with a number of
challenges in providing a convenient and satisfactory shopping experience for
consumers:
- Limited selection. Physical retail space constrains the variety of
products and the amount of product inventory that may be carried by a
single store. The significant costs associated with carrying physical
inventory at multiple locations require traditional children's products
retailers to limit their product selection to the most popular products
that produce the highest inventory turns.
- Lack of specialty toy products. Specialty toy products are generally not
offered because of space constraints, significant added costs associated
with carrying specialty brands and lack of expertise required to select
specialized products.
- Limited customer service. Because traditional retail stores typically do
not have many trained, knowledgeable salespeople, obtaining helpful,
in-depth product information may be challenging.
- Significant infrastructure investment. The costs associated with
building or leasing and operating physical stores, including costs
associated with personnel, real estate, construction, store set-up,
maintenance, inventory and fixed assets may cause prices at traditional
retail stores to be higher.
- Limited operating hours. Traditional store operating hours can make
shopping inconvenient for busy customers and, may require parents to shop
with their children, which can be extremely challenging.
- Relatively inflexible inventory procurement. Traditional retailers face
the challenge of adapting to seasonal changes in demand for children's
products in each of their stores. In addition, stores with limited
storage areas often have difficulties in stocking sufficient inventories
of popular products during the peak holiday season.
As a result of these challenges, we believe that no traditional children's
products retailer offers an effective combination of a broad selection of
popular brand name products, a convenient shopping experience, detailed product
information, expert advice and personalized service.
CHALLENGES IN ONLINE CHILDREN'S PRODUCTS RETAILING. We believe that
retailers operating solely on the Internet have several obstacles to becoming
the preferred place for purchasing toys or other children's products:
- Newly formed vendor relationships. Most online children's products
retailers do not have strong and established relationships with
manufacturers, which limits their ability to purchase popular toys and
other children's products and limits their access to volume purchasing
discounts as well.
- Undeveloped brand name. Most online children's products retailers are
still in the early stages of brand formation. Brand recognition attracts
customers, fosters customer loyalty, helps sustain high levels of
customer traffic and may lower customer acquisition costs.
- Limited merchandising and retailing expertise. Most online children's
products retailers have begun operations without significant
merchandising, product procurement or other retailing experience. These
companies are in the early stages of establishing merchandising
relationships with vendors. In addition, these companies must develop a
method of returning or exchanging products, which may result in
significant delays between when a product is returned and when a refund
or replacement product is received.
- Limited inventory liquidation procedures. Online children's product
retailers, generally, have no easily accessible outlet to liquidate their
inventories of toy products, which is inevitable in the toy industry due
to manufacturers' or distributors' advance order requirements.
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- Lack of content and community. Smaller online retailers, in particular,
do not have the experience and scale of operation in the children's
products market to develop and maintain the type of content and community
aspects of online stores that we believe customers desire.
OUR SOLUTION
We believe our ability to combine KB Toys' toy retailing experience and
infrastructure with our entrepreneurial culture and Internet experience has
allowed us to employ a superior business model which delivers a rewarding
customer experience. We believe our superior business model gives us the
following advantages:
COST-EFFECTIVE CUSTOMER ACQUISITION. We believe that our strong brand
recognition, cross-marketing synergies and store-based synergies will allow us
to acquire customers on a cost-effective basis:
- Strong brand recognition. We have a distinct advantage over many online
children's products retailers because of our affiliation with KB Toys and
the use of the KBkids.com trade name which allows us to leverage the
trusted, longstanding KB brand name. In recent tests conducted by
Diagnostic Research International, the KB Toys brand had a more than 80%
aided brand awareness. We believe that KB Toys' 55 year operating history
and reputation for product knowledge is attractive to consumers and
manufacturers and lays the foundation for long-term customer and vendor
loyalty. We believe that the KB brand name will attract a significant
number of customers to our online store, ultimately enabling us to reduce
our costs of customer acquisition.
- Cross-marketing synergies. We benefit directly from the advertising
efforts of KB Toys, including the distribution of approximately 250
million KB Toys circulars annually that will advertise our online store
and will contain product numbers to order online. From time to time, we
also have signage and other promotional materials in the KB Toys stores,
including coupons for the online store and our AOL keyword appearing on
KB Toys salespersons' uniforms and on purchase receipts, shopping bags
and posters.
- Store-based synergies. There are approximately 1,300 KB Toys stores with
locations in all 50 states, Puerto Rico and Guam. We believe that
approximately 80% of the U.S. population lives within 20 miles of a KB
Toys store. We believe that we will receive incremental sales from the KB
Toys stores through referrals when an item is not available in the store.
Since we have a more extensive product offering than an individual store,
we frequently may carry an item that the stores do not. In this
situation, the salesperson in a KB Toys store can refer the customer to
our online store, rather than to another competing toy retailer.
MERCHANDISING LEVERAGE. We are able to take advantage of KB Toys'
experience in toy merchandising, its significant volume purchasing power and
resulting strong vendor relationships to receive favorable allocations of
popular items, manufacturer support funds and exclusive merchandise. Using KB
Toys' extensive direct vendor access generally allows us to purchase at a lower
cost because we can often make volume purchases collectively with KB Toys. Since
our merchandising strategy's success is largely a function of our ability to
make accurate predictions with respect to popular holiday season children's
products, our ability to use KB Toys' experience to help us with these
predictions decreases our inventory risk.
Our business model allows us to provide our customers with a rewarding
shopping experience including the following benefits:
CONVENIENCE AND SELECTION. Customers can enjoy the time savings,
convenience and flexibility of shopping at our online store 24 hours a day, 7
days a week, with access to a broad selection of products. Our customers range
from those who find the in-store toy shopping experience less desirable to those
in rural or other locations that do not have convenient access to physical
stores. The combination of our relationship with KB Toys and BrainPlay.com's
heritage in specialty toys allows us to offer a significant selection of
well-known brand name products, popular children's products, harder-to-find
specialty products and exclusive merchandise through our online store. Our
online store currently offers over 9,000 children's products representing over
100 brands, which we believe to be a competitive mix of products. The
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flexibility afforded by our technology allows us to rapidly change not only the
organization and presentation of our product selection but also our promotions
and special pricing of selected items.
VALUE. We believe that our customers save time and money by using our
online store to purchase children's products. Through our purchasing leverage
with KB Toys, we can pass on the benefits of volume discounts to our customers
in the form of lower prices. In addition, we can stock our "Great Values"
section of the online store with excess closeout merchandise purchased through
KB Toys at significant discounts up to 70% off of manufacturers' suggested
retail prices.
PURCHASING ADVICE. To assist customers in selecting products, we provide
customer reviews and comments, daily spotlight products, favorites by age,
special offers and featured products, such as new releases and "Surprise of the
Day." Each week we release new articles that highlight developments in the toy
world, as observed by our editorial team and by experts such as the syndicated
national columnist, Dr. Toy. This adds to our extensive content base which
includes hundreds of feature articles and product reviews. We also notify
customers of any recalls issued by manufacturers of the products we carry.
CUSTOMER SERVICE. Our customers can make returns or exchanges at any of KB
Toys' 1,300 stores conveniently located in malls and strip centers nationwide.
In addition, we provide free pre-sale and post-sale customer service through
e-mail, fax and 24-hour, 7-days-a-week toll-free telephone operations.
Our integrated inventory control system is designed so that a product's
availability on our website reflects our warehouse's stock position of that
product. This helps to eliminate much of the customer's anxiety regarding
delivery of products. We believe that over 98% of all products guaranteed for
receipt prior to Christmas were shipped by us in time for Christmas arrival.
COMMUNITY. An important element of our online store is our community of
customers and their interaction with each other. To foster this interaction, we
currently host message boards that are relevant to our target audience such as
discussions regarding video games, popular seasonal toys, collectibles and
parenting, as well as ask-the-experts message boards where customers can ask
specific questions of our editorial staff.
GROWTH STRATEGY
Our goal is to become the premier online destination for purchasing a wide
range of children's products. To achieve this objective, we are pursuing the
following strategies:
- INCREASE ACQUISITION OF CUSTOMERS. Since our inception through December
31, 1999, we had approximately 417,000 unique customers who purchased
from our online store, approximately 371,000 of which were acquired since
July 1999. We intend to combine our strong brand recognition and
cross-marketing synergies with KB Toys and expanded online and offline
marketing media to continue to aggressively acquire customers for our
online store. We currently advertise on AOL, Yahoo!, Excite@Home and
NetZero. In addition, we have partnering and affiliate programs that are
revenue sharing arrangements with companies such as Shopweb.net. We plan
to use a mix of advertising consisting primarily of online advertising
through major portals and Internet service providers, offline advertising
on television, radio, print and outdoor mediums, an affiliate network of
websites and promotions, events and sponsorships. We believe that the
right combination of these advertising techniques will accelerate our
acquisition of new customers and help drive repeat business.
- PROMOTE REPEAT BUSINESS FROM EXISTING CUSTOMERS. We intend to promote
customer loyalty and build relationships with our customers to drive
repeat sales. We believe that over 53% of our customers have made more
than one purchase of children's products from our online store.
Currently, we seek input from our parental advisory council, customers
and merchandisers with respect to product offerings, new features, the
look and feel of the site and functionality of the site. We plan to
continually enhance our online store and its features to make it more
attractive to our customers. We strive to provide quality customer
service seven days a week, ship products promptly and at competitive
prices and have an easy-to-shop online retail environment. To further
increase
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customer loyalty, we intend to increase the amount of direct marketing
targeted at our existing customers and add certain features to our online
store which are accessible only by registered customers and that are
tailored to each customer. We plan to add features which will offer a
personalized experience for each customer based on their past usage of
our website. We also plan to expand our direct e-mail promotions to offer
customers the option of being notified of sales on certain products and
other information. We often run promotions on our online store to
encourage frequent visits by customers who want to be aware of the latest
bargains.
- EXPAND OUR PRODUCT OFFERINGS. To increase our customer base and counter
the seasonality of the toy business, we intend to expand our product
offerings, examine geographic expansion and pursue alternative selling
formats. We intend to add new product categories to our online store,
through efforts that include creating new strategic relationships with
manufacturers or resellers or through strategic acquisitions. We also
plan to continue to aggregate and develop web content that is relevant
and useful to our customers. We expect to become the premier destination
for parents, caretakers, grandparents, aunts and uncles to learn about
children's products, receive parenting advice, interact with other users
on the subject of children and children's products and to purchase the
full spectrum of children's products. We also plan to extend our business
in selected international markets with appropriate demographics and
market characteristics because we believe that the international market
opportunity is vast and that in many international markets retailing of
children's products is highly fragmented and less developed than in the
United States.
- ENHANCE OUR TECHNOLOGY. To effectively compete and gain market share in
the online retail children's products industry, we plan to continue to
augment and improve the functionality and features of our online store.
We intend to incorporate features that provide personalized customer
interaction to enhance our customers' shopping experience. In addition,
we need to ensure that downtime for our online store is minimized, the
expected increase in website traffic is supported and all leading online
retail technology, including security technology, is incorporated into
our online store.
- EXPAND OUR FULFILLMENT AND CUSTOMER CARE CAPABILITIES. We plan to expand
our fulfillment and customer care infrastructure that supports our online
store. We are examining our fulfillment operations to determine how to be
the best in our class in terms of warehousing, packaging and delivery,
which may result in our purchasing or leasing dedicated fulfillment
centers and the corresponding expense of automating and integrating those
centers. We are reviewing similar alternatives with respect to our
outsourced customer service call centers.
OUR ONLINE STORE
OVERVIEW. We designed our online retail store to be the principal place
for consumers to purchase children's products. We provide consumers with a
complete online children's products destination integrating commerce, content
and community. Key features of the KBkids.com store include:
OUR STORE DEPARTMENTS. We categorize products into the following
departments: toys, video games, software, DVDs and videos, collectibles, and
specialty toys. Within each department, products are generally organized by age,
brand, character, category and by our recommendations, such as best sellers and
bargains. The following is a summary of each of these departments:
Toys. We believe that we offer one of the best selections of toys
available on the Internet. Through our toy department, we offer an
extensive selection of over 100 brands of toys. We offer not only popular
brands, such as Pokemon, Barbie, Furby, LEGO and Fisher-Price, but also
specialty brands, such as Small World Toys, International Playthings and
Alex Toys. Acknowledging the consumer reality of the toy market, we try to
capitalize on KB Toys' merchandising experience to predict and
appropriately stock popular toys and other children's products.
Video games. In our video game department, we offer a wide selection
of game titles, including best sellers, new releases and bargains, for
popular platforms such as Sega Dreamcast, Sony
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PlayStation, Nintendo 64 and GameBoy. In connection with the game titles,
we provide ratings by the Entertainment Software Rating Board for most
video games, which addresses the level of violence, language and content.
In addition, we sell the various platform consoles and accessories.
Software. Through our software department, we offer a selection of
software that is organized into easy-to-use and understandable categories
and by recognizable brands and characters. We feature a variety of
well-known classic and currently popular brands, including LucasArts,
Reader Rabbit and Disney.
DVDs and videos. We offer videos for families and children that are
organized into easy-to-shop categories and by popular characters. In
addition, consumers can search for videos through links to best sellers,
bargains, new and upcoming videos, DVDs and award winning videos.
Collectibles. Through our collectibles department, we offer many
collectibles, including dolls, cars and action figures. Many of these are
exclusively available at KB Toys stores and our online store. Since these
items typically do not have large inventory turns and can occupy
significant shelf space, traditional retail stores typically carry only
limited offerings, if any, of these items. However, collectibles are an
ideal product for our online store since we do not have the same space
limitations as a traditional retail store. Collectors also contribute
regularly to our community section and, we believe, are loyal customers.
Specialty toys. Our specialty toys department offers a unique way to
access products that help kids learn, play and grow. These child-learning
products are organized into easy-to-shop categories, such as developmental
skills, subject, category, brands and characters. Through this department,
we believe we make it easier for consumers to purchase products with the
dual purpose of educating and entertaining children.
SHOPPING AT OUR ONLINE STORE. We believe that the sale of children's
products over the Internet can offer attractive benefits to consumers. These
include enhanced selection, convenience, ease-of-use, depth of content and
information and competitive pricing. Key features of our online store include:
Browsing. Our website offers customers a variety of highlighted
subject areas and special features arranged in a simple, easy-to-use format
intended to enhance product search, selection and discovery. By clicking on
the permanently displayed department names, the consumer moves directly to
the department's home page and can quickly view promotions and featured
products. Customers can also use a keyword search to quickly locate a
specific product. Once this search is done, customers can re-sort their
results by age, price or alphabetically. This helps a customer quickly
choose the right toy, especially when shopping for gifts.
Getting information. One of the advantages of an Internet retail
store is the ability to provide useful product information and editorial
content. Our product pages typically include a detailed description of the
product, a picture, information about age appropriateness and price. The
consumer can also read customer reviews and comments on the product page.
In addition, our community section provides relevant information about
products and issues of interest to our consumers. Through this community
section, we post new articles each week that highlight developments in the
toy world, as observed by our editorial team and other experts.
Additionally, our ask-the-expert message board is a place where consumers
can post specific questions about toys and related issues. Other message
boards give consumers an opportunity to voice their opinions about products
and to hear what other customers have to say. The community section also
provides information on recalls issued by the manufacturers of the products
we carry.
We employ an editorial staff which contributes to these articles. To
help us make decisions about products, advertising and the look and feel of
the online store, we formed a parental advisory council, made up of
parents, caretakers, grandparents, aunts and uncles who have expressed an
interest in helping us make our website even better. Members of our
parental advisory council are compensated for their time and assistance.
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Registering for a gift. Our website allows a parent or child to
inform others of products that are wanted as gifts. Once the parent or
child has found a product that they would like to wish for, they simply
click on the "wish for this gift" icon and then are prompted to provide the
e-mail addresses of those people to whom the gift wish, together with a
personal message, will be sent.
Finding a gift. In our gift center, consumers can obtain gift
recommendations that are broken down by age category. In addition, the gift
center gives the consumer another chance to add a product to his or her
wish list, and because gifts and parties often go together, the gift center
features articles and tips on throwing parties and creating party games. We
are working to enhance our gift center including adding gift wrapping,
registry services and reminder features.
Choosing a product and checking out. To purchase products, customers
simply click on the "add to cart" button to add products to their virtual
shopping cart. As customers browse around our store, they can add and
subtract products from their shopping cart before making a final purchase
decision, just as they could in a physical store. To execute orders,
customers click on the "I want to check out" button and then are prompted
to supply payment and shipping details online. Prior to finalizing an
order, customers are shown their total charges along with the various
options chosen, at which point customers still have the ability to change
their orders or cancel them entirely. During the check out process,
customers are asked to enter their e-mail addresses so that we can send an
order confirmation to them. Registered users at the online store can also
use our quick checkout process, where the customer does not have to
re-enter information from previous shopping trips. Our inventory system is
fully integrated into the website and is designed so that a product's
availability on our website reflects our warehouse's stock position of that
product. This helps to eliminate the anxiety regarding whether a popular
product will be in stock and whether, when purchasing an item, the customer
will receive the product in time.
Paying for merchandise. To pay for orders, a customer must use a
credit card, which is charged when we ship the customer's items from the
distribution facility. Our website uses security technology licensed from
VeriSign that works with the most common Internet browsers and is designed
to prevent unauthorized parties from reading information sent by customers.
Our system automatically confirms receipt of each order via e-mail and
notifies the customer when we shipped the order, which typically occurs by
the next business day for in-stock items. We intend to add the ability to
purchase electronic gift certificates which will be able to be used to
purchase items at our online store.
Customer assistance. From every page of our website, a customer can
click on the "Help" button to go to our help and customer care area. The
help and customer care area of our website contains extensive information
for first time and repeat visitors. In this area, we assist customers in
searching for, shopping for, ordering and returning our products as well as
provide information on our low price guarantee, shipping charges and other
policies. In addition, customer service representatives are available to
answer questions about products in the shopping process 24 hours a day, 7
days a week, via e-mail, fax or our toll free number, which is displayed in
the help and customer care area of our website. Our goal is to answer each
telephone call to our customer service center within 30 seconds and each
e-mail within 24 hours, although we may not consistently meet this goal
during the peak holiday season.
MERCHANDISING
MERCHANDISING STRATEGY. We believe that the breadth and depth of our
product selection, together with the flexibility of our online store and our
range of helpful and useful shopping services, enable us to pursue a unique
merchandising strategy. This strategy includes efforts to predict popular
products for the holiday season early each year, to leverage on our relationship
with KB Toys to receive favorable allocations of popular products and exclusive
products and to capitalize on the experience of our dedicated buying team. The
following are examples of some of our specific merchandising strategies and our
implementation of them.
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BROAD SELECTION OF PRODUCTS. We provide an extensive selection of
children's products. These include traditional mass market toys, specialty toys
and a broad selection of related children's products, including video games,
software and videos, that would be economically impractical to stock in a
traditional store. We have approximately 9,000 SKUs of merchandise,
approximately 73% of which are toys, 15% of which are DVDs and videos, 7% of
which are software and 5% of which are video game related products.
FLEXIBILITY OF OUR ONLINE STORE. Unlike many of our competitors, our
technology provides us with significant flexibility with regard to the
organization and presentation of our product selection. To encourage purchases,
we feature various promotions on a rotating basis throughout our online store
and continually update our online recommendations. We frequently give a product
prominent placement on our site and describe its key features with a
high-quality picture. Products that receive this merchandising focus generally
receive a boost in sales. We offer selected products on promotion and provide
special pricing. The flexibility afforded by our technology allows us to adjust
our promotions rapidly to promote targeted sales.
EARLY PREDICTION OF POPULAR PRODUCTS. A major component of our
merchandising strategy is to contractually lock in allocations of products that
we believe will be popular during the coming year's holiday season early in the
year. Our success in implementing this strategy is responsible in part for our
large inventory of popular products. In addition, successful implementation of
this strategy helps to reduce excess inventory and closeout inventory. For
information regarding our inventory risks, see "Risk Factors -- Risks Related to
our Business."
STRATEGIC RELATIONSHIP WITH KB TOYS. Our relationship with KB Toys allows
us to use its merchandising experience, purchasing power and vendor
relationships to receive favorable allocations of popular toys and also gives us
the opportunity to sell exclusive products. KB Toys' experience in the
children's products market also helps us in successfully executing our
merchandising strategy of securing early popular product allocations. KB Toys'
relationships allow us to largely eliminate distributors, which many online
retailers have to rely on for product inventory. In addition, KB Toys'
relationships with children's products manufacturers help us control costs by
eliminating distributor markups and benefitting from group buying discounts.
PURCHASING EXPERIENCE. We have a dedicated buying staff located in
Pittsfield, Massachusetts, who purchase all of our online store merchandise,
except for the specialty toy products. Some of these buyers were formerly KB Toy
buyers and they work closely, and sometimes in cooperation, on group orders,
with the KB Toys' buyers. Our specialty toy products are purchased out of
Denver, Colorado, where there are dedicated buyers who have several years of
buying experience in the specialty toy category. This specialty toy purchasing
experience is invaluable, as many traditional retail toy stores do not have this
experience or the ability to choose the right product in this category. No
single manufacturer makes up more than 4% of our merchandise purchases for the
online store.
MARKETING AND PROMOTION
TARGET DEMOGRAPHIC AND MARKETING STRATEGY. We believe that our target
customer for our online store is female, between 25 and 49 years old. However,
we have significant participation in our community section from parents of all
ages as well as others who are interested in video games and collectibles.
Our marketing objective is designed to increase traffic to the online
store, continue to build brand recognition, acquire new customers and build
customer loyalty. From our inception through December 1999, we spent $47 million
on online and offline marketing and advertising. We schedule our marketing
expenditures to capitalize on and respond to seasonal demand. For example, we
significantly increased our marketing activities beginning in October 1999 in
preparation for the holiday season. We will discontinue some of these activities
during the first quarter of 2000, since these high levels will not be cost
effective during the post-holiday period.
We intend to use a portion of the net proceeds of this offering to fund our
marketing activities.
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ADVERTISING MIX. The primary elements of our advertising mix include
network and cable television, print, and broad reach online services, such as
AOL, Yahoo! and Excite@Home. Our TV media plan includes advertising during
several time slots, including prime time, and during major children's and family
programming and events. We have also secured agreements with leading shopping
portals, with positions in children's products shopping areas. For example,
under our agreement with AOL, we are a "shopping anchor" in AOL's children's
products shopping areas for kids, toys and babies. We also have agreements with
Excite@Home and Yahoo! for prominent positioning in their online shopping areas.
In addition to the large portal advertising arrangements with AOL,
Excite@Home and Yahoo!, our online advertising consists of banner advertising
focused on web page results from searches or links related to children. We also
have an arrangement with NetZero, a leading Internet Service Provider, under
which our banner ad appears when certain searches are performed. This allows us
to focus our advertising on those customers who are most likely to shop at our
site.
In addition, we leverage our relationship with KB Toys in integrated store
promotions and circulars. The KB Toys circulars highlight products that are
available at our online store and provide item numbers for these products to
make purchasing easier on the website. We also have signage in the KB Toys
stores and other promotional materials in the stores, including the online
store's web address and AOL keyword appearing on KB Toys salespeople's uniforms,
purchase receipts, shopping bags and posters.
AFFILIATE PROGRAM. We have an affiliate program under which other websites
can post our KBkids logo and link to our online store. For every new customer
who reaches the online store through an affiliate's link and purchases an item
during that session, we will pay the affiliate a small, fixed referral fee. This
program is a low-cost means of acquiring customers.
PROMOTIONS, EVENTS AND SPONSORSHIPS. We have sponsored multiple events to
build credibility with, and recognition by, parents, including title sponsorship
of NBC's four-part StarSkates figure skating series and sponsorship of the daily
children's television show, Teletubbies. Promotions on the site are designed to
encourage consumers to try our service. Our promotions include holiday discounts
and coupons such as our millennium madness sale, giveaways of popular products
such as Pokemon holographic cards, and sweepstakes to win trips to locations
like LEGOLAND, California and other items such as movie tickets to Pokemon: The
Movie and Toy Story 2.
LOYALTY AND RETENTION. We believe that we are building a loyal base of
customers through a total shopping experience which emphasizes customer service
and marketing incentive programs. We believe that over 53% of our customers have
made more than one purchase of children's products from our online store. We
believe that expansion of our direct e-mail newsletter campaign and the
introduction of other features to our website, such as mykbkids.com, which would
offer a personalized shopping experience for each customer based on their past
usage of our website, and checkout and shopping cart enhancements, will increase
customer loyalty.
A study done in June 1999 by NFO Interactive found that 53% of online
consumers surveyed reported that they would likely transact online more often
with an e-commerce site that offered a loyalty program. Since we believe in the
value of such loyalty programs, we have partnered with Netcentives in their
ClickMiles program. For every dollar spent at our online store, the customer
receives ClickMiles, which are redeemable for frequent flyer miles on ten major
airlines and other premium goods and services.
As part of our customer loyalty strategy, we offer our customers a low
price guarantee. If a customer finds the selected product in stock for a lower
price at a major national retail outlet or one of the top five online toy
retailers, we will match the price.
FULFILLMENT, DISTRIBUTION AND WAREHOUSING
On June 24, 1999, we entered into a direct marketing services agreement
with Keystone Internet Services, Inc., a wholly-owned subsidiary of Hanover
Direct which is a leading provider of fulfillment services, for receiving,
warehousing and shipping services. The agreement terminates on July 1, 2001 but
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may be renewed for two-year terms upon agreement of both parties at least 120
days before the end of the then current term.
We work in tandem with Keystone to manage and monitor order accuracy,
fulfillment rate, shipment speed and overall delivery reliability and
timeliness. Under the agreement, Keystone agrees to receive our merchandise from
our suppliers, store the merchandise in its warehouse and pack and ship the
merchandise to our customers. In addition, Keystone receives, processes and
refurbishes returns of our merchandise and destocks and returns to our suppliers
any rejected or overstock merchandise.
The agreement also describes service standards that Keystone has agreed to
follow in performing its services. These generally include that:
- merchandise from a supplier will be received and entered into inventory
within one business day;
- available items will be released to the distribution center for shipping
on the morning of the business day following the day the order is
entered;
- 90% of all in stock merchandise will be shipped on the business day
following the day the order is entered and 100% will be shipped by the
second business day;
- 100% of all priority orders for available merchandise received by 12:00
p.m. EST on any business day will be processed and shipped the same day;
and
- there will be a minimum accuracy level of 99.5% for all distributions.
Although our agreement with Keystone provides these service standards, they
were not consistently met during the 1999 holiday season for a variety of
reasons including our failure to accurately forecast sales volume due primarily
to a lack of historical information to predict demand. We believe, however, that
over 98% of products guaranteed for receipt prior to Christmas were shipped by
us in time for Christmas arrival. For a discussion regarding the risks
associated with the suspension or impairment of Keystone's services, see "Risk
Factors -- Risks Related to Our Business."
Keystone bears the risk of lost inventory, except for the first 0.8% of
lost inventory in the aggregate. We are required to provide Keystone with
forecasts of weekly receipts, shipments and returns and those forecasts must be
within 10% of actual results for Keystone to be obligated to perform according
to the above service standards. Even if Keystone is not obligated to perform
under the service standards, it has agreed to reasonably strive to meet these
standards as long as we have provided weekly forecasts of our sales volume and
fulfilled our other contractual obligations to them. These inventory and
fulfillment systems are fully integrated into our online store so that if an
item is out of stock, it cannot be added to a customer's cart.
We offer three levels of shipping service: next day delivery, second day
delivery and ground delivery. UPS provides next day and second day delivery
services while the United States Postal Service Priority Mail provides the
ground delivery services.
Currently, Keystone provides all of our warehousing and fulfillment
services. As part of our desire to control all points of customer contact, we
would like to explore options for our warehouse, distribution and fulfillment
infrastructure. We intend to use a portion of the proceeds from this offering to
purchase or lease warehouse space and install necessary automation for such a
facility. Even if we take these steps, we still believe that a portion of these
operations will have to be outsourced, especially during our peak holiday
season.
TECHNOLOGY
We have software and hardware systems that manage our website, search
functions, distribution services and order and payment functions. These services
and systems use a combination of our own technologies and commercially
available, licensed technologies and are designed to be easily expanded to grow
with the increasing consumer traffic that we are experiencing and believe will
continue. The systems that we use to process customers' orders and payments are
integrated with our accounting and financial
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systems. We focus our internal development efforts on creating and enhancing
specialized software for our online store and its operations. We use a set of
applications for:
- generating and running our website;
- managing product data, including product details, inventory and pricing;
- merchandising and inventory management;
- accepting and validating customer orders;
- interacting with the fulfillment center;
- customer service and e-mail management;
- organizing, placing and managing orders with suppliers; and
- capturing and analyzing customer information and trends.
Our systems are based on commercially available software and industry
standard protocols and have been designed to reduce downtime in the event of
outages or catastrophic occurrences. Our primary commerce platform is hosted at
a third-party data center in Sunnyvale, California, which provides redundant
communications lines and emergency power backup. We have recently added
redundant network components, web servers, cache systems and load balancing
systems to provide for fault tolerance. We believe that the problems encountered
during the 1999 Thanksgiving weekend have been alleviated by adding additional
server capacity and tuning the performance of several parts of our technology.
We have a backup commerce platform in Denver, Colorado, in the event of a
catastrophic failure at our primary facility in California. We are continually
improving our systems and working to eliminate potential failure points. Our
database systems currently require manual intervention for fail-over; however,
deployment of automatic fail-over technology is planned. System security is
managed by both internal staff as well as by security staff at our third-party
data center. See "Risk Factors -- Risks Related to Our Business."
E-commerce transactions and browser-based account management screens employ
secure sockets layer (SSL) encryption technology to secure data transmitted
between clients and servers. Credit card information captured during e-commerce
transactions is never shared with outside parties, and shoppers can use the
toll-free customer service number to place orders by telephone as an alternative
to completing a transaction online.
RELATED PARTY AGREEMENTS
AGREEMENTS WITH CONSOLIDATED. We have entered into a number of agreements
with Consolidated directly and indirectly through its subsidiaries that are
discussed throughout this prospectus. These agreements are the contribution
agreement, operating agreement, supply agreement, services agreement, domain
name agreement and sublicense agreement. You should carefully consider the terms
of these agreements, which we summarize in "Certain Transactions -- Arrangements
with Consolidated."
Supply agreement. Under our supply agreement with KB Toys, we can
place orders for toy products with KB Toys, and KB Toys has agreed to use
its best commercially reasonable efforts to fill our orders. Purchases of
popular toy products of limited availability are allocated between us and
KB Toys according to a formula that initially affords us an allocation of
popular products that is 50% greater than our percentage share of the
combined projected fiscal year revenues of KB Toys and KBKids.com. The
formula is based on our projected fiscal year revenues as a percentage of
the aggregate projected fiscal year revenues of KB Toys and KBkids.com
multiplied by a sliding scale factor that adjusts by one-tenth for every
$75,000,000 of actual revenues of KBkids for the preceding fiscal year and
ranges from 1.5 for actual sales of $200,000,000 or less to 1.0 for actual
sales in excess of $500,000,000. For example, if our projected fiscal year
revenues are $100,000,000 and the aggregate projected fiscal year revenues
of KB Toys and KBkids.com are $2,000,000,000, then our projected fiscal
year revenues would be 5% of the aggregate projected fiscal year revenues
of KB Toys and KBkids.com. Assuming our actual revenues for the preceding
fiscal year were $75,000,000, the supply
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agreement formula would yield a factor of 1.5. Therefore, our actual
allocation of popular products would be 5% multiplied by the factor of 1.5,
resulting in 7.5% of the total units of such toy products ordered being
allocated to us. This example is for illustrative purposes only and does
not reflect our actual revenues or projections of revenues. Under the
supply agreement, KB Toys has agreed to supply toy products to us at their
net cost based on its retail inventory method of accounting, less all
applicable discounts, plus the direct measurable costs incurred by KB Toys
in connection with the purchase, delivery, holding and warehousing of these
toy products.
Domain name agreement. Under our domain name agreement with KB Toys,
we have the exclusive right to use the following domain names to operate an
online retail website that features children's products: kbkids.com,
kbtoy.com, kbtoys.com, toyworks.com, kbtoyworks.com, kbtoyoutlet.com,
kbtoyoutlets.con, kaybeetoys.com, kaybeetoys.net and kaybeetoys.org. We are
not required to make any royalty payments under the domain name agreement
on a going-forward basis. However, upon termination of the agreement, we
have the option to purchase the kbkids.com domain name, together with the
KBkids trade name, from KB Toys for $100,000.
Sublicense agreement. Under our sublicense agreement with KB Toys, we
have the non-exclusive right to use approximately 50 trademarks, service
marks, copyrights and associated goodwill in connection with the operation
of an Internet website selling children's products, including the
KBkids.com, KB Toy and KB Toys trade names. We are not required to make any
royalty payments under the sublicense agreement on a going-forward basis.
However, upon termination of the agreement, we have the option to purchase
the KBkids trade name, together with the kbkids.com domain name, from KB
Toys for $100,000.
EMPLOYMENT AGREEMENTS. KBkids.com LLC has employment agreements with
Messrs. Srinivasan, Wagner and other key employees. You should read the
information contained in "Management -- Employment Arrangements" for a
description of the terms of these agreements. In addition, KBkids.com LLC has
entered into employment agreements with its other key employees.
COMPETITION
There is extreme competition within the children's toy, video game,
software and video retailing industries. Additionally, the online commerce
market presents new, rapidly evolving competitive challenges of its own. We
anticipate that competition will only intensify in the future, because, among
other reasons, current and new competitors can enter our market with little
difficulty and can open new online stores at a relatively low cost. The result
of this increased competition may be price reductions, reduced gross margins and
loss of market share, any of which could seriously harm our net sales and
results of operations.
Our current or potential competition includes: traditional store-based toy
and children's product retailers, major discount retailers, traditional software
and video game retailers, online efforts of the traditional store-based
retailers, other online retailers that sell children's products, physical and
online stores of entertainment entities that sell and license children's
products, catalog retailers of children's products, vendors of children's
products that currently sell or may in the future sell some or all of their
products directly online, Internet portals and online service providers that
feature shopping services that include children's products and various smaller
online retailers of children's specialty products.
We believe that the following are principal competitive factors in our
market:
- brand recognition;
- selection;
- convenience;
- price;
- speed and accessibility;
- level of customer service;
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- ease of search tools;
- quality of site content; and
- reliability and speed of order delivery.
Many present and future online competitors have longer operating histories,
larger customer or user bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. Many of these
competitors can devote substantially more resources to online store development
than we can. It is also quite possible that competition will further intensify
due to the formation of business combinations or alliances among established and
financially sound entities, our online competitors or children's toy, video
game, software and video publishers or suppliers as the use of the Internet and
other online services increases.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently or adopt more
aggressive pricing or inventory availability policies than we can. In addition,
traditional store-based retailers enable customers to see and feel products in a
manner that is not possible over the Internet. Traditional catalog retailers
also provide customers with convenient service. Additionally, increased
competition may stem from the announcement or introduction of new or enhanced
sites, services and products by our competitors, from new technologies or the
expansion of existing technologies or from our expansion into new product
categories. Finally, vendors and manufacturers of toys, including some of those
that do business with us, may compete directly with us online.
GOVERNMENT REGULATION
At present we are not subject to direct federal, state or local regulation
relating to the Internet. However, Internet popularity is increasing. Therefore,
we may see the adoption of laws and regulations relating to Internet issues such
as user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Furthermore, more stringent consumer protection laws may
result from electronic commerce growth. Several states have proposed legislation
to limit the uses of personal user information gathered online or to require
online services to establish privacy policies. The Federal Trade Commission has
also initiated action against at least one online service regarding the manner
in which personal information is collected from users and provided to third
parties. However, we do not currently provide personal information regarding our
users to third parties. If such consumer protection laws were enacted,
compliance requirements could disrupt our business.
It is unclear how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. Generally, most of these laws were enacted before
the emergence of the Internet. As a result, the existing laws typically do not
contemplate or address the specific Internet and Internet technology issues. As
laws change in order to address such issues, market uncertainty may result. Such
uncertainty could reduce demand for our services or increase the cost of doing
business as a result of litigation costs or increased service delivery costs.
In addition, because our services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that we are
required to qualify to do business in each such state or foreign country. We are
qualified to do business only in Colorado, Virginia and Massachusetts. Failing
to qualify in a jurisdiction, where required to do so, could subject us to taxes
and penalties. It could also hamper our ability to enforce contracts in those
jurisdictions. Furthermore, the application of laws or regulations from
jurisdictions whose laws do not currently apply to our business could have a
material adverse effect on our business and financial condition.
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LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a materially adverse effect on us.
INTELLECTUAL PROPERTY
Under our domain name agreement with KB Toys, we have the exclusive right
to use the following domain names to operate an online retail website that
features children's products: kbkids.com, kbtoy.com, kbtoys.com, toyworks.com,
kbtoyworks.com, kbtoyoutlet.com, kbtoyoutlets.com, kaybeetoys.com,
kaybeetoys.net and kaybeetoys.org.
Under our sublicense agreement with KB Toys, we have the non-exclusive
right to use approximately 50 trademarks, service marks, copyrights and
associated goodwill in connection with the operation of an Internet website
selling children's products, including the KBkids.com, KB Toy and KB Toys trade
names. See "-- Related Party Agreements" and "Certain Transactions --
Arrangements with Consolidated" for a description of the terms of these
agreements.
Despite efforts by KB Toys to protect these proprietary rights through the
use of trademarks, trade secrets and copyright law, and our efforts to protect
our proprietary rights through confidentiality agreements and technical
measures, unauthorized parties may attempt to copy aspects of our online store
or obtain and use information that we regard as proprietary. Policing
unauthorized use of proprietary rights is difficult. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which our online store is available. In addition, the
relationship between regulations governing domain names and laws protecting
trademarks and other proprietary rights is unclear.
We cannot be sure that the steps taken by us will prevent misappropriation
of technology or that the agreements entered into for that purpose will be
enforceable. Misappropriation of our intellectual property or potential
litigation could have a negative impact on our business.
EMPLOYEES
As of December 31, 1999, we had 111 full-time and 2 part-time employees.
None of our employees is represented by a labor union. We have not experienced
any work stoppages and consider our employee relations to be good.
From time to time, we also employ independent contractors to support our
permanent staff in various departments, including technology, product and
content development.
FACILITIES
Our corporate offices are located in Denver, Colorado, where we lease
21,464 square feet under a lease that expires in January 31, 2005. We also lease
an additional 5,800 square feet in Denver, Colorado under a lease that expires
on October 31, 2003. We believe our existing facilities, along with options to
lease an additional 47,334 square feet in our corporate office building, are
adequate to meet our current requirements and that suitable additional or
substitute space will be available as needed.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our directors,
executive officers and other key employees as of January 17, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Srikant Srinivasan........................ 34 Chief Executive Officer, President,
Chairman and Director
Michael Wagner............................ 38 Chief Financial Officer, Treasurer and
Secretary
Cecilia Atkinson.......................... 45 Vice President -- Marketing
Shawn Davison............................. 32 Vice President -- Technology
John Jolly................................ 48 Vice President -- Operations
David Novitsky............................ 34 Vice President -- Merchandising
Marty Smuin............................... 32 Vice President -- Business Development
Scott Wilder.............................. 38 Vice President -- Product Development
Scott Beck................................ 41 Director
Albert Bell............................... 39 Director
Michael Glazer............................ 51 Director
Michael Potter............................ 38 Director
</TABLE>
Biographical Information
Srikant Srinivasan. Mr. Srinivasan has been a member of our board of
directors since January 2000 and has been a member of the board of managers of
KBkids.com LLC since June 25, 1999. Mr. Srinivasan joined KBkids in June 1999 as
Chief Executive Officer, President and Chairman. Prior to joining KBkids, Mr.
Srinivasan served as the President and Chief Executive Officer of BrainPlay.com,
Inc. since July 1997, and served as Chief Executive Officer since July 1996. Mr.
Srinivasan co-founded BrainPlay.com in July 1996. From February 1993 to March
1996, Mr. Srinivasan served in various capacities with US West, most recently as
General Manager at US West Interactive Services, which is now known as MediaOne
Interactive Services, and earlier as Director of Marketing and Business
Development at US West Multimedia Group. Mr. Srinivasan has also held various
positions with McKinsey & Company. Mr. Srinivasan holds a B.S. in Electrical
Engineering from the Indian Institute of Technology and an M.B.A. from the
Wharton School of the University of Pennsylvania.
Michael Wagner. Mr. Wagner joined KBkids in June 1999 as Chief Financial
Officer, Treasurer and Secretary. Prior to joining KBkids, from August 1998 to
June 1999, he served as Vice President of Strategic Planning and Investor
Relations at Consolidated and, from February 1997 to July 1998, he served as
Director of that same department of Consolidated. Prior to that, from May 1994
to January 1997, Mr. Wagner served as Assistant Treasurer of Consolidated. Mr.
Wagner holds a B.S. in Accounting from Marquette University and has been a
Certified Public Accountant since 1987.
Cecilia Atkinson. Ms. Atkinson joined KBkids in July 1999 as Vice
President of Marketing. Prior to joining KBkids, from February 1998 to July
1999, Ms. Atkinson served as Director of Marketing at Horizon Organic Dairy.
Prior to that she directed marketing efforts at Celestial Seasonings as Senior
Director of Marketing from January 1996 to November 1997 and as Director of
Marketing from July 1995 to December 1996. From July 1987 to April 1995, Ms.
Atkinson held key marketing positions with Warner Lambert, serving most recently
as Business Director. Prior to that time, Ms. Atkinson held product management
positions at Johnson & Johnson and Nabisco. Ms. Atkinson holds a B.S. in Food
Marketing from St. Joseph's University.
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Shawn Davison. Mr. Davison joined KBkids in June 1999 as Vice President of
Technology. Prior to joining KBkids, from January 1998 to June 1999, he served
as Vice President of Technology and Operations at BrainPlay.com. Prior to
joining BrainPlay.com, from June 1996 to January 1998, he served as Senior
Consultant and Architect at Bold Tech Systems. Prior to joining Bold Tech
Systems, from January 1995 to June 1996, he served as Service Architect and
Development Lead at US West !nterprise Networking Services. Mr. Davison has M.S.
in Telecommunications from the University of Colorado at Boulder and a B.S. in
Computer Information Systems from DeVry Institute of Technology, Phoenix,
Arizona.
John Jolly. Mr. Jolly joined KBkids in June 1999 as Vice President of
Operations. Prior to joining KBkids, from January 1991 to June 1999. Mr. Jolly
was with QVC, the electronic retailing subsidiary of Comcast Corp., serving most
recently as its Vice President/General Manager of Operations. From October 1988
to January 1991, Mr. Jolly served as Director of Distribution for QVC Jewelry.
From September 1985 to October 1988, Mr. Jolly served as Director of
Distribution for Franklin Mint. Mr. Jolly holds a B.S. in Business
Administration and Management from LaSalle University.
David Novitsky. Mr. Novitsky joined KBkids in September 1999 as Vice
President of Merchandising. Prior to joining KBkids, from June 1995 to September
1999, he served as Vice President of Sales and Marketing at Peachtree Playthings
Incorporated. Prior to joining Peachtree Playthings, from March 1991 to May
1995, Mr. Novitsky served in various capacities, including as a senior buyer, at
KB Toys. Mr. Novitsky holds a B.S. in Marketing from The Pennsylvania State
University.
Marty Smuin. Mr. Smuin joined KBkids in November 1999 as Vice President of
Business Development. Prior to joining KBkids, from May 1998 to November 1999,
Mr. Smuin held various positions, including Vice President of Strategic
Alliances and Content Productions, at the Internet Shopping Network, the
Internet retailing operations subsidiary of USA Networks, Inc. Prior to joining
the Internet Shopping Network, from April 1997 to April 1998, Mr. Smuin served
as Director of New Business Development and General Manager of the HSN
Institute, the Home Shopping Network's product sourcing, development and
research center, a division of USA Networks, Inc. Prior to joining the Home
Shopping Network, from January 1997 to March 1997, he worked as a consultant in
Hong Kong. Prior to this, from December 1995 to December 1996, he served as the
Manager of New Market Development at QVC, the electronic retailing subsidiary of
Comcast Corp. In addition, Mr. Smuin also worked as Director of International
Business Development at Network Trade Associates, a consulting firm specializing
in international market penetration, from December 1993 to December 1995. Prior
to this, Mr. Smuin worked for the Oklahoma Department of Commerce, International
Investment and Trade Division. Mr. Smuin holds two degrees, a B.S. in Business
and a B.A. in Spanish/Latin American Studies, from the University of Oklahoma.
For two years prior to attending the University of Oklahoma, Mr. Smuin served as
a U.S. missionary to South America.
Scott Wilder. Mr. Wilder joined KBkids in June 1999 as Vice President of
Product Development. Prior to joining KBkids, he was a consultant to
BrainPlay.com from February 1999 to June 1999. Prior to that time, from July
1997 to February 1999, Mr. Wilder served as Director of Internet Services for
Borders.com. From January 1996 to January 1997, Mr. Wilder held key e-commerce
and product development positions at America Online's Internet properties, GNN
and WebCrawler. From January 1993 to December 1996, Mr. Wilder held key
development positions at Apple Computer. Prior to joining Apple Computer, Mr.
Wilder worked at Silicon Graphics, Inc. and at American Express. Mr. Wilder
holds a B.A. in English from Vassar College, an M.A. in International Studies
from The Johns Hopkins University and an M.B.A. from New York University.
Scott Beck. Mr. Beck has been a member of our board of directors since
January 2000 and has been a member of the board of managers of KBkids.com LLC
since June 25, 1999. Mr. Beck is the founder and Chief Executive Officer of
Tango, a private investment firm in Boulder, Colorado. He was a Chairman or
Co-Chairman of the board of directors of Boston Chicken, Inc. from June 1992
until May 1998 and Chief Executive Officer or President of Boston Chicken, Inc.
from June 1992 until October 1997. Boston Chicken, Inc. filed for bankruptcy on
October 5, 1998. Mr. Beck served as Chairman of the board of
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directors of Einstein/Noah Bagel Corp. from July 1996 until May 1998 and served
as a director from March 1995 until May 1998. Since February 1998, Mr. Beck has
been a member of the board of directors for Hollywood Entertainment Corporation.
Prior to that time, Mr. Beck was Vice Chairman of the board of Blockbuster
Entertainment Corporation from September 1989 until his retirement in January
1992 and Chief Operating Officer of Blockbuster Entertainment Corporation from
September 1989 to January 1991. Mr. Beck holds a B.S. in Business Administration
from Southern Methodist University.
Albert Bell. Mr. Bell has been a member of our board of directors since
January 2000 and has been a member of the board of managers of KBkids.com LLC
since June 25, 1999. Mr. Bell has been a member of Consolidated's in-house legal
department since January 1987. Since February 1998, he has served as its
Executive Vice President, Secretary and General Counsel. Prior to that time,
from February 1992 to February 1998, he served as Senior Vice President,
Secretary and General Counsel. Mr. Bell holds a J.D. from Capital University and
a B.A. in English from The Ohio State University.
Michael Glazer. Mr. Glazer has been a member of our board of directors
since January 2000. Mr. Glazer has been President and Chief Executive Officer of
KB Toys since May 1996. Prior to that, from May 1995 to May 1996, he was
President of Consolidated. From August 1990 to February 1995, Mr. Glazer was
President of The Bombay Company. Mr. Glazer is a director of both Consolidated
and Brookstone, Inc. Mr. Glazer holds a B.S. from University of California at
Berkley and an M.B.A. from Columbia University.
Michael Potter. Mr. Potter has been a member of our board of directors
since January 2000 and has been a member of the board of managers of KBkids.com
LLC since June 25, 1999. Mr. Potter has been with Consolidated since September
1991. Most recently, since February 1998, he has served as its Executive Vice
President and Chief Financial Officer. From April 1994 to February 1998, he
served as Senior Vice President and Chief Financial Officer. Mr. Potter holds an
M.B.A. from Capital University and a B.S. in Finance and Management from the
University of Oregon.
BOARD OF DIRECTORS
Following this offering, our board will consist of seven directors. Our
board of directors currently consists of five directors. Prior to consummation
of this offering, our board of directors will increase the size of the board to
seven directors. Shortly after the consummation of this offering, we will elect
two independent directors to fill the additional positions. Each director is
elected for a period of one year at our annual meeting of stockholders and
serves until the next annual meeting or until his successor is duly elected and
qualified.
Audit Committee
We have established an audit committee composed of independent directors
that reviews and supervises our financial controls, including the selection of
our auditors, reviews our books and accounts, meets with our officers regarding
our financial controls, acts upon recommendations of our auditors and takes
further actions as the audit committee deems necessary to complete an audit of
our books and accounts, as well as other matters that may come before it or as
directed by the board. The audit committee currently consists of three
directors, Messrs. Beck, and .
Compensation Committee, Interlocks and Insider Participation
We have also established a compensation committee that reviews and approves
the compensation and benefits for our executive officers, administers our stock
plans and performs other duties as may from time to time be determined by the
board. The compensation committee currently consists of three directors, Messrs.
Bell, and . None of our compensation committee
members is an employee of, or ever was an employee of, KBkids. Mr. Bell is an
executive officer of Consolidated and KB Toys and is a director of KB Toys. See
"Risk Factors -- Risks Related to Our Relationship with Consolidated." None of
our executive officers serves on the board of directors or compensation
committee
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of any entity, including Consolidated, that has one or more executive officers
serving as a member of our board or our compensation committee.
Compensation of Directors
Directors who are not officers and who are not involved in the daily
affairs of managing us, KBkids.com LLC or KB Toys receive an annual retainer of
$18,000, plus $1,000 for each board meeting attended and $500 for each committee
meeting attended. Such directors constitute outside directors. Our directors who
are not outside directors do not currently receive any cash compensation from us
for their service as members of the board of directors. All directors are
reimbursed for travel and lodging expenses for attending board and committee
meetings. In addition, outside directors will be eligible to receive option
grants under our stock option plan at the discretion of the board or other
administrator of the plan.
EXECUTIVE OFFICERS
Upon the completion of this offering, we will issue stock options to
acquire shares of our common stock to our executive officers at an
exercise price per share equal to the initial public offering price. Such
options will vest in equal monthly installments over a period of four years
beginning after the executive officer has been employed by us for one year.
Our executive officers are appointed by and, subject to the terms of their
employment agreements, serve at the discretion of, our board of directors. There
are no family relationships among any of our directors, officers or key
employees.
EXECUTIVE COMPENSATION
Summary Compensation Table
All of our executive officers began to work for us after March 31, 1999.
Accordingly, the following table sets forth the annualized salary and the
compensation we have paid since our inception in June 1999 through December 31,
1999 to our Chief Executive Officer and our four other most highly compensated
executive officers, based on current compensation. These five executive officers
will be referred to as the named executive officers. During this period, the
named executive officers were compensated in accordance with our plans and
policies.
The named executive officers will serve as officers of both KBkids.com LLC
and KBkids.com Inc. after this offering.
In June 1999, Mr. Srinivasan joined us as our Chief Executive Officer, Mr.
Wagner joined us as our Chief Financial Officer and Mr. Wilder joined us as our
Vice President -- Product Development. In addition, Mr. Novitsky joined us as
our Vice President -- Merchandising in September 1999, and in November 1999, Mr.
Smuin joined us as our Vice President -- Business Development.
No individual who would otherwise have been includable in the table on the
basis of salary and bonus earned during 1999 has resigned or otherwise
terminated his or her employment during 1999.
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<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------- --------------- SECURITIES
NAME AND PRINCIPAL ANNUALIZED OTHER ANNUAL UNDERLYING ALL OTHER
POSITION SALARY(1) SALARY BONUS(2) COMPENSATION(3) OPTIONS(#) COMPENSATION(4)
- ------------------ ---------- ------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Srikant Srinivasan........ $200,000 $77,885 -- $4,004 875,000 $ 2,538
Chief Executive Officer
Michael Wagner............ 185,000 70,096 -- 9,338 200,000 39,539
Chief Financial Officer
Scott Wilder.............. 130,000 67,500 -- 3,490 200,000 2,200
Vice President -- Product
Development
Marty Smuin............... 150,000 25,962 -- 431 150,000 --
Vice President -- Business
Development
David Novitsky............ 160,000 32,308 10,769 2,168 125,000 2,830
Vice President --
Merchandising
</TABLE>
- ---------------
(1) Includes guaranteed minimum annual bonus amounts.
(2) Annual bonuses have not been paid since our inception in June 1999, except
for the bonus paid to Mr. Novitsky as required by the terms of his
employment agreement. However other bonuses may be paid after March 31,
2000. In addition, Mr. Wilder will receive a one-time bonus of $10,000
payable as of June 25, 2000, and Mr. Smuin will receive a one-time bonus of
$20,000 payable in three equal installments through June 30, 2000.
(3) Other annual compensation is comprised of a car allowance, long term
disability benefits and, except for Mr. Smuin, executive medical benefits.
(4) All other compensation is comprised of our 401(k) matching contributions,
however, with regard to Mr. Wagner and Mr. Novitsky, relocation expenses of
$37,254 and $1,538, respectively, are also included.
Option Grants in Last Fiscal Year
There were no stock options or stock appreciation rights granted as of
March 31, 1999. Accordingly, the following table sets forth information with
respect to stock options granted through January 26, 2000 to each of our named
executive officers, including the potential realizable value over the term of
the options, based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. All of these options have been granted since April 1, 1999.
No stock appreciation rights have been granted.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
INDIVIDUAL GRANTS(1) RATES OF STOCK PRICE
--------------------------------------------- APPRECIATION FOR
SECURITIES OPTION TERM (2)
UNDERLYING % OF TOTAL EXERCISE -----------------------
OPTIONS OPTIONS GRANTED PRICE EXPIRATION 5% 10%
NAME GRANTED(#) TO EMPLOYEES ($/SH) DATE ($) ($)
- ---- ----------- --------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Srikant Srinivasan... 875,000 18.3% 2.85 7/06/09 1,568,262 3,974,425
Michael Wagner....... 200,000 4.2% 2.85 7/06/09 358,460 908,440
Scott Wilder......... 200,000 4.2% 2.85 7/06/09 358,460 908,440
6,000 less than 1% 0.70 4/12/04 1,160 2,564
2,258 less than 1% 0.70 5/12/04 369 965
Marty Smuin.......... 150,000 3.1% 2.85 11/01/09 268,845 681,330
David Novitsky....... 125,000 2.6% 2.85 9/24/09 224,037 567,775
</TABLE>
- ---------------
(1) All options with an exercise price of $2.85 per unit are options to purchase
units in KBkids.com LLC and will be replaced with options to purchase common
stock at the same exercise price concurrently with completion of this
offering. All options with an exercise price of $0.70 per share are options
to
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purchase shares of common stock in BrainPlay.com and will be replaced with
options to purchase common stock in connection with the merger of
BrainPlay.com with a wholly-owned subsidiary of KBkids.com Inc. at an
exchange ratio of shares of common stock for each share of
BrainPlay.com common stock along with a corresponding adjustment in exercise
price. All replacement options will have the same vesting period and
expiration date as the options they replace.
(2) The potential realizable values represent future opportunity and have not
been reduced to present value in 1999 dollars. The dollar amounts included
in these columns are the result of calculations at assumed rates set by the
Commission for illustration purposes. These rates are not intended to be a
forecast of the common stock price and are not necessarily indicative of the
values that may be realized by the named executive officer. The potential
realizable values are based on arbitrarily assumed annualized rates of stock
price appreciation of 5% and 10% over the full ten-year term of the options.
For example, in order for an individual named above who received options
with an exercise price of $2.85 per share to realize the potential values
set forth in the 5% and 10% columns in the table above, the price per share
of the common stock would have to be approximately $4.64 and $7.39,
respectively.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
None of our executive officers exercised any options during the fiscal year
ended March 31, 1999 nor were any options outstanding as of March 31, 1999.
Therefore, the following table sets forth information concerning the exercise of
stock options and the numbers and value of shares of common stock underlying the
unexercised options held by the named executive officers to date. The value of
unexercised in-the-money options at January 17, 2000 is calculated on the basis
of the assumed initial offering price of $ , less the aggregate
exercise price of the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JANUARY 17, 2000 AT JANUARY 17, 2000
ACQUIRED ON VALUE --------------------------------- ---------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
---- ----------- ----------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Srikant Srinivasan... 225,000(1) 468,000 145,833 729,167
Michael Wagner....... 0 0 0 200,000 0
Scott Wilder......... 0 0 8,258(2) 200,000
Marty Smuin.......... 0 0 0 150,000 0
David Novitsky....... 0 0 0 125,000 0
</TABLE>
- ---------------
(1) Represents 225,000 shares of BrainPlay.com common stock received upon
exercise of an option at an exercise price of $0.77 per share.
(2) Represents options to purchase shares of BrainPlay.com common stock.
EMPLOYMENT ARRANGEMENTS
General
All of our named executive officers have employment agreements with
KBkids.com LLC. These employment agreements will be amended and restated by
KBkids.com LLC and KBkids.com Inc. in connection with this offering to add us as
a party. The officers will serve as officers of both KBkids.com LLC and
KBkids.com Inc.
Employment Agreements, Termination Provisions and Severance Arrangements
Srikant Srinivasan, Chief Executive Officer
Mr. Srinivasan's employment agreement dated June 25, 1999 has an initial
term of two years and will automatically renew for additional one-year terms
until it is terminated by either party. Under the agreement, Mr. Srinivasan
receives an annual base salary of $150,000, which cannot be reduced, and a
guaranteed annual bonus of between $50,000 and $100,000 based on the achievement
of milestones mutually agreed to by KBkids and him at the beginning of each
fiscal year. Additionally, if KBkids does
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<PAGE> 62
not enter into a capital markets transaction, such as this initial public
offering, before June 25, 2002, then Mr. Srinivasan will have the option to sell
to KBkids his ownership interest in BrainPlay.com for $1.9 million plus any cash
contributions to KBkids made by him after June 25, 1999. Mr. Srinivasan's
employment may be terminated by KBkids in the case of his death or disability or
for cause, and it may be terminated by him for good reason. A good reason
includes a material reduction in his position, duties, salary or benefits, a
relocation of our headquarters more than 50 miles from Denver, Colorado or a
material breach of the employment agreement by us that is not cured within 30
days after written notice. Any termination for cause must be approved by at
least 80% of our board of directors. If his employment is terminated by KBkids
without cause or by him for good reason, Mr. Srinivasan will be entitled to
receive his annual base salary for 24 months after being terminated, any unpaid
bonus and continued participation in all employee benefit plans or programs in
which he was participating when he was terminated for up to 24 months. Under the
terms of Mr. Srinivasan's option award agreement with KBkids.com LLC, if his
employment is terminated by KBkids for cause or by him for good reason, any
unvested options immediately vest on the date of termination. In addition, if
KBkids does not renew his employment agreement, Mr. Srinivasan will be entitled
to receive the same payments and benefits that would have been received if he
had been terminated without cause. The employment agreement requires Mr.
Srinivasan not to compete during the term of his employment and for two years
after its termination and not to disclose confidential information at any time.
Michael Wagner, Chief Financial Officer
Mr. Wagner's employment agreement dated June 25, 1999 has an initial term
of two years and will automatically renew for additional one-year terms until it
is terminated by either party. Under the agreement, Mr. Wagner receives an
annual base salary of $135,000, which cannot be reduced, and a guaranteed annual
bonus of between $50,000 and $100,000 based on the achievement of milestones
mutually agreed to by KBkids and him at the beginning of each fiscal year. Mr.
Wagner's employment may be terminated by KBkids in the case of his death or
disability or for cause, and it may be terminated by him for good reason. A good
reason includes a material reduction in his position, duties, salary or
benefits, a relocation of our headquarters more than 50 miles from Denver,
Colorado or a material breach of the employment agreement by us that is not
cured within 30 days after written notice. Any termination for cause must be
approved by at least 80% of our board of directors. If his employment is
terminated by KBkids without cause or by him for good reason, Mr. Wagner will be
entitled to receive his annual base salary for 12 months after being terminated,
however, he will be entitled to receive his annual base salary for 18 months if
termination occurs during the first year of his employment agreement. In
addition, he will be entitled to receive any unpaid bonus and continued
participation in all employee benefit plans or programs in which he was
participating when he was terminated for up to one year, or for up to 18 months
if he is terminated during the first year of the employment agreement. In
addition, if KBkids does not renew his employment agreement, Mr. Wagner will be
entitled to receive the same payments and benefits that he would have received
if he had been terminated without cause. The employment agreement requires Mr.
Wagner not to compete during the term of his employment and for one year after
its termination and not to disclose confidential information at any time.
Scott Wilder, Vice President -- Product Development
Under his employment agreement dated June 25, 1999, Mr. Wilder serves as
our Vice President -- Product Development. Under the agreement, Mr. Wilder
receives an annual base salary of $130,000, and an annual first-year bonus equal
to .06% of the net revenues of KBkids.com LLC, which bonus will be set by KBkids
after the first year. Mr. Wilder also will receive a one-time bonus of $10,000
upon completion of his first year of employment. Mr. Wilder's employment can be
terminated by KBkids in the case of his death or disability, or may be
terminated by either party on 30 days prior written notice. If his employment is
terminated by either party on 30 days prior written notice, he will be entitled
to receive his annual base salary for 12 months after termination unless
employed by a subsequent employer during the 12-month period, any unpaid bonus
and continued participation in all employee benefit plans or programs in which
he was participating when his employment terminated for up to 12 months. The
employment agreement
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requires Mr. Wilder not to compete during the term of his employment and for one
year after its termination and not to disclose confidential information at any
time.
Marty Smuin, Vice President -- Business Development
Mr. Smuin serves as our Vice President -- Business Development under a
letter agreement with KBkids effective as of November 1, 1999. The agreement may
be terminated at any time by either party. Under the agreement, Mr. Smuin
receives an annual base salary of $150,000, and an annual bonus of up to 25% of
the annual base salary based on the achievement of goals to be established by
Mr. Smuin and us. Mr. Smuin is also entitled to receive a one-time bonus of
$20,000 to be paid in three installments, on December 31, 1999, March 31, 2000
and June 30, 2000. If his employment is terminated by KBkids, except for cause,
Mr. Smuin will be entitled to receive a lump sum severance payment equal to six
months of his then current base salary. The agreement requires Mr. Smuin not to
compete during the term of his employment and for six months after its
termination. As a condition to his employment, Mr. Smuin also executed a
nondisclosure and assignment of inventions agreement. The agreement requires Mr.
Smuin not to disclose confidential information at any time during his employment
and for three years after termination of employment and assigns to us all
inventions developed by Mr. Smuin during his term of employment.
David Novitsky, Vice President -- Merchandising
Mr. Novitsky serves as our Vice President -- Merchandising under a letter
agreement with KBkids dated September 2, 1999. The agreement may be terminated
at any time by either party. Under the agreement, Mr. Novitsky receives an
annual base salary of $120,000, and a guaranteed annual minimum bonus of
$40,000. The bonus will be paid bi-monthly, in equal amounts. The agreement
requires Mr. Novitsky not to compete during the term of his employment and for
six months after its termination. As a condition to his employment, Mr. Novitsky
also executed a nondisclosure and assignment of inventions agreement. The
agreement requires Mr. Novitsky not to disclose confidential information at any
time during his employment and for three years after termination of employment
and assigns to us all inventions developed by Mr. Novitsky during his term of
employment.
INCENTIVE PLANS
Our stock option plan is intended to encourage ownership of common stock by
our officers and other key employees and advisors, to encourage their continued
employment with us and to provide them with additional incentives to promote our
success.
Our stock option plan authorizes the grant to officers, key employees,
consultants and directors of us or of KBkids.com LLC of awards consisting of
"incentive stock options," as that term is defined under the provisions of
section 422 of the Code, and non-qualified stock options. There were
shares of Class A common stock available for granting awards
under our stock option plan. The compensation committee of the Board administers
the stock option plan and has sole discretion to determine those employees to
whom awards will be granted, the number of awards granted, the provisions
applicable to each award and the time periods during which awards may be
exercisable. Our stock option plan is substantially the same as the KBkids.com
LLC Option Plan established by KBkids.com LLC. Our stock option plan provides
for the grant of replacement options to persons who received options under the
KBkids.com LLC Option Plan and to persons who received options under
BrainPlay.com's stock option plan. In connection with the consummation of this
offering, we will issue replacement options to all holders of outstanding
options under the KBkids.com LLC Option Plan and the BrainPlay.com stock option
plan. We will contribute all proceeds received by us upon the exercise of
options under our stock option plan to KBkids.com LLC in exchange for an
equivalent number of membership units at a price per membership unit equal to
the exercise price of such option.
The compensation committee of the board may grant incentive stock options,
non-qualified stock options, or a combination of the two. Options granted are
exercisable for a term of up to ten years from
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the grant date. The exercise price of each incentive stock option may not be
less than the fair market value of the Class A common stock at the date of
grant. Under our stock option plan, fair market value is generally the closing
price on the date immediately preceding the date of grant. For any stockholder
possessing more than 10% of the combined voting power of all classes of our
capital stock, or, if applicable, our parent's or subsidiary's capital stock,
the exercise price of each incentive stock option granted must not be less than
110% of the fair market value on the grant date, and the option cannot be
exercisable more than five years after the grant date. In addition, no employee
may be granted an incentive stock option to the extent the aggregate fair market
value, as of the grant date, of the stock with respect to which incentive stock
options are first exercisable by such employee during any calendar year exceeds
$100,000.
Awards granted under our stock option plan are subject to adjustment upon a
recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend or other similar event affecting the common
stock. Except as otherwise provided in a particular option agreement, an award
is not transferable, other than by will or the laws of descent and distribution
or, in some circumstances, pursuant to a qualified domestic relations order. An
option award may be exercised during the lifetime of the holder of the award,
only by the holder, except as otherwise provided in a particular option
agreement, or the holder's personal representative in the event of disability.
Our stock option plan terminates on , 2010, and awards will not
be granted under it after that date, although the terms of any award may be
amended in accordance with the stock option plan at any date prior to the end of
the term of such award. Any awards outstanding at the time of termination of the
stock option plan continue in full force and effect according to the terms and
conditions of the award and the stock option plan.
Our stock option plan may be amended by our board, but no amendment may
impair any rights of any holder of an award previously granted under the stock
option plan without that holder's consent. As of , options for
Class A common shares were outstanding, options for
Class A common shares had been granted and exercised, and options
for Class A common shares were unissued.
LIMITATION OF LIABILITIES AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that the liability of our
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law. Under the Delaware General Corporation Law,
the directors have a fiduciary duty to us which is not eliminated by this
provision of the certificate of incorporation and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers to purchase insurance to cover liability
arising out of their capacity or status as directors and officers, provided that
this provision shall not eliminate or limit the liability of a director:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions which are found by a court of competent
jurisdiction to be not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for the payment of dividends or approval of stock repurchases or
redemptions that are prohibited by the Delaware General Corporation Law;
or
- for any transaction from which the director derived an improper personal
benefit.
The Delaware General Corporation Law provides further that the
indemnification will not be exclusive of any other rights to which the directors
and officers may be entitled under the corporation's bylaws, any agreement, a
vote of stockholders or otherwise. Our certificate of incorporation eliminates
the personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware General Corporation Law and provides that we shall
fully indemnify any person who was or is a party or is
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threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that person is or was our director or officer, or is or was
serving at our request as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
This indemnification will be against expenses including attorney's fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the indemnitee in connection with such action, suit or proceeding.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our current directors and executive
officers, in addition to the indemnification provided for in our restated
certificate of incorporation. These indemnification agreements will contain
provisions that may require us to, among other things:
- indemnify our officers and directors against liabilities that may
arise by reason of their status or service as directors or officers,
other than liabilities arising from willful misconduct of a culpable
nature;
- advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified; and
- obtain directors' and officers' insurance if available on reasonable
terms.
We believe that these provisions and agreements are necessary to attract
and retain qualified directors and executive officers. In addition, we intend to
obtain liability insurance for our directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under our certificate of incorporation or under the
indemnification agreements referred to above. We are not aware of any threatened
litigation or proceeding that may result in a claim for this type of
indemnification.
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PRINCIPAL STOCKHOLDERS
In general, "beneficial ownership" includes those shares a stockholder has
the power to vote or transfer and stock options or other securities that are
convertible into shares within 60 days. After this offering, we will have
outstanding shares of Class A common stock and one share of Class
B common stock. The information presented in the following table assumes the
conversion of BrainPlay.com common stock into shares of Class A common stock in
the merger of the wholly-owned subsidiary of KBkids.com with and into
BrainPlay.com, the issuance by KBKids.com Inc. of replacement options for
outstanding options to purchase membership units in KBkids.com LLC and options
to purchase shares of BrainPlay.com common stock and the contribution by KB
Online of one membership unit to KBkids.com Inc. in exchange for one share of
Class B common stock. Unless otherwise indicated, these stockholders may be
reached at our headquarters located at 1099 Eighteenth Street, Suite 1000,
Denver, Colorado 80202. As used in the following table, an asterisk in the
Percentage of Outstanding Stock column means less than 1%.
<TABLE>
<CAPTION>
CLASS A CLASS B OPTIONS/WARRANTS TOTAL PERCENTAGE OF PERCENTAGE OF
SHARES SHARES EXERCISABLE BENEFICIAL OUTSTANDING OUTSTANDING STOCK
BENEFICIAL OWNER OWNED OWNED WITHIN 60 DAYS OWNERSHIP STOCK AFTER THIS OFFERING(1)
- ---------------- --------- --------- ---------------- ---------- ------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
KB Online Holdings
LLC.................. 0 1 (2) (2)
300 Phillipi Road
Columbus, Ohio 43228 0
Srikant Srinivasan... 1,368,161 0 194,444 1,562,605
Michael Wagner....... 0 0 0 0
David Novitsky....... 0 0 0 0
Marty Smuin.......... 0 0 0 0
Scott Wilder......... 0 0 7,858 7,858
Scott Beck........... 214,325(3) 0 0 214,325(3)
Albert Bell.......... 0 0 55,556 55,556
Michael Glazer....... 0 0 16,667 16,667
Michael Potter....... 0 0 55,556 55,556
All directors and
executive officers
as a group (12
persons)...........
</TABLE>
- ---------------
(1) Reflects our issuance of shares of Class A common stock in this
offering and the corresponding issuance by KBkids.com LLC of
membership units to us in exchange for the net proceeds of this offering.
(2) Represents ownership of one share of Class B common stock and
membership units in KBkids.com LLC, all of which are
convertible at any time into shares of Class A common stock on a one-to-one
basis.
(3) Represents 214,325 shares of common stock held by Pearl Street Trust, of
which Mr. Beck is the primary beneficiary.
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CERTAIN TRANSACTIONS
ARRANGEMENTS WITH CONSOLIDATED
We have entered into a number of agreements with Consolidated directly and
indirectly through its subsidiaries that are discussed throughout this
prospectus. These agreements are the contribution agreement, operating
agreement, supply agreement, services agreement, domain name agreement and
sublicense agreement. In addition, we have entered into several consulting
agreements as a result of the KBkids.com LLC joint venture and this offering.
You should carefully consider the terms of these agreements discussed below.
CONTRIBUTION AGREEMENT. On June 25, 1999, KB Online and BrainPlay.com
entered into a contribution agreement regarding their joint venture to form
KBkids.com LLC. Under the contribution agreement, KB Online received 80% of the
membership units in KBkids.com LLC in exchange for contributing cash and
property worth $80,000,000 and intangibles worth $4,000,000. BrainPlay.com
received the remaining 20% of the membership units in exchange for contributing
substantially all of its assets and liabilities.
Under this contribution agreement, none of KB Online or its affiliates can
sell toy products on the Internet until December 31, 2001, or one year after the
completion of a capital markets transaction, such as this offering, whichever
comes first. In addition, as long as KB Online owns a majority of the membership
interests of KBkids.com LLC, none of KB Online or its affiliates can sell any
toy products on the Internet, unless they are "closeouts."
In connection with the contribution agreement, in June 1999, KBkids.com LLC
entered into services, supply, domain name and sublicense agreements with KB
Toys and employment agreements with key executives. Each of these agreements
were amended and restated in January 2000 in connection with this offering.
OPERATING AGREEMENT. In connection with this offering, KBkids.com Inc., KB
Online and BrainPlay.com will enter into an amended and restated operating
agreement, under which we will become the sole manager of KBkids.com LLC. As
sole manager of KBkids.com LLC, we will have control over all of the affairs and
decision making of KBkids.com LLC. Through our board of directors and our
officers, we will be responsible for all operational and administrative
decisions of KBkids.com LLC and the day-to-day management of its business. Under
the operating agreement, cash will be distributed to members, and profits and
losses will be allocated among members in proportion to their number of
membership units in KBkids.com LLC. The operating agreement requires KBkids.com
LLC to make distributions to its members to cover any tax liabilities incurred
by them as a result of their ownership of membership units and contains no
limitations on distributions for any other purpose.
SERVICES AGREEMENT. Under our services agreement with KB Toys, KB Toys has
agreed to provide us with various services as we may request, including:
- customer returns;
- inventory liquidation;
- defective product disposal;
- advertising;
- management and employee training;
- payroll and payroll tax processing;
- legal services;
- licensing;
- accounting and tax services;
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- corporate, administrative and general overhead services;
- toy research;
- data access; and
- purchasing and quality control.
We are entitled to use copies of marketing and related materials that are
developed and produced by KB Toys and that concern our toy products.
For each of these services, we pay KB Toys an amount equal to its direct
out-of-pocket expenses paid to third parties plus any other expenses incurred by
KB Toys that otherwise would not have been incurred and an amount equal to 3.5%
of the direct out-of-pocket expenses paid to third parties. If any individual
expense is greater than $25,000, KB Toys has agreed to notify us before
incurring this expense, and we will have ten days to advise KB Toys whether the
expense should be incurred. The services agreement terminates when Consolidated
no longer owns at least 10% of KBkids.com LLC or our common stock and when
Consolidated no longer owns securities of KBKids.com with a market value of at
least $100,000,000, and may also be terminated earlier by KB Toys upon an event
of our bankruptcy or insolvency or a default under the agreement that is not
cured within 30 days after written notice of default. We may terminate the
services agreement at any time upon 60 days written notice of termination to KB
Toys. If the services agreement is terminated, we may not be able to obtain
similar terms from an unrelated third party.
SUPPLY AGREEMENT. Under our supply agreement with KB Toys, we can place
orders for toy products with KB Toys, and KB Toys has agreed to use its best
commercially reasonable efforts to fill our orders. Purchases of popular toy
products of limited availability are allocated between us and KB Toys according
to an agreed-upon formula set forth in the agreement. Under the supply
agreement, KB Toys has agreed to supply toy products to us at their net cost
based on its retail inventory method of accounting, less all applicable
discounts, plus the direct measurable costs incurred by KB Toys in connection
with the purchase, delivery, holding and warehousing of these toy products. The
supply agreement terminates when Consolidated no longer owns at least 10% of
KBkids.com LLC or our common stock and when Consolidated no longer owns
securities of KBKids.com with a market value of at least $100,000,000, and may
also be terminated earlier by KB Toys upon an event of our bankruptcy or
insolvency, a default under the agreement that is not cured within 30 days after
written notice of default or a default under the retail pricing mechanisms in
the agreement on at least three occasions each of which is not cured within 15
days after written notice of default. We believe that, due to our relationship
with KB Toys, the terms of the supply agreement are more favorable to us than
terms we could have obtained in an arms-length transaction with an unrelated
third party.
DOMAIN NAME AGREEMENT. Under our domain name agreement with KB Toys, we
have the exclusive right to use the following domain names to operate an online
retail website that features children's products: kbkids.com, kbtoy.com,
kbtoys.com, toyworks.com, kbtoyworks.com, kbtoyoutlet.com, kbtoyoutlets.com,
kaybeetoys.com, kaybeetoys.net and kaybeetoys.org. The domain name agreement is
perpetual; however, it terminates when Consolidated no longer owns at least 10%
of KBkids.com LLC or our common stock and when Consolidated no longer owns
securities of KBKids.com with a market value of at least $100,000,000, and may
also be terminated earlier by KB Toys upon an event of our bankruptcy or
insolvency, a merger, consolidation or dissolution resulting in termination of
the corporate existence, or a default under the agreement that is not cured
within 30 days after written notice of default. We are not required to make any
royalty payments under the domain name agreement on a going-forward basis.
However, upon termination of the agreement, we have the option to purchase the
kbkids.com domain name, together with the KBkids trade name, from KB Toys for
$100,000.
SUBLICENSE AGREEMENT. Under our sublicense agreement with KB Toys, we have
the non-exclusive right to use approximately 50 trademarks, service marks,
copyrights and the associated goodwill in connection with the operation of an
Internet website selling children's products, including the KBkids.com, KB Toy
and KB Toys trade names. The sublicense agreement is perpetual; however, it
terminates when Consolidated no longer owns at least 10% of KBkids.com LLC or
our common stock and when
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Consolidated no longer owns securities of KBKids.com with a market value of
least $100,000,000, and may also be terminated earlier by KB Toys upon an event
of our bankruptcy or insolvency, a merger, consolidation or dissolution
resulting in termination of the corporate existence, or a default under the
agreement that is not cured within 30 days after written notice of default. We
are not required to make any royalty payments under the sublicense agreement on
a going-forward basis. However, upon termination of the agreement, we have the
option to purchase the KBkids trade name, together with the kbkids.com domain
name, from KB Toys for $100,000.
CONSULTING AGREEMENTS. Michael Wagner, our Chief Financial Officer,
entered into a consulting agreement with Consolidated on June 25, 1999 to
provide investor relations services for Consolidated as requested by
Consolidated. Mr. Wagner receives an annual fee of $10,000 for his consulting
services. In addition, Mr. Wagner received a one-time, lump sum payment of
$87,000 within 30 days after entering into the agreement. The consulting
agreement terminates on the earlier of October 15, 2003 or the end of any period
during which severance payments are being made to Mr. Wagner under his
employment agreement with KBkids. For further discussion of the terms of Mr.
Wagner's employment agreement, see "Management -- Employment Arrangements."
Mr. William Kelley, the Chief Executive Officer and a director of
Consolidated, will enter into a consulting agreement with us to provide
strategic planning services to us as reasonably requested by our Chief Executive
Officer.
AGREEMENTS WITH OFFICERS AND DIRECTORS
We have entered into employment arrangements with our executive officers.
See "Management -- Employment Arrangements" and "Our Business -- Related Party
Agreements."
We have entered into an indemnification agreement with each of our
executive officers and directors. See "Management -- Limitation of Liabilities
and Indemnification Matters."
We have entered into noncompetition and confidentiality arrangements with
each of our executive officers, including the named executive officers, Ms.
Atkinson and Messrs. Jolly and Davison. See "Management -- Employment
Arrangements."
On December 29, 1999, BrainPlay.com made a loan of $173,025 to Mr.
Srinivasan for payment of the balance of the exercise price of his BrainPlay.com
stock options to acquire 225,000 shares of BrainPlay.com common stock. This loan
was made under a promissory note given by Mr. Srinivasan to BrainPlay.com. The
note is due and payable in full on June 30, 2001 and bears interest at the rate
of 5.74% per year. All accrued interest is due and payable on the maturity date.
If Mr. Srinivasan's employment by or association with BrainPlay.com or us is
terminated for any reason before maturity, all principal and accrued interest is
due and payable 90 days after the termination. This note is secured by a stock
pledge agreement which grants BrainPlay.com a first priority security interest
in the 225,000 shares of BrainPlay.com acquired upon exercise of the options,
plus an additional 60,790 shares of BrainPlay.com owned by Mr. Srinivasan. The
loan was approved by the board of directors of BrainPlay.com. As a result of the
merger of our wholly-owned subsidiary into BrainPlay.com simultaneously with
this offering, we will receive the benefits of this note and stock pledge
agreement upon completion of this offering.
On July 23, 1999, BrainPlay.com issued and sold 225,226 shares of Series B
preferred stock for $2.22 per share to Pearl Street Trust, whose principal
beneficiary is Mr. Beck, a member of our board of directors and of the board of
managers of KBkids.com LLC. We refer you to the more complete discussion of the
BrainPlay.com Series B preferred stock in Note 6 of the notes to financial
statements of BrainPlay.com.
We believe that all of the transactions entered into with our officers and
directors were made on terms no less favorable to us than could have been
otherwise obtained from unaffiliated third parties. It is our intention that all
future transactions, including loans, if any, between the company and our
officers, directors and principal stockholders and their affiliates and any
transactions between the company and any entity with which our officers,
directors or 5% stockholders are affiliated will be approved by a majority of
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the board of directors, including a majority of the independent and
disinterested outside directors of the board of directors and will be on terms
no less favorable to us than could be obtained from unaffiliated third parties.
DESCRIPTION OF CAPITAL STOCK AND MEMBERSHIP UNITS
GENERAL
Our authorized capital stock consists of shares of Class A
common stock, par value $.01 per share, and one share of Class B common stock,
par value $.01 per share.
COMMON STOCK
As of the completion of this offering there will be shares
of Class A common stock, or shares of Class A common stock if the
underwriters exercise their over-allotment option, issued and outstanding, and
one share of Class B common stock issued and outstanding and beneficially held
of record by KB Online.
VOTING RIGHTS. The holders of the Class A common stock and the Class B
common stock vote together as a single class on all matters except as described
below. Each share of Class A common stock entitles its holder to one vote. Each
share of Class B common stock entitles its holder to the number of votes equal
to the total number of shares of Class B common stock owned by that holder plus
the total number of membership units in KBkids.com LLC owned by that holder.
Holders of shares of Class A common stock and Class B common stock are not
entitled to cumulate their votes in the election of directors. Generally, all
matters to be voted on by stockholders must be approved by a majority or, in the
case of election of directors, by a plurality of the votes entitled to be cast
by all shares of Class A common stock and Class B common stock present in person
or represented by proxy, voting together as a single class, subject to any
voting rights granted to holders of any preferred stock. Except as otherwise
provided by law, and subject to any voting rights granted to holders of any
outstanding preferred stock, amendments to the charter must be approved by a
majority of the combined voting power of all Class A common stock and Class B
common stock, voting together as a single class. However, amendments to the
charter that would alter or change the powers, preferences or special rights of
the Class A common stock or the Class B common stock so as to affect them
adversely must also be approved by a majority of the class to be adversely
affected by the amendment, voting as a separate class. Notwithstanding the
foregoing, any amendment to our charter to increase or decrease the authorized
shares of any class shall be approved upon the affirmative vote of the holders
of a majority of the common stock, voting together as a single class.
DIVIDENDS. We do not anticipate declaring or paying any cash dividends on
our common stock in the foreseeable future. KBkids.com LLC does not expect to
pay any cash distributions for the foreseeable future, except that KBkids.com
LLC, pursuant to its amended and restated operating agreement, is required to
pay distributions to its members to the extent necessary to enable the members,
including us, to pay taxes incurred with respect to KBkids.com LLC's taxable
income. We currently intend to cause KBkids.com LLC to retain future earnings,
if any, to finance the expansion of its business. Any future determination with
respect to the payment of cash dividends on our common stock or directing the
payment of cash distributions by KBkids.com LLC will be at the discretion of our
board of directors and will depend on factors that our board deems relevant.
CONVERSION OF CLASS B COMMON SHARE. The one share of Class B common stock
is convertible at the option of the holder into one share of Class A common
stock. If the share of Class B common stock is transferred to a person other
than Consolidated or any of its subsidiaries or affiliates, such share will
automatically convert to one share of Class A common stock upon such
disposition. If the aggregate percentage voting power of the outstanding share
of Class B common stock falls below 10% of the total aggregate voting power of
all shares of Class A common stock and Class B common stock, voting together
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as a single class, then the outstanding share of Class B common stock will
automatically convert into Class A common stock.
OTHER RIGHTS. If we merge or consolidate with or into another company and
our shares of common stock are converted into or exchangeable for shares of
stock, other securities or property, including cash, all holders of our common
stock, regardless of class, will be entitled to receive the same kind and amount
of shares of stock and other securities and property, including cash.
If we are liquidated, dissolved or wound up, we will pay the full amounts
required to be paid to holders of shares of any outstanding preferred stock
before we make any payments to holders of shares of common stock. All holders of
shares of common stock are entitled to share ratably in any assets available for
distribution to these holders, after all of our creditors have been satisfied.
No shares of common stock may be redeemed. Holders of shares of common
stock do not have any preemptive rights to purchase additional shares of common
stock.
PREFERRED STOCK
We may issue up to shares of preferred stock from time to
time in one or more series and with the terms of each series stated in the
board's resolutions providing for the designation and issue of that series. Our
certificate of incorporation authorizes the board to determine the dividend,
voting, conversion, redemption and liquidation preferences, rights, privileges
and limitations pertaining to each series of preferred stock that is issued.
Without seeking any stockholder approval, the board may issue preferred stock
with voting and other rights that could adversely affect the voting power of the
holders of common stock and could have anti-takeover effects. The board, in so
acting, could issue preferred stock having terms that could discourage an
acquisition attempt through which an acquirer may be able to change the
composition of the board, including a tender offer or other transaction that
some, or a majority, of our stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then current market price of their stock. No shares of preferred stock have
been designated or issued.
REGISTRATION RIGHTS
Under the registration rights agreement between us and KB Online, KB Online
will be granted registration rights for the shares of Class A common stock
issuable upon conversion of its share of our Class B common stock and upon
exchange of its membership units in KBkids.com LLC.
The registration rights agreement provides that KB Online will have
unlimited piggyback registration rights, which will entitle it to include its
shares of Class A common stock in all registered offerings of our common stock
on Form S-1 or Form S-3, subject to the ability of the underwriters to limit the
number of shares included in the offering in view of market conditions. KB
Online may also demand that we use our best efforts to register its shares of
Class A common stock on two occasions beginning 180 days after the date of this
offering, provided that the amount of stock subject to such demand equals at
least % of our outstanding common stock on the date of the demand or has a
market value in excess of $ million. In addition, KB Online may require
us to use our best efforts to register its shares of Class A common stock on
Form S-3 on three occasions after we have qualified to use Form S-3, provided
that the amount of stock subject to such demand equals at least % of our
outstanding common stock on the date of the demand or has a market value in
excess of $ million. We have agreed to pay the costs associated with
all such registrations other than underwriting discounts and commissions.
Immediately following this offering, shares of Class A
common stock will be issuable to KB Online upon conversion of its Class B common
share and its membership units in KBkids.com, all of which will be subject to
these registrations rights.
In addition, under the registration rights agreement among us and the
BrainPlay.com equityholders, if we register any common stock for our own account
or for the account of KB Online, the BrainPlay.com
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equityholders are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the number of
shares included in the offering in view of market conditions.
All registration rights terminate on the date five years following the
closing of this offering, or at such time as the holder is entitled to sell all
of its shares in any three-month period under Rule 144 of the Securities Act.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND THE CHARTER AND BYLAWS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult our acquisition by a third party and the removal of
our incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of KBkids.com Inc. to first
negotiate with us. We believe that the benefits of increased protection of our
ability to negotiate with the proponent of an unfriendly or unsolicited
acquisition proposal outweigh the disadvantages of discouraging these proposals
because negotiation could result in an improvement of their terms.
DELAWARE BUSINESS COMBINATION STATUTE. Because we are a Delaware
corporation, Section 203 of the Delaware General Corporation Law applies to us.
Section 203 provides that, except for transactions specified in Section 203, a
corporation will not engage in any business combination with any interested
stockholder for a three-year period after the date that the stockholder became
an interested stockholder unless:
- before the date that the stockholder became an interested stockholder,
the board approved either the business combination or the transaction
which resulted in a stockholder becoming an interested stockholder;
- upon completion of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding, shares owned by persons who are directors
and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or after the date that the stockholder became an interested
stockholder, the business combination is approved by the board of the
corporation and authorized at an annual or special meeting of
stockholders by the affirmative votes of at least 66% of the outstanding
voting stock which is not owned by the interested stockholder.
A business combination includes a merger, consolidation, asset sale or
other transaction resulting in a financial benefit to an interested stockholder.
An interested stockholder is a person who, together with affiliates and
associates, owns, or within three years, did own, 15% or more of a corporation's
outstanding voting stock.
Section 203 makes it more difficult under some circumstances for an
interested stockholder to affect a business combination with us for a three-year
period. Although our stockholders may elect to exclude us from the restrictions
imposed under Section 203, we currently have not elected to opt out of Section
203 so that the restrictions imposed by Section 203 will apply. However, on
January , 2000, our board of directors approved the issuance of one share
of Class B common stock to KB Online in exchange for its contribution of one
membership unit of KBkids.com LLC and the execution of the amended and restated
operating agreement of KBkids.com LLC. The amended and restated operating
agreement provides KB Online with the right to convert its membership units in
KBkids.com LLC into shares of Class A common stock. This board approval was made
prior to KB Online becoming an interested stockholder so that the restrictions
imposed by Section 203 will not apply with respect to any business combination
or transaction with KB Online or its affiliates.
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CHARTER AND BYLAWS. Our certificate of incorporation authorizes our board
of directors to establish one or more series of undesignated preferred stock,
the voting rights or other terms of which can be determined by our board at the
time of issuance without any stockholder action. In addition, our certificate of
incorporation and bylaws do not provide our stockholders with the right to act
by written consent without a meeting or for cumulative voting in the election of
directors. Our certificate of incorporation authorizes our board of directors to
fill vacant directorships and to increase the size of the board of directors.
These provisions, which may only be amended by the vote of stockholders holding
at least a majority of the outstanding common stock, may have the effect of
deterring hostile takeovers or delaying changes in our management.
MEMBERSHIP UNITS
Immediately following this offering, there will be
membership units of KBkids.com LLC, of which will be
beneficially owned by KB Online, an indirect wholly-owned subsidiary of
Consolidated, of which will be beneficially owned by BrainPlay.com,
and of which will be beneficially owned by us. Because we will
own 100% of BrainPlay.com following this offering, the membership units owned by
it will be 100% indirectly owned by us.
The total number of outstanding membership units that we own directly and
indirectly will at all times equal the number of shares of outstanding Class A
and Class B common stock. The net cash proceeds that we receive from any future
issuance of shares of Class A common stock, including upon the exercise of
options issued under our stock option plan, will be simultaneously transferred
to KBkids.com LLC in exchange for the same number of membership units as the
number of shares of Class A common stock we issued.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is .
Its telephone number is .
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL. Prior to this offering, there has been no public market for our
common stock. Sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices of our common stock.
Furthermore, since no shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale described
below, sales of substantial amounts of common stock in the public market after
these restrictions lapse could adversely affect the prevailing market price and
our ability to raise equity capital in the future.
SHARES. Upon closing of this offering, we will have outstanding an
aggregate of shares of our common stock, assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options.
Of these shares, all shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act unless such
shares are purchased by affiliates as that term is defined in Rule 144 under the
Securities Act. The one share of Class B common stock will be restricted stock
within the meaning of Rule 144 under the Securities Act. The one share of Class
B common stock is convertible into one share of Class A common stock at the
option of the holder of the Class B common stock. In addition, the
membership units in KBkids.com LLC held by Consolidated are convertible into an
equivalent number of shares of Class A common stock. The Class A common stock
into which the Class B common stock and the membership units in KBkids.com LLC
are convertible will also be restricted securities within the meaning of Rule
144 of the Securities Act. All of the Class A common shares issuable upon
conversion of the share of Class B common stock and the membership units in
KBkids.com LLC have demand and piggyback registration rights attached to them.
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See "-- Registration Rights." The following table illustrates the shares
eligible for sale in the public market:
<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE
- --------- ----
<S> <C>
After the date of this prospectus, freely tradeable shares
sold in this offering and shares saleable under Rule 144(k)
that are not subject to the 180-day lock-up
After 90 days from the date of this prospectus, shares
saleable under Rule 144 or Rule 701 that are not subject to
the 180-day lock-up
After 180 days from the date of this prospectus, the 180-day
lock-up is released and these shares are saleable under Rule
144 subject, in some cases, to volume limitations, Rule
144(k) or Rule 701
After 180 days from the date of this prospectus, restricted
securities that are held for less than one year are not yet
saleable under Rule 144
</TABLE>
STOCK OPTIONS. As of , 2000, options to purchase a total of
shares of our common stock were outstanding, of
which are currently exercisable. We intend to file a Form S-8 registration
statement under the Securities Act to register all shares of common stock
issuable under our stock option plan. Accordingly, shares of common stock
underlying these options will be eligible for sale in the public markets,
subject to the lock-up agreements described below. See "Management -- Executive
Compensation."
LOCK-UP AGREEMENTS. All of our stockholders and option holders as of the
date of this prospectus have signed lock-up agreements under which they have
agreed not to transfer or dispose of, directly or indirectly, any shares of our
common stock or any securities convertible into or exercisable or exchangeable
for shares of our common stock for 180 days after the date of this prospectus.
Credit Suisse First Boston Corporation may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements.
RULE 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this
offering, or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 in connection with such sale.
Sales under Rule 144 are also subject to manner-of-sale provisions, notice
requirements and the availability of current public information about us.
RULE 144(k). Under Rule 144(k), a person who is not one of our affiliates
at any time during the 90 days preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years, including the holding
period of any prior owner other than an affiliate, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
contractually restricted, 144(k) shares may be sold immediately upon completion
of this offering.
RULE 701. In general, under Rule 701 of the Securities Act as currently in
effect, each of our employees, consultants or advisors who purchases shares from
us in connection with a compensatory stock plan or other written agreement is
eligible to resell such shares 90 days after the effective date of this offering
in reliance on Rule 144, but without compliance with restrictions, including the
holding period, contained in Rule 144.
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<PAGE> 75
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of the U.S. federal income and estate
tax consequences of the ownership and disposition of common stock by a
beneficial owner thereof that is a non-U.S. holder. A non-U.S. holder is a
person or entity that, for U.S. federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership, or a foreign
estate or trust.
This discussion is based on the Internal Revenue Code of 1986, as amended,
and administrative interpretations as of the date hereof, all of which are
subject to change, including changes with retroactive effect. This discussion
does not address all aspects of U.S. federal income and estate taxation that may
be relevant to non-U.S. holders in light of their particular circumstances and
does not address any tax consequences arising under the laws of any state, local
or foreign jurisdiction. You should consult your own tax advisor about the
particular tax consequences to you of owning and disposing of common stock,
including the consequences under the laws of any state, local or foreign
jurisdiction.
DIVIDENDS
Except as discussed below, dividends paid to a non-U.S. holder of common
stock generally will be subject to withholding tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. For purposes of
determining whether tax is to be withheld at a 30% rate or at a reduced rate as
specified by an income tax treaty, we ordinarily will presume that dividends
paid on or before December 31, 2000 to an address in a foreign country are paid
to a resident of such country absent knowledge that such presumption is not
warranted.
Under United States Treasury Regulations issued on October 6, 1997, which
are applicable to dividends paid after December 31, 2000, to obtain a reduced
rate of withholding under a treaty, a non-U.S. holder will generally be required
to provide an Internal Revenue Service Form W-8BEN certifying such non-U.S.
holder's entitlement to benefits under a treaty. The new regulations also
provide special rules to determine whether, for purposes of determining the
applicability of a tax treaty, dividends paid to a non-U.S. holder that is an
entity should be treated as paid to the entity or those holding an interest in
that entity.
There will be no withholding tax on dividends paid to a non-U.S. holder
that are effectively connected with the non-U.S. holder's conduct of a trade or
business within the United States if a Form 4224 stating that the dividends are
so connected and are includable in the holder's gross income for the taxable
year is filed with us. Instead, the effectively connected dividends will be
subject to a regular U.S. income tax in the same manner as if the non-U.S.
holder were a U.S. resident. A non-U.S. corporation receiving effectively
connected dividends may also be subject to an additional branch profits tax that
is imposed, under certain circumstances, at a rate of 30%, or such lower rate as
may be specified by an applicable treaty, on the non-U.S. corporation's
effectively connected earnings and profits, subject to certain adjustments.
Under the new regulations, Form W-8ECI will replace Form 4224.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DIVIDENDS
Generally, we must report to the U.S. Internal Revenue Service the amount
of dividends paid, the name and address of the recipient, and the amount, if
any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or certain other agreements, the U.S. Internal Revenue Service may make
such reports available to tax authorities in the recipient's country of
residence.
Dividends paid to a non-U.S. holder may be subject to backup withholding
imposed at a rate of 31% if the non-U.S. holder fails to establish that it is
entitled to an exemption or to provide a correct taxpayer identification number
and certain other information.
Under current United States federal income tax law, backup withholding
imposed at a rate of 31% generally will not apply to dividends paid on or before
December 31, 2000 to a non-U.S. holder at an address outside the United States
unless the payer has knowledge that the payee is a U.S. person. Under
74
<PAGE> 76
the new regulations, however, a non-U.S. holder will be subject to backup
withholding unless applicable certification requirements are met.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of common stock
unless:
- the gain is effectively connected with a trade or business of such holder
in the United States;
- in the case of certain non-U.S. holders who are non-resident alien
individuals and hold the common stock as a capital asset, such
individuals are present in the United States for 183 or more days in the
taxable year of the disposition and other conditions are met;
- the non-U.S. holder is subject to a tax pursuant to the provisions of the
Internal Revenue Code regarding the taxation of U.S. expatriates; or
- we are or have been a U.S. real property holding corporation within the
meaning of Section 897(c)(2) of the Internal Revenue Code at any time
within the shorter of the five-year period preceding such disposition or
such holder's holding period. We are not, and do not anticipate becoming,
a U.S. real property holding corporation.
If a non-U.S. holder which is a corporation recognizes gain on the sale or
other disposition of common stock which is effectively connected with a trade or
business of such holder in the United States, such corporation will be subject
to tax on its gain under regular graduated U.S. income tax rates and, in
addition, may be subject to the branch profits tax equal to 30% of its
effectively connected earnings and profits, unless the corporation qualifies for
a lower rate under an applicable tax treaty.
Special rules may apply to certain non-U.S. holders such as controlled
foreign corporations, passive foreign investment companies, and foreign personal
holding companies that are subject to special treatment under the Internal
Revenue Code. Such entities should consult their own tax advisors to determine
the U.S. federal, state, local and other tax consequences that may be relevant
to them.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK
Under current United States federal income tax law, information reporting
and backup withholding imposed at a rate of 31% will apply to the proceeds of a
disposition of common stock by a non-corporate holder if the transaction is
effected within the United States unless the disposing holder certifies as to
its non-U.S. status or otherwise establishes an exemption. In general, prior to
January 1, 2001, backup withholding will not apply to a payment of disposition
proceeds where the transaction was effected outside of the United States.
However, unless the broker has documentary evidence that the holder is a
non-U.S. holder, U.S. information reporting requirements may apply where the
transaction was effected outside of the United States.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
FEDERAL ESTATE TAX
An individual non-U.S. holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the common stock will be required
to include the value thereof in his gross estate for U.S. federal estate tax
purposes, and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.
75
<PAGE> 77
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and
E*OFFERING Corp. are acting as representatives, the following respective numbers
of shares of Class A common stock:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Credit Suisse First Boston Corporation......................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Deutsche Bank Securities Inc. ..............................
E*OFFERING Corp. ...........................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in this offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay:
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us............. $ $ $ $
-------- -------- -------- --------
Expenses payable by us............. $ $ $ $
-------- -------- -------- --------
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
the filing of a Form S-8 registration statement to register all shares of common
stock issuable upon exercise of stock options granted under our stock option
plan, grants of stock options under the terms of our stock option plan and
issuances of common stock pursuant to the exercise of stock options granted
under our stock option plan.
Our officers, directors, stockholders and optionholders have agreed that
they will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or
76
<PAGE> 78
securities convertible into or exchangeable or exercisable for any shares of our
common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock, whether
any such aforementioned transaction is to be settled by delivery of our common
stock or such other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition, without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for employees, directors
and certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for sale
to the general public in this offering will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same terms as the
other shares.
E*OFFERING Corp., one of the underwriters, will allocate for distribution
by E*TRADE Securities, Inc. a portion of the shares that E*OFFERING is
underwriting in this offering. Copies of the prospectus in electronic format
will be made available on Internet websites maintained by E*OFFERING Corp. and
E*TRADE Securities, Inc. Customers of E*TRADE Securities, Inc. who complete and
pass an online eligibility profile may place conditional offers to purchase
shares in this offering through E*TRADE's Internet website.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We intend to apply to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "KBKD."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include the following:
- the information included in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchase of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
77
<PAGE> 79
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a stabilizing transaction or a syndicate
covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Certain of the underwriters and their affiliates have provided and may in
the future continue to provide investment banking, commercial banking and other
financial services, to us and our affiliates for which they have received and
may in the future receive customary compensation.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
(1) such a purchase is entitled under applicable provincial securities laws
to purchase such common stock without the benefit of a prospectus
qualified under such securities laws,
(2) where required by law, that such purchaser is purchasing as principal
and not as agent, and
(3) such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuers's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
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<PAGE> 80
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of the common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed on for us by Benesch, Friedlander, Coplan & Aronoff LLP, Cleveland, Ohio.
Davis Polk & Wardwell is acting as counsel for the underwriters in connection
with various legal matters relating to this offering.
EXPERTS
The financial statements of BrainPlay.com, Inc. included in this prospectus
and elsewhere in the registration statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement, each statement
being qualified in all respects by this reference.
You may read and copy materials that we have filed with the SEC, including
the registration statement, at the following SEC public reference rooms:
<TABLE>
<S> <C> <C>
450 Fifth Street, N.W. Northwest Atrium Center 7 World Trade Center
Room 1024 500 West Madison Street Suite 1300
Washington, D.C. 20549 Suite 1400 New York, New York 10048
Chicago, Illinois 60661
</TABLE>
You can call the SEC at 1-800-732-0330 for further information about the
public reference rooms.
We are required to file electronic versions of these documents with the
SEC. Those documents may be accessed through the SEC's Internet site at
http://www.sec.gov.
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<PAGE> 81
KBKIDS.COM
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KBkids.com LLC Balance Sheet as of September 30, 1999....... F-2
KBkids.com LLC (Predecessor and Successor) Statements of
Operations for the periods April 1, 1998 through September
30, 1998, April 1, 1999 through June 25, 1999 and June 26,
1999 through September 30, 1999........................... F-3
KBkids.com LLC Statement of Members' Equity for the period
June 26, 1999 to September 30, 1999....................... F-4
KBkids.com LLC (Predecessor and Successor) Statements of
Cash Flows for the periods April 1, 1999 through June 25,
1999 and June 26, 1999 through September 30, 1999......... F-5
Notes to Financial Statements............................... F-6
Report of Independent Public Accountants for BrainPlay.com,
Inc. ..................................................... F-14
BrainPlay.com, Inc. Balance Sheets as of March 31, 1998 and
1999...................................................... F-15
BrainPlay.com, Inc. Statement of Operations for the years
ended March 31, 1997, 1998 and 1999 and the three months
ended June 30, 1998 (unaudited) and September 30, 1998
(unaudited)............................................... F-16
BrainPlay.com, Inc. Statements of Stockholders' Deficit at
March 31, 1999............................................ F-17
BrainPlay.com, Inc. Statements of Cash Flows for the years
ended March 31, 1997, 1998 and 1999....................... F-18
Notes to Financial Statements............................... F-19
</TABLE>
F-1
<PAGE> 82
KBKIDS.COM LLC
BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 34,938,711
Accounts receivable, net of an allowance of $13,425......... 230,920
Inventory................................................... 12,043,236
Prepaid expenses and other current assets................... 2,084,285
------------
Total current assets...................................... 49,297,152
Property and equipment, net................................. 2,792,838
Intangibles (net)........................................... 21,335,132
------------
$ 73,425,122
============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 117,199
Due to affiliates........................................... 14,619,531
Accrued liabilities......................................... 3,864,359
Current portion of capital lease obligations................ 203,214
------------
Total current liabilities................................. 18,804,303
Capital lease obligations, net of current portion........... 372,298
Commitments and contingencies (Notes 1 and 9)
MEMBERS' EQUITY:
Class A membership units, 29,461,212 issued and
outstanding............................................... 84,000,000
Class B membership units, 7,365,303 issued and
outstanding............................................... 21,000,000
Subscriptions receivable -- Class A membership units........ (40,000,000)
Accumulated deficit......................................... (10,751,479)
------------
Total members' equity..................................... 54,248,521
------------
Total liabilities and members' equity....................... $ 73,425,122
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 83
KBKIDS.COM LLC
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
-------------------------------- ---------------
PERIOD APRIL 1, PERIOD PERIOD JUNE 26,
1998 THROUGH APRIL 1, 1999 THROUGH
SEPTEMBER 30, 1999 THROUGH SEPTEMBER 30,
1998 JUNE 25, 1999 1999
--------------- ------------- ---------------
<S> <C> <C> <C>
Net sales......................................... $ 91,162 $ 498,563 $ 1,046,029
Cost of products sold............................. 108,627 850,060 1,247,542
----------- ----------- ------------
Gross profit (loss)............................... (17,465) (351,497) (201,513)
Costs and expenses:
Sales and marketing............................. 822,740 1,540,700 5,163,855
Product development and support................. 493,096 744,571 1,246,981
General and administrative...................... 315,961 747,092 1,332,203
Amortization of intangibles..................... -- -- 3,000,000
----------- ----------- ------------
Total operating expenses................ 1,631,797 3,032,363 10,743,039
----------- ----------- ------------
Loss from operations.............................. (1,649,262) (3,383,860) (10,944,552)
Interest income................................... 45,774 37,387 223,170
Interest expense.................................. -- (41,353) (30,097)
----------- ----------- ------------
Net loss.......................................... $(1,603,488) $(3,387,826) $(10,751,479)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 84
KBKIDS.COM LLC
STATEMENT OF MEMBERS' EQUITY
FOR THE PERIOD JUNE 26, 1999 TO
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
LLC MEMBERSHIP UNITS
-----------------------------------------------------------------------
ACCUMULATED SUBSCRIPTIONS
DEFICIT CLASS A CLASS B RECEIVABLE TOTAL
------------ ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at June 25, 1999.... $ $ $ $ $
Issuance of LLC Membership
Units........................ 84,000,000 21,000,000 (40,000,000) 65,000,000
Net loss..................... (10,751,479) (10,751,479)
------------ ----------- ----------- ------------ ------------
Balances at September 30,
1999....................... $(10,751,479) $84,000,000 $21,000,000 $(40,000,000) $ 54,248,521
============ =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 85
KBKIDS.COM LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
--------------- ------------------
PERIOD APRIL 1, PERIOD JUNE 26,
1999 THROUGH 1999 THROUGH
JUNE 25, 1999 SEPTEMBER 30, 1999
--------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(3,387,826) $(10,751,479)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 27,364 148,495
Amortization of intangibles............................... -- 3,000,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable................ 53,460 (193,541)
Increase in inventory..................................... (589,930) (11,352,641)
Increase in prepaid expenses and other current assets..... (91,787) (1,865,659)
Increase (decrease) in accounts payable................... 1,140,547 (34,158)
Increase in due to affiliates............................. -- 13,575,702
Increase in accrued liabilities........................... 116,571 3,510,736
----------- ------------
Net cash used in operating activities....................... (2,731,601) (3,962,545)
----------- ------------
Cash flows used in investing activities --
Purchases of property and equipment....................... (612,069) (1,598,813)
Cash flows from financing activities:
Payment of revolving credit note.......................... -- (500,000)
Payment of note payable................................... (10,335) (177,243)
Payments on capital leases................................ (22,942) (37,572)
Cash proceeds from issuance of Class A LLC membership
units.................................................. -- 40,000,000
Cash proceeds from issuance of Class B LLC membership
units.................................................. -- 1,214,884
----------- ------------
Net cash provided by (used in) financing activities......... (33,277) 40,500,069
----------- ------------
Net increase (decrease) in cash and cash equivalents........ (3,376,947) 34,938,711
Cash and cash equivalents, beginning of period.............. 5,089,371 --
----------- ------------
Cash and cash equivalents, end of period.................... $ 1,712,424 $ 34,938,711
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 45,167 $ 57,172
=========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Equipment acquired through capital lease.................. $ 146,083 $ 276,746
=========== ============
Issuance of Class B LLC membership units.................. -- $ 19,785,116
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 86
KBKIDS.COM LLC
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF BUSINESS
KBkids.com LLC ("KBkids.com") is an online retailer of products for
children, including toys, software, video games, videos, and collectibles.
KBkids.com is a limited liability company whose members are Consolidated Stores
Corporation ("Consolidated") and BrainPlay.com, Inc ("BrainPlay.com").
Contribution Agreement
On June 25, 1999, BrainPlay.com and KB Online Holdings LLC ("KB Online"),
an indirect subsidiary of Consolidated, entered into a contribution agreement
regarding formation of the joint venture to form KBkids.com (originally formed
as Toyco.com LLC). Terms of the contribution agreement provide that KB Online
receive 80% of the membership units in exchange for cash and property valued at
$80,000,000 and intangibles valued at $4,000,000. BrainPlay.com received the
remaining 20% of the membership units in exchange for substantially all of its
assets and liabilities. KBkids.com is located in Denver, Colorado.
Under this contribution agreement, none of KB Online or its affiliates can
sell toy products on the Internet until December 31, 2001, or one year after the
completion of a capital markets transaction, whichever comes first. In addition,
as long as KB Online owns a majority of the membership interests of KBkids.com,
none of KB Online or its affiliates can sell any toy products on the Internet,
unless they are "closeouts."
Planned Offering of Common Stock and Reorganization
Terms of the contribution agreement contemplate that immediately before a
planned public offering, KBkids.com Inc. will be formed, and in addition, a
subsidiary of KBkids.com Inc. will be formed to be merged with and into
BrainPlay.com. The operating agreement of KBkids.com LLC will be amended and
restated to eliminate the two classes of membership units and will provide for
only one class of membership units upon completion of the planned offering.
Immediately following the planned offering, a number of structural changes
will result. First, KBkids.com Inc. will invest the net proceeds of the offering
in KBkids.com LLC, and in return KBkids.com Inc. will receive units of
membership interest in KBkids.com LLC, which will represent % of the then
outstanding membership units and KBkids.com Inc. will become the sole manager of
KBkids.com LLC. As a result of KBkids.com Inc. obtaining its interest, KB
Online's membership units will represent % of the then outstanding
membership units and BrainPlay.com's membership units will represent % of
the then outstanding membership units. In connection with this reorganization,
KB Online will contribute one membership unit in KBkids.com LLC to KBkids.com
Inc. in exchange for one share of Class B common stock. Also, the subsidiary of
KBkids.com Inc. will merge into BrainPlay.com with BrainPlay.com becoming a
wholly-owned subsidiary of KBkids.com Inc. In connection with this subsidiary
merger, the equity holders of BrainPlay.com will receive, in the aggregate,
shares (and/or options to acquire shares) of Class A common stock
in KBkids.com Inc. After this restructuring, KBkids.com LLC will be controlled
by KBkids.com Inc. as sole manager of KBkids.com LLC. Additionally, KB Online
has the right to exchange its membership units in KBkids.com LLC into an
equivalent number of shares of Class A common stock of KBkids.com Inc.
After the offering, public stockholders receiving stock in the offering
will own shares of Class A common stock in the aggregate, which will
represent % of the total issued and outstanding Class A and Class B common
stock. The former equityholders of BrainPlay.com will beneficially own
shares of Class A common stock in the aggregate, which will
represent % of the total issued and outstanding Class A and Class B common
stock. However, through its ownership of the Class B common
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<PAGE> 87
KBKIDS.COM LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock, Consolidated will control % of the aggregate voting power of
KBkids.com Inc., while the public stockholders will control % and the
former BrainPlay.com equityholders will control %.
Risks and Uncertainties
KBkids.com is subject to various risks and uncertainties frequently
encountered by entities in the early stages of development, particularly
entities in the new and rapidly evolving market for Internet based products and
services. Such risks and uncertainties include, but are not limited to, its
limited operating history, an evolving and unpredictable business model and the
management of rapid growth. To address these risks, KBkids.com must, among other
things, maintain and increase its customer base, implement and successfully
execute its business and marketing strategy, continue to develop and upgrade its
technology, provide superior customer service and attract, retain and motivate
qualified personnel. There can be no guarantee that KBkids.com will be
successful in addressing such risks.
Since inception, KBkids.com has not been profitable and may continue to
lose money for the foreseeable future. As of September 30, 1999, the operations
of KBkids.com have an accumulated deficit of $10,751,479. To date, sufficient
revenue has not been generated to cover the substantial amounts spent to create,
launch and enhance its services. If revenue does not increase substantially,
profitability may never be achieved. Even if future profitability is achieved,
profitability may not be sustained or increased. Historically funding has been
obtained by selling equity and from bank loans. It is expected that future
growth plans will require significant external financing within the next year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements are unaudited. In the opinion of
management, all adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the financial position and results of operations for
the interim period presented have been made.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates may affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
KBkids.com considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. At September 30, 1999,
KBkids.com held investments in high quality commercial paper with original
maturities ranging from 30 to 75 days.
Concentrations of Credit Risk
Financial instruments which potentially subject KBkids.com to
concentrations of credit risk are primarily accounts receivable. However, in
general, KBkids.com requires customers to pay with a credit card, for which
authorization is obtained prior to shipment of product.
KBkids.com maintains a cash investment policy which restricts investments
to ensure preservation of principal and maintenance of liquidity. Cash and cash
equivalents are invested in financial institutions and corporate securities
which KBkids.com believes to be creditworthy. KBkids.com has no significant off-
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KBKIDS.COM LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
balance sheet concentrations of credit risk such as foreign exchange contracts,
option contracts or other foreign currency hedging arrangements.
Revenue Recognition
Revenue is recognized when goods are shipped. In addition, an allowance is
provided for estimated future returns at the time a sale is recorded.
Merchandise Inventories
Inventories are valued at the lower of cost or market as determined on a
first-in, first-out basis. KBkids.com purchased a substantial portion of its
products from Consolidated's subsidiary, KB Toys of Massachusetts, Inc. ("KB
Toys") in 1999. Consolidated accounted for 76.3% of KBkids.com's inventory
purchases during the period ended September 30, 1999.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment and amortization of capital leases are computed using the
straight-line method based on the following estimated useful lives:
<TABLE>
<S> <C>
Computer software......................................... 3 years
Office and computer equipment............................. 3 years
Leasehold improvements.................................... 5 years
Furniture and fixtures.................................... 5 years
Leased assets............................................. 3.5 years
</TABLE>
Maintenance and repairs are expensed as incurred, and improvements are
capitalized.
Impairment of Long-Lived Assets
KBkids.com reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to undiscounted pre-tax future net
cash flows expected to be generated by that asset. An impairment loss is
recognized for the amount by which the carrying amount of the assets exceeds the
fair value of the assets. To date, no such impairment has been recognized.
Advertising Costs
KBkids.com expenses the costs of producing advertising for magazines,
television, radio, and other media during the period in which these costs are
incurred. KBkids.com recognizes the costs of broadcasting television, Internet
and radio advertising, displaying print and billboard advertising, and event
sponsorships in the period in which the advertising takes place. Advertising
expense was $3.5 million for the three months ended September 30, 1999.
Website Development Costs
On March 4, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 established
standards for the capitalization of costs related to internal use software. In
general, costs incurred during the development stage are capitalized, and costs
incurred during
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<PAGE> 89
KBKIDS.COM LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the preliminary project and post-implementation stages are expensed. The
adoption of SOP 98-1 did not have a material effect on KBkids.com's financial
statements.
Income Taxes
KBkids.com, as a limited liability company, is not considered a taxable
entity for federal income tax purposes and most state income tax purposes. Thus,
KBkids.com's items of taxable income or loss generated are included in members'
taxable income or loss. A provision in the operating agreement of KBkids.com
requires a distribution of cash in payment of any resultant taxes which may
arise.
Simultaneous with the planned offering, BrainPlay.com will become a wholly
owned subsidiary of KBkids.com Inc. Accordingly, KBkids.com Inc. will file a
consolidated U.S. income tax return with BrainPlay.com. The anticipated net
operating loss carryforwards ("NOLs") for federal income tax purposes generated
by BrainPlay.com for periods up to the time of the offering, will be available
on the aforementioned consolidated return, but could be restricted as to their
annual usage by certain provisions of the Internal Revenue Code of 1986, as
amended. Such restrictions may have the effect of limiting the tax benefit of
any carryforward losses of BrainPlay.com.
Stock-Based Compensation
Employee stock option plans and other stock-based compensation arrangements
are accounted for in accordance with the provisions of Accounting Principles
Board No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and
related interpretations. KBkids.com adopted the disclosure-only provisions of
SFAS No. 123 "Accounting for Stock-Based Compensation," which allows entities to
continue to apply the provisions of APB No. 25 for transactions with employees
and provide pro forma disclosures for employee stock grants made as if the
fair-value-based method of accounting had been applied to these transactions.
KBkids.com accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. From its inception through September 30,
1999, KBkids.com has not had any material transactions that are required to be
reported in comprehensive income as compared to its net loss.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." KBkids.com is required to adopt SFAS No.
133 in the year ended December 31, 2000. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. In June 1999, SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133 -- an amendment of FASB
Statement No. 133," was issued. This amendment delayed the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. As of September 30,
1999 there have been no derivative financial instruments issued or hedging
activities.
On April 3, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." The Statement provides guidance on the financial reporting of
start-up costs and organization costs and requires costs of start-up activities
and
F-9
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KBKIDS.COM LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
organization costs to be expensed as incurred. The adoption of the Statement
does not have a material impact on the Company.
(3) RELATED PARTY TRANSACTION
KBkids.com has entered into several agreements with Consolidated and its
subsidiaries, in particular KB Toys, including a supply agreement under which KB
Toys has agreed to supply merchandise to KBkids.com, and the agreements under
which KBkids.com licenses the kbkids.com and kbtoys.com domain names and the
KBkids and KB Toys tradenames. Under a services agreement with KB Toys,
KBkids.com can use various services from Consolidated and its subsidiaries
including services for advertising, store returns, inventory liquidation,
defective merchandise disposal, payroll processing, data access, tax and
accounting. These agreements each terminate when Consolidated no longer owns at
least 10% of either KBkids.com or the common stock of a parent company of
KBkids.com and when Consolidated no longer owns securities of KBkids.com with a
market value of at least $100,000,000, and may be terminated earlier in other
circumstances. Upon termination of the licensing and domain name arrangements,
KBkids.com has the option to purchase the KBkids trade name and the kbkids.com
domain name from KB Toys for $100,000.
Aggregate purchases from KB Toys accounted for approximately 76.3% of
KBkids.com's purchases during the period June 26, 1999 to September 30, 1999.
Under the supply agreement, KBkids.com has the right to place toy orders with KB
Toys and KB Toys has agreed to use its best commercially reasonable efforts to
fill those orders. Purchases of toy products under the supply agreement are
allocated between KBkids.com and KB Toys according to a formula based on
projected fiscal year revenues as a percentage of the projected fiscal year
revenues of KB Toys multiplied by a sliding scale factor ranging between 1.5 and
1.0 based on actual revenues for the preceding fiscal year.
Total services charges during the period June 26, 1999 to September 30,
1999 pursuant to the services agreement were $300,000.
The inability to obtain these products or services for any reason,
including any termination of our agreements with KB Toys, could result in a
material adverse effect on business operations and financial condition.
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Computer and office equipment........................... $1,751,212
Computer software....................................... 619,704
Furniture and fixtures.................................. 6,225
Leasehold improvements.................................. 2,927
Capital leases.......................................... 657,826
----------
Property and equipment.................................. $3,037,894
Accumulated depreciation.............................. 245,056
----------
Property and equipment, net............................. $2,792,838
==========
</TABLE>
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<PAGE> 91
KBKIDS.COM LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) CAPITAL LEASES
Included in the cost of property and equipment are assets obtained through
capital leases. The following is a summary of assets under capital lease as of
September 30, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Furniture and fixtures.................................. $ 98,625
Computer and office equipment........................... 553,318
Computer software....................................... 5,884
--------
Leased property and equipment........................... $657,826
Accumulated amortization.............................. 152,298
--------
Leased property and equipment, net...................... $505,528
========
</TABLE>
Amortization expense related to property and equipment under capital lease
was $107,881 for the period ended September 30, 1999. Such amount is included in
the amounts disclosed in Note 4.
The capital leases are collateralized by the leased assets and are due in
minimum monthly payments totaling $6,288, including interest at a rate of 7.0%.
Interest expense related to capital leases for the period ended September 30,
1999, was approximately $2,808.
At September 30, 1999, future payments under the capital lease obligations
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
------------------
<S> <C>
March 31, 2000............................................ $129,781
March 31, 2001............................................ 254,482
March 31, 2002............................................ 232,138
March 31, 2003............................................ 41,977
March 31, 2004............................................ 0
--------
Total minimum lease payments.............................. 658,378
Less amount representing interest......................... (82,866)
--------
Present value of net minimum lease payments............... 575,512
Less current portion...................................... 203,214
Current lease obligations................................. $372,298
========
</TABLE>
(6) DEBT
Pursuant to terms of Consolidated's Revolving Credit Facility, KBkids.com
is a guarantor of outstanding obligations thereto. Upon completion of the public
offering of stock in KBkids.com Inc., KBkids.com will be released as a
guarantor. In addition, pursuant the Revolving Credit Facility, upon completion
of the public offering of stock in KBkids.com Inc. Consolidated may, at its
option, lend, on a secured basis, up to $100 million to KBkids.com Inc. at
market rates and subject to the requirement that we pay down any outstanding
balance on this line of credit in full for at least one consecutive 30 day
period during each year.
F-11
<PAGE> 92
KBKIDS.COM LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) MEMBERS' EQUITY
Class A and Class B Membership Units
Class A and Class B membership units in KBkids.com have the same privileges
with the exception of liquidation rights. In the event of dissolution of
KBkids.com, Class A members are entitled to a distribution first in an amount
equivalent to the capital contribution of members holding Class A membership
units. The amended and restated operating agreement of KBkids.com, effective
upon completion of the public offering of stock in KBkids.com Inc., eliminates
the two classes of membership units and provides for only one class of
membership units.
KBkids.com LLC Stock Option Plan
In 1999, KBkids.com established the 1999 Option Plan ("1999 Plan"). The
1999 Plan authorizes the grant to officers, key employees, consultants and
directors of Consolidated or of KBkids.com of awards consisting of non-qualified
options to purchase equity interests in KBkids.com LLC. Options granted are
exercisable for a term of up to ten years from the grant date. The exercise
price of each incentive stock option may not be less than the fair market value
at the date of grant.
Awards granted under the 1999 Plan are subject to adjustment upon a
recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend or other similar event affecting the common
stock. Except as otherwise provided in a particular option grant, an award is
not transferable, other than by will or the laws of descent and distribution or,
in some circumstances, pursuant to a qualified domestic relations order. An
option award may be exercised during the lifetime of the holder of the award,
only by the holder or the holder's personal representative in the event of
disability. In the event of a public offering of stock, provisions provide for
the grant of replacement options in the public entity to persons who received
options under the 1999 Plan at a price per share equal to the exercise price of
the option under the 1999 Plan.
The 1999 Plan terminates on July 6, 2009, and awards will not be granted
under it after that date, although the terms of any award may be amended in
accordance with the 1999 Plan at any date prior to the end of the term of such
award. Any awards outstanding at the time of termination of the stock option
plan continue in full force and effect according to the terms and conditions of
the award and the 1999 Plan.
A summary of option activity for the period from June 25, 1999 to September
30, 1999 is as follows:
<TABLE>
<CAPTION>
SHARES
UNDERLYING WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at June 25, 1999...................... 0 --
Granted........................................... 3,939,357 $ 2.85
BrainPlay.com replacement......................... 416,250 $ 0.44
Forfeited......................................... 92,448 $ 1.81
Exercised......................................... 0 --
Outstanding at September 30, 1999................. 4,263,159 $ 2.65
Exercisable at September 30, 1999................. 0 --
</TABLE>
(8) EMPLOYEE BENEFIT PLAN
Eligible employees can enroll in a savings plan with a 401(k) deferral
feature and a Top Hat Plan with a similar deferral feature provided by
Consolidated. As of September 30, 1999, no employer matching contributions have
been made to the savings plan on behalf of employees of KBkids.com.
F-12
<PAGE> 93
KBKIDS.COM LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
Operating Leases
Leases for administrative offices and certain equipment under noncancelable
operating lease agreements are utilized.
Rent expense under these leases for the period ended September 30, 1999 was
$41,833. The following is a schedule of future minimum lease payments on the
facility located at 475 17th Street, Denver, Colorado:
<TABLE>
<CAPTION>
MINIMUM
FISCAL YEAR ENDING LEASE PAYMENTS
------------------ --------------
<S> <C>
March 31, 2000......................................... $ 58,415
March 31, 2001......................................... 118,814
March 31, 2002......................................... 121,707
March 31, 2003......................................... 124,062
March 31, 2004......................................... 58,920
-----------
Total............................................. $ 481,918
===========
</TABLE>
Planned Acquisition
If a public offering is consummated, KBkids.com LLC will be controlled by a
new entity, KBKids.com Inc. KBKids.com Inc. will acquire BrainPlay.com through a
wholly-owned subsidiary, which will subject KBkids.com Inc. indirectly to a
liability for preexisting obligations of BrainPlay.com to the extent of
BrainPlay.com's assets.
Legal Matters
Various claims and business disputes arise in the ordinary course of
business. While the outcome of these matters cannot be predicted with certainty,
management anticipates that the ultimate outcome of these issues will not have a
material impact on the financial position, results of operations or cash flows.
(10) INTANGIBLE ASSETS
KBkids.com is currently evaluating the components of the intangible assets.
The valuation study should be completed during the first calendar quarter of
2000 with value assigned to each component. Intangible assets as of September
30, 1999 totaled $21,335,132, net of accumulated amortization of $3,000,000. The
intangible assets are being amortized over their estimated useful lives, which
is expected to be two years.
F-13
<PAGE> 94
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BrainPlay.com, Inc.:
We have audited the accompanying balance sheets of BrainPlay.com, Inc. (a
Delaware corporation) as of March 31, 1998 and 1999, and the related statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended March 31, 1999. These financial statements are the
responsibility of BrainPlay.com, Inc.'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 financial position of BrainPlay.com, Inc. as of
March 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1999, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
June 16, 1999.
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<PAGE> 95
BRAINPLAY.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $2,447,948 $ 5,089,371
Accounts receivable, net of an allowance of $0 and $40,886,
respectively.............................................. 7,502 90,840
Inventory................................................... -- 100,665
Prepaid expenses and other current assets................... 2,900 39,802
---------- -----------
Total current assets...................................... 2,458,350 5,320,678
Property and equipment, net................................. 30,375 334,983
Other assets................................................ 6,000 87,037
---------- -----------
Total assets.............................................. $2,494,725 $ 5,742,698
========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................ $ 36,630 $ 546,400
Accrued liabilities......................................... 126,545 237,053
Revolving credit note....................................... -- 500,000
Current portion of note payable............................. -- 50,280
Current portion of capital lease obligations................ -- 62,513
---------- -----------
Total current liabilities................................. 163,175 1,396,246
Note payable, net of current portion........................ -- 137,298
Capital lease obligations, net of current portion........... -- 150,684
---------- -----------
Total liabilities......................................... 163,175 1,684,228
---------- -----------
Commitments and contingencies
Convertible, mandatorily redeemable preferred stock, $0.001
par value, 4,754,507 shares authorized
Series A, 1,823,530 shares issued and outstanding at March
31, 1998 and 1999, respectively; stated at liquidation
value.................................................. 3,100,001 3,100,001
Series B, 2,918,918 shares issued and outstanding at March
31, 1999; stated at liquidation value.................. -- 6,479,998
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par value: 20,000,000 shares
authorized, 3,080,000 and 3,082,855 issued and 2,620,000
and 2,622,855 outstanding at March 31, 1998 and 1999,
respectively.............................................. 3,080 3,083
Additional paid-in capital.................................. 767,942 768,510
Treasury stock, at cost; 460,000 shares of common stock at
March 31, 1998 and 1999................................... (170,160) (170,160)
Deferred compensation....................................... (6,000) (4,000)
Accumulated deficit......................................... (1,363,313) (6,118,962)
---------- -----------
Total stockholders' deficit............................... (768,451) (5,521,529)
---------- -----------
Total liabilities and stockholders' deficit............... $2,494,725 $ 5,742,698
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE> 96
BRAINPLAY.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, FOR THE THREE FOR THE THREE
--------------------------------------- MONTHS ENDED MONTHS ENDED
1997 1998 1999 JUNE 30, 1998 SEPTEMBER 30, 1998
--------- ----------- ----------- ------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............. $ 2,324 $ 71,211 $ 595,652 $ 34,524 $ 56,638
Cost of products
sold................. 2,185 64,679 674,373 36,089 72,538
--------- ----------- ----------- --------- -----------
Gross profit (loss).... 139 6,532 (78,721) (1,565) (15,900)
Cost and expenses:
Sales and
marketing......... 35,458 112,390 2,626,364 275,026 547,714
Product development
and support....... 81,897 337,550 1,191,444 186,232 306,864
General and
administrative.... 201,637 653,492 911,436 111,048 204,913
--------- ----------- ----------- --------- -----------
Total operating
expenses........ 318,992 1,103,432 4,729,244 572,306 1,059,491
--------- ----------- ----------- --------- -----------
Loss from operations... (318,853) (1,096,900) (4,807,965) (573,871) (1,075,391)
Interest income........ 4,894 50,246 82,152 28,881 16,893
Interest expense....... -- -- (29,836) -- --
--------- ----------- ----------- --------- -----------
Net loss............... $(313,959) $(1,046,654) $(4,755,649) $(544,990) $(1,058,498)
========= =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 97
BRAINPLAY.COM, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------ PAID-IN ------------------- DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION DEFICIT TOTAL
--------- ------ ---------- ------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1996.... 2,700,000 $2,700 $ -- -- $ -- $ -- $ (2,700) $ --
Sale of common stock in March
1997........................ 260,000 260 259,740 -- -- -- -- 260,000
Net loss...................... -- -- -- -- -- -- (313,959) (313,959)
--------- ------ -------- ------- --------- ------- ----------- -----------
Balances at March 31, 1997.... 2,960,000 2,960 259,740 -- -- -- (316,659) (53,959)
Sale of common stock in April
1997........................ 120,000 120 119,880 -- -- -- -- 120,000
Common stock purchased for
treasury.................... -- -- 60 460,000 (170,160) -- -- (170,100)
Outstanding restricted common
stock purchased by
founder..................... -- -- 345,262 -- -- -- -- 345,262
Contribution of services by
officer..................... -- -- 35,000 -- -- -- -- 35,000
Stock options issued as
employee compensation....... -- -- 8,000 -- -- (8,000) -- --
Amortization of deferred
compensation................ -- -- -- -- -- 2,000 -- 2,000
Net loss...................... -- -- -- -- -- -- (1,046,654) (1,046,654)
--------- ------ -------- ------- --------- ------- ----------- -----------
Balances at March 31, 1998.... 3,080,000 3,080 767,942 460,000 (170,160) (6,000) (1,363,313) (768,451)
--------- ------ -------- ------- --------- ------- ----------- -----------
Stock options exercised....... 2,855 3 568 -- -- -- -- 571
Amortization of deferred
compensation................ -- -- -- -- -- 2,000 -- 2,000
Net loss...................... -- -- -- -- -- -- (4,755,649) (4,755,649)
--------- ------ -------- ------- --------- ------- ----------- -----------
Balances at March 31, 1999.... 3,082,855 $3,083 $768,510 460,000 $(170,160) $(4,000) $(6,118,962) $(5,521,529)
========= ====== ======== ======= ========= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 98
BRAINPLAY.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................... $(313,959) $(1,046,654) $(4,755,649)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 549 3,417 65,235
Provision for bad debt.................................... -- -- 40,886
Contribution of services by officer....................... -- 35,000 --
Compensation expense from founder purchase of restricted
common stock............................................ -- 345,262 --
Amortization of deferred compensation..................... -- 2,000 2,000
Changes in operating assets and liabilities:
Increase in accounts receivable........................... (692) (6,810) (124,224)
Increase in inventory..................................... -- -- (100,665)
Increase in prepaid expenses and other current assets..... -- (2,900) (36,902)
Increase in other assets.................................. (6,000) -- (81,037)
Increase in accounts payable.............................. 9,900 26,730 609,770
Increase (decrease) in accrued liabilities................ 150,842 (124,297) 110,508
--------- ----------- -----------
Net cash used in operating activities....................... (159,360) (768,252) (4,270,078)
--------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment....................... (5,161) (29,180) (134,844)
--------- ----------- -----------
Net cash used in investing activities....................... (5,161) (29,180) (134,844)
--------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from borrowings on revolving credit note......... -- -- 500,000
Proceeds from note payable................................ -- -- 200,000
Payments on note payable.................................. -- -- (12,422)
Payments on capital lease obligations..................... -- -- (21,802)
Proceeds from issuance of Series B Preferred Stock........ -- -- 6,479,998
Proceeds from issuance of Series A Preferred Stock........ -- 3,100,001 --
Proceeds from issuance of common stock.................... 260,000 120,000 --
Proceeds from exercise of stock options................... -- -- 571
Purchase of shares from founder for treasury.............. -- (70,100) (100,000)
--------- ----------- -----------
Net cash provided by financing activities................... 260,000 3,149,901 7,046,345
--------- ----------- -----------
Net increase in cash and cash equivalents................... 95,479 2,352,469 2,641,423
Cash and cash equivalents, beginning of period.............. -- 95,479 2,447,948
--------- ----------- -----------
Cash and cash equivalents, end of period.................... $ 95,479 $ 2,447,948 $ 5,089,371
========= =========== ===========
Supplemental Cash Flow Information:
Cash paid for interest.................................... $ -- $ -- $ 22,449
========= =========== ===========
Non-cash investing and financing:
Equipment acquired through capital lease.................. $ -- $ -- $ 234,999
========= =========== ===========
Treasury shares acquired in exchange for accrued
liability............................................... $ -- $ 100,000 $ --
========= =========== ===========
Treasury shares acquired at no cost....................... $ -- $ 60 $ --
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 99
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF MARCH 31, 1998 AND 1999
(INFORMATION FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND FOR
THE PERIOD FROM APRIL 1, 1999 TO JUNE 25, 1999 IS UNAUDITED)
(1) ORGANIZATION AND NATURE OF BUSINESS
BrainPlay.com, Inc.
BrainPlay.com, Inc. was organized and incorporated in Delaware in August
1995. BrainPlay.com, Inc. has previously operated under the names
Thunderbeam.com, Inc., 3dub, Inc., and Warf, Weft or Woof Corporation.
BrainPlay.com, Inc. is an online reseller of children's products. Sales are made
through credit cards and are fulfilled by third parties. Substantially all sales
are made to United States customers and are denominated in United States
dollars. BrainPlay.com, Inc. is located in Denver, Colorado.
Contribution Agreement(unaudited)
On June 25, 1999, BrainPlay.com, Inc. and KB Online, a indirect subsidiary
of Consolidated Stores Corporation ("Consolidated Stores"), entered into a
contribution agreement regarding formation of the joint venture to form
KBkids.com LLC (originally formed as Toyco.com LLC). Terms of the contribution
agreement provide that KB Online receive 80% of the membership units in exchange
for cash and property valued at $80,000,000 and intangibles valued at
$4,000,000. BrainPlay.com, Inc. received the remaining 20% of the membership
units in exchange for substantially all of its assets and liabilities.
Under this contribution agreement, none of KB Online or its affiliates can
sell toy products on the Internet until December 31, 2001, or one year after the
completion of a capital markets transaction, whichever comes first. In addition,
as long as KB Online owns a majority of the membership interests of KBkids.com
LLC, none of KB Online or its affiliates can sell any toy products on the
Internet, unless they are "closeouts."
Planned Offering of Common Stock and Reorganization(unaudited)
The terms of the Contribution Agreement contemplate that immediately before
a planned public offering, KBkids.com Inc. will be formed, and in addition, a
subsidiary of KBkids.com Inc. will be formed to be merged with and into
BrainPlay.com, Inc. The operating agreement of KBkids.com LLC will be amended
and restated to eliminate the two classes of membership units and will provide
for only one class of membership units upon completion of the planned public
offering.
Immediately following the planned offering, a number of structural changes
will result. First, KBkids.com, Inc. will invest the net proceeds of the
offering in KBkids.com LLC, and in return KBkids.com, Inc. will receive
units of membership interest in KBkids.com LLC, which will
represent % of the then outstanding membership units and will become the
sole manager of KBkids.com LLC. As a result of KBkids.com, Inc. obtaining its
interest, KB Online's membership units will represent % of the then
outstanding membership units and BrainPlay.com, Inc.'s membership units will
represent % of the then outstanding membership units. In connection with
this reorganization, KB Online will contribute one membership unit in KBkids.com
LLC to KBkids.com, Inc. in exchange for one share of Class B common stock. Also,
the subsidiary of KBkids.com Inc. will merge into BrainPlay.com, Inc. with
BrainPlay.com, Inc. becoming a wholly-owned subsidiary of KBkids.com, Inc. In
connection with this subsidiary merger, the equity holders of BrainPlay.com,
Inc. will receive, in the aggregate, shares (and/or options to acquire
shares) of Class A common stock in KBkids.com, Inc. After this restructuring,
KBkids.com LLC will be controlled by KBkids.com Inc. as sole manager of
KBkids.com LLC. Additionally, KB Online has the right to exchange its membership
units in KBkids.com LLC into an equivalent number of shares of Class A common
stock.
F-19
<PAGE> 100
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
After the offering, public stockholders receiving stock in the offering
will own shares of Class A common stock in the aggregate, which
will represent of the total issued and outstanding Class A and Class B
common stock. The former equity holders of BrainPlay.com, Inc. will beneficially
own shares of Class A common stock in the aggregate, which will
represent of the total issued and outstanding Class A and Class B common
stock. However, through its ownership of the Class B common stock, Consolidated
Stores will control of the aggregate voting power of KBkids.com Inc., while
the public stockholders will control and the former BrainPlay.com, Inc.
equity holders will control .
Risks and Uncertainties
BrainPlay.com, Inc. is subject to various risks and uncertainties
frequently encountered by companies in the early stages of development,
particularly companies in the new and rapidly evolving market for Internet-based
products and services. Such risks and uncertainties include, but are not limited
to, its limited operating history, an evolving and unpredictable business model
and the management of rapid growth. To address these risks, the BrainPlay.com,
Inc. must, among other things, maintain and increase its customer base,
implement and successfully execute its business and marketing strategy, continue
to develop and upgrade its technology, provide superior customer service and
attract, retain and motivate qualified personnel. There can be no guarantee that
BrainPlay.com, Inc. will be successful in addressing such risks.
Since inception, BrainPlay.com, Inc. has not been profitable and may
continue to lose money for the foreseeable future. BrainPlay.com, Inc. incurred
net losses of $313,959 in fiscal year 1997, $1,046,654 in fiscal year 1998,
$4,755,649 in fiscal 1999. To date, sufficient revenue has not been generated to
cover the substantial amounts spent to create, launch and enhance its services.
If the revenue does not increase substantially, profitability may never be
achieved. Even if future profitability is achieved, profitability may not be
sustained or increased. Historically, funding has been obtained by selling stock
and from bank loans.
(Unaudited): Subsequent to the transaction with KB Online, BrainPlay.com,
Inc.'s operations will be limited to holding its minority investment in
KBkids.com LLC. Accordingly, BrainPlay.com, Inc.'s future financial position,
viability and results of operations will substantially depend on the financial
position, viability and results of operations of KBkids.com LLC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates may affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
BrainPlay.com, Inc. considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. At March 31,
1999, BrainPlay.com, Inc. held investments in high quality commercial paper with
original maturities ranging from 30 to 75 days.
F-20
<PAGE> 101
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk
Financial instruments which potentially subject BrainPlay.com, Inc. to
concentrations of credit risk are primarily accounts receivable. However, in
general, BrainPlay.com, Inc. requires customers to pay with a credit card, for
which authorization is obtained prior to shipment of product.
BrainPlay.com, Inc. maintains a cash investment policy which restricts
investments to ensure preservation of principal and maintenance of liquidity.
Cash and cash equivalents are invested in financial institutions and corporate
securities which BrainPlay.com, Inc. believes to be creditworthy. BrainPlay.com,
Inc. has no significant off-balance sheet concentrations of credit risk such as
foreign exchange contracts, option contracts or other foreign currency hedging
arrangements.
Inventory
Various third-party warehousing agents maintain inventory for
BrainPlay.com, Inc. Inventories are reported at the lower of its cost or market
value using the first-in, first-out method of accounting.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is computed using the straight-line method based on the following
estimated useful lives:
<TABLE>
<S> <C>
Computer software.................................. 3 years
Office and computer equipment...................... 3 years
Leasehold improvements............................. 5 years
Furniture and fixtures............................. 5 years
Leased assets...................................... 3.5 years
</TABLE>
Maintenance and repairs are expensed as incurred, and improvements are
capitalized.
Revenue Recognition
Revenues are generated from the sale of children's software and other
children's products via its Internet website. Merchandise is generally shipped
from suppliers directly to the customer. BrainPlay.com, Inc. recognizes revenue
when merchandise is shipped and provides for allowances for uncollectible
amounts, coupons and discounts.
Website Development Costs
On March 4, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-l"). SOP 98-1
established standards for the capitalization of costs related to internal use
software. In general, costs incurred during the development stage are
capitalized, and costs incurred during the preliminary project and
post-implementation stages are expensed. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 is not expected to
have a material effect on BrainPlay.com Inc.'s financial statements.
Income Taxes
A current tax provision or benefit is recognized for current tax payments
to be made, or refunds to be received, if any. BrainPlay.com, Inc. recognizes
deferred income tax assets and liabilities for the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying balance sheets, and for operating loss and
tax credit carryforwards. The
F-21
<PAGE> 102
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
change in deferred tax assets and liabilities for the period measures the
deferred tax provision or benefit for the period. Effects of changes in enacted
tax laws on deferred tax assets and liabilities are reflected as adjustments to
the tax provision or benefit in the period of enactment. The amount of deferred
tax assets may be reduced by providing a valuation allowance if deemed more
likely than not that some or all of the deferred tax assets will not be
realized.
Stock-Based Compensation
Employee stock option plans and other stock-based compensation arrangements
are accounted for in accordance with the provisions of Accounting Principles
Board No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and
related interpretations. BrainPlay.com, Inc. adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation", which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma disclosures for employee stock grants made in 1997 and future
years as if the fair-value-based method of accounting in SFAS No. 123 had been
applied to these transactions. BrainPlay.com, Inc. accounts for equity
instruments issued to non-employees in accordance with the provisions of SFAS
No. 123.
Comprehensive Income
Effective January 1, 1998, BrainPlay.com, Inc. adopted the provisions of
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. From its inception through
March 31, 1999, BrainPlay.com, Inc. has not had any material transactions that
are required to be reported in comprehensive income as compared to its net loss.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." BrainPlay.com,
Inc. is required to adopt SFAS No. 133 in the fiscal year ended March 31, 2002.
SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. To date, BrainPlay.com, Inc. has not entered into any
derivative financial instruments or hedging activities.
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of March 31, 1998 and
1999:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Computer and office equipment.............. $26,090 $199,531
Furniture and fixtures..................... -- 130,762
Computer software.......................... 8,251 66,929
Leasehold improvements..................... -- 6,962
------- --------
34,341 404,184
Accumulated depreciation................... (3,966) (69,201)
------- --------
$30,375 $334,983
======= ========
</TABLE>
F-22
<PAGE> 103
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense was $549, $3,417 and $65,235 for the years ended March
31, 1997, 1998 and 1999, respectively.
(4) CAPITAL LEASES
Included in the cost of property and equipment are assets obtained through
capital leases. The following is a summary of assets under capital lease as of
March 31, 1999:
<TABLE>
<S> <C>
Furniture and fixtures............................... $124,537
Computer and office equipment........................ 67,084
Computer software.................................... 43,377
--------
Total fixed assets................................... 234,998
Accumulated depreciation........................... (28,570)
--------
Net fixed assets..................................... $206,428
========
</TABLE>
There were no assets under capital lease as of March 31, 1998.
Depreciation expense related to property and equipment under capital lease
was $28,570 for the year ended March 31, 1999. Such amounts are included in the
amounts disclosed in Note 3.
The capital leases are collateralized by the leased assets and are due in
minimum monthly payments totaling $6,288, including interest at a rate of 7.0%.
Interest expense related to capital leases for the year ended March 31, 1999 was
approximately $7,000.
At March 31, 1999, future payments under the capital lease obligations are
as follows:
<TABLE>
<S> <C>
Year ended March 31,
2000................................................. $ 75,457
2001................................................. 75,457
2002................................................. 75,457
2003................................................. 11,910
--------
Total future payments................................ 238,281
Amount related to interest........................... (25,084)
--------
Amount related to principal.......................... 213,197
Current portion...................................... (62,513)
--------
Long-term portion.................................... $150,684
========
</TABLE>
(5) DEBT
Revolving Credit Note
On February 23, 1998, BrainPlay.com, Inc. entered into a revolving credit
note with a bank (the "Revolving Credit Note"). Under the terms of the Revolving
Credit Note, BrainPlay.com, Inc. was allowed to borrow up to $500,000. The
Revolving Credit Note is collateralized by substantially all of BrainPlay.com
Inc.'s assets and matures on August 20, 1999. Interest accrues on the
outstanding principal balance at a rate equal to the bank's prime rate plus
0.25% (8.00% at March 31, 1999). At March 31, 1999, the outstanding principal
balance was $500,000.
F-23
<PAGE> 104
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Note Payable
On November 24, 1998, BrainPlay.com, Inc. entered into a Loan and Security
Agreement ("Loan Agreement") whereby BrainPlay.com, Inc. borrowed $200,000.
Under the terms of the Loan Agreement, the loan is to be repaid in 42 payments
commencing on January 1, 1999, with a balloon payment of $24,000 to be paid on
June 1, 2002. The loan bears interest at 7.5% per annum. At March 31, 1999, the
outstanding principal balance was $187,578.
As of March 31, 1999, annual maturities of BrainPlay.com Inc.'s outstanding
debt described above were as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended March 31,
2000............................................... $550,280
2001............................................... 57,453
2002............................................... 65,650
2003............................................... 14,195
--------
$687,578
========
</TABLE>
(6) MANDATORILY REDEEMABLE, CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
SERIES A SERIES B
------------------------- -------------------------
# OF SHARES $ AMOUNT # OF SHARES $ AMOUNT
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balances, March 31, 1997.................. -- $ -- -- $ --
Sale of Series A preferred stock at
$1.70..................................... 1,823,530 3,100,001 -- --
---------- ---------- ---------- ----------
Balances, March 31, 1998.................. 1,823,530 3,100,001 -- --
Sale of Series B preferred stock at
$2.22................................... -- -- 2,918,918 6,479,998
---------- ---------- ---------- ----------
Balances, March 31, 1999.................. 1,823,530 $3,100,001 2,918,918 $6,479,998
========== ========== ========== ==========
</TABLE>
Authorized Shares
BrainPlay.com, Inc. is authorized to issue preferred stock in various
series with rights and privileges as determined by the Board of Directors. All
shares of preferred stock have a par value of $0.001 per share. In November
1997, the Board of Directors authorized 1,823,530 shares of preferred stock. In
December 1998 and March 1999, BrainPlay.com, Inc. increased the number of
authorized shares of preferred stock to 3,412,166 and 4,754,507, respectively.
Series A and Series B Convertible, Mandatorily Redeemable Preferred Stock
In November 1997, 1,823,530 shares of preferred stock were designated as
Series A Preferred Stock ("Series A") and were issued at a price of $1.70 per
share. In December 1998 and March 1999, 2,930,977 shares of preferred stock were
designated as Series B Preferred Stock ("Series B") and 2,918,918 of those
shares were issued at a price of $2.22 per share.
Series A and Series B annually accrue dividends at stated rates of $0.136
and $0.1776, or 8.0 percent, per share, respectively. Such dividends are
non-cumulative and are payable only when, as, and if declared by the Board of
Directors. In the event of liquidation, the holders of Series A and Series B are
entitled to receive, in preference to any holders of BrainPlay.com Inc.'s common
stock, an amount equal to $1.70 and $2.22 per share, respectively, plus all
accrued or declared but unpaid dividends on the shares of Series A and Series B
then held. Furthermore, the holders of Series A and Series B are entitled to
share in any
F-24
<PAGE> 105
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
remaining liquidation proceeds in proportion to the number of shares of common
stock they would own as if they exercised their full conversion rights (see
below) immediately prior to such liquidation, up to a total additional
distribution of $5.10 per share.
Each share of Series A and Series B is convertible at the option of the
holder into shares of common stock at initial conversion prices of $1.70 and
$2.22 per share, respectively, of common stock. The Series A and Series B
conversion prices will be adjusted upon the occurrence of certain dilutive
equity events.
Each share of Series A and Series B shall automatically be converted into
shares of common stock at the then effective Series A or Series B Conversion
Price upon the earlier of: (i) conversion into common stock of at least 66 2/3%
of all Series A and Series B then outstanding, or (ii) upon the closing of an
initial public offering in which common shares are sold at a price per share of
not less than $8.50 and which provides aggregate proceeds to BrainPlay.com, Inc.
which exceed $15,000,000.
Furthermore, at the election of the holders of at least two-thirds of the
outstanding Series A and Series B, BrainPlay.com, Inc. is required to redeem
Series A and Series B shares at $1.70 and $2.22 per share, respectively, plus
accrued and unpaid dividends.
The Series A and Series B Preferred Stock outstanding as of March 31, 1999
is subject to redemption in eight equal quarterly installments in the following
fiscal years:
<TABLE>
<CAPTION>
SERIES A SERIES B TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Year ended March 31,
2005...................... $ 775,000 $1,620,000 $2,395,000
2006...................... 1,550,000 3,240,000 4,790,000
2007...................... 775,001 1,619,998 2,394,999
---------- ---------- ----------
$3,100,001 $6,479,998 $9,579,999
========== ========== ==========
</TABLE>
Each holder of Series A and Series B shall be entitled to the number of
votes equal to the number of shares of BrainPlay.com's common stock into which
such shares of Series A and Series B could be converted.
(7) STOCKHOLDERS' EQUITY
Restricted Stock
In August 1996, BrainPlay.com, Inc. required its two founders to enter into
a Founder Stock Restriction Agreement (the "FSR Agreement"), under which all of
the 2,700,000 shares of outstanding common stock owned by the founders became
restricted. Under the FSR Agreement, BrainPlay.com, Inc. has the right to
repurchase unvested common shares at the original issuance price of $0.001 per
share upon termination of either founder's business relationship with
BrainPlay.com, Inc. Fifty percent of the restrictions lapsed upon adoption of
the FSR Agreement. The remaining restrictions lapse ratably over a three year
period, and are subject to acceleration under certain conditions. During the
year ended March 31, 1998, one of the founders terminated his business
relationship with BrainPlay.com, Inc. He retained the 904,392 shares which had
been released from the repurchase option, and 100,000 restricted shares were
repurchased by BrainPlay.com, Inc. for $100. As allowed for in the FSR
Agreement, the remaining 345,608 restricted shares were purchased by the
remaining founder for a nominal amount. In connection with the shares the
remaining founder was allowed to purchase, BrainPlay.com, Inc. recorded a
compensation charge of $345,262 for the fiscal year ended March 31, 1998.
F-25
<PAGE> 106
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In November 1997, in connection with the sale of shares of Series A
Preferred Stock, 480,000 of the remaining founder's common stock became subject
to a second restriction agreement (the "Management Agreement"). Pursuant to the
terms of the Management Agreement, BrainPlay.com, Inc. has the right to
repurchase unvested common shares at the original issuance price of $0.001 per
share upon termination of the founder's employment with BrainPlay.com, Inc. The
restrictions lapse ratably over a thirty-two month period.
As of March 31, 1999, restrictions had lapsed with regard to 1,496,297 of
the 1,830,000 shares collectively subject to the FSR Agreement and the
Management Agreement.
Treasury Stock
In addition to the shares repurchased under the FSR Agreement, during
fiscal 1998 BrainPlay.com, Inc. purchased 300,000 shares of common stock from
the departing founder. Cash paid at the date of repurchase totaled $70,000. In
addition, as of March 31, 1998, BrainPlay.com, Inc. accrued $100,000 relating to
amounts contingently due for the repurchase. This amount was paid to the founder
during fiscal 1999 (Note 10).
During fiscal 1998, the other founder returned 60,000 shares of common
stock held by him to BrainPlay.com, Inc. for no consideration.
Stock Option Plan
In March 1998, BrainPlay.com, Inc. adopted a stock option plan (the "Plan")
whereby officers, employees and independent contractors may be granted options
for approximately 950,000 shares of BrainPlay.com's common stock. Under the
terms of the Plan, the Board of Directors may grant either nonqualified or
incentive options, as defined by the Internal Revenue Code. The purchase price
of the shares subject to incentive stock options will be the fair market value
of the common stock on the date of grant. If the grantee owns more than 10% of
the voting power of all classes of stock on the date of grant, the purchase
price of the shares subject to a nonqualified stock option must be at least 110%
of the fair market value at the date of grant and the exercise term will be up
to five years from the date of grant. All incentive options granted under the
Plan are exercisable up to eight years from the date of grant. During fiscal
1997, 1998 and 1999, BrainPlay.com, Inc. issued options for 10,000, 10,000 and
727,250 shares of common stock under the Plan, respectively. As of March 31,
1999, options for 615,000 shares of common stock were still outstanding under
the Plan.
SFAS No. 123 defines a fair value-based method of accounting for employee
stock options or similar equity instruments. However, SFAS No. 123 allows the
continued measurement of compensation cost for such plans using the intrinsic
value-based method prescribed by APB No. 25, provided that pro forma disclosures
are made of net income or loss assuming the fair value based method of SFAS No.
123 had been applied. BrainPlay.com, Inc. has elected to account for its
stock-based compensation plans under APB No. 25; accordingly, for purposes of
the pro forma disclosures presented below, BrainPlay.com, Inc. has computed the
fair values of all options granted during fiscal 1997, 1998 and 1999 using the
Black-Scholes pricing model and the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Risk-free interest rate............ 6.73% 6.22% 5.11%
4 4 4
Expected lives..................... years years years
Expected volatility................ 0.001% 0.001% 0.001%
Expected dividend yield............ 0% 0% 0%
</TABLE>
F-26
<PAGE> 107
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
To estimate the expected lives of options for this valuation, it was
assumed that all options will be exercised upon becoming fully vested. All
options granted vest over a four year period from the date of grant. Cumulative
compensation cost recognized in pro forma net income or loss with respect to
options that are forfeited prior to vesting is adjusted as a reduction of pro
forma compensation expense in the period of forfeiture.
The total fair value of options granted was computed to be approximately
$459, $429 and $56,941 for the years ended March 31, 1997, 1998 and 1999,
respectively. This amount is amortized ratably over the vesting periods of the
options. Pro forma stock-based compensation, net of the effect of forfeitures,
was $38, $150 and $3,668 for fiscal 1997, 1998 and 1999, respectively. If
BrainPlay.com, Inc. had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, BrainPlay.com, Inc.'s net loss would have been
reported as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Net loss:
As reported........... $(313,959) $(1,046,654) $(4,755,649)
========= =========== ===========
Pro forma............. $(313,997) $(1,046,804) $(4,759,317)
========= =========== ===========
</TABLE>
A summary of option activity for each of the three years in the period ended
March 31,1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding at March 31, 1996........ -- $ --
Granted.............................. 10,000 0.20
-------- -----
Outstanding at March 31, 1997........ 10,000 0.20
Granted.............................. 10,000 0.20
-------- -----
Outstanding at March 31, 1998........ 20,000 0.20
Granted.............................. 727,250 0.45
Forfeited............................ (129,395) 0.20
Exercised............................ (2,855) 0.20
-------- -----
Outstanding at March 31, 1999........ 615,000 $0.49
======== =====
Exercisable at March 31, 1999........ 68,222 $0.36
======== =====
</TABLE>
The weighted average fair value of options granted during the years ended
March 31, 1997, 1998 and 1999 were $0.05, $0.04 and $0.10, respectively.
In connection with 10,000 options granted in fiscal 1998, BrainPlay.com,
Inc. recognized deferred compensation expense of $8,000. This amount has been
deferred and is being amortized into income over the four-year vesting period of
the options. As of March 31, 1999, deferred compensation totaled $4,000, which
has been netted against additional paid-in capital in the accompanying balance
sheets.
F-27
<PAGE> 108
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable under the Plan at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- -------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.20 288,800 7.28 $0.20 46,814 $0.20
$0.70 -- $0.77 326,200 7.92 $0.75 21,408 $0.72
</TABLE>
Stock Warrants
BrainPlay.com, Inc. has issued warrants to purchase Series A Preferred
Stock in connection with certain capital leases entered into in fiscal 1999. The
warrants were determined to have a nominal value using the Black-Scholes option
pricing model and the following weighted average assumptions: risk-free interest
rate of 4.49%, expected lives of four years, expected volatility of 75% and no
expected dividend yield.
The following table summarizes information about stock warrants outstanding
and exercisable under the Plan at March 31, 1999:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
-------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
WARRANTS CONTRACTUAL EXERCISE WARRANTS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$1.70 12,059 7.89 $1.70 12,059 $1.70
</TABLE>
(8) INCOME TAXES
For income tax purposes, BrainPlay.com, Inc. has approximately $6.0 million
of net operating loss carryforwards at March 31, 1999 related to the period from
fiscal 1996 through fiscal 1999. The net operating loss for tax purposes differs
from that for financial reporting purposes due primarily to expirations of net
operating loss carryforwards and differences in reporting certain transactions
for income tax and financial reporting purposes. The net operating loss
carryforwards expire at various dates beginning in 2011.
The components of the net deferred income tax asset at March 31, 1998 and
1999 were as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1999
-------- ----------
<S> <C> <C>
Net operating loss carryforwards........ $505,456 $2,233,038
Other................................... 2,052 48,327
Valuation allowance..................... (507,508) (2,281,365)
-------- ----------
$ -- $ --
======== ==========
</TABLE>
BrainPlay.com, Inc. has determined that approximately $508,000 and
$2,281,000 of net deferred tax assets as of March 31, 1998 and 1999,
respectively, did not satisfy the realization criteria set forth in SFAS No.
109, "Accounting for Income Taxes." Accordingly, a valuation allowance was
recorded against the entire net deferred tax asset.
F-28
<PAGE> 109
BRAINPLAY.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
For the years ended March 31, 1997, 1998 and 1999, BrainPlay.com, Inc.
recorded no provision for income taxes, which differs from the Federal statutory
rate of 34% due to the following reasons:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Benefit at statutory rate.... $106,746 $355,862 $1,616,921
State taxes, net of federal
benefit.................... 10,360 34,540 156,936
Increase in valuation
allowance.................. (117,106) (390,402) (1,773,857)
-------- -------- ----------
$ -- $ -- $ --
======== ======== ==========
</TABLE>
(9) EMPLOYEE BENEFIT PLAN
In March 1999, BrainPlay.com, Inc. implemented a defined contribution plan
under Section 401(k) of the Internal Revenue Code. Under the plan, eligible
employees may contribute a portion of their compensation. As of March 31, 1999,
no employer matching contributions have been made to the plan.
(10) COMMITMENTS AND CONTINGENCIES
Operating Leases
BrainPlay.com, Inc. leases administrative offices and certain equipment
under noncancelable operating lease agreements.
Rent expense under these leases for the years ended March 31, 1997, 1998
and 1999 was $7,988, $22,646 and $46,448, respectively. The following is a
schedule of future minimum lease payments:
<TABLE>
<S> <C>
For the year ended March 31,
2000............................................... $105,862
2001............................................... 111,546
2002............................................... 114,438
2003............................................... 118,350
2004............................................... 67,480
--------
$517,676
========
</TABLE>
Payable to Founder
In November 1997, BrainPlay.com, Inc. entered into a Consulting Termination
Agreement with one of its founders. Under the agreement, BrainPlay.com, Inc.
agreed to repurchase shares of common stock in exchange for $70,000 in cash and
an additional $100,000 payable upon the culmination of certain events. The
additional $100,000 was accrued as of March 31, 1998, and is included in accrued
liabilities in the accompanying fiscal 1998 balance sheet. The amount was paid
to the founder during fiscal 1999.
Legal Matters
BrainPlay.com, Inc. is subject to various claims and business disputes in
the ordinary course of business. While the outcome of these matters cannot be
predicted with certainty, management anticipates that the ultimate outcome of
these issues will not have a material impact on BrainPlay.com, Inc.'s financial
position, results of operations or cash flows.
F-29
<PAGE> 110
[KBKIDS.COM LOGO]
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by KBkids.com Inc. in connection
with the sale of common stock being registered. All expenses other than the
Securities and Exchange Commission registration fee, the NASD filing fee and the
Nasdaq National Market listing fee are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $55,440
NASD Filing Fee............................................. 21,500
Nasdaq National Market Listing Fee.......................... *
Transfer Agent Fees......................................... *
Accounting Fees and Expenses................................ *
Blue Sky Fees and Expenses.................................. *
Printing and Engraving Fees and Expenses.................... *
Miscellaneous Expenses...................................... *
-----
Total..................................................... $ *
=====
</TABLE>
- ---------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the General Corporation Law of the State of Delaware
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no cause to believe their conduct was unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
acted in any of the capacities set forth above, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if the person acted under similar
standards set forth above, except that no indemnification may be made in respect
to any claim, issue or matter as to which such person shall have been adjudged
to be liable to the corporation unless and only to the extent that the court in
which such action or suit was brought shall determine that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to be indemnified for such expenses
that the court shall deem proper.
Section 145 further provides that to the extent that a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in the
previous two paragraphs, or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of
II-1
<PAGE> 112
any other rights to which the indemnified party may be entitled; and that the
corporation may purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under such Section 145.
Section 102(b)(7) provides that a corporation in its original certificate
of incorporation or an amendment thereto validly approved by stockholders may
eliminate or limit personal liability of members of its board of directors for
monetary damages for breach of a director's fiduciary duty. However, no such
provision may eliminate or limit the liability of a director for breaching his
duty of loyalty, failing to act in good faith, engaging in intentional
misconduct or knowingly violating a law, paying a dividend or approving a stock
repurchase which was illegal, or obtaining an improper personal benefit. A
provision of this type has no effect on the availability of equitable remedies,
such as injunction or rescission, for breach of fiduciary duty.
The certificate of incorporation of KBkids.com Inc. provides that each
person who is a party to or involved in any, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
is or was a director or officer of KBkids.com Inc. or is or was serving at the
request of KBkids.com Inc. as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise, shall
be indemnified and held harmless by KBkids.com Inc. to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as exists or
may be amended, but only to the extent that such amendment broadens the
KBkids.com Inc.'s indemnity powers, against all expense, liability and loss
reasonably incurred by such person in connection therewith. The certificate of
incorporation provides that the right to indemnification contained therein is a
contract right and includes the right to be paid by KBkids.com Inc. the expenses
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that if the General Corporation Law of the State of Delaware
requires, the payment of such expenses incurred in advance of the final
disposition of a proceeding shall be made only upon delivery to KBkids.com Inc.
of an undertaking to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified.
The Company also maintains directors' and officers' liability insurance
covering certain liabilities incurred by the directors and officers of the
Company in connection with the performance of their duties. We also have entered
into an indemnification agreement with each of our executive officers and
directors. These indemnification agreements require us to indemnify our officers
and directors against liabilities that may arise by reason of their status or
service as directors or officers, other than liabilities arising from willful
misconduct of a culpable nature, advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified and obtain
directors' and officers' liability insurance if available on reasonable terms.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The information required by this Item 16(a) is set forth in the Index to
Exhibits accompanying this Registration Statement and is incorporated herein by
reference.
(b) Financial Statement Schedules
None.
II-2
<PAGE> 113
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-3
<PAGE> 114
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM S-1 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN DENVER, COLORADO ON THE 26TH DAY OF JANUARY, 2000.
KBkids.com Inc.
By: /s/ SRIKANT SRINIVASAN
------------------------------------
Srikant Srinivasan, Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below, except Scott Beck, constitutes and appoints Srikant Srinivasan and
Michael Potter, or any of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and any
registration statement for the same offering filed pursuant to Rule 462 under
the Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact, agent, or his substitute may lawfully do or cause to be done
by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SRIKANT SRINIVASAN Chief Executive Officer and
- --------------------------------------------------- Director
Srikant Srinivasan January 26, 2000
/s/ MICHAEL WAGNER Chief Financial Officer and
- --------------------------------------------------- Treasurer
Michael Wagner January 26, 2000
/s/ SCOTT BECK Director
- ---------------------------------------------------
Scott Beck January 26, 2000
/s/ ALBERT BELL Director
- ---------------------------------------------------
Albert Bell January 26, 2000
/s/ MICHAEL GLAZER Director
- ---------------------------------------------------
Michael Glazer January 26, 2000
/s/ MICHAEL POTTER Director
- ---------------------------------------------------
Michael Potter January 26, 2000
</TABLE>
II-4
<PAGE> 115
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- ------- ---------------------- ------
<C> <S> <C>
*1.1 Form of Underwriting Agreement among Credit Suisse First
Boston, as representatives of the several underwriters,
and KBkids.com Inc. ......................................
2.1 Contribution Agreement, dated May 18, 1999, by and among KB
Online Holdings LLC, BrainPlay.com, Inc. and KBkids.com
LLC (formerly Toyco.com LLC)..............................
*2.2 Agreement and Plan of Merger between a wholly-owned
subsidiary of KBkids.com and BrainPlay.com, Inc. .........
*3.1 Restated Certificate of Incorporation of KBkids.com Inc. ...
*3.2 Bylaws of KBkids.com Inc. ..................................
*3.3 Articles of Organization of KBkids.com LLC..................
*3.4 Amended and Restated Operating Agreement of KBkids.com
LLC.......................................................
*3.5 Certificate of Incorporation of KBkids.com Merger Sub.......
*3.6 Bylaws of KBkids.com Merger Sub.............................
3.7 Certificate of Incorporation of BrainPlay.com, Inc. ........
3.8 Bylaws of BrainPlay.com, Inc. ..............................
*4.1 Form of KBkids.com Inc. Common Stock Certificate............
*5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.......
*10.1 Registration Rights Agreement, dated , 2000, by
and between KBkids.com Inc. and KB Online Holdings LLC....
*10.2 Registration Rights Agreement, dated , 2000,
by and among KBkids.com Inc. and the equityholders of
BrainPlay.com, Inc. ......................................
*10.3 Amended and Restated Supply Agreement, dated January ,
2000, by and among KB Toy of Massachusetts, Inc., KB
Online Holdings LLC and KBkids.com LLC....................
*10.4 Amended and Restated Services Agreement dated January ,
2000, by and among KB Toy of Massachusetts, Inc., KB
Online Holdings LLC and KBkids.com LLC....................
*10.5 Amended and Restated Domain Name Agreement, dated January ,
2000, by and between KB Holdings, Inc. and KBkids.com
LLC.......................................................
*10.6 Amended and Restated Sublicense Agreement, dated January ,
2000, by and between KB Toys of Massachusetts, Inc. and
KBkids.com LLC............................................
*10.7 Direct Marketing Services Agreement between Keystone
Fulfillment, Inc. (now known as Keystone Internet
Services, Inc.) and KBkids.com LLC........................
10.8 Task Order, dated as of August 25, 1999, between Canicom,
Inc. and KBkids.com LLC...................................
10.9 Advertising Agency Agreement, dated August 20, 1999, between
Goldberg Moser O'Neill and KBkids.com LLC.................
*10.10 1999 KBkids.com Inc. Stock Option Plan......................
10.11 1999 KBkids.com LLC Option Plan.............................
10.12 Employment Agreement, dated May 18, 1999, among Toyco.com
LLC (now known as KBkids.com LLC), KB Consolidated, Inc.
and Srikant Srinivasan....................................
10.13 Employment Agreement, dated June 25, 1999, among KBkids.com
LLC, K B Toy of Massachusetts, Inc. and Michael Wagner....
10.14 Employment Agreement, dated June 25, 1999, between
KBkids.com LLC and Shawn Davison..........................
</TABLE>
II-5
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- ------- ---------------------- ------
<C> <S> <C>
10.15 Employment Agreement, dated June 25, 1999, between
KBkids.com LLC and John Jolly.............................
*10.16 Consulting Agreement, dated March , 2000, between
KBkids.com Inc. and William Kelley........................
10.17 Employment Agreement, dated June 25, 1999, between
KBkids.com LLC and Scott Wilder...........................
10.18 Letter of Employment Agreement, dated July 7, 1999, between
KBkids.com LLC and Cecilia Atkinson.......................
10.19 Letter of Employment Agreement, dated July 7, 1999, between
KBkids.com LLC and Marty Smuin............................
10.20 Letter of Employment Agreement, dated September 2, 1999,
between KBkids.com and David Novitsky
10.21 Consulting Agreement, dated June 25, 1999, between
Consolidated Stores Corporation and Michael J. Wagner.....
10.22 Agreement of Lease for Denver Place Plaza Tower, Suite 1000,
between Denver-Stellar Associates Limited Partnership and
KBkids.com LLC............................................
*10.23 Form of Indemnification Agreement for Directors and
Executive Officers of KBkids.com Inc......................
10.24 Promissory Note, dated December 29, 1999, made by Srikant
Srinivasan and payable to BrainPlay.com, Inc..............
10.25 Stock Pledge Agreement, dated December 29, 1999, made by
Srikant Srinivasan in favor of BrainPlay.com, Inc.........
10.26 Promotional Sponsorship Agreement, dated September 23, 1999,
between Netcentives Inc. and KBkids.com...................
*11.1 Statement regarding Computation of per Share Earnings.......
*21.1 Subsidiaries of the Registrant..............................
*23.1 Consent of Benesch, Friedlander, Coplan & Aronoff LLP
(included in 5.1).........................................
23.2 Consent of Arthur Andersen LLP..............................
24.1 Power of Attorney (included in Part II of Registration
Statement)................................................
27.1 Financial Data Schedule for KBkids.com LLC..................
27.2 Financial Data Schedule for BrainPlay.com, Inc. ............
</TABLE>
- ---------------
* To be filed by amendment.
II-6
<PAGE> 1
Exhibit 2.1
CONTRIBUTION AGREEMENT
by and among
KB ONLINE HOLDINGS, INC.,
BRAINPLAY.COM, INC.
and
TOYCO.COM LLC
May 18, 1999
<PAGE> 2
TABLE OF CONTENTS
PAGE
ARTICLE 1 DEFINITIONS..................................................1
1.1 Definitions..................................................1
ARTICLE 2 CONTRIBUTIONS................................................5
2.1 Contributions by KB Online Holdings..........................5
2.2 Contributions by BrainPlay...................................5
2.3 Assumed Liabilities..........................................5
2.4 Amount and Form of Consideration.............................6
2.5 Closing......................................................6
2.6 Transactions at Closing......................................6
ARTICLE 3 REPRESENTATIONS OF KB ONLINE HOLDINGS...............................7
3.1 Corporation Existence and Power..............................7
3.2 Corporate Authorization and Execution........................8
3.3 Governmental Authorization...................................8
3.4 Non-Contravention............................................8
3.5 Litigation...................................................8
3.6 Assets.......................................................8
3.7 Brokers......................................................9
3.8 Material Adverse Effect......................................9
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BRAINPLAY..........................9
4.1 Corporate Existence and Power................................9
4.2 Corporate Authorization......................................9
4.3 Governmental Authorization...................................9
4.4 Non-Contravention...........................................10
4.5 Capitalization..............................................10
4.6 Financial Statements........................................10
4.7 Absence of Certain Changes..................................11
4.8 No Undisclosed Material Liabilities.........................12
4.9 Labor Matters...............................................12
4.10 Contracts...................................................13
4.11 Litigation..................................................14
4.12 Compliance With Laws and Court Orders.......................14
4.13 Properties..................................................15
4.14 ERISA Representations.......................................15
4.15 Intellectual Property.......................................15
i
<PAGE> 3
4.16 Insurance Coverage..........................................17
4.17 Taxes.......................................................17
4.18 Licenses and Permits........................................19
4.19 Brokers.....................................................19
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF TOYCO.............................19
5.1 Existence and Power.........................................19
5.2 Authorization...............................................19
5.3 Governmental Authorization..................................19
5.4 Non-Contravention...........................................20
5.5 Litigation..................................................20
5.6 Brokers.....................................................20
5.7 Liabilities.................................................20
5.8 Contracts...................................................20
ARTICLE 6 COVENANTS OF KB ONLINE HOLDINGS.....................................21
6.1 Confidentiality.............................................21
6.2 Access......................................................21
6.3 Notice of Certain Events....................................21
6.4 Use of KBToys.com Name......................................22
6.5 Merchandise Supply..........................................22
6.6 Intercompany Services.......................................22
6.7 Forbearance.................................................23
6.8 Srinivasan Employment Agreement.............................23
ARTICLE 7 COVENANTS OF BRAINPLAY.............................................23
7.1 Conduct of the Business.....................................23
7.2 Access......................................................24
7.3 Notice of Certain Events....................................24
7.4 Other Offers................................................24
7.5 Confidentiality.............................................25
7.6 Books and Records...........................................25
ARTICLE 8 COVENANTS OF ALL PARTIES...........................................25
8.1 Reasonable Best Efforts; Further Assurances.................25
8.2 Certain Filings.............................................25
8.3 Public Announcements........................................26
8.4 Capital Markets Transaction.................................26
8.5 Put Option..................................................27
8.6 Guaranty....................................................27
ii
<PAGE> 4
ARTICLE 9 EMPLOYEES AND EMPLOYEE BENEFITS.....................................27
9.1 Employees...................................................27
9.2 Equity Program..............................................28
9.3 BrainPlay Administrative Costs..............................28
9.4 Third Party Beneficiaries...................................28
ARTICLE 10 CONDITIONS TO CLOSING..............................................28
10.1 Conditions to Obligations of All Parties....................28
10.2 Conditions to Obligation of KB Online Holdings and Toyco....29
10.3 Conditions to Obligations of BrainPlay......................30
ARTICLE 11 SURVIVAL; INDEMNIFICATION..........................................30
11.1 Survival....................................................30
11.2 Indemnification.............................................31
11.3 Procedures..................................................31
11.4 Threshold and Limitation on Indemnification.................32
11.5 Failure to Meet KB Funding Obligations......................32
11.6 Injunctive Relief...........................................32
11.7 Specific Performance........................................32
ARTICLE 12 TERMINATION........................................................32
12.1 Events of Termination.......................................32
12.2 Effect of Termination.......................................33
ARTICLE 13 MISCELLANEOUS......................................................34
13.1 Notices.....................................................34
13.2 Binding Effect; Assignment..................................35
13.3 Third Party Beneficiaries ..................................35
13.4 Headings....................................................35
13.5 Governing Law; Consent to Jurisdiction......................35
13.6 Waivers.....................................................35
13.7 Expenses....................................................36
13.8 Severability................................................36
13.9 Amendment...................................................36
13.10 Entire Agreement............................................36
13.11 Counterparts................................................37
CSC GUARANTY..................................................................38
MAC FRUGAL'S GUARANTY.........................................................41
iii
<PAGE> 5
SCHEDULES
Schedule 2.1(a) KB Online Assets
Schedule 2.1(b) KB Online Contributions
Schedule 2.1(c) KB Intangibles
Schedule 2.2(a) BrainPlay Assets
Schedule 2.2(b) Excluded BrainPlay Assets
Schedule 2.3(a) Other Assumed Liabilities
Schedule 2.3(b) Excluded Liabilities
Schedule 3.6 KB Online Liens
Schedule 4.4 Required Consents
Schedule 4.5 Capitalization
Schedule 4.6 Financial Statements
Schedule 4.7 Certain Changes
Schedule 4.8 Certain Liabilities
Schedule 4.9 Labor Matters
Schedule 4.10 Contracts
Schedule 4.11 Litigation
Schedule 4.13 BrainPlay Liens
Schedule 4.14 Employee Plans and Benefit Arrangements
Schedule 4.15 Intellectual Property
Schedule 4.16 Insurance
Schedule 4.17 BrainPlay Tax Basis of Assets
Schedule 4.18 Licenses and Permits
Schedule 7.1 Conduct of the Business
Schedule 8.5 Selling Stockholders' Cash Contributions
EXHIBITS
Exhibit A Assumption Agreement
Exhibit B Operating Agreement
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<PAGE> 6
CONTRIBUTION AGREEMENT
This CONTRIBUTION AGREEMENT, dated as of this 18th day of May, 1999
(this "Agreement"), is made by and among KB Online Holdings, Inc., an Ohio
corporation ("KB Online Holdings"), BrainPlay.com, Inc., a Delaware corporation
("BrainPlay"), and Toyco.com LLC, an Ohio limited liability company ("Toyco").
RECITALS
A. BrainPlay currently markets and sells toys, children's video games,
children's software, children's books, children's music and children's sporting
goods (collectively, "Toy Products") using web-based, on-line or Internet
retailing distribution channels, including operation of its website (the
"Business").
B. Toyco was formed pursuant to Chapter 1705 of the Ohio Revised Code
to (i) acquire certain assets from KB Online Holdings and/or its Affiliates (as
defined herein) and from BrainPlay and (ii) assume certain liabilities of
BrainPlay.
C. KB Online Holdings (directly or through certain Affiliates (as
defined herein)) desires to contribute to Toyco, and Toyco desires to accept and
acquire from KB Online Holdings (directly or through certain Affiliates
thereof), (i) all of the right, title and interest of KB Online Holdings in the
KB Online Assets (as defined herein) and (ii) the KB Funding Obligations (as
defined herein) in exchange for an Interest in Toyco.
D. BrainPlay desires to contribute to Toyco, and Toyco desires to
accept and acquire from BrainPlay, all of the right, title and interest of
BrainPlay in the BrainPlay Assets (as defined herein), subject to the Assumed
Liabilities (as defined herein), in exchange for an Interest in Toyco.
NOW, THEREFORE, in consideration of the mutual promises and
representations, warranties, covenants and agreements hereinafter set forth and
other good and valuable consideration, KB Online Holdings, BrainPlay and Toyco
hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. (a) The following terms, as used herein, have the
following meanings:
"AFFILIATE" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by or under common control with
such Person.
"ASSUMPTION AGREEMENT" means that certain Assumption Agreement between
BrainPlay and Toyco, to be entered into on the Closing Date, substantially in
the form of Exhibit A attached hereto.
<PAGE> 7
"BALANCE SHEET" means the unaudited balance sheet of BrainPlay as of
March 31, 1999.
"BENEFIT ARRANGEMENT" means any employment, severance or similar
contract, arrangement or policy, or plan or arrangement (whether or not written)
providing for severance benefits, insurance coverage (including any self-insured
arrangements), workers' compensation, disability payments, supplemental
unemployment benefits, vacation benefits, retirement benefits, deferred
compensation, profit-sharing, bonuses, stock options, stock appreciation rights
or other forms of incentive compensation of post-retirement insurance,
compensation of benefits that (i) is not an Employee Plan, (ii) is entered into
or maintained, as the case may be, by BrainPlay or any of its ERISA Affiliates
and (iii) covers any employee or former employee of BrainPlay or any Leased
Employee.
"CHARTER" means, with respect to any juridical Person, the Certificate
or Articles of Incorporation, or other analogous organizational or constituent
documents of such Person (including, in the case of a limited liability company,
such company's limited liability company or operating agreement).
"CLOSING DATE" means the date of Closing.
"CODE" means the United States Internal Revenue Code of 1986, as
amended.
"EMPLOYEE PLAN" means any "employee benefit plan", as defined in
Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by BrainPlay or any of its ERISA
Affiliates and (iii) covers any employee or former employee of BrainPlay or any
Leased Employee.
"ERISA" means the Employee Retirement Income Security Act of 1974, or
any successor statute, and the rules and regulations promulgated thereunder, and
in the case of any reference section of any such statute, rule or regulation,
any successor section thereto, in each case, as from time to time amended and
then in effect.
"ERISA Affiliate" means of any entity, any other entity which, together
with such entity, would be treated as a single employer under Section 414 of the
Code.
"H-S-R Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"INTELLECTUAL PROPERTY RIGHTS" means any trademark, service mark, trade
name, invention, patent, trade secret, copyright, know-how (including any
registrations or applications for registration of any of the foregoing), or any
other similar type of proprietary intellectual property right.
"INTEREST" means the entire ownership interest in Toyco represented by
one or more Units.
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<PAGE> 8
"KNOWLEDGE," with respect to any party, means actual knowledge of such
party's officers, key employees and directors, together with matters which such
individuals should have known consistent with their position.
"LEASED EMPLOYEE" means each individual who is considered to be a
"leased employee" of BrainPlay within the meaning of Section 414(n) of the Code.
"LIENS" means, with respect to any property or asset, any mortgage,
lien, pledge, charge, security interest, encumbrance or other adverse claim of
any kind and in respect of such property or asset. For the purposes of this
Agreement, a person shall be deemed to own, subject to a lien, any property or
asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sales agreement, capital lease or other title
retention agreement relating to such property or asset.
"MATERIAL ADVERSE EFFECT" means any change, event or effect that is or
is reasonably likely to be materially adverse to the business, financial
condition or results of operations of a party taken as a whole or to the
transactions contemplated by this Agreement; provided, however, that a Material
Adverse Effect shall not include any adverse effect following the date of this
Agreement that is attributable to the announcement of the transactions
contemplated hereby or to general market conditions.
"OPERATING AGREEMENT" means that certain Operating Agreement for Toyco
between KB Online Holdings and BrainPlay, to be entered into as of the Closing
Date, substantially in the form of Exhibit B attached hereto.
"PERCENTAGE INTEREST" means the amount, expressed as a percentage, that
the number of Units owned by a Person at any given time bears to the total
number of Units owned by all Persons as of such date.
"PERSON" means an individual, corporation, limited liability company,
partnership, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"SRINIVASAN EMPLOYMENT AGREEMENT" means that certain Employment
Agreement between Toyco and Srikant Srinivasan, to be entered into as of the
date of this Agreement, and effective as of the Closing Date.
"SUBSIDIARIES" means, with respect to any Person, any other entity of
which securities or other ownership interests having extraordinary voting power
to elect a majority of the Board of Directors or other persons performing
similar functions are at the time directly or indirectly owned by such Person.
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<PAGE> 9
"UNITS" means a unit of ownership interest in Toyco representing an
undivided interest in the capital contributions and capital accounts of Toyco.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
Term Section
---- -------
Agreement Preamble
Assumed Liabilities 2.3
Balance Sheet Date 2.3
BrainPlay Preamble
BrainPlay Assets 2.2
BrainPlay Intellectual Property Rights 4.15(a)
Business Recitals
Capital Markets Transaction 8.4(a)
Closing 2.5
Contracts 4.10(b)
Damages 11.2(a)
Excluded Liabilities 2.3
Indemnified Party 11.3(a)
Indemnifying Party 11.3(a)
Insurance Policies 4.16
Internet Distribution 6.7(a)
KB Funding Obligations 2.1(a)
KB Indemnitees 11.2(a)
KB Indemnitors 11.2(b)
KB Intangibles 2.1(c)
KB Online Assets 2.1(a)
KB Online Holdings Preamble
License Agreement 6.4
Licensor 2.6(a)(iii)
Permits 4.18
Public Entity 8.4(a)
Put Trigger Date 8.5(a)
Selling Stockholder 8.5(a)
Supply Agreement 6.5
Services Agreement 6.6
Taxes 4.17(j)
Tax Returns 4.17(j)
Toyco Preamble
Toy Products Recitals
Transaction Proposal 7.4
4
<PAGE> 10
(c) Definitions shall be equally applicable to both the singular and
plural forms of the terms defined, and references to the masculine, feminine or
neuter gender shall include each other gender.
ARTICLE 2
CONTRIBUTIONS
2.1 Contributions By KB Online Holdings. (a) Upon the terms and subject
to the conditions of this Agreement, during a twelve-month term commencing on
the Closing Date, KB Online Holdings (directly or through certain Affiliates)
shall assign, transfer, convey and deliver to Toyco, and Toyco shall acquire and
accept from KB Online Holdings, (i) all of the right, title and interest of KB
Online Holdings in and to the assets, rights and properties set forth on
Schedule 2.1(a) which shall he attached hereto prior to the Closing, wherever
such assets, rights and properties are located (collectively, the "KB Online
Assets"), free and clear of all Liens, except as set forth on Schedule 3.6
attached hereto, (ii) certain obligations of KB Online Holdings to provide cash
to fund Toyco's operations ("KB Funding Obligations") and (iii) all of
Licensor's right, title and interest in certain intangibles relating to its
website for the sale of toys using the name "K.B Toys", as set forth on Schedule
2.1(c) which shall be attached hereto prior to the Closing (the "KB
Intangibles"). The aggregate value of the KB Online Assets, together with the KB
Funding Obligations, is deemed to be $80,000,000; the stipulated value of the KB
Intangibles is $4,000,000.
(b) The KB Online Assets, together with the KB Funding Obligations,
will be provided to Toyco in accordance with Schedule 2.1(b) attached hereto.
2.2 Contributions By Brainplay. Upon the terms and subject to the
conditions of this Agreement, at the Closing, BrainPlay shall assign, transfer,
convey and deliver to Toyco, and Toyco shall acquire and accept from BrainPlay,
all of the right, title and interest of BrainPlay in and to all assets, rights
and properties of BrainPlay, wherever such assets, rights and properties are
located (collectively, the "BrainPlay Assets"), including without limitation the
assets set forth on Schedule 2.2(a) which shall be attached hereto prior to the
Closing. Notwithstanding the foregoing, the assets set forth on Schedule 2.2(b)
attached hereto shall be retained by BrainPlay (the "Excluded Assets").
2.3 Assumed Liabilities. Upon the terms and subject to the conditions
of this Agreement, at the Closing BrainPlay shall assign and Toyco shall assume
and be liable for any and all liabilities and obligations of BrainPlay (i)
reflected on the balance sheet of BrainPlay as of March 31, 1999 attached hereto
as Schedule 4.6 (the "Balance Sheet Date"), (ii) arising since the Balance Sheet
Date in the ordinary course consistent with past practice which are not material
liabilities, (iii) arising under the Contracts, on or after the Closing Date,
(iv) arising under the Employee Plans or Benefit Arrangements on or after the
Closing Date hereof and (v) other liabilities set forth on Schedule 2.3(a)
(collectively, the "Assumed Liabilities"). In no event, shall Toyco assume or be
liable for any obligations of BrainPlay set forth on Schedule 2.3(b) attached
hereto (the "Excluded Liabilities").
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<PAGE> 11
2.4 AMOUNT AND FORM OF CONSIDERATION. (a) In consideration for their
aggregate contribution to Toyco of the KB Online Assets, the KB Funding
Obligations and the KB Intangibles, on the Closing Date, KB Online Holdings will
receive an Interest in Toyco equal to 80% of all outstanding Units (which Units
will be designated Class A Units).
(b) In consideration for BrainPlay's contribution to Toyco of the
BrainPlay Assets, on the Closing Date (i) Toyco will assume and be liable for
the Assumed Liabilities and (ii) BrainPlay will receive an Interest in Toyco
equal to 20% of all outstanding Units (which Units will be designated Class B
Units).
(c) The rights, preferences and terms of the Units are set forth in the
Operating Agreement.
2.5 CLOSING. The closing of the transactions contemplated herein (the
"Closing") shall take place at 10:00 a.m. (Eastern time) on June 25, 1999 at the
offices of Benesch, Friedlander, Coplan & Aronoff LLP, 88 East Broad Street,
Columbus, Ohio 43215-3506, or such other time, date and place as the parties
hereto may mutually agree; provided, however, that nothing contained in this
Section 2.5 shall release any of the parties hereto from liability for a willful
failure to perform its obligations hereunder.
2.6 TRANSACTIONS AT CLOSING. The following deliveries and transactions
shall take place at the Closing:
(a) KB Online Holdings shall deliver to BrainPlay and Toyco:
(i) such assignments, bills of sale, consents and other
instruments, in form and substance satisfactory to BrainPlay, as shall
be necessary in the reasonable judgment of BrainPlay, to evidence (A)
the assignment, transfer, conveyance and delivery to Toyco of the KB
Online Assets and (B) the first installment of the KB Funding
Obligation, in accordance with the terms hereof;
(ii) a counterpart of the Operating Agreement, duly executed by
KB Online Holdings;
(iii) a counterpart of the License Agreement, duly executed by KB
Online Holdings (or its designated Affiliate) (the "Licensor");
(iv) a counterpart of each of the Supply Agreement and the
Services Agreement, each duly executed by KB Online Holdings (or its
designated Affiliate);
(v) final versions of Schedules 2.1(a) and 2.1(c), drafts of
which shall be provided to BrainPlay and Toyco not less than five
business days prior to the Closing Date; and
(vi) such further instruments and documents as may be necessary
or appropriate to consummate the transactions contemplated herein.
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<PAGE> 12
(b) BrainPlay will deliver to Toyco and KB Online Holdings:
(i) such assignments, bills of sale, consents and other
instruments, in form and substance satisfactory to KB Online Holdings,
as shall be necessary in the reasonable judgment of KB Online
Holdings, to evidence the assignment, transfer, conveyance and
delivery to Toyco of the BrainPlay Assets, in accordance with the
terms hereof;
(ii) a counterpart of the Assumption Agreement, duly executed by
BrainPlay;
(iii) a counterpart of the Operating Agreement, duly executed by
BrainPlay;
(iv) final versions of Schedules 2.2(a) and 4.17, drafts of which
shall be provided to Toyco and KB Online Holdings not less than five
business days prior to the Closing Date;
(v) the audited balance sheet of BrainPlay as of March 31, 1999,
and the related statements of income and cash flows for the year ended
March 31, 1999;
(vi) any updated Schedules to this Agreement to reflect matters
arising since the date of this Agreement and prior to Closing which
would have been required to have been disclosed pursuant hereto if the
same had existed or occurred as of or prior to the date of this
Agreement, drafts of which shall be provided to Toyco and KB Online
Holdings not less than five business days prior to the Closing Date;
and
(vii) such further instruments and documents as may be necessary
or appropriate to consummate the transactions contemplated herein.
(c) Toyco will deliver to each of KB Online Holdings and BrainPlay:
(i) a counterpart of the Assumption Agreement, duly executed by
Toyco;
(ii) a counterpart of the Operating Agreement, duly executed by
Toyco;
(iii) such further instruments and documents as may he necessary
to consummate the transactions contemplated herein.
ARTICLE 3
REPRESENTATIONS OF KB ONLINE HOLDINGS
KB Online Holdings hereby represents and warrants to each of BrainPlay
and Toyco as of the date hereof and the Closing Date, except as disclosed herein
or in any Schedule attached hereto:
3.1 CORPORATION EXISTENCE AND POWER. KB Online Holdings is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation,
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<PAGE> 13
and has all corporate powers and all material governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted.
3.2 CORPORATE AUTHORIZATION AND EXECUTION. The execution, delivery and
performance by KB Online Holdings of this Agreement are within the corporate
powers of KB Online Holdings and have been duly authorized by all necessary
corporate action on the part of KB Online Holdings. This Agreement constitutes a
valid and binding agreement of KB Online Holdings enforceable in accordance with
its terms, except as (a) the enforceability hereof may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and (b) the availability of equitable remedies may
be limited by equitable principles of general applicability.
3.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance
by KB Online Holdings of this Agreement require no approval, consent, waiver,
authorization or other action by or in respect of, or filing, registration or
recording with, any governmental body, agency or official, except for (a)
satisfaction of the requirements of the H-S-R Act (if applicable) and (b) any
such approval, consent, waiver, authorization, or other action or filing,
registration or recording as to which the failure to make or obtain would not,
individually or in the aggregate, have a Material Adverse Effect on KB Online
Holdings or on the transaction contemplated in this Agreement.
3.4 NON-CONTRAVENTION. The execution, delivery and performance by KB
Online Holdings of this Agreement do not and will not (a) violate the articles
of incorporation and regulations of KB Online Holdings, (b) assuming compliance
with the matters referred to in Section 3.3 hereof, violate any applicable law,
rule, regulation, judgment, injunction, order or decree or (c) assuming
compliance with the matters referred to in Section 8.6, require any approval,
consent, waiver, authorization, or other action by, or filing, registration or
recording with, any Person under, constitute a breach or default under, or give
rise to any right or obligation of KB Online Holdings or to a modification of
the terms or conditions of any right or obligation to which KB Online Holdings
is entitled under, any agreement or other instrument binding upon KB Online
Holdings, except to the extent that any such approval, consent, waiver,
authorization or other action, default, right or modification would not,
individually or in the aggregate, have a Material Adverse Effect on KB Online
Holdings or the transactions contemplated in this Agreement.
3.5 LITIGATION. There is no action, suit or proceeding pending against,
or to the Knowledge of KB Online Holdings, threatened against or affecting, KB
Online Holdings before any court or arbitrator or any governmental body, agency
or official, which, individually or in the aggregate, is reasonably likely to
have a Material Adverse Effect on KB Online Holdings, or would, or would be
reasonably likely to, materially impair the ability of KB Online Holdings to
consummate the transactions contemplated in this Agreement.
3.6 ASSETS. As of the Closing, KB Online Holdings will have good and
marketable title to, all property, rights and assets (whether real or personal,
tangible or intangible), which constitute the KB Online Assets. None of the KB
Online Assets is subject to any Liens, except for Liens disclosed on Schedule
3.6 attached hereto. The KB Online Assets, together with cash of KB Online
Holdings, shall constitute all of the assets of KB Online Holdings.
8
<PAGE> 14
3.7 BROKERS. No Person has acted, directly or indirectly, as a broker,
finder or financial adviser for KB Online Holdings in connection with the
negotiations relating to the transactions contemplated by this Agreement, and no
Person is entitled to any fee or commission or like payment in respect thereof
based in any way on any agreement, arrangement or understanding made by or on
behalf of KB Online Holdings.
3.8 MATERIAL ADVERSE EFFECT. Since May 17, 1999, there has not been any
event, occurrence, development or state of circumstances or facts which has had
or would reasonably be expected to have a Material Adverse Effect on KB Online
Holdings.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BRAINPLAY
BrainPlay hereby represents and warrants to each of KB Online Holdings
and Toyco as of the date hereof and as of the Closing Date, except as disclosed
herein or in any Schedule attached hereto as follows:
4.1 CORPORATE EXISTENCE AND POWER. BrainPlay is a corporation duly
incorporated, validly existing and in good standing under the laws
of its jurisdiction of incorporation, and has all corporate powers and all
material governmental licenses, authorizations, permits, consents and approvals
required to carry on its business as now conducted. BrainPlay is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction where such qualification is necessary, except for those
jurisdictions where failure to be so qualified would not, individually or in the
aggregate, have a material adverse effect on BrainPlay, or the transactions
contemplated by this Agreement. BrainPlay has delivered to KB Online Holdings
true and complete copies of the certificate of incorporation and bylaws of
BrainPlay as currently in effect. BrainPlay has no Subsidiaries.
4.2 CORPORATE AUTHORIZATION. The execution, delivery and performance by
BrainPlay of this Agreement are within BrainPlay's corporate powers and have
been duly authorized by all necessary corporate action on the part of
BrainPlay. This Agreement constitutes the valid and binding agreement of
BrainPlay enforceable in accordance with its terms, except as (a) the
enforceability hereof may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the enforcement of creditors' rights generally
and (b) the availability of equitable remedies may be limited by equitable
principles of general applicability.
4.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance
by BrainPlay of this Agreement require no approval, consent, waiver,
authorization or other action by or in respect of, or filing, registration or
recording with, any governmental body, agency, or official, except for (a)
satisfaction of the requirements of the H-S-R Act (if applicable) and (b) any
such approval, consent, waiver, authorization or other action or filing,
registration or recording as to which the failure to make or obtain would not,
individually or in the aggregate, have a Material Adverse Effect on BrainPlay or
on the transactions contemplated in this Agreement.
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<PAGE> 15
4.4 NON-CONTRAVENTION. The execution, delivery and performance by
BrainPlay of this Agreement do not and will not (a) violate the certificate of
incorporation or bylaws of BrainPlay, (b) assuming compliance with the matters
referred to in Section 4.3 hereof, violate any applicable law, rule, regulation,
judgment, injunction, order or decree, (c) except as set forth on Schedule 4.4,
require any approval, consent, waiver, authorization or other action by, or
filing, registration or recording with, any Person under, constitute a breach
or default under, or give rise to any right of termination, cancellation or
acceleration of any right or obligation of BrainPlay or to a modification of the
terms or conditions of any right or obligation to which BrainPlay is entitled
under, any agreement or other instrument binding upon BrainPlay or any license,
franchise, permit or other similar authorization held by BrainPlay, or (d)
result in the creation or imposition of any Lien on, or the forfeiture of, any
asset of BrainPlay, except, in the case of subparagraphs (b), (c) and (d), to
the extent that any such violation, failure to obtain any such approval,
consent, waiver, authorization or other action, default, right, modification,
Lien or forfeiture would not, individually or in the aggregate, have a Material
Adverse Effect on BrainPlay, or on the transactions contemplated in this
Agreement.
4.5 CAPITALIZATION. (a) The authorized capital stock of BrainPlay
consists of 20,000,000 shares of common stock and 4,754,507 shares of preferred
stock, of which 2,622,855 shares of common stock and 4,742,448 shares of
preferred stock (consisting of 1,823,530 shares of Series A preferred stock and
2,918,918 shares of Series B preferred stock) are issued and outstanding.
Attached hereto as Schedule 4.5 are the record and beneficial owners of
BrainPlay's capital stock and their holdings.
(b) Except as disclosed in Section 4.5(a) hereof and set forth on
Schedule 4.5 attached hereto, there are no outstanding (i) shares of capital
stock or voting securities of BrainPlay, (ii) securities of BrainPlay
convertible into or exchangeable for shares of capital stock or voting
securities of BrainPlay or (iii) options or other rights to acquire from
BrainPlay or other obligations of BrainPlay to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of BrainPlay. There are no outstanding obligations of
BrainPlay to issue, repurchase, redeem or otherwise acquire, or make any
payment in respect of, any of its outstanding common stock or other securities.
4.6 FINANCIAL STATEMENTS. The (a) audited balance sheets of BrainPlay
as of March 31, 1997 and 1998 and the related statements of income and cash
flows for each of the years ended March 31, 1997 and 1998, previously delivered
to KB Online Holdings, and (b) unaudited balance sheet of BrainPlay as of
March 31, 1999 and the related statements of income and cash flows for the year
ended March 31, 1999, attached hereto as Schedule 4.6, (i) present fairly, in
all material respects, the financial position of BrainPlay as of the dates
thereof and their results of operations for the periods then ended in conformity
with generally accepted accounting principles applied on a consistent basis,
except that such unaudited financial statements do not contain footnotes or
normal year-end adjustments and (ii) are accurate and complete in all material
respects.
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<PAGE> 16
4.7 ABSENCE OF CERTAIN CHANGES. Except as disclosed in Schedule 4.7
attached hereto or as contemplated in this Agreement, since the Balance Sheet
Date, the Business has been conducted in the ordinary course consistent with
past practices and there has not been:
(a) any event, occurrence, development or state of circumstances or
facts which has had or would reasonably be expected to have a Material Adverse
Effect on BrainPlay;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any of BrainPlay's capital stock, or any
repurchase, redemption or other acquisition by BrainPlay of any outstanding
shares of capital stock or other securities of, or other ownership interests in,
BrainPlay;
(c) any amendment of any material term of any outstanding security of
BrainPlay;
(d) any incurrence, assumption or guarantee by BrainPlay of any
indebtedness for borrowed money;
(e) any creation or assumption by BrainPlay of any Lien on any asset,
other than in the ordinary course of business consistent with past practices;
(f) any making of any loan, advance or capital contributions to or
investment in any Person;
(g) any damage, destruction or other casualty loss (whether or not
covered by insurance) materially affecting the Business or assets of BrainPlay;
(h) any transaction or commitment made, or any contract or agreement
entered into, by BrainPlay relating to its assets or the Business (including the
acquisition, disposition or lease of any assets) or any relinquishment by
BrainPlay of any contract or other right, other than (i) transactions and
commitments in the ordinary course of business consistent with past practices
and (ii) those contemplated in this Agreement;
(i) any change in the method of accounting or accounting practice by
BrainPlay, except for any change required by reason of a concurrent change in
generally accepted accounting principles;
(j) any (i) employment, deferred compensation, severance, retirement or
other similar agreement entered into with any director, officer or employee of
BrainPlay (or any amendment to any such existing agreement), (ii) grant of any
severance or termination pay to any director, officer, employee, consultant or
agent of BrainPlay or (iii) increase in compensation or other benefits paid or
payable to any director, officer, employee, consultant or agent of BrainPlay,
in each case other than for officers, employees or consultants with annual
compensation, payments and other benefits aggregating less than $100,000;
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<PAGE> 17
(k) any labor dispute, other than routine individual grievances, or any
activity or proceeding by a labor union or representative thereof to organize
any employees of BrainPlay, which employees were not subject to a collective
bargaining agreement at the Balance Sheet Date, or any lockouts, strikes,
slowdowns, work stoppages or threats thereof by or with respect to any employees
of BrainPlay;
(1) any material capital expenditures;
(m) any sale, transfer, license or other disposition of any
Intellectual Property Rights;
(n) any canceled or compromised debt or claim;
(o) any settlement of, or agreement to settle, any material claim,
action, cause of action, suit, arbitration, proceeding or investigation; or
(p) any acquisition of capital stock of any Person or any assets
material in amount and constituting a business, or any merger, consolidation or
other business combination affecting BrainPlay or the entering into of an
agreement for such an acquisition, merger, consolidation or other business
combination.
4.8 NO UNDISCLOSED MATERIAL LIABILITIES. There are no material
liabilities of BrainPlay of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, other than:
(a) liabilities provided for in the Balance Sheet or disclosed in the
notes thereto;
(b) liabilities incurred in the ordinary course of business consistent
with past practice since the Balance Sheet Date; and
(c) liabilities disclosed in Schedule 4.8 attached hereto.
4.9 LABOR MATTERS. (a) BrainPlay has complied and is complying with all
Federal, state and local laws, rules, regulations and policies of a material
nature respecting employment and employment practices (including but not limited
to compensation for or termination of employment) and have not and are not
engaged in any unfair labor practice or unlawful discriminatory act or any other
act which violates in any material respect any of such laws, rules, regulations
or policies. Except as disclosed in Schedules 4.9 and 4.11 attached hereto,
there is no pending or, to the Knowledge of BrainPlay, threatened charge or
complaint by or against BrainPlay before the Equal Employment Opportunity
Commission, any other Federal governmental authority relating to labor or
employee matters or any similar state or local governmental authority, or any
other charge or complaint pending between BrainPlay and any of its employees,
except for charges and complaints with individual employees arising in the
ordinary course of business that have not had and would not have a Material
Adverse Effect on BrainPlay. BrainPlay is not a party to, or subject to, any
collective bargaining or other similar agreement with any labor union or other
similar association representing employees of BrainPlay, nor is any collective
bargaining agreement currently being
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negotiated by BrainPlay with respect to any employees of BrainPlay, nor has any
labor union within the last 12 months invoked the process of the National Labor
Relations Board, or any similar state or local agency, seeking to represent any
of BrainPlay's employees, or demanded recognition as the collective bargaining
representative of any such employees, and, to the Knowledge of BrainPlay, no
movement to designate a collective bargaining agent to represent any such
employees, is being conducted or is threatened.
(b) Except as disclosed in Schedule 4.9 attached hereto, the employment
by BrainPlay of any individual (whether or not a party to a written employment
agreement) is at-will and may be terminated for any reason whatsoever not
inconsistent with applicable law without penalty or liability of any kind other
than expenses or liabilities payable or reimbursable to such individuals
(including but not limited to accrued vacation pay and severance payable
pursuant to a BrainPlay severance policy) in the ordinary course of business
consistent with BrainPlay's past practices.
(c) BrainPlay does not maintain or participate in, or is it otherwise
subject to any grievance procedure or other dispute resolution mechanism under
which it is obligated to adjust or resolve employee grievances or complaints in
a manner other than through the exercise of BrainPlay's own discretion.
4.10 CONTRACTS. (a) Except as disclosed in Schedule 4.10 attached
hereto, BrainPlay is not a party to or bound by:
(i) any lease or sublease for real or personal property held or
used by BrainPlay;
(ii) any agreement for the purchase or other acquisition of
goods, services, equipment, property or other assets with payment
obligations of BrainPlay in excess of $25,000 since the Balance Sheet
Date;
(iii) any partnership, joint venture or other similar agreement
or arrangement;
(iv) any agreement relating to material indebtedness for borrowed
money or the deferred purchase price of property;
(v) any license, franchise or similar agreement;
(vi) any agency, dealer, sales representative, marketing or other
similar agreement;
(vii) any agreement that limits the freedom of BrainPlay to
compete in any line of business or with any Person or in any area or
which would so limit the freedom of BrainPlay after the Closing Date;
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(viii) any agreement with (A) any of its Affiliates, (B) any
Person directly or indirectly owning, controlling or holding with
power to vote, 5% or more of the outstanding voting securities of
BrainPlay or any of its Affiliates, (C) any Person 5% or more of whose
outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by BrainPlay or any of its
Affiliates or (D) any director or officer of BrainPlay or any of its
Affiliates or any "associates" or members of the "immediate family"
(as such terms are respectively defined in Rule 12b-2 and Rule 16a-1
of the Securities Exchange Act) of any such director or officer;
(ix) any agreement with any director or officer of BrainPlay or
with any "associate" or any member of the "immediate family" (as such
terms are respectively defined in Rules 12b-2 and 16a- 1 of the
Securities Exchange Act) of any such director or officer;
(x) any employment or material consulting agreement and all other
plans, agreements, arrangements or practices which provide
compensation or benefits to any of the directors, officers or
employees of BrainPlay, other than any Employee Plan or Benefit
Arrangement; or
(xi) any other agreement, commitment, arrangement or plan not
made in the ordinary course of business.
(b) Each agreement, commitment, arrangement, lease or plan disclosed in
Schedule 4.10 attached hereto (individually, a "Contract", or collectively, the
"Contracts") is a valid and binding agreement of BrainPlay, and is in full force
and effect; and BrainPlay is not and to the Knowledge of BrainPlay, no other
party thereto is, in default or breach in any material respect under the terms
of any Contract. To the Knowledge of BrainPlay, no event has occurred or
circumstance exists which with notice or lapse of time or both would constitute
such a material default or breach, or permit termination, modification or
acceleration by BrainPlay or any other Person or would result in a loss of
rights or the creation of any Lien under any Contract. BrainPlay has heretofore
delivered to Buyer true and complete copies of each of the Contracts disclosed
in Schedule 4.10 attached hereto.
4.11 LITIGATION. Except as disclosed in Schedule 4.11 attached hereto,
there is no action, suit, investigation or proceeding pending against, or to the
Knowledge of BrainPlay threatened against or affecting, BrainPlay or any of its
properties before any court or arbitrator or any governmental body, agency or
official, which, individually or in the aggregate, is likely to have a Material
Adverse Effect on BrainPlay, or would, or would be reasonably likely to,
materially impair the ability of BrainPlay to consummate the transactions
contemplated in this Agreement.
4.12 COMPLIANCE WITH LAWS AND COURT ORDERS. BrainPlay is not in
violation of, and since March 31, 1999 has not violated, any applicable law,
rule, regulation, judgment, injunction, order or decree, except for such
violations as have not had and will not have individually or in the aggregate a
Material Adverse Effect on BrainPlay.
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4.13 PROPERTIES. (a) BrainPlay has good and marketable title to, or in
the case of leased property has valid leasehold interests in, all property,
rights and assets (whether real or personal, tangible or intangible) reflected
on the Balance Sheet or acquired after the Balance Sheet Date. None of such
property or assets is subject to any Liens, except:
(i) Liens disclosed on the Balance Sheet; or
(ii) Liens disclosed in Schedule 4.13 attached hereto.
(b) There are no developments affecting any such property or assets
(whether real or personal) pending or, to the Knowledge of BrainPlay threatened,
which might materially detract from the value of such property, rights or assets
or materially interfere with any present or intended use of any such property,
rights or assets, other than any such developments affecting leased property,
rights or assets resulting from the transactions contemplated by this Agreement.
The BrainPlay Assets comprise all the assets necessary to operate the Business
as currently conducted.
4.14 ERISA REPRESENTATIONS. (a) Schedule 4.14 attached hereto
identifies each Employee Plan. BrainPlay has furnished or made available to KB
Online Holdings copies of the Employee Plans (and, if applicable, related trust
agreements) together with related summary plan descriptions and the most recent
annual report prepared in connection with any Employee Plan (Form 5500).
(b) Each Employee Plan that is intended to be qualified under Section
401(a) of the Code has (i) received a favorable determination letter from the
Internal Revenue Service that covers the applicable provisions of the Code added
by the Tax Reform Act of 1986 and other subsequent legislation covered by
applicable Internal Revenue Service procedures relating to such Employee Plans,
(ii) been maintained in substantial compliance with its terms and with the
requirements prescribed by any and all applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Code, and (iii) no
Employee Plan is a Title IV Plan or a Multiemployer Plan, except with respect to
matters that would not have a Material Adverse Effect on BrainPlay.
(c) Schedule 4.14 attached hereto identifies each Benefit Arrangement.
BrainPlay has furnished or made available to KB Online Holdings copies or
descriptions of each Benefit Arrangement. Each Benefit Arrangement has been
maintained in substantial compliance with its terms and with the requirements
prescribed by any and all applicable statutes, orders, rules and regulations,
except where the failure to do so would not have a Material Adverse Effect on
BrainPlay.
4.15 INTELLECTUAL PROPERTY. (a) Schedule 4.15 attached hereto contains
a list of all material Intellectual Property Rights owned by or licensed to
BrainPlay ("BrainPlay Intellectual Property Rights"), specifying as to each, as
applicable: (i) the nature of such Intellectual Property Right; (ii) the owner
of such Intellectual Property Right; and (iii) all licenses, sublicenses,
consents and other agreements as to which BrainPlay is a party, and pursuant to
which any Person is authorized to use such Intellectual Property Right or which
otherwise relates to any such Intellectual Property Rights, including the
identity of all parties thereto, a description of the nature and subject matter
thereof, the
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applicable royalty and any advances, the term thereof and the territory covered
thereby. Copies of all such licenses heretofore have been delivered to KB Online
Holdings.
(b) Except as disclosed in Schedule 4.15 attached hereto, all BrainPlay
Intellectual Property Rights are owned solely by BrainPlay or licensed to
BrainPlay under validly existing license agreements. Except as disclosed in
Schedule 4.15 attached hereto, there is no material license or other contractual
obligation under which BrainPlay is liable as licensor with respect to any
BrainPlay Intellectual Property Rights and BrainPlay has not granted any license
to any third party with respect to any BrainPlay Intellectual Property Rights.
Except as disclosed in Schedule 4.15 attached hereto and to BrainPlay's
Knowledge, the use or sale by BrainPlay of any products or services in the
Business and use by BrainPlay of the Intellectual Property Rights does not
infringe and has not infringed any rights of any third party, and no activity of
any third party infringes upon the rights of BrainPlay with respect to any of
BrainPlay's Intellectual Property Rights. Except as disclosed in Schedule 4.15
attached hereto, no action alleging or relating to any such infringement against
the rights of BrainPlay or any third parties is currently pending or, to the
Knowledge of BrainPlay, threatened.
(c) (i) Except as disclosed in Schedule 4.15 attached hereto, since
March 31, 1999, BrainPlay has not been a defendant in any unsettled action,
suit, investigation or proceeding relating to, or otherwise has been notified
of, any alleged claim of infringement of any other Person's Intellectual
Property Rights by BrainPlay, whether or not such claim of infringement involves
BrainPlay Intellectual Property Rights; and (ii) except as disclosed in Schedule
4.15 attached hereto, to the Knowledge of BrainPlay, has not engaged in any
activity which would amount to or give rise to any claim of infringement of any
other Person's Intellectual Property Rights.
(d) (i) Except as disclosed in Schedule 4.15 attached hereto, since
March 31,1999, BrainPlay has not been a plaintiff in any unsettled action, suit,
investigation or proceeding relating to any of BrainPlay Intellectual Property
Rights; and (ii) except as disclosed in Schedule 4.15 attached hereto, BrainPlay
has no Knowledge of any continuing infringement or other unlawful use of any
BrainPlay Intellectual Property Rights by any other Person.
(e) Except as disclosed in Schedule 4.15 attached hereto or the
agreements referred to therein, no BrainPlay Intellectual Property Right is
subject to any outstanding judgment, injunction, order, decree or agreement
restricting the use thereof by or restricting the licensing or sale thereof by
BrainPlay to any Person.
(f) BrainPlay has not entered into any agreement to indemnify any third
party against any charge of infringement of any Intellectual Property Right.
(g) BrainPlay has initiated a review of its operations with a view to
assessing whether its business or operations will, in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data, be vulnerable to any significant risk that computer
hardware or software used in its business or operations will not, in the case of
dates or time periods occurring after December 31, 1999, function at least as
effectively as in the case of dates or
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time periods occurring prior to January 1, 2000. As of the date hereof,
BrainPlay has no reason to believe that any such risk would have a Material
Adverse Effect on BrainPlay.
4.16 INSURANCE COVERAGE. All material properties of BrainPlay are
covered by valid and currently effective insurance policies issued in favor of
BrainPlay. Schedule 4.16 contains a summary of all policies or binders of
insurance by which BrainPlay is insured (the "Insurance Policies"), together
with (i) the name of the insurer, the names of the principal insured and each
named insured, and (ii) the policy number and period of coverage, the type,
scope (including an indication of whether coverage is on a claims made,
occurrence or other basis), and amounts (including a description of how
deductibles, retentions, aggregates and retroactive premium adjustments or other
loss-sharing arrangements are calculated and operate) of coverage. BrainPlay
has given KB Online Holdings access to true and complete copies of all Insurance
Policies and fidelity bonds relating to the assets, the Business, operations,
employees, officers or directors of BrainPlay. Except as disclosed in Schedule
4.16 hereof, there is no claim by or on behalf of BrainPlay pending under any of
such Insurance Policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such Insurance Policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such Insurance Policies or bonds or in respect of which such underwriters have
reserved their rights. All premiums payable under such Insurance Policies and
bonds have been paid timely and BrainPlay has otherwise complied in all material
respects with the terms and conditions of all such Insurance Policies and bonds.
The insurance currently maintained by BrainPlay provides coverage in kind and
amount reasonably necessary to protect against the risk inherent or associated
with the Business, except with respect to matters which would not have a
Material Adverse Effect on BrainPlay.
4.17 TAXES. (a) BrainPlay has filed all Tax Returns required to be
filed by BrainPlay (including any consolidated or combined return required to be
filed by them or any affiliated person or entity) accurately reflecting all
Taxes owing to the United States or any other government or any government
subdivision, state, local, or foreign or any other taxing authority, and has
paid in full all Taxes for which BrainPlay has or may have liability, regardless
of whether shown on any Tax Return, except where the failure to do so would not
have a Material Adverse Effect on BrainPlay. All such Tax Returns are true,
correct and complete in all material respects.
(b) BrainPlay has no Knowledge of any unassessed Tax deficiency
proposed or threatened against BrainPlay as a result of the operation of the
Business. There are no encumbrances on the assets of BrainPlay as a result of
any Tax liabilities except for Taxes not yet due and payable. There are, and
after the date of this Agreement will be, no Tax deficiencies of any kind
assessed against or relating to BrainPlay with respect to any taxable period
ending on or before, or including, the Closing Date, of a character or nature
that would result in any encumbrances or other claims on all or any portion of
the BrainPlay Assets or on Toyco's title to or use of the BrainPlay Assets, or
that would result in any claim against Toyco or the Business after the Closing
Date.
(c) As to all Tax periods, or portions thereof, which end prior to, or
include, the Closing Date for which no Tax Returns are yet due, the liability of
BrainPlay for Taxes with respect to such periods, or portions thereof, does not
exceed in any material respect the amount accrued for such liability (rather
than any reserve for deferred Taxes to reflect timing differences between book
and
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Tax income) on the most recent financial statements delivered to KB Online
Holdings, as adjusted for operations and transactions in the ordinary course of
business of BrainPlay through the Closing Date in accordance with the past
practice of BrainPlay.
(d) BrainPlay has complied in all respects with all applicable laws,
rules and regulations relating to the payment and withholding of Taxes and has,
within the time and the manner prescribed by law, withheld and paid over to the
proper governmental authorities, all amounts required to be so withheld and paid
over under applicable laws except where the failure to do so would not have a
Material Adverse Effect on BrainPlay.
(e) BrainPlay is not a party to any action, audit or proceeding by any
governmental or taxing authority for the assessment or collection of Taxes, nor
to BrainPlay's Knowledge, has any such event been asserted or threatened.
(f) There are no outstanding agreements or waivers extending the
statutory period of limitations applicable to any Tax Return of BrainPlay for
any period. No taxing authority has audited any Tax Return filed by BrainPlay.
(g) BrainPlay has never been a member of an affiliated, consolidated,
combined or unitary group for federal, state, local or foreign Tax purposes, and
is not liable for the Taxes of any person under Treasury Regulations Section
1.1502-6 (or any similar provision of state, local or foreign law) as a
transferee or successor, by operation of law or otherwise.
(h) There are no Tax sharing agreements or similar arrangements
(whether written or oral) in effect that include BrainPlay, and BrainPlay does
not have liability to any person with respect to any previously terminated Tax
sharing agreement or similar arrangement.
(i) Schedule 4.17 which shall be attached hereto prior to the Closing
sets forth the tax basis of BrainPlay in the BrainPlay Assets as of March 31,
1999.
(j) For purposes of this Agreement, "Taxes" shall mean any and all
taxes, charges, fees, levies or other assessments, including, without
limitation, income, alternative minimum tax, gross receipts, value added,
excise, real or personal property, sales, withholding, social security,
retirement, unemployment, occupation, use, service, service use, license, net
worth, payroll, franchise, transfer and recording taxes, customs and import
dues, fees and charges, imposed by the Internal Revenue Service or any taxing
authority (whether domestic or foreign including, without limitation, any state,
county, local or foreign government or any subdivision or taxing agency
thereof), whether computed on a separate, consolidated, unitary, combined or any
other basis; and such term shall include any interest whether paid or received,
fines, penalties or additional amounts attributable to, or imposed upon, or with
respect to, any such taxes, charges, fees, levies or other assessments. "Tax
Return" shall mean any report, return, document, declaration or other
information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes, including, without
limitation, information returns, any documents with respect to or accompanying
payments of estimated Taxes, or with respect to or accompanying requests for the
extension of time in which to file any such report, return, document,
declaration or other information.
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(k) None of the BrainPlay Assets are subject to the provisions of
Section 197(f)(9)(A) of the Code.
4.18 LICENSES AND PERMITS. Schedule 4.18 attached hereto contains a
list of each material license, franchise, permit or other similar authorization
affecting, or relating in any way to, the BrainPlay Assets or the Business (the
"Permits") together with the name of the government agency or entity issuing
such Permit. BrainPlay has been duly granted and continues to hold, and as of
the Closing Date will hold, all Permits necessary for the conduct of the
Business, except where the failure to do so would not have a Material Adverse
Effect with respect to BrainPlay. Except as disclosed in Schedule 4.18 attached
hereto, such Permits are valid and in full force and effect and none of the
Permits will be terminated or impaired or become terminable, in whole or in
part, as a result of the transactions contemplated hereby. BrainPlay has not
received written notice that any governmental authority or agency will revoke,
cancel, rescind, materially modify or refuse to renew in the ordinary course of
business any of the Permits.
4.19 BROKERS. No person has acted, directly or indirectly, as a broker,
finder or financial advisor for BrainPlay in connection with the negotiations
relating to the transactions contemplated by this Agreement, and no person is
entitled to any fee or commission or like payment in respect thereof based in
any way on any agreement, arrangement or understanding made by or on behalf of
BrainPlay.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF TOYCO
Toyco hereby represents and warrants to BrainPlay as of the date hereof
and the Closing Date, except as disclosed herein or in any Schedule attached
hereto:
5.1 EXISTENCE AND POWER. Toyco is a limited liability company duly
organized and validly existing under the laws of its jurisdiction of
organization, and has all powers and all material governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted. Toyco has delivered to BrainPlay true and complete
copies of its Charter as currently in effect.
5.2 AUTHORIZATION. The execution, delivery and performance by Toyco of
this Agreement are within Toyco's powers and have been duly authorized by all
necessary action on the part of Toyco. This Agreement constitutes a valid and
binding agreement of Toyco enforceable in accordance with its terms, except as
(a) the enforceability hereof may be limited by bankruptcy, insolvency,
moratorium or other similar laws effecting the enforcement of creditors'
generally and (b) the availability of equitable remedies may be limited by
equitable principles of general applicability.
5.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance
by Toyco of this Agreement require no approval, consent, waiver, authorization
or other action by or in respect
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of, filing, registration or recording with, any governmental body, agency or
official, except for (a) satisfaction of the requirements of the H-S-R Act (if
applicable) or (b) any such approval, consent, waiver, authorization or other
action or filing, registration or recording as to which failure to make or
obtain would not, individually or in the aggregate, have a Material Adverse
Effect on Toyco, or on the transactions contemplated in this Agreement.
5.4 NON-CONTRAVENTION. The execution, delivery and performance by Toyco
of this Agreement do not and will not (a) violate the Charter of Toyco or
Operating Agreement, (b) assuming compliance with the matters referred to in
Section 5.3 hereof, violate any applicable law, rule, regulation, judgment,
injunction, order or decree or (c) assuming compliance with the matters referred
to in Section 8.6, require any approval, consent, waiver, authorization or other
action by, or filing, registration or recording with any Person under,
constituting a breach or default under, or give rise to any right or obligation
of Toyco or to a modification of the terms or conditions of any right or
obligation to which Toyco is entitled under any Agreement or other instrument
binding upon Toyco, except to the extent that any such approval, consent,
waiver, authorization or other action, default, right or modification would not,
individually or in the aggregate, have a Material Adverse Effect on Toyco, or on
the transactions contemplated in this Agreement.
5.5 LITIGATION. There is no action, suit, investigation or proceeding
pending against, or to the knowledge of Toyco, threatened against or affecting
Toyco before any court or arbitrator or any governmental body, agency or
official, which, individually or in the aggregate, is reasonably likely to have
a Material Adverse Effect on Toyco, or would, or would be reasonably likely to,
materially impair the ability of Toyco to consummate the transactions
contemplated in this Agreement.
5.6 BROKERS. No person has acted directly or indirectly as a broker,
finder or financial advisor for Toyco in connection with the negotiations
relating to the transactions contemplated by this Agreement and no person is
entitled to any fee or commission or like payment in respect thereof based in
any way on arrangements or understandings made by or on behalf of Toyco.
5.7 LIABILITIES. As of the Closing Date, there will be no material
liabilities of Toyco of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, other than the Assumed
Liabilities, the liabilities set forth on Schedule 3.6 and expenses accrued in
connection with the transactions contemplated herein.
5.8 CONTRACTS. As of the Closing Date, except as provided herein,
including, without limitation, as provided in Section 8.6, there will be no
contractual agreements to which Toyco is a party.
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ARTICLE 6
COVENANTS OF KB ONLINE HOLDINGS AND TOYCO
6.1 CONFIDENTIALITY. Prior to the Closing Date and after any
termination of this Agreement, KB Online Holdings and Toyco will hold in
confidence and not use, and will use their best efforts to cause their
respective officers, directors, members, managers, employees, accountants,
counsel, consultants, advisors and agents to hold in confidence and not to use,
unless compelled to disclose by judicial or administrative process or by other
requirements of law, all confidential documents and information concerning
BrainPlay furnished to KB Online Holdings or Toyco or on their behalf in
connection with the transactions contemplated by this Agreement, except to the
extent that such information can be shown to have been (a) previously known on a
nonconfidential basis by KB Online Holdings or Toyco, (b) in the public domain
through no fault of KB Online Holdings or Toyco or (c) later lawfully acquired
by KB Online Holdings or Toyco from sources other than BrainPlay; provided,
however, that KB Online Holdings or Toyco may disclose such information to its
officers, directors, members, managers, employees, accountants, counsel,
consultants, advisors and agents in connection with the transactions
contemplated by this Agreement and to its lenders so long as such Persons are
informed by KB Online Holdings and Toyco of the confidential nature of such
information and are directed by KB Online Holdings or Toyco to comply with the
foregoing obligations. KB Online Holdings and Toyco shall be liable for any
breach by any such Person of such obligations. The obligations of KB Online
Holdings or Toyco to hold any such information in confidence shall he satisfied
if they exercise the same care with respect to such information as they would
take to preserve the confidentiality of their own similar information. If this
Agreement is terminated, KB Online Holdings and Toyco will, and will use their
best efforts to cause their respective officers, directors, members, managers,
employees, accountants, counsel, consultants, advisors and agents to, destroy
and deliver to BrainPlay, upon request, all documents and other materials, and
all copies thereof, obtained by KB Online Holdings or Toyco or on their behalf
from BrainPlay in connection with this Agreement that are subject to such
confidence.
6.2 ACCESS. KB Online Holdings and Toyco, on and after the Closing
Date, will provide BrainPlay with reasonable access during normal business hours
to their properties, books, records, employees and auditors to the extent
necessary to permit BrainPlay to determine any matter relating to its rights and
obligations hereunder or to any period ending on or before the Closing Date;
provided, however, that any such access (a) does not unreasonably interfere with
the normal conduct of the business of KB Online Holdings or Toyco and (b) is
reasonably related to such matter (including but not limited to the preparation
of any Tax Returns).
6.3 NOTICE OF CERTAIN EVENTS. KB Online Holdings and Toyco shall
promptly notify BrainPlay in writing of:
(a) any notice or other communication received from any Person alleging
that the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
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(b) any notice or other communication received from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement;
(c) any actions, suits, claims, investigations or proceedings commenced
or, to its Knowledge threatened against, relating to or involving or otherwise
affecting KB Online Holdings or Toyco that, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to Sections
3.5 or 5.5 hereof, or that relate to the consummation of the transactions
contemplated by this Agreement; and
(d) any development which would have a Material Adverse Effect on KB
Online Holdings or Toyco or give rise to any breach of any representation or
warranty of KB Online Holdings or Toyco contained in this Agreement; provided,
that no such disclosure shall be deemed to amend any Schedule or cure any such
breach or provide an exception to any such representation or warranty.
6.4 USE OF KBToys.com NAME. KB Online Holdings will use its best
efforts to cause the Licensor to execute and deliver to Toyco a license or
sublicense for use of the KBToys.com name, which shall be mutually agreeable to
KB Online Holdings and BrainPlay and which shall be executed at Closing (the
"License Agreement"). The License Agreement shall provide, inter alia, for use
by Toyco of certain service marks and trademarks utilizing the name "KBToys.com"
and for domain names utilizing the name "KBToys.com" and certain derivatives.
6.5 MERCHANDISE SUPPLY. KB Online Holdings will, and will cause its
Affiliates to, provide Toyco with such expertise and experience in the buying of
merchandise and related know-how as shall be reasonably required in connection
with the operation of Business, the terms and conditions of such arrangement to
be set forth in a supply agreement (the "Supply Agreement") which shall be
mutually agreeable to KB Online Holdings and BrainPlay and which shall be
executed at Closing. In any event, the Supply Agreement shall provide (a) that
KB Online Holdings will, and will cause its Affiliates to, provide merchandise
to Toyco at costs available to KB Online Holdings or its Affiliates (such costs
to include freight, third-party warehousing and any other out-of-pocket expenses
incurred in connection with the buying and delivery of such merchandise) and (b)
KB Online Holdings will use commercially reasonable efforts to provide Toyco
with such merchandise (both number of SKUs and amount of merchandise) as Toyco
shall reasonably require.
6.6 INTERCOMPANY SERVICES. (a) KB Online Holdings will, and will cause
its Affiliates to, provide Toyco with certain intercompany services such as (i)
expertise and experience in advertising and media relations as shall be
reasonably required in connection with the operation of the Business and (ii)
expertise and experience in warehousing and fulfillment and related know-how as
shall be reasonably required in connection with the operation of the Business.
(b) The obligations of KB Online Holdings set forth in Section 6.6(a)
hereof shall be set forth in greater detail in a services agreement between KB
Online Holdings or its Affiliate and Toyco (the "Services Agreement"), the terms
and conditions thereof to be mutually agreeable to KB Online Holdings and
BrainPlay, which Services Agreement shall be executed at Closing.
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6.7 FORBEARANCE. (a) Until the earlier of (i) twelve months after the
consummation of a Capital Markets Transaction or (ii) December 31, 2001, KB
Online Holdings will, and will cause its Affiliates to, not offer for sale or
sell Toy Products using web-based, on-line or Internet retailing distribution
channels ("Internet Distribution").
(b) Until KB Online Holdings no longer owns a majority Interest,
directly or indirectly, in Toyco, KB Online Holdings will, and will cause its
Affiliates to, not engage in Internet Distribution of Toy Products that are not
"closeouts" as that term is commonly applied in the toy industry.
6.8 SRINIVASAN EMPLOYMENT AGREEMENT. Concurrent with the execution of
this Agreement, Toyco shall enter into the Srinivasan Employment Agreement.
ARTICLE 7
COVENANTS OF BRAINPLAY
7.1 CONDUCT OF THE BUSINESS. Except as otherwise contemplated by this
Agreement or set forth in Schedule 7.1 attached hereto, from the date hereof
until the Closing Date, BrainPlay will conduct the Business in the ordinary
course consistent with past practice and use its reasonable best efforts to
preserve intact relationships with third parties and to keep available the
services of present officers and employees. Without limiting the generality of
the foregoing, except as otherwise contemplated by this Agreement, from the date
hereof until the Closing Date, without the prior written consent of KB Online
Holdings, which shall not be unreasonably withheld, BrainPlay will not:
(a) adopt or propose any change to its certificate of incorporation or
bylaws;
(b) merge or consolidate with any other Person or acquire a material
amount of assets of any other Person;
(c) sell, lease, license or otherwise dispose of any material assets or
property except (i) pursuant to the Contracts and (ii) in the ordinary course
consistent with past practice;
(d) fail to maintain its books and records in the ordinary course
of business;
(e) fail to maintain in good repair, subject to ordinary wear and tear,
its premises, fixtures, machinery, furniture and equipment in a manner
consistent with past practices;
(f) hire any new employee for an annual salary in excess of
$100,000;
(g) purchase or otherwise acquire any real property;
(h) make any material capital expenditures;
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(i) enter into any agreement with a vendor providing for payments to
BrainPlay in return for an exclusive arrangement with such vendor; or
(j) agree or commit to do any of the foregoing.
BrainPlay will not (i) take or agree or commit to take any action that
would make any representation and warranty of BrainPlay hereunder inaccurate in
any respect at, or as of any time prior to, the Closing Date or (ii) omit or
agree or commit to omit to take any action necessary to prevent any such
representation or warranty from being inaccurate in any respect at any such
time.
7.2 ACCESS. From the date hereof until the Closing Date, BrainPlay (a)
will give KB Online Holdings and its counsel, financial advisors, auditors,
lenders and other authorized representatives reasonable access during normal
business hours to the offices, properties, books and records of BrainPlay, and
(b) will furnish to KB Online Holdings and its counsel, financial advisors,
auditors, lenders and other authorized representatives such financial and
operating data and other information relating to BrainPlay as such Persons may
reasonably request.
7.3 NOTICE OF CERTAIN EVENTS. BrainPlay shall promptly notify KB Online
Holdings in writing of:
(a) any notice or other communication received from any Person alleging
that the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication received from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement;
(c) any actions, suits, claims, investigations or proceedings commenced
or, to its Knowledge threatened against, relating to or involving or otherwise
affecting that, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 4.11 hereof or that relate
to the consummation of the transactions contemplated by this Agreement; and
(d) any development which would have a Material Adverse Effect on
BrainPlay or give rise to any breach of any representation or warranty of
BrainPlay contained in this Agreement; provided that no such disclosure shall be
deemed to amend any Schedule or cure any such breach or provide an exception to
any such representation or warranty.
7.4 OTHER OFFERS. From the date hereof until the Closing Date or
termination hereof, BrainPlay will not, and will cause its directors, officers,
employees and representatives not to, directly or indirectly, take any action to
solicit, initiate or encourage any Transaction Proposal or in any manner
discuss, consider or accept any Transaction Proposal, except as shall be
consistent with their fiduciary duties under the Delaware General Corporation
Law. For purposes of this Agreement, "Transaction Proposal" means any offer or
proposal for, or any indication of interest in, a joint venture, business
combination or similar arrangement involving BrainPlay or the acquisition of any
equity interest in, or a material portion of the assets of, BrainPlay, other
than the transactions
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contemplated by this Agreement. BrainPlay shall promptly notify KB Online
Holdings of any Transaction Proposal, which notice shall include the identity of
all relevant parties thereto and the terms and conditions of such Transaction
Proposal, or any change in the terms and conditions of any such Transaction
Proposal.
7.5 CONFIDENTIALITY. From and after the Closing Date, BrainPlay will
hold in confidence and not use, and will use its best efforts to cause its
officers, directors, employees, accountants, counsel, consultants, advisors and
agents to hold in confidence and not use, unless compelled to disclose by
judicial or administrative process of by other requirements of law, all
confidential documents and information concerning KB Online Holdings and its
Affiliates, as may be received from any of them, except to the extent that such
information can be shown to have been (i) in the case of information relating to
any of them, previously known on a nonconfidential basis by BrainPlay, (ii) in
the public domain through no fault of BrainPlay or (iii) later lawfully acquired
by BrainPlay from sources other than KB Online Holdings or its Affiliates.
BrainPlay shall be liable for any breach by any such Person of such obligations.
The obligation of BrainPlay to hold any such information in confidence shall be
satisfied if it exercises the same care with respect to such information as it
would take to preserve the confidentiality of its own similar information.
7.6 BOOKS AND RECORDS. BrainPlay acknowledges and agrees that from and
after the Closing Toyco will be entitled to copies of all documents, books,
records, agreements and financial data of any sort relating to the Business.
BrainPlay agrees to deliver, at Closing, copies of all such books and records in
its possession to Toyco.
ARTICLE 8
COVENANTS OF ALL PARTIES
8.1 REASONABLE BEST EFFORTS; FURTHER ASSURANCES. Subject to the terms
and conditions of this Agreement, each of the parties hereto will use their
reasonable best efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary or desirable under applicable laws and
regulations to consummate the transactions contemplated by this Agreement.
8.2 CERTAIN FILINGS. (a) Each party hereto shall cooperate with the
other parties (i) in determining whether any action by or in respect of, or
filing with, any governmental body, agency, official or authority is required,
or any actions, consents, approvals or waivers are required to be obtained from
parties to any Contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (ii) in taking such actions or
making such filings, furnishing information required in connection therewith and
seeking timely to obtain any such actions, consents, approvals or waivers.
(b) Promptly upon execution and delivery of this Agreement and if
required by law, each of KB Online Holdings and BrainPlay will prepare and file,
or cause to be prepared and filed, with the appropriate governmental
authorities, a notification with respect to the transactions contemplated by
this Agreement pursuant to the H-S-R Act. Each of KB Online Holdings and
BrainPlay will
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promptly provide all additional information requested, and take all other
actions necessary or appropriate, to comply with the notification requirements
under the H-S-R Act and to cause the expiration of all waiting periods under the
H-S-R Act.
8.3 PUBLIC ANNOUNCEMENTS. Each of the parties hereto agree not to issue
any press release or make any public statement with respect to this Agreement or
the transactions contemplated hereby without the approval of the other parties,
which approval shall not be unreasonably withheld, and, except as may be
required by applicable law or any listing agreement with any national securities
exchange, will not issue any such press release or make any such public
statement prior to receipt of such approval.
8.4 CAPITAL MARKETS TRANSACTION. (a) Each of the parties hereto will
use their reasonable best efforts during the 12-month period commencing on the
Closing Date to cause Toyco, or an Affiliate thereof (the "Public Entity"), to
seek an underwritten public offering of equity (a "Capital Markets
Transaction"). Any Capital Markets Transaction will require the approval of the
Toyco Board of Managers (as required by the Operating Agreement); PROVIDED,
HOWEVER, each of KB Online Holdings and BrainPlay will cause their designees to
the Toyco Board of Managers to approve a Capital Markets Transaction if:
(i) the gross proceeds exceed $50,000,000;
(ii) the market capitalization of the Public Entity as of the
effectiveness of the registration statement relating to the Capital
Markets Transaction exceeds $250,000,000;
(iii) each of (A) KB Online Holdings and (B) BrainPlay shall be
entitled to exchange their respective Interests in Toyco for shares of
the Public Entity, such exchange (1) to be structured in a manner that
would result in a tax-free transaction to the stockholders of
BrainPlay and (2) to be based on (x) the valuation of the Public
Entity as determined by the underwriter of the Capital Markets
Transaction and (y) the interest of the exchanging party in Toyco; and
(iv) the underwriters' lockup or similar restrictions on
transferability or share of the Public Entity held by KB Online
Holdings or BrainPlay shall not exceed 180 days.
(b) BrainPlay agrees that the condition set forth in Section
8.4(a)(iii) (1) shall be satisfied if the proposed structure to consummate a
Capital Markets Transaction is one in which (i) BrainPlay is the Public Entity
or (ii) BrainPlay becomes a subsidiary of the Public Entity in a reverse
triangular merger in which the stockholders of BrainPlay receive stock in the
Public Entity. BrainPlay agrees that it shall use its best efforts and exercise
good faith to evaluate whether any particular structure proposed by KB Online
Holdings to consummate a Capital Markets Transaction satisfies the condition set
forth in Section 8.4(a)(iii)(1).
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8.5 PUT OPTION. (a) If Toyco has not consummated a Capital Markets
Transaction on or before the third anniversary of the Closing Date, then on such
date (the "Put Trigger Date") each stockholder of BrainPlay shall have the
right, exercisable for one year after the Put Trigger Date, to require Toyco or
its Affiliates to purchase all of such stockholder's interest (the "Selling
Stockholder") in BrainPlay at a purchase price equal to the Selling
Stockholders' aggregate cash contributions to BrainPlay as set forth on Schedule
8.5 hereto, plus the amount of any cash contributions after the date of this
Agreement, so long as at the time such entity is not prohibited by law from
doing so.
(b) A Selling Stockholder may exercise its put right pursuant to
subparagraph (a) above by giving written notice of exercise to Toyco within one
year after the Put Trigger Date, which notice must specify a date for the
closing of the purchase which shall be at least thirty (30) days from the date
of the exercise notice. The purchase price shall be paid by Toyco to the Selling
Stockholder in immediately available funds at the closing.
8.6 GUARANTY. The parties acknowledge and agree that as of the date of
this Agreement, each of Toyco and KB Online Holdings shall execute and deliver a
counterpart signature page to the Master Guaranty Agreement and the Master
Intercompany Subordination Agreement as required pursuant to the Amended and
Restated Credit Agreement among Consolidated Stores Corporation, the Banks party
thereto and the various agents, dated as of May 15, 1998, as amended.
ARTICLE 9
EMPLOYEES AND EMPLOYEE BENEFITS
9.1 EMPLOYEES. With respect to each individual who, immediately prior
to the Closing Date, is employed (including persons absent from active service
by reason of illness, disability or leave of absence, whether paid or unpaid),
by BrainPlay (an "Employee"), (a) BrainPlay shall continue the employment of
each Employee (whether through BrainPlay or the current employee leasing
organization) or (ii) BrainPlay shall terminate the employment of each Employee
and, immediately thereafter, Toyco shall employ, or cause an Affiliate thereof,
to employ each Employee as mutually agreed by the parties. If any Employee Plan
of BrainPlay is terminated or discontinued in connection with the transactions
contemplated herein, such Employee Plan shall be given full credit for purposes
of eligibility in vesting (and in connection with severance or vacation plan or
policy, for the purposes of determining level of benefits) for any service of an
Employee with Toyco or an Affiliate thereof.
(b) Prior to the Closing, the parties agree to use their best efforts
and exercise good faith to determine a structure for the purposes of employing
the Employees and providing such Employee Plans as set forth herein.
(c) As soon as practicable after the Closing Date, BrainPlay, Toyco and
any of their respective Affiliates shall take all necessary action, if any, and
shall make any and all filings and
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submissions to the appropriate governmental agencies required to be made by any
of them, in connection with treatment of the Employee Plans hereunder.
9.2 EQUITY PROGRAM. The parties hereto agree to use good faith and
their best efforts to agree on an incentive equity program (the "Equity
Program") prior to the Closing Date which will provide for the grant of options
to acquire Units in (or substantially similar contractual rights from) Toyco to
or for the benefit of (i) certain of Toyco's officers, managers, and employees,
(ii) certain of Consolidated Stores Corporation's and/or its Affiliates'
officers and employees and (iii) if applicable, officers or employees of an
entity that provides management services to Toyco. The amount of Units (or
substantially similar contractual rights) available to be granted pursuant to
the Equity Program from time to time shall not exceed fifteen percent (15%) of
the outstanding Units immediately following the Closing and the initial grants
to be made under the Equity Program shall not exceed ten percent (10%) of the
outstanding Units immediately following the Closing.
9.3 BRAINPLAY ADMINISTRATIVE COSTS. After the Closing Date, Toyco
agrees that it shall reimburse BrainPlay, promptly upon submission to Toyco of
receipts therefor, for all administrative costs actually incurred by BrainPlay
in connection with BrainPlay's continuing existence as a corporate entity
subsequent to the Closing and prior to consummation of a Capital Markets
Transaction; provided, that the aggregate amount of all such reimbursements by
Toyco for administrative costs shall not exceed $25,000.
9.4 THIRD PARTY BENEFICIARIES. No provision of this Article 9 shall
create any third party beneficiary rights to any Employee or former employee of
BrainPlay (including any beneficiary dependent thereof) in respect of continued
employment or resumed employment, and no provision of this Article 9 shall
create any rights in any such persons in respect of any benefits that may be
provided, directly or indirectly, under any Employee Plan or Benefit
Arrangement.
ARTICLE 10
CONDITIONS TO CLOSING
10.1 CONDITIONS TO OBLIGATIONS OF ALL PARTIES. The obligations of each
party hereto to consummate the Closing are subject to the satisfaction of the
following conditions:
(a) No provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Closing.
(b) Any applicable waiting period under the H-S-R Act (if applicable)
relating to the transactions contemplated hereby shall have expired or been
terminated.
(c) All actions by or in respect of or filing with any governmental
body, agency, official or authority required to permit the consummation of the
Closing shall have been taken, made or obtained.
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10.2 CONDITIONS TO OBLIGATION OF KB ONLINE HOLDINGS AND TOYCO. The
obligation of KB Online Holdings and Toyco to consummate the Closing is subject
to the satisfaction of the following further conditions:
(a) (j) BrainPlay shall have performed in all material respects all of
its obligations hereunder required to be performed by it on or prior to the
Closing Date, (ii) the representations and warranties of BrainPlay contained in
this Agreement and in any certificate or other writing delivered by BrainPlay
pursuant hereto shall be true in all material respects at and as of the Closing
Date as if made at and as of such date, it being understood that, for purposes
of this Section 10.2, where any such representation or warranty already includes
a Material Adverse Effect or materiality exception, the materiality exception in
this clause (ii) shall not apply, and (iii) KB Online Holdings and Toyco shall
have received a certificate signed by an officer of BrainPlay to the foregoing
effect.
(b) KB Online Holdings and Toyco shall have received an opinion of
counsel of BrainPlay, dated the Closing Date, in form and substance as shall be
reasonably satisfactory to each of them.
(c) KB Online Holdings and Toyco shall have received the audited
balance sheet of BrainPlay as of March 31, 1999 and the related statements of
income and cash flows for the year ended March 31, 1999 in accordance with
Section 2.6(b)(v), which shall not be materially and adversely different from
the unaudited financial statements attached hereto as Schedule 4.6; provided,
however, in the event (i) Toyco agrees to assume any materially and adversely
different item set forth therein, or (ii) Toyco does not agree to assume any
materially and adversely different item set forth therein but the stockholders
of BrainPlay assume such obligation (including by satisfying such obligation in
cash or by agreeing to a reduction in the equity interests of Toyco held by
BrainPlay), in each case subject to the approval of KB Online Holdings, then
this closing condition shall not apply.
(d) KB Online Holdings and Toyco shall have received Schedules 2.2(a)
and 4.17 in accordance with Section 2.6(b)(iv).
(e) KB Online Holdings and Toyco shall have received any updated
Schedules in accordance with Section 2.6(b)(vi), which shall not be materially
and adversely different from the Schedules attached hereto as of the date of
this Agreement; provided, however, in the event (i) Toyco agrees to assume any
material adverse newly disclosed item, or (ii) Toyco does not agree to assume
any material adverse newly disclosed item but the stockholders of BrainPlay
assume such obligation (including by satisfying such obligation in cash or by
agreeing to a reduction in the equity interests of Toyco held by BrainPlay), in
each case subject to the approval of KB Online Holdings, then this closing
condition shall not apply.
(f) KB Online Holdings and Toyco shall have received all documents it
may reasonably request relating to the existence of BrainPlay and the authority
of BrainPlay for this Agreement, all in form and substance reasonably
satisfactory to each of them.
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10.3 CONDITIONS TO OBLIGATIONS OF BRAINPLAY. The obligation of
BrainPlay to consummate the Closing is subject to the satisfaction of the
following further conditions:
(a) (i) Each of KB Online Holdings and Toyco shall have performed in
all material respects their respective obligations hereunder required to be
performed by them at or prior to the Closing Date, (ii) the representations and
warranties of each of KB Online Holdings and Toyco contained in this Agreement
and in any certificate or other writing delivered by any of them pursuant hereto
shall be true in all material respects at and as of the Closing Date as if made
at and as of such date, it being understood that, for purposes of this Section
10.3, where any such representation or warranty already includes a Material
Adverse Effect or materiality exception, the materiality exception in this
clause (ii) shall not apply, and (iii) BrainPlay shall have received a
certificate signed by an officer or authorized representative of each of KB
Online Holdings and Toyco to the foregoing effect.
(b) BrainPlay shall have received an opinion of counsel to or counsel
of each of KB Online Holdings and Toyco, dated the Closing Date, in form and
substance reasonably satisfactory to BrainPlay.
(c) BrainPlay shall have received all documents it may reasonably
request relating to the existence of each of KB Online Holdings and Toyco and
the authority of each of KB Online Holdings and Toyco for this Agreement, all in
form and substance reasonably satisfactory to BrainPlay.
(d) BrainPlay shall have received Schedules 2.1(a) and 2.1(c) in
accordance with Section 2.6(a)(v).
(e) With respect to Sections 10.2(c) and 10.2(e), in the case of any
materially and adversely different item, either Toyco or the BrainPlay
stockholders, with the approval of KB Online Holdings, as the case may be, shall
have assumed such obligation.
ARTICLE 11
SURVIVAL; INDEMNIFICATION
11.1 SURVIVAL. The covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement or in any
certificate or other writing delivered pursuant hereto or in connection herewith
shall survive until the later of (a) the consummation of a Capital Markets
Transaction; or (b) the first anniversary of the Closing Date; provided,
however, that (i) the covenants and agreements contained in Articles 6, 7 and 8
hereof shall survive for the respective periods set forth therein, (ii) the
covenants, agreements, representations and warranties contained in Sections 4.14
and 4.17 hereof shall survive until expiration of the statute of limitations
applicable to the matters covered thereby (giving effect to any waiver,
mitigation or extension thereof), if later, and (iii) the representations and
warranties set forth in the first sentence of Section 4.13(a) hereof shall
survive until the third anniversary of the Closing Date. No covenant, agreement,
representation
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or warranty contained in this Agreement shall survive after the time at which it
would otherwise terminate pursuant to the preceding sentence unless notice of
the inaccuracy or breach thereof shall have been given to the party against whom
such indemnity may be sought prior to such time.
11.2 INDEMNIFICATION. (a) BrainPlay hereby agrees to indemnify KB
Online Holdings and Toyco (collectively, the "KB Indemnitees"), its Affiliates
and their respective directors and officers against and agrees to hold them
harmless from any and all damage, loss, liability and expense (including without
limitation reasonable expenses of investigation and reasonable attorneys' fees
and expenses in connection with any action, suit or proceeding) ("Damages")
incurred or suffered by the KB Indemnitees, arising out of (i) any
misrepresentation or breach of warranty, covenant or agreement made or to be
performed by BrainPlay pursuant to this Agreement or (ii) the Excluded
Liabilities.
(b) KB Online Holdings and Toyco (collectively, the "KB Indemnitors"),
jointly and severally, hereby agree to indemnify BrainPlay against and agree to
hold it harmless from any and all Damages incurred or suffered by the BrainPlay
arising out of any misrepresentation or breach of warranty, covenant or
agreement made or to be performed by the KB Indemnitors pursuant to this
Agreement.
(c) Toyco hereby agrees to indemnify BrainPlay and KB Online Holdings
and to hold each of them harmless from any and all Damages incurred or suffered
by any of them arising out of (i) the Assumed Liabilities, (ii) any liabilities
of Toyco arising subsequent to the Closing, and (iii) any liabilities of
BrainPlay in connection with any obligations of BrainPlay set forth in Article 9
hereof other than liabilities resulting from BrainPlay's fraud or gross,
intentional or willful misconduct.
11.3 PROCEDURES. (a) The party seeking indemnification under Sections
11.2 or 11.3 hereof (the "Indemnified Party") agrees to give prompt notice to
the party against whom indemnity is sought (the "Indemnifying Party") of the
assertion of any claim, or the commencement of any suit, action or proceeding in
respect of which indemnity may be sought under such Section; provided, however,
that, if a claim for indemnification under Section 11.2 hereof is based upon the
claim, demand, action or assertion of a third party, such notice shall be given
within ten Business Days after the Indemnified Party has received from such
third party written notice of such claim, demand, action or assertion. The
Indemnifying Party may, and at the request of the Indemnified Party shall,
participate in and control the defense of any such suit, action or proceeding at
its own expense. The Indemnifying Party shall not be liable under Section 11.2
hereof for any settlement effected without its consent of any claim, litigation
or proceeding in respect of which indemnity may be sought hereunder.
(b) After the Closing, this Article 11 will provide the exclusive
remedy for any misrepresentation or breach of warranty, covenant or other
agreement (other than those contained in Sections 2.6, 6.1 and 7.5 hereof), or
other claim arising out of this Agreement or the transactions contemplated
hereby other than claims relating to fraud or pursuant to Section 11.5, 11.6 and
11.7 hereof.
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11.4 THRESHOLD AND LIMITATION ON INDEMNIFICATION. An Indemnified Party
shall not be entitled to indemnification (or otherwise for Damages) under this
Article 11 or under any other provision of this Agreement unless and until the
aggregate of all Damages incurred and suffered by such Indemnified Party exceeds
$400,000; provided, however, when the aggregate of all Damages does exceed this
limitation, the Indemnified Party shall be entitled to seek indemnification from
the Indemnifying Party for all Damages incurred or suffered hereunder.
Notwithstanding the foregoing, the liability of each of the parties hereunder
shall be limited solely to their Interest in Toyco, which shall be adjusted to
reflect the payment of any Damages.
11.5 FAILURE TO MEET KB FUNDING OBLIGATIONS. The parties agree that the
remedies for a breach of Section 2.1(b) shall be, in addition to any other
rights available at law or in equity, as set forth in the Operating Agreement.
11.6 INJUNCTIVE RELIEF. KB Online Holdings acknowledges that monetary
damages would not adequately compensate Toyco in the event of a breach by KB
Online Holdings of its obligations under Section 6.7, and that injunctive relief
would be essential for Toyco to adequately protect itself hereunder.
Accordingly, KB Online Holdings agrees that, in addition to any other remedies
available to Toyco at law or in equity, Toyco shall be entitled to injunctive
relief in the event KB Online Holdings or any of its Affiliates is in breach of
the provisions of Section 6.7.
11.7 SPECIFIC PERFORMANCE. Toyco expressly agrees and understands that
the remedy at law for a breach by it of Section 8.5 will be inadequate, and
accordingly, acknowledges that upon adequate proof of its violation of Section
8.5, a stockholder of BrainPlay shall be entitled to compel specific performance
by Toyco of the obligations set forth in Section 8.5.
ARTICLE 12
TERMINATION
12.1 EVENTS OF TERMINATION. (a) This Agreement may be terminated at any
time prior to the Closing:
(i) by written agreement of KB Online Holdings, Toyco and
BrainPlay;
(ii) by either (A) KB Online Holdings, or (B) BrainPlay if the
Closing shall not have been consummated on or before July 31, 1999 and
such failure to close does not result from the actions or failure to
act of the terminating party;
(iii) by either (A) KB Online Holdings, or (B) BrainPlay, if
there shall be any law or regulation that makes consummation of the
transactions contemplated hereby illegal or otherwise prohibited or if
consummation of the transactions contemplated hereby would violate any
nonappealable final order, decree or judgment of any court or
governmental body having competent jurisdiction;
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(iv) by Brainplay, if any representation or warranty of KB Online
Holdings or Toyco contained in this Agreement shall prove to be
inaccurate in any material respect at the time when made (it being
understood that, for purposes of this subsection (iv), where any such
representation or warranty already includes a Material Adverse Effect
or materiality exception, the materiality exception in this subsection
(iv) shall not apply) and KB Online Holdings or Toyco, as the case may
be, shall refuse or fail after written notice to correct such
representation or warranty within 15 days of such written notice;
(v) by KB Online Holdings, if any representation or warranty of
BrainPlay contained in this Agreement shall prove to be inaccurate in
any material respect at the time when made (it being understood that,
for purposes of this subsection (v), where any such representation or
warranty already includes a Material Adverse Effect or materiality
exception, the materiality exception in this subsection (v) shall not
apply) and BrainPlay shall refuse or fail after written notice to
correct such representation or warranty within 15 days of such written
notice;
(vi) by BrainPlay, if there shall be any material breach or
violation of any material covenant or agreement herein to be performed
by KB Online Holdings, including the failure of KB Online Holdings to
deliver the License Agreement pursuant to Section 2.6(a)(iii), and
such breach of violation is not capable of cure prior to July 31,
1999;
(vii) by KB Online Holdings, if there shall be any material
breach or violation of any material covenant or agreement herein to be
performed by BrainPlay and such breach or violation is not capable of
cure prior to July 31, 1999;
(b) The party desiring to terminate this Agreement shall give written
notice of such termination to the other parties hereto.
12.2 EFFECT OF TERMINATION. If this Agreement is terminated as
permitted by Section 12.1 hereof, termination shall be without liability of any
party (or any stockholder, director, member, manager, officer, employee, agent,
consultant or representative of such party) to any other party to this
Agreement; provided that if such termination shall result from the willful
failure of any party hereto to fulfill a condition to the performance of the
obligations of the other party, failure to perform a covenant of this Agreement
or breach by such party of any representation or warranty or agreement contained
herein, such party shall be fully liable for any and all Damages incurred or
suffered by the other party as a result of such failure or breach. The
provisions of Sections 6.1, 7.5, 12.2 and Article 13 shall survive any
termination hereof pursuant to Section 12.1.
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ARTICLE 13
MISCELLANEOUS
13.1 NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be deemed to have been given (a) three days after
the registration if sent by registered mail, postage prepaid, return receipt
requested, (b) upon delivery by courier, (c) upon transmission by facsimile or
(d) upon e-mail to the following addresses:
If to KB Online Holdings or Toyco:
Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228-8707
Attention: General Counsel
Fax: (614) 278-6527
Voice: (614) 278-6762
e-mail: [email protected]
with a copy to:
Benesch, Friedlander,
Coplan & Aronoff LLP
2300 BP Tower
200 Public Square
Cleveland, Ohio 44114
Attention: Michael Wager, Esq.
Fax: (216) 363-4588
Voice: (216) 363-4686
e-mail: [email protected]
If to BrainPlay:
BrainPlay.com, Inc.
475 Seventeenth Street
Suite 750
Denver, Colorado 80202
Attention: Srikant Srinivasan
Fax: (303) 382-1185
Voice: (303) 226-6200
e-mail: [email protected]
34
<PAGE> 40
with a copy to:
Brobeck, Phleger & Harrison LLP
25th Floor
1125 Seventeenth Street
Denver, Colorado 80202
Attention: Jeremy Makarechian, Esq.
Fax: (303)299-8819
Voice: (303) 299-8801
e-mail: [email protected]
13.2 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns. No assignment of this Agreement or of any rights or obligations
hereunder (by operation of law or otherwise) may be made without consent of the
other parties, except, however, that KB Online Holdings may assign its rights or
obligations (other than the KB Funding Obligations or the redemption obligations
set forth in Section 8.5) hereunder to one or more of its respective Affiliates.
Any attempted assignment without any required consent hereunder shall be void.
13.3 THIRD PARTY BENEFICIARIES. Nothing in this Agreement is intended
or shall be construed to confer on any person other than the parties any rights
or benefits hereunder, except, however, that the stockholders of BrainPlay shall
have the right to enforce the provisions of Section 8.5 against Toyco or its
Affiliates, or against Consolidated Stores Corporation or its Affiliates or Mac
Frugel's Bargains Close-outs Inc. or its Affiliates as the guarantors as
hereinafter provided.
13.4 HEADINGS. The headings in this Agreement are intended solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
13.5 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be
governed by and construed in accordance with the laws of the State of Ohio
without regard to conflicts of law rules of such state. Any action or
proceeding, however characterized, relating to or arising out of this Agreement,
or in connection with the subject matter hereof shall be maintained in the state
or federal courts located in the County of Franklin and State of Ohio, and the
parties hereto, each for itself, its successors and permitted assigns, hereby
irrevocably submits to the jurisdiction of the courts of the State of Ohio and
the Courts of the United States of America sitting in the County of Franklin and
State of Ohio for the purposes of any such action or proceeding and irrevocably
agrees to be bound by any judgment rendered thereby in connection with this
Agreement.
13.6 WAIVERS. Compliance with the provisions of this Agreement may be
waived only by a written instrument specifically referring to this Agreement and
signed by the party waiving compliance. No course of dealing, nor any failure or
delay in exercising any right, shall be construed as a waiver, and no single or
partial exercise of a right shall preclude any other or further exercise of that
or any other right.
35
<PAGE> 41
13.7 EXPENSES. Except as otherwise expressly provided herein, Toyco
shall bear all of the fees and expenses of each of KB Online Holdings, BrainPlay
and Toyco (including, without limitation, reasonable fees and disbursements of
counsel, accountants and other experts) incurred by them in connection with the
preparation, negotiation, execution, delivery and performance of this Agreement,
each of the other documents and instruments executed in connection with or
contemplated by this Agreement and the consummation of the transactions
contemplated hereby and thereby. If the transactions contemplated herein are not
consummated, all costs and expenses incurred in connection with this Agreement
will be borne by the party incurring such cost or expense.
13.8 SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, each of which shall remain in full force and
effect.
13.9 AMENDMENT. No amendment of this Agreement shall be binding unless
made in a written instrument that specifically refers to this Agreement and is
signed by all parties hereto.
13.10 ENTIRE AGREEMENT. This Agreement (together with the Exhibits and
Schedules hereto) is the exclusive statement of the agreement among KB Online
Holdings, BrainPlay and Toyco concerning the subject matter hereof. All
negotiations, disclosures, discussions and investigations relating to the
subject matter of this Agreement are merged into the Agreement and there are no
representations, warranties, covenants, understandings, or agreements, oral or
otherwise, relating to the subject matter of the Agreement, other than those
included herein.
36
<PAGE> 42
13.11 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the document.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written
KB ONLINE HOLDINGS, INC.
By: /s/Michael J. Potter
-----------------------------
Name: Michael J. Potter
---------------------------
Title: Executive Vice President
--------------------------
BRAINPLAY.COM
By:
-----------------------------
Srikant Srinivasan
President and Chief Executive Officer
TOYCO.COM LLC
By: K.B. Consolidated, Inc. its Member
By: /s/Albert J. Bell
---------------------------
Name: Albert J. Bell
---------------------------
Title: Executive Vice President
--------------------------
<PAGE> 43
13.8 SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, each of which shall remain in full force and
effect.
13.9 AMENDMENT. No amendment of this Agreement shall be binding unless
made in a written instrument that specifically refers to this Agreement and is
signed by all parties hereto.
13.10 ENTIRE AGREEMENT. This Agreement (together with the Exhibits and
Schedules hereto) is the exclusive statement of the agreement among KB Online
Holdings, BrainPlay and Toyco concerning the subject matter hereof. All
negotiations, disclosures, discussions and investigations relating to the
subject matter of this Agreement are merged into the Agreement and there are no
representations, warranties, covenants, understandings, or agreements, oral or
otherwise, relating to the subject matter of the Agreement, other than those
included herein.
13.11 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the document.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
KB ONLINE HOLDINGS, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
BRAINPLAY.COM
By: /s/Srikant Srinivasan
-----------------------------
Srikant Srinivasan
President and Chief Executive Officer
TOYCO.COM LLC
By: K.B. Consolidated, Inc. its Member
By:
---------------------------
Name:
---------------------------
Title:
--------------------------
<PAGE> 1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 08/18/1995
950188446 - 2535248
BK 00465 PG266
Exhibit 3.7
CERTIFICATE OF INCORPORATION
OF
WARP, WEFT OR WOOF CORP.
------------------------
FIRST: The name of the corporation is:
WARP, WEFT OR WOOF CORP.
SECOND: Its registered office in the State of Delaware
is located at 25 Greystone Manor, Lewes, Delaware 19958-9776, County of Sussex.
The registered agent in charge thereof is Harvard Business Services, Inc.
THIRD: The purpose of the corporation is to engage in
any lawful activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of stock which the
corporation is authorized to issue is 20,000,000 shares having a par value
of $ 0.001 per share.
FIFTH: The business and affairs of the corporation
shall be managed by or under the direction of the board of directors, and
the directors need not be elected by ballot unless required by the bylaws
of the corporation.
SIXTH: This corporation shall be perpetual unless
otherwise decided by a majority of the Board of Directors.
SEVENTH: In furtherance and not in limitation of the
powers conferred by the laws of Delaware, the board of directors is
authorized to amend or repeal the bylaws.
EIGHTH: The corporation reserves the right to amend or
repeal any provision in this Certificate of Incorporation in the manner
prescribed by the laws of Delaware.
NINTH: The incorporator is Harvard Business Services, Inc.,
whose mailing address is 25 Greystone Manor, Lewes, DE 19958-9766. The powers of
the incorporator are to file this certificate of incorporation, approve the
by-laws of the corporation and elect the initial directors.
TENTH: To the fullest extent permitted by the Delaware
General Corporation Law a director of this corporation shall not be liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
I, Richard H. Bell, for the purpose of forming a corporation
under the laws of the State of Delaware do make and file this certificate, and
do certify that the facts herein stated are true; and have accordingly signed
below, this 18th day of August, 1995.
Signed and Attested to by: /s/Richard H. Bell
-----------------------------------
Richard H. Bell, President & Secretary
HARVARD BUSINESS SERVICES, INC.
RECORDER OF DEEDS
FRANCIS X. RASKAUSKAS
95 AUG 31 AM 9:21
SUSSEX COUNTY
DOC. SURCHARGE PAID
<PAGE> 2
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
WARP, WEFT OR WOOF CORP.
I, the undersigned President and Secretary of Warp, Weft or Woof Corp., a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "Corporation"), hereby certify as
follows:
FIRST, The Board of Directors of the Corporation duly adopted resolutions
containing the amendment to the Certificate of Incorporation of the Corporation
set forth below, declaring such amendment to be advisable and calling for the
consent of the stockholders of the Corporation to such amendments.
SECOND, Simultaneously, the Corporation's stockholders unanimously gave
written consent to the adoption of the amendment pursuant to Section 228 of the
Delaware General Corporation Law without a meeting, and the amendment was in
all respects duly adopted in accordance with the provisions of Section 242 of
the Delaware General Corporation Law.
THIRD, Article FIRST of the Certificate of Incorporation of the
Corporation was amended to read in its entirety as follows:
FIRST: The name of the corporation is:
3dub, Inc.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Aloke Majumdar, its President and its Secretary, this 19th day of
August, 1996.
WARP, WEFT OR WOOF CORP.
By: /s/ ALOKE MAJUMDAR
----------------------------
Aloke Majumdar, President
ATTEST:
/s/ ALOKE MAJUMDAR
- ----------------------------
Aloke Majumdar, Secretary
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 09/05/1996
960257229 - 2535248
<PAGE> 3
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
3dub, Inc.
We, the undersigned, President and Secretary, respectively, of 3dub,
Inc., a corporation organized and existing wider and by virtue of the General
Corporation law of the State of Delaware (the "Corporation"), do hereby certify
as follows:
FIRST: The Board of Directors of the Corporation duly adopted
resolutions containing the amendments to the Certificate of Incorporation of the
Corporation set forth below, declaring such amendments to be advisable and
calling for the consent of the stockholders of the Corporation to such
amendments.
SECOND: Simultaneously, stockholders holding sufficient shares of each
class and series of stock entitled to vote gave written consent to the adoption
of the amendments pursuant to Section 228 of the Delaware General Corporation
Law without a meeting, written notice pursuant to Section 228(d) of the Delaware
General Corporation Law will be given to stockholders who did not consent in
writing and the amendments were in all respects duly adopted in accordance with
the provisions of Section 242 of the Delaware General Corporation Law.
THIRD: Article FOURTH of the Certificate of Incorporation of the
Corporation was amended to read in its entirety as set forth on EXHIBIT A
hereto.
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 11/26/1997
971404339 - 2535248
<PAGE> 4
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Srikant Srinivasan, its President, and Srikant Srinivasan, its
Secretary, this 26th day of November, 1997.
3dub, Inc.
By:/s/Srikant Srinivasan
-----------------------------
Srikant Srinivasan, President
-2-
<PAGE> 5
EXHIBIT A
TO
CERTIFICATE OF AMENDMENT
FOURTH: The total number of shares of stock that the Corporation shall
have authority to issue is 21,823,530 divided into 20,000,000 shares of common
stock, each having a par value of $0.001 ("Common Stock"), and 1,823,530 shares
of preferred stock, each having a par value of $0.001 ("Preferred Stock").
Subject to the provisions of Section 13 of this Article FOURTH, the
Board of Directors is authorized to provide for the issuance of Preferred Stock
from time to time in one or more series with such distinctive serial
designations, rights, preferences and limitations of the shares of each such
series as the Board of Directors shall establish. The authority of the Board of
Directors with respect to each series shall include, without limiting the
generality of the foregoing, the determination of any or all of the following:
A. The number of shares constituting the series and the
distinctive designation of that series;
B. The extent, if any, to which the shares of the series shall
have voting rights;
C. Whether dividends, if any, shall be cumulative or
noncumulative, the dividend rate or method of determining the dividend rate of
such series, and the dates and preferences of dividends on such series;
D. The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of the
corporation, or upon any distribution of its assets;
E. Whether the shares of that series shall have conversion
privileges and, if so, the terms and conditions of such conversion privileges,
including provisions, if any, for adjustment of the conversion rate and for
payment of additional amounts by holders of preferred stock of that series upon
exercise of such conversion privileges;
F. Whether or not the shares of that series shall he redeemable,
and, if so, the price at and the terms and conditions upon which such series
shall be redeemable, and whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund; and
G. Any other preferences and relative, participating, optional, or
other special rights, and qualifications, limitations, or restrictions thereof,
all as shall he determined from time to time by the Board of Directors and shall
be stated in a resolution or resolutions providing for the issuance of such
Preferred Stock (a "Preferred Stock Designation"). A Preferred Stock Designation
originally adopted by the Board of Directors that is subsequently amended by an
amendment to the Corporation's Certificate of Incorporation shall continue to be
a Preferred Stock Designation.
<PAGE> 6
Shares of any series of Preferred Stock that have been redeemed
(whether through the operation of a sinking fund or otherwise) or purchased by
the Corporation, or that, if convertible or exchangeable, have been converted
into or exchanged for shares of stock of any other class or classes shall be
canceled on the books of the Corporation, and the shares so redeemed, purchased,
converted or exchanged shall be deemed to be canceled and no longer authorized
or available for issuance by the Corporation.
1. DESIGNATION
One Million Eight Hundred Twenty Three Thousand, Five Hundred Thirty
(1,823,530) shares of Preferred Stock are hereby designated Series A Convertible
Preferred Stock (hereinafter referred to as the "Series A Preferred"), such
series with the powers, preferences and rights and the qualifications,
restrictions, and limitations thereon, specified in this Article FOURTH. The
Series A Preferred is sometimes referred to herein as the "Preferred Stock."
2. DIVIDENDS
a. RIGHT TO DIVIDENDS. The holders of outstanding Series A Preferred
shall be entitled to receive cash dividends at the rate of $0.136 per share per
annum (as adjusted for stock splits, stock dividends and the like with respect
to such shares), respectively, only when, as, and if declared from time to time
by the Board of Directors, out of any assets at the time legally available.
Notwithstanding Section 2.a(2), dividends on each share of the Series A
Preferred (a "Share") shall accrue on a daily basis at the rate of 8% per annum
(as adjusted for stock splits, stock dividends and the like with respect to such
shares), of the sum of the Series A Liquidation Preference Per Share thereof
plus all accumulated and unpaid dividends thereon from and including the date of
issuance of such Share to and including the date on which the Series A
Liquidation Preference Per Share of such Share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection with the
Liquidation of the Corporation pursuant to Section 3.a(1) below. Such dividends
shall accrue whether or not they have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends, and such dividends shall be cumulated such that all
accrued and unpaid dividends shall be fully paid or declared with funds
irrevocably set apart for payment before any dividends, distributions,
redemptions or other payments may be made with respect to any Common Stock. The
date on which the Corporation initially issues any Share shall be deemed to be
its "date of issuance" regardless of the number of times transfer of such Share
is made on the stock records maintained by the Corporation.
(1) PRIORITY OF DIVIDENDS. The Corporation shall make no Distribution
(as defined below) to the holders of Common Stock in any fiscal year unless and
until any and all declared but unpaid dividends shall have been paid upon all
Preferred Stock. "Distribution" in this paragraph means the transfer of cash or
property without consideration, whether by way of dividend or otherwise (except
a dividend in shares of the Corporation), or the purchase or redemption of
shares of the Corporation for cash or property, but does not include (i) the
repurchase of shares from a terminated employee or consultant of the Corporation
within the terms of a management agreement or stock restriction agreement, or in
exercise of the
-2-
<PAGE> 7
Corporation's right of first refusal upon a proposed transfer, in either case
approved by the Corporation's Board of Directors or (ii) a distribution which is
part of a voluntary liquidation, dissolution or winding up of the Corporation.
In the event dividends are paid on any share of Common Stock, an additional
divided shall be paid with respect to all outstanding shares of Series A
Preferred in an amount equal per share (on as as-if converted to Common Stock
basis) to the amount paid or set aside for each share of Common Stock.
(2) DIVIDENDS NOT CUMULATIVE. Except as provided in Section 2.a above,
dividends shall not be cumulative for payment. Dividends shall accrue or
accumulate only if and to the extent they are declared but unpaid. No undeclared
or declared but unpaid dividend shall bear or accrue interest.
3. LIQUIDATION PREFERENCE
a. BASIC PREFERENCE RIGHTS. In the event of any voluntary
or involuntary liquidation, dissolution, or winding up of the Corporation
(a "Liquidation"):
(1) PAYMENTS TO HOLDERS OF PREFERRED STOCK. Subject to Section 3.a(3),
each holder of shares of Series A Preferred then outstanding shall be entitled
to receive an amount equal to $1.70 for each share of Series A Preferred (the
"Series A Liquidation Preference Per Share") (as adjusted for stock splits and
the like), plus the accrued dividend at 8% per annum provided in Section 2.a(1),
before any payment shall be made in respect of the Corporation's Common Stock.
The total payments made under this Section 3.a(1) shall be the "Total
Liquidation Preference."
(2) SHOULD ASSETS EXCEED PAYMENTS. Subject to Section 3.a(3), the
remaining assets of the Corporation available for distribution to shareholders
after payments are made under Section 3.a(1) shall be distributed pro rata among
all of the Corporation's shareholders. For purposes of this Section 3.a(2),
holders of Preferred Stock shall share in this distribution in proportion to the
number of shares of Common Stock they would hold had full conversion of their
Preferred Stock occurred immediately prior to the Liquidation, according to the
provisions of Sections 4 and 5, below.
(3) DISTRIBUTIONS EXCEEDING MINIMUM TARGET. If the assets available for
distribution to shareholders without any application of the Total Liquidation
Preference is an amount that yields to the shareholders an amount per share
equal to or greater than $5.10 per share (adjusted for stock splits and the
like) (the "Minimum Target"), the assets available for distribution shall be
distributed pro rata among all of the Corporation's shareholders. For purposes
of this Section 3.a(3), holders of Preferred Stock shall share in this
distribution in proportion to the number of shares of Common Stock they would
hold had full conversion of their Preferred Stock occurred immediately prior to
the Liquidation, according to the provisions of Sections 4 and 5, below.
(4) SHOULD ASSETS BE INSUFFICIENT. If upon a Liquidation the assets of
the Corporation available for distribution to its shareholders shall be
insufficient to make full
-3-
<PAGE> 8
payments due under Section 3.a(1), then the holders of the Series A Preferred
then outstanding shall share ratably in proportion to the number of such shares
owned by each such holder in proportion to the Series A Liquidation Preference
per share.
(5) SOURCE OF LIQUIDATION PAYMENT. The holders of stock shall be paid
under this Section 3.a out of the assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus or earnings.
(6) MERGER OR ACQUISITION. The Corporation shall not effect (i) a
merger, reorganization, or consolidation of the Corporation into or with another
corporation, or any other corporate reorganization, in which the shareholders of
the Corporation immediately prior to such other consolidation, merger or
reorganization, own less than fifty percent (50%) of the Corporation's voting
power immediately after such event, or any transaction or series of related
transactions in which in excess of fifty percent (50%) of the Corporation's
voting power is transferred (an "Acquisition"), or (ii) the sale or transfer of
all or substantially all of the assets of the Corporation (an "Asset Transfer")
until the Corporation shall have provided notice to all holders of Preferred
Stock pursuant to Section 3.b, below. Unless otherwise agreed to by the holders
of two-thirds of the Preferred Stock which is then outstanding, an Acquisition
or Asset Transfer shall be deemed to be a Liquidation.
b. NOTICE. In the event of any Liquidation of the Corporation, or in
the event of any Acquisition or Asset Transfer, the Corporation shall give each
holder of Preferred Stock initial written notice of the proposed action within
fifteen (15) days after the date the Board of Directors approves such action, or
twenty (20) days prior to any shareholders' meeting called to approve such
action, or twenty (20) days after the commencement of any involuntary
proceeding, whichever is earlier.
(1) CONTENT OF NOTICE. Such initial written notice shall describe the
material terms and conditions of the proposed action, including a description of
the stock, cash, and property to be received by the holders of Preferred Stock
upon consummation of the proposed action. If any material change in the facts
set forth in the initial notice shall occur, the Corporation shall promptly give
written notice to each holder of the Preferred Stock of that material change.
(2) NOTICE PRECEDES CONSUMMATION. The Corporation shall not consummate
any Liquidation of the Corporation before the expiration of twenty (20) days
after the mailing of the initial notice or ten (10) days after the mailing of
any subsequent written notice, whichever is later. Any such 20-day or 10-day
period may be shortened upon the written consent of the holders of a majority of
the Preferred Stock then outstanding.
c. NON-CASH DISTRIBUTIONS ON LIQUIDATION. In the event of any
Liquidation of the Corporation which will involve the distribution of assets
other than cash, the Corporation shall promptly engage a competent independent
appraiser to determine the value of the assets to be distributed. With respect
to the valuation of securities, the Corporation shall engage such appraiser as
shall be approved by the holders of a majority of the Preferred Stock then
-4-
<PAGE> 9
outstanding. The Corporation shall, upon receipt of such appraiser's valuation,
give prompt written notice to each holder of shares of Preferred Stock of the
appraiser's valuation.
4. CONVERSION
a. CONVERSION RIGHTS.
(1) OPTIONAL CONVERSION. Each share of Preferred Stock shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share and up to and including the day prior to the closing
of a Qualified Public Offering (as defined below) (the "Conversion Period"),
into fully paid and non-assessable shares of Common Stock of the Corporation.
(2) AUTOMATIC CONVERSION. All outstanding shares of Series A Preferred
shall automatically be converted into fully paid and non-assessable shares of
Common Stock of the Corporation, at the then applicable Conversion Price (as
defined below), immediately:
(a) Prior to the closing of a firm commitment underwritten public
offering of the shares of Common Stock of the Corporation pursuant to a
registration statement filed under the Securities Act of 1933, as amended, at a
price per share of not less than $8.50 per share (prior to underwriter
commissions and expenses and adjusted for stock splits, stock dividends,
reorganizations and the like) and with aggregate offering proceeds to the
Corporation of not less than Fifteen Million Dollars ($15,000,000) (a "Qualified
Public Offering"); or
(b) Upon the conversion into Common Stock of at least 66-2/3% of
all Series A Preferred then outstanding.
(3) CONVERSION FORMULA. Each share of Series A Preferred shall be
valued at $1.70 (the "Original Series A Purchase Price"), for purposes of such
optional or automatic conversion, notwithstanding any accrued but unpaid
dividends. The number of shares of Common Stock into which each share of the
Series A Preferred, may be converted shall be determined by dividing the
Original Series A Purchase Price by the Series A Conversion Price (as determined
as provided below) in effect at the time of the conversion. The Corporation
shall make all necessary payments as of the Conversion Date (as defined in
Section 4.c) on account of any dividends declared and thus accrued on the
Preferred Stock surrendered for conversion.
b. INITIAL CONVERSION PRICE. The conversion price per share at which
shares of Common Stock shall be initially issuable upon conversion of any shares
of Series A Preferred (the "Series A Conversion Price") shall be equal to the
Original Series A Purchase Price, subject to adjustment as provided in Section 5
below.
c. MECHANICS OF CONVERSION.
(1) OPTIONAL CONVERSION. Before any holder of Preferred Stock will be
entitled to convert the same into shares of Common Stock pursuant to Section
4.a(1) hereof, such holder
-5-
<PAGE> 10
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the Preferred Stock, and
shall give written notice to the Corporation at such office that such holder
elects to convert the same and will state therein the name or names in which the
certificate or certificates for shares of Common Stock should be issued. The
Corporation, as soon as practicable thereafter, will issue and deliver at such
office to such holder of Preferred Stock or to the holder's nominee or nominees,
a certificate or certificates for the number of shares of Common Stock to which
such holder will be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Preferred Stock to be converted (the "Conversion
Date"), and the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall he treated for all purposes as the record
holder or holder of such shares of Common Stock on such Conversion Date.
(2) AUTOMATIC CONVERSION. Conversion of all the outstanding shares of
Preferred Stock into shares of Common Stock pursuant to Section 4.a(2) hereof
shall be deemed to have been made automatically and immediately prior to the
closing of a Qualified Public Offering, or immediately following the prior
conversion of at least 66-2/3% of all Series A Preferred ever issued as set
forth in Section 4.a(2)(B) hereof (an "Automatic Conversion Date"). Upon such
automatic conversion, the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion will be treated for all purposes as
the record holder or holders of such Common Stock on the Automatic Conversion
Date whether or not such holder or holders shall have surrendered certificates
for such holder's shares of Preferred Stock to the Corporation. Upon the
Automatic Conversion Date, the certificates representing all the shares of
Preferred Stock shall be deemed void; as soon as practicable after the surrender
by any holder of Preferred Stock certificates, accompanied by a statement from
the holder as to the name or names in which the certificate or certificates for
shares of Common Stock should be issued, the Corporation shall then issue and
deliver, at the office of the Corporation to such holder or his nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which the holder shall be entitled.
(3) NEW CERTIFICATES. Upon conversion of only a portion of the number
or shares or Preferred Stock represented by a certificate surrendered for
conversion, the Corporation shall issue and deliver upon the written order of
the holder at the expense of the Corporation, a new certificate covering the
number of shares of Preferred Stock representing the unconverted portion of the
certificate so surrendered.
(4) PUBLIC OFFERING. If any holder of Preferred Stock elects to convert
in connection with an underwritten offering of securities registered pursuant to
the Securities Act of 1933, as amended (other than in connection with a
Qualified Public Offering) the conversion may, at the option of any holder
tendering Preferred Stock for conversion, be conditioned upon the closing with
the underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Preferred Stock shall not be deemed to have converted such
Preferred Stock until the close of business on the actual closing date with
respect to such sale of securities. Notice of such closing shall be given by the
Corporation by certified mail, postage prepaid, return receipt requested, to
-6-
<PAGE> 11
the holders of the Preferred Stock at their addresses shown in the Corporation's
records at least five (5) days prior to the closing date of such sale of
securities. On or after the closing date as specified in such notice, each
holder of the Preferred Stock shall surrender the certificate or certificates
representing such Preferred Stock for the number of shares of Common Stock to
which the holder is entitled at the office of the Corporation or any transfer
agent. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which the holder shall
be entitled as aforesaid. The conversion shall be deemed to have occurred as of
the close of business on the actual closing date with respect to such
underwritten offering of securities, and immediately upon the surrender of any
certificate representing the Preferred Stock to be converted, each holder of
such Preferred Stock shall thereafter be treated for all purposes as the record
holder of the number of shares of Common Stock issuable to such holder upon
such conversion.
(5) INABILITY TO PAY DIVIDENDS ON CONVERSION. If for any reason the
Corporation is unable to pay any declared and accrued dividends on any Preferred
Stock being converted, at the converting holder's option, (i) the Corporation
will pay such dividends to the converting holder as soon thereafter as funds of
the Corporation are legally available for such payment or (b) all or a portion
of such unpaid dividends may he used to acquire an additional number of shares
of Common Stock determined by dividing the amount of the unpaid dividends to be
applied for such purpose by the Series A Conversion Price which is then in
effect.
d. NO FRACTIONAL SHARES. The Corporation shall issue no fractional
shares of Common Stock or scrip upon conversion of shares of Preferred Stock. If
more than one share of Preferred Stock shall be surrendered for conversion at
any one time by the same holder, the number of full shares of Common Stock
issuable upon their conversion shall be computed on the basis of the aggregate
number of shares of Preferred Stock so surrendered. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of any
shares of Preferred Stock, the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to the same fraction of
the Series A Conversion Price in effect on the business day next preceding the
day of conversion.
e. TAXES INCIDENT TO CONVERSION. The Corporation shall pay any and all
issue taxes and other taxes (excluding income taxes) that may be payable in
respect to any issue or delivery of shares of Common Stock on conversion of
Preferred Stock. The Corporation shall not be required to pay any tax which may
be payable in respect of any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that in which the Preferred Stock so
converted was registered, and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the Corporation the amount of
any such tax, or has established, to the satisfaction of the Corporation, that
such tax has been paid.
f. SUFFICIENT RESERVES OF STOCK. The Corporation shall at all times
reserve and keep available, out of its authorized but unissued Common Stock,
solely for the purpose of effecting the conversion of the Preferred Stock, the
full number of shares of Common Stock deliverable upon the conversion of all
Preferred Stock from time to time outstanding.
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<PAGE> 12
g. VALID ISSUE FOR CONVERSION. All shares of Common Stock which may be
issued upon conversion of the shares of Preferred Stock shall, upon issuance by
the Corporation, be validly issued, fully paid, non-assessable and free from all
taxes, liens and charges with respect to their issuance.
5. ADJUSTMENT OF CONVERSION PRICES
a. ANTI-DILUTION ADJUSTMENT. The Series A Conversion Price (also known
as the "Conversion Price") in effect at any time shall be adjusted from time to
time as provided in this Section 5.
b. NO ADJUSTMENT FOR CERTAIN GRANTS, SALES, OR ISSUANCES. Anything in
this Certificate of Incorporation to the contrary notwithstanding, the
Corporation shall not be required to make any adjustment of the Conversion Price
in the case of the grant of options or other rights to purchase, or the sale of,
or the issuance of, shares of Common Stock or obligations or securities
convertible into the Common Stock of the Corporation:
(1) To its officers, employees, directors, and consultants pursuant to
the Company's Stock Option Plan so long as any such grants, sales or issuances
do not exceed in the aggregate 947,037 shares of Common Stock or obligations or
securities convertible into Common Stock;
(2) Upon the conversion of any shares of the Corporation's Preferred
Stock.
c. STOCK SPLITS, STOCK DIVIDENDS OR STOCK COMBINATIONS. In case the
Corporation shall at any time subdivide the outstanding shares of Common Stock,
or shall issue a stock dividend on its outstanding Common Stock or make a
distribution payable in additional shares of Common Stock, the Conversion Price
in effect immediately prior to such subdivision, the issuance of such dividend
or the making of such distribution, shall be proportionately decreased. In case
the Corporation shall at any time combine the outstanding shares of Common
Stock, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased, effective at the close of business on the
date of such subdivision, dividend, or combination.
d. ADJUSTMENT FORMULAS. The Corporation may, at some point after the
first issuance of the Series A Preferred issue or sell Common Stock, a right or
option to purchase Common Stock, or shares of stock or an obligation convertible
into Common Stock for a certain consideration receivable by the Corporation per
share ("Consideration Receivable," with the product or the number of such shares
times such Consideration Receivable being the "Aggregate Consideration
Receivable") which is less than the Series A Conversion Price then in effect. In
any such event, the Series A Conversion Price shall immediately and
automatically be adjusted as determined to the nearest cent by the following
formula:
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<PAGE> 13
Where z = New Series A Conversion Price;
x = Current Series A Conversion Price;
y = The Aggregate Consideration Receivable on such issuance,
sale, etc.;
a = Number of shares of Common Stock outstanding just prior to
such issuance, sale, etc., less all shares of Common Stock
owned by Srikant Srinivasan and Aloke Majumdar at such time
(or owned by the ancestors, descendants or spouses of such
persons or held in trust or other entitles for the benefit
of such persons or Messrs. Srinivasan and Majumdar);
b = Number of shares of Common Stock to which all holders of
Options (as defined in 5.d(1) below) are entitled to
subscribe for, or purchase immediately prior to, such
issuance, sale, etc.;
c = Number of shares of Common Stock issuable to all holders of
Convertible Securities (as defined in 5.d(2) below),
immediately prior to such issuance, sale, etc. (using the
Series A Conversion Price then in effect); and
d = Number of shares of Common Stock to be issued, or deemed to
be issued under 5(d)(1) and (2) below, in connection with
such issuance, sale, etc.;
then z = x(a+b+c)+y;
-----------
a+b+c+d
provided, however, that the Series A Conversion Price shall never exceed the
Original Series A Purchase Price.
For purposes of this Section 5.d only, the following provisions shall
apply:
(1) OPTIONS OR WARRANTS. In case of the issuance or sale by the
Corporation in any manner of any options for the purchase of shares of Common
Stock or of any rights to subscribe for or to purchase shares of Common Stock
("Options"), all shares of Common Stock which the holders of such Options shall
be entitled to subscribe for or purchase pursuant to such Options shall be
deemed to be issued or sold as of the date of the offering of such rights or the
granting of such Options.
(2) CONVERTIBLE SECURITIES. In the case of the issuance or sale by the
Corporation in any manner of any obligations or of any shares of stock of the
Corporation that shall be convertible into or exchangeable for Common Stock
("Convertible Securities"), all
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<PAGE> 14
shares of Common Stock issuable upon the conversion or exchange of such
obligations or shares shall be deemed issued as of the date such obligations or
shares are issued.
(3) CASH CONSIDERATION FOR COMMON STOCK. In the case of an issue or
sale for cash of shares of Common Stock, the Consideration Receivable by the
Corporation therefor shall be the amount of cash received, before deducting any
commissions or expenses paid by the Corporation.
(4) NON-CASH CONSIDERATION FOR COMMON STOCK. In the case of the
issuance or sale (otherwise than upon conversion or exchange of obligations or
shares of stock of the Corporation) of shares of Common Stock for a
consideration other than cash or a consideration partly other than cash, the
amount of the consideration other than cash receivable by the Corporation for
such shares shall be deemed to be the value of such consideration as determined
in good faith by the Board or Directors.
(5) CONSIDERATION RECEIVABLE FOR OPTIONS OR CONVERTIBLE SECURITIES.
(a) The amount of the Aggregate Consideration Receivable by the
Corporation upon the issuance of any Options referred to in Subparagraph (1)
above shall be the minimum aggregate consideration named in such Options for the
shares of Common Stock covered thereby, plus the consideration, if any, received
by the Corporation for such Options.
(b) The amount of Consideration Receivable by the Corporation upon
the issuance of any obligations or shares which are convertible or exchangeable
as described in Subparagraph (2) above as "Convertible Securities," shall be the
amount of consideration received by the Corporation upon the issuance of such
obligations or shares, plus the minimum aggregate consideration, if any, other
than such obligations or shares, receivable by the Corporation upon such
conversion or exchange, except in adjustment of dividends.
(c) The amount of Aggregate Consideration Receivable under
Paragraphs 5.d(5)(A) and 5.d(5)(B) and the amount of Aggregate Consideration
Receivable upon the exercise of Options or upon the conversion or exchange of
convertible securities under this Paragraph 5.d(5), shall be determined in the
same manner provided in Subparagraphs (3) and (4) above with respect to the
Aggregate Consideration Receivable by the Corporation as in the case of the
issuance of additional shares of Common Stock. But if such obligations or shares
of stock so convertible or exchangeable are issued in satisfaction of any
dividend upon any stock of the Corporation other than Common Stock, the amount
of the consideration received upon the original issuance of such obligations or
shares of stock shall be the value of such obligations or shares of stock, as of
the date of the adoption of the resolution declaring the dividend, as determined
in good faith by the Board of Directors at or as of that date.
(6) OTHER PARTICULARS CONCERNING OPTIONS AND CONVERTIBLE SECURITIES. In
the event that the Series A Conversion Price shall be adjusted with respect to
the issuance of Options or Convertible Securities (as defined in Sections 5.d(1)
and (2)), the following provisions apply:
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<PAGE> 15
(a) No further adjustment in the Conversion Price(s) shall be made
upon the subsequent issue of Convertible Securities or shares of Common Stock
when those Options are exercised or those Convertible Securities are converted.
(b) Such Options or Convertible Securities may by their terms
provide, with the passage of time or otherwise, for any decrease in the
consideration payable to the Corporation, or increase in the number of shares of
Common Stock issuable, upon their exercise, conversion or exchange. In such a
case, the Conversion Price computed upon the original issue thereof, and any
subsequent adjustments shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects those Options or the rights of conversion or exchange under those
Convertible Securities.
(c) Upon the expiration of any such Options or any rights of
conversion under such Convertible Securities which shall not have been
exercised, the Conversion Price computed upon the original issue thereof, and
any subsequent adjustments shall, upon such expiration, be recomputed as if:
i) In the case of Convertible Securities or Options for Common
Stock, the only additional shares of common stock issued were the shares of
Common Stock actually issued upon the exercise of such Options or the
conversion of such Convertible Securities; and the Aggregate Consideration
Receivable was the consideration actually received by the Corporation for
the issue of such Convertible Securities which were actually converted, and
ii) In the case of Options for Convertible Securities, only
the Convertible Securities actually issued upon the exercise thereof were
issued at the time of issue of such Options; and the Aggregate
Consideration Receivable for the additional shares or Common Stock deemed
to have been then issued was the consideration actually received by the
Corporation for the issue of all such Options for Convertible Securities,
whether or not exercised, plus the consideration deemed to have been
received by the Corporation (determined pursuant to Section 5.d(5)) upon
the issue of the Convertible Securities when such Options were actually
exercised.
(d) No readjustment pursuant to Section 5.d(6)(b) or Section
5.d(6)(c) shall have the effect of increasing the Conversion Price by an amount
greater than the amount of the adjustment originally made when the Options or
Convertible Securities were issued.
(e) In the case of any Options which expire by their terms not more
than thirty (30) days after the date of issue or sooner, no adjustment of the
Conversion Price shall be made until the expiration or exercise of all such
Options.
e. WAIVER OF ADJUSTMENT.
(1) In the event that holders of two-thirds of the then currently
outstanding shares of the Series A Preferred shall consent to limit, or waive in
its entirety, any
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<PAGE> 16
anti-dilution adjustment to which the holders of such series would otherwise be
entitled under Section 5.d hereof, the Corporation shall not be required to make
any adjustment whatsoever with respect to any shares of Series A Preferred or to
make any adjustment with respect to any shares of Series A Preferred in excess
of such limit, as the terms of such consent may dictate.
(2) Moreover, any holder of Series A Preferred shall be permitted to
waive in whole or in part, currently or prospectively, by contract or any other
writing, any anti-dilution adjustment to which he or it would otherwise be
entitled pursuant to the provisions of this Section 5.
6. REDEMPTION.
a. OPTIONAL REDEMPTION. So long as any Series A Preferred shall be
outstanding, at the election of two-thirds of the outstanding Series A
Preferred, the Corporation shall on each of the dates set forth below redeem
from each holder of shares of Series A Preferred at the redemption price of
$1.70 per share plus any declared and unpaid dividends with respect to such
shares (such amount to be adjusted proportionately in the event the shares of
Preferred Stock are subdivided into a greater number or combined into a lesser
number) the number of shares of Series A Preferred, to the nearest whole share,
held by such holder on such date in eight (8) equal quarterly installments
beginning November 30, 2004, provided that such number shall be reduced, in each
instance, with respect to each holder, by the number of shares of Series A
Preferred with respect to which such holder exercises its conversion rights
during the period commencing on the date of the notice of redemption delivered
pursuant to Section 6.b and ending on the date of redemption.
b. PROCEDURES. Whenever any shares of Preferred Stock are to be
redeemed pursuant to this Section 6, the Corporation shall give not less than
thirty (30) days advance written notice thereof to each holder of record whose
stock is to be redeemed, by registered or certified mail, postage prepaid,
addressed to such holder at such holder's address as the same shall appear on
the registry books of the Corporation. Such notice shall (i) state the number of
shares to be purchased from such holder, (ii) state the date fixed for the
redemption thereof, and (iii) call upon such holder to surrender to the
Corporation on or after said date, at the place designated in such notice, a
certificate or certificates representing the number of shares of Preferred Stock
to he redeemed in accordance with such notice. On or after the redemption date
specified in such notice of redemption, each holder of shares of Preferred Stock
to be so redeemed shall present and surrender the certificate or certificates
for such shares to the Corporation at the place designated in said notice, duly
endorsed for transfer, free and clear of all liens, claims, and encumbrances of
any kind or nature, and thereupon the redemption price of such shares shall be
paid to, or to the order of, the person whose name appears an such certificate
or certificates as the owner thereof. From and after the date fixed in any such
notice as the date of redemption, unless the Corporation shall default in
providing from the payment of the redemption price pursuant to such notice, all
rights of the holders of Preferred Stock thereby called for redemption as
shareholders of the Corporation with respect to such shares of Preferred Stock,
except the right to receive the redemption price, shall cease and terminate. The
Corporation shall deposit the amount required for the payment of any part of the
redemption price not claimed on the
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<PAGE> 17
redemption date with a bank or trust company selected by the Corporation and
doing business in Colorado. Any interest allowed on monies so deposited shall be
paid from time to time to the Corporation. Any monies so deposited which shall
remain unclaimed by the holders of the Preferred Stock at the end of two years
after the redemption date shall be paid by such bank or trust company to the
Corporation, but the Corporation shall remain obligated to make payment of the
redemption price to the holders of Preferred Stock entitled thereto, subject to
any applicable escheat or similar laws.
c. PRE-EMPTIVE CONVERSION. Nothing in this Section 6 shall be deemed to
prevent any holder of shares of Preferred Stock from exercising such holder's
right of conversion pursuant to Section 4 hereof with respect to any share of
Preferred Stock at any time prior to the redemption of such share of Preferred
Stock, including the giving of notice of redemption with respect to such share
pursuant to Section 6.b.
7. REORGANIZATION, RECLASSIFICATION, AND SALE OF ASSETS.
If any capital reorganization or reclassification of the capital stock
of the Corporation, including any such reorganization or reclassification in
connection with any merger, consolidation, or transfer of substantially all of
the assets of the Corporation, shall not be deemed to be a Liquidation pursuant
to Section 3 hereof, and if it shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities, or assets with
respect to or in exchange for Common Stock, then the following shall be an
express condition of such reorganization or reclassification.
a. Lawful and adequate provisions in a form satisfactory to the holders
of two-thirds of the Preferred Stock, shall be made, whereby each holder of
shares of Preferred Stock shall thereafter have the right to receive, upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
of the Corporation immediately theretofore receivable upon the conversion of
such shares of the Preferred Stock, such shares of stock, securities, or assets
as may be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore so receivable had such reorganization or
reclassification not taken place.
b. Moreover, in any such case, appropriate provision shall be made with
respect to the rights and interests of each such holder of Preferred Stock to
the end that the provisions hereof (including without limitation provisions for
adjustments of the Conversion Price) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities, or assets thereafter
deliverable upon the exercise of such conversion rights. In the event of a
merger or consolidation of the Corporation as a result of which a greater or
lesser number of shares of Common Stock of the surviving Corporation are
issuable to holders of the Common Stock of the Corporation outstanding
immediately prior to such merger or consolidation, the Conversion Price in
effect immediately prior to such merger or consolidation shall be adjusted in
the same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock of the Corporation.
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<PAGE> 18
c. The Corporation shall not effect any such reorganization,
reclassification, consolidation, merger, or sale unless, prior to the
consummation thereof: (i) the Corporation shall have obtained the consent of the
holders of two-thirds of the Preferred Stock then outstanding, and (ii) the
successor corporation (if other than the Corporation) resulting from such
consolidation or merger, or the corporation purchasing such assets, shall assume
by written instrument, in a form satisfactory to the holders of two-thirds of
the Preferred Stock then outstanding the obligation to deliver to such holder
such shares of stock, securities, or assets as, in accordance with the foregoing
provisions, such holder may be entitled to receive. Such written instrument
shall be promptly mailed or delivered to each holder of shares of Preferred
Stock at the last address of such holder appearing on the books of the
Corporation.
8. NO IMPAIRMENT
Without the consent of the holders of two-thirds of the Preferred Stock
then outstanding, the Corporation shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance of performance of any of the terms in this
Article FOURTH to be observed or performed by the Corporation. The Corporation
shall at all times in good faith assist in the carrying out of all the
provisions of Sections 4, 5, 6 and 7 hereof.
9. CERTIFICATE AS TO ADJUSTMENTS
a. Upon the occurrence of each adjustment of the Series A Conversion
Price, pursuant to Section 5, the Corporation at its expense shall promptly
compute such adjustment and prepare and furnish to each holder of Series A
Preferred a certificate setting forth such adjustment and showing in detail the
facts upon which such adjustment is based, and
b. Upon the written request at any time of any holder of Series A
Preferred, the Corporation shall furnish to such holder a like certificate
setting forth (i) such adjustment, (ii) the Series A Conversion Price at the
time in effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of Series A Preferred.
10. NOTICE OF RECORD DATES
In the event:
a. That the Corporation shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend, or any other
distribution, payable otherwise than in cash; or
b. That the Corporation shall take a record of the holders of its Common
Stock for the purpose of entitling them to subscribe for or purchase any shares
of stock of any class or to receive any other rights; or
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<PAGE> 19
c. Of any capital reorganization of the Corporation, reclassification
of the capital stock of the Corporation (other than a subdivision or combination
of its outstanding shares of Common Stock), consolidation, or merger of the
Corporation with or into another corporation or conveyance of all or
substantially all of the assets of the Corporation to another corporation; or
d. Of the voluntary or involuntary dissolution, liquidation, or winding up
of the Corporation;
then, the Corporation shall cause to be mailed to the holders of record of the
outstanding Preferred Stock, at least twenty (20) days prior to the date
specified therein, a notice stating the date on which that record is to be taken
or that event is to take place. The notice shall also specify the date, if any
is to be fixed, as of which holders of Common Stock of record shall be entitled
to exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation, or winding up.
11. FORM OF NOTICES
Any notice required by the provisions of this Article FOURTH to be
given to the holders of shares of Preferred Stock shall be deemed given if hand
delivered, delivered by courier, or deposited in the United States mail, postage
prepaid, addressed to each bolder of record at such holder's address appearing
on the books of the Corporation.
12. VOTING
a. GENERAL RIGHTS. The shares of Preferred Stock shall be voted equally
with the shares of the Corporation's Common Stock at any annual or special
meeting of shareholders of the Corporation, or may act by written consent on the
same basis, with respect to all matters which come before the shareholders. Each
holder of shares of Preferred Stock shall be entitled to the number of votes
equal to the number of whole shares of the Corporation's Common Stock into which
such holder's shares of Series A Preferred are convertible, pursuant to Sections
4 and 5 of this Article FOURTH, immediately after the close of business on the
record date fixed for such meeting or the effective date of such written
consent.
b. ELECTION OF THE BOARD OF DIRECTORS. For so long as the authorized size
of the Corporation's Board of Directors is five (5) or more, (i) the holders of
Series A Preferred, voting as a separate class, shall be entitled to elect two
(2) members (one designated by Sequel Limited Partnership and its affiliates and
one by Sevin Rosen Funds and its affiliates) of the Corporation's Board of
Directors at each meeting or pursuant to each consent of the Corporation's
shareholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors; (ii) the holders of Common stock, voting as a separate class,
shall be entitled to elect two (2) members of the Corporation's Board of
Directors at each meeting or pursuant to each consent of the Corporation's
shareholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors; and (iii) the
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<PAGE> 20
holders of Common Stock and Series A Preferred, voting together as a class,
shall be entitled to elect the remaining members of the Board of Directors.
13. AMENDMENTS AND CHANGES
As long as any of the Series A Preferred shall be issued and outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of 66-2/3% of the Series A
Preferred then outstanding:
a. Take any action that increases the number of authorized shares of
Preferred Stock or which would materially and adversely alter or change the
preferences, rights, privileges, or powers of, or the restrictions provided for
the benefit of, the Series A Preferred;
b. Authorize, create, or issue shares of any class of stock, any bonds,
debentures, notes, or other obligations convertible into or exchangeable for or
having option rights to purchase, any shares of stock of the Corporation having
any preference or priority, as to dividends, assets or otherwise on a parity
with or superior to any preferences or priority of the Series A Preferred;
c. Reclassify any outstanding shares into shares having any preference
or priority as to dividends, assets or otherwise superior to or on a parity with
any such preference or priority of Preferred Stock;
d. Merge, consolidate, reorganize, recapitalize, liquidate or sell all
or substantially all of the assets outside the ordinary course of business or
enter into any agreement regarding an Asset Transfer or an Acquisition);
e. Increase shares subject to or available for stock options above the
aggregate number provided in Section 5.b(1);
f. Repurchase shares of stock from employees or former employees other
than in connection with termination of employment pursuant to agreements
approved by the Board of Directors of the Corporation;
g. Effect substantial acquisitions or changes in the business of the
Corporation;
h. Engage in any transaction with an affiliate of the Corporation; or
i. Take any action that increases or decreases the authorized size of the
Board of Directors.
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<PAGE> 21
14. HEADINGS
The headings of the Sections, Subsections, Paragraphs and Subparagraphs
of this Article FOURTH are inserted for convenience only and shall not be deemed
to constitute a part of this Article FOURTH.
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<PAGE> 22
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 01/28/1998
981034575 - 2535248
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF 3DUB, INC.
The undersigned, as President and Secretary of 3dub, Inc., a corporation
organized and existing under and by virtue of the General Corporation Law of
the State of Delaware (the "Corporation"), does hereby certify as follows:
FIRST: The Board of Directors of the Corporation duly adopted resolutions
containing the amendment to the Certificate of Incorporation of the Corporation
set forth below, declaring such amendment to be advisable and calling for the
consent of the stockholders of the Corporation to such amendment.
SECOND: Simultaneously, stockholders holding sufficient shares of each
class and series of stock entitled to vote gave written consent to the adoption
of the amendment pursuant to Section 228 of the Delaware General Corporation
Law without a meeting, written notice pursuant to Section 228(d) of the
Delaware General Corporation Law will be given to stockholders who did not
consent in writing and the amendments were in all respects duly adopted in
accordance with the provisions of Section 242 of the Delaware General
Corporation Law.
THIRD: Article FIRST of the Certificate of Incorporation of the
Corporation was amended to read in its entirety as follows:
FIRST: The name of the corporation is: Thunderbeam.com, Inc.
<PAGE> 23
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Srikant Srinivasan, its President and Secretary, this 27th day of
January, 1998.
3dub, Inc.
By: /s/ SRIKANT SRINIVASAN
-----------------------------
Srikant Srinivasan, President
ATTEST:
/s/ SRIKANT SRINIVASAN
- -----------------------------
Srikant Srinivasan, Secretary
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<PAGE> 24
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
THUNDERBEAM.COM, INC.
The undersigned, as President and Secretary of Thunderbeam.com, Inc., a
corporation organized and existing under and by virtue of the General
Corporation law of the State of Delaware (the "Corporation"), does hereby
certify as follows:
FIRST: The Board of Directors of the Corporation duly adopted
resolutions containing the amendments to the Certificate of Incorporation of the
Corporation set forth below, declaring such amendments to be advisable and
calling for the consent of the stockholders of the Corporation to such
amendments.
SECOND: Simultaneously, stockholders holding sufficient shares of each
class and series of stock entitled to vote gave written consent to the adoption
of the amendments pursuant to Section 228 of the Delaware General Corporation
Law without a meeting, written notice pursuant to Section 228(d) of the Delaware
General Corporation Law will be given to stockholders who did not consent in
writing and the amendments were in all respects duly adopted in accordance with
the provisions of Section 242 of the Delaware General Corporation Law.
THIRD: Article FIRST of the Certificate of Incorporation of the
Corporation is hereby amended to read in its entirety as follows:
FIRST: The name of the corporation is: BrainPlay.com, Inc.
<PAGE> 25
FOURTH: The introductory paragraph of Article FOURTH of the
Certificate of Incorporation of the Corporation was amended to read in its
entirety as follows: "FOURTH: The total number of shares of stock that the
Corporation shall have authority to issue is 21,831,177, divided into 20,000,000
shares of common stock, each having a par value of $0.001 ("Common Stock"), and
1,831,177 shares of preferred stock, each having a par value of $0.001
("Preferred Stock")."
FIFTH: Paragraph 1 of Article FOURTH of the Certificate of
Incorporation of the Corporation was amended to read in its entirety as follows:
"1. DESIGNATION - One Million Eight Hundred Thirty One Thousand, One Hundred
Seventy Seven (1,831,177) shares of Preferred Stock are hereby designated Series
A Convertible Preferred Stock (hereinafter referred to as the "Series A
Preferred"), such series with the powers, preferences and rights and the
qualifications, restrictions, and limitations thereon, specified in this Article
FOURTH. The Series A Preferred is sometimes referred to herein as the
"Preferred Stock."
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Srikant Srinivasan, its President and Secretary, this 17th day of
July, 1998.
Thunderbeam.com, Inc.
By:/s/Srikan Srinivasan
------------------------------------------
Srikan Srinivasan, President and Secretary
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<PAGE> 26
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 12/18/1998
981489471 - 2535248
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
BRAINPLAY.COM, INC,
I, the undersigned, President and Secretary of BrainPlay.com, Inc., a
corporation organized and existing under and by virtue of the General
Corporation law of the State of Delaware (the "Corporation"), do hereby certify
as follows:
FIRST: The Board of Directors of the Corporation duly adopted
resolutions containing the amendments to the Certificate of Incorporation of the
Corporation set forth below, declaring such amendments to be advisable and
calling for the consent of the stockholders of the Corporation to such
amendments.
SECOND: Simultaneously, stockholders holding sufficient shares of each
class and series of stock entitled to vote gave written consent to the adoption
of the amendments pursuant to Section 228 of the Delaware General Corporation
Law without a meeting, written notice pursuant to Section 228(d) of the Delaware
General Corporation Law will be given to stockholders who did rot consent in
writing and the amendments were in all respects duly adopted in accordance with
the provisions of Section 242 of the Delaware General Corporation Law.
THIRD: Article FOURTH of the Certificate of Incorporation of the
Corporation was amended to read in its entirety as set forth on EXHIBIT A
Hereto.
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IN WITNESS WHEREOF, (the Corporation has caused this Certificate to be
signed by Srikant Srinivasan, its President and Secretary, this 18 day of
December, 1998.
BrainPlay.com, Inc.
By:/s/Srikant Srinivasan
----------------------------
Srikant Srinivasan, President and Secretary
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EXHIBIT A
TO
CERTIFICATE OF AMENDMENT
FOURTH: The total number of shares of stock that the Corporation shall
have authority to issue is 23,412,166 divided into 20,000,000 shares of common
stock, each having a par value of $0.001 ("Common Stock"), and 3,412,166 shares
of preferred stock, each having a par value of $0.001 ("Preferred Stock").
Subject to the provisions of Section 13 of this Article FOURTH, the
Board of Directors is authorized to provide for the issuance of Preferred Stock
from time to time in one or more series with such distinctive serial
designations, rights, preferences and limitations of the shares of each such
series as the Board of Directors shall establish. The authority of the Board of
Directors with respect to each series shall include, without limiting the
generality of the foregoing, the determination of any or all of the following:
A. The number of shares constituting the series and the distinctive
designation of that series;
B. The extent, if any, to which the shares of the series shall have
voting rights;
C. Whether dividends, if any, shall be cumulative or noncumulative,
the dividend rate or method of determining the dividend rate of such series, and
the dates and preferences of dividends on such series;
D. The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of the
corporation, or upon any distribution of its assets;
E. Whether the shares of that series shall have conversion
privileges and, if so, the terms and conditions of such conversion privileges,
including, provisions, if any, for adjustment of the conversion rate and for
payment of additional amounts by holders of preferred stock of that series upon
exercise of such conversion privileges;
F. Whether or not the shares of that series shall be redeemable,
and, if so, the price at and the terms and conditions upon which such series
shall be redeemable, and whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund; and
G. Any other preferences and relative, participating, optional, or
other special rights, and qualifications, limitations, or restrictions,
thereof, all as shall be determined from time to time by the Board of Directors
and shall be stated in a resolution or resolutions providing for the issuance
of such Preferred Stock (a "Preferred Stock Designation"). A Preferred Stock
Designation originally adopted by the Board of Directors that is subsequently
amended by an amendment to the Corporation's Certificate of Incorporation shall
continue to be a Preferred Stock Designation.
Shares of any series of Preferred Stock that have been redeemed
(whether through the operation of a sinking fund or otherwise) or purchased by
the Corporation, or that, if convertible or
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exchangeable, have been converted into or exchanged for shares of stock of any
other class or classes shall be canceled on the books of the Corporation, and
the shares so redeemed, purchased, converted or exchanged shall be deemed to be
canceled and no longer authorized or available for issuance by the Corporation.
1. DESIGNATION
One Million Eight Hundred Thirty Five Thousand, Five Hundred Eighty
Nine (1,835,589) shares of Preferred Stock are hereby designated Series A
Convertible Preferred Stock (hereinafter referred to as the "Series A
Preferred"), and One Million Five Hundred Seventy Six Thousand, Five Hundred
Seventy Seven (1,576,577) shares of Preferred Stock are hereby designated
Series B Convertible Preferred Stock (hereinafter referred to as the "Series B
Preferred"). The Series A Preferred and the Series B Preferred are collectively
referred to herein as the "Series Preferred." The Series Preferred shall have
the powers, preferences and rights and the qualifications, restrictions, and
limitations, specified in this Article FOURTH.
2. DIVIDENDS
a. Right to Dividends. The holders of outstanding Series Preferred
shall be entitled to receive cash dividends, at the rate of $0.136 per share
per annum in the case of Series A Preferred, and $0.1776 per share per annum in
the case of Series B Preferred (in each case as adjusted for stock splits,
stock dividends and the like with respect to such shares), respectively, only
when, as, and if declared from time to time by the Board of Directors, out of
any assets at the time legally available. The date on which the Corporation
initially issues any Share shall be deemed to be its "date of issuance"
regardless of the number of times transfer of such Share is made on the stock
records maintained by the Corporation.
(1) Priority of Dividends. The Corporation shall make no
Distribution (as defined below) to the holders of Common Stock in any fiscal
year unless and until any and all declared but unpaid dividends shall have been
paid upon all Series Preferred. "Distribution" in this paragraph means the
transfer of cash or property without consideration, whether by way of dividend
or otherwise (except a dividend in shares of the Corporation), or the purchase
or redemption of shares of the Corporation for cash or property, but does not
include (i) the repurchase of shares from a terminated employee or consultant of
the Corporation within the terms of a management agreement or stock restriction
agreement, or in exercise of the Corporation's right of first refusal upon a
proposed transfer, in either case approved by the Corporation's Board of
Directors or (ii) a distribution which is part of a voluntary liquidation,
dissolution or winding up of the Corporation. In the event dividends are paid
on any share of Common Stock, an additional dividend shall be paid with respect
to all outstanding shares of Series Preferred in an amount equal per share (on
an as-if converted to Common Stock basis) to the amount paid or set aside for
each share of Common Stock.
(2) Dividends Not Cumulative. Dividends shall not be
cumulative for payment. Dividends shall accrue or accumulate only if and to the
extent they are declared but unpaid. No undeclared or declared but unpaid
dividend shall bear or accrue interest.
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3. LIQUIDATION PREFERENCE
a. Basic Preference Rights. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Corporation (a
"Liquidation"):
(1) Before any distribution or payment shall be made to the
holders of any other capital stock of the Corporation, the holders of Series
Preferred shall be entitled to be paid out of the assets of the Corporation an
amount per share of Series Preferred then held by them (as adjusted for any
stock dividends, combinations, splits, recapitalizations and the like with
respect to such shares) equal to the sum of (i) the Original Issue Price for
such series plus (ii) all declared and accrued but unpaid dividends thereon (the
"Liquidation Preference") for each share of Series Preferred held by them. The
Original Issue Price for the Series A Preferred shall by $1.70 per share and the
Original Issue Price for the Series B Preferred shall be $2.22 per share.
(2) After the payment of the Liquidation Preference of the
Series Preferred as set forth in Section 3(a)(1) above, the remaining assets of
the Corporation legally available for distribution, if any, shall be distributed
ratably to the holders of the Common Stock, the Series A Holders and the Series
B Holders on an as-if-converted to Common Stock basis, based on the number of
shares then held by them, until such time as the Series B Holders have received
pursuant to Section 3(a)(1) above and this Section 3(a)(2) an aggregate amount
per share of Series B Preferred equal to $5.10 per share (as adjusted for any
stock dividends, combinations, splits, recapitalizations and the like with
respect to such shares).
(3) After the payment of the Liquidation Preference of the
Series Preferred as set forth in Section 3(a)(1) above, and after the payments
under Section 3(a)(2) above, the remaining assets of the Corporation legally
available for distribution, if any, shall be distributed ratably to the holders
of the Common Stock and the Series A Holders on an as-if-converted to Common
Stock basis, based on the number of shares then held by them, until such time as
the Series A Holders have received pursuant to Sections 3(a)(1) and 3(a)(2)
above and this Section 3(a)(3) an aggregate amount per share of Series A
Preferred equal to $5.10 per share (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares).
(4) After the payment of the Liquidation Preference of the
Series Preferred as set forth in Section 3(a)(1) above, and after the payments
under Sections 3(a)(2) and 3(a)(3) above, the remaining assets of the
Corporation legally available for distribution, if any, shall be distributed
ratably to the holders of the Common Stock, based on the number of shares then
held by them.
(5) Should Assets Be Insufficient. If upon a Liquidation
the assets of the Corporation available for distribution to its shareholders
shall be insufficient to make full payments due under Section 3(a)(1), then the
holders of the Series Preferred then outstanding shall share ratably in
proportion to the number of shares of Common Stock they would hold had full
conversion of their Series Preferred occurred immediately prior to the
Liquidation, according to the provisions of Sections 4 and 5, below.
(6) Source of Liquidation Payment. The holders of stock
shall be paid under this
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Section 3.a out of the assets of the Corporation available for distribution to
its shareholders, whether from capital, surplus or earnings.
(7) Merger or Acquisition. The Corporation shall not effect
(i) a merger, reorganization, or consolidation of the Corporation into or with
another corporation, or any other corporate reorganization, in which the
shareholders of the Corporation immediately prior to such other consolidation,
merger or reorganization, own less than fifty percent (50%) of the Corporation's
voting power immediately after such event, or any transaction or series of
related transactions in which in excess of fifty percent (50%) of the
Corporation's voting power is transferred (an "Acquisition"), or (ii) the sale
or transfer of all or substantially all of the assets of the Corporation (an
"Asset Transfer") until the Corporation shall have provided notice to all
holders of Series Preferred pursuant to Section 3.b, below. Unless otherwise
agreed to by the holders of two-thirds of the Series Preferred which is then
outstanding, an Acquisition or Asset Transfer shall be deemed to be a
Liquidation.
b. Notice. In the event of any Liquidation of the Corporation, or
in the event of any Acquisition or Asset Transfer, the Corporation shall give
each holder of Series Preferred initial written notice of the proposed action
within fifteen (15) days after the date the Board of Directors approves such
action, or twenty (20) days prior to any shareholders' meeting called to approve
such action, or twenty (20) days after the commencement of any involuntary
proceeding, whichever is earlier.
(1) Content of Notice. Such initial written notice shall
describe the material terms and conditions of the proposed action, including a
description of the stock, cash, and property to be received by the holders of
Series Preferred upon consummation of the proposed action. If any material
change in the facts set forth in the initial notice shall occur, the
Corporation shall promptly give written notice to each holder of the Series
Preferred of that material change.
(2) Notice Precedes Consummation. The Corporation shall not
consummate any Liquidation of the Corporation before the expiration of twenty
(20) days after the mailing of the initial notice or ten (10) days after the
mailing of any subsequent written notice, whichever is later. Any such 20-day or
10-day period may be shortened upon the written consent of the holders of a
majority of the Series Preferred then outstanding.
c. Non-Cash Distributions on Liquidation. In the event of any
Liquidation of the Corporation which will involve the distribution of assets
other then cash, the Corporation shall promptly engage a competent independent
appraiser to determine the value of the assets to be distributed. With respect
to the valuation of securities, the Corporation shall engage such appraiser as
shall be approved by the holders of a majority of the Series Preferred then
outstanding. The Corporation shall, upon receipt of such appraiser's valuation,
give prompt written notice to each holder of shares of Series Preferred of the
appraiser's valuation.
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4. CONVERSION
a. Conversion Rights.
(1) Optional Conversion. Each share of Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share and up to and including the day prior to the
closing of a Qualified Public Offering (as defined below) (the "Conversion
Period"), into fully paid and non-assessable shares of Common Stock of the
Corporation.
(2) Automatic Conversion. All outstanding shares of Series
A Preferred shall automatically be converted into fully paid and non-assessable
shares of Common Stock of the Corporation, at the then applicable Conversion
Price (as defined below), immediately:
(a) Prior to the closing of a firm commitment
underwritten public offering of the shares of Common Stock of the Corporation
pursuant to a registration statement filed under the Securities Act of 1933, as
amended, at a price per share of not less than $8.50 per share (prior to
underwriter commissions and expenses and adjusted for stock splits, stock
dividends, reorganizations and the like) and with aggregate offering proceeds to
the Corporation of not less than Fifteen Million Dollars ($15,000,000) (a
"Qualified Public Offering"); or
(b) Upon the election, at any time, of holders of at
least 66-2/3% of the outstanding shares of Series Preferred.
(3) Conversion Formula. Each share of Series A Preferred
shall be valued at $1.70 (the "Original Series A Purchase Price") and each share
of Series B Preferred shall be valued at $2.22 (the "Original Series B Purchase
Price"), for purposes of such optional or automatic conversion, notwithstanding
any accrued but unpaid dividends. The number of shares of Common Stock into
which each share of the Series Preferred may be converted shall be determined by
(i) in the case of the Series A Preferred, dividing the Original Series A
Purchase Price by the Series A Conversion Price (as determined as provided
below) in effect at the time of the conversion, and (ii) in the case of the
Series B Preferred, dividing the Original Series B Purchase Price by the Series
B Conversion Price (as determined as provided below) in effect at the time of
the conversion. The Corporation shall make all necessary payments as of the
Conversion Date (as defined in Section 4.c) on account of any dividends declared
and thus accrued on the Series Preferred surrendered for conversion.
b. Initial Conversion Price. The conversion price per share at which
shares of Common Stock shall be initially issuable upon conversion of any
shares of Series A Preferred (the "Series A Conversion Price") shall be equal
to the Original Series A Purchase Price, and the conversion price per share at
which shares of Common Stock shall be initially issuable upon conversion of any
shares of Series B Preferred (the "Series B Conversion Price") shall be equal
to the Original Series B Purchase Price, in each case subject to adjustment as
provided in Section 5 below. The Series A Conversion Price and the Series B
Conversion Price may individually be referred to as a "Conversion Price" and
shall collectively be referred to as the "Conversion Prices."
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c. Mechanics of Conversion
(1) Optional Conversion. Before any holder of Series
Preferred will be entitled to convert the same into shares of Common Stock
pursuant to Section 4.a(1) hereof, such holder shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the Corporation or of
any transfer agent for the Series Preferred, and shall give written notice to
the Corporation at such office that such holder elects to convert the same and
will state therein the name or names in which the certificate or certificates
for shares of Common Stock should be issued. The Corporation, as soon as
practicable thereafter, will issue and deliver at such office to such holder of
Series Preferred or to the holder's nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder will
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series Preferred to be converted (the "Conversion Date"), and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or holder
of such shares of Common Stock on such Conversion Date.
(2) Automatic Conversion. Conversion of all the outstanding
shares of Preferred Stock into shares of Common Stock pursuant to Section 4.a(2)
hereof shall be deemed to have been made automatically and immediately prior to
the closing of a Qualified Public Offering, or upon the election to convert by
holders of at least 66-2/3% of the outstanding shares of Series Preferred as set
forth in Section 4.a(2)(B) hereof (an "Automatic Conversion Date"). Upon such
automatic conversion, the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion will be treated for all purposes as
the record holder or holders of such Common Stock on the Automatic Conversion
Date whether or not such holder or holders shall have surrendered certificates
for such holder's shares of Preferred Stock to the Corporation. On the Automatic
Conversion Date, the certificates representing all the shares of Preferred Stock
shall be deemed void; and as soon as practicable after the surrender by any
holder of Preferred Stock certificates, accompanied by a statement from the
holder as to the name or names in which the certificates or certificates for
shares of Common Stock should be issued, the Corporation shall then issue and
deliver, at the office of the Corporation to such holder or his nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which the holder shall be entitled.
(3) New Certificates. Upon conversion of only a portion of
the number of shares of Preferred Stock represented by a certificate surrendered
for conversion, the Corporation shall issue and deliver upon the written order
of the holder at the expense of the Corporation, a new certificate covering the
number of shares of Preferred Stock representing the unconverted portion of the
certificate so surrendered.
(4) Public Offering. If any holder of Preferred Stock
elects to convert in connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933, as amended (other than in
connection with a Qualified Public Offering) the conversion may, at the option
of any holder tendering Preferred Stock for conversion, be conditioned upon the
closing with the underwriter of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common Stock
issuable upon such conversion of the Preferred Stock shall not be deemed to have
converted such Preferred Stock until the close of business on the actual closing
date with respect to such sale of securities. Notice of such closing shall be
given by the Corporation
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by certified mail, postage prepaid, return receipt requested, to the holders of
the Preferred Stock at their addresses shown in the Corporation's records at
least five (5) days prior to the closing date of such sale of securities. On or
after the closing date as specified in such notice, each holder of the Preferred
Stock shall surrender the certificate or certificates representing such
Preferred Stock for the number of shares of Common Stock to which the holder is
entitled at the office of the Corporation or any transfer agent. The Corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Preferred Stock, a certificate or certificates for the number of
shares of Common Stock to which the holder shall be entitled as aforesaid. The
conversion shall be deemed to have occurred as of the close of business on the
actual closing date with respect to such underwritten offering of securities,
and immediately upon the surrender of any certificate representing the Preferred
Stock to be converted, each holder of such Preferred Stock shall thereafter be
treated for all purposes as the record holder of the number of shares of Common
Stock issuable to such holder upon such conversion.
(5) Inability to Pay Dividends on Conversion. If for any
reason the Corporation is unable to pay and declared and accrued dividends on
any Preferred Stock being converted, at the converting holder's option, (i) the
Corporation will pay such dividends to the converting holder as soon thereafter
as funds of the Corporation are legally available for such payment or (b) all or
a portion of such unpaid dividends may be used to acquire an additional number
of shares of Common Stock determined by dividing the amount of the unpaid
dividends to be applied for such purpose by the Series A Conversion Price or
Series B Conversion Price, as applicable, which is then in effect.
d. No Fractional Shares. The Corporation shall issue no fractional
shares of Common Stock or scrip upon conversion of shares of Series Preferred.
If more than one share of Series Preferred shall be surrendered for conversion
at any one time by the same holder, the number of full shares of Common Stock
issuable upon their conversion shall be computed on the basis of the aggregate
number of shares of Series Preferred so surrendered. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of any
shares of Series Preferred, the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to the same fraction of
Series A Conversion Price or Series B Conversion Price, as applicable, in effect
on the business day next preceding the day of conversion.
e. Taxes Incident to Conversion. The Corporation shall pay any and
all issue taxes and other taxes (excluding income and capital gains taxes) that
may be payable in respect to any issue or delivery of shares of Common Stock on
conversion of Series Preferred. The Corporation shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the Series
Preferred so converted was registered, and no such issue or delivery shall be
made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax, or has established, to the satisfaction
of the Corporation, that such tax has been paid.
f. Sufficient Reserves of Stock. The Corporation shall at all times
reserve and keep available, out of its authorized but unissued Common Stock,
solely for the purpose of effecting the conversion of the Series Preferred, the
full number of shares of Common Stock deliverable upon the conversion of all
Series Preferred from time to time outstanding.
g. Valid Issue for Conversion. All shares of Common Stock which may
be issued upon
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conversion of the shares of Series Preferred shall, upon issuance by the
Corporation, be validly issued, fully paid, non-assessable and free from all
taxes, liens and charges with respect to their issuance.
5. ADJUSTMENT OF CONVERSION PRICES
a. Anti-Dilution Adjustment. The Conversion Prices in effect at
any time shall be adjusted from time to time as provided in this Section 5.
b. No Adjustment for Certain Grants, Sales, or Issuances. Anything
in this Certificate of Incorporation to the contrary notwithstanding, the
Corporation shall not be required to make any adjustment of the Conversion
Prices in the case of the grant of options or other rights to purchase, or the
sale of, or the issuance, shares of Common Stock or obligations or securities
convertible into the Common Stock of the Corporation:
(1) To its officers, employees, directors, and consultants
pursuant to the Company's Stock Option Plan so long as any such grants, sales or
issuances do not exceed in the aggregate 947,037 shares of Common Stock or
obligations or securities convertible into Common Stock; or
(2) Upon the conversion of any shares of the Corporation's
Series Preferred.
c. Stock Splits, Stock Dividends or Stock Combinations. In case the
Corporation shall at any time subdivide the outstanding shares of Common Stock,
or shall issue a stock dividend on its outstanding Common Stock or make a
distribution payable in additional shares of Common Stock, the Conversion Price
in effect immediately prior to such subdivision, the issuance of such dividend
or the making of such distribution, shall be proportionately decreased,
effective at the close of business on the date of such subdivision, dividend, or
distribution. In case the Corporation shall at any time combine the outstanding
shares of Common Stock, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased, effective at the close of
business on the date of such combination.
d. Adjustment Formulas. If, at any time or from time to time after
the first issuance of shares of Series B Preferred, the Corporation issues or
sells Common Stock, or a right or option to purchase Common Stock, or shares of
stock or an obligation convertible into Common Stock (other than in connection
with a stock split, stock dividend, or distribution on the Corporation's Common
Stock) for a consideration receivable by the Corporation per share
("Consideration Receivable," with the product of the number of such shares times
such Consideration Receivable being the "Aggregate Consideration Receivable")
which is less than the Conversion Price then in effect for a series of Series
Preferred, such Conversion Price shall immediately and automatically be adjusted
as determined to the nearest cent by the following formula:
Where z = New Conversion Price for such series of Series Preferred;
x = Current Conversion Price for such series of Series
Preferred;
y = The Aggregate Consideration Receivable on such
issuance, sale, etc.;
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a = Number of shares of Common Stock outstanding just
prior to such issuance, sale, etc., less all shares
of Common Stock owned by Srikant Srinivasan and Aloke
Majumdar at such time (or owned by the ancestors,
descendants or spouses of such persons or held in
trust or other entities for the benefit of such
persons or Messrs. Srinivasan and Majumdar);
b = Number of shares of Common Stock to which all holders
of Options (as defined in 5.d(1) below) are entitled
to subscribe for, or purchase immediately prior to,
such issuance, sale, etc.;
c = Number of shares of Common Stock issuable to all
holders of Convertible Securities (as defined in
5.d(2) below), immediately prior to such issuance,
sale, etc. (using the Series A Conversion Price then
in effect); and
d = Number of shares of Common Stock to be issued, or
deemed to be issued under 5(d)(1) and (2) below, in
connection with such issuance, sale, etc.;
then z = x (a + b + c) + y;
------------------
a + b + c + d
provided, however, that the Conversion Price for any series of Series Preferred
shall never exceed the Original Purchase Price for such series of Series
Preferred.
For purposes of this Section 5.d only, the following provisions shall
apply:
(1) Options or Warrants. In case of the issuance or sale by the
Corporation in any manner of any options for the purchase of shares of Common
Stock or of any rights to subscribe for or to purchase shares of Common Stock
("Options"), all shares of Common Stock which the holders of such Options shall
be entitled to subscribe for or purchase pursuant to such Options shall be
deemed to be issued or sold as of the date of the offering of such rights or the
granting of such Options.
(2) Convertible Securities. In the case of the issuance or sale
by the Corporation in any manner of any obligations or of any shares of stock of
the Corporation that shall be convertible into or exchangeable for Common Stock
("Convertible Securities"), all shares of Common Stock issuable upon the
conversion or exchange of such obligations or shares shall be deemed issued as
of the date such obligations or shares are issued.
(3) Cash Consideration for Common Stock. In the case of an
issue or sale for cash of shares of Common Stock, the Consideration Receivable
by the Corporation therefor shall be the amount of cash received, before
deducting any commissions or expenses paid by the Corporation.
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(4) Non-Cash Consideration for Common Stock. In the case of
the issuance or sale (otherwise than upon conversion or exchange of obligations
or shares of stock of the Corporation) of shares of Common Stock for a
consideration other than cash or a consideration partly other than cash, the
amount of the consideration other than cash receivable by the Corporation for
such shares shall be deemed to be the value of such consideration as determined
in good faith by the Board of Directors.
(5) Consideration Receivable for Options of Convertible
Securities.
(a) The amount of the Aggregate Consideration
Receivable by the Corporation upon the issuance of any Options referred to in
Subparagraph (1) above shall be the minimum aggregate consideration named in
such Options for the shares of Common Stock covered thereby, plus the
consideration, if any, received by the Corporation for such Options.
(b) The amount of Consideration Receivable by the
Corporation upon the issuance of any obligations or shares which are
convertible or exchangeable as described in Subparagraph (2) above as
"Convertible Securities," shall be the amount of consideration received by the
Corporation upon the issuance of such obligations or shares, plus the minimum
aggregate consideration, if any, other than such obligations or shares,
receivable by the Corporation upon such conversion or exchange, except in
adjustment of dividends.
(c) The amount of Aggregate Consideration Receivable
under Paragraphs 5.d(5)(A) and 5.d(5)(B) and the amount of Aggregate
Consideration Receivable upon the exercise of Options or upon the conversion or
exchange of convertible securities under this Paragraph 5.d(5), shall be
determined in the same manner provided in Subparagraphs (3) and (4) above with
respect to the Aggregate Consideration Receivable by the Corporation as in the
case of the issuance of additional shares of Common Stock. But if such
obligations or shares of stock so convertible or exchangeable are issued in
satisfaction of any dividend upon any stock of the Corporation other than
Common Stock, the amount of the consideration received upon the original
issuance of such obligations or shares of stock shall be the value of such
obligations or shares of stock, as of the date of the adoption of the
resolution declaring the dividend, as determined in good faith by the Board of
Directors at or as of that date.
(6) Other Particulars Concerning Options and Convertible
Securities. In the event that the Conversion Price for any series of Series
Preferred shall be adjusted with respect to the issuance of Options or
Convertible Securities (as described in Sections 5.d(1) and (2)), the following
provisions apply with respect to such Convertible Price:
(a) No further adjustment in the Conversion Price(s)
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock when those Options are exercised or those Convertible Securities
are converted.
(b) Such Options or Convertible Securities may by
their terms provide, with the passage of time or otherwise, for any decrease in
the consideration payable to the Corporation, or increase in the number of
shares of Common Stock issuable, upon their exercise, conversion or exchange. In
such a case, the Conversion Price computed upon the original issue thereof, and
any subsequent adjustments shall, upon any such increase or decrease becoming
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<PAGE> 38
effective, be recomputed to reflect such increase or decrease insofar as it
affects those Options or the rights of conversion or exchange under those
Convertible Securities.
(c) Upon the expiration of any such Options or any
rights of conversion under such Convertible Securities which shall not have been
exercised, the Conversion Price computed upon the original issue thereof, and
any subsequent adjustments shall, upon such expiration, be recomputed as if:
i) In the case of Convertible Securities or
Options for Common Stock, the only additional shares of common stock
issued were the shares of Common Stock actually issued upon the
exercise of such Options or the conversion of such Convertible
Securities; and the Aggregate Consideration Receivable was the
consideration actually received by the Corporation for such
Convertible Securities which were actually converted, and
ii) In the case of Options for Convertible
Securities, only the Convertible Securities actually issued upon the
exercise thereof were issued at the time of issue of such Options; and
the Aggregate Consideration Receivable for the additional shares or
Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options
for Convertible Securities, whether or not exercised, plus the
consideration deemed to have been received by the Corporation
(determined pursuant to Section 5.d(5)) upon the issue of the
Convertible Securities when such Options were actually exercised.
(d) No readjustment pursuant to Section 5.d(6)(b) or
Section 5.d(6)(c) shall have the effect of increasing the Conversion Price by an
amount greater than the amount of the adjustment originally made when the
Options or Convertible Securities were issued.
(e) In the case of any Options which expire by their
terms not more than thirty (30) days after the date of issue or sooner, no
adjustment of the Conversion Price shall be made until the expiration or
exercise of all such Options.
e. Waiver of Adjustment
(1) In the event that holders of two-thirds of the then
currently outstanding shares of the Series Preferred shall consent to limit, or
waive in its entirety, any anti-dilution adjustment to which the holders of
such series would otherwise be entitled under Section 5.d hereof, the
Corporation shall not be required to make any adjustment whatsoever with respect
to any shares of Series Preferred or to make any adjustment with respect to any
shares of Series Preferred in excess of such limit, as the terms of such consent
may dictate.
(2) Moreover, any holder of Series Preferred shall be permitted
to waive in whole or in part, currently or prospectively, by contract or any
other writing, any anti-dilution adjustment to which he or it would otherwise be
entitled pursuant to the provisions of this Section 5.
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<PAGE> 39
6. REDEMPTION
a. Optional Redemption. So long as any shares of any series of Series
Preferred shall be outstanding, at the election of two-thirds of the outstanding
shares of such series of Series Preferred, the Corporation shall on each of the
dates set forth below redeem from each holder of shares of such series at the
redemption price of $1.70 per share, in the case of the Series A Preferred, and
$2.22 per share, in the case of the Series B Preferred, in each case plus any
declared and unpaid dividends with respect to such shares (such amount to be
adjusted proportionately in the event the shares of Preferred Stock are
subdivided into a greater number or combined into a lesser number) the number of
shares of such series, to the nearest whole share, held by such holder on such
date in eight (8) equal quarterly installments beginning November 30, 2004,
provided that such number shall be reduced, in each instance, with respect to
each holder, by the number of shares of such series with respect to which such
holder exercises its conversion rights during the period commencing on the date
of the notice of redemption delivered pursuant to Section 6.b and ending on
the date of redemption.
b. Procedures. Whenever any shares of Series Preferred are to be
redeemed pursuant to this Section 6, the Corporation shall give not less than
thirty (30) days advance written notice thereof to each holder of record whose
stock is to be redeemed, by registered or certified mail, postage prepaid,
addressed to such holder at such holder's address as the same shall appear on
the registry books of the Corporation. Such notice shall (i) state the number of
shares to be purchased from such holder, (ii) state the date fixed for the
redemption thereof, and (iii) call upon such holder to surrender to the
Corporation on or after said date, at the place designated in such notice, a
certificate or certificates representing the number of shares of Series
Preferred to be redeemed in accordance with such notice. On or after the
redemption date specified in such notice of redemption, each holder of shares
of Series Preferred to be so redeemed shall present and surrender the
certificate or certificates for such shares to the Corporation at the place
designated in said notice, duly endorsed for transfer, free and clear of all
liens, claims, and encumbrances of any kind or nature, and thereupon the
redemption price of such shares shall be paid to, or to the order of, the
person whose name appears on such certificate or certificates as the owner
thereof. From and after the date fixed in any such notice as the date of
redemption, unless the Corporation shall default in providing from the payment
of the redemption price pursuant to such notice, all rights of the holders of
Series Preferred thereby called for redemption as shareholders of the
Corporation with respect to such shares of Series Preferred, except the right
to receive the redemption price, shall cease and terminate. The Corporation
shall deposit the amount required for the payment of any part of the redemption
price not claimed on the redemption date with a bank or trust company selected
by the Corporation and doing business in Colorado. Any interest allowed on
monies so deposited shall be paid from time to time to the Corporation. Any
monies so deposited which shall remain unclaimed by the holders of the Series
Preferred at the end of two years after the redemption date shall be paid by
such bank or trust company to the Corporation, but the Corporation shall remain
obligated to make payment of the redemption price to the holders of Series
Preferred entitled thereto, subject to any applicable escheat or similar laws.
c. Pre-emptive Conversion. Nothing in this Section 6 shall be deemed to
prevent any holder of shares of Series Preferred from exercising such holder's
right of conversion pursuant to Section 4 hereof with respect to any share of
Series Preferred at any time prior to the redemption of
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<PAGE> 40
such share of Series Preferred, including the giving of notice of redemption
with respect to such share pursuant to Section 6.b.
7. REORGANIZATION, RECLASSIFICATION, AND SALE OF ASSETS.
If any capital reorganization or reclassification of the capital stock
of the Corporation, including any such reorganization or reclassification in
connection with any merger, consolidation, or transfer of substantially all of
the assets of the Corporation, shall not be deemed to be a Liquidation pursuant
to Section 3 hereof, and if it shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities, or assets with
respect to or in exchange for Common Stock, then the following shall be an
express condition of such reorganization or reclassification.
a. Lawful and adequate provisions in a form satisfactory to the
holders of two-thirds of the Series Preferred, shall be made, whereby each
holder of shares of Series Preferred shall thereafter have the right to receive,
upon the terms and conditions specified herein and in lieu of the shares of
Common Stock of the Corporation immediately theretofore receivable upon the
conversion of such shares of the Series Preferred, such shares of stock,
securities, or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such stock immediately theretofore so receivable had such
reorganization or reclassification not taken place.
b. Moreover, in any such case, appropriate provision shall be made
with respect to the rights and interests of each such holder of Series Preferred
to the end that the provisions hereof (including without limitation provisions
for adjustments of the Conversion Price) shall thereafter be applicable, as
nearly as may be, in relation to any shares of stock, securities, or assets
thereafter deliverable upon the exercise of such conversion rights. In the event
of a merger or consolidation of the Corporation as a result of which a greater
or lesser number of shares of Common Stock of the surviving Corporation are
issuable to holders of the Common Stock of the Corporation outstanding
immediately prior to such merger or consolidation, the Conversion Price in
effect immediately prior to such merger or consolidation shall be adjusted in
the same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock of the Corporation.
c. The Corporation shall not effect any such reorganization,
reclassification, consolidation, merger, or sale unless, prior to the
consummation thereof: (i) the Corporation shall have obtained the consent of
the holders of two-thirds of the Series Preferred then outstanding, and (ii) the
successor corporation (if other than the Corporation) resulting from such
consolidation or merger, or the corporation purchasing such assets, shall
assume by written instrument, in a form satisfactory to the holders of
two-thirds of the Series Preferred then outstanding the obligation to deliver
to such holder such shares of stock, securities, or assets as, in accordance
with the foregoing provisions, such holder may be entitled to receive. Such
written instrument shall be promptly mailed or delivered to each holder of
shares of Series Preferred at the last address of such holder appearing on the
books of the Corporation.
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<PAGE> 41
8. NO IMPAIRMENT
Without the consent of the holders of two-thirds of the Preferred Stock
then outstanding, the Corporation shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary
action, avoid or seek to avoid the observance of performance of any of the
terms in this Article FOURTH to be observed or performed by the Corporation.
The Corporation shall at all times in good faith assist in the carrying out of
all the provisions of Sections 4, 5, 6 and 7 hereof.
9. CERTIFICATE AS TO ADJUSTMENTS
a. Upon the occurrence of each adjustment of the Conversion Price for
any series of Series Preferred, pursuant to Section 5, the Corporation at its
expense shall promptly compute such adjustment and prepare and furnish to each
holder of shares of such series of Series Preferred a certificate setting forth
such adjustment and showing in detail the facts upon which such adjustment is
based, and
b. Upon the written request at any time of any holder of shares of
Series Preferred, the Corporation shall furnish to such holder a like
certificate setting forth (i) such adjustment, (ii) the Conversion Price for
such series at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of shares of such series.
10. NOTICE OF RECORD DATES
In the event:
a. That the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend, or any
other distribution, payable otherwise than in cash; or
b. That the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to subscribe for or purchase any
shares of stock of any class or to receive any other rights; or
c. Of any capital reorganization of the Corporation, reclassification
of the capital stock of the Corporation (other than a subdivision or combination
of its outstanding shares of Common Stock), consolidation, or merger of the
Corporation with or into another corporation or conveyance of all or
substantially all of the assets of the Corporation to another corporation; or
d. Of the voluntary or involuntary dissolution, liquidation, or
winding up of the Corporation;
then the Corporation shall cause to be mailed to the holders of record of the
outstanding Series Preferred, at least twenty (20) days prior to the date
specified therein, a notice stating the date on which that record is to be taken
or that event is to take place. The notice shall also specify the date, if
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<PAGE> 42
any is to be fixed, as of which holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation, or winding up.
11. FORM OF NOTICES
Any notice required by the provisions of this Article FOURTH to be
given to the holders of shares of Series Preferred shall be deemed given if hand
delivered, delivered by courier, or deposited in the United States mail, postage
prepaid, addressed to each holder of record at such holder's address appearing
on the books of the Corporation.
12. VOTING
a. General Rights. Except as set forth in Section 12(b) below, the
shares of Series Preferred shall be voted equally with the shares of the
Corporation's Common Stock at any annual or special meeting of shareholders of
the Corporation, or may act by written consent on the same basis, with respect
to all matters which come before the shareholders. Each holder of shares of
Series Preferred shall be entitled to the number of votes equal to the number of
whole shares of the Corporation's Common Stock into which such holder's shares
of Series Preferred are convertible, pursuant to Sections 4 and 5 of this
Article FOURTH, immediately after the close of business on the record date fixed
for such meeting or the effective date of such written consent.
b. Election of the Board of Directors. For so long as the authorized
size of the Corporation's Board of Directors is five (5) or more, (i) the
holders of Series Preferred, voting as a separate class, shall be entitled to
elect two (2) members (one designated by Sequel Limited Partnership and its
affiliates and one by Sevin Rosen Funds and its affiliates) of the Corporation's
Board of Directors at each meeting or pursuant to each consent of the
Corporation's shareholders for the election of directors, and to remove from
office such directors and to fill any vacancy caused by the resignation, death
or removal of such directors; (ii) the holders of Common stock, voting as a
separate class, shall be entitled to elect two (2) members of the Corporation's
Board of Directors at each meeting or pursuant to each consent of the
Corporation's shareholders for the election of directors, and to remove from
office such directors and to fill any vacancy caused by the resignation, death
or removal of such directors; and (iii) the holders of Common Stock and Series
Preferred, voting together as a class, shall be entitled to elect the remaining
members of the Board of Directors.
13. AMENDMENTS AND CHANGES
As long as any of the Series Preferred shall be issued and outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of 66-2/3% of the Series
Preferred then outstanding:
a. Take any action that increases the number of authorized shares of
Series Preferred or which would materially and adversely alter or change the
preferences, rights, privileges, or powers of, or the restrictions provided for
the benefit of, the Series Preferred;
b. Authorize, create, or issue shares of any class of stock, any
bonds, debentures, notes, or other obligation convertible into or exchangeable
for or having option rights to purchase, any
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<PAGE> 43
shares of stock of the Corporation having any preference or priority, as to
dividends, assets or otherwise on a parity with or superior to any preferences
or priority of the Series Preferred;
c. Reclassify any outstanding shares into shares having any
preference or priority as to dividends, assets or otherwise superior to or on a
parity with any such preference or priority of Preferred Stock;
d. Merge, consolidate, reorganize, recapitalize, liquidate or sell
all or substantially all of the assets outside the ordinary course of business
or enter into any agreement regarding an Asset Transfer or an Acquisition;
e. Increase shares subject to or available for stock options above
the aggregate number provided in Section 5.b(1);
f. Repurchase shares of stock from employees or former employees
other than in connection with termination of employment pursuant to agreements
approved by the Board of Directors of the Corporation;
g. Effect substantial acquisitions or changes in the business of the
Corporation;
h. Engage in any transaction with an affiliate of the Corporation; or
i. Take any action that increases or decreases the authorized size of
the Board of Directors.
14. HEADINGS
The headings of the Sections, Subsections, Paragraphs and Subparagraphs of
this Article FOURTH are inserted for convenience only and shall not be deemed
to constitute a part of this Article FOURTH.
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<PAGE> 44
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 03/08/1999
991088171 - 2535248
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
BRAINPLAY.COM, INC.
I, the undersigned, President and Secretary of BrainPlay.com, Inc., a
corporation organized and existing under and by virtue of the General
Corporation law of the State of Delaware (the "Corporation"), do hereby certify
as follows:
FIRST: The Board of Directors of the Corporation duly adopted
resolutions containing the amendments to the Certificate of Incorporation of the
Corporation set forth below, declaring such amendments to be advisable and
calling for the consent of the stockholders of the Corporation to such
amendments.
SECOND: Simultaneously, stockholders holding sufficient shares of each
class and series of stock entitled to vote gave written consent to the adoption
of the amendments pursuant to Section 228 of the Delaware General Corporation
Law without a meeting, written notice pursuant to Section 228(d) of the Delaware
General Corporation Law will be given to stockholders who did not consent in
writing and the amendments were in all respects duly adopted in accordance with
the provisions of Section 242 of the Delaware General Corporation Law.
THIRD: Article FOURTH of the Certificate of Incorporation of the
Corporation was amended to read in its entirety as set forth on EXHIBIT A
hereto.
<PAGE> 45
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Srikant Srinivasan, its President and Secretary, this 5th day of
March, 1999.
BrainPlay.com, Inc.
By /s/ Srikant Srinivasan
--------------------------------------------
Srikant Srinivasan, President and Secretary
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<PAGE> 46
EXHIBIT A
TO
CERTIFICATE OF AMENDMENT
FOURTH: The total number of shares of stock that the Corporation shall
have authority to issue is 24,754,507 divided into 20,000,000 shares of common
stock, each having a par value of $0.001 ("Common Stock"), and 4,754,507 shares
of preferred stock, each having a par value of $0.001 ("Preferred Stock").
Subject to the provisions of Section 13 of this Article FOURTH, the
Board of Directors is authorized to provide for the issuance of Preferred Stock
from time to time in one or more series with such distinctive serial
designations, rights, preferences and limitations of the shares of each such
series as the Board of Directors shall establish. The authority of the Board of
Directors with respect to each series shall include, without limiting the
generality of the foregoing, the determination of any or all of the following:
A. The number of shares constituting the series and the distinctive
designation of that series;
B. The extent, if any, to which the shares of the series shall have
voting rights;
C. Whether dividends, if any, shall be cumulative or noncumulative, the
dividend rate or method of determining the dividend rate of such series, and
the dates and preferences of dividends on such series;
D. The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution, or winding up of the corporation, or upon
any distribution of its assets;
E. Whether the shares of that series shall have conversion privileges
and, if so, the terms and conditions of such conversion privileges, including
provisions, if any, for adjustment of the conversion rate and for payment of
additional amounts by holders of preferred stock of that series upon exercise of
such conversion privileges;
F. Whether or not the shares of that series shall be redeemable, and,
if so, the price at and the terms and conditions upon which such series shall be
redeemable, and whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of such
sinking fund; and
G. Any other preferences and relative, participating, optional, or
other special rights, and qualifications, limitations, or restrictions thereof,
all as shall be determined from time to time by the Board of Directors and shall
be stated in a resolution or resolutions providing for the issuance of such
Preferred Stock (a "Preferred Stock Designation"). A Preferred Stock Designation
originally adopted by the Board of Directors that is subsequently amended by an
amendment to the Corporation's Certificate of Incorporation shall continue to be
a Preferred Stock Designation.
Shares of any series of Preferred Stock that have been redeemed
(whether through the operation of a sinking fund or otherwise) or purchased by
the Corporation, or that, if convertible or
<PAGE> 47
exchangeable, have been converted into or exchanged for shares of stock of any
other class or classes shall be canceled on the books of the Corporation, and
the shares so redeemed, purchased, converted or exchanged shall be deemed to be
canceled and no longer authorized or available for issuance by the Corporation.
1. DESIGNATION
One Million Eight Hundred Thirty Five Thousand, Five Hundred Eighty
Nine (1,835,589) shares of Preferred Stock are hereby designated Series A
Convertible Preferred Stock (hereinafter referred to as the "Series A
Preferred"), and Two Million Nine Hundred Eighteen Thousand, Nine Hundred
Eighteen (2,918,918) shares of Preferred Stock are hereby designated Series B
Convertible Preferred Stock (hereinafter referred to as the "Series B
Preferred"). The Series A Preferred and the Series B Preferred are collectively
referred to herein as the "Series Preferred." The Series Preferred shall have
the powers, preferences and rights and the qualifications, restrictions, and
limitations, specified in this Article FOURTH.
2. DIVIDENDS
a. RIGHT TO DIVIDENDS. The holders of outstanding Series
Preferred shall be entitled to receive cash dividends, at the rate of $0.136
per share per annum in the case of Series A Preferred, and $0.1776 per share
per annum in the case of Series B Preferred (in each case as adjusted for stock
splits, stock dividends and the like with respect to such shares),
respectively, only when, as, and if declared from time to time by the Board of
Directors, out of any assets at the time legally available. The date on which
the Corporation initially issues any Share shall be deemed to be its "date of
issuance" regardless of the number of times transfer of such Share is made on
the stock records maintained by the Corporation.
(1) PRIORITY OF DIVIDENDS. The Corporation shall make no
Distribution (as defined below) to the holders of Common Stock in any fiscal
year unless and until any and all declared but unpaid dividends shall have been
paid upon all Series Preferred. "Distribution" in this paragraph means the
transfer of cash or property without consideration, whether by way of dividend
or otherwise (except a dividend in shares of the Corporation), or the purchase
or redemption of shares of the Corporation for cash or property, but does not
include (i) the repurchase of shares from a terminated employee or consultant
of the Corporation within the terms of a management agreement or stock
restriction agreement, or in exercise of the Corporation's right of first
refusal upon a proposed transfer, in either case approved by the Corporation's
Board of Directors or (ii) a distribution which is part of a voluntary
liquidation, dissolution or winding up of the Corporation. In the event
dividends are paid on any share of Common Stock, an additional dividend shall be
paid with respect to all outstanding shares of Series Preferred in an amount
equal per share (on as as-if converted to Common Stock basis) to the amount
paid or set aside for each share of Common Stock.
(2) DIVIDENDS NOT CUMULATIVE. Dividends shall not be
cumulative for payment. Dividends shall accrue or accumulate only if and to the
extend they are declared but unpaid. No undeclared or declared but unpaid
dividend shall bear or accrue interest.
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<PAGE> 48
3. LIQUIDATION PREFERENCE
a. BASIC PREFERENCE RIGHTS. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Corporation
(a"Liquidation"):
(1) Before any distribution or payment shall be made to
the holders of any other capital stock of the Corporation, the holders of
Series Preferred shall be entitled to be paid out of the assets of the
Corporation an amount per share of Series Preferred then held by them (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares) equal to the sum of (i) the Original
Issue Price for such series plus (ii) all declared and accrued but unpaid
dividends theron (the "Liquidation Preference")for each share of Series
Preferred held by them. The Original Issue Price for the Series A Preferred
shall be $1.70 per share and the Original Issue Price for the Series B
Preferred shall be $2.22 per share.
(2) After the payment of the Liquidation Preference of
the Series Preferred as set forth in Section 3(a)(1) above, the remaining
assets of the Corporation legally available for distribution, if any, shall be
distributed ratably to the holders of the Common Stock, the Series A Holders
and the Series B Holders on an as-if-converted to Common Stock basis, based on
the number of shares then held by them, until such time as the Series B Holders
have received pursuant to Section 3(a)(1) above and this Section 3(a)(2) an
aggregate amount per share of Series B Preferred equal to $5.10 per share (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares).
(3) After the payment of the Liquidation Preference of
the Series Preferred as set forth in Section 3(a)(1) above, and after the
payments under Section 3(a)(2) above, the remaining assets of the Corporation
legally available for distribution, if any, shall be distributed ratably to the
holders of the Common Stock and the Series A Holders on an as-if-converted to
Common Stock basis, based on the number of shares then held by them, until such
time as the Series A Holders have received pursuant to Sections 3(a)(1) and
3(a)(2) above and this Section 3(a)(3) an aggregate amount per share of Series A
Preferred equal to $5.10 per share (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares).
(4) After the payment of the Liquidation Preference of
the Series Preferred as set forth in Section 3(a)(1) above, and after the
payments under Sections 3(a)(2) and 3(a)(3) above, the remaining assets of the
Corporation legally available for distribution, if any, shall be distributed
ratably to the holders of the Common Stock, based on the number of shares then
held by them.
(5) SHOULD ASSETS BE INSUFFICIENT. If upon a Liquidation
for the assets of the Corporation available for distribution to its shareholders
shall be insufficient to make full payments due under Section 3a(1), then the
holders of the Series Preferred then outstanding shall share ratably in
proportion to the number of shares of Common Stock they would hold had full
conversion of their Series Preferred occurred immediately prior to the
Liquidation, according to the provisions of Sections 4 and 5, below.
(6) SOURCE OF LIQUIDATION PAYMENT. The holders of stock
shall be paid under this
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<PAGE> 49
Section 3.a out of the assets of the Corporation available for distribution to
its shareholders, whether from capital surplus or earnings.
(7) MERGER OR ACQUISITION: The Corporation shall not effect (i) a
merger, reorganization, or consolidation of the Corporation into or with another
corporation, or any other corporate reorganization, in which the shareholders of
the Corporation immediately prior to such other consolidation, merger or
reorganization, own less than fifty percent (50%) of the Corporation's voting
power immediately after such event, or any transaction or series of related
transactions in which in excess of fifty percent (50%) of the Corporations's
voting power is transferred (an "Acquisition"), or (ii) the sale or transfer of
all or substantially all of the assets of the Corporation (an "Asset Transfer")
until the Corporation shall have provided notice to all holders of Series
Preferred pursuant to Section 3.b, below. Unless otherwise agreed to by the
holders of two-thirds of the Series Preferred which is then outstanding, an
Acquisition or Asset Transfer shall be deemed to be a Liquidation.
b. NOTICE. In the event of any Liquidation of the Corporation, or in the
event of any Acquisition or Asset Transfer, the Corporation shall give each
holder of Series Preferred initial written notice of the proposed action within
fifteen (15) days after the date the Board of Directors approves such action, or
twenty (20) days prior to any shareholders' meeting called to approve such
action, or twenty (20) days after the commencement of any involuntary
proceeding, whichever is earlier.
(1) CONTENT OF NOTICE. Such initial written notice shall describe the
material terms and conditions of the proposed action, including a description of
the stock, cash, and property to be received by the holders of Series Preferred
upon consummation of the proposed action. If any material change in the facts
set forth in the initial notice shall occur, the Corporation shall promptly give
written notice to each holder of the Series Preferred of that material change.
(2) NOTICE PRECEDES CONSUMMATION. The Corporation shall not
consummate any Liquidation of the Corporation before the expiration of twenty
(20) days after the mailing of the initial notice or ten (10) days after the
mailing of any subsequent written notice, whichever is later. Any such 20-day or
10-day period may be shortened upon the written consent of the holders of a
majority of the Series Preferred then outstanding.
c. NON-CASH DISTRIBUTIONS ON LIQUIDATION. In the event of any Liquidation
of the Corporation which will involve the distribution of assets other than
cash, the Corporation shall promptly engage a competent independent appraiser to
determine the value of he assets to be distributed. With respect to the
valuation of securities, the Corporation shall engage such appraiser as shall be
approved by the holders of a majority of the Series Preferred then outstanding.
The Corporation shall, upon receipt of such appraiser's valuation, give prompt
written notice to each holder of shares of Series Preferred of the appraiser's
valuation.
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<PAGE> 50
4. CONVERSION
a. CONVERSION RIGHTS.
(1) OPTIONAL CONVERSION. Each share of Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share and up to and including the day prior to the closing of a
Qualified Public Offering (as defined below) (the "Conversion Period"), into
fully paid and non-assessable shares of Common Stock of the Corporation.
(2) AUTOMATIC CONVERSATION. All outstanding shares of Series A
Preferred shall automatically be converted into fully paid and non-assessable
shares of Common Stock of the Corporation, at the then applicable Conversion
Price (as defined below), immediately;
(a) Prior to the closing of a firm commitment underwritten
public offering of the shares of Common Stock of the Corporation pursuant to a
registration statement filed under the Securities Act of 1933, as amended, at a
price per share of not less than $8.50 per share (prior to underwriter
commissions and expenses and adjusted for stock splits, stock dividends,
reorganizations and the like) and with aggregate offering proceeds to the
Corporation of not less than Fifteen Million Dollars ($15,000,000) (a "Qualified
Public Offering"); or
(b) Upon the election, at any time, of holders of at least
66 2/3% of the outstanding shares of Series Preferred.
(3) CONVERSION FORMULA. Each share of Series A Preferred shall be
valued at $1.70 (the "Original Series A Purchase Price") and each share of
Series B Preferred shall be valued at $2.22 (the "Original Series B Purchase
Price"), for purposes of such optional or automatic conversion, notwithstanding
any accrued but unpaid dividends. The number of shares of Common Stock into
which each share of the Series Preferred may be converted shall be determined by
(i) in the case of the Series A Preferred, dividing the Original Series A
Purchase Price by the Series A Conversion Price (as determined as provided
below) in effect at the time of the conversion, and (ii) in the case of the
Series B Preferred, dividing the Original Series B Purchase Price by the Series
B Conversion Price (as determined as provided below) in effect at the time of
the conversion. The Corporation shall make all necessary payments as of the
Conversion Date (as defined in Section 4.c) on account of any dividends declared
and thus accrued on the Series Preferred surrendered for conversion.
b. INITIAL CONVERSION PRICE. The conversion price per share at which
shares of Common Stock shall be initially leasable upon conversion of any shares
of Series A Preferred (the "Series A Conversion Price") shall be equal to the
Original Series A Purchase Price, and the conversion price per share at which
shares of Common Stock shall be initially issuable upon conversion of any shares
of Series B Preferred (the "Series B Conversion Price") shall be equal to the
Original Series B Purchase Price, in each case subject to adjustment as provided
in Section 5 below. The Series A Conversion Price and the Series B Conversion
Price may individually be referred to as a "Conversion Price" and shall
collectively be referred to as the "Conversion Prices."
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<PAGE> 51
c. MECHANICS OF CONVERSION
(1) OPTIONAL CONVERSION. Before any holder of Series Preferred will
be entitled to convert the same into shares of Common Stock pursuant to Section
4.a(1) hereof, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series Preferred, and shall give written notice to the Corporation
at such office that such holder elects to convert the same and will state
therein the name or names in which the certificate or certificates for shares of
Common Stock should be issued. The Corporation as soon as practicable
thereafter, will issue and deliver at such office to such holder of Series
Preferred or to the holder's nominee or nominees, a certificate or certificates
for the number of shares of Common Stock to which such holder will be entitled
as aforesaid. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Series Preferred to be converted (the "Conversion Date"), and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holder of
such shares of Common Stock on such Conversion Date.
(2) AUTOMATIC CONVERSION. Conversion of all the outstanding shares of
Preferred Stock into shares of Common Stock pursuant to Section 4.a(2) hereof
shall be deemed to have been made automatically and immediately prior to closing
of a Qualified Public Offering, or upon the election to convert by holders of at
least 66-2/3% of the outstanding shares of Series Preferred as set forth in
Section 4.a(2)(B) hereof (and "Automatic Conversion Date"). Upon such automatic
conversion, the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion will be treated for all purposes as the record
holder or holders of such Common Stock on the Automatic Conversion Date whether
or not such holder or holders shall have surrendered certificates for such
holder's shares of Preferred Stock to the Corporation. On the Automatic
Conversion Date, the certificates representing all the shares of Preferred Stock
shall be deemed void; and as soon as practicable after the surrenders by any
holder of Preferred Stock certificates, accompanied by a statement from the
holder of Preferred Stock certificates, accompanied by a statement from the
holder as to the name or names in which the certificate or certificates for
shares of Common Stock should be issued, the Corporation shall then issue and
deliver, at the office of the Corporation to such holder or his nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which the holder shall be entitled.
(3) NEW CERTIFICATES. Upon conversion of only a portion of the
number of shares of Preferred Stock represented by a certificate surrendered for
conversion, the Corporation shall issue and deliver upon the written order of
the holder at the expense of the Corporation, a new certificate covering the
number of shares of Preferred Stock representing the unconverted portion of the
certificate so surrendered.
(4) PUBLIC OFFERING. If any holder of Preferred Stock elects to
convert in connection with an underwritten offering of securities registered
pursuant to the Securities Act of 1933, as amended (other than in connection
with a Qualified Public Offering)the conversion may, at the option of any holder
tendering Preferred Stock for conversion, be conditioned upon the closing with
the underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Preferred Stock shall not be deemed to have converted such
Preferred Stock until the close of business on the actual closing date with
respect to such sale of securities. Notice of such closing shall be give by the
Corporation
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by certified mail, postage prepaid, return receipt requested, to the holders of
the Preferred Stock at their addresses shown in the Corporation's records at
least five (5) days prior to the closing date of such sale of securities. On or
after the closing date as specified in such notice, each holder of the
Preferred Stock shall surrender the certificate or certificates representing
such Preferred Stock for the number of shares of Common Stock to which the
holder is entitled at the office of the Corporation or any transfer agent. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which the holder shall be entitled as
aforesaid. The conversion shall be deemed to have occurred as of the close of
business on the actual closing date with respect to such underwritten offering
of securities, and immediately upon the surrender of any certificate
representing the Preferred Stock to be converted, each holder of such Preferred
Stock shall thereafter be treated for all purposes as the record holder of the
number of shares of Common Stock issuable to such holder upon such conversion.
(5) INABILITY TO PAY DIVIDENDS ON CONVERSION. If for any reason the
Corporation is unable to pay any declared and accrued dividends on any Preferred
Stock being converted, at the converting holder's option, (i) the Corporation
will pay such dividends to the converting holder as soon thereafter as funds of
the Corporation are legally available for such payment or (b) all or a portion
of such unpaid dividends may be used top acquire an additional number of shares
of Common Stock determined by dividing the amount of the unpaid dividends to be
applied for such purpose by the Series A Conversion Price or Series B Conversion
Price, as applicable, which is then in effect.
d. NO FRACTIONAL SHARES. The Corporation shall issue no fractional
shares of Common Stock or scrip upon conversion of shares of Series Preferred.
If more than one share of Series Preferred shall be surrendered for conversion
at any one time by the same holder, the number of full shares of Common Stock
issuable upon their conversion shall be computed on the basis of the aggregate
number of shares of Series Preferred so surrendered. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of any
shares of Series Preferred, the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to the same fraction of
the Series A Conversion Price or Series B Conversion Price, as applicable, in
effect on the business day next preceding the day of conversion.
e. TAXES INCIDENT TO CONVERSION. The Corporation shall pay any and all
issue taxes and other taxes (excluding income and capital gains taxes) that may
be payable in respect to any issue or delivery of shares of Common Stock on
conversion of Series Preferred. The Corporation shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the Series
Preferred so converted was registered, and no such issue or delivery shall be
made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax, or has established, to the satisfaction
of the Corporation, that such tax has been paid.
f. SUFFICIENT RESERVES OF STOCK. The Corporation shall at all times
reserve and keep available, out of its authorized but unissued Common Stock,
solely for the purpose of affecting the conversion of the Series Preferred, the
full number of shares of Common Stock deliverable upon the conversion of all
Series Preferred from time to time outstanding.
g. VALID ISSUE FOR CONVERSION. All shares of Common Stock which may be
issued upon
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<PAGE> 53
conversion of the shares of Series Preferred shall, upon issuance by the
Corporation, be validly issued, fully paid, non-assessable and free from all
taxes, liens and charges with respect to their issuance.
5. ADJUSTMENT OF CONVERSION PRICES
a. ANTI-DILUTION ADJUSTMENT. The Conversion Prices in effect at any time
shall be adjusted from time to time as provided in this Section 5.
b. NO ADJUSTMENT FOR CERTAIN GRANTS, SALES OR ISSUANCES. Anything in this
Certificate of Incorporation to the contrary notwithstanding, the Corporation
shall not be required to make any adjustment of the Conversion Prices in the
case of the grant of options or other rights to purchase, or the sale of, or the
issuance of, shares of Common Stock or obligations or securities convertible
into the Common Stock of the Corporation:
(1) To its officers, employees, directors, and consultants pursuant
to the Company's Stock Option Plan so long as any such grants, sales or
issuances do not exceed in the aggregate 947,037 shares of Common Stock or
obligations or securities convertible into Common Stock; or
(2) Upon the conversion of any shares of the Corporation's Series
Preferred.
c. STOCK SPLITS, STOCK DIVIDENDS OR STOCK COMBINATIONS. In case the
Corporation shall at any time subdivide the outstanding shares of Common Stock,
or shall issue a stock dividend on its outstanding Common Stock or make a
distribution payable in additional shares of Common Stock, the Conversion Price
in effect immediately prior to such subdivision, the issuance of such dividend
or the making of such distribution, shall be proportionately decreased,
effective at the close of business on the date of such subdivision, dividend, or
distribution. In case the Corporation shall at any time combine the outstanding
shares of Common Stock, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased, effective at the close of
business on the date of such combination.
d. ADJUSTMENT FORMULAS. If, at any time or from time to time after
the first issuance of shares of Series B Preferred, the Corporation issues or
sells Common Stock, or a right or option to purchase Common Stock, or shares of
stock or an obligation convertible into Common Stock (other than in connection
with a stock split, stock dividend, or distribution on the Corporation's Common
Stock) for a consideration receivable by the corporation per share
("Consideration Receivable," with the product of the number of such shares times
such Consideration Receivable being the "Aggregate Consideration Receivable")
which is less than the Conversion Price then in effect for a series of Series
Preferred, such Conversion Price shall immediately and automatically be adjusted
as determined to the nearest cent by the following formula:
Where z = New Conversion Price for such series of Series Preferred;
x = Current Conversion Price for such series of Series Preferred;
y = The Aggregate Consideration Receivable on such issuance,
sale, etc.;
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<PAGE> 54
a = Number of shares of Commons Stock outstanding just prior to such
issuance, sale, etc., less all shares of Common Stock owned by
Srikant Srinivasan and Aloke Majumdar at such time (or owned by
the ancestors, descendants or spouses of such persons or held in
trust or other entities for the benefit of such persons or
Messrs. Srinivasan and Majumdar);
b = Number of shares of Common Stock to which all holders of Options
(as defined in 5.d(1) below) are entitled to subscribe for, or
purchase immediately prior to, such issuance, sales, etc.;
c = Number of shares of Common Stock issuable to all holders of
Convertible Securities (as defined in 5.d(2) below), immediately
prior to such issuance, sale, etc. (using the Series A Conversion
Price then in effect); and
d = Number of shares of Common Stock to be issued or deemed to be
issued under 5(d)(1) and (2) below, in connection with such
issuance, sale, etc.;
then z = x(a+b+c)+y
----------
a+b+c+d
provided, however, that the Conversion Price for any series of Series Preferred
shall never exceed the Original Purchase Price for such series of Series
Preferred.
For purposes of this Section 5.d only, the following provisions shall
apply:
(1) OPTIONS OR WARRANTS. In case of the issuance or sale by the
Corporation in any manner of any options for the purchase of shares of Common
Stock or of any rights to subscribe for or to purchase shares of Common Stock
("Options"), all shares of Common Stock which the holders of such Options shall
be entitled to subscribe for or purchase pursuant to such Options shall be
deemed to be issued or sold as of the date of the offering of such rights or
the granting of such Options.
(2) CONVERTIBLE SECURITIES. In the case of the issuance or sale by
the Corporation in any manner of any obligations or of any shares of stock of
the Corporation that shall be convertible into or exchangeable for Common Stock
("Convertible Securities"), all shares of Common Stock issuable upon the
conversion or exchange of such obligations or shares shall be deemed issued as
of the date such obligations or shares are issued.
(3) CASH CONSIDERATIONS FOR COMMON STOCK. In the case of an issue or
sale for cash of shares of Common Stock, the Consideration Receivable by the
Corporation therefor shall be the amount of cash received, before deducting any
commissions or expenses paid by the Corporation.
<PAGE> 55
(4) NON-CASH CONSIDERATION FOR COMMON STOCK. In the case of the
issuance or sale (otherwise than upon conversion or exchange of obligations or
shares of stock of the Corporation) of shares of Common Stock for a
consideration other than cash or a consideration partly other-than cash, the
amount of the consideration other than cash receivable by the Corporation for
such shares shall be deemed to be the value of such consideration as determined
in good faith by the Board of Directors.
(5) CONSIDERATION RECEIVABLE FOR OPTIONS OR CONVERTIBLE SECURITIES.
(a) The amount of the Aggregate Consideration Receivable by the
Corporation upon the issuance of any Options referred to in Subparagraph (1)
above shall be the minimum aggregate consideration named in such Options for
the shares of Common Stock covered thereby, plus the consideration, if any,
received by the Corporation for such Options.
(b) The amount of Consideration Receivable by the Corporation upon
the issuance of any obligations or shares which are convertible or exchangeable
as described in Subparagraph (2) above as "Convertible Securities," shall be the
amount of consideration received by the Corporation upon the issuance of such
obligations or shares, plus the minimum aggregate consideration, if any, other
than such obligations or shares, receivable by the Corporation upon such
conversion or exchange, except in adjustment of dividends.
(c) The amount of Aggregate Consideration Receivable under
Paragraphs 5.d(5)(A) and 5.d(5)(B) and the amount of Aggregate Consideration
Receivable upon the exercise of Options or upon the conversion or exchange of
convertible securities under this Paragraph 5.d(5), shall be determined in the
same manner provided in Subparagraphs (3) and (4) above with respect to the
Aggregate Consideration Receivable by the Corporation as in the case of the
issuance of additional shares of Common Stock. But if such obligations or shares
of stock so convertible or exchangeable are issued in satisfaction of any
dividend upon any stock of the Corporation other than Common Stock, the
amount of the consideration received upon the original issuance of such
obligations or shares of stock shall be the value of such obligations or shares
of stock, as of the date of the adoption of the resolution declaring the
dividend, as determined in good faith by the Board of Directors at or as of that
date.
(6) OTHER PARTICULARS CONCERNING OPTIONS AND CONVERTIBLE SECURITIES. In
the event that the Conversion Price for any series of Series Preferred shall be
adjusted with respect to the issuance of Options or Convertible Securities (as
defined in Sections 5.d(1) and (2)), the following provisions apply with respect
to such Conversion Price:
(a) No further adjustment in the Conversion Price(s) shall be made
upon the subsequent issue of Convertible Securities or shares of Common Stock
when those Options are exercised or those Convertible Securities are converted.
(b) Such Options or Convertible Securities may by their terms
provide, with the passage of time or otherwise, for any decrease in the
consideration payable to the Corporation, or increase in the number of shares of
Common Stock issuable, upon their exercise, conversion or exchange. In such a
case, the Conversion Price computed upon the original issue thereof, and any
subsequent adjustments shall, upon any such increase or decrease becoming
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<PAGE> 56
effective, be recomputed to reflect such increase or decrease insofar as it
affects those Options or the rights of conversion or exchange under those
Convertible Securities.
(c) Upon the expiration of any such Options or any rights of
conversion under such Convertible Securities which shall not have been
exercised, the Conversion Price computed upon the original issue thereof, and
any subsequent adjustments shall, upon such expiration, be recomputed AS IF:
i) In the case of Convertible Securities or Options for Common
Stock, the only additional shares of common stock issued were the
shares of Common Stock actually issued upon the exercise of such
Options or the conversion of such Convertible Securities; and the
Aggregate Consideration Receivable was the consideration actually
received by the Corporation for the issue of such Convertible
Securities which were actually converted, and
ii) In the case of Options for Convertible Securities, only
the Convertible Securities actually issued upon the exercise thereof
were issued at the time of issue of such Options; and the Aggregate
Consideration Receivable for the additional shares or Common Stock
deemed to have been then issued was the consideration actually received
by the Corporation for the issue of all such Options for Convertible
Securities, whether or not exercised, plus the consideration deemed to
have been received by the Corporation (determined pursuant to Section
5.d(5)) upon the issue of the Convertible Securities when such Options
were actually exercised.
(d) No readjustment pursuant to Section 5.d(6)(b) or Section
5.d(6)(c) shall have the effect of increasing the Conversion Price by an amount
greater than the amount of the adjustment originally made when the Options or
Convertible Securities were issued.
(e) In the case of any Options which expire by their terms not
more than thirty (30) days after the date of issue or sooner, no adjustment of
the Conversion Price shall be made until the expiration or exercise of all such
Options.
e. WAIVER OF ADJUSTMENT.
(1) In the event that holders of two-thirds of the then currently
outstanding shares of the Series Preferred shall consent to limit, or waive in
its entirety, any anti-dilution adjustment to which the holders of such series
would otherwise be entitled under Section 5.d hereof, the Corporation shall not
be required to make any adjustment whatsoever with respect to any shares of
Series Preferred or to make any adjustment with respect to any shares of Series
Preferred in excess of such limit, as the terms of such consent may dictate.
(2) Moreover, any holder of Series Preferred shall be permitted to
waive in whole or in part, currently or prospectively, by contract or any other
writing, any anti-dilution adjustment to which he or it would otherwise be
entitled pursuant to the provisions of this Section 5.
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6. REDEMPTION
a. OPTIONAL REDEMPTION. So long as any shares of any series of
Series Preferred shall be outstanding, at the election of two-thirds of the
outstanding shares of such series of Series Preferred, the Corporation shall on
each of the dates set forth below redeem from each holder of shares of such
series at the redemption price of $1.70 per share, in the case of the Series A
Preferred, and $2.22 per share, in the case of the Series B Preferred, in each
case plus any declared and unpaid dividends with respect to such shares (such
amount to be adjusted proportionately in the event the shares of Preferred
Stock are subdivided into a greater number or combined into a lesser number)
the number of shares of such series, to the nearest whole share, held by such
holder on such date in eight (8) equal quarterly installments beginning
November 30, 2004, provided that such number shall be reduced, in each
instance, with respect to each holder, by the number of shares of such series
with respect to which such holder exercises its conversion rights during the
period commencing on the date of the notice of redemption delivered pursuant to
Section 6.b and ending on the date of redemption.
b. PROCEDURES. Whenever any shares of Series Preferred are to be
redeemed pursuant to this Section 6, the Corporation shall give not less than
thirty (30) days advance written notice thereof to each holder of record whose
stock is to be redeemed, by registered or certified mail, postage prepaid,
addressed to such holder at such holder's address as the same shall appear on
the registry books of the Corporation. Such notice shall (i) state the number of
shares to be purchased from such holder, (ii) state the date fixed for the
redemption thereof, and (iii) call upon such holder to surrender to the
Corporation on or after said date, at the place designated in such notice, a
certificate or certificates representing the number of shares of Series
Preferred to be redeemed in accordance with such notice. On or after the
redemption date specified in such notice of redemption, each holder of shares
of Series preferred to be so redeemed shall present and surrender the
certificate or certificates for such shares to the Corporation at the place
designated in said notice, duly endorsed for transfer, free and clear of all
liens, claims, and encumbrances of any kind or nature, and thereupon the
redemption price of such shares shall be paid to, or to the order of, the
person whose name appears on such certificate or certificates as the owner
thereof. From and after the date fixed in any such notice as the date of
redemption, unless the Corporation shall default in providing from the payment
of the redemption price pursuant to such notice, all rights of the holders of
Series Preferred thereby called for redemption as shareholders of the
Corporation with respect to such shares of Series Preferred, except the right
to receive the redemption price, shall cease and terminate. The Corporation
shall deposit the amount required for the payment of any part of the redemption
price not claimed on the redemption date with a bank or trust company selected
by the Corporation and doing business in Colorado. Any interest allowed on
monies so deposited shall be paid from time to time to the Corporation. Any
monies so deposited which shall remain unclaimed by the holders of the Series
Preferred at the end of two years after the redemption date shall be paid by
such bank or trust company to the Corporation, but the Corporation shall remain
obligated to make payment of the redemption price to the holders of Series
Preferred entitled thereto, subject to any applicable escheat or similar laws.
c. PRE-EMPTIVE CONVERSION. Nothing in this Section 6 shall be
deemed to prevent any holder of shares of Series Preferred from exercising such
holder's right of conversion pursuant to Section 4 hereof with respect to any
share of Series Preferred at any time prior to the redemption of
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such share of Series Preferred, including the giving of notice or redemption
with respect to such share pursuant to Section 6.b.
7. REORGANIZATION, RECLASSIFICATION, AND SALE OF ASSETS.
If any capital reorganization or reclassification of the capital stock
of the Corporation, including any such reorganization or reclassification in
connection with any merger, consolidation, or transfer of substantially all of
the assets of the Corporation, shall not be deemed to be a Liquidation pursuant
to Section 3 hereof, and if it shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities, or assets with
respect to or in exchange for Common Stock, then the following shall be an
express condition of such reorganization or reclassification.
a. Lawful and adequate provisions in a form satisfactory to the
holders of two-thirds of the Series Preferred, shall be made, whereby each
holder of shares of Series Preferred shall thereafter have the right to
receive, upon the terms and conditions specified herein and in lieu of the
shares of Common Stock of the Corporation immediately theretofore receivable
upon the conversion of such shares of the Series Preferred, such shares of
stock, securities, or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of such stock immediately theretofore so receivable had such
reorganization or reclassification not taken place.
b. Moreover, in any such case, appropriate provision shall be
made with respect to the rights and interests of each such holder of Series
Preferred to the end that the provisions hereof (including without limitation
provisions for adjustments of the Conversion Price) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities,
or assets thereafter deliverable upon the exercise of such conversion rights. In
the event of a merger or consolidation of the Corporation as a result of which a
greater or lesser number of shares of Common Stock of the surviving Corporation
are issuable to holders of the Common Stock of the Corporation outstanding
immediately prior to such merger or consolidation, the Conversion Price in
effect immediately prior to such merger or consolidation shall be adjusted in
the same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock of the Corporation.
c. The Corporation shall not effect any such reorganization,
reclassification, consolidation, merger, or sale unless, prior to the
consummation thereof: (i) the Corporation shall have obtained the consent of
the holders of two-thirds of the Series Preferred then outstanding, and (ii)
the successor corporation (if other than the Corporation) resulting from such
consolidation or merger, or the corporation purchasing such assets, shall
assume by written instrument, in a form satisfactory to the holders of
two-thirds of the Series Preferred then outstanding, the obligation to deliver
to such holder such shares of stock, securities, or assets as, in accordance
with the foregoing provisions, such holder may be entitled to receive. Such
written instrument shall be promptly mailed or delivered to each holder of
shares of Series Preferred at the last address of such holder appearing on the
books of the Corporation.
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8. NO IMPAIRMENT
Without the consent of the holders of two-thirds of the Preferred Stock then
outstanding, the Corporation shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary
action, avoid or seek to avoid the observance of performance of any of the terms
in this Article FOURTH to be observed or performed by the Corporation. The
Corporation shall at all times in good faith assist in the carrying out all the
provisions of Sections 4, 5, 6, and 7 hereof.
9. CERTIFICATE AS TO ADJUSTMENTS
a. Upon the occurrence of each adjustment of the Conversion Price for any
series of Series Preferred, pursuant to Section 5, the Corporation at its
expense shall promptly compute such adjustment and prepare and furnish to each
holder of shares of such series of Series Preferred a certificate setting
forth such adjustment and showing in detail the facts upon which such
adjustment is based, and
b. Upon the written request at any time of any holder of shares of Series
Preferred, the Corporation shall furnish to such holder a like certificate
setting forth (i) such adjustment, (ii) the Conversion Price for such series at
the time in effect, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of shares of such series.
10. NOTICE OF RECORD DATES
In the event:
a. That the Corporation shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend, or any other
distribution, payable otherwise than in cash; or
b. That the Corporation shall take a record of the holders of its Common
Stock for the purpose of entitling them to subscribe for or purchase any shares
of stock of any class or to receive any other rights; or
c. Of any capital reorganization of the Corporation, reclassification of
the capital stock of the Corporation (other than a subdivision or combination
of its outstanding shares of Common Stock), consolidation, or merger of the
Corporation with or into another corporation or conveyance of all or
substantially all of the assets of the Corporation to another corporation; or
d. Of the voluntary or involuntary dissolution, liquidation, or winding up
of the Corporation;
then, the Corporation shall cause to be mailed to the holders of record of the
outstanding Series Preferred, at least twenty (20) days prior to the date
specified therein, a notice stating the date on which that record is to be taken
or that event is to take place. The notice shall also specify the date, if
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any is to be fixed, as of which holders of Common Stock or record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation, or winding up.
11. FORM OF NOTICES
Any notice required by the provisions of this Article FOURTH to be given to
the holders of shares of Series Preferred shall be deemed given if hand
delivered, delivered by courier, or deposited in the United States mail, postage
prepaid, addressed to each holder of record at such holder's address appearing
on the books of the Corporation.
12. VOTING
a. GENERAL RIGHTS. Except as set forth in Section 12(b) below, the shares
of Series Preferred shall be voted equally with the shares of the Corporation's
Common Stock at any annual or special meeting of shareholders of the
Corporation, or may act by written consent on the same basis, with respect to
all matters which come before the shareholders. Each holder of shares of Series
Preferred shall be entitled to the number of votes equal to the number of whole
shares of the Corporation's Common Stock into which such holder's shares of
Series Preferred are convertible, pursuant to Sections 4 and 5 of this Article
FOURTH, immediately after the close of business on the record date fixed for
such meeting or the effective date of such written consent.
b. ELECTION OF THE BOARD OF DIRECTORS. For so long as the authorized size
of the Corporation's Board of Directors is five (5) or more, (i) the holders of
Series Preferred, voting as a separate class, shall be entitled to elect two (2)
members (one designated by Sequel Limited Partnership and its affiliates and one
by Sevin Rosen Funds and its affiliates) of the Corporation's Board of Directors
at each meeting or pursuant to each consent of the Corporation's shareholders
for the election of directors, and to remove from office such directors and to
fill any vacancy caused by the resignation, death or removal of such directors;
(ii) the holders of Common Stock, voting as a separate class, shall be entitled
to elect two (2) members of the Corporation's Board of Directors at each meeting
or pursuant to each consent of the Corporation's shareholders for the election
of directors, and to remove from office such directors and to fill any vacancy
caused by the resignation, death or removal of such directors; and (iii) the
holders of Common Stock and Series Preferred, voting together as a class, shall
be entitled to elect the remaining members of the Board of Directors.
13. AMENDMENTS AND CHANGES
As long as any of the Series Preferred shall be issued and outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of 66-2/3% of the Series Preferred
then outstanding:
a. Take any action that increases the number of authorized shares of Series
Preferred or which would materially and adversely alter or change the
preferences, rights, privileges, or powers of, or the restrictions provided for
the benefit of, the Series Preferred;
b. Authorize, create, or issue shares of any class of stock, any bonds,
debentures, notes or other obligations convertible into or exchangeable for or
having option rights to purchase, any
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shares of stock of the Corporation having any preference or priority, as to
dividends, assets or otherwise on a parity with or superior to any preferences
or priority of the Series Preferred;
c. Reclassify any outstanding shares into shares having any preference or
priority as to dividends, assets or otherwise superior to or on a parity with
any such preference or priority of Preferred Stock;
d. Merge, consolidate, reorganize, recapitalize, liquidate or sell all or
substantially all of the assets outside the ordinary course of business or enter
into any agreement regarding an Asset Transfer or an Acquisition;
e. Increase shares subject to or available for stock options above the
aggregate number provided in Section 5.b(1);
f. Repurchase shares of stock from employees or former employees other than
in connection with termination of employment pursuant to agreements approved by
the Board of Directors of the Corporation;
g. Effect substantial acquisitions or changes in the business of the
Corporation;
h. Engage in any transaction with an affiliate of the Corporation; or
i. Take any action that increases or decreases the authorized size of the
Board of Directors.
14. HEADINGS
The headings of the Sections, Subsections, Paragraphs and Subparagraphs of
this Article FOURTH are inserted for convenience only and shall not be deemed to
constitute a part of this Article FOURTH.
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Exhibit 3.8
BYLAWS
OF
3DUB, INC.
A DELAWARE CORPORATION
ARTICLE I
Offices
SECTION A. REGISTERED OFFICE. The registered office of the Corporation
in the State of Delaware shall be at 25 Greystone Manor, Lewes, Delaware
19958-9776, Delaware. The name of the Corporation's registered agent at such
address shall be Harvard Business Services, Inc.
SECTION B. OTHER OFFICES. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
Stockholders
SECTION A. ANNUAL MEETING. The annual meeting of the stockholders of
the Corporation shall he held for the purpose of electing Directors and for the
transaction of such other business as may properly be brought before the meeting
on such date and at such time as may be designated by the Board of Directors.
SECTION B. SPECIAL MEETINGS. Special meetings of the stockholders for
any purpose or purposes may be called by the Board of Directors, by the Chairman
of the Board or by the President. Any special meeting shall be held on such date
(subject to the provisions on notice) and at such time as shall be designated by
the Board of Directors or by the officer calling the meeting. At a special
meeting of the stockholders, no business shall be transacted and no corporate
action shall be taken other than that stated in the notice of the meeting unless
all of the stockholders of the Corporation are present in person or by proxy, in
which case any and all business may be transacted at the meeting even though not
included in the notice of meeting and even though the meeting itself was held
without notice.
SECTION C. PLACE OF MEETING. Every annual meeting of the stockholders
of the Corporation shall be held at such place within or without the State of
Delaware as may
<PAGE> 2
be designated by the Board of Directors. Every special meeting of the
stockholders of the Corporation shall be held at such place within or without
the State of Delaware as may be designated by the Board of Directors or the
officer calling the meeting.
SECTION D. NOTICE OF MEETINGS. It shall be the duty of the Secretary to
cause notice of each meeting of the stockholders to be mailed to each
stockholder of the Corporation entitled to vote at such meeting at his address
as it appears upon the records of the Corporation not less than ten nor more
than sixty days before the day of the meeting. The notice of the meeting shall
state the place, date, and hour of the meeting and, in case of a special
meeting, also shall state the purpose or purposes for which the meeting is
called.
SECTION E. QUORUM.
1. At any meeting of the stockholders, the holders of a majority in
number of the total outstanding shares of the Common Stock of the Corporation
that are entitled to vote at such meeting, present in person or otherwise
represented by proxy, shall constitute a quorum of the stockholders for all
purposes, unless the presence or representation of a larger number of shares
shall be required by law, by the Certificate of Incorporation, or by these
Bylaws, and, in that case, the presence or representation of the number of
shares so required shall constitute a quorum.
2. Any meeting may be adjourned (even though a quorum is not present)
by the holders of a majority in number of the shares of Common Stock of the
Corporation present in person and represented by proxy and entitled to vote at
such meeting to another time or place, and notice need not be given of the
adjourned meeting if the time and place thereof are announced at the meeting at
which the adjournment is taken and the adjournment is for less than thirty days
and a new record date is not set for the adjourned meeting.
SECTION F. ORGANIZATION.
1. The Chairman, if he is present at the meeting, or the President, if
the Chairman is not present, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the Chairman
and the President, the holders of a majority in number of the shares of Common
Stock of the Corporation present in person and represented by proxy and entitled
to vote at such meeting shall elect a chairman.
2. The Secretary of the Corporation shall act as secretary of all
meetings of the stockholders; but, in the absence of the Secretary, the chairman
of the meeting may appoint any person to act as secretary of the meeting.
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3. At least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting shall be prepared and
maintained in accordance with of the Delaware General Corporation Law.
SECTION G. VOTING.
1. Except as otherwise provided for in the Certificate of
Incorporation, in these Bylaws, in resolutions of the Board of Directors, or by
law, each stockholder shall be entitled to one vote in person or by proxy for
each share of Common Stock of the Corporation registered in his name upon the
books of the Corporation, but no proxy shall be voted after three years from the
date of its being granted unless the proxy provides for a longer period.
2. Upon the demand of any stockholder, the vote upon any matter before
the meeting shall be by ballot.
3. Shares of the Common Stock of the Corporation owned directly or
indirectly by the Corporation shall not be voted directly or indirectly or
counted in determining whether a quorum is present at any meeting.
4. Each proxy shall submit his power of attorney to the Secretary or to
the Treasurer for examination before the commencement of the meeting at which
the proxy intends to represent a stockholder who has given him a proxy. The
certificate of the Secretary or the Treasurer as to the regularity of any powers
of attorney so submitted, and as to the number of shares held by the persons who
severally and respectively executed the powers of attorney so submitted, shall
be received as prima facie evidence of the number of shares represented by the
holders of the powers of attorney for the purposes of establishing the presence
of a quorum at such meeting, for organizing the same, for voting, and for all
other purposes.
SECTION H. INFORMAL ACTION. Any action required to be taken at any
annual or special meeting of stockholders of the corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing. Any
action taken pursuant to such written consent of the stockholders shall have the
same force and effect as if taken by the stockholders at a meeting thereof.
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SECTION I. INSPECTORS OF ELECTION. When required by law or upon the
demand of any stockholder or proxy entitled to vote, but not otherwise, the
polls shall be opened and closed, the proxies and ballots shall be received and
taken in charge, and all questions touching the qualification of voters, the
validity of proxies, and the acceptance or rejection of votes shall be decided
at any meeting of the stockholders by two or more Inspectors or Judges of
Elections, who may be appointed by the Board of Directors before the meeting, or
if not so appointed, shall be appointed by the chairman of the meeting. If any
person so appointed fails to appear or act, the vacancy may be filled by
appointment by the chairman of the meeting.
ARTICLE III
Board of Directors
SECTION A. NUMBER AND TERM OF OFFICE. The business and property of the
Corporation shall be managed and controlled by a Board of Directors. The number
of directors which shall constitute the first Board shall be two (2).
Thereafter, the number of directors shall be established from time to time by
resolution of the Board. The directors shall he elected at the annual meeting of
the stockholders, except as provided in Section B of this Article III, and each
director elected shall hold office until the next annual meeting of stockholders
and until a successor is duly elected and qualified or until his or her earlier
death, resignation or removal as hereinafter provided.
SECTION B. RESIGNATION, REMOVAL, AND VACANCIES.
1. Any Director may resign at any time by giving written notice of his
resignation to the Chairman, the President, or the Secretary of the Corporation.
Any such resignation shall take effect at the time specified in the notice of
resignation, or, if the time when it shall become effective shall not be
specified therein, it shall take effect when accepted by action of the Board.
The acceptance of a resignation shall not he necessary to make it effective.
2. Newly created directorships resulting from any increase in the
number of Directors and any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled
only by an affirmative vote of a majority of the remaining Directors then in
office, even though less than a quorum of the Board of Directors. Any director
elected in accordance with the preceding sentence shall hold office for the
unexpired portion of the term of the director whose place he or she has been
elected to fill and until such Director's successor shall have been elected and
qualified.
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3. Any Director or the entire Board of Directors may be removed at any
time, with or without cause, by the holders of a majority of the shares of stock
of the corporation then entitled to vote at an election of Directors, except as
otherwise provided by law.
SECTION C. PLACE OF MEETING. The Board of Directors may hold its
meetings at such place or places within or without the State of Delaware as the
Board from time to time shall determine or as shall be designated in the notice
or waiver of notice of the meeting.
SECTION D. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No notice shall be required for any regular meeting
of the Board of Directors; but a copy of every resolution fixing or changing the
time or place of regular meetings shall be (i) mailed to each Director at least
three days before the first meeting held in pursuance thereof or (ii) delivered
personally or by prepaid commercial delivery or courier service, or sent by
telegram, cable, or wireless, to every Director at least one day before the
first meeting held in pursuance thereof.
SECTION E. SPECIAL MEETINGS.
1. Special meetings of the Board of Directors shall be held whenever
called by direction of the Chairman, the President, or a majority of the
Directors then in office.
2. The Secretary or an Assistant Secretary shall give notice of the
day, hour, and place of each special meeting (i) by mailing the same to each
Director at least three days before the meeting or (ii) by causing the same to
be delivered personally or by prepaid commercial delivery or courier service, or
to be sent by telegraph, cable or wireless, to each Director at least one day
before the meeting.
3. Unless otherwise indicated in the notice thereof, any and all
business may he transacted at any special meeting; and an amendment of these
Bylaws may be acted upon if the notice of the meeting shall have stated an
amendment of the Bylaws to be one of its purposes. At any meeting at which every
Director shall be present and no Director shall object, any business may be
transacted, even though no notice is given.
SECTION F. QUORUM. Except as otherwise provided for herein, a majority
of the members of the Board of Directors in office (but in no case less than
one-third of the total number of Directors) shall constitute a quorum for the
transaction of business and the action of the Board of Directors at which a
quorum is present shall be the action of the Board of Directors. If less than a
quorum is present at any meeting of the Board, a majority of those present may
adjourn the meeting from time to time.
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SECTION G. CHAIRMAN AND SECRETARY OF THE MEETING. The Chairman of the
Board, if any and if present, shall preside at all meetings of the Board of
Directors. Otherwise, the President, if present, or, if not, any other Director
chosen by the Board, shall preside. The Chairman of the Board, the President, or
other presiding Director, as the case may be, may appoint any person to act as
secretary of the meeting.
SECTION H. COMMITTEES. The Board of Directors, by resolution passed by
all members of the Board, may designate one or more committees, each committee
to consist of one or more of the Directors of the Corporation. The Board may
designate one or more Directors as alternate members of any committee, to
replace any absent or disqualified member at any meeting of the committee. Each
committee, to the extent provided for in the resolution of the Board, shall have
and may exercise the powers of the Board of Directors in the management of the
business and affairs of the Corporation and may authorize the seal of the
Corporation to be affixed to all papers that may require it. In the absence or
disqualification of any member of any committee or committees, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
SECTION I. ACTION BY CONSENT IN LIEU OF MEETING. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing. All consents in lieu
of meetings shall be filed with the minutes of proceedings of the Board or
committee.
SECTION J. TELEPHONE MEETINGS. Members of the Board of Directors or of
any committee thereof may participate in a meeting of the Board or committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear, and speak to, each
other. Participation in a telephone meeting pursuant to this Section J shall
constitute presence in person at such meeting. The person designated to be
secretary of the meeting by the Director initiating the telephone meeting shall
take minutes of the meeting, and such minutes shall be filed with the other
minutes of proceedings of the Board or committee.
SECTION K. COMPENSATION. Each Director, in consideration of his serving
as a Director, shall be entitled to receive from the Corporation such amount per
annum or such fees for attendance at meetings of the Board or of any committee,
or both, as the Board from time to time shall determine. The Board likewise may
provide that the Corporation shall reimburse each Director or member of a
committee for any expenses incurred by him on account of his attendance at any
such meeting. Nothing contained in this Section shall be construed to preclude
any Director from serving the Corporation in any other capacity and receiving
compensation therefor.
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ARTICLE IV
Officers
SECTION A. OFFICERS.
1. The officers of the Corporation shall he a President, one or more
Vice Presidents, a Secretary, and a Treasurer. All such officers shall be
elected by the Board of Directors at its first meeting after each annual meeting
of the stockholders and shall hold office until the earlier of their removal or
their respective successors shall have been elected and shall qualify.
2. In addition to the powers and duties of the officers of the
Corporation as set forth in these Bylaws, each shall have such authority and
shall perform such duties as from time to time may be determined by the Board of
Directors or the President.
SECTION B. RESIGNATION, REMOVAL, AND VACANCIES.
1. Any officer may resign at any time by giving written notice of his
resignation to the Board of Directors. Any such resignation shall take effect at
the time specified therein, or, if the time when it shall become effective shall
not be specified therein, the resignation shall take effect when accepted by
action of the Board. Except as aforesaid, the acceptance of such resignation
shall not be necessary to make it effective.
2. All officers and agents elected or appointed by the Board shall be
subject to removal with or without cause at any time by the Board.
3. A vacancy in any office may be filled at any time by the Board of
Directors.
SECTION C. POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER. Subject to
the control and general supervision of the Board of Directors, the Chief
Executive Officer shall have general charge and control of all of the Company's
business and affairs.
SECTION D. POWERS AND DUTIES OF THE PRESIDENT. The President shall be
the chief operating officer of the Company. Subject to the control and general
supervision of the Board of Directors and the Chief Executive Officer, the
President shall have general charge and control of all its business and affairs.
SECTION E. POWERS AND DUTIES OF THE VICE PRESIDENTS. The Board of
Directors may appoint one or more Vice Presidents. Each Vice President shall
have such
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powers and shall perform such duties as the Board of Directors or the President
shall assign to him.
SECTION F. POWERS AND DUTIES OF THE SECRETARY. Except as otherwise
provided for in these Bylaws, the Secretary shall keep the minutes of all
meetings of the Board of Directors and the minutes of all meetings of the
stockholders in books provided for that purpose; he shall attend to the giving
or serving of all notices of the Corporation; he shall have custody of the
corporate seal of the Corporation and shall affix the same to such documents and
other papers as the Board of Directors shall authorize and direct; he shall have
charge of the stock certificate books, transfer books, stock ledgers, and such
other books and papers as the Board of Directors or the President shall direct,
all of which shall at all reasonable times be open to the examination of any
Director or officer of the Corporation upon application at the office of the
Corporation during business hours; and he shall perform all other duties
incident to the office of Secretary. The Secretary shall also have such other
powers and shall perform such other duties as may be assigned to him by these
Bylaws, the Board of Directors, or the President.
SECTION G. POWERS AND DUTIES OF THE TREASURER. Unless otherwise
determined by the Board of Directors, the Treasurer shall have custody of, and,
when proper, may pay out, disburse or otherwise dispose of, all funds and
securities of the Corporation that may have come into his hands; he may endorse
on behalf of the Corporation for collection checks, notes, and other obligations
and deposit the same to the credit of the Corporation in such bank or banks or
depositary or depositaries as the Board of Directors may designate; he shall
enter or cause to be entered regularly in the books of the Corporation kept for
the purpose full and accurate accounts of all moneys received or paid or
otherwise disposed of by him and, whenever required by the Board of Directors,
shall render statements of such accounts; he shall exhibit his books and
accounts to any Director or officer of the Corporation upon application at the
Office of the Corporation during business hours; and he shall perform all acts
incident to the position of Treasurer and shall also have such powers and shall
perform such other or different duties as may be assigned to him from time to
time by these Bylaws or the Board of Directors or the President.
SECTION H. ADDITIONAL OFFICERS. The Board of Directors may from time to
time appoint such other officers, including Chairman of the Board, Assistant
Vice Presidents, Assistant Treasurers and Assistant Secretaries, as the Board
may deem advisable. Such officers shall have such powers and duties as usually
pertain to their offices, except as modified by the Board of Directors, and
shall also have such other powers and duties as may from time to time be
conferred upon them by the Board of Directors or the President.
SECTION I. GIVING OF BOND BY OFFICERS. If required to do so by the
Board of Directors, each officer designated by the Board shall furnish a bond to
the Corporation for the faithful performance of his duties with such penalties,
conditions, and security as the Board may require.
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SECTION J. VOTING OF STOCK. Unless otherwise ordered by the Board of
Directors, each officer of the Corporation shall have full power and authority
on behalf of the Corporation to attend and to act and to vote, or in the name of
the Corporation to execute proxies to vote, at any meetings of stockholders of
any corporation in which the Corporation may hold stock, and at any such
meetings, shall possess and may exercise, in person or by proxy, any and all
rights, powers, and privileges incident to the ownership of such stock. The
Board of Directors, by resolution, from time to time, may confer like powers
upon any other person or persons.
SECTION K. COMPENSATION OF OFFICERS. The officers of the Corporation
shall be entitled to receive such compensation for their services as officers as
the Board of Directors from time to time may determine.
ARTICLE V
Indemnification
Any person who is or was a director, officer, employee, or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise and who was or is a party or threatened to
be made a party to any threatened, pending or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, by reason
of the fact that he is or was serving in such capacity, may be indemnified by
the Corporation to the extent and in the manner described herein. The
indemnification provided for in or authorized by this Article shall continue as
to any person who has ceased to be a director, officer, employee, or agent and
shall inure to the benefit of the heirs, executors, and administrators of such
person. More specifically and in elaboration of the foregoing:
a. The Corporation shall indemnify such person who has been successful
on the merits or otherwise in defense of any such proceeding against expenses,
including attorney's fees, actually and reasonably incurred by him in
connection therewith.
b. The Corporation shall indemnify such person against expenses,
judgments, fines, and amounts paid in settlement and attorney's fees actually
and reasonably incurred by him in such proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interest
of the Corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
c. In any action brought by or in the right of the Corporation to
procure a judgment against such person, the Corporation shall indemnify such
person against expenses,
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including attorney's fees, actually and reasonably incurred by him in connection
with the defense or settlement of such action, if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interest of
the Corporation. The Corporation shall not indemnify such person if he shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the Corporation unless and only to the extent that the Court of
Chancery or other court of competent jurisdiction shall determine upon
application that such person is fairly and reasonably entitled to such indemnity
for such expenses as the Court shall deem proper.
d. Any indemnification authorized under subsections B and C (unless
otherwise ordered by a court) shall be made only upon a determination that the
director, officer, employee, or agent has met the standard of conduct set forth
in such subsections. Such determination shall be made by a majority of a quorum
of disinterested directors, or if a disinterested quorum is not available, or
even if obtainable a quorum of disinterested directors so directs, by
independent legal counsel chosen by the Board of Directors or by vote of the
stockholders.
e. Expenses incurred in defending a civil or criminal action, suit, or
proceeding may he paid by the Corporation in advance of the final disposition of
such action, suit, or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of such person to repay such amount
unless it shall ultimately be determined that he is entitled to be indemnified
by the Corporation.
f. The Corporation shall also have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the Corporation or is serving at the request of the Corporation in
said capacity of another Corporation against any liability asserted against him
and incurred by him in any such capacity, whether or not the Corporation would
have the power to indemnify him against such liability under the provisions of
this Section.
g. The rights of indemnification under this Article V shall be in
addition to rights that such person may otherwise be entitled to under the law
of the State of Delaware.
ARTICLE VI
The Corporation's Stock
SECTION A. STOCK CERTIFICATES. Stock certificates representing all
shares to which stockholders are entitled shall be in the form determined by the
Board of Directors. Certificates shall be numbered consecutively and shall be
entered in the books of the Corporation as they are issued. They shall be signed
by the Chairman of the Board, the
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President, or a Vice President and by the Treasurer, an Assistant Treasurer, the
Secretary, or an Assistant Secretary. If the Board of Directors has designated a
transfer agent or registrar and if any certificate is countersigned by a
transfer agent, or an assistant transfer agent or registered by a registrar
(either of which is other than the Corporation or an employee of the
Corporation), the signature of any officer of the Corporation may be a
facsimile.
SECTION B. LOST, STOLEN, OR DESTROYED CERTIFICATES. The Corporation or
its transfer agent may issue a new certificate of stock of the Corporation in
place of any certificate theretofore issued by it, alleged by its owner, or his
legal representative, to have been lost, stolen, or destroyed, and the Board of
Directors or its transfer agent may require the owner, or his legal
representative, to give the Corporation and its transfer agent a bond sufficient
to indemnify the Corporation and its transfer agent against any claim that may
be made against them on account of the alleged loss, theft, or destruction of
any such certificate or the issuance of any such new certificate.
SECTION C. TRANSFER OF SHARES. Upon compliance with provisions
restricting the transfer or registration of transfer of shares of stock, if any,
and applicable statutory requirements, registration of transfers of shares of
stock of the Corporation shall be made on the books of the Corporation.
SECTION D. REGULATIONS. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION E. CLOSING OF TRANSFER BOOKS; FIXING OF RECORD DATES. For the
purpose of determining the stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or to express consent to or
dissent from any corporate action in writing without a meeting, or for the
purpose of determining stockholders entitled to receive payment of any dividend
or other distribution or the allotment of any rights, or entitled to exercise
any rights in respect of any change, conversion, or exchange of stock, or for
the purpose of any other lawful action, the directors may fix, in advance, a
date as the record date for any such determination of stockholders. Such date
shall not be more than sixty days nor less than ten days before the date of such
meeting, nor more than sixty days prior to any other action. If no record date
is fixed, the record date for the determination of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held; the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is expressed; the record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto. When a
determination of stockholders of record entitled to notice of or to vote at any
meeting of stockholders has been made as provided for in this Section, such
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determination shall apply to any adjournment thereof; provided, however, that
the Board of Directors may fix a new record date for the adjourned meeting.
SECTION F. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof; accordingly, the Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it has express or other notice thereof, except
as otherwise provided for by law.
SECTION G. DIVIDENDS.
1. Subject to the provisions of the Certificate of Incorporation, the
Board of Directors shall have power to declare and pay dividends upon shares of
stock of the Corporation but only out of funds available for the payment of
dividends as provided for by law.
2. Subject to the provisions of the Certificate of Incorporation, any
dividends declared upon the stock of the Corporation shall be payable on such
date or dates as the Board of Directors shall determine. If the date fixed for
the payment of any dividend shall in any year fall upon a Saturday, Sunday, or
legal holiday, the dividend payable on such date shall be paid on the next day
that is not a Saturday, Sunday, or legal holiday.
ARTICLE VII
Corporate Seal; Fiscal Year; Miscellaneous Provisions
SECTION A. CORPORATE SEAL. The Board of Directors shall provide a
suitable seal, containing the name of the Corporation, which, unless otherwise
determined by the Board of Directors, shall be in the custody of the Secretary.
If and when so directed by the Board of Directors or the Chief Executive
Officer, a duplicate of the seal may be kept and be used by any officer of the
Corporation designated by the Board.
SECTION B. FISCAL YEAR. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
SECTION C. CHECKS, NOTES, ETC. All checks, drafts, bills of exchange,
acceptances, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, shall be countersigned
by such officers of the Corporation and/or other persons as the Board of
Directors from time to time shall designate.
SECTION D. WAIVERS OF NOTICE. Whenever any notice whatever is required
to be given under the provisions of these Bylaws or the Certificate of
Incorporation to any
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person or persons, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
SECTION E. OFFICES OUTSIDE OF DELAWARE. Except as otherwise required by
the laws of the State of Delaware, the Corporation may have an office or offices
and keep its books, documents, and papers outside of the State of Delaware at
such place or places as from time to time may be determined by the Board of
Directors.
ARTICLE VIII
Amendment of the Bylaws
Subject to the provisions of the Certificate of Incorporation and the
power of the stockholders to alter or repeal any Bylaw made by the Board, these
Bylaws may be altered or repealed by the vote of a majority of the members of
the Board.
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Exhibit 10.8
KBkids.com
TASK ORDER
THIS Task Order dated, as of August 25, 1999 is by and between CANICOM, INC, a
Colorado Corporation ("CANICOM") and KBKids.com, an Ohio Limited Liability
Company ("KBKids.com")
1. Customer Interaction Agreement. This Task Order is being entered into
pursuant to the terms and conditions of that certain Customer Interaction
Agreement ("CIA") dated August 25, 1999, between KBkids.com, and CANICOM. By
execution of this Task Order, the terms and conditions of the CIA are added to
and/or modified by the terms of this Task Order; the terms and condition of the
CIA shall govern unless otherwise provided in this Task Order.
2. Term. The term of this Task Order shall commence effective as of the above
referenced date. This Task Order shall terminate three years from date of
signature. KBkids.com may cancel the services provided under any Task Order at
any time upon forty-five (45) days written notice to CANICOM. Termination and
renewals of this Task Order shall otherwise be governed by the CIA.
3. Services. CANICOM's Obligations During the term of the Task Order. CANICOM
shall provide the following services and/or materials (collectively "Services"):
3.1. CANICOM will provide workstations and communication technology for
KBkids.com agents, as described in 5.2.1.
3.2. CANICOM will accommodate inbound and outbound calls, as well as
e-mails, for KBkids.com on a twenty-four hours per day, seven days per week
basis:
3.2.1. Inbound. CANICOM will accept inbound calls that are generated
via print and electronic advertisements and referrals.
Inbound calls handled will include but are not limited to,
credit issues, order status, and web site navigation. CANICOM
will staff inbound lines in a manner, which will support
achieving acceptable call handling guidelines. These include
answering 90% of the calls within 30 seconds and an
abandonment rate of five (5) percent or less based upon the
KBkids.com forecasted call volume and time of day, day of
week;
3.2.2. Outbound. CANICOM will also perform outbound calls where the
customer needs additional information that was not available
at the time of the original call.
3.2.3. E-mail. CANICOM will provide e-mail support to KBkids.com in
such a manner that 97% of incoming e-mails are answered within
twenty-four (24) hours and 100% of incoming e-mails are
answered within (48) forty-eight hours.
3.3. Work Requests. Canicom will make every effort to perform any changes
to the project. All requests will be documented on a "work request" which
outlines the changes to be made, scope of the change, time needed to make the
change, scheduled start date and completion date and anticipated costs
associated with the change.
3.4. Scripts. Together KBkids.com and CANICOM will agree on appropriate
call handling and e-mail scripts which CANICOM will provide to CANICOM's
Customer Service Representative's for their use.
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3.5. Reports. CANICOM will provide reports that will meet KBkids.com's
specifications and time requirements consistent with CANICOM's software and
database limitations. Report formats and transmission of reports will be
prepared based on the agreed upon specifications of KBkids.com and CANICOM.
4. KBkids.com's Obligations. In connection with the obligations to be
performed by CANICOM pursuant to this Task Order, KBkids.com shall provide:
4.1. Accurate and current advertising and media campaign schedules, call
forecasts, e-mail forecasts, workstation forecasts, and calling lists
that allow CANICOM to maintain staffing levels and meet inbound and
outbound performance and services levels.
4.2. A ninety (90) day rolling forecast for workstation and agent
requirements, with fourteen (14) days being a firm forecast.
4.3. A dedicated project manager or contact who can serve as CANICOM's
interface throughout the project.
4.4. The initial agent training for both CANICOM and KBkids.com agents.
This training will include product training on KBkids.com's goods
and services, as well as corporate culture and philosophies,
including goals and objectives. Training related to Smith-Gardner's
MACS software will also be included.
4.5. Scripts, product information, pricing, service information and
materials as needed by CANICOM for the process of handling customer
calls and e-mail inquirers.
4.6. Licenses for the MACS and HP systems, as well as for eGain, for use
by CANICOM Customer Service Representatives.
4.7. A point to point T1 line with enough capacity to handle the estimated
data transmissions.
4.8. Phone and data line charges are to be paid by KBkids.com, or billed
separately at an additional cost ($0.062 per minute for voice and
$391.05/month for a 36-month agreement or $342.24/month for a
60-month agreement for data. Installation charges of $626.50.)
4.9. Replacement equipment for lost or damaged equipment, unless such
equipment is lost or damaged because of the negligence of CANICOM.
4.10. A security deposit of $50,000 (approximately one month's phone bill)
4.11. The following data hardware or equivalents:
- 2 Motorola DDS/MR64 CSU/DSUs
- 2 Cisco 2501 Routers
- 1 T1 dataline
- Cisco 1605 Firewall Router
This hardware is the property of KBKids.com
5. Compensation. KBkids.com will pay CANICOM (in addition to any other
compensation otherwise provided in the CIA or this Task Order) the following
amounts at the following times and/or at the following rates:
5.1. Fees Due on Execution of this Task Order/Set-up Fees: ..........$0.00
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5.2. Invoiced Fees. The following fees and charges shall be paid pursuant
to invoice in accordance with the CIA and pursuant to the following schedule:
5.2.1. WORKSTATION AND COMMUNICATION TECHNOLOGY PRICING:
Workstation and Communication Technology:..................$10
(per agent station per hour for KBkids.com agents located at Canicom.)
Included in this fee are:
- - Lucent Definity G3-R ACD
- - Center-Vu Agent software
- - Center-Vu Supervisor software
- - Workstation Systems
- - Workstation and 5' Cubicles
- - CMS Reporting software and reports
- - Training Facility Use
- - Access to a Conference Room
- - 24 Hour Security
- - Janitorial Services
- - Power Backup for ACD
- - Insurance on Facility and Fixtures
- - Local Phone Calls and Phone Line
- - Technical Support for Equipment
- - Use of Breakroom and Kitchen Facilities
- - Use of Receptionist
- - Use of agent-lockers
This $10 rate will be effective for the period August 25,1999, to December
31,1999. Prior to December 31, 1999, a new rate will be negotiated for the year
2000.
The following items can also be included for KBkids.com agents/employees for the
amounts listed:
- - Quality Monitoring Services $20 per agent monitored per week
- - Training (MACS/Center-Vu) $100 per hour per trainer
- - Supplies (Copier, fax, etc.) At Cost
- - Management Training $100 per hour per trainer
(Center-Vu Supervisor, CMS)
5.2.2 Canicom Customer Service Representatives:
Inbound, per dedicated agent, per hour, without Telecom:..........$31.00
Outbound, per dedicated agent, per hour, without Telecom:.........$31.00
E-mail, per dedicated agent, per hour, without Telecom:...........$31.00
Call handling agent rate includes:
- - Supervisors, Agents and Management
- - Benefits Package for Agents, Supervisors, and Managers
- - Quality Assurance
- - Monitoring and Agent Scoring
- - Training Personnel
- - Human Resources (recruiting, etc.)
- - Facilities
- - On-going MIS Support for Normal Operations
- - Account Services & Support
- - Agent Workstations
- - Automatic call vectoring by skill.
- - Lucent Definity G3-R ACD
- - Telecom Support
- - Furniture/Fixtures
- - Center Vu Software
- - Standard Incentive programs
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5.2.2. Fulfillment:
a) Fulfillment, per piece, (Appt. & Info.) w/o
postage:..........................................N/A
b) Fulfillment, per piece, (Thanks Letter) w/o
postage:..........................................N/A
5.2.4. Processing of mail orders (Keying into database):.....N/A
5.2.5. Training, per hour, per CANICOM agent & supervisor:..$18.00
KBkids.com will not be responsible for training costs
associated with CANICOM agents that do not return for the
second day of training. Should the turnover rate of Canicom
agents assigned to KBkids.com exceed an annual rate of 30%,
Canicom will be responsible for the costs associated with
training replacement agents.
5.2.6. Charges for Reports:
a) Standard Reports:........................Included
b) Custom Reports:........Standard Programming Rates
5.2.7 Supplemental Charges (if applicable):
a) Standard programming, regular per hour:..........$75.00
b) Custom programming, rush per hour
(completion required within 24 hours):..........$125.00
c) Shipping and postage:...............................N/A
d) Faxing, administrative, and project related
per page:...........................................N/A
e) Automated faxing per page:..........................N/A
f) Dedicated 800 number....................... Actual Cost
g) Long distance from CANICOM to KBkids.com:...Actual Cost
5.2.8. Incentive Commission. CANICOM will collect a fee as agreed
upon and documented in a separate Task Order. The fees and parameters are to be
defined in a Task Order.
5.3. Other CANICOM Service Fees (some may apply in addition, based on
complexity of Project and Travel Charges. KBkids.com agrees to
reimburse CANICOM for all necessary and reasonable project related
pre-approved travel.
5.4. During the term of this Task Order prices set forth above will
increase Annually on the anniversary of this Task Order by 5%. This increase is
used to offset cost of living raises and agents pay raises based on merits.
6. Database Information. All Database Information pursuant to
this Task Order shall belong to KBkids.com.
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IN WITNESS WHEREOF, each party hereto has caused this Task Order to be executed
and delivered by its duly authorized representative, all as of the date first
set forth above.
CANICOM, INC: KBKids.com, LLC:
By: /s/ Tom Ward By: /s/ Michael Wagner
------------------------------- -----------------------------
Its: President Its: Vice President and Chief
------------------------------- Financial Officer
-----------------------------
ADDRESS FOR NOTICE:
-------------------
CANICOM, INC: KBKids.com:
Mr. Tom Ward, President 475 17th Street, Suite 750
720 S. Colorado Boulevard Denver, CO 80202
Suite 1200N
Denver, CO 80246
KBKids.com:
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ADDENDUM
This Addendum is to the Customer Interaction Agreement dated August 25,
1999, and the attached and referenced Work Order by and between Canicom Inc., a
Colorado Corporation ("Canicom") and KBkids.com an Ohio Limited Liability
Company ("KBKids. com").
Notwithstanding anything contained in the Customer Interaction
Agreement or Task Order to the contrary, the parties agree as follows:
1. In reliance on the forecast provided by KBKids.com to Canicom which is
attached hereto, Canicom agrees to dedicate 75 workstations, twenty-four (24)
hours per day, seven (7) days per week to the fulfillment of the KBKids.com Task
Order during the period from September 1, 1999 through December 31, 1999. A
"workstation" is defined as a Canicom agent with access to sufficient equipment
to perform the Canicom services required under the Task Order.
In addition, Canicom will provide seating for a maximum of eight (8) KBKids.com
support personnel at no charge. KBKids.com will be responsible for providing any
computers required by these individuals and will provide the technical support
for this equipment. Should technical support from Canicom be required, it will
be billed at a rate of $120 per hour.
2. In consideration of the above, KBKids.com agrees to pay Canicom a
minimum amount of $1,999,759.00 in the event the amount payable to Canicom under
the Customer Interaction Agreement and Task Order is less than $1,999,759.00
during the period of September 1, 1999 and December 31, 1999. Payment of the
additional funds required to meet the contractual minimum amount shall be due on
January 31, 2000.
3. Except as expressly modified herein, all other terms and conditions of
the Customer Interaction Agreement and Task Order remains the same.
DATED: 8/27/99 CANICOM, INC.
--------------------------
BY: /s/ Tom Ward
------------------------------
TOM WARD, PRESIDENT
DATED: KBKids.com, LLC.
--------------------------
BY: /s/ Michael Wagner
------------------------------
TITLE: Vice President and Chief
Financial Officer
---------------------------
<PAGE> 7
CUSTOMER INTERACTION AGREEMENT
THIS Agreement, dated as of August 25,1999, is by and between CANICOM,
INC., a Colorado Corporation ("CANICOM"), and KBKids.com, an Ohio Limited
Liability Company ("KBkids.com").
WHEREAS, CANICOM is engaged in the Customer Interaction and Fulfillment
business and offers its services to businesses; and
WHEREAS, KBkids.com desires Customer Interaction and/or Fulfillment
services as defined more fully in a Task Order attached hereto, (the "Task
Order"), and
WHEREAS, the parties desire to enter into an arrangement whereby they can
enter into or engage in projects through separate Task Orders while having this
Agreement govern.
NOW, THEREFORE, based upon these premises and other good and valuable
consideration. the receipt and sufficiency of which is hereby acknowledged,
KBkids.com and CANICOM agree as follows:
1. TERM
1.1. The term of this Agreement shall commence as of August 25, 1999, and
shall expire on the third anniversary thereof unless renewed by KBkids.com by
written notice to CANICOM thirty (30) days prior to said anniversary or
otherwise provided in the Task Order.
2. SERVICES AND DELIVERABLES.
2.1. This Agreement establishes the standard terms and conditions pursuant
to which KBkids.com will obtain from CANICOM and CANICOM will provide to
KBkids.com, such services and deliverables as KBkids.com and CANICOM may
mutually agree upon from time to time in writing. Bach such written agreement
for specific project services shall be referred to hereinafter as a "Task
Order," and the services and deliverables set forth in such Task Order to be
provided by CANICOM shall be collectively referred to hereinafter as the
"Services." To the extent of any express conflict or inconsistency between the
terms and conditions of a Task Order and the terms and conditions of this
Agreement, the terms and conditions of the Task Order will control where it
specifically amends this Agreement or sets forth terms not included herein.
Otherwise, this Agreement shall govern in all respects.
2.2. The Task Orders entered into by the parties shall:
2.2.1. Refer specifically to this Agreement and incorporate by
reference all of this Agreement's terms and conditions unless the Task Order
specifically provides otherwise;
2.2.2. Designate the date as of which the provisions of the Task Order
will be effective and, if applicable, the term or period of time during which
CANICOM will perform services, provide resources or otherwise discharge its
obligations as specified in the Task Order;
2.2.3. Describe the services to be performed, resources to be provided
or obligations to be discharged by CANICOM pursuant to the Task Order;
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2.2.4. Describe the obligations of KBkids.com related to the Task
Order, including any facilities, equipment, personnel and tasks or other support
to be provided or performed by KBkids.com;
2.2.5. Specify the payments to be made to CANICOM under the Task
Order, or, if applicable, the basis on which such payments will be computed; and
2.2.6. Specify any other terms and conditions appropriate to the
services to be performed and the obligations of the parties.
2.3. CANICOM shall use reasonable efforts to provide qualified and
competent services to KBkids.com in accordance with the schedules, description
of services and specifications of the Task Orders in effect. If CANICOM fails to
provide services in a competent or qualified manner, then CANICOM shall re-do
the work or provide a credit to KBkids.com at CANICOM's option.
3. PAYMENTS.
3.1. CANICOM will be paid the professional fees and costs set forth in the
applicable task order for providing services.
3.2. There shall be added to the charges under a Task Order, and KBkids.com
shall pay to CANICOM:
3.2.1. Amounts equal to any sales, use, services or excise tax,
however levied and based upon the charges under this Agreement or a Task Order;
and
3.2.2. Any and all applicable late charges or fees which maybe added
to an invoice as a result of untimely payment of said invoice; and
3.2.3. Reimbursement for all reasonable travel expenses or costs
approved by KBkids.com and related to the performance of this Agreement or a
specific Task Order. CANICOM shall provide KBkids.com with copies of receipts or
other documentation for each travel expense upon written request.
3.3. CANICOM may increase its rates and costs at such times and under such
terms as are set forth in the Task Order.
4. INVOICES.
4.1. CANICOM shall invoice KBkids.com weekly for all services provided to
KBkids.com by CANICOM for the week just completed, together with all previously
approved out-of-pocket expenses incurred by CANICOM, during said period. Each
such invoice shall be due and payable no later than fifteen (15) days after
receipt by KBkids.com by check in immediately available funds. Any sum not paid
when due shall thereafter bear interest until paid at a rate equal to one
percent (1.5%) per month, but in no event to exceed the maximum rate of interest
allowed by applicable law.
5. CANICOM PERSONNEL.
5.1. CANICOM shall use reasonable efforts to supply competent and qualified
personnel to the KBkids.com project identified in a Task Order.
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5.2. KBkids.com may request at any time the removal of any individual
performing Services under a Task Order if KBkids.com believes that individual is
not qualified to perform the Services or does not meet appropriate professional
standards. CANICOM will remove any such individual from the project if CANICOM
determines there is a reasonable basis for KBkids.com's complaint.
5.3. CANICOM personnel who may be physically located at KBkids.com's
facilities shall comply with all reasonable work place standards and policies,
applicable to KBkids.com employees, of which KBkids.com apprises CANICOM in
writing.
6. KBKIDS.COM'S RESPONSIBILITIES.
6.1. KBkids.com agrees to use its best effort to provide CANICOM with
reasonable support related to the training of new agents to perform the
Services.
6.2. KBkids.com agrees to provide reasonable administrative support,
computer facilities and other support, each as described more particularly in a
Task Order, which are necessary to perform the services under a Task Order.
KBkids.com agrees to perform in a timely fashion those tasks and provide the
personnel agreed to by the parties as set forth in a Task Order to promote
success of the project being performed by the Task Order.
6.3. Should KBkids.com or CANICOM default in any of their obligations under
this Agreement or a Task Order, they each agree that the non-defaulting party is
not liable for delay, cost increase or other consequences due to such default of
the other party.
6.4. KBkids.com shall provide the services, materials and make payments to
CANICOM as set forth herein and/or in any Task Order.
7. TERMINATION OF AGREEMENT OR TASK ORDER.
7.1. In the event that KBkids.com defaults in the payment of any amount due
to CANICOM and does not cure such default within twenty (20) days after being
given written notice, and the amount outstanding is not subject to a good faith
dispute by Kbkids.com, then CANICOM may, at its option, immediately cease any
services under this Agreement, and upon giving written notice, terminate this
Agreement, or the specific Task Order then in effect, which is in default, as of
a date specified in such notice of termination.
7.2. CANICOM is relying on the proper presentation of project specific
information, which is to be provided by KBkids.com. In the event that the
information given concerning a specific Task Order is not an accurate
representation of the clients desires, expectations, and/or current expected
performance requirements are inadequate to provide sufficient Customer
Interaction opportunities or to maintain staffing minimums, or in the event
KBkids.com's products or services are inadequate, defective, or insufficient to
provide adequate staffing levels to CANICOM, or maintain profit margins
acceptable to continuing business then CANICOM shall have the right to terminate
this agreement, or any Task Order applicable. Upon ten (10) days written notice
to KBkids.com.
7.3. Either party shall have the right to terminate this Agreement or the
specific Task Order then in effect by giving forty-five (45) days written
notice. If the termination option is exercised by either party, this Agreement
shall terminate automatically at the end of the forty-five (45) day notice. In
the event KBKids.com terminates under this paragraph KBKids.com is still liable
for the minimum payment payable pursuant to the addendum except in the case of a
material breach on the part of CANICOM.
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7.4. Force Majeure. Each party shall be excused from performance for any
period and to the extent that it is prevented from performing any obligation or
service, in whole or in part, as a result of causes beyond the reasonable
control and without the fault or negligence of such party and/or its
subcontractors. Such acts shall include, without limitation, acts of God,
strikes, lockouts, riots, acts of war, epidemics, governmental regulations
superimposed after the fact, fire, communication line failures, power failures,
earthquakes, floods or other natural disasters ("Force Majeure Event"). Delays
in delivery or in meeting completion dates due to Force Majeure Events shall
automatically extend such dates for a period equal to the duration of such
events. In the event such non-performance continues for a period of sixty (60)
days or more, either party may terminate this Agreement, or any applicable Task
Order by giving written notice thereof to the other party.
8. INDEMNIFICATION.
8.1. KBkids.com agrees to indemnify, defend and hold harmless CANICOM and
its subcontractors, officers, agents and employees from any and all claims,
actions, damages, liabilities, costs and expenses, including reasonable
attorneys fees and expenses, in connection with claims of third parties
resulting from or arising out of the work performed, or sale/fulfillment of
KBkids.com goods and services. CANICOM shall indemnify, defend and hold harmless
KBkids.com and its subcontractors, officers, agents and employees from any and
all claims, damages, actions, liabilities, costs or expenses, including
reasonable attorney's fees and expenses in connection with claims of third
parties resulting from or arising out of CANICOM's misrepresentation of
KBkids.com's goods and services, or Canicom's negligence.
9. CONFIDENTIALITY.
9.1. KBkids.com agrees that CANICOM's service business, and all of its
ideas, methods, concepts, know-how, structures, techniques, inventions,
developments, discoveries and proprietary data or programs and other information
identified as proprietary by CANICOM which may be disclosed to KBkids.com is
confidential and proprietary information of CANICOM ("CANICOM Confidential
Information"). CANICOM agrees that KBkids.com's business plan, and all of its
ideas, methods, concepts, know-how, structures, techniques, inventions,
developments, discoveries, database information and proprietary data or programs
and other information identified as proprietary by KBkids.com which may be
disclosed to CANICOM is confidential and proprietary information of KBkids.com
("KBkids.com Confidential Information"). KBkids.com Confidential Information and
CANICOM Confidential Information are collectively referred to as "Confidential
Information." The obligations of this Section 9 shall survive the expiration or
termination of this Agreement. Confidential Information shall not include any
information which: (a) is already known to the party; (b) is or becomes part of
the public domain through no wrongful act of said party; (c) is received from a
third party without similar restrictions and without breach of this Agreement;
(d) is independently developed by that party; or (e) is approved for release by
written authorization of the other party.
9.2. CANICOM and KBkids.com shall use Confidential Information only for the
purposes of this Agreement and shall not disclose Confidential Information to
any third party, other than each party's subcontractors or each other's
employees on a need-to-know basis, without the other party's prior written
consent. CANICOM and KBkids.com agree to take appropriate action and to utilize
the same effort to safeguard Confidential Information as each utilizes to
protect its own trade secrets or proprietary Information but, at a minimum,
CANICOM and KBkids.com shall take reasonable steps to advise their employees,
and subcontractors of the confidential nature of the Confidential Information
and of the prohibitions on copying or revealing such Confidential Information
except to the extent required by such subcontractor or employee to carry out
CANICOM's or KBkids.com's obligations under this Agreement. All Confidential
Information relating to a Task Order of a party in the other party's possession
at the termination of this Agreement shall be returned or destroyed.
9.3. CANICOM and KBkids.com also agree to treat as confidential and
proprietary any information of a third party that CANICOM or KBkids.com is
obligated to treat as proprietary and confidential, provided that sufficient
notice of the obligation is given by either party in writing.
9.4. CANICOM agrees not to use any scripts developed by KBkids.com or
KBkids.com's Confidential Information for any other customer or its own use.
Further, CANICOM agrees that it will not intentionally solicit KBkids.com's
customer base. KBkids.com acknowledges that CANICOM is in the business of
customer interaction and that the customer bases of its clients may overlap, and
therefore CANICOM cannot guarantee it will not call ,any customer in the normal
course of its business operations.
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9.5. The parties agree that the breach of this Section 9 may cause
irreparable harm to the non-breaching party, and that, in addition to any other
remedies, the non-breaching party shall be entitled to pursue an action for
injunctive relief.
10. Ownership of Technology or Developments. Any and all materials developed by
CANICOM pursuant to any Task Order or previously owned by CANICOM and used for
any project, including without limitation any and all, software modifications,
enhancements, customizations, developments, specifications and documentation,
shall be and remain the property of CANICOM, and KBkids.com shall not obtain any
rights or interests therein. Likewise, such materials supplied by KBkids.com
shall be and remain the property of KBkids.com. Jointly developed materials
shall be the property of each party unless otherwise provided in this Agreement
or in a Task Order. Any customer data incorporated into a database developed
pursuant to a Task Order shall belong to KBkids.com and it's client the
software, structure and methodology surrounding the database information shall
be and remain the property of the party who developed or owned such materials.
All calling lists obtained by CANICOM shall remain the property of CANICOM.
11. CANICOM's entire liability to Kbkids.com in the event of breach or
default hereunder except for injunctive relief for breach of confidentiality,
shall be the actual damages and costs sustained by Kbkids.com as a result of
such breach by CANICOM under any applicable Task Order or project. CANICOM SHALL
NOT UNDER ANY CIRCUMSTANCES BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL,
INDIRECT, PUNITIVE OR SPECIAL DAMAGES OF ANY NATURE WHATSOEVER.
KBkids.com's entire liability to CANICOM in the event of breach or default
hereunder except for injunctive relief for breach of confidentiality, shall be
the actual damages and costs sustained by CANICOM as a result of such breach by
KBkids.com under any applicable Task Order or project. KBkids.com SHALL NOT
UNDER ANY CIRCUMSTANCES BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT,
PUNITIVE OR SPECIAL DAMAGES OF ANY NATURE WHATSOEVER.
12. Change Orders/Work Requests. If at any time during the term of this
Agreement, KBkids.com should desire or CANICOM wish to recommend an addition,
modification or change to CANICOM's required performance hereunder, or under any
Task Order then in effect, CANICOM and KBkids.com shall comply with the
following administrative control procedures.
12.1. The party desiring the addition, modification or change shall submit
in writing to the other party all requests for any services which alter, amend,
enhance, add to, delete from or otherwise change the scope of services specified
in this Agreement, as modified or amended in accordance with this Change Order
procedure, and/or the time and/or place of performance (hereinafter referred to
as a "Change Order/Work Request").
12.2. CANICOM's acceptance and performance of any Change Order/Work Request
will be subject to its having the technical capability and technically qualified
personnel to perform the work requested and to the availability (as determined
by CANICOM using its good faith business judgment) of the necessary CANICOM
personnel and resources.
12.3. CANICOM will evaluate each Change Order/Work Request initiated by
KBkids.com and shall submit an appropriate written response to KBkids.com's
authorized representative as soon as possible but not later than seven (7)
working days following CANICOM's receipt of the request. If CANICOM does not
accept and will not perform a Change Order/Work Request initiated by KBkids.com,
its written response will so inform KBkids.com. If CANICOM accepts the Change
Order/Work Request, subject to the parties' agreement as to cost and completion
dates, then its written response shall include a statement of the availability
of CANICOM personnel and resources and the estimated additional costs and the
impact, if any, on the completion date(s) associated with such Change Order/Work
Request Change Orders and Work Orders initiated or prepared by CANICOM shall
include the above mentioned statement when submitted to KBkids.com.
12.4. Should KBkids.com elect to authorize a Change Order/Work Request
initiated or accepted by CANICOM, KBkids.com will, as soon as possible, but not
later than five (5) working days after receipt of a Change Order/Work Request or
CANICOM's acceptance thereof, authorize CANICOM to perform the requested Change
Order/Work Request by returning a duly authorized and executed copy of the
request form to CANICOM's Project Manager. Upon such authorization by
KBkids.com, CANICOM will commence performance in accordance with such Change
Order/Work Request.
12.5. CANICOM shall not be obligated to perform any such additional or
different services in advance of written authorization from KBkids.com.
Furthermore, CANICOM shall not be obligated to accept any Change Order/Work
Request or to perform any additional services that in its good faith business
judgment it determines are not feasible or impracticable or for
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<PAGE> 12
which KBkids.com is unwilling to accept CANICOM's estimate of additional costs,
completion time(s) or impact on performance measures.
12.6. For the purposes of this Agreement, each Change Order/Work Request
initiated or accepted by CANICOM and duly authorized in writing by KBkids.com,
shall be deemed incorporated into and shall constitute a formal change to the
associated Task Order, adjusting the services, costs and completion dates as
finally agreed upon for each authorized Change Order/Work Request.
13. Subcontracts. Unless otherwise provided in the Task Order, CANICOM may
subcontract any of the Services and shall he responsible for all Services
performed by its subcontractors, and may perform the Services at any site
reasonably selected by CANICOM.
14. Hiring of Employees. Except as maybe otherwise agreed in writing, during
the term of this Agreement and each Task Order and for twelve (12) months
thereafter, neither KBkids.com or CANICOM, shall offer employment to or employ
any person employed then or within the preceding twelve (12) months by the other
if such person was involved, directly or indirectly, in the performance of this
Agreement or any Task Order.
15. GENERAL.
15.1. INDEPENDENT CONTRACTOR. CANICOM, IN FURNISHING SERVICES TO
KBKIDS.COM, IS ACTING ONLY AS AN INDEPENDENT CONTRACTOR CANICOM DOES NOT
UNDERTAKE TO PERFORM ANY OBLIGATION OF KBKIDS.COM, WHETHER REGULATORY OR
CONTRACTUAL, OR TO ASSUME ANY RESPONSIBILITY FOR KBKIDS.COM'S BUSINESS OR
OPERATIONS. CANICOM HAS THE SOLE RIGHT AND OBLIGATION TO SUPERVISE, MANAGE,
CONTRACT, DIRECT, PROCURE, PERFORM OR CAUSE TO BE PERFORMED ALL WORK TO BE
PERFORMED BY CANICOM, EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT OR ANY TASK
ORDER. CANICOM ACCEPTS FULL AND EXCLUSIVE LIABILITY FOR THE PAYMENT OF ALL
EMPLOYER CONTRIBUTIONS AND TAXES MEASURED BY THE REMUNERATION PAID TO CANICOM
EMPLOYEES AS REQUIRED BY ALL APPLICABLE FEDERAL, STATE AND LOCAL LAWS, RULES AND
REGULATIONS.
15.2. Entire Agreement. This Agreement including, all Task Orders issued
hereunder, constitutes the entire agreement between the parties and there are no
prior or contemporaneous, oral or written, representations, understandings or
agreements relating to this subject matter which are not fully expressed herein.
This Agreement may only be amended in writing and signed by a duly authorized
representative of each party.
15.3. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO.
15.4. Attorneys' Fees. In the event that any action or proceeding is
commenced by any party hereto for the purpose of enforcing any provision of this
Agreement, the party in breach shall pay all costs and expenses, including
attorneys' fees.
15.5. No Waiver. No delay or omission by either party in exercising any
right or power shall impair such right or power or be construed to be
a waiver. A waiver by either party of any of the covenants to be
performed by the other or any breach thereof shall not be construed
to be a waiver of any succeeding breach or of any other covenant. No
waiver or discharge shall be valid unless in writing and signed by an
authorized representative of the party against whom such waiver or
discharge is sought to be enforced.
15.6. Binding Effect. This Agreement shall be binding on the parties and
their respective successors and assigns.
15.7. Survival. All obligations for confidentiality, payment, limitations
and indemnification shall explicitly survive termination or expiration this
Agreement.
15.8. Notice. Whenever under this agreement one party is required or
permitted to give notice to the other, such notice shall be deemed given when
delivered by hand or overnight courier, telecopied with transmission
confirmation, or when mailed by United States mail, registered or certified
mail, return receipt requested, postage prepaid, and addressed to the address
listed at the signature page of this Agreement. Either party hereto may change
its address for notification purposes from time to time by giving the other
party prior written notice of the new address and the date upon which it will
become effective.
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15.9. Severability. If any provision of this Agreement is declared or found
to be illegal, unenforceable or void, then both parties shall be relieved of all
obligations arising under such provision, but if the remainder of this Agreement
shall not be affected by such declaration or finding and is capable of
substantial performance then each provision not so affected shall be enforced to
the extent permitted by law.
15.10. Consent. Where agreement, approval, acceptance, consent or similar
action by KBkids.com or CANICOM is required, such action shall not
be unreasonably delayed or withheld.
15.11. Advertising. KBkids.com's advertisements directing calls to the
telephone lines serviced by CANICOM shall contain the name of
KBkids.com's goods and services and shall not include or refer to
CANICOM in any way or in any manner KBkids.com's advertisements
shall not suggest that CANICOM is selling or has an interest in the
product or service or is in any manner affiliated with KBkids.com
or has an ownership interest in KBkids.com.
15.12. Counterparts. This Agreement maybe executed in counterpart, each of
which shall bean original, but all of which shall be deemed to be one and the
same instrument. Execution by any party may be delivered by telecopier with
counterpart signature pages delivered via telecopier and such delivery shall
have the same effect as the delivery of an original counterpart hereof or
thereof.
15.13. Time of Essence. Time is of the essence with reference to all
matters of performance hereunder.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed
and delivered by its duly authorized representative, all as of the date first
set forth above.
CANICOM, INC. KBKids.com LLC
By: /s/ Tom Ward By: /s/ Michael Wagner
------------------------------- -----------------------------
Its: President Its: Vice President and Chief
------------------------------- Financial Officer
-----------------------------
ADDRESS FOR
NOTICE:
CANICOM, INC. KBKids.com LLC
Mr. Tom Ward, President 475 17th Street, Suite 750
720 S. Colorado Boulevard Denver, CO 80202
Suite 1200N
Denver, CO 80246
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<PAGE> 1
Exhibit 10.9
[Goldberg Moser O'Neill Letterhead]
August 20, 1999
Srikant Srinivasan
Chief Executive Officer
KBKIDS.com LLC
475 17th Street, Suite 750
Denver, CO 80202
RE: COMPENSATION AGREEMENT
Dear Srikant:
We are extremely pleased with your decision to appoint us as your advertising
agency. We will do everything that we possibly can to contribute to your
success. We're proud to join your team, and look forward to a mutually
profitable, long-term relationship.
The following summarizes the terms of our compensation arrangement that you and
I have discussed:
1. APPOINTMENT. KBkids.com (KB) appoints Goldberg Moser O'Neill, LLC (GMO),
and we accept such appointment, as your advertising agency of record for
purposes of and subject to the terms and conditions of this Agreement. As
such, you authorize us to act as your agent in purchasing the materials,
services and media required to produce advertising on your behalf.
2. BASIC SERVICES. The Basic Services to be rendered by GMO will include the
following: formulating advertising strategies; account management;
planning, preparing and placing of broadcast media, either directly or
through a buying service; account planning; preparation of copy for all
off-line media; producing broadcast commercials; designing, placing and
checking all print advertising (including all direct response print,
radio or broadcast advertising); checking invoices and making payments;
preparing comprehensive layouts, and finished storyboards; and conducting
qualitative research and advertising-related research projects, including
those in which field work is conducted by GMO personnel.
3. COMPENSATION FOR BASIC SERVICES.
a. GMO will receive a monthly fee of $166,667 beginning July 1, 1999,
payable on or before the 16th day of each month.
b. GMO will receive incentive compensation equal to 1.4% of KB's net
revenue (i.e., revenues received by KB less returns, rebates,
discounts, allowances and the like for such fiscal year), payable
quarterly.
<PAGE> 2
Srikant Srinivasan
KBKIDS.com
August 20, 1999
Page 2.
4. MEDIA. GMO will pass-through costs related to media buying through a
buying service with no markup to KB.
5. PRODUCTION. Production will be billed at vendor costs plus a 15% markup.
Any such production expenses will be charged to KB in accordance with
estimates GMO will supply to KB and authorized by KB in advance.
6. RESEARCH.
a. Qualitative research and advertising-related research projects,
including those in which field work is conducted by GMO personnel,
will be billed at net vendor cost with no markup to KB.
b. Quantitative research other than advertising related will be
billed at net vendor cost with no markup to KB. GMO hours incurred
will be billed at a rate of 80% of GMO's standard hourly rates.
7. MEDIA MERCHANDISING. Media Merchandising will be billed at net vendor
cost with no markup to KB. GMO hours incurred will be billed at a rate of
80% of GMO's standard hourly rates.
8. COMPENSATION REVIEW. The parties agree to review this Agreement in 12
months to see that it remains fair and equitable to both parties. GMO
will issue quarterly labor reports to determine agency labor vs.
compensation delivered.
9. SPECIAL SERVICES. In addition to the Basic Services described in
Paragraph 2, GMO may perform additional services from time to time as
requested by KB. KB shall pay GMO its out-of-pocket expenses without any
markup on such expenses. These Special Services may include internally
produced mechanicals and photostats; color copies; preparation of sales
kits, sales manuals and sales presentation materials; trade show
materials; newsletters; annual and other reports; and POS and packaging
projects. For these Special Services, GMO will be entitled to a
project-based compensation in addition to that outlined elsewhere in this
Agreement. Any such project-based compensation will be charged to KB in
accordance with estimates GMO will supply to KB and authorized by KB in
advance.
10. TRAVEL. If any travel costs are incurred by GMO on behalf of KB, they
will be paid for by KB subject to KB's prior approval.
11. FINANCIAL RESPONSIBILITY. KB agrees that GMO will not be responsible for
financing its advertising.
12. INDEMNITY. KB and GMO each agree to indemnify each other as outlined in
the enclosed Indemnification Agreement.
<PAGE> 3
Srikant Srinivasan
KBKIDS.com
August 20, 1999
Page 3.
13. TERMINATION. This Agreement may be terminated by either party upon 90
days written notice, during which time both parties will continue to
perform in accordance with this Agreement.
14. NONCOMPETE. During the term of this Agreement, GMO will refrain from
performing advertising services for companies directly competitive with
KB. For purposes of this Agreement, an entity is assumed to be directly
competitive with KB if it derives more than 20% of its net revenues from
the retail sales of children's merchandise.
15. SOLICITATION OF NEW BUSINESS. From the date of this Agreement through
August 15, 1999, GMO will neither solicit nor accept any solicitations
for new accounts.
We are excited about the opportunity to work with you and KB. We are confident
that we can add measurably to the quality and impact of your communications
efforts. You have my promise that I will do my best to deliver GMO in all
regards to make your programs the absolute best they can be.
If this meets with your approval, please acknowledge by signing and returning
one copy of each Agreement to us. Thanks for the opportunity to work together.
Regards,
ACCEPTED:
GOLDBERG MOSER O'NEILL, LLC KBKIDS.COM LLC
BY: /s/ Dennis C. O'Rourke BY: /s/ Srikant Srinivasan
--------------------------------- -----------------------------
Dennis C. O'Rourke Srikant Srinivasan
ITS: SVP & Chief Financial Officer ITS: Chief Executive Officer
DATE: 8/20/99 DATE:
-------------------------------- -----------------------------
Enclosure
<PAGE> 4
INDEMNIFICATION AGREEMENT
BETWEEN
GOLDBERG MOSER O'NEILL, LLC
AND
KBKIDS.COM LLC
Goldberg Moser O'Neill, LLC (GMO) agrees to exercise its best judgment in the
preparation and placing of KBKids.com LLC (KB) advertising and publicity with a
view to avoiding any claims, proceedings, or suits being made or instituted
against KB or GMO. GMO shall indemnify KB and its employees, officers,
directors, shareholders, licensees and agents (KB Indemnities) against any
loss, cost, liabilities and expenses (including reasonable attorney's fees) KB
or such other party may incur as the result of any claims pertaining to libel,
slander, defamation, copyright infringement, invasion of privacy, piracy and/or
plagiarism, or violations of any law or regulation governing advertising or
claims made in advertising, arising from any materials supplied by GMO for
advertising or publicity prepared by GMO for KB.
KB will indemnify GMO and its employees, officers, directors, shareholders,
licensees and agents against any loss, cost, liabilities and expenses (including
reasonable attorney's fees) GMO or such other party may incur as the result of
any claim, suit or proceeding made or brought against GMO based upon any
personal injury claims arising from use of any KB products, product claims
contained in advertising produced by GMO on behalf of KB that are based upon
information or materials provided by KB, and/or infringement claims based on
trademarks claimed by KB.
ACCEPTED:
GOLDBERG MOSER O'NEILL, LLC KBKIDS.COM LLC
By: /s/ DENNIS C. O'ROURKE By: /s/ SRIKANT SRINIVASAN
--------------------------------- -----------------------------
Dennis C. O'Rourke Srikant Srinivasan
Its: SVP & Chief Financial Officer Its: Chief Executive Officer
Date: 8/20/99 Date:
------------------------------- ---------------------------
<PAGE> 1
Exhibit 10.11
1999 OPTION PLAN
OF
KBKIDS.COM LLC
1. PURPOSE OF THE PLAN. This 1999 Option Plan of KBKids.com LLC adopted
on this 6th day of July, 1999, is intended to enable officers, managers and
other key employees and consultants of the Company and its subsidiaries and
affiliates to acquire or increase their ownership of membership interests of the
Company on reasonable terms. The opportunity so provided is intended to foster
in participants an incentive to put forth maximum effort for the continued
success and growth of the Company, to aid in retaining individuals who put forth
such efforts, and to assist in attracting the best available individuals to the
Company in the future.
2. DEFINITIONS. When used herein, the following terms shall have the
meaning set forth below:
2.1 "BOARD" means the Board of Managers of KBKids.com
LLC.
2.2 "CHANGE IN CONTROL" means a change in control of the
Company as a result of the occurrence of any of the following events:
(a) any Person other than an Exempt Person (an "Acquiring
Person") is or becomes the beneficial owner, directly or indirectly, of
Units of the Company representing more than fifty percent (50%) of the
combined voting power of the Company's then outstanding Units, other
than either in connection with an issuance of Units or series of
related issuances of Units approved by the Board (which Board must
include at least a majority who were Continuing Managers and which
transaction or series of related transactions must have been approved
by a majority of the Continuing Managers) or as the result of the
reduction in the number of issued
<PAGE> 2
and outstanding Units pursuant to a transaction or series of related
transactions approved by the Board;
(b) there shall cease to be a majority of the Board comprised
of Continuing Managers, other than in connection with a Capital Markets
Transaction; or
(c) (i) the Members of the Company approve a merger or
consolidation of the Company with any other entity, other than a merger
or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
more than fifty percent (50%) of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (ii) the Members of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all the Company's assets (other than to a more than fifty
percent (50%) subsidiary or other controlled person of the Company or
other than pursuant to the incorporation of the Company).
2.3 "CAPITAL MARKETS TRANSACTION" means an underwritten public offering
of equity securities by an affiliate of the Company (the "Public Entity")
approved by the Board pursuant to Section 6.3 of the Operating Agreement.
2.4 "CLASS C MEMBER" means a Class C Member of the Company as defined
in the Company's Operating Agreement.
2.5 "CODE" means the Internal Revenue Code of 1986, as amended, as in
effect at the time of reference, or any successor revenue code which may
hereafter be adopted in
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<PAGE> 3
lieu thereof, and reference to any specific provisions of the Code shall refer
to the corresponding provisions of the Code as it may hereafter be amended or
replaced.
2.6 "COMMITTEE" means the Compensation Committee of the Board or any
other committee appointed by the Board which is invested by the Board with
responsibility for the administration of the Plan.
2.7 "COMPANY" means KBKids.com LLC
2.8 "CONTINUING MANAGER" means a Manager of the Company who is not an
Acquiring Person or an affiliate or associate thereof or any of their
representatives and who was either a Manager of the Company before any Person
became an Acquiring Person or whose nomination or election to the Board was
recommended or approved by a majority of the then Continuing Managers or by an
Exempt Person.
2.9 "ERISA" means the Employee Retirement Income Security Act of 1974,
as in effect at the time of reference, or any successor law which may hereafter
be adopted in lieu thereof, and any reference to any specific provisions of
ERISA shall refer to the corresponding provisions of ERISA as it may hereafter
be amended or replaced.
2.10 "EXEMPT PERSON" means the Company, any subsidiary thereof, any
employee benefit plan of the Company or any affiliate or more than fifty percent
(50%) subsidiary thereof, any entity holding Units for or pursuant to the terms
of any such plan, and any Member as of the close of business on the date the
Plan is adopted by the Board or any affiliate of any such Member.
2.11 "FAIR MARKET VALUE" means with respect to the Units, the fair
market value determined in good faith by the Board, or the Committee if one has
been appointed, in its
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<PAGE> 4
discretion, which determination may, but need not, be based on (i) the advice of
an independent financial advisor (which may be the Company's regular outside
auditors) or (ii) the last known price per Unit paid by a purchaser in an arm's
length transaction.
2.12 "MANAGER" means a Manager of the Company as defined in the
Company's Operating Agreement.
2.13 "MEMBER" means a Member of the Company as defined in the Company's
Operating Agreement.
2.14 "OPERATING AGREEMENT" means the Company's Operating Agreement
dated as of June 25, 1999, as the same may be amended from time to time.
2.15 "OPTION" means the right to purchase the number of Units specified
by the Board, or the Committee if one has been appointed, at a price and for a
term fixed by the Board, or the Committee if one has been appointed, in
accordance with the Plan, and subject to such other limitations and restrictions
as the Plan and the Board or the Committee, as the case may be, may impose.
2.16 "OPTION AGREEMENT" means a written agreement in such form as may
be, from time to time, hereafter approved by the Board, or the Committee if one
has been appointed, which shall be duly executed by the Company and the
Participant and which shall set forth the terms and conditions of an Option
under the Plan.
2.17 "PARTICIPANTS" means officers (including officers who are members
of the Board), managers and other key employees and consultants of the Company
or any of its subsidiaries or affiliates.
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<PAGE> 5
2.18 "PERSON" means any individual, partnership, corporation,
trust, limited liability company, or other entity.
2.19 "PLAN" means the 1999 Option Plan of KBKids.com LLC.
2.20 "UNITS" means units of membership interest of the Company
or, if by reason of the adjustment provisions contained herein, any
rights under an Option under the Plan pertain to any other security,
such other security.
2.21 "SUCCESSOR" means (i) the legal representative of the
estate of a deceased Participant, (ii) the person or persons who shall
acquire the right to exercise or receive an Option by bequest or
inheritance or by reason of the death of the Participant or (iii) the
beneficiary or beneficiaries designated by the Participant for any
Option granted to the Participant that is outstanding at the time of
his death.
2.22 "TERM" means the period during which a particular Option
may be exercised.
3. UNITS SUBJECT TO THE PLAN. There will be reserved for use, upon the
issuance, vesting or exercise of Options to be granted from time to time under
the Plan, an aggregate of Six Million (6,000,000) Units, which Units may be, in
whole or in part, as the Board shall from time to time determine, authorized but
unissued Units, or issued Units which shall have been reacquired by the Company,
but which shall in any case entitle the holder to the rights and obligations
accorded to Class C Members of the Company. Any Units subject to issuance upon
exercise of Options but which are not issued because of a surrender, lapse,
expiration, forfeiture or termination of any such Option prior to issuance of
the Units shall once again be available for issuance in satisfaction of Options.
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<PAGE> 6
4. ADMINISTRATION OF THE PLAN. The Board shall be invested with the
responsibility for the administration of the Plan; provided, however, that the
Board may appoint a Committee which shall be invested with the responsibility
for the administration of the Plan. Subject to the provisions of the Plan, the
Committee shall have full authority, in its discretion, to determine the
Participants to whom Options shall be granted, the number of Units to be covered
by each of the Options, and the terms of any such Option; to amend or cancel
Options (subject to Section 16 of the Plan); to accelerate the vesting of
Options; to require the cancellation or surrender of any previously granted
awards under this Plan or any other plans of the Company as a condition to the
granting of an Option; to interpret the Plan; to prescribe, amend and rescind
rules and regulations relating to the Plan; and generally to interpret and
determine any and all matters whatsoever relating to the administration of the
Plan and the granting of Options hereunder. The Board may from time to time
appoint members to the Committee in substitution for or in addition to members
previously appointed and may fill vacancies, however caused, in the Committee.
The Committee shall select one of its members as its chairman and shall hold its
meetings at such times and places as it shall deem advisable. A majority of its
members shall constitute a quorum. Any action of the Committee may be taken by a
written instrument signed by all of the members, and any action so taken shall
be fully as effective as if it had been taken by a vote of a majority of the
members at a meeting duly called and held. The Committee shall make such rules
and regulations for the conduct of its business as it shall deem advisable and
shall appoint a Secretary who shall keep minutes of its meetings and records of
all action taken in writing without a meeting. No member of the Committee shall
be liable, in the absence of bad faith, for any act or omission with respect to
his or her service on the Committee.
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<PAGE> 7
5. PARTICIPANTS TO WHOM OPTIONS MAY BE GRANTED. Options may be granted
in each calendar year or portion thereof while the Plan is in effect to such of
the Participants as the Board, or the Committee if one has been appointed, in
its discretion, shall determine. In determining the Participants to whom Options
shall be granted and the number of Units to be issued or subject to purchase or
issuance under such Options, the Board, or the Committee if one has been
appointed, shall take into account the recommendations of the Company's
management as to the duties of the respective Participants, their present and
potential contributions to the success of the Company and its subsidiaries, and
such other factors as the Board or the Committee, as the case may be, shall deem
relevant in connection with accomplishing the purposes of the Plan.
6. OPTION TERMS AND CONDITIONS.
6.1 OPTION PRICE. The option price per Share of any Option
granted under the Plan shall be the Fair Market Value of the Units
covered by the Option on the date the Option is granted unless the
Board, or the Committee if one has been appointed, in its sole
discretion, determines to set the option price at an amount less than
or greater than the Fair Market Value of the Units on such date.
6.2 TERM OF OPTIONS. Options granted hereunder shall be
exercisable for a Term of not more than ten (10) years from the date of
grant thereof, but shall be subject to earlier termination as
hereinafter provided. Each Option Agreement issued hereunder shall
specify the Term of the Option, which shall be determined by the Board,
or the Committee if one has been appointed, in accordance with its
discretionary authority hereunder.
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<PAGE> 8
6.3 OTHER OPTION TERMS AND CONDITIONS. Each Option or each
Option Agreement setting forth an Option shall contain such other terms
and conditions not inconsistent herewith as shall be approved by the
Board, or the Committee if one has been appointed.
7. DATE OF GRANT. The date of grant of an Option granted hereunder
shall be the date on which the Board, or the Committee if one has been
appointed, acts in granting the Option or, if later, such other date as the
Board or the Committee, as the case may be, shall specify.
8. EXERCISE OF RIGHTS UNDER OPTIONS. A Participant entitled to exercise
an Option shall do so by delivery of a written notice to that effect specifying
the number of Units with respect to which the Option is being exercised and any
other relevant information the Board, or the Committee if one has been
appointed, may require. The notice shall be accompanied by payment in full of
the purchase price of any Units to be purchased, which payment may be made in
cash or, with the Board's approval, or the Committee's approval if one has been
appointed, in Units that have been held for at least six (6) months valued at
their Fair Market Value on the date of exercise or, upon the approval of the
Board, or the Committee if one has been appointed, by a combination of cash and
Units. No Units shall be issued upon exercise of an Option until full payment
has been made therefor. All notices or requests provided for herein shall be
delivered to the Company's President, or such other person as the Board, or the
Committee if one has been appointed, may designate.
9. RIGHTS OF OPTION HOLDER. Subject to the provisions in Sections 14
and 17 of this Plan, the holder of an Option shall not have any of the rights of
a Member with respect to the Units subject to purchase or receipt under the
Option, except to the extent that the holder has exercised the
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<PAGE> 9
Option for those Units in accordance with the terms of the Option Agreement
applicable to such Option and paid the full exercise price for the purchased
Units to the Company.
10. NONTRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
Board, or the Committee if one has been appointed, and set forth in an Option
Agreement, an Option shall not be transferable other than: (a) by will or the
laws of descent and distribution or pursuant to any beneficiary designation in
effect for said Option at the time of the holder's death, and an Option subject
to exercise may be exercised, during the lifetime of the holder of the Option,
only by the holder or in the event of death, the holder's Successor, or in the
event of disability, the holder's personal representative, or (b) pursuant to a
qualified domestic relations order, as defined in the Code or ERISA or the rules
thereunder.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR CAPITAL MARKETS
TRANSACTION.
(a) In the event of changes in all of the outstanding Units by
reason of Unit dividends, Unit splits, reclassifications, recapitalizations,
mergers, consolidations, combinations, or exchanges of Units, separations,
reorganizations or liquidations, or similar events, or in the event of
extraordinary cash or non-cash distributions being declared with respect to the
Units, or similar transactions or events, the number and class of Units
available under the Plan in the aggregate, the number and class of Units subject
to Options theretofore granted, applicable purchase prices and all other
applicable provisions, shall, subject to the provisions of the Plan, be
equitably adjusted by the Board, or the Committee if one has been appointed
(which adjustment may, but need not, include payment to the holder of an Option,
in cash or in securities, in an amount equal to the difference between the price
at which such Option may be exercised and the then current fair market value of
the Units subject to such
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<PAGE> 10
Option as equitably determined by the Board or the Committee, as the case may
be) in order to prevent the diminution or enlargement of benefits thereunder.
The foregoing adjustment and the manner of application of the foregoing
provisions shall be determined by the Board, or the Committee if one has been
appointed, in its sole discretion.
(b) On or before the closing of a Capital Markets Transaction,
the Company shall cause the Public Entity to adopt (a) an incentive equity plan,
(b) either assume all outstanding Options granted under the Plan or to replace
all outstanding Options granted under the Plan with comparable options that
preserve the spread, exercise period and vesting periods of such Options and
that neither enlarges or diminishes the benefits thereunder and (c) use its best
efforts to register the shares underlying the Public Entity options as promptly
as practicable following the closing of the Capital Markets Transaction on a
Form S-8 (or successor form), to the extent eligible to be registered on a Form
S-8 (or successor form). Upon such assumption or issuance of comparable
replacement Options, all outstanding Options granted under the Plan shall
automatically terminate.
12. CHANGE IN CONTROL. Notwithstanding anything to the contrary in the
Plan or any Option Agreement, in the case of a Change in Control of the Company:
(a) If the Change in Control of the Company is described in
Section 2.2(a) or 2.2(b) of the Plan, the Board, or the Committee if
one has been appointed, may, in its discretion, taking into account the
purposes of this Plan, determine, on a case by case basis, that each
Option granted under the Plan shall, subject to the following
provisions, terminate thirty (30) days after the occurrence of such
Change in Control but, in the event of any such termination, an Option
holder shall have the right, commencing at least five (5) days prior
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to such Change in Control and subject to any other limitation on the exercise of
such Option in effect on the date of exercise to immediately exercise any
Options in full, without regard to any vesting limitations, to the extent they
shall not have been theretofore exercised.
(b) If the Change in Control of the Company is described in
Section 2.2(c) of the Plan, then (i) the Board, or the Committee if one has been
appointed, shall use its best efforts to cause the acquiring or successor entity
to either assume all outstanding Options granted under the Plan or to replace
all outstanding Options granted under the Plan with comparable options which
preserve the spread, exercise period and vesting periods of such Options; (ii)
all outstanding Options granted under the Plan that are not so assumed or
replaced with comparable options shall become exercisable in full immediately
prior to, and conditioned upon, the closing of the transaction (a "Corporate
Transaction") the approval of which resulted in a Change in Control described in
Section 2.2(c) of the Plan and written notice of such acceleration shall be
given to the holders of all non-assumed or non-replaced Options at least ten
(10) days prior to the date of the closing of the Corporate Transaction; and
(iii) all outstanding Options granted under the Plan shall automatically
terminate upon the closing of the Corporate Transaction.
13. FORMS OF OPTIONS. Nothing contained in the Plan nor any resolution
adopted or to be adopted by the Board or by the Members of the Company shall
constitute the granting of any Option. An Option shall be granted hereunder only
by action taken by the Board, or the Committee if one has been appointed, in
granting an Option. Whenever the Board, or the Committee if one has been
appointed, shall designate a Participant for the receipt of an Option, the
Company's Secretary, or such other person as the Board or the Committee, as the
case may be, may designate, shall
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<PAGE> 12
forthwith send notice thereof to the Participant, in such form as the Board or
the Committee, as the case may be, shall approve, stating the number of Units
subject to the Option, its Term, and the other terms and conditions thereof. The
notice shall be accompanied by a written Option Agreement in such form as may
from time to time hereafter be approved by the Board, or the Committee if one
has been appointed, which shall have been duly executed by or on behalf of the
Company. If the surrender of previously issued Options is made a condition of
the grant, the notice shall set forth the pertinent details of such condition.
Execution by the Participant to whom such Option is granted of said Option
Agreement in accordance with the provisions set forth in this Plan shall be a
condition precedent to the exercise or receipt of any Option.
14. TAXES. The Company shall have the right to require a person
entitled to receive Units pursuant to the receipt, vesting or exercise of an
Option under the Plan to pay the Company the amount of any taxes which the
Company is or will be required to withhold with respect to such Units before the
Units are issued in such person's name. Furthermore, the Company may elect to
deduct such taxes from any other amounts then payable in cash or in Units or
from any other amounts payable any time thereafter to the Participant.
15. TERMINATION OF THE PLAN. The Plan shall terminate ten (10) years
from the date hereof, and an Option shall not be granted under the Plan after
that date although the terms of any Options may be amended at any date prior to
the end of its Term in accordance with the Plan. Any Options outstanding at the
time of termination of the Plan shall continue in full force and effect
according to the terms and conditions of the Option and this Plan.
16. AMENDMENT OF THE PLAN. The Plan may be amended at any time and from
time to time by the Board in the manner prescribed in the Operating Agreement.
Notwithstanding the
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<PAGE> 13
discretionary authority granted to the Board, or the Committee, if one has been
appointed, in Section 4 of the Plan, no amendment of the Plan or any Option
granted under the Plan shall impair any of the rights of any holder, without the
holder's consent, under any Option theretofore granted under the Plan.
17. ADMISSION AS CLASS C MEMBER ON EXERCISE OR GRANT. The issuance of
Units to a holder of an Option pursuant to the exercise of an Option, and the
admission of such holder as a Class C Member with respect to such Units, may be
postponed by the Company for such period as may be required for it with
reasonable diligence to comply with any applicable requirements of any federal,
state or local law or regulation or any administrative or quasi-administrative
requirement applicable to the sale, issuance, distribution or delivery of such
Units. The Board, or the Committee if one has been appointed, may, in its sole
discretion, require a Participant to furnish the Company with appropriate
representations and a written investment letter prior to the exercise of an
Option or the admission of the Participant as a Class C Member.
18. FEES AND COSTS. The Company shall pay all original issue taxes on
the issuance or exercise of any Option granted under the Plan and all other fees
and expenses necessarily incurred by the Company in connection therewith.
19. EFFECTIVENESS OF THE PLAN. The Plan shall become effective when
approved by the Board.
20. OTHER PROVISIONS. As used in the Plan, and in Options and other
documents prepared in implementation of the Plan, references to the masculine
pronoun shall be deemed to refer to the feminine or neuter, and references in
the singular or the plural shall refer to the plural or the singular, as the
identity of the person or persons or entity or entities being referred to may
require. The
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<PAGE> 14
captions used in the Plan and in such Options and other documents prepared in
implementation of the Plan are for convenience only and shall not affect the
meaning of any provision hereof or thereof.
21. OHIO LAW TO GOVERN. This Plan shall be governed by and construed in
accordance with the laws of the State of Ohio.
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<PAGE> 1
Exhibit 10.12
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated May 18, 1999, and effective as of the
Closing Date (as defined in the Contribution Agreement) (the "Effective Date"),
by and among Toyco.com LLC, an Ohio limited liability company (together with its
successors and assigns permitted under this Agreement, "Toyco.com"), K.B.
Consolidated, Inc., an Ohio corporation and the member of Toyco.com (together
with its successors and assigns permitted under this Agreement, "K.B.
Consolidated," and together with Toyco.com, the "Company"), and SRIKANT
SRINIVASAN (the "Executive").
R E C I T A L S:
A. In connection with the Contribution Agreement by and among KB
Online Holdings, Inc., BrainPlay.com, Inc. ("BrainPlay"), and Toyco.com dated as
of the date hereof (the "Contribution Agreement"), the Executive will become an
employee of the Company;
B. The Company and Executive desire to enter into an employment
arrangement; and
C. The Company has determined that it is in the best interests of
Toyco.com and K.B. Consolidated and their respective equityholders to enter
into this Agreement setting forth the obligations and duties of both the Company
and the Executive; and
D. The Company wishes to assure itself of the services of the
Executive for Toyco.com and K.B. Consolidated for the period hereinafter
provided, and the Executive is willing to be employed by the Company for said
period, upon the terms and conditions provided in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually, a
"Party" and together, the "Parties") agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Executive,
and the Executive hereby agrees to serve the Company, on the terms and
conditions set forth herein.
2. TERM. Subject to the provisions for termination as hereinafter
provided, the term of this Employment Agreement shall begin on the Effective
Date and shall continue for two (2) years hereafter (the "Term of Employment").
This Agreement will be renewed for additional terms of one (1) year unless
either Party sends written notice of termination to the other Party within sixty
(60) days prior to the expiration of this Agreement, or any renewals hereof. The
"Term of Employment" shall be deemed to include any such renewal period.
Notwithstanding the foregoing, the provisions of Section 7(b) shall survive any
termination of this Agreement for the time periods specified therein.
<PAGE> 2
3. POSITION AND DUTIES.
(a) The Executive shall serve as Chief Executive Officer of
Toyco.com, and in such other capacity or capacities as the Board of
Managers of Toyco.com (the "Board") shall reasonably determine,
without additional compensation therefor. As Chief Executive Officer,
the Executive shall, subject to the bylaws of Toyco.com, and to the
direction of the Board, serve the Company by performing such duties
and carrying out such responsibilities as are normally related to the
position of Chief Executive Officer in accordance with the standards
of the industry.
(b) The Executive shall devote his full time and best efforts to
his employment and perform diligently such duties as are consistent
with his capacity as Chief Executive Officer of Toyco.com. The
Executive shall devote his entire working time and attention to the
performance of his responsibilities hereunder.
4. BASE SALARY. The Executive shall receive from Toyco.com an annual
base salary, payable in accordance with the regular payroll practices of
Toyco.com, of One Hundred Fifty Thousand Dollars ($150,000) (the "Minimum Annual
Compensation"). There shall be a review for merit by the Board no less often
than annually and an increase as deemed appropriate to reflect the value of
services by the Executive. At no time during the Term of Employment shall the
Executive's annual base salary fall below the Minimum Annual Compensation.
5. BONUS. The Executive shall receive a guaranteed minimum annual
bonus of Fifty Thousand Dollars ($50,000). In addition, the Executive may be
paid an additional annual bonus not in excess of Fifty Thousand Dollars
($50,000) conditioned on the achievement of certain milestones to be mutually
determined by the Executive and the Board.
6. EXPENSE REIMBURSEMENT. During the Term of Employment, the
Executive shall be entitled to prompt reimbursement by the Company for all
reasonable out-of-pocket expenses incurred by him in performing services under
this Agreement, upon submission of such accounts and records as may be required
under Company policy.
7. EFFECT OF AGREEMENT ON OTHER BENEFITS.
(a) OTHER BENEFITS. During the Term of Employment, the Executive
will be entitled to such medical, dental, life insurance, 401(k),
stock option plan and such other similar employment privileges and
benefits as are afforded generally from time to time to other
executive officers of Toyco.com and four (4) weeks paid vacation time
per year to be taken at times mutually acceptable to the Company and
the Executive.
(b) PUT OPTION. If Toyco.com has not consummated a Capital
Markets Transaction (as defined in the Contribution Agreement) on or
before the third anniversary of the Closing Date (as defined in the
Contribution Agreement), then on such date (the "Put Trigger Date"),
the Executive shall have the right, exercisable for one year after the
Put Trigger Date by written notice to the Company specifying a closing
date for such redemption at least thirty (30) days after the date of
the notice, to require Toyco.com to purchase all of
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the Executive's ownership interest in BrainPlay at such closing for a
cash purchase price equal to One Million Nine Hundred Thousand Dollars
($1,900,000) plus the amount of any cash contributions after the date
of this Agreement, so long as at the time Toyco.com is not prohibited
by law from doing so.
8. TERMINATION OF EMPLOYMENT. The Executive's employment may be
terminated under the following circumstances:
(a) DEATH. The Executive's employment is terminated upon his
death.
(b) DISABILITY. The Executive's employment may be terminated due
to illness or other physical or mental disability of the Executive,
resulting in his inability to perform substantially his duties under
this Agreement for a period of one hundred eighty (180) or more
consecutive days or for two hundred seventy (270) days in the
aggregate during any consecutive twelve (12) month period
("Disability").
(c) CAUSE. The Executive's employment may be terminated for
Cause. For purposes of this Agreement, the Company shall have "Cause"
to terminate the Executive's employment upon: (i) the Executive's
final conviction or plea of guilty or nolo contendere to a felony;
(ii) acts of the Executive which constitute willful misconduct on the
part of the Executive in connection with his duties under this
Agreement, including misappropriation or embezzlement in the
performance of his duties as an executive officer of the Company; or
(iii) willfully engaging in conduct materially injurious to the
Company and in violation of the covenants contained in this Agreement.
Notwithstanding the foregoing, the Executive will not be deemed
to have been terminated for "Cause" without an affirmative vote of not
less than eighty percent (80%) of the Board finding that in the good
faith opinion of the Board, the Executive was guilty of conduct set
forth in this subsection 8(c). Any termination for "Cause" will not be
in limitation of any other right or remedy the Company may have under
this Agreement or otherwise.
(d) GOOD REASON. The Executive's employment may be terminated for
Good Reason. For purposes of this Agreement, the Executive shall have
"Good Reason" to terminate his employment upon the occurrence of one
or more of the following events: (i) there is a material reduction or
change of the Executive's reporting relationship, job duties,
responsibilities or requirements that is inconsistent with the
position or positions listed in Section 3 and the Executive's prior
reporting relationship, duties, responsibilities or requirements; (ii)
there is a reduction in the Executive's salary or benefits then in
effect; (iii) the headquarters of the Company are relocated, or the
Company requires the Executive to relocate, to a facility or location
more than 50 miles from the Company's current location in Denver,
Colorado; or (iv) the Company materially breaches any provision of
this Agreement, which breach is not cured within thirty (30) days
after written notice thereof to the Board from the Executive.
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<PAGE> 4
(e) OTHER POSITIONS. Upon termination of this Agreement by the
Executive, the Executive shall be deemed to have resigned from all
offices and directorships held by the Executive with the Company and
any subsidiaries or affiliates.
9. COMPENSATION UPON TERMINATION.
(a) If the Executive's employment is terminated as a result of
the Executive's death or is terminated by the Company as a result of
the Executive's Disability or for Cause, or is terminated by the
Executive without Good Reason, he, or his estate, shall be entitled
to:
(i) any base salary earned but not yet paid;
(ii) any bonus awarded pursuant to Section 5 of this
Agreement but not yet paid;
(iii) reimbursement in accordance with this Agreement of any
business expense incurred by the Executive but not yet paid; and
(iv) other benefits accrued and earned by the Executive
through the date of his death, Disability or termination in
accordance with applicable plans and programs of the Company.
(b) If the Executive's employment is terminated by the Company
without Cause (other than due to Disability or the Executive's death)
or is terminated by the Executive for Good Reason, he shall be
entitled to:
(i) his base salary, at the rate in effect on the date of
his termination of employment, for twenty-four (24) months
following the date of termination (the "Severance Period"),
payable in accordance with the regular payroll practices of the
Company;
(ii) any bonus earned or guaranteed pursuant to Section 5 of
this Agreement but not yet paid, payable in accordance with the
regular payroll practices of the Company;
(iii) continued participation in all employee benefit plans
or programs in which he was participating on the date of his
termination of employment, until the earlier of:
(A) the end of the Severance Period, or
(B) the date he receives equivalent coverage and
benefits under the plans and programs of a subsequent
employer;
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<PAGE> 5
(iv) reimbursement in accordance with this Agreement of any
business expenses incurred by the Executive but not yet paid to
him on the date of his termination of employment; and
(v) other benefits accrued and earned by the Executive
through the date of his termination in accordance with the
applicable plans and programs of the Company.
(c) Any amounts due under this Section 9 are in the nature of
severance payments or liquidated damages or both, and they are not in
the nature of a penalty.
10. COMPENSATION UPON FAILURE OF THE COMPANY TO RENEW THE TERM OF
EMPLOYMENT.
(a) In the event of the failure of the Company to renew the
Executive's employment pursuant to Section 2 above, the Executive
shall be entitled to severance compensation as follows:
(i) his base salary, at the rate in effect on the date of
the expiration of his Term of Employment, for twenty-four (24)
months payable in accordance with the regular payroll practices
of the Company;
(ii) any bonus earned or awarded pursuant to Section 5 of
this Agreement but not yet paid, payable in accordance with the
regular payroll practices of the Company;
(iii) continued participation in all employee benefit plans
or programs in which he was participating on the date of the
expiration of his Term of Employment, until the earlier of:
(A) the second anniversary of the date of the
expiration of his Term of Employment, or
(B) the date he receives equivalent coverage and
benefits under the plans and programs of a subsequent
employer;
(iv) reimbursement in accordance with this Agreement of any
business expenses incurred by the Executive but not yet paid to
him on the date of the expiration of his Term of Employment; and
(v) other benefits accrued and earned by the Executive
through the date of the expiration of his Term of Employment in
accordance with the applicable plans and programs of the Company.
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<PAGE> 6
11. COVENANTS AND CONFIDENTIAL INFORMATION.
(a) The Executive agrees that so long as he is employed by the
Company and for a period of two (2) years thereafter and, as to
subsection 11(a)(iv) below, at any time after the Term of Employment
he will not, directly or indirectly, do or suffer any of the
following:
(i) Own, manage, control or participate in the ownership,
management or control of, or be employed or engaged by or
otherwise affiliated or associated as a consultant, independent
contractor or otherwise with, any other corporation, partnership,
proprietorship, firm, association or other business entity or
otherwise engage in any business that is engaged in any manner
in, or otherwise competes with, the business of Toyco.com or any
of its subsidiaries (as conducted on the date the Executive
ceases to be employed by the Company in any capacity, including
as a consultant) in any state in the United States or any foreign
country in which Toyco.com or its subsidiaries are then doing
business and then only with respect to the business of Toyco.com
or its subsidiaries then being conducted in such states or
countries; provided, however, that the ownership of not more than
1% of the stock of any publicly traded corporation shall not be
deemed a violation of this covenant.
(ii) Induce any person who is an employee, officer, agent,
customer or supplier of Toyco.com or any of its subsidiaries to
terminate said relationship.
(iii) Solicit or direct business of any current or
prospective customers of Toyco.com or its subsidiaries, who are
current or prospective customers during the Term of Employment,
in competition with any product or service being offered by
Toyco.com or its subsidiaries, either for himself or for any
other individual or entity or advise any person or entity with
respect thereto. As used herein, "customer" means any customer of
Toyco.com or its subsidiaries whose identity the Executive
learned through his employment with the Company or with whom the
Executive and/or Toyco.com had business contact with respect to
the business of the Company during the twelve (12) month period
immediately before the Executive's employment with the Company
terminated.
(iv) Disclose, divulge, discuss, copy or otherwise use or
suffer to be used in any manner in competition with, or contrary
to the interests of, the Company or its subsidiaries, the
customer lists, product research or engineering data,
requirements, prices or other trade secrets of the Company or its
subsidiaries, it being acknowledged by the Executive that all
such information regarding the business of the Company and its
subsidiaries, compiled or obtained by, or furnished to, the
Executive while the Executive shall have been employed by or
associated with the Company is confidential information and the
Company's exclusive property. Upon termination of this Agreement,
Executive shall promptly return to the Company all books,
manuals, reports, client and customer lists, keys and other
materials referred to above and any other materials that belong
to the Company.
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<PAGE> 7
(b) All business ideas, concepts, inventions, improvements and
developments made or conceived by the Executive during the Term of
Employment and relating to the business of the Company or to any
business or product the Company is actively considering entering or
developing, shall become and remain the exclusive property of the
Company, its successors and assigns.
(c) The Executive expressly agrees and understands that the
remedy at law for any breach by him of this Section 11 will be
inadequate and that the damages flowing from such breach are not
readily susceptible of being measured in monetary terms. Accordingly,
it is acknowledged that upon adequate proof of the Executive's
violation of any legally enforceable provision of this Section 11, the
Company shall be entitled to seek immediate injunctive relief and may
obtain a temporary order restraining any threatened or further breach.
Nothing in this Section 11 shall be deemed to limit the Company's
remedies at law or in equity for any breach by the Executive of any of
the provisions of this Section 11 that may be pursued or availed of by
the Company.
(d) In the event that the Executive shall violate any legally
enforceable provision of this Section 11 as to which there is a
specific time period during which he is prohibited from taking certain
actions or from engaging in certain activities, as set forth in such
provision, then such violation shall toll the running of that time
period from the date of its commencement until the date of its
cessation.
(e) The Executive has carefully considered the nature and extent
of the restrictions upon him and the rights and remedies conferred
upon the Company under this Section 11, and hereby acknowledges and
agrees that the same (i) were a material inducement to the parties
thereto in entering into the Contribution Agreement, and (ii) are
reasonable in time and territory, are designed to eliminate
competition that would otherwise be unfair to the Company, do not
stifle the inherent skill and experience of the Executive, would not
operate as a bar to the Executive's sole means of support, are fully
required to protect the legitimate interests of the Company and do not
confer a benefit upon the Company disproportionate to the detriment to
the Executive.
12. WITHHOLDING TAXES. All payments to the Executive or his
beneficiary shall be subject to withholding on account of federal, state and
local taxes as required by law. If any payment hereunder is insufficient to
provide the amount of such taxes required to be withheld, the Company may
withhold such taxes from any other payment due the Executive or his beneficiary.
In the event all cash payments due the Executive are insufficient to provide the
required amount of such withholding taxes, the Executive or his beneficiary,
within five days after written notice from the Company, shall pay to the Company
the amount of such withholding taxes in excess of all cash payments due the
Executive or his beneficiary.
13. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding
upon and inure to the benefit of the Parties and their respective successors,
heirs (in the case of the Executive) and assigns. No rights or obligations of
the Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred pursuant
to (a) a merger or consolidation in which the Company is not the continuing
entity or (b) a
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<PAGE> 8
sale or liquidation of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law. The Company further
agrees that, in the event of a sale of assets or liquidation as described in the
preceding sentence, it will use its best efforts to cause such assignee or
transferee expressly to assume the liabilities, obligations and duties of the
Company hereunder. No obligations of the Executive under this Agreement may be
assigned or transferred by the Executive.
14. ENTIRE AGREEMENT. Except to the extent otherwise provided herein,
this Agreement contains the entire understanding and agreement between the
Parties concerning the subject matter hereof and supersedes any prior
agreements, whether written or oral, between the Parties concerning the subject
matter hereof.
15. AMENDMENT OR WAIVER. No provision in this Agreement may be
amended unless such amendment is agreed to in writing and signed by both the
Executive and an authorized officer of the Company. No waiver by either Party of
any breach by the other Party of any condition or provision contained in this
Agreement to be performed by such other Party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by the Executive or an
authorized officer of the Company, as the case maybe.
16. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.
17. SURVIVORSHIP. The respective rights and obligations of the
Parties hereunder shall survive any termination of the Executive's employment
with the Company to the extent necessary to the intended preservation of such
rights and obligations as described in this Agreement.
18. GOVERNING LAW. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of Colorado, without
reference to principles of conflict of laws.
19. NOTICES. Any notice given to either Party shall be in writing and
shall be deemed to have been given when delivered personally or one (1) day
after having been sent by overnight courier service or three (3) days after
having been sent by certified or registered mail, postage prepaid, return
receipt requested, duly addressed to the Party concerned at the address
indicated below or to such changed address as such Party may subsequently give
such notice of:
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<PAGE> 9
If to the Company or the Board Toyco.com LLC/K.B. Consolidated, Inc.
or the Board of Directors: c/o Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228-0512
Attention: General Counsel
With a copy to: Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP Tower
200 Public Square
Cleveland, Ohio 44114
Attention: Michael Wager, Esq.
If to the Executive: Srikant Srinivasan
475 Seventeenth Street, Suite 750
Denver, Colorado 80202
With a copy to: Brobeck Phieger & Harrison LLP
1125 Seventeenth Street
Suite 2525
Denver, Colorado 80202
Attention: Jeremy W. Makarechian, Esq.
20. HEADINGS. The headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
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<PAGE> 10
21. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of
the date and year first above written.
TOYCO.COM LLC
By: K.B. Consolidated, Inc., its Member
By: /s/Albert J. Bell
-----------------------------------------
Name: Albert J. Bell
---------------------------------------
Title: Executive Vice President
--------------------------------------
K.B. CONSOLIDATED, INC.
By: /s/Albert J. Bell
-----------------------------------------
Name: Albert J. Bell
---------------------------------------
Title: Executive Vice President
--------------------------------------
--------------------------------------------
SRIKANT SRINIVASAN
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CSC GUARANTY:
Consolidated Stores Corporation, an Ohio corporation ("CSC"), on behalf
of itself and its Affiliates, hereby guarantees the payment of any unpaid amount
required to be paid by Toyco.com to the Executive pursuant to Section 7(b) of
this Agreement.
The liability of CSC under this Guaranty shall be irrevocable,
absolute, independent and unconditional and shall not be affected by any
circumstance which might constitute a discharge of a surety or guarantor other
than the indefeasible payment and performance in full of the obligations set
forth in Section 7(b) of this Agreement. In furtherance of the foregoing and
without limiting the generality thereof, CSC agrees that its liability with
respect to such obligations shall remain in full force and effect without
regard to, and shall not be impaired by, nor shall CSC be exonerated or
discharged by, (a) any insolvency, bankruptcy, reorganization, arrangement,
adjustment, composition, assignment for the benefit of creditors, liquidation,
winding up or dissolution of Toyco.com, CSC or any of its Affiliates; (b) any
limitation, discharge, or cessation of the liability of Toyco.com, CSC or its
Affiliates for any of the obligations due to any statute, regulation or rule of
law, or any invalidity or unenforceablity in whole or in part of any of the
obligations; (c) any merger, acquisition, consolidation or change in structure
of Toyco.com, CSC or its Affiliates, or any sale, lease, transfer or other
disposition of any or all of the assets or shares of Toyco.com, CSC or its
Affiliates; (d) any claim, defense, counterclaim or setoff, other than that of
prior performance, that Toyco.com, CSC or its Affiliates may have or assert,
including, without limitation any defense or incapacity or lack of corporate or
other authority to execute or deliver this Guaranty or any other document
related hereto; and (e) any direction of application pursuant to Toyco.com, CSC
or its Affiliates.
CONSOLIDATED STORES CORPORATION
By: /s/William G. Kelley
-----------------------------------------
Name: William G. Kelley
---------------------------------------
Title: Chairman & CEO
--------------------------------------
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Exhibit 10.13
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, dated as of June 25, 1999, by and among
KBKids.com LLC, an Ohio limited liability company formerly known as Toyco.com
LLC (together with its successors and assigns permitted under this Agreement,
"KBKids.com"), K B Toy of Massachusetts, Inc., a Massachusetts corporation and a
member of KBKids.com (together with its successors and assigns permitted under
this Agreement, "K B Toy," and together with KBKids.com, the "Company"), and
Michael J. Wagner (the "Executive").
RECITALS
A. In connection with the Contribution Agreement by and among KB Online
Holdings, Inc., BrainPlay.com, Inc. ("BrainPlay"), and Toyco.com LLC, dated as
of May 18, 1999 (the "Contribution Agreement"), the Executive will become an
employee of the Company;
B. The Company and Executive desire to enter into an employment
arrangement;
C. The Company has determined that it is in the best interests of
KBKids.com and K B Toy and their respective equityholders to enter into this
Agreement setting forth the obligations and duties of both the Company and the
Executive; and
D. The Company wishes to assure itself of the services of the Executive
for KBKids.com and K B Toy for the period hereinafter provided, and the
Executive is willing to be employed by the Company for said period, upon the
terms and conditions provided in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually, a
"Party" and together, the "Parties") agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to serve the Company, on the terms and conditions
set forth herein.
2. TERM. Subject to the provisions for termination as hereinafter
provided, the term of this Employment Agreement shall begin on the date hereof
and shall continue for two (2) years hereafter (the "Term of Employment"). This
Agreement will be renewed for additional terms of one (1) year unless either
Party sends written notice of termination to the other Party within sixty (60)
days prior to the expiration of this Agreement, or any renewals hereof. The
"Term of Employment" shall be deemed to include any such renewal period.
<PAGE> 2
3. POSITION AND DUTIES.
(a) The Executive shall serve as Chief Financial Officer of
KBKids.com, and in such other capacity or capacities as the Board of
Managers of KBKids.com (the "Board") shall reasonably determine,
without additional compensation therefor. As Chief Financial Officer,
the Executive shall, subject to the bylaws of KBKids.com, and to the
direction of the Board, serve the Company by performing such duties
and carrying out such responsibilities as are normally related to the
position of Chief Financial Officer in accordance with the standards
of the industry.
(b) The Executive shall devote his full time and best efforts to
his employment and perform diligently such duties as are consistent
with his capacity as Chief Financial Officer of KBKids.com. The
Executive shall devote his entire working time and attention to the
performance of his responsibilities hereunder.
4. BASE SALARY. The Executive shall receive from KBKids.com an annual
base salary, payable in accordance with the regular payroll practices of
KBKids.com, of One Hundred Thirty-Five Thousand Dollars ($135,000) (the
"Minimum Annual Compensation"). There shall be a review for merit by the Board
no less often than annually and an increase as deemed appropriate to reflect the
value of services by the Executive. At no time during the Term of Employment
shall the Executive's annual base salary fall below the Minimum Annual
Compensation.
5. BONUS. The Executive shall receive a guaranteed minimum annual bonus
of Fifty Thousand Dollars ($50,000). In addition, the Executive may be paid an
additional annual bonus not in excess of Fifty Thousand Dollars ($50,000)
conditioned on the achievement of certain milestones to be mutually determined
by the Executive and the Board.
6. EXPENSE REIMBURSEMENT. During the Term of Employment, the Executive
shall be entitled to prompt reimbursement by the Company for all reasonable
out-of-pocket expenses incurred by him in performing services under this
Agreement, upon submission of such accounts and records as may be required under
Company policy.
7. OTHER BENEFITS. During the Term of Employment, the Executive will be
entitled to such medical, dental, life insurance, 401(k), paid vacation time and
such other similar employment privileges and benefits as are afforded generally
from time to time to other executive officers of Consolidated Stores
Corporation, an Ohio corporation ("Consolidated"), and shall be entitled to
receive grants under the Company's stock option plan(s).
8. TERMINATION OF EMPLOYMENT. The Executive's employment may be
terminated under the following circumstances:
(a) DEATH. The Executive's employment is terminated upon his
death.
(b) DISABILITY. The Executive's employment may be terminated due
to illness or other physical or mental disability of the Executive,
resulting in his inability to perform substantially his duties under
this Agreement for a period of one hundred eighty (180) or
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<PAGE> 3
more consecutive days or for two hundred seventy (270) days in the
aggregate during any consecutive twelve (12) month period
("Disability").
(c) CAUSE. The Executive's employment may be terminated for
Cause. For purposes of this Agreement, the Company shall have "Cause"
to terminate the Executive's employment upon: (i) the Executive's
final conviction or plea of guilty or nolo contendere to a felony;
(ii) acts of the Executive which constitute willful misconduct on the
part of the Executive in connection with his duties under this
Agreement, including misappropriation or embezzlement in the
performance of his duties as an executive officer of the Company; or
(iii) willfully engaging in conduct materially injurious to the
Company and in violation of the covenants contained in this Agreement.
Notwithstanding the foregoing, the Executive will not be deemed
to have been terminated for "Cause" without an affirmative vote of not
less than eighty percent (80%) of the Board finding that in the good
faith opinion of the Board, the Executive was guilty of conduct set
forth in this subsection 8(c). Any termination for "Cause" will not be
in limitation of any other right or remedy the Company may have under
this Agreement or otherwise.
(d) GOOD REASON. The Executive's employment may be terminated for
Good Reason. For purposes of this Agreement, the Executive shall have
"Good Reason" to terminate his employment upon the occurrence of one
or more of the following events: (i) there is a material reduction or
change of the Executive's reporting relationship, job duties,
responsibilities or requirements that is inconsistent with the
position or positions listed in Section 3 and the Executive's prior
reporting relationship, duties, responsibilities or requirements; (ii)
there is a reduction in the Executive's salary or benefits then in
effect; (iii) the headquarters of the Company are relocated, or the
Company requires the Executive to relocate, to a facility or location
more than fifty (50) miles from the Company's current location in
Denver, Colorado; or (iv) the Company materially breaches any
provision of this Agreement, which breach is not cured within thirty
(30) days after written notice thereof to the Board from the
Executive.
(e) OTHER POSITIONS. Upon termination of this Agreement by the
Executive, the Executive shall be deemed to have resigned from all
offices and directorships held by the Executive with the Company and
any subsidiaries or affiliates.
9. COMPENSATION UPON TERMINATION.
(a) If the Executive's employment is terminated as a result of
the Executive's death or is terminated by the Company as a result of
the Executive's Disability or for Cause, or is terminated by the
Executive without Good Reason, he, or his estate, shall be entitled
to:
(i) any base salary earned but not yet paid;
(ii) any bonus awarded pursuant to Section 5 of this
Agreement but not yet paid;
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<PAGE> 4
(iii) reimbursement in accordance with this Agreement of any
business expense incurred by the Executive but not yet paid; and
(iv) other benefits accrued and earned by the Executive
through the date of his death, Disability or termination in
accordance with applicable plans and programs of the Company.
(b) If the Executive's employment is terminated by the Company
without Cause (other than due to Disability or the Executive's death)
or is terminated by the Executive for Good Reason, he shall be
entitled to:
(i) his base salary, at the rate in effect on the date of
his termination of employment, for twelve (12) months following
the date of termination; provided that if such termination occurs
within twelve (12) months of the date hereof, the Executive shall
be entitled to his base salary, at the rate in effect on the date
of his termination of employment, for eighteen (18) months
following the date of termination (the "Severance Period"). In
either event, such amounts shall be payable in accordance with
the regular payroll practices of the Company;
(ii) any bonus earned or guaranteed pursuant to Section 5 of
this Agreement but not yet paid, payable in accordance with the
regular payroll practices of the Company;
(iii) continued participation in all employee benefit plans
or programs in which he was participating on the date of his
termination of employment, until the earlier of:
(A) the end of the Severance Period, or
(B) the date he receives equivalent coverage and
benefits under the plans and programs of a subsequent
employer;
(iv) reimbursement in accordance with this Agreement of any
business expenses incurred by the Executive but not yet paid to
him on the date of his termination of employment; and
(v) other benefits accrued and earned by the Executive
through the date of his termination in accordance with the
applicable plans and programs of the Company.
(c) Any amounts due under this Section 9 are in the nature of
severance payments or liquidated damages or both, and they are not in
the nature of a penalty.
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<PAGE> 5
10. COMPENSATION UPON FAILURE OF THE COMPANY TO RENEW THE TERM OF
EMPLOYMENT. In the event of the failure of the Company to renew the Executive's
employment pursuant to Section 2 above, the Executive shall be entitled to
severance compensation as follows:
(a) his base salary, at the rate in effect on the date of the
expiration of his Term of Employment, for twelve (12) months, payable
in accordance with the regular payroll practices of the Company;
(b) any bonus earned or awarded pursuant to Section 5 of this
Agreement but not yet paid, payable in accordance with the regular
payroll practices of the Company;
(c) continued participation in all employee benefit plans or
programs in which he was participating on the date of the expiration
of his Term of Employment, until the earlier of:
(i) the first anniversary of the date of the expiration of
his Term of Employment, or
(ii) the date he receives equivalent coverage and benefits
under the plans and programs of a subsequent employer;
(d) reimbursement in accordance with this Agreement of any
business expenses incurred by the Executive but not yet paid to him on
the date of the expiration of his Term of Employment; and
(e) other benefits accrued and earned by the Executive through
the date of the expiration of his Term of Employment in accordance
with the applicable plans and programs of the Company.
11. COVENANTS AND CONFIDENTIAL INFORMATION.
(a) The Executive agrees that so long as he is employed by the
Company and for a period of one (1) year thereafter and, as to
subsection 11(a)(iv) below, at any time after the Term of Employment
he will not, directly or indirectly, do or suffer any of the
following:
(i) Own, manage, control or participate in the ownership,
management or control of; or be employed or engaged by or
otherwise affiliated or associated as a consultant, independent
contractor or otherwise with, any corporation, partnership,
proprietorship, firm, association or other business entity other
than Consolidated and its subsidiaries and affiliates or
otherwise engage in any business that is engaged in any manner
in, or otherwise competes with, the business of KBKids.com or any
of its subsidiaries (as conducted on the date the Executive
ceases to be employed by the Company in any capacity, including
as a consultant) in any state in the United States or any foreign
country in which KBKids.com or its subsidiaries are then doing
business and then only with respect to the business of KBKids.com
or its subsidiaries then being conducted in such states or
countries; provided, however, that the
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<PAGE> 6
ownership of not more than 1% of the stock of any publicly traded
corporation shall not be deemed a violation of this covenant.
(ii) Induce any person who is an employee, officer, agent,
customer or supplier of KBKids.com or any of its subsidiaries to
terminate said relationship.
(iii) Solicit or direct business of any current or
prospective customers of KBKids.com or its subsidiaries, who are
current or prospective customers during the Term of Employment,
in competition with any product or service being offered by
KBKids.com or its subsidiaries, either for himself or for any
other individual or entity or advise any person or entity with
respect thereto. As used herein, "customer" means any customer of
KBKids.com or its subsidiaries whose identity the Executive
learned through his employment with the Company or with whom the
Executive and/or KBKids.com had business contact with respect to
the business of the Company during the twelve (12) month period
immediately before the Executive's employment with the Company
terminated.
(iv) Disclose, divulge, discuss, copy or otherwise use or
suffer to be used in any manner in competition with, or contrary
to the interests of; the Company or its subsidiaries, the
customer lists, product research or engineering data,
requirements, prices or other trade secrets of the Company or its
subsidiaries, it being acknowledged by the Executive that all
such information regarding the business of the Company and its
subsidiaries, compiled or obtained by, or furnished to, the
Executive while the Executive shall have been employed by or
associated with the Company is confidential information and the
Company's exclusive property. Upon termination of this Agreement,
Executive shall promptly return to the Company all books,
manuals, reports, client and customer lists, keys and other
materials referred to above and any other materials that belong
to the Company.
(b) All business ideas, concepts, inventions, improvements and
developments made or conceived by the Executive during the Term of
Employment and relating to the business of the Company or to any
business or product the Company is actively considering entering or
developing, shall become and remain the exclusive property of the
Company, its successors and assigns.
(c) The Executive expressly agrees and understands that the
remedy at law for any breach by him of this Section 11 will be
inadequate and that the damages flowing from such breach are not
readily susceptible of being measured in monetary terms. Accordingly,
it is acknowledged that upon adequate proof of the Executive's
violation of any legally enforceable provision of this Section 11, the
Company shall be entitled to seek immediate injunctive relief and may
obtain a temporary order restraining any threatened or further breach.
Nothing in this Section 11 shall be deemed to limit the Company's
remedies at law or in equity for any breach by the Executive of any of
the provisions of this Section 11 that may be pursued or availed of by
the Company.
(d) In the event that the Executive shall violate any legally
enforceable provision of this Section 11 as to which there is a
specific time period during which he is prohibited
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<PAGE> 7
from taking certain actions or from engaging in certain activities, as
set forth in such provision, then such violation shall toll the
running of that time period from the date of its commencement until
the date of its cessation.
(e) The Executive has carefully considered the nature and extent
of the restrictions upon him and the rights and remedies conferred
upon the Company under this Section 11, and hereby acknowledges and
agrees that the same are reasonable in time and territory, are
designed to eliminate competition that would otherwise be unfair to
the Company, do not stifle the inherent skill and experience of the
Executive, would not operate as a bar to the Executive's sole means of
support, are fully required to protect the legitimate interests of the
Company and do not confer a benefit upon the Company disproportionate
to the detriment to the Executive.
12. WITHHOLDING TAXES. All payments to the Executive or his beneficiary
shall be subject to withholding on account of federal, state and local taxes as
required by law. If any payment hereunder is insufficient to provide the amount
of such taxes required to be withheld, the Company may withhold such taxes from
any other payment due the Executive or his beneficiary. In the event all cash
payments due the Executive are insufficient to provide the required amount of
such withholding taxes, the Executive or his beneficiary, within five days after
written notice from the Company, shall pay to the Company the amount of such
withholding taxes in excess of all cash payments due the Executive or his
beneficiary.
13. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective successors, heirs
(in the case of the Executive) and assigns. No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred pursuant
to (a) a merger or consolidation in which the Company is not the continuing
entity or (b) a sale or liquidation of all or substantially all of the assets
of the Company, provided that the assignee or transferee is the successor to all
or substantially all of the assets of the Company and such assignee or
transferee assumes the liabilities, obligations and duties of the Company, as
contained in this Agreement, either contractually or as a matter of law. The
Company further agrees that, in the event of a sale of assets or liquidation as
described in the preceding sentence, it will use its best efforts to cause such
assignee or transferee expressly to assume the liabilities, obligations and
duties of the Company hereunder. No obligations of the Executive under this
Agreement may be assigned or transferred by the Executive.
14. ENTIRE AGREEMENT. Except to the extent otherwise provided herein,
this Agreement contains the entire understanding and agreement between the
Parties concerning the subject matter hereof and supersedes any prior
agreements, whether written or oral, between the Parties concerning the subject
matter hereof.
15. AMENDMENT OR WAIVER. No provision in this Agreement may be amended
unless such amendment is agreed to in writing and signed by both the Executive
and an authorized officer of the Company. No waiver by either Party of any
breach by the other Party of any condition or provision contained in this
Agreement to be performed by such other Party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver
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<PAGE> 8
must be in writing and signed by the Executive or an authorized officer of the
Company, as the case may be.
16. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.
17. SURVIVORSHIP. The respective rights and obligations of the Parties
hereunder shall survive any termination of the Executive's employment with the
Company to the extent necessary to the intended preservation of such rights and
obligations as described in this Agreement.
18. GOVERNING LAW. ThIs Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of Ohio, without
reference to principles of conflict of laws.
19. NOTICES. Any notice given to either Party shall be in writing and
shall be deemed to have been given when delivered personally or one (1) day
after having been sent by overnight courier service or three (3) days after
having been sent by certified or registered mail, postage prepaid, return
receipt requested, duly addressed to the Party concerned at the address
indicated below or to such changed address as such Party may subsequently give
such notice of:
If to the Company or the Board KBKids.com LLC/K B Toy of
or the Board of Directors: Massachusetts, Inc.
c/o Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228-0512
Attention: General Counsel
With a copy to: Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP Tower
200 Public Square
Cleveland, Ohio 44114
Attention: Michael Wager, Esq.
If to the Executive: Michael J. Wagner
77 Cherry Hills Farm Drive
Englewood, CO 80110-7113
20. HEADINGS. The headings of the sections contained in this Agreement
are for convenience only and shall not be deemed to control or affect the
meaning or construction of any provision of this Agreement.
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<PAGE> 9
21. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date and year first above written.
KBKIDS.COM LLC
By: /s/Srikant Srinivasan
----------------------
Srikant Srinivasan
Chief Executive Officer
K B TOY OF MASSACHUSETTS, INC.
By: /s/Albert J. Bell
----------------------
Albert J. Bell
Executive Vice President
/s/Michael J. Wagner
----------------------
MICHAEL J. WAGNER
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<PAGE> 1
Exhibit 10.14
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), dated as of June 25, 1999,
between KBKids.com LLC, an Ohio limited liability company (together with its
successors and assigns permitted under this Agreement, the "Company"), and Shawn
Davison (the "Employee").
RECITALS
A. In connection with the Contribution Agreement by and among KB Online
Holdings LLC, BrainPlay.com, Inc., and KBKids.com LLC, dated as of May 18, 1999
(the "Contribution Agreement"), the Employee will become an employee of the
Company;
B. The Company and the Employee desire to enter into an employment
arrangement;
C. The Company has determined that it is in the best interests of the
Company and its equityholders to enter into this Agreement setting forth the
obligations and duties of both the Company and the Employee; and
D. The Company wishes to assure itself of the services of the Employee
for the period hereinafter provided, and the Employee is willing to be employed
by the Company for said period, upon the terms and conditions provided in this
Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Employee (individually, a
"Party" and together, the "Parties") agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Employee, and
the Employee hereby agrees to serve the Company, on the terms and conditions set
forth herein.
2. TERM. The term of this Employment Agreement shall begin on the date
hereof and shall continue until terminated as hereinafter provided (the "Term of
Employment").
3. POSITION AND DUTIES.
(a) The Employee shall serve as Vice President - Technology of
the Company, and in such other capacity or capacities as the Chief
Executive Officer ("CEO") or Board of Managers (the "Board") of the
Company shall reasonably determine, without additional compensation
therefor.
(b) The Employee shall devote his full time and best efforts to
his employment and perform diligently such duties as the CEO or the
Board shall reasonably determine. The Employee shall devote his entire
working time and attention to the performance of his responsibilities
hereunder.
4. BASE SALARY. The Employee shall receive from the Company an annual
base salary, payable in accordance with the regular payroll practices of the
Company, of One Hundred Twenty
<PAGE> 2
Thousand Dollars ($120,000). During the Term of Employment, the Board shall
review the base salary no less often than annually for possible increase, any
such increase to be based on the performance of the Employee.
5. EXPENSE REIMBURSEMENT. During the Term of Employment, the Employee
shall be entitled to prompt reimbursement by the Company for all reasonable
out-of-pocket expenses incurred by him in performing services under this
Agreement, upon submission of such accounts and records as may be required under
Company policy.
6. EFFECT OF AGREEMENT ON OTHER BENEFITS. During the Term of
Employment, the Employee will be entitled to such medical, dental, life
insurance, 401(k), option plan and such other similar employment privileges and
benefits as are afforded generally from time to time by the Company and two (2)
weeks paid vacation time per year to be taken at times mutually acceptable to
the Company and the Employee. The Employee shall be awarded options to acquire
the number of Units in the Company set forth on EXHIBIT A pursuant to a grant
under the Company's 1999 Option Plan on terms and conditions to be approved by
the Board.
7. TERMINATION OF EMPLOYMENT. The Employee's employment may be
terminated under the following circumstances:
(a) DEATH. The Employee's employment is terminated upon his
death.
(b) DISABILITY. The Employee's employment may be terminated by
the Company, due to illness or other physical or mental disability of
the Employee, resulting in his inability to perform substantially his
duties under this Agreement for a period of one hundred eighty (180)
or more consecutive days or for two hundred seventy (270) days in the
aggregate during any consecutive twelve (12) month period
("Disability").
(c) NOTICE. The Employee's employment may be terminated by either
Party upon thirty (30) days written notice to the other Party.
(d) OTHER POSITIONS. Upon termination of this Agreement by the
Employee, the Employee shall be deemed to have resigned from all
offices and directorships, if applicable, held by the Employee with
the Company or any of its affiliates or subsidiaries.
8. COMPENSATION UPON TERMINATION.
(a) If the Employee's employment is terminated as a result of the
Employee's death or Disability, the Employee, or his estate, shall be
entitled to:
(i) any base salary earned but not yet paid, payable in
accordance with the regular payroll practices of the Company;
(ii) reimbursement in accordance with this Agreement of any
business expense incurred by the Employee but not yet paid; and
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<PAGE> 3
(iii) other benefits accrued and earned by the Employee
through the date of his death or Disability in accordance with
the applicable plans and programs of the Company.
(b) If the Employee's employment is terminated by the Company or by the
Employee upon thirty (30) days written notice, the Employee shall be entitled
to:
(i) his base salary, at the rate in effect on the date of
his termination of employment, until the earlier of (A) the first
anniversary of the date of termination or (B) the date he begins
working for a subsequent employer not in violation of Section 9
of this Agreement (the "Severance Period"), payable in accordance
with the regular payroll practices of the Company;
(ii) continued participation in all employee benefit plans
or programs in which he was participating on the date of his
termination of employment, until the end of the Severance Period;
(iii) reimbursement in accordance with this Agreement of any
business expenses incurred by the Employee but not yet paid to
him on the date of his termination of employment; and
(iv) other benefits accrued and earned by the Employee
through the date of his termination in accordance with the
applicable plans and programs of the Company.
(c) Any amounts due under this Section 8 are in the nature of severance
payments or liquidated damages or both, and shall fully compensate the Employee
and his dependents or beneficiaries, as the case may be, for any and all direct
damages and consequential damages that any of them may suffer as a result of
termination of the Employee's employment, and they are not in the nature of a
penalty.
9. COVENANTS AND CONFIDENTIAL INFORMATION.
(a) The Employee agrees that so long as he is employed by the Company
and for a period of one (1) year thereafter and, as to subsection 9(a)(v) below,
at any time after the Term of Employment he will not, directly or indirectly, do
or suffer any of the following:
(i) Own, manage, control or participate in the ownership,
management or control of, or be employed or engaged by or otherwise
affiliated or associated as a consultant, independent contractor or
otherwise with, any other corporation, partnership, proprietorship,
firm, association or other business entity or otherwise engage in any
business that is engaged in any manner in, or otherwise competes with,
the business of the Company or any of the Company's affiliates or
subsidiaries (as conducted on the date the Employee ceases to be
employed by the Company in any capacity, including as a consultant)
in any state in the United States or any foreign
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<PAGE> 4
country in which the Company or such affiliates or subsidiaries are then doing
business and then only with respect to the business of the Company, its
affiliates or subsidiaries then being conducted in such states or countries;
provided, however, that the ownership of not more than 1% of the stock of any
publicly traded corporation shall not be deemed a violation of this covenant.
(ii) Employ, assist in employing, or otherwise associate in
business with any present or former or future employee, officer or
agent of the Company or any of the Company's affiliates or
subsidiaries.
(iii) Induce any person who is an employee, officer, agent,
customer or supplier of the Company or any of the Company's affiliates
or subsidiaries to terminate said relationship.
(iv) Solicit or direct business of any current or prospective
customers of the Company, its affiliates or subsidiaries, who are
current or prospective customers during the Term of Employment, either
for himself or for any other individual or entity or advise any person
or entity with respect thereto. As used herein, "customer" means any
customer of the Company or its affiliates or subsidiaries whose
identity the Employee learned through his employment with the Company
or with whom the Employee and/or the Company had business contact
during the twelve (12) month period immediately before the Employee's
employment with the Company terminated.
(v) Disclose, divulge, discuss, copy or otherwise use or suffer
to be used in any manner in competition with, or contrary to the
interests of, the Company or any of the Company's affiliates or
subsidiaries, the customer lists, product research or engineering
data, requirements, prices or other trade secrets of the Company or
any of the Company's affiliates or subsidiaries, it being acknowledged
by the Employee that all such information regarding the business of
the Company and the Company's affiliates or subsidiaries, compiled or
obtained by, or furnished to, the Employee while the Employee shall
have been employed by or associated with the Company is confidential
information and the Company's exclusive property; provided, however,
that this prohibition will not apply to any item of confidential
information which is otherwise publicly available or becomes so other
than as a result of the Employee's violation of this Agreement. Upon
termination of this Agreement, Employee shall promptly return to the
Company all books, manuals, reports, client and customer lists, keys
and other materials referred to above and any other materials that
belong to the Company.
(b) All business ideas, concepts, inventions, improvements and
developments made or conceived by the Employee during the Term of Employment and
relating to the business of the Company or to any business or product the
Company is considering entering or developing, shall become and remain the
exclusive property of the Company, its successors and assigns. The Employee will
promptly disclose in writing to the Company all such ideas,
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<PAGE> 5
concepts, inventions, improvements and developments, and will
cooperate fully in confirming, protecting and obtaining legal
protection of the Company's ownership rights.
(c) The Employee expressly agrees and understands that the
remedy at law for any breach by him of this Section 9 will be
inadequate and that the damages flowing from such breach are not
readily susceptible of being measured in monetary terms. Accordingly,
it is acknowledged that upon adequate proof of the Employee's
violation of any legally enforceable provision of this Section 9,
the Company shall be entitled to seek immediate injunctive relief and
may obtain a temporary order restraining any threatened or further
breach. Nothing in this Section 9 shall be deemed to limit the
Company's remedies at law or in equity for any breach by the Employee
of any of the provisions of this Section 9 that may be pursued or
availed of by the Company.
(d) In the event that the Employee shall violate any legally
enforceable provision of this Section 9 as to which there is a
specific time period during which he is prohibited from taking
certain actions or from engaging in certain activities, as set forth
in such provision, then such violation shall toll the running of that
time period from the date of its commencement until the date of its
cessation.
(e) The Employee has carefully considered the nature and
extent of the restrictions upon him and the rights and remedies
conferred upon the Company under this Section 9, and hereby
acknowledges and agrees that the same are reasonable in time and
territory, are designed to eliminate competition that would otherwise
be unfair to the Company, do not stifle the inherent skill and
experience of the Employee, would not operate as a bar to the
Employee's sole means of support, are fully required to protect the
legitimate interests of the Company and do not confer a benefit upon
the Company disproportionate to the detriment to the Employee.
10. WITHHOLDING TAXES. All payments to the Employee or his beneficiary
shall be subject to withholding on account of federal, state and local taxes as
required by law. If any payment hereunder is insufficient to provide the amount
of such taxes required to be withheld, the Company may withhold such taxes from
any other payment due the Employee or his beneficiary. In the event all cash
payments due the Employee are insufficient to provide the required amount of
such withholding taxes, the Employee or his beneficiary, within five days after
written notice from the Company, shall pay to the Company the amount of such
withholding taxes in excess of all cash payments due the Employee or his
beneficiary.
11. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective successors, heirs
(in the case of the Employee) and assigns. No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred pursuant
to (a) a merger or consolidation in which the Company is not the continuing
entity or (b) a sale or liquidation of all or substantially all of the assets of
the Company, provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either
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<PAGE> 6
contractually or as a matter of law. The Company further agrees that, in the
event of a sale of assets or liquidation as described in the preceding sentence,
it will use its best efforts to cause such assignee or transferee expressly to
assume the liabilities, obligations and duties of the Company hereunder. No
obligations of the Employee wider this Agreement may be assigned or transferred
by the Employee.
12. ENTIRE AGREEMENT. Except to the extent otherwise provided herein,
this Agreement contains the entire understanding and agreement between the
Parties concerning the subject matter hereof and supersedes any prior
agreements, whether written or oral, between the Parties concerning the subject
matter hereof.
13. AMENDMENT OR WAIVER. No provision in this Agreement may be amended
unless such amendment is agreed to in writing and signed by both the Employee
and an authorized officer of the Company No waiver by either Party of any breach
by the other Party of any condition or provision contained in this Agreement to
be performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Employee or an authorized
officer of the Company, as the case may be.
14. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.
15. SURVIVORSHIP. The respective rights and obligations of the Parties
hereunder shall survive any termination of the Employee's employment with the
Company to the extent necessary to the intended preservation of such rights and
obligations as described in this Agreement.
16. GOVERNING LAW. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of Colorado, without
reference to principles of conflict of laws.
17. NOTICES. Any notice given to either Party shall be in writing and
shall be deemed to have been given when delivered personally or one (1) day
after having been sent by overnight courier service or three (3) days after
having been sent by certified or registered mail, postage prepaid, return
receipt requested, duly addressed to the Party concerned at the address
indicated below or to such changed address as such Party may subsequently give
such notice of:
If to the Company or the Board: KBKids.com LLC
475 Seventeenth Street
Suite 750
Denver, Colorado 80202
Attn: Chief Executive Officer
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<PAGE> 7
If to the Employee: Shawn Davison
7746 W. 81st Place
Arvada, CO 80005
18. HEADINGS. The headings of the sections contained in this Agreement
are for convenience only and shall not be deemed to control or affect the
meaning or construction of any provision of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date and year first above written.
KBKIDS.COM LLC
By: /s/Srikant Srinivasan
-----------------------
Srikant Srinivasan
Chief Executive Officer
EMPLOYEE
/s/ Shawn Davison
--------------------------
Shawn Davison
Vice President - Technology
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<PAGE> 8
EXHIBIT A
The Employee shall be awarded options to acquire 119,000 Units in the Company.
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<PAGE> 1
Exhibit 10.15
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), dated as of June 25, 1999,
between KBKids.com LLC, an Ohio limited liability company (together with its
successors and assigns permitted under this Agreement the "Company"), and John
Jolly (the "Employee").
RECITALS
A. In connection with the Contribution Agreement by and among KB Online
Holdings LLC, BrainPlay.com, Inc., and KBKids.com LLC, dated as of May 18, 1999
(the "Contribution Agreement"), the Employee will become an employee of the
Company;
B. The Company and the Employee desire to enter into an employment
arrangement;
C. The Company has determined that it is in the best interests of the
Company and its equityholders to enter into this Agreement setting forth the
obligations and duties of both the Company and the Employee; and
D. The Company wishes to assure itself of the services of the Employee
for the period hereinafter provided, and the Employee is willing to be employed
by the Company for said period, upon the terms and conditions provided in this
Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Employee (individually, a
"Party" and together, the "Parties") agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Employee, and
the Employee hereby agrees to serve the Company, on the terms and conditions set
forth herein.
2. TERM. The term of this Employment Agreement shall begin on the date
hereof and shall continue until terminated as hereinafter provided (the "Term of
Employment").
3. POSITION AND DUTIES.
(a) The Employee shall serve as Vice President - Operations
and Customer Care of the Company, and in such other capacity or
capacities as the Chief Executive Officer ("CEO") or Board of Managers
(the "Board") of the Company shall reasonably determine, without
additional compensation therefor.
(b) The Employee shall devote his full time and best efforts
to his employment and perform diligently such duties as the CEO or the
Board shall reasonably determine. The Employee shall devote his entire
working time and attention to the performance of his responsibilities
hereunder.
<PAGE> 2
4. BASE SALARY. The Employee shall receive from the Company an annual
base salary, payable in accordance with the regular payroll practices of the
Company, of One Hundred Twenty-Five Thousand Dollars ($125,000). During the Term
of Employment, the Board shall review the base salary no less often than
annually for possible increase, any such increase to be based on the performance
of the Employee.
5. BONUS. The Employee shall be eligible for an annual bonus based on
the achievement of certain objectives as set forth on Exhibit A. Any upward
adjustment of the bonus amount or reduction or waiver with respect to the
established objectives during the Term of Employment shall be at the sole
discretion of the Board.
6. EXPENSE REIMBURSEMENT. During the Term of Employment, the Employee
shall be entitled to prompt reimbursement by the Company for all reasonable
out-of-pocket expenses incurred by him in performing services under this
Agreement, upon submission of such accounts and records as may be required under
Company policy.
7. EFFECT OF AGREEMENT ON OTHER BENEFITS. During the Term of
Employment, the Employee will be entitled to such medical, dental, life
insurance, 401(k), option plan and such other similar employment privileges and
benefits as are afforded generally from time to time by the Company and two (2)
weeks paid vacation time per year to be taken at times mutually acceptable to
the Company and the Employee. The Employee shall be awarded options to acquire
the number of Units in the Company set forth on Exhibit B pursuant to a grant
under the Company's 1999 Option Plan on terms and conditions to be approved by
the Board.
8. TERMINATION OF EMPLOYMENT. The Employee's employment may be
terminated under the following circumstances:
(a) DEATH. The Employee's employment is terminated upon his
death.
(b) DISABILITY. The Employee's employment may be terminated by
the Company, due to illness or other physical or mental disability of
the Employee, resulting in his inability to perform substantially his
duties under this Agreement for a period of one hundred eighty (180) or
more consecutive days or for two hundred seventy (270) days in the
aggregate during any consecutive twelve (12) month period
("Disability").
(c) NOTICE. The Employee's employment may be terminated by
either Party upon thirty (30) days written notice to the other Party.
(d) OTHER POSITIONS. Upon termination of this Agreement by the
Employee, the Employee shall be deemed to have resigned from all
offices and directorships, if applicable, held by the Employee with the
Company or any of its affiliates or subsidiaries.
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<PAGE> 3
9. COMPENSATION UPON TERMINATION.
(a) If the Employee's employment is terminated as a result of
the Employee's death or Disability, the Employee, or his estate, shall
be entitled to:
(i) any base salary earned but not yet paid, payable
in accordance with the regular payroll practices of the
Company;
(ii) any bonus awarded pursuant to Section 5 of this
Agreement but not yet paid, payable in accordance with the
regular payroll practices of the Company;
(iii) reimbursement in accordance with this Agreement
of any business expense incurred by the Employee but not yet
paid; and
(iv) other benefits accrued and earned by the
Employee through the date of his death or Disability in
accordance with the applicable plans and programs of the
Company.
(b) If the Employee's employment is terminated by the Company
or by the Employee upon thirty (30) days written notice, the Employee
shall be entitled to:
(i) his base salary, at the rate in effect on the
date of his termination of employment, until the earlier of
(A) the first anniversary of the date of termination or (B)
the date he begins working for a subsequent employer not in
violation of Section 10 of this Agreement (the "Severance
Period"), payable in accordance with the regular payroll
practices of the Company;
(ii) any bonus awarded pursuant to Section 5 of this
Agreement but not yet paid and all or a portion of any bonus
that he would have received pursuant to Section 5 for the year
in which the termination occurred (pro rata, according to the
number of days the Employee was employed by the Company during
such year), in each case payable in accordance with the
regular payroll practices of the Company;
(iii) continued participation in all employee benefit
plans or programs in which he was participating on the date of
his termination of employment, until the end of the Severance
Period;
(iv) reimbursement in accordance with this Agreement
of any business expenses incurred by the Employee but not yet
paid to him on the date of his termination of employment; and
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<PAGE> 4
(v) other benefits accrued and earned by the Employee
through the date of his termination in accordance with the
applicable plans and programs of the Company.
(c) Any amounts due under this Section 9 are in the nature of
severance payments or liquidated damages or both, and shall fully
compensate the Employee and his dependents or beneficiaries, as the
case maybe, for any and all direct damages and consequential damages
that any of them may suffer as a result of termination of the
Employee's employment, and they are not in the nature of a penalty.
10. COVENANTS AND CONFIDENTIAL INFORMATION.
(a) period of The Employee agrees that so long as he is employed by the
Company and for of one (1) year thereafter and, as to subsection 10(a)(v) below,
at any time after the Term of Employment he will not, directly or indirectly, do
or suffer any of the following:
(i) Own, manage, control or participate in the ownership,
management or control of, or be employed or engaged by or otherwise
affiliated or associated as a consultant, independent contractor or
otherwise with, any other corporation, partnership, proprietorship,
firm, association or other business entity or otherwise engage in any
business that is engaged in any manner in, or otherwise competes with,
the business of the Company or any of the Company's affiliates or
subsidiaries (as conducted on the date the Employee ceases to be
employed by the Company in any capacity, including as a consultant) in
any state in the United States or any foreign country in which the
Company or such affiliates or subsidiaries arc then doing business and
then only with respect to the business of the Company, its affiliates
or subsidiaries then being conducted in such states or countries;
provided, however, that the ownership of not more than 1% of the stock
of any publicly traded corporation shall not be deemed a violation of
this covenant.
(ii) Employ, assist in employing, or otherwise associate in
business with any present or former or future employee, officer or
agent of the Company or any of the Company's affiliates or
subsidiaries.
(iii) Induce any person who is an employee, officer, agent,
customer or supplier of the Company or any of the Company's affiliates
or subsidiaries to terminate relationship.
(iv) Solicit or direct business of any current or prospective
customers of the Company, its affiliates or subsidiaries, who are
current or prospective customers during the Term of Employment, either
for himself or for any other individual or entity or advise any person
or entity with respect thereto. As used herein, "customer" means any
customer of the Company or its affiliates or subsidiaries whose
identity the
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<PAGE> 5
Employee learned through his employment with the Company or with whom
the Employee and/or the Company had business contact during the twelve
(12) month period immediately before the Employee's employment with the
Company terminated.
(v) Disclose, divulge, discuss, copy or otherwise use or
suffer to be used in any manner in competition with, or contrary to the
interests of, the Company or any of the Company's affiliates or
subsidiaries, the customer lists, product research or engineering data,
requirements, prices or other trade secrets of the Company or any of
the Company's affiliates or subsidiaries, it being acknowledged by die
Employee that all such information regarding the business of the
Company and the Company's affiliates or subsidiaries, compiled or
obtained by, or furnished to, the Employee while the Employee shall
have been employed by or associated with the Company is confidential
information and the Company's exclusive property; provided, however,
that this prohibition will not apply to any item of confidential
information which is otherwise publicly available or becomes so other
than as a result of the Employee's violation of this Agreement. Upon
termination of this Agreement, Employee shall promptly return to the
Company all books, manuals, reports, client and customer lists, keys
and other materials referred to above and any other materials that
belong to the Company.
(b) All business ideas, concepts, inventions, improvements and
developments made or conceived by the Employee during the Term of Employment and
relating to the business of the Company or to any business or product the
Company is considering entering or developing, shall become and remain the
exclusive property of the Company, its successors and assigns. The Employee will
promptly disclose in writing to the Company all such ideas, concepts,
inventions, improvements and developments, and will cooperate fully in
confirming, protecting and obtaining legal protection of the Company's ownership
rights.
(c) The Employee expressly agrees and understands that the remedy at
law for any breach by him of this Section 10 will be inadequate and that the
damages flowing from such breach are not readily susceptible of being measured
in monetary terms. Accordingly, it is acknowledged that upon adequate proof of
the Employee's violation of any legally enforceable provision of this Section
10, the Company shall be entitled to seek immediate injunctive relief and may
obtain a temporary order restraining any threatened or further breach. Nothing
in this Section 10 shall be deemed to limit the Company's remedies at law or in
equity for any breach by the Employee of any of the provisions of this Section
10 that may be pursued or availed of by the Company.
(d) In the event that the Employee shall violate any legally
enforceable provision of this Section 10 as to which there is a specific time
period during which he is prohibited from taking certain actions or from
engaging in certain activities, as set forth in such provision, then such
violation shall toll the running of that time period from the date of its
commencement until the date of its cessation.
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<PAGE> 6
(e) The Employee has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon the Company
under this Section 10, and hereby acknowledges and agrees that the same are
reasonable in time and territory, are designed to eliminate competition that
would otherwise be unfair to the Company, do not stifle the inherent skill and
experience of the Employee, would not operate as a bar to the Employee's sole
means of support, are fully required to protect the legitimate interests of the
Company and do not confer a benefit upon the Company disproportionate to the
detriment to the Employee.
11. WITHHOLDING TAXES. All payments to the Employee or his beneficiary
shall be subject to withholding on account of federal, state and local taxes as
required by law. If any payment hereunder is insufficient to provide the amount
of such taxes required to be withheld, the Company may withhold such taxes from
any other payment due the Employee or his beneficiary. In the event all cash
payments due the Employee are insufficient to provide the required amount of
such withholding taxes, the Employee or his beneficiary, within five days after
written notice from the Company, shall pay to the Company the amount of such
withholding taxes in excess of all cash payments due the Employee or his
beneficiary.
12. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective successors, heirs
(in the case of the Employee) and assigns. No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred pursuant
to (a) a merger or consolidation in which the Company is not the continuing
entity or (b) a sale or liquidation of all or substantially all of the assets of
the Company, provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law. The Company further
agrees that, in the event of a sale of assets or liquidation as described in the
preceding sentence, it will use its best efforts to cause such assignee
or transferee expressly to assume the liabilities, obligations and duties of the
Company hereunder. No obligations of the Employee under this Agreement may be
assigned or transferred by the Employee.
13. ENTIRE AGREEMENT. Except to the extent otherwise provided herein,
this Agreement contains the entire understanding and agreement between the
Parties concerning the subject matter hereof and supersedes any prior
agreements, whether written or oral, between the Parties concerning the subject
matter hereof.
14. AMENDMENT OR WAIVER. No provision in this Agreement may be amended
unless such amendment is agreed to in writing and signed by both the Employee
and an authorized officer of the Company. No waiver by either Party of any
breach by the other Party of any condition or provision contained in this
Agreement to be performed by such other Party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver
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<PAGE> 7
must be in writing and signed by the Employee or an authorized officer of the
Company, as the case may be.
15. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.
16. SURVIVORSHIP. The respective rights and obligations of the Parties
hereunder shall survive any termination of the Employee's employment with the
Company to the extent necessary to the intended preservation of such rights and
obligation as described in this Agreement.
17. GOVERNING LAW. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the state of Colorado, without
reference to principals of conflict of laws.
18. NOTICES. Any notice given to either Party shall be in writing and
shall be deemed to have been given when delivered personally or one (1) day
after having been sent by overnight courier service or three (3) days
after having been sent by certified or registered mail, postage prepaid, return
receipt requested, duly addressed to the Party concerned at the address
indicated below or to such changed address as such Party may subsequently give
such notice of:
If to the Company or the Board KBKids.com LLC
475 Seventeenth Street
Suite 750
Denver, Colorado 80202
Attn: Chief Executive Officer
If to the Employee John Jolly
900 Hawley Ct.
Chesapeake, VA 23322
19. HEADINGS. The headings of the sections contained in this Agreement
are for convenience only and shall not be deemed to control or affect the
meaning or construction of any provision of this Agreement.
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<PAGE> 8
20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date and year first above written.
KBKIDS.COM LLC
By: /s/ Srikant Srinivasan
----------------------------
Srikant Srinivasan
Chief Executive Officer
EMPLOYEE
/s/ John Jolly
--------------------------------
John Jolly
Vice President - Operations and
Customer Care
<PAGE> 9
EXHIBIT A
The Employee's annual bonus shall be an amount equal to $35,000 based on the
achievement of objectives to be mutually determined by the Company and the
Employee. The annual bonus shall be awarded by the Company within thirty (30)
days of the determination by the Company of whether such objectives were
achieved for the applicable fiscal year.
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<PAGE> 10
EXHIBIT B
The Employee shall be awarded options to acquire 75,000 Units in the Company.
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<PAGE> 1
Exhibit 10.17
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), dated as of June 25, 1999,
between KBKids.com LLC, an Ohio limited liability company (together with its
successors and assigns permitted under this Agreement, the "Company"), and Scott
K. Wilder (the "Employee").
R E C I T A L S
A. In connection with the Contribution Agreement by and among KB
Online Holdings LLC, BrainPlay.com, Inc., and KBKids.com LLC, dated as of May
18, 1999 (the "Contribution Agreement"), the Employee will become an employee of
the Company;
B. The Company and the Employee desire to enter into an employment
arrangement;
C. The Company has determined that it is in the best interests of
the Company and its equityholders to enter into this Agreement setting forth the
obligations and duties of both the Company and the Employee; and
D. The Company wishes to assure itself of the services of the
Employee for the period hereinafter provided, and the Employee is willing to be
employed by the Company for said period, upon the terms and conditions provided
in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Employee (individually, a
"Party" and together, the "Parties") agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Employee, and
the Employee hereby agrees to serve the Company, on the terms and conditions set
forth herein.
2. TERM. The term of this Employment Agreement shall begin on the
date hereof and shall continue until terminated as hereinafter provided (the
"Term of Employment").
3. POSITION AND DUTIES.
(a) The Employee shall serve as Vice President - Product
Development and Online Marketing of the Company, and in such other
capacity or capacities as the Chief Executive Officer ("CEO") or Board
of Managers (the "Board") of the Company shall reasonably determine,
without additional compensation therefor.
(b) The Employee shall devote his frill time and best efforts to
his employment and perform diligently such duties as the CEO or the
Board shall reasonably determine. The Employee shall devote his entire
working time and attention to the performance of his responsibilities
hereunder.
4. BASE SALARY. The Employee shall receive from the Company an
annual base salary, in accordance with the regular payroll practices of the
Company, of One Hundred Thirty
<PAGE> 2
Thousand Dollars ($130,000). During the Term of Employment, the Board shall
review the base salary no less often than annually for possible increase, any
such increase to be based on the performance of the Employee.
5. BONUS.
(a) ANNUAL. The Employee shall be eligible for an annual bonus as
set forth on EXHIBIT A. Any upward adjustment of the bonus amount or
reduction or waiver with respect to any established objectives during
the Term of Employment shall be at the sole discretion of the Board.
(b) FIRST ANNIVERSARY. The Employee shall be entitled to a
one-time lump sum cash bonus in the amount of Ten Thousand Dollars
($10,000) following the first anniversary of the date of this
Agreement; provided, however, that the Employee shall forfeit such
bonus in the event that the Employee terminates his employment with
the Company prior to the first anniversary date hereof.
6. EXPENSE REIMBURSEMENT. During the Term of Employment, the
Employee shall be entitled to prompt reimbursement by the Company for all
reasonable out-of-pocket expenses incurred by him in performing services under
this Agreement, upon submission of such accounts and records as may be required
under Company policy.
7. OTHER BENEFITS.
(a) GENERALLY. During the Term of Employment, the Employee will
be entitled to such medical, dental, life insurance, 401(k), option
plan and such other similar employment privileges and benefits as are
afforded generally from time to time by the Company and two (2) weeks
paid vacation time per year to be taken at times mutually acceptable
to the Company and the Employee. The Employee shall be awarded options
to acquire the number of Units in the Company set forth on Exhibit B
pursuant to a grant under the Company's 1999 Option Plan on terms and
conditions to be approved by the Board.
(b) RELOCATION COSTS. The Company shall promptly reimburse the
Employee for all reasonable out-of-pocket expenses incurred by him in
connection with his relocation from his current residence in San
Francisco, California to the Denver, Colorado area for the purpose of
performing services under this Agreement, upon submission of such
accounts and records as may be required under Company policy.
8. TERMINATION OF EMPLOYMENT. The Employee's employment may be
terminated under the following circumstances:
(a) DEATH. The Employee's employment is terminated upon his
death.
(b) DISABILITY. The Employee's employment may be terminated by
the Company, due to illness or other physical or mental disability of
the Employee, resulting in his inability
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<PAGE> 3
to perform substantially his duties under this Agreement for a period
of one hundred eighty (180) or more consecutive days or for two
hundred seventy (270) days in the aggregate during any consecutive
twelve (12) month period ("Disability").
(c) NOTICE. The Employee's employment may be terminated by either
Party upon thirty (30) days written notice to the other Party.
(d) OTHER POSITIONS. Upon termination of this Agreement by the
Employee, the Employee shall be deemed to have resigned from all
offices and directorships, if applicable, held by the Employee with
the Company or any of its affiliates or subsidiaries.
9. COMPENSATION UPON TERMINATION.
(a) If the Employee's employment is terminated as a result of the
Employee's death or Disability, the Employee, or his estate, shall be
entitled to:
(i) any base salary earned but not yet paid, payable in
accordance with the regular payroll practices of the Company;
(ii) any bonus awarded pursuant to Section 5 of this
Agreement but not yet paid, payable in accordance with the
regular payroll practices of the Company;
(iii) reimbursement in accordance with this Agreement of any
business expense incurred by the Employee but not yet paid; and
(iv) other benefits accrued and earned by the Employee
through the date of his death or Disability in accordance with
the applicable plans and programs of the Company.
(b) If the Employee's employment is terminated by the Company or
by the Employee upon thirty (30) days written notice, the Employee
shall be entitled to:
(i) his base salary, at the rate in effect on the date of
his termination of employment, until the earlier of (A) the first
anniversary of the date of termination or (B) the date he begins
working for a subsequent employer not in violation of Section 10
of this Agreement (the "Severance Period"), payable in accordance
with the regular payroll practices of the Company;
(ii) any annual bonus awarded and any first anniversary
bonus earned pursuant to Section 5 of this Agreement but not yet
paid and all or a portion of any annual bonus that he would have
received pursuant to Section 5 for the year in which the
termination occurred (pro rata, according to the number of days
the Employee was employed by the Company during such year), in
each case payable in accordance with the regular payroll
practices of the Company;
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<PAGE> 4
(iii) continued participation in all employee benefit plans
or programs in which he was participating on the date of his
termination of employment, until the end of the Severance Period;
(iv) reimbursement in accordance with this Agreement of any
business expenses incurred by the Employee but not yet paid to
him on the date of his termination of employment; and
(v) other benefits accrued and earned by the Employee
through the date of his termination in accordance with the
applicable plans and programs of the Company.
(c) Any amounts due under this Section 9 are in the nature of
severance payments or liquidated damages or both, and shall fully
compensate the Employee and his dependents or beneficiaries, as the
case may be, for any and all direct damages and consequential damages
that any of them may suffer as a result of termination of the
Employee's employment, and they are not in the nature of a penalty.
10. COVENANTS AND CONFIDENTIAL INFORMATION.
(a) The Employee agrees that so long as he is employed by the
Company and for a period of one (1) year thereafter and, as to
subsection 10(a)(v) below, at any time after the Term of Employment he
will not, directly or indirectly, do or suffer any of the following:
(i) Own, manage, control or participate in the ownership,
management or control of, or be employed or engaged by or
otherwise affiliated or associated as a consultant, independent
contractor or otherwise with, any other corporation, partnership,
proprietorship, firm, association or other business entity or
otherwise engage in any business that is engaged in any manner
In, or otherwise competes with, the business of the Company or
any of the Company's affiliates or subsidiaries (as conducted on
the date the Employee ceases to be employed by the Company in any
capacity, including as a consultant) in any state in the United
States or any foreign country in which the Company or such
affiliates or subsidiaries are then doing business and then only
with respect to the business of the Company, its affiliates or
subsidiaries then being conducted in such states or countries;
provided, however, that the ownership of not more than 1% of the
stock of any publicly traded corporation shall not be deemed a
violation of this covenant.
(ii) Employ, assist in employing, or otherwise associate in
business with any present or former or future employee, officer
or agent of the Company or any of the Company's affiliates or
subsidiaries.
(iii) Induce any person who is an employee, officer, agent,
customer or supplier of the Company or any of the Company's
affiliates or subsidiaries to terminate said relationship.
-4-
<PAGE> 5
(iv) Solicit or direct business of any current or
prospective customers of the Company, its affiliates or
subsidiaries, who are current or prospective customers during the
Term of Employment, either for himself or for any other
individual or entity or advise any person or entity with respect
thereto. As used herein, "customer" means any customer of the
Company or its affiliates or subsidiaries whose identity the
Employee learned through his employment with the Company or with
whom the Employee and/or the Company had business contact during
the twelve (12) month period immediately before the Employee's
employment with the Company terminated.
(v) Disclose, divulge, discuss, copy or otherwise use or
suffer to be used in any manner in competition with' or contrary
to the interests of; the Company or any of the Company's
affiliates or subsidiaries, the customer lists, product research
or engineering data, requirements, prices or other trade secrets
of the Company or any of the Company's affiliates or
subsidiaries, it being acknowledged by the Employee that all such
information regarding the business of the Company and the
Company's affiliates or subsidiaries, compiled or obtained by, or
furnished to, the Employee while the Employee shall have been
employed by or associated with the Company is confidential
information and the Company's exclusive property; provided,
however, that this prohibition will not apply to any item of
confidential information which is otherwise publicly available or
becomes so other than as a result of the Employee's violation of
this Agreement. Upon termination of this Agreement, Employee
shall promptly return to the Company all books, manuals, reports,
client and customer lists, keys and other materials referred to
above and any other materials that belong to the Company.
(b) All business ideas, concepts, inventions, improvements and
developments made or conceived by the Employee during the Term of
Employment and relating to the business of the Company or to any
business or product the Company is considering entering or developing,
shall become and remain the exclusive property of the Company, its
successors and assigns. The Employee will promptly disclose in writing
to the Company all such ideas, concepts, inventions, improvements and
developments, and will cooperate fully in confirming, protecting and
obtaining legal protection of the Company's ownership rights.
(c) The Employee expressly agrees and understands that the remedy
at law for any breach by him of this Section 10 will be inadequate and
that the damages flowing from such breach are not readily susceptible
of being measured in monetary terms. Accordingly, it is acknowledged
that upon adequate proof of the Employee's violation of any legally
enforceable provision of this Section 10, the Company shall be
entitled to seek immediate injunctive relief and may obtain a
temporary order restraining any threatened or further breach. Nothing
in this Section 10 shall be deemed to limit the Company's remedies at
law or in equity for any breach by the Employee of any of the
provisions of this Section 10 that may be pursued or availed of by the
Company.
-5-
<PAGE> 6
(d) In the event that the Employee shall violate any legally
enforceable provision of this Section 10 as to which there is a
specific time period during which he is prohibited from taking certain
actions or from engaging in certain activities, as set forth in such
provision, then such violation shall toll the running of that time
period from the date of its commencement until the date of its
cessation.
(e) The Employee has carefully considered the nature and extent
of the restrictions upon him and the rights and remedies conferred
upon the Company under this Section 10, and hereby acknowledges and
agrees that the same are reasonable in time and territory, are
designed to eliminate competition that would otherwise be unfair to
the Company, do not stifle the inherent skill and experience of the
Employee, would not operate as a bar to the Employee's sole means of
support, are fully required to protect the legitimate interests of the
- Company and do not confer a benefit upon the Company
disproportionate to the detriment to the Employee.
11. WITHHOLDING TAXES. All payments to the Employee or his
beneficiary shall be subject to withholding on account of federal, state and
local taxes as required by law. if any payment hereunder is insufficient to
provide the amount of such taxes required to be withheld, the Company may
withhold such taxes from any other payment due the Employee or his beneficiary.
In the event all cash payments due the Employee are insufficient to provide the
required amount of such withholding taxes, the Employee or his beneficiary,
within five days after written notice from the Company, shall pay to the Company
the amount of such withholding taxes in excess of all cash payments due the
Employee or his beneficiary.
12. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding
upon and inure to the benefit of the Parties and their respective successors,
heirs (in the case of the Employee) and assigns. No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred pursuant
to (a) a merger or consolidation in which the Company is not the continuing
entity or (b) a sale or liquidation of all or substantially all of the assets
of the Company, provided that the assignee or transferee is the successor to all
or substantially all of the assets of the Company and such assignee or
transferee assumes the liabilities, obligations and duties of the Company, as
contained in this Agreement, either contractually or as a matter of law. The
Company further agrees that, in the event of a sale of assets or liquidation as
described in the preceding sentence, it will use its best efforts to cause such
assignee or transferee expressly to assume the liabilities, obligations and
duties of the Company hereunder. No obligations of the Employee under this
Agreement may be assigned or transferred by the Employee.
13. ENTIRE AGREEMENT. Except to the extent otherwise provided herein,
this Agreement contains the entire understanding and agreement between the
Parties concerning the subject matter hereof and supersedes any prior
agreements, whether written or oral, between the Parties concerning the subject
matter hereof.
-6-
<PAGE> 7
14. AMENDMENT OR WAIVER. No provision in this Agreement may be
amended unless such amendment is agreed to in writing and signed by both the
Employee and an authorized officer of the Company. No waiver by either Party of
any breach by the other Party of any condition or provision contained in this
Agreement to be performed by such other Party shall be deemed a waiver of a
similar or dissimilar condition or provision at the same or any prior or
subsequent time. Any waiver must be in writing and signed by the Employee or an
authorized officer of the Company, as the case may be.
15. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.
16. SURVIVORSHIP. The respective rights and obligations of the
Parties hereunder shall survive any termination of the Employee's employment
with the Company to the extent necessary to the intended preservation of such
rights and obligations as described in this Agreement.
17. GOVERNING LAW. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of Colorado, without
reference to principles of conflict of laws.
18. NOTICES. Any notice given to either Party shall be in writing
and shall be deemed to have been given when delivered personally or one (1) day
after having been sent by overnight courier service or three (3) days alter
having been sent by certified or registered mall, postage prepaid, return
receipt requested, duly addressed to the Party concerned at the address
indicated below or to such changed address as such Party may subsequently give
such notice of:
If to the Company or the Board: KBKids.com LLC
475 Seventeenth Street
Suite 750
Denver, Colorado 80202
Attn: Chief Executive Officer
If to the Employee: Scott K. Wilder
-----------------------------
-----------------------------
19. HEADINGS. The headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
-7-
<PAGE> 8
20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date and year first above written.
KBKIDS.COM LLC
By: /s/ Srikant Srinivasan
--------------------------------
Srikant Srinivasan
Chief Executive Officer
EMPLOYEE
/s/ Scott K. Wilder
-----------------------------------
Scott K. Wilder
Vice President - Product Development
and Online Marketing
-8-
<PAGE> 9
EXHIBIT A
The Employee's annual bonus for the first year of this Agreement shall be an
amount equal to .06% of the "Net Revenues" of KBKids.com LLC for such fiscal
year. Thereafter, the Employee's annual bonus shall be determined by the Board.
The "Net Revenues" shall mean the revenues received during the applicable fiscal
year less returns, rebates and discounts for such fiscal year. The annual bonus
shall be awarded by the Company within thirty (30) days of the determination by
the Company of the "Net Revenues" for the applicable fiscal year.
-9-
<PAGE> 10
EXHIBIT B
The Employee shall be awarded options to acquire 200,000 Units in the Company.
-10-
<PAGE> 1
Exhibit 10.18
July 7th, 1999
Cecilia Atkinson
4861 Dakota Boulevard
Boulder, CO 80304
Re: TERMS OF EMPLOYMENT
Dear Cecilia:
This letter will confirm the terms of your employment with KBkids.com LLC.
Such terms of employment are as follows:
1. TITLE AND RESPONSIBILITIES. You will serve in the position of Vice
President, Marketing. You will assume and discharge such responsibilities as are
commensurate with such position and as the CEO of KBKids.com may direct. During
the term of your employment, you shall devote your full time, skill and
attention to your duties and responsibilities, shall perform them faithfully,
diligently and competently, and shall use your best efforts to further the
business of KBkids.com and its affiliates. In addition, you shall comply with
and be bound by the operating policies, procedures and practices of KBkids.com,
in effect from time to time during your employment.
2. AT WILL EMPLOYMENT. You agree that your employment with KBkids.com
is for an unspecified duration that constitutes at-will employment, and that
either you or KBkids.com can terminate this relationship at any time, with or
without cause.
3. COMPENSATION.
(a) In consideration of your services, you will be paid an annualized
salary of U.S. $127,500, effective on your first day (yet to be determined)
payable twice a month in accordance with KBkids.com's standard payroll
practices.
(b) In addition to your base compensation you will be eligible for an
annual bonus based on the achievement of the Company's planned sales goals. You
will receive the full amount of $35,000, if the Company achieves 100% of its
sales goals. The annual bonus shall be awarded by the Company within
thirty (30) days of the determination by the Company of achieving the sales
goals for the applicable fiscal year.
<PAGE> 2
[07/07/99
Page 2
(c) The Board of Directors shall consider, at its next meeting, the
grant of an option to purchase 125,000 membership units in KBkids.com LLC at
the exercise price of $2.85. These units shall vest over four years starting on
the Effective Date, with no units vesting if your employment with KBkids.com
terminates within a year of the Effective Date. Such grant is contingent upon
Board approval.
4. OTHER BENEFITS. You will be entitled to receive the standard
employee benefits, as well as the Vice President level benefits, made available
by KBkids.com to its employees to the full extent of your eligibility therefor.
You shall be entitled to one day of paid time off per month, which shall be
consistent with KBkids.com's PTO policy. During your employment, you shall be
permitted, to the extent eligible, to participate in any group medical
insurance plans, 401(k) plan, or similar benefit plan of KBkids.com that is
available from time to time to other comparable employees. Participation in any
such plan shall be consistent with your rate of compensation to the extent that
compensation is a determinative factor with respect to coverage under any such
plan.
KBkids.com shall reimburse you for all reasonable business expenses
actually incurred or paid by you in the performance of your services on behalf
of KBkids.com, in accordance with the company's expense reimbursement policy as
from time to time in effect.
5. CONFIDENTIAL INFORMATION. You agree that your employment is
contingent upon your execution and delivery to KBkids.com of a Nondisclosure
and Assignment of Inventions Agreement in the standard form utilized by
KBkids.com.
6. BACKGROUND CHECK. Employment is contingent on receiving a
satisfactory result from a confidential background check conducted by
KBkids.com.
7. NO CONFLICTING EMPLOYMENT. You agree that, during the term of
your employment with KBkids.com, you will not engage in any other employment,
occupation, consulting or other business activity related to the business in
which KBkids.com is now involved or becomes involved during the term of your
employment, nor will you engage in any other activities that conflict with your
obligations to KBkids.com.
<PAGE> 3
[07/07/99
Page 3
8. GENERAL PROVISIONS.
(a) This Offer Letter will be governed by the laws of Colorado,
applicable to agreements made and to be performed entirely within Colorado.
(b) This Offer Letter sets forth the entire offer of KBkids.com
relating to your potential employment and supersedes all prior verbal
discussions between us.
(c) If one or more of the provisions in this letter are deemed
void by law, then the remaining provisions will continue in full force and
effect.
(d) The terms of this Offer Letter, when signed by you, will be
binding upon your heirs, executors, administrators and other legal
representatives and will be for the benefit of KBkids.com and successors and
assigns.
(e) You warrant that there is no agreement between you and any
other party that would conflict with your obligations under this agreement or
otherwise as an employee of KBkids.com.
We are excited about having you join KBkids.com. If the foregoing
accurately sets forth our mutual understanding and agreement regarding the terms
of your employment, please acknowledge the same and accept this offer by signing
and returning the enclosed copy of this letter, whereupon it shall become a
binding agreement for such employment.
Very truly yours,
KBkids.com LLC
By: /s/ Srikant Srinivasan
-----------------------------
Its: CEO
<PAGE> 4
[07/07/99
Page 4
ACCEPTANCE:
I accept the terms of my employment with KBkids.com as set forth
herein. I understand that this Offer Letter does not constitute a contract of
employment for any specified period of time, and that the employment
relationship may be terminated by either party at any time.
/s/ Cecilia Atkinson
- -------------------------------
By
Cecilia Atkinson
- -------------------------------
Print Name
7/7/99
- -------------------------------
Date
<PAGE> 1
Exhibit 10.19
[LOGO KBkids.com]
October 7, 1999
Marty Smuin
22403 Riverside Drive
Cupertino,CA 95014
RE: TERMS OF EMPLOYMENT
Dear Marty:
This letter will confirm the terms of your employment with
KBkids.com LLC. Such terms of employment are as follows:
1. TITLE AND RESPONSIBILITIES. You will serve in the position
of Vice President, Business Development. You will assume and discharge such
responsibilities as are commensurate with such position and as the Founder and
CEO of KBkids.com may direct. During the term of your employment, you shall
devote your full time, skill and attention to your duties and responsibilities,
shall perform them faithfully, diligently and competently, and shall use your
best efforts to further the business of KBkids.com and its affiliates. In
addition, you shall comply with and be bound by the operating policies,
procedures and practices of KBkids.com, in effect from time to time during your
employment.
2. AT-WILL EMPLOYMENT. You agree that your employment with
KBkids.com is for an unspecified duration that constitutes at-will employment,
and that either you or KBkids.com can terminate this relationship at any time,
with or without cause.
3. COMPENSATION.
(a) In consideration of your services, you will be paid an
annualized salary of U.S. $150,000, effective on your
start date, November 1, 1999.
(b) You will receive a lump sum signing bonus of $20,000 t0
be paid at the end of each quarter after your start
date, for three consecutive quarters, upon the start
date. This lump sum signing bonus is subject to all
applicable tax withholdings.
(c) In addition, you will be eligible for an annual bonus
of up to 25% of your base compensation based on the
achievement of certain goals. These goals will be
determined jointly by you and the Founder and CEO at
the time of your employment. This bonus will be
pro-rated for your first year of employment.
475 17th Street, Suite 750 . Denver, CO 80202 . Tel. 303.228.9000
Fax. 303.382.1185
<PAGE> 2
[LOGO KBkids.com]
[10/12/99
Page 2
(d) The Board of Directors shall consider, at its next
meeting, the grant of an option to purchase 150,000
membership units in KBkids.com LLC. These units shall
vest over four years starting on the Effective Date
(November 1, 1999), with no units vesting if your
employment with KBkids.com terminates within a year of
the Effective Date. Such grant is contingent upon Board
approval.
4. OTHER BENEFITS. You will be entitled to receive the
standard employee benefits, as well as the Vice President level benefits, made
available by KBkids.com to its employees to the full extent of your eligibility
therefor. During your employment, you shall be permitted, to the extent
eligible, to participate in any group medical insurance plans, 401(k) plan, or
similar benefit plan of KBkids.com that is available from time to time to other
comparable employees. Participation in any such plan shall be consistent with
your rate of compensation to the extent that compensation is a determinative
factor with respect to coverage under any such plan.
KBkids.com shall reimburse you for all reasonable business expenses actually
incurred or paid by you in the performance of your services on behalf of
KBkids.com, in accordance with the company's expense reimbursement policy as
from time to time in effect.
5. RELOCATION ASSISTANCE.
(a) KBkids.com shall arrange for a professional household
goods carrier to provide moving of your household
belongings. KBkids.com will pay for the normal packing,
loading and unloading, as well as the transportation of
physical goods. At the time of your primary household
move, up to ten months from your start date, KBkids.com
will pay direct to the van line moving company.
(b) You will also be reimbursed for the cost of two round
trips for you and your spouse, from your current
primary home to the new work location, for house
hunting purposes.
(c) Should you purchase a new home before the sale of your
current property and have mortgage payments due on both
homes during the same month, KBKkids.com will pay the
lesser of the two mortgages (principal and interest)
for up to three months.
(d) KBkids.com will cover all reasonable and customary
closing costs on your new residence, not to exceed
$2,500.
6. SEVERANCE. In the event that your employment is terminated
(except for cause) by KBkids.com, you will receive a lump
sum severance payment equal to six months of your then
current base salary.
475 17th Street, Suite 750 . Denver, CO 80202 . Tel. 303.228.9000
Fax. 303.382.1185
<PAGE> 3
[LOGO KBkids.com]
[10/12/99
Page 3
7. CONFIDENTIAL INFORMATION. You agree that your employment is
contingent upon your execution and delivery to KBkids.com of a Nondisclosure and
Assignment of Inventions Agreement in the standard form utilized by KBkids.com.
8. NO CONFLICTING EMPLOYMENT. You agree that, during the term
of your employment with KBkids.com, you will not engage in
any other employment, occupation, consulting or other
business activity related to the business in which
KBkids.com is now involved or becomes involved during the
term of your employment, nor will you engage in any other
activities that conflict with your obligations to
KBkids.com.
9. NO COMPETE. You agree that so long as you are employed by
KBkids.com and for a period of six (6) months after your employment with
KBkids.com terminates, you will not, directly or indirectly, own, manage,
control or participate in the ownership, management or control of, or be
employed or engaged by or otherwise affiliated or associated as a consultant,
independent contractor or otherwise with, any other corporation, partnership,
proprietorship, firm, association or business entity or otherwise engaged in any
business that is engaged in any manner more than 30% of whose revenues are
derived from the online retailing of children's products, in any state in the
United States or any foreign country in which the Company or such affiliates or
subsidiaries are then doing business and then only with respect to the business
of the Company, its affiliates or subsidiaries then being conducted in such
states or countries; provided, however, that the ownership of not more than 1%
of the stock of any publicly traded corporation shall not be deemed a violation
of this covenant.
475 17th Street, Suite 750 . Denver, CO 80202 . Tel. 303.228.9000
Fax. 303.382.1185
<PAGE> 4
[10/12/99
Page 4
10. GENERAL PROVISIONS.
(a) This Offer Letter will be governed by the laws of
Colorado, applicable to agreements made and to be
performed entirely within Colorado.
(b) This Offer Letter sets forth the entire offer of
KBkids.com relating to your potential employment and
supersedes all prior verbal discussions between us.
(c) If one or more of the provisions in this letter is
deemed void by law, then the remaining provisions
will continue in full force and effect.
(d) The terms of this Offer Letter, when signed by you,
will be binding upon your heirs, executors,
administrators and other legal representatives and
will be for the benefit of KBkids.com and successors
and assigns.
(e) You warrant that there is no agreement between you and
any other party that would conflict with your
obligations under this agreement or otherwise as an
employee of KBkids.com.
We are excited about you joining KBkids.com. If the foregoing
accurately sets forth our mutual understanding and agreement regarding the terms
of your employment, please acknowledge the same and accept this offer by signing
and returning the enclosed copy of this letter, whereupon it shall become a
binding agreement for such employment.
Very truly yours,
KBkids.com LLC
By: /s/ Srikant Srinivasan
---------------------------------
Its: Founder and CEO
475 17th Street, Suite 750 . Denver, CO 80202 Tel. 303.228.9000
Fax. 303.382.1185
<PAGE> 5
[LOGO KBkids.com]
[10/11/99
Page 5
ACCEPTANCE:
I accept the terms of my employment with KBkids.com as set forth
herein. I understand that this Offer Letter does not constitute a contract of
employment for any specified period of time, and that the employment
relationship may be terminated by either party at any time.
/s/ Marty Smuin
- -----------------------------
By
/s/ Marty Smuin
- -----------------------------
Print Name
October 9 - 1999
- -----------------------------
Date
<PAGE> 1
Exhibit 10.20
September 2, 1999
David Novitsky
5035 Kendall Station
Acworth, GA 30102
RE: TERMS OF EMPLOYMENT
-------------------
Dear David:
This letter will confirm the terms of your employment with KBkids.com LLC.
Such terms of employment are as follows:
1. TITLE AND RESPONSIBILITIES. You will serve in the position of Vice
President, Merchandising. You will assume and discharge such responsibilities
as are commensurate with such position and as the Founder and CEO of KBkids.com
may direct. During the term of your employment, you shall devote your full
time, skill and attention to your duties and responsibilities, shall perform
them faithfully, diligently and competently, and shall use your best efforts to
further the business of KBkids.com and its affiliates. In addition, you shall
comply with and be bound by the operating policies, procedures and practices of
KBkids.com, in effect from time to time during your employment.
2. AT-WILL EMPLOYMENT. You agree that your employment with KBkids.com is
for an unspecified duration that constitutes at-will employment, and that either
you or KBkids.com can terminate this relationship at any time, with or without
cause.
3. COMPENSATION.
(a) In consideration of your services, you will be paid an annualized
salary of U.S. $120,000, effective on your first day (yet to be determined).
(b) In addition to your base compensation you will be guaranteed an
annual minimum bonus of $40,000. This bonus will be paid to you in your regular
paycheck, in equal amounts of $1,538.46 per paycheck.
(c) The Board of Directors shall consider, at its next meeting, the
grant of an option to purchase 125,000 membership units in KBkids.com LLC.
These units shall vest over four years starting on the Effective Date (start
date), with no units vesting if your employment with KBkids.com terminates
within a year of the Effective Date. Such grant is contingent upon Board
approval.
4. OTHER BENEFITS. You will be entitled to receive the standard employee
benefits, as well as the Vice President level benefits, made available by
KBkids.com to its employees to
<PAGE> 2
[09/02/99]
Page 2
full extent of your eligibility therefor. During your employment, you shall be
permitted, to extent eligible, to participate in any group medical insurance
plans, 401(k) plan, or similar benefit plan of KBkids.com that is available from
time to time to other comparable employees. Participation in any such plan
shall be consistent with your rate of compensation to the extent that
compensation is a determinative factor with respect to coverage under any such
plan.
KBkids.com shall reimburse you for all reasonable business expenses actually
incurred or paid by you in the performance of your services on behalf of
KBkids.com, in accordance with the Company's expense reimbursement policy as
from time to time in effect.
5. RELOCATION ASSISTANCE.
(a) PHYSICAL MOVE: KBkids.com shall arrange for a professional household
goods carrier to move your household belongings. KBkids.com will pay
for the normal packing, loading and unloading, as well as the
transportation of physical goods.
(b) TEMPORARY LIVING: KBkids.com will reimburse you for a furnished
corporate apartment for the duration of three months for temporary
living. During this temporary living, you will be reimbursed for up
to $1,000 monthly for the cost of your round trip travels to your
current home, for up to six months. You will also be reimbursed for
the cost of two round trips for your spouse to the new work location
for the purpose of house hunting.
(c) DUPLICATE MORTGAGE: Should you purchase a new home before the sale of
your current property and have mortgage payments due on both homes
during the same month, KBkids.com will pay the lesser of the two
mortgages (principal and interest) for up to six months.
(d) SELLING EXISTING RESIDENCE: KBkids.com will cover all reasonable and
customary selling costs on your existing primary residence, not to
exceed $20,000.
(e) NEW RESIDENCE: KBkids.com will cover all reasonable and customary
closing costs on your new residence, not to exceed $2,000.
6. CONFIDENTIAL INFORMATION. You agree that your employment is
contingent upon your execution and delivery to KBkids.com of a
Nondisclosure and Assignment of Inventions Agreement in the standard form
utilized by KBkids.com.
7. NO CONFLICTING EMPLOYMENT. You agree that during the term of your
employment with KBkids.com, you will not engage in any other employment,
occupation, consulting or other business activity related to the business in
which KBkids.com is now involved or becomes involved during the term of your
employment, nor will you engage in any
<PAGE> 3
[09/02/99]
Page 3
other activities that conflict with your obligations to KBkids.com.
8. NO COMPETE. You agree that so long as you are employed by KBkids.com
and for a period of six (6) months after your employment with KBkids.com
terminates, you will not directly or indirectly, own, manage, control or
participate in the ownership, management or control of, or be employed or
engaged by or otherwise affiliated or associated as a consultant, independent
contractor or otherwise with, any other corporation, partnership,
proprietorship, firm, association or business entity or otherwise engaged in any
business that is engaged in any manner as an internet retailer of similar
products to Kbkids.com, in any state in the United States or any foreign country
in which the Company or such affiliates or subsidiaries are then doing business
and then only with respect to the business of the Company, its affiliates or
subsidiaries then being conducted in such states or countries; provided,
however, that the ownership of not more than 1% of the stock of any publicly
traded corporation shall not be deemed a violation of this covenant.
9. GENERAL PROVISIONS.
(a) This Offer Letter will be governed by the laws of Colorado,
applicable to agreements made and to be performed entirely within Colorado.
(b) This Offer Letter sets forth the entire offer of KBkids.com
relating to your potential employment and supersedes all prior verbal
discussions between us.
(c) If one or more of the provisions in this letter are deemed void
by law, then the remaining provisions will continue in full force and effect.
(d) The terms of this Offer Letter, when signed by you, will be
binding upon your heirs, executors, administrators and other legal
representatives and will be for the benefit of KBkids.com and successors and
assigns.
(e) You warrant that there is no agreement between you and any other
party that would conflict with your obligations under this agreement or
otherwise as an employee of KBkids.com.
We are excited about having you join KBkids.com. If the foregoing
accurately sets forth our mutual understanding and agreement regarding the terms
of your employment, please acknowledge the same and accept this offer by signing
and returning the enclosed copy of this letter, whereupon it shall become a
binding agreement for such employment.
<PAGE> 4
[09/02/99]
Page 4
Very truly yours,
KBkids.com LLC
By: /s/ Srikant Srinivasan
-------------------------------
Its: Founder and CEO
<PAGE> 5
[09/02/99]
Page 5
ACCEPTANCE:
I accept the terms of my employment with KBkids.com as set forth
herein. I understand that the Offer Letter does not constitute a contract
of employment for any specified period of time, and that either party may
terminate the employment relationship at any time.
/s/ David Novitsky
- ------------------------------
By
David Novitsky
- ------------------------------
Print Name
September 2, 1999
- ------------------------------
Date
<PAGE> 1
Exhibit 10.21
CONSULTING AGREEMENT
This CONSULTING AGREEMENT ("Agreement"), dated as of June 25, 1999,
between Consolidated Stores Corporation, an Ohio corporation (the "Company"),
and Michael J. Wagner ("Consultant").
RECITALS
A. The Company and Consultant desire to enter into a consulting
arrangement;
B. The Company has determined that it is in the best interests of the
Company and its shareholders to enter into this Agreement setting forth the
obligations and duties of both the Company and Consultant; and
C. The Company wishes to assure itself of the services of Consultant
for the period hereinafter provided, and Consultant is willing to serve as a
consultant to the Company for said period, upon the terms and conditions
provided in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and Consultant (individually, a
"Party" and together, the "Parties") agree as follows:
1. CONSULTING PERIOD. Subject to the provisions for earlier termination
as hereinafter provided, the Company shall engage Consultant on the terms and
conditions set forth for a term commencing on the date hereof and continuing
through and until the earlier of (a) October 15, 2003; or (b) the end of any
period during which severance payments are being made to Consultant pursuant to
the Employment Agreement of even date herewith among Consultant, KB Kids.com LLC
and K.B. Consolidated, Inc. ("Consulting Period").
2. CONSULTING SERVICES. During the Consulting Period, Consultant shall
provide the Company, at such times and as may be requested by the Company, with
advice and recommendations concerning various matters respecting the business of
the Company, including, without limitation, advice and recommendations as to
investor relations and the public dissemination of information by the Company.
At the request of the Company, Consultant shall meet periodically with the
Company's executive officers, Board of Directors or such other persons as may be
designated by the Company for the purpose of providing the consulting services
as set forth herein. The Company and Consultant expressly acknowledge and agree
that the consulting services to be provided under this Agreement shall be
performed as an independent contractor, and not as an agent or employee of the
Company.
<PAGE> 2
3. PAYMENTS.
(a) As consideration for entering into this Agreement, the Company
shall pay to Consultant a one-time, lump sum cash bonus in the amount of
Eighty-Seven Thousand Dollars ($87,000), payable within thirty (30) days
after the date of this Agreement.
(b) As consideration for the obligations of Consultant under this
Agreement, the Company shall pay to Consultant Ten Thousand Dollars
($10,000) per annum during the term of the Consulting Period, payable in
accordance with the regular payroll practices of the Company.
(c) During the Consulting Period, Consultant shall be entitled to
prompt reimbursement by the Company for all reasonable out-of-pocket
expenses incurred by him in performing consulting services requested by the
Company under this Agreement, upon submission of such accounts and records
as may be required under Company policy.
4. TERMINATION OF CONSULTING PERIOD.
(a) DEATH OR DISABILITY. The Consulting Period will terminate upon
the death or " Disability" of Consultant. For purposes of this Agreement,
"Disability" shall mean the illness or other physical or mental disability
of Consultant, resulting in his inability to perform substantially his
consulting duties under this Agreement for a period of one hundred eighty
(180) or more consecutive days or for two hundred seventy (270) days in the
aggregate during any consecutive (12) month period.
(b) Upon Termination of the Consulting Period pursuant to this
Section 4, all obligations and liabilities of the Parties under this
Agreement shall cease unless otherwise set forth herein.
5. CONFIDENTIALITY. Consultant agrees that during the Consulting Period
and for a period of one (1) year after termination of the Consulting Period, he
will hold in strictest confidence and will not use or disclose any information
regarding the techniques, processes, business plans, services, pricing, trade
secrets, customers, suppliers, prospect names, or other proprietary or
confidential information of the Company, including, without limitation,
information relating to the current or planned products, services, sales,
employees or business of the Company, except as such disclosure or use may be
required in connection with Consultant's consulting services hereunder. Upon
termination of the Consulting Period, Consultant will deliver to the Company any
and all materials that contain such proprietary or confidential information and
will not retain any copies, reproductions or summaries of any such materials.
All property of the Company shall be returned by Consultant promptly and in good
condition except for normal wear. The Consultant acknowledges that upon adequate
proof of violation of any legally enforceable provision of this Section 5, the
Company shall be entitled to seek injunctive relief and may obtain a temporary
order restraining any threatened or further breach.
2
<PAGE> 3
6. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors, heirs
(in the case of Consultant) and assigns. No rights or obligations of the Company
under this Agreement may be assigned or transferred by the Company except that
such rights or obligations may be assigned or transferred pursuant to (a) a
merger or consolidation in which the Company is not the continuing entity or (b)
a sale or liquidation of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law. The Company further
agrees that, in the event of a sale of assets or liquidation as described in the
preceding sentence, it will use its best efforts to cause such assignee or
transferee expressly to assume the liabilities, obligations and duties of the
Company hereunder. No obligations of Consultant under this Agreement may be
assigned or transferred by Consultant.
7. ENTIRE AGREEMENT. Except to the extent otherwise provided herein,
this Agreement contains the entire understanding and agreement between the
Parties concerning the subject matter hereof and supersedes any prior
agreements, whether written or oral, between the Parties concerning the subject
matter hereof.
8. AMENDMENT OR WAIVER. No provision in this Agreement may be amended
unless such amendment is agreed to in writing and signed by both Consultant and
an authorized officer of the Company. No waiver by either Party of any breach by
the other Party of any condition or provision contained in this Agreement to be
performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by Consultant or an authorized officer
of the Company, as the case may be.
9. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be
unaffected thereby and shall remain in full force and effect to the fullest
extent permitted by law.
10. SURVIVORSHIP. The respective rights and obligations of the Parties
hereunder shall survive any termination of the Consulting Period to the extent
necessary to the intended preservation of such rights and obligations as
described in this Agreement.
11. GOVERNING LAW. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of Ohio, without
reference to principles of conflict of laws.
12. NOTICES. Any notice given to either Party shall be in writing and
shall be deemed to have been given when delivered personally or one (1) day
after having been sent by overnight courier service or three (3) days after
having been sent by certified or registered mail, postage prepaid, return
receipt requested, duly addressed to the Party concerned at the address
indicated below or to such changed address as such Party may subsequently give
such notice of:
3
<PAGE> 4
If to the Company: Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228-0512
Attention: General Counsel
With a copy to: Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP Tower
200 Public Square
Cleveland, Ohio 44114
Attention: Michael Wager, Esq.
If to Consultant: Michael J. Wagner
77 Cherry Hills Farm Drive
--------------------------
Englewood, Co 80110-7113
--------------------------
13. HEADINGS. The headings of the sections contained in this Agreement
are for convenience only and shall not be deemed to control or affect the
meaning or construction of any provision of this Agreement.
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Consultant have caused this
Consulting Agreement to be executed as of the date and year first above
written.
CONSOLIDATED STORES CORPORATION
By: /s/ Albert J. Bell
------------------------------
Albert J. Bell
Executive Vice President
CONSULTANT
/s/ Michael J. Wagner
----------------------------------
MICHAEL J. WAGNER
4
<PAGE> 1
Exhibit 10.22
DENVER PLACE PLAZA TOWER
AGREEMENT OF LEASE
BETWEEN
DENVER-STELLAR ASSOCIATES LIMITED PARTNERSHIP, LANDLORD
AND
KBKIDS.COM, L.L.C., an Ohio limited liability company, TENANT
<PAGE> 2
DENVER PLACE PLAZA TOWER
AGREEMENT OF LEASE
BETWEEN
DENVER-STELLAR ASSOCIATES LIMITED PARTNERSHIP, LANDLORD
AND
KBKIDS.COM, L.L.C., an Ohio limited liability company, TENANT
TABLE OF CONTENTS
-----------------
Page
----
1. TERM ............................................................. 2
2. BASE RENT ........................................................ 2
3. COMPLETION OF IMPROVEMENTS ....................................... 2
(a) Preliminary Information and Plans ....................... 2
(b) Tenant's Plans .......................................... 2
(c) Engineering Plans ....................................... 3
(d) Completion by Landlord .................................. 3
(e) Special Tenant Work ..................................... 3
(f) Payment for Work ........................................ 4
(g) Access; Acceptance of Work .............................. 4
(h) Delivery of Possession .................................. 4
(i) Occupancy ............................................... 4
4. ADDITIONAL RENT .................................................. 5
(a) Definitions ............................................. 5
(b) Payment of Additional Rent .............................. 6
(c) Adjustment for Services Not Rendered .................... 7
(d) Partial Year ............................................ 7
(e) Disputes ................................................ 7
(f) Place of Payment ........................................ 7
(g) Tenant Taxes ............................................ 7
(h) Delay in Computation .................................... 8
5. USE OF PREMISES .................................................. 8
6. CONDITION OF PREMISES ............................................ 8
7. SERVICES ......................................................... 9
(a) Standard Services ....................................... 9
(b) Additional Services ..................................... 10
(c) Interruption of Services ................................ 11
8. ALTERATIONS ...................................................... 12
9. LIENS ............................................................ 12
10. INSURANCE AND WAIVER OF SUBROGATION .............................. 13
11. FIRE OR CASUALTY ................................................. 13
12. WAIVER OF CLAIMS - INDEMNIFICATION ............................... 14
13. NONWAIVER ........................................................ 15
14. CONDEMNATION ..................................................... 15
<PAGE> 3
15. ASSIGNMENT AND SUBLETTING ....................................... 15
16. HOLDOVER ........................................................ 17
17. ESTOPPEL CERTIFICATE ............................................ 17
18. SUBORDINATION ................................................... 17
19. CERTAIN RIGHTS RESERVED BY LANDLORD ............................. 18
20. RULES AND REGULATIONS ........................................... 19
21. REMEDIES ........................................................ 19
22. EXPENSES OF ENFORCEMENT ......................................... 21
23. COVENANT OF QUIET ENJOYMENT ..................................... 21
24. SECURITY DEPOSIT ................................................ 21
25. REAL ESTATE BROKER .............................................. 22
26. MISCELLANEOUS ................................................... 22
(a) Rights Cumulative ...................................... 22
(b) Captions and Usage ..................................... 22
(c) Binding Effect ......................................... 22
(d) Lease Contains All Terms ............................... 23
(e) Submission of Lease .................................... 23
(f) No Air Rights .......................................... 23
(g) Modification of Lease .................................. 23
(h) Substitution of Other Premises ......................... 23
(i) Transfer of Landlord's Interest ........................ 23
(j) Recording; Short Form Memo ............................. 23
(k) Covenants and Conditions ............................... 23
(l) Application of Payments ................................ 23
(m) Security Interest ...................................... 24
(n) Governing Law; Partial Invalidity ...................... 24
(o) Hazardous Materials .................................... 24
(p) Warranty Disclaimer .................................... 24
(q) Waiver of Trial by Jury ................................ 24
(r) Force Majeure .......................................... 24
(s) List of Exhibits ....................................... 25
27. TELEPHONE AND TELECOMMUNICATIONS SERVICE ........................ 25
28. NOTICES ......................................................... 26
29. TIME IS OF THE ESSENCE .......................................... 27
ADDENDUM ................................................................. 28
EXHIBIT A ................................................................ 31
EXHIBIT A-1 .............................................................. 32
EXHIBIT A-2 .............................................................. 33
EXHIBIT A-3 .............................................................. 34
EXHIBIT A-4 .............................................................. 35
-2-
<PAGE> 4
EXHIBIT B ................................................................ 36
EXHIBIT "C" .............................................................. 39
EXHIBIT "D" .............................................................. 40
-3-
<PAGE> 5
OFFICE LEASE
DENVER PLACE PLAZA TOWER
DENVER, COLORADO
AGREEMENT OF LEASE made as of the ____ day of __________, 199____
(hereinafter referred to as the "Lease") between Amerimar Realty Management
Co.-Colorado, as agent for DENVER-STELLAR ASSOCIATES LIMITED PARTNERSHIP, a
Delaware limited partnership (hereinafter referred to as "Landlord") and
KBKIDS.COM, L.L.C., an Ohio limited liability company whose present address is
475 17th Street, Suite 750, Denver, CO 80202 (hereinafter referred to as
"Tenant").
W I T N E S S E T H:
Landlord hereby leases to Tenant, and Tenant hereby accepts from
Landlord, the premises (hereinafter referred to as the "Premises") containing
approximately 21,464 square feet of rentable area and designated on the plan
attached hereto as Exhibit "A" and further described as Suite 1000 in the
building known as Denver Place Plaza Tower (hereinafter referred to as the
"Building") located at 1099 18th Street, Denver, Colorado, 80202, subject to the
covenants, terms, provisions and conditions of this Lease. The Building, the
land upon which it is situated, all surrounding improvements, any garage or
other related improvements and all common areas appurtenant to, associated with
or servicing the Building are hereinafter called the "Real Property" or the
"Property".
In consideration thereof, Landlord and Tenant covenant and agree as
follows:
1. TERM. The term of this Lease (the "Term") shall commence on that
date (the "Commencement Date") which is the date upon which Tenant shall have
commenced occupancy of any part of the Premises, which date is estimated to be
October 1, 1999 (the "Scheduled Commencement Date"), and, unless sooner
terminated as provided herein, shall end, absolutely and without the need for
notice from either party to the other, on January 31, 2005 (the "Termination
Date"); provided, however, that if such term does not result in a Term which is
at least 62 full calendar months, then the Termination Date shall automatically
extend to the last day of the 62nd full calendar month following the
Commencement Date.
2. BASE RENT. Subject to adjustment as herein provided, the "Base Rent"
to be paid hereunder during months 1 through 36 of the Term shall be
$368,966.16 per annum, payable in equal monthly installments of $30,747.18, and
during months 37 through 62 of the Term shall be $468,773.76 per annum, payable
in equal monthly installments of $39,064.48. All payments of Base Rent shall be
paid in advance on or before the first day of each calendar month during the
Term. If the Term commences other than on the first day of a month, the Base
Rent for such month shall be a prorated portion of $30,747.18 based on the
number of days in that month that Tenant's rental obligations were in effect.
The Base Rent for the portion of the month in which the Term commences shall be
paid on the first day of the first full month of the Term. Notwithstanding
anything to the contrary set forth hereinabove, so long as there is no Event of
Default hereunder, Tenant shall not be obligated to pay Base Rent or any Expense
Adjustment Amount or any Tax Adjustment Amount for the first two full calendar
months following the Commencement Date. Upon an occurrence of an Event of
Default, all amounts so deferred hereunder shall be immediately due and payable
to Landlord without notice.
3. COMPLETION OF IMPROVEMENTS.
(a) PRELIMINARY INFORMATION AND PLANS. Landlord has heretofore
delivered to Tenant for use by Tenant and Landlord's architect or engineer, such
plan or plans and other information with respect to the Premises and the
Building as Tenant may reasonably require for proper and expeditious preparation
of Tenant's Layout Plans. Receipt of all such information is hereby acknowledged
by Tenant.
(b) TENANT'S PLANS. Tenant shall prepare at Tenant's expense and,
not later than September 15, 1999, shall deliver to Landlord one mylar and two
black line prints of complete and
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<PAGE> 6
final architectural working drawings (which shall be 1/8" scale) and three
copies of specifications and two (2) non-copyrighted CADD disks, prepared by an
architect or space planner approved by Landlord ("Tenant's Layout Plans") for
the construction and finishing of the Premises for Tenant's occupancy. Tenant's
Layout Plans shall (i) include the layout of Tenant's furniture, fixtures and
equipment, (ii) include electrical and heat specifications for all of Tenant's
fixtures and equipment, (iii) be signed and sealed by an architect licensed by
and registered in the State of Colorado, and (iv) conform to all applicable laws
and requirements of public authorities and insurance underwriters' requirements.
Tenant's Layout Plans shall be subject to Landlord's review and written
approval, which approval shall not be unreasonably withheld, and such plans
shall be deemed modified to take account of any changes reasonably required by
Landlord. Tenant's Layout Plans as approved by Landlord and with the aforesaid
modifications, if any, are herein called the "Final Layout Plans". Concurrently
with delivery of Tenant's Layout Plans to Landlord, Tenant shall by notice to
Landlord in writing designate a single individual who Tenant agrees shall be
available to meet and consult with Landlord at the Premises as Tenant's
representative respecting the matters which are the subject of this Paragraph 3
and who, as between Landlord and Tenant, shall have the power to legally bind
Tenant, in making requests for changes, giving approval of plans or work, giving
directions to Landlord or the like, under this Paragraph 3; and any notice or
delivery given to such person personally or at his place of business shall have
the same effect as a notice or delivery given to Tenant.
(c) ENGINEERING PLANS. Landlord shall direct its engineers to
prepare at Landlord's expense and, not later than 30 days after approval by
Landlord of the Final Layout Plans, shall deliver to Tenant mechanical,
electrical and fire protection engineering drawings and specifications
("Engineering Plans"), based on the Final Layout Plans (and such pertinent
additional information as shall have been submitted by Tenant with Tenant's
Layout Plans or as requested by Landlord), as may be required to complete the
Premises in accordance with the Final Layout Plans. Within ten days after
submission to Tenant by Landlord of the Engineering Plans, Tenant shall give its
written approval thereof if they are in substantial conformity with or a direct
extension of the Final Layout Plans, otherwise such approval shall not be
unreasonably withheld; however, the Engineering Plans shall be deemed to have
been approved by Tenant unless Tenant shall have notified Landlord in writing to
the contrary within ten days of their receipt by Tenant, stating in which
respects such plans fail to conform with the Final Layout Plans. The Engineering
Plans shall be deemed to have been approved by Tenant if they are returned by
Tenant with specified changes noted and such changes are made, whether or not
approval is thereafter specifically noted on the Engineering Plans so changed.
(d) COMPLETION BY LANDLORD. Landlord shall, in a good and
workmanlike manner, cause the Premises to be improved and completed in
accordance with the Final Layout Plans and the Engineering Plans (the "Tenant
Work") (such plans are hereinafter together called the "Tenant Construction
Plans"). Landlord reserves the right however: (i) to make substitutions of
material or components of equivalent grade and quality when and if any specified
material or component shall not be readily or reasonably available, and (ii) to
make changes necessitated by conditions met in the course of construction,
provided that Tenant's approval of any substantial change shall first be
obtained (which approval shall not be unreasonably withheld or delayed so long
as there shall be general conformity with the Final Layout Plans).
(e) SPECIAL TENANT WORK. In the improvement of the Premises in
accordance with the Tenant Construction Plans, Landlord agrees to perform those
items of the work as set forth on the schedule attached hereto as Exhibit "A"
(herein referred to as "Standard Tenant Work") to the extent required by the
Tenant Construction Plans. All work to be performed by Landlord pursuant to the
Tenant Construction Plans in addition to, in substitution for, or different
from, Standard Tenant Work is hereinafter referred to as "Special Tenant Work"
and Special Tenant Work shall also include the relocation of existing Building
mechanical, electrical, sprinkler or other systems to accommodate the Tenant
Work or to comply with Tenant's requirements. All Special Tenant Work shall be
furnished, installed and performed by Landlord for the sum (hereinafter called
the "Special Tenant Costs") equal to "Landlord's Cost" (as hereinafter defined)
plus an amount equal to 5% of such amount to cover coordination, supervision and
overhead. "Landlord's Cost" shall be deemed to mean Landlord's out-of-pocket
contract or purchase price or prices (to be paid by Landlord to Landlord's
general contractor or other sources) for the material, labor and services
applied to the Special Tenant
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<PAGE> 7
Work, plus applicable sales taxes. After Landlord shall have obtained an
estimate of the Special Tenant Cost which Landlord in its good faith judgment
believes to be substantially accurate, and before commencing the Special Tenant
Work, Landlord shall give Tenant written notice of such estimate.
(f) PAYMENT FOR WORK. Landlord agrees to obtain not less than two
(2) bids for the completion of the Tenant Work from general contractors
reasonably acceptable to Landlord and Tenant maintaining an "A" or "B" license
with the City and County of Denver and the general contractor submitting the
lowest bid shall be selected to complete the Tenant Work; provided, however,
that Landlord and Tenant may agree to select the other general contractor if its
submitted bid is within two percent (2%) of the lowest bid provided such
selection is made within one (1) business day after Landlord delivers the final
bid summary to Tenant. Landlord currently estimates that the Tenant Work can be
completed by the Scheduled Commencement Date (subject to delays beyond
Landlord's control), provided the Final Layout Plans are completed on or before
5:00 p.m. (Denver time), October 1, 1999. The Tenant Work shall be performed
pursuant to a "guaranteed maximum price" construction contract. Tenant shall
have the right to approve such construction contract, provided such approval
shall not be unreasonably withheld or delayed. Tenant shall pay for all costs
related to the Tenant Work, including costs of preparation and approval of the
Final Layout Plans and Engineering Plans and a 5% construction management fee to
Landlord ("Tenant Improvement Costs"), which costs shall be payable by Tenant to
Landlord within ten (10) days after the date that the contract for the
completion of the Tenant Work is awarded; provided, however, Tenant shall pay
Landlord all Special Tenant Costs in full concurrent with the applicable change
order.
(g) ACCESS; ACCEPTANCE OF WORK. Landlord shall afford Tenant and
its employees and agents access to the Premises at reasonable times prior to the
commencement of the Term and at Tenant's sole risk and expense, for the purposes
of inspecting and verifying Landlord's performance of the Tenant Work. Tenant
shall advise Landlord promptly of any objection to the performance of such work.
(h) DELIVERY OF POSSESSION. If Landlord shall, for any reason
(including, without limitation, failure to complete the work, if any, required
to be done by Landlord under this Lease), fail to make available to Tenant
possession of the Premises on or before January 1, 2000, Tenant shall have the
right to terminate the Lease upon three (3) days prior written notice. However,
there shall be no termination right (and the only remedy available to Tenant
shall be a deferral of Tenant's obligation to pay Base Rent and Additional Rent
until Tenant is provided occupancy of the Premises), if any such failure is
caused in whole or part by any act or omission of Tenant, its agents, servants,
employees or contractors, which has the effect of hindering or delaying
Landlord's delivery of possession or the timely completion of any work to be
done by Landlord (hereinafter a "Tenant Delay") including, without limitation,
(i) any delay in delivery of the Tenant Layout Plans, (ii) any delay which is
caused by changes in the work to be performed by Landlord in readying the
Premises for Tenant's occupancy, which changes are requested by Tenant after
Tenant's submission of the Tenant Layout Plans as required by Landlord for
approval thereof, (iii) any delay, not caused by Landlord, in furnishing
materials or procuring labor required to be furnished or procured for the Tenant
Work on account of installations or work required by Tenant and not encompassed
within Standard Tenant Work, (iv) any delay which is caused by any failure by
Tenant, without regard to any grace period applicable thereto, to furnish to
Landlord any required plan, information, approval or consent within the period
of time required therefor by the terms of this Lease or caused by any good faith
reluctance on the part of Landlord to approve any plan or other information
required to be submitted by Tenant and approved by Landlord, (v) any delay which
is caused by the performance of any work or activity in the Premises by Tenant
or any of its employees, agents or contractors, or (vi) any delay or failure to
pay the Tenant Improvement Costs or the Special Tenant Costs. Tenant also shall
pay to Landlord, within ten days after receipt of demand made from time to time,
a sum equal to any additional cost to Landlord in completing the Tenant Work
resulting from any Tenant Delay.
(i) OCCUPANCY. The Premises shall not be deemed incomplete or not
ready for occupancy or for delivery of possession, if details of construction,
mechanical adjustments or decoration, or other items of the Tenant Work which do
not materially interfere with Tenant's use of the Premises, remain to be done.
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<PAGE> 8
4. ADDITIONAL RENT. In addition to paying the Base Rent specified in
Paragraph 2 hereof, Tenant shall pay "Additional Rent," which is equal to the
sum of the Expense Adjustment Amount, Tax Adjustment Amount, and Additional
Services Charge (all as hereinafter defined) and any other charges noted in this
Lease. The Base Rent and Additional Rent are sometimes herein collectively
referred to as the "Rent." Unless otherwise specified, all amounts due under
this lease as Additional Rent shall be payable in the same manner and at the
same place as the Base Rent.
(a) DEFINITIONS. As used in this Paragraph 4, the terms:
(i) "Operating Expense Base Amount" shall mean $5.60 per
rentable square foot per annum.
(ii) "Tax Base Amount" shall mean $1.08 per rentable square
foot per annum.
(iii) "Calendar Year" shall mean each calendar year in which
any part of the Term falls, through and including the year in which the Term
expires.
(iv) "Tenant's Proportionate Share" shall mean 4.175% being
the percentage calculated by dividing 21,464 square feet, the rentable area of
the Premises provided at the beginning of this Lease, by 514,000 square feet
(being 95% of the rentable area of the office space in the Building). The
rentable area of the Premises has been calculated according to a method pursuant
to which a portion of the common areas has been deemed included in the Premises.
(v) "Taxes" for any Calendar Year shall mean the Building's
Proportionate Tax Share of all real estate taxes and assessments, special or
otherwise, levied or assessed upon the Property or the Building during such
Calendar Year; provided, however, that if Landlord subdivides the Property so
that the Building is located on its own tax lot (i.e., there are no other
buildings on such tax lot), then (1) such separate tax lot shall be referred to
as the "Building Tax Lot", and (2) for each year that the Building Tax Lot is
taxed separately from the remainder of the Land, the term "Taxes" shall mean all
real estate taxes and assessments, special or otherwise, levied or assessed upon
the Building Tax Lot or the Building during such Calendar Year. For purposes of
this subparagraph "Buildings Proportionate Tax Share" for any Calendar Year
shall mean the fraction the numerator of which is equal to the assessed
valuation for the Building only for such Calendar Year and the denominator of
which is equal to the sum of the assessed valuations for all buildings and
improvements on the Property (including the Building) for such Calendar Year.
Should the State of Colorado, or any political subdivision thereof, or any other
governmental authority, impose a tax, assessment, charge or fee, which Landlord
shall be required to pay, wholly or partially in substitution of any of the
above Taxes, all such taxes, assessments fees or charges shall be deemed to
constitute Taxes hereunder but shall be computed as if the Real Property and any
other shared use real property referred to in this subparagraph was the only
real property of Landlord. "Taxes" shall also include all fees and costs,
including reasonable attorneys' fees, appraisals and consultants' fees, incurred
by Landlord in seeking to obtain a reduction of, or a limit on, any increase in
any Taxes (regardless of whether any reduction or limitation is obtained). In
the event that the Real Property shall be for any taxes or assessments assessed
under the same assessment as other real property, the amount of such taxes or
assessment to be included within Taxes shall be such portion thereof as Landlord
fairly and equitably shall deem attributable thereto.
(vi) "Operating Expenses" shall mean all expenses, costs and
disbursements (other than Taxes) of every kind and nature paid or incurred by or
on behalf of Landlord in connection with the ownership, management, operation,
maintenance and repair of the Property, other than those costs reimbursable to
Landlord by other tenants in the Building (and, as allocated by Landlord, those
paid or incurred in connection with the ownership, operation, maintenance,
management and repair of any garage or other improvements the use of which is
shared by the Building and one or more other buildings), except the following:
[A] Costs of alterations of any tenant's premises;
[B] Principal or interest payments on loans secured by
mortgages or trust deeds on the Real Property;
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[C] Costs of capital improvements, except that Operating
Expenses shall include the costs as amortized over such number of years as
Landlord may reasonably determine, with interest at the rate of 12% per annum on
the unamortized amount, of any capital improvements which, (1) in Landlord's
reasonable opinion, will have the effect of reducing any component cost included
within Operating Expenses, (2) are made or installed to assure compliance with
all governmental rules and regulations applicable from time to time, or (3)
under generally applied real estate accounting practices may be expensed or
treated as deferred expenses (and the amortization and interest so determined
for each Calendar Year shall be included in Operating Expenses for that Calendar
Year); and
[D] Leasing commissions for space in the Building.
(vii) "Expense Adjustment Amount" shall mean Tenant's
Proportionate Share of the amount by which the Operating Expenses incurred with
respect to such Calendar Year exceed the Operating Expense Base Amount;
provided, however, that in determining the amount of Operating Expenses for each
Calendar Year, if less than 95% of the rentable office area of the Building
shall have been occupied at any time during such Calendar Year, Operating
Expenses shall be deemed for such Calendar Year to be in the amount reasonably
determined by Landlord to be equal to that amount of like expenses which
normally would be expected to be incurred had such occupancy been 95% throughout
such Calendar Year.
(viii) "Tax Adjustment Amount" shall mean Tenant's
Proportionate Share of the amount by which the Taxes incurred with respect to
such Calendar Year exceed the Tax Base Amount.
(ix) "Additional Services Charge" shall mean all expenses and
disbursements that Landlord incurs in connection with the ownership, operation,
and maintenance of the Premises, in addition to the services provided as
standard to all premises in the Building, which Additional Services are more
specifically described and defined in Paragraph 7 below.
(b) PAYMENT OF ADDITIONAL RENT.
(i) EXPENSE ADJUSTMENT. The Expense Adjustment Amount with
respect to each Calendar Year shall be paid in monthly installments, in advance
on the first day of each calendar month during the course of such year, in
amounts estimated from time to time by Landlord and communicated by written
notice to Tenant. Landlord shall cause to be kept books and records showing
Operating Expenses in accordance with generally accepted accounting principles.
Following the close of each Calendar Year, Landlord shall cause the amount of
the Expense Adjustment Amount for such Calendar Year to be computed based on
Operating Expenses for such Calendar Year, and Landlord shall deliver to Tenant
a statement of such amount; thereupon Tenant shall pay any deficiency as shown
by such statement to Landlord within 30 days after receipt of such statement.
If the total of the estimated monthly installments paid by Tenant during any
Calendar Year exceed the actual Expense Adjustment Amount due from Tenant for
such Calendar Year, then, at Landlord's option, such excess shall be either
credited against payments next due hereunder or refunded by Landlord, provided
Tenant is not then in default hereunder.
(ii) TAX ADJUSTMENT AMOUNT. The Tax Adjustment Amount with
respect to each Calendar Year shall be paid in monthly installments, in an
amount estimated from time to time by Landlord and communicated by written
notice to Tenant. Following the close of each Calendar Year, Landlord shall
cause the amount of the Tax Adjustment Amount for such Calendar Year to be
computed based on Taxes for such Calendar Year and Landlord shall deliver to
Tenant a statement of such amount and Tenant shall pay any deficiency as shown
by such statement to Landlord within 30 days after receipt of such statement. If
the total of the estimated monthly installments paid by Tenant during any
Calendar Year exceeds the actual Tax Adjustment Amount due from Tenant for such
Calendar Year, then, at Landlord's option such excess shall be either credited
against payments next due hereunder or refunded by Landlord, provided Tenant is
not then in default hereunder. The amount of any refund of Taxes received by
Landlord shall be credited against Taxes for the year in which such refund is
received. In determining the amount of Taxes for any year, the amount of special
assessments to be included shall be limited to the amount of the installment
(plus any interest payable thereon) of such special assessment required to be
paid during such year as if Landlord had elected to have such special assessment
paid over the maximum period of time permitted by law; if
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the authority to whom such assessment is to be paid shall not permit such
assessment to be paid in installments, the amount of such assessment shall be
treated as being amortized over such number of calendar years, beginning with
the Calendar Year in which the assessment is payable, as Landlord shall
reasonably determine, with interest at the rate of 15% per annum on the
unamortized amount, and such amortization and interest for each Calendar Year
shall be included in Taxes for that Calendar Year. Notwithstanding the
foregoing, Landlord shall provide Tenant copies of actual tax bills and
statements upon Tenant's request.
(iii) ADDITIONAL SERVICES CHARGE. The Additional Services
Charge shall be paid in monthly installments, in arrears, on the first day of
each calendar month during the course of such year, in amounts estimated from
time to time by Landlord and communicated by written notice to Tenant. Following
the close of each Calendar Year, Landlord shall cause the amount of the
Additional Services Charge for such Calendar Year to be computed and Landlord
shall deliver to Tenant a statement of such amount, whereupon Tenant shall pay
any deficiency as shown by such statement to Landlord within 30 days after
receipt of such statement. If the total of the estimated monthly installments
paid by Tenant during any Calendar Year exceeds the actual Additional Services
Charge due from Tenant for such Calendar Year, then, at Landlord's option, such
excess shall be either credited against payments next due hereunder or refunded
by Landlord, provided Tenant is not then in default hereunder.
(c) ADJUSTMENT FOR SERVICES NOT RENDERED. If Landlord shall not be
furnishing any particular work or service (the cost of which, if furnished by
Landlord would be included in Operating Expenses) to a tenant who undertakes to
itself perform or obtain such work or service in lieu of the furnishing thereof
by Landlord, Operating Expenses shall be deemed for purposes of this Paragraph 4
to be increased by an amount equal to the additional Operating Expenses, as
reasonably determined by Landlord, which would have been incurred during such
period if Landlord had at its own expense furnished such work or service to such
tenant.
(d) PARTIAL YEAR. If only part of any Calendar Year shall fall
within the Term, the amounts computed as Additional Rent, with respect to such
Calendar Year under the foregoing provisions of this Paragraph 4 shall be
prorated in proportion to the portion of such Calendar Year falling within the
Term, but the expiration or termination of this Lease prior to the end of such
Calendar Year shall not impair Tenant's obligation hereunder to pay such
prorated portion of such Additional Rent with respect to that portion of such
year falling within the Term.
(e) DISPUTES. Any statement furnished to Tenant by Landlord under
the provisions of this Paragraph 4 shall constitute a final determination as
between Landlord and Tenant as to the Rent set forth therein due from Tenant for
the period represented thereby, unless Tenant, within 60 days after such
statement is furnished, shall give a notice to Landlord that it disputes the
correctness thereof, specifying in detail the basis for such assertion. Pending
resolution of such dispute, Tenant shall pay all disputed amounts in accordance
with the statement furnished by Landlord. Landlord agrees, upon prior written
request, during normal business hours to make available for Tenant's inspection,
at Landlord's offices, Landlord's books and records which are relevant to any
items in dispute, provided Tenant has paid all amounts billed to Tenant on
account of the Additional Rent and all installments thereof, and all other rents
and sums then and previously due under this Lease.
(f) PLACE OF PAYMENT. Tenant shall, without any demand therefor
and without set-off, pay to DENVER-STELLAR ASSOCIATES LTD. PARTNERSHIP, A/R
DEPARTMENT, DENVER, COLORADO 80256-0170, or to such other person or at such
other place as Landlord may from time to time direct by notice given to Tenant,
the Base Rent as well as all other sums which may become due by Tenant under
this Lease. All such other sums shall be payable as Additional Rent.
(g) TENANT TAXES.
(i) Any provision hereof to the contrary notwithstanding,
Tenant shall, upon demand from time to time, as Additional Rent, pay to Agent
or, as Landlord may direct, to Landlord or to the tax collecting authority, the
full amount of all taxes, levies, charges and assessments legally required or
authorized to be collected by Landlord from Tenant or any subtenant or occupant
of the Premises and all taxes, levies, charges and assessments required to be
paid by Landlord (or imposed upon the Property) if not paid by or collected from
Tenant or a subtenant or
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occupant of the Premises. Tenant hereby agrees to defend, indemnify and hold
harmless Landlord from and against all loss, cost, liability and expenses
(including counsel fees and costs of litigation) which Landlord may suffer,
incur or be exposed to as a result of any assertion against Landlord of
liability for any of the taxes referred to in this subparagraph (h), and from
and against any penalties or interest relating thereto, which Tenant fails to
pay pursuant hereto.
(ii) Tenant shall timely pay when due all taxes, levies,
charges and assessments which are required to be paid by Tenant with respect to
Tenant's use or occupancy of the Premises or which are or could become a lien
upon the personal property, trade fixtures, furniture or facilities of Tenant on
the Premises. Tenant hereby agrees to defend, indemnify and hold harmless
Landlord from and against all loss, cost, liability and expense (including,
without limitation, counsel fees and costs of litigation) which Landlord may
suffer or incur, or to which Landlord may be exposed, as a result of Tenant's
failure to pay any of the foregoing.
(iii) Within 15 days after each date upon which such taxes are
due, Tenant shall deliver to Landlord official receipts for the payment of all
taxes due with respect to the personal property, trade fixtures, furniture or
facilities of Tenant on the Premises. In addition, within 15 days after written
notice from Landlord to do so, Tenant shall deliver to Landlord official
receipts for the payment of all other taxes, levies, charges and assessments
within the scope of subparagraph (ii) above that were due and payable in the
calendar year in which such notice is given and in the preceding calendar year.
If Tenant shall fail to present any of the receipts referred to in this
subparagraph within the times set forth herein, Landlord shall have the right to
pay the amounts of the taxes which Landlord reasonably determines would have
been covered thereby, together with the full interest and penalties chargeable
thereon in accordance with law, and Landlord shall, upon demand, be entitled to
reimbursement for all of such payments together with interest at the "Lease
Interest Rate" (defined in Paragraph 21 hereof).
(iv) Tenant shall cause all of the personal property, trade
fixtures, furniture and facilities of Tenant on the Premises, and all
alterations, additions and improvements made by Tenant to the Premises which for
purposes of personal property taxes are treated as personal property (such as
built-in cabinets, counters and partitions) to be assessed separately from
Landlord's property, and, if they are not so separately assessed, Landlord shall
be entitled to reimbursement, within 10 days after demand made from time to
time, for any tax payable by Landlord which is attributable to any of such items
taxable as personal property.
(h) DELAY IN COMPUTATION. Delay in computation of the Expense
Adjustment Amount, Tax Adjustment Amount, or Additional Services Charge shall
not be deemed a default hereunder or a waiver of Landlord's right to collect any
of such amounts.
5. USE OF PREMISES. Tenant shall use and occupy the Premises solely as
a general business office and for no other purpose.
6. CONDITION OF PREMISES. Tenant's taking possession of the Premises or
any portion thereof shall be conclusive evidence that the Premises or any such
portion was in good order and satisfactory condition when Tenant took
possession, unless notice to the contrary is provided to Landlord on an
inspection Punchlist prior to Tenant's occupancy or by written notice within ten
(10) days after occupancy. At the expiration or other termination of this Lease
or of Tenant's right of possession, Tenant shall leave the Premises, and during
the Term will keep the same, in good order and condition, ordinary wear and
tear, damage by fire or other casualty alone excepted; and for that purpose,
Tenant shall make all necessary repairs and replacements. Tenant shall give
Landlord prompt notice of any damage to or accident upon the Premises and of any
breakage or defects in the window glass, wiring or plumbing, heating,
ventilating or cooling or electrical apparatus or systems on or serving the
Premises. Tenant shall at the expiration or termination of this Lease or of
Tenant's right of possession, also have had removed from the Premises all
furniture, trade fixtures, office equipment and all other items of Tenant's
property (including, without limitation, the items Tenant is required to remove
pursuant to subparagraph 8(c) hereof) so that Landlord may again have and
repossess the Premises. All such items not removed from the Premises at such
expiration or termination, shall conclusively be deemed to have been abandoned
and may be appropriated, sold, stored, destroyed or otherwise disposed of by
Landlord without notice to Tenant or any other party with an interest in such
property and without any obligation to account therefor. Tenant shall pay
Landlord all expenses incurred in connection with the disposition of such
property, and if Landlord
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shall choose to stone any such items, Landlord shall have no liability for the
safekeeping thereof and such items may not be retrieved by Tenant or any other
person except upon payment of such charges as may be imposed for the removal and
storage. Tenant shall comply with all laws, rules, orders, ordinances and
regulations at any time issued or in force by any lawful authority, applicable
to Tenant or any other occupant of the Premises, or to the Premises, or to the
use or occupancy of the Premises. Tenant shall, upon demand, pay to Landlord the
amount of any damages suffered or incurred by Landlord as a result of any injury
to any part of the Property other than the Premises, done by Tenant or any
subtenant or any agent, employee, contractor or invitee of Tenant or any
subtenant, done by the bringing or removal of furniture and other property.
Tenant shall forthwith repair all damage done to the Premises by installation or
removal of furniture and property by Tenant or any subtenant or by any agent,
employee, contractor or invitee of Tenant or of any subtenant or, if Landlord
shall so request, pay to Landlord the cost of such repair. Tenant shall not do
or commit, or suffer on permit to be done or committed, any act or thing as a
result of which any policy of insurance of any kind on or in connection with the
Property shall become void or suspended, or any insurance risk on or in
connection with the Building or any other portion of the Property shall (in the
opinion of the insurer on any insurance organization) be rendered more hazardous
on require payment of a greater premium; without limitation of any other rights
and remedies of Landlord, Tenant shall pay as Additional Rent the amount of any
increase of premiums for such insurance, resulting from any breach of this
provision. Tenant shall leave the Premises in a reasonably tidy condition on all
days upon which janitorial services are to be provided by Landlord. Landlord
shall, at Landlord's expense, replace any glass broken in the Premises windows
in the exterior walls of the Building, unless such glass is broken by Tenant,
its servants, employees, agents, invitees, licensees on contractors, in which
case Tenant shall, upon demand, pay the cost of replacement by Landlord. Tenant
shall replace and pay for any other glass broken in on about the Premises.
7. SERVICES.
(a) STANDARD SERVICES. Landlord shall provide the following
services on all days during the Term, except Sundays and holidays, unless
otherwise stated:
(i) HVAC. Heating, ventilation and air conditioning, as deemed
appropriate by Landlord, from Monday through Friday within the period from 6:00
a.m. to 6:00 p.m. and on Saturday within the period from 8:00 a.m. to 1:00 p.m.,
holidays excepted. Tenant, within ten days after its receipt of each bill
therefor, will pay for all heating, ventilating and air conditioning requested
and furnished at other times, at rates to be established from time to time by
Landlord. Tenant anticipates its occupancy ratio to equal one person for each
160 square feet of floor area, however, Tenant acknowledges that Landlord shall
not be responsible for the failure of the HVAC system to provide normal comfort
if such failure results from occupancy of the Premises by more than an average
of one person for each 200 square feet of floor area on if Tenant uses
heat-producing equipment or equipment the electrical load of which, when
combined with the load of all lighting fixtures, exceeds 3.2 watts per square
foot of floor area in any one room on area. Unless otherwise consented to by
Landlord, window coverings shall be uniform in the Building and shall be closed
when exterior office windows are exposed to the sun without regard to Tenant's
specific use of the space or to the installation of any computers or data
processing equipment.
(ii) ELECTRICITY. Subject to subparagraph 7(b) hereof,
electrical energy for Building-standard lighting fixtures provided by Landlord
and for the operation of desk-top office equipment, provided that (A) the
connected electrical load of such equipment plus all lights on the Premises does
not exceed an average of 3.2 watts per square foot of the Premises and (B) the
electricity so furnished for equipment uses will be at a nominal 120 volts and
no electrical circuit for the supply of such use need have a current capacity
exceeding 20 amperes. Landlord shall provide and pay for electric service as
described in this subparagraph 7(a)(ii) during the period from 6:00 a.m. to 6:00
p.m. from Monday through Friday and during the period from 8:00 a.m. to
1:00 p.m. on Saturday, holidays excepted.
(iii) WATER. Ordinary water from the regular Building outlets
for drinking, lavatory and toilet purposes.
(iv) JANITORIAL SERVICES. Janitorial services, including,
without limitation, replacement of fluorescent bulbs in Building-standard
lighting fixtures, Monday through Friday in and about the Premises (except
holidays). If any material use made of the Premises after 6:00 p.m. shall,
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by reason of work force scheduling or security, overtime, union rules or
otherwise, cause any increase in Landlord's cost for providing janitorial
services, Tenant shall, as an Additional Services Charge, pay all bills for
reimbursement of Landlord for such increase, within ten days after Tenant's
receipt of such bill, or Landlord may bill Tenant for such services with other
Additional Services. All janitorial services shall be performed solely at
Landlord's direction without interference from Tenant.
(v) PASSENGER ELEVATOR. Automatic passenger elevator service
at all times.
(vi) FREIGHT ELEVATOR. Freight elevator services subject to
reasonable scheduling by Landlord.
(b) ADDITIONAL SERVICES. The following services are being provided
to the Premises in addition to the standard services described in subparagraph
7(a) above ("Additional Services"), and costs and expenses therefor incurred by
Landlord will be charged directly to Tenant as an Additional Services charge and
will not be included in the Operating Expenses for the Building:
(i) EXCESS UTILITY USE.
(A) AFTER-HOURS UTILITIES. In the event that Landlord, in
Landlord's sole discretion, determines that Tenant's use of electricity exceeds
the service to be provided under subparagraph 7(a) above or goes materially
beyond the hours specified in subparagraph 7(a), Tenant shall pay, as an
Additional Services Charge, such amounts for such excess or other hours use with
other Additional Services as shall be required under this subparagraph 7(b)(i).
In addition, if the Premises are used in a manner exceeding the aforementioned
occupancy and electric load criteria or if such window covering requirement
shall not be observed or if heat-producing or controlled climate equipment is
used, Tenant shall pay to Landlord, promptly upon billing, Landlord's additional
costs of supplying air conditioning resulting from such causes, at such rates as
Landlord shall establish therefor. If due to use of the Premises in a manner
exceeding the aforementioned occupancy and electrical load criteria, or due to
the arrangement of partitioning, or the use of heat-producing or controlled
climate equipment, or the distribution system within the Premises, impairment of
normal operation of the HVAC system in the Premises results, necessitating
changes in HVAC distribution system within the Premises, such changes may be
made by Landlord upon request by Tenant at Tenant's sole cost and expense,
provided that they can be accommodated by Landlord's systems. Tenant agrees at
all times to cooperate fully with Landlord and to abide by all the regulations
and requirements which Landlord may prescribe for the proper functioning and
protection of the HVAC system. After Landlord has balanced the air-conditioning
system for Tenant, if Tenant installs partitions, equipment, or fixtures
requiring rebalancing of the system, Landlord, at Tenant's request and at
Tenant's expense (which shall be charged as an Additional Services Charge
payable upon demand) shall endeavor to do such rebalancing. If Tenant's
requirements for electricity or other utilities are in excess of those set forth
in subparagraph 7(a), and if, in Landlord's sole judgment, Landlord's facilities
are inadequate for such additional requirements and if electrical energy for
such additional requirements is available to Landlord, Landlord, upon written
request and at the sole cost and expense of Tenant, will furnish and install,
or, at Landlord's sole discretion, permit Tenant to furnish and install, such
additional wires, risers, conduits, feeders, cabling, or other pipelines or
conduits and switchboards as reasonably may be required to supply such
additional requirements of Tenant provided that (1) the same shall be permitted
by applicable laws and insurance regulations; (2) in Landlord's sole judgment,
the same are necessary and will not cause permanent damage or injury to the
Building or the Premises or cause or create a dangerous or hazardous condition
or entail excessive or unreasonable alterations or repairs or interfere with or
disturb other tenants or occupants of the Building; (3) in Landlord's sole
judgment, the same will not in any way diminish or adversely affect the
utilities which Landlord deems should remain available for other tenants; and
(4) Tenant, at Tenant's expense, shall, concurrently with the making of such
written request, execute and deliver to Landlord Tenant's written undertaking,
in form and substance satisfactory to Landlord, obligating Tenant to fully and
promptly pay the entire cost and expense of so furnishing and installing any
additional wires, risers, conduits, feeders, cabling, and other pipelines and
conduits and switchboards as Additional Services.
(B) Measured Usage. In the event that Tenant's use of the
Premises includes either (i) the use or installation of any machines, equipment,
or devices in the Premises that do not constitute standard office equipment
provided to all tenants of the Building, including, without limitation, air
conditioning units, heating units, main frame computers or other electrical
equipment
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or fixtures which do not operate on 110 volts, single phase or require the use
of self contained air conditioning units ("Non-Standard Equipment") causing, in
Landlord's sole determination, Tenant's use of electric service or other
utilities provided to the Premises to exceed the service to be provided under
subparagraph 7(a) above, or (ii) if consistent use of a majority of the Premises
outside the hours specified in subparagraph 7(a), Landlord shall install in the
Premises or elsewhere, if Landlord shall so elect, or, if Tenant shall so
request and if feasible in Landlord's reasonable judgment, one or more meters or
other devices to measure the electricity or other utilities used by such
computers or other equipment or fixtures or such other hours use; and Tenant
shall pay Landlord for such electricity or other utilities as Additional
Services within ten days after submission of each bill by Landlord therefor, or
Landlord may bill Tenant for such services with other Additional Services, at
such rates as shall be from time to time determined by Landlord, provided that
the rates charged by Landlord shall not exceed Landlord's cost (including,
without limitation, taxes, fuel adjustment charges, and other like charges
regularly passed on to customers by public utility companies and transformer
costs) of supplying such electricity or other utilities as determined by
Landlord using reasonable accounting methods; and the cost of obtaining and
installing such meters or other devices shall be paid by Tenant to Landlord
within ten days after submission of each bill by Landlord to Tenant therefor, or
Landlord may bill Tenant for such services with other Additional Services.
(C) ESTIMATED USAGE. For any other hours use of
electricity or other utilities determined by Landlord to be material, and for
any use of electricity or other utilities which is determined by Landlord to be
in excess of the service to be provided under subparagraph 7(a) above, and which
is not actually measured, Tenant shall pay to Landlord, in monthly installments
at the times prescribed for the monthly installments of the Base Rent, as
Additional Services, amounts, as reasonably estimated by Landlord from time to
time, which Tenant would be required to pay for such excess or other hours
electrical or other utilities service if the same were actually measured as
provided in subparagraph 7(b)(i)(B) above.
(ii) LANDLORD'S REPAIR OF NON-STANDARD EQUIPMENT. If
Non-Standard Equipment located in the Premises requires maintenance or repair in
excess of the amount provided to all tenants of the Building, Landlord will
provide such excess services to Tenant within a reasonable amount of time after
Tenant's request is made to the manager of the Building, provided that such
excess services are available from the manager of the Building or the
contractors already retained by the manager for the Building. Tenant will pay
the cost of such excess services as Additional Services.
(iii) EXCESS JANITORIAL SERVICES. If Tenant requires any
janitorial or cleaning services in excess of the amounts provided by Landlord
according to subparagraph 7(a)(iv) (such as cleaning services beyond normal
office janitorial services for kitchens, computer rooms, or other special use
areas and carpet cleaning), Landlord will provide such excess services to Tenant
within a reasonable period after Tenant's request is made to the manager of the
Building, provided that such excess services are available from Landlord's
regular janitorial or cleaning contractor. Tenant will pay the cost of such
excess services as Additional Services. Landlord will also provide, within a
reasonable period after Tenant's request is made to the manager of the Building,
on at Tenant's cost and to the extend available to Landlord, replacement of
bulbs, tubes or ballasts in any Building non-standard lighting fixtures in the
Premises. Tenant will pay the costs of such services as Additional Services.
(iv) EXCESS SERVICES. If Tenant requires any work, service, or
materials performed for, or facilities or materials furnished to Tenant, to a
greater extent or in a manner more favorable to Tenant than those performed for
or furnished to other tenants of the Building, including, but not limited to,
supplying paper towels, restocking recycling containers, hanging pictures or
whiteboards, providing extra keys to the Premises and any other work or services
which relate to Tenant's use of the Premises, Landlord will provide such excess
services to Tenant within a reasonable period after Tenant's request is made to
the manager of the Building provided that such excess services are available
from the manager of the Building, or the contractors already retained by the
manager of the Building. Tenant will pay the cost of such excess services as
Additional Services.
(c) INTERRUPTION OF SERVICES. Tenant agrees that Landlord shall
not be liable for damages (by abatement of rent or otherwise) for failure to
furnish or delay in furnishing any service, or for any diminution in the quality
or quantity thereof, when such failure or delay or diminution is
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occasioned, in whole or in part, by repairs, renewals, or improvements, by any
strike, lockout or other labor trouble, by inability to secure fuel, by
governmental laws, regulations or orders, by Landlord's compliance, in whole or
in part with any government promulgated program (whether voluntary or
mandatory), for conservation of energy by any accident or casualty whatsoever,
by act or default of Tenant on other parties, on by any cause beyond Landlord's
reasonable control; and such failures or delays or diminution shall never be
deemed to constitute an eviction or disturbance of Tenant's use and possession
of the Premises or relieve Tenant from paying rent or performing any of its
obligations under this Lease. Landlord's obligation to furnish services shall
also be further conditioned upon the availability of adequate energy sources
from the public utility companies then servicing the downtown Denver area.
8. ALTERATIONS.
(a) Tenant shall not, without the prior written consent of
Landlord, make any alterations, improvements or additions to the Premises. If
Landlord consents to any alterations, improvements or additions, it may impose
such conditions with respect thereto as Landlord deems appropriate, including,
without limitation, Landlord's approval of plans and specifications for the work
(but Tenant shall not be entitled to rely upon such approval as evidencing that
the plans and specifications are proper in any respect), use of Landlord's
approved contractors to perform the work, insurance against liabilities which
may arise out of such work, permits necessary for such work and as-built
drawings upon completion of such work and its completion free of mechanics',
materialmen's and similar liens or claims thereof. Tenant shall not be obligated
to provide security for such alterations. All work done by Tenant or its
contractors shall be done in a first-class workmanlike manner, using only good
grades of materials and without disturbing other tenants and shall comply with
all insurance requirements and all applicable laws or ordinances and rules and
regulations of governmental departments or agencies. Any work performed by or
for Tenant shall be performed by competent workmen whose labor union
affiliations are compatible with those of the workmen who may be employed in the
Building by Landlord, its contractors or subcontractors, and Landlord shall have
the right, at its option, to directly supervise the work, which supervision
shall be for the protection of Landlord's interest only.
(b) If Tenant requests that Landlord, through its contractors,
perform the work associated with any alteration, improvement or addition to the
Premises, and Landlord agrees, in its sole discretion, to perform such work,
Landlord shall provide Tenant with a Tenant Work Order describing the work to be
performed by Landlord and stating the total cost to Tenant for the performance
of the work. Upon Tenant's acceptance of the Tenant Work Order, the total cost
for the work stated therein shall become a sum required to be paid under this
Lease and subject to the provisions of Paragraph 21. All work performed by
Landlord under this subparagraph 8(b) shall be subject to the provisions of
subparagraph 8(a).
(c) All alterations, additions or improvements made by Tenant and
all fixtures attached to the Premises shall become the property of Landlord and
remain at the Premises or, at Landlord's option, any or all of the foregoing
shall be removed at the cost of Tenant before the expiration or sooner
termination of this Lease and in such event Tenant shall repair all damage to
the Premises caused by the installation or removal thereof. Tenant shall not
permit or suffer any signs advertisements or notices to be displayed, inscribed
upon or affixed on any part of the outside or inside of the Premises, or in the
Building, except on the entrance doors of the Premises, and then only of such
size, color and style as Landlord may approve. Landlord shall have the right to
remove unauthorized signs at Tenant's expense.
9. LIENS.
(a) Tenant shall not permit there to be filed against the Property
or Landlord's interest therein or any part of either, and shall within ten days
after Tenant has notice of the claim or lien, remove or have removed, any
mechanics', or materialmen's or other lien, or claim thereof, filed by reason of
work, labor, services or materials provided for or at the request of Tenant
(other than work, labor, services or materials provided by Landlord) or any
subtenant or occupant or for any contractor or subcontractor employed by Tenant
or any subtenant or occupant, and shall exonerate, protect, defend and hold free
and harmless Landlord against and from any and all such claims or liens. Without
limitation of the foregoing, if any such claim or lien be filed, Landlord may,
but shall not be obligated to, discharge it either by paying the amount claimed
to be due in the claim or lien or by
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procuring the discharge of such lien or claim by deposit or by bonding
proceedings. Any amount so paid by Landlord and all costs and expenses,
including, without limitation, reasonable attorney's fees, in connection
therewith, together with interest thereon at the Lease Interest Rate
(hereinafter defined) from the respective dates of Landlord's making of the
payments and incurring of the costs and expenses, shall constitute Additional
Rent payable by Tenant under this Lease and shall be paid by Tenant to Landlord
on demand.
(b) At least ten days before the commencement of any work ordered
by Tenant on the Premises, Tenant shall notify Landlord of the proposed work and
of the names and addresses of the persons supplying labor and materials for the
proposed work so that Landlord may avail itself of the provisions of statutes
such as C.R.S. Section 38-22-105(2). During any such work on the Premises,
Landlord, or its representatives, shall have the right to go upon and inspect
the Premises at all reasonable times, and shall have the right to post and
keep posted thereon notices such as those provided for by C.R.S. Section
38-22-105(2) or to take any action that Landlord may deem advisable to protect
Landlord's interest in the Premises.
10. INSURANCE AND WAIVER OF SUBROGATION.
(a) Tenant, at its sole cost, shall maintain with responsible
insurance companies acceptable to Landlord and qualified to do business in
Colorado, general comprehensive public liability insurance against claims for
personal injury (including death) and property damage, arising from occurrences
in, on and about the Premises, with coverage on an occurrence basis in all cases
of not less than a combined single limit of $3,000,000.00 per occurrence.
Landlord shall be designated a named additional insured in the policies for such
insurance, which shall contain endorsements providing that the naming of more
than one insured shall not operate to limit or void the coverage of any named
insured relating to claims by another named additional insured.
(b) Tenant, at its sole cost, shall maintain with responsible
insurance companies acceptable to Landlord and qualified to do business in
Colorado, "All Risk" or equivalent insurance upon all personal property upon the
Premises and all equipment, fixtures, additions, alterations and improvements
and betterments installed by or for Tenant upon the Premises, including, without
limitation, anything in the nature of a leasehold improvement, in an amount
which is at least 80% of the full replacement cost thereof, which insurance
shall name Landlord as a named insured and Landlord's mortgagees as mortgagees
under a standard mortgagee clause. In the event of damage or destruction to any
leasehold improvements, Tenant shall use the proceeds of such insurance to
repair or restore such leasehold improvements. If this Lease shall be terminated
pursuant to subparagraph 11(a) on account of damage by fire or other casualty to
the Building or the Premises, Landlord shall be entitled to all of the insurance
proceeds payable under the aforesaid insurance relating to the leasehold
improvements.
(c) Tenant shall, prior to the commencement of the Term, and at
least 30 days prior to the expiration date of each policy, furnish to Landlord
certificates evidencing the coverage required hereinabove in this Paragraph and
the renewal thereof, which certificates shall state that such insurance coverage
may not be materially changed or canceled without at least ten days prior
written notice to Landlord and Landlord's mortgagee.
(d) Notwithstanding anything herein to the contrary, Landlord and
Tenant each hereby release the other, its officers, directors, partners, agents
and employees (and Tenant hereby also releases Agent, its partners, officers,
directors, agents and employees), to the extent of the releasing party's
coverage under its insurance policies, from any and all liability for any loss
or damage which may be inflicted upon the property of such party,
notwithstanding that such loss or damage shall have arisen out of the negligence
of the other party, its partners, officers, directors, agents or employees.
11. FIRE OR CASUALTY.
(a) If the Premises or the Building (including machinery or
equipment used in the operation of the Building) shall be damaged by fire or
other casualty and if such damage does not render all or a substantial portion
of the Premises or Building untenantable, then Landlord shall repair and restore
the same with reasonable promptness, subject to reasonable delays for insurance
adjustments and delays caused by matters beyond Landlord's reasonable control.
If any such damage
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renders all or a substantial portion of the Premises or Building untenantable,
Landlord shall have the right to terminate this Lease (with appropriate
prorations of rent being made for Tenant's possession subsequent to the date of
such damage of those tenantable portions of the Premises) upon giving written
notice to Tenant at any time within 120 days after the date of such damage; and
if such notice is given Landlord shall have no obligation to repair or restore.
Landlord shall have no liability to Tenant, and Tenant shall not be entitled to
terminate this Lease by virtue of any delays in completion of such repairs and
restoration, except that Tenant may terminate the Lease if the Premises are not
restored to a usable condition within 180 days of the casualty. Rent, however,
shall abate on those portions of the Premise as are, from time to time,
untenantable as a result of such damage.
(b) Notwithstanding anything to the contrary herein set forth,
Landlord shall have no duty pursuant to this Paragraph 11 to repair or restore
any portion of any alterations, additions or improvements in the Premises or the
decorations thereto except to the extent that such alterations, additions,
improvements and decorations were provided by Landlord at the beginning of the
Term.
12. WAIVER OF CLAIMS - INDEMNIFICATION. To the extent not prohibited by
law, Landlord, Agent and their respective officers, directors, partners, agents,
servants and employees shall not be liable for, and it and they are hereby
released by Tenant from all liability for, any damage either to person or
property or resulting from the loss of use thereof or any other loss, or any
death, sustained by Tenant or by other persons claiming through Tenant due to
the Property or any part thereof or any appurtenances thereof becoming out of
repair, or due to the happening of any accident or event in, on or about the
Property, or due to any act or neglect of any tenant or occupant of the Building
or of any other person. This provision shall apply particularly, but not
exclusively, to damage caused by gas, electricity, snow, frost, steam, sewage,
sewer gas or odors, fire, water or by the bursting or leaking of pipes, faucets,
sprinklers, plumbing fixtures and windows, and whether or not such act or
neglect occurred before, at or after the execution of this Lease, and whether
the damage was due to any of the causes specifically enumerated above or to some
other cause of an entirely different kind. Tenant further agrees that all
personal property of Tenant upon the Premises, or upon loading docks, receiving
and holding areas, or elsewhere in, on or about the Property, shall be at the
risk of Tenant only, and that neither Landlord nor Agent, nor their partners,
directors or officers, shall be liable for any loss or damage thereto or theft
thereof. Without limitation of any other provisions hereof, Tenant agrees to
defend, protect, indemnify and save harmless Landlord and Agent, and their
respective partners, officers, directors and employees, from and against all
liability to third parties arising out of the acts or omissions of Tenant or any
subtenant or the servants, agents, employees, contractors, suppliers, workmen
and invitees of Tenant or any subtenant.
Tenant agrees to indemnify and save harmless, and upon request, defend,
Landlord, Agent, and their respective partners, directors, officers and
employees (herein called "indemnitees") against and from any and all claims by
or on behalf of any person, arising out of or related to:
(a) Tenant's use or occupancy of the Premises or the conduct of
its business, or any activity, work, or thing, permitted or suffered by Tenant,
in, on or about the Premises or the Property;
(b) any occurrence in, on or about the Premises;
(c) any breach or default on Tenant's part in the performance or
observance of, or compliance with, any term, covenant or condition on Tenant's
part to be performed pursuant to the terms of this Lease; or
(d) any act or negligence of Tenant or any subtenant, or any of
their respective agents, contractors, servants, employees, invitees or
licensees, and from and against all costs, counsel fees, expenses, penalties,
fines and liabilities which Landlord or any other indemnitee may suffer or incur
in connection with any such claim and any action or proceeding brought with
respect thereto. In the event that any action or proceeding shall be brought by
reason of any such claim, against any party to be indemnified hereunder, Tenant
covenants that Tenant, upon notice from such party and at Tenant's expense,
shall resist and defend such action or proceeding by counsel reasonably
satisfactory to such party. Notwithstanding anything to the contrary contained
in this Lease, in no event shall Tenant be responsible for, and in no event
shall Tenant's indemnity obligations apply to the gross negligence or wilful
misconduct of Landlord or Agent.
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13. NONWAIVER. No waiver of any provision of this Lease shall be
implied by any failure of Landlord to enforce any remedy on account of the
violation of such provision, even if such violation be continued or repeated
subsequently, and no express waiver shall affect any provision other than the
one specified in such waiver and that one only for the time and in the manner
specifically stated. No receipt of moneys by Landlord or its agents from Tenant
after the termination of this Lease shall in any way alter the length of the
Term or of Tenant's right of possession hereunder or after the giving of any
notice shall reinstate, continue or extend the Term or affect any notice given
Tenant prior to the receipt of such moneys, it being agreed that after the
service of notice or the commencement of a suit or after final judgment for
possession of the Premises, Landlord may receive and collect any rent due, and
the payment and acceptance of payment of rent shall not waive or affect said
notice, suit or judgment.
14. CONDEMNATION. In the event that the whole of the Premises
shall be lawfully condemned or taken for a public or quasi-public use, this
Lease shall terminate as of the date that possession is to be surrendered to the
condemnor or taking authority. In the event that there shall be a lawful
condemnation or taking for any public or quasi-public use of any part of the
Building, without there being condemned or taken all of the Premises, then, at
the option of Landlord, exercisable by notice given to Tenant not later than 90
days after the date upon which Landlord receives notice of the taking or
condemnation, this Lease shall terminate as of the date that possession of the
Premises taken is required to be surrendered to the condemnor or taking
authority. In the event of any such taking or condemnation of all or any part of
the Premises or of all or any part of the Property, Tenant shall have no claim
against Landlord and shall not have any claim or right to any portion of the
amount that may be awarded as damages or paid as a result of such taking or
condemnation; and all rights of Tenant to damages therefor are hereby assigned
by Tenant to Landlord and Tenant shall have no claim against Landlord or the
condemnor for the value of the unexpired term of this Lease. However, the
foregoing provisions of this paragraph shall not be construed to deprive Tenant
of the right to claim and receive payment from the condemnor or taking authority
for moving and related expenses as long as such claim or the payment thereof
does not reduce the award which Landlord would otherwise be entitled to receive.
In the event of any such taking or condemnation of part of the Premises, the
Base Rent, the Tax Adjustment and the Operating Expense Adjustment shall be
proportionately reduced from the date that possession is required to be
surrendered to the condemnor or taking authority.
15. ASSIGNMENT AND SUBLETTING. Tenant shall not, without the prior
written consent of Landlord (which shall not be unreasonably withheld in the
case of an assignment or subletting), (a) assign, convey or mortgage this Lease
or any interest hereunder; (b) suffer to occur or permit to exist any assignment
of this Lease, or any lien upon Tenant's interest hereunder, whether
voluntarily, involuntarily or by operation of law; (c) sublet the Premises or
any part thereof, or (d) permit the use of the Premises by any parties other
than Tenant and its employees. Any such action on the part of Tenant without
Landlord's consent, shall be void and of no effect. Landlord's consent to any
assignment, subletting or transfer or Landlord's election to accept any
assignee, subtenant or transferee as the tenant hereunder and to collect rent
from such assignee, subtenant or transferee shall not release Tenant or any
subsequent tenant from any covenant or obligation under this Lease. Landlord's
consent to any assignment, subletting or other act or occurrence requiring
Landlord's consent shall not constitute a waiver of Landlord's right to withhold
its consent to any future assignment, subletting or act or occurrence requiring
Landlord's consent. Without limitation of the circumstances in which Landlord's
withholding of consent to an assignment or subletting shall not be unreasonable,
it shall not be unreasonable for Landlord to withhold its consent if the
reputation, financial responsibility, or business of the proposed assignee or
subtenant is unsatisfactory to Landlord, or if Landlord deems such business to
be not consonant with that of other tenants in the Building, or if the intended
use by the proposed assignee or subtenant conflicts with any commitment made by
Landlord to any other tenant in the Building, or if in Landlord's judgment the
assignment or subletting will have financial consequences adverse to Landlord's
interest, or if the proposed assignee or subtenant shall be (i) a government or
any subdivision or agency thereof, (ii) a school, college, university or
educational institution of any type, whether for profit or non-profit or (iii)
an employment, recruitment or temporary help service or agency or (iv) an
existing or former tenant of the Project or any affiliate or guarantor thereof
who defaulted under any of its financial lease obligations to Landlord or any
affiliate of Landlord.
At least fifteen (15) business days prior to any proposed subletting or
assignment, Tenant shall submit to Landlord a statement seeking Landlord's
consent and containing the name and address of
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the proposed subtenant or assignee, the terms of the proposed sublease or
assignment (including, without limitation, the date upon which the assignee or
subtenant is to take possession and the amount of rent that Tenant will be
charging the proposed assignee or subtenant) and such financial and other
information with respect to the proposed assignee or subtenant as Landlord
reasonably may request. Landlord shall indicate its consent or non-consent
within fifteen (15) business days of its receipt of said statement.
Contemporaneously with any request or proposal by tenant to sublet or
assign any part of this Lease, Tenant shall pay all costs, including reasonable
attorneys' fees, incurred by Landlord (not to exceed $1000.00 in total in a
subletting, if Landlord's standard sublease form is utilized) or anticipated to
be incurred by Landlord, in connection with Landlord's investigation of any
financial or other information of the proposed assignee or subtenant. Landlord
may require that all or a portion of the costs or anticipated costs be paid in
advance by Tenant. The payment of such costs shall not obligate Landlord in any
way to consent to any proposed assignment or subletting nor shall the amount of
costs paid by Tenant be applied or used as a set-off to any amounts due or to
become due by Tenant to Landlord.
In addition to withholding its consent, Landlord shall have the
additional right, exercisable within such 30-day period, to terminate this Lease
in its entirety (where Tenant seeks to assign this Lease or sublet the entire
Premises) or as to that portion of the Premises which Tenant seeks to sublet
(where Tenant seeks to sublet only a portion of the Premises). Landlord may
exercise such right to terminate by giving written notice to Tenant at any time
prior to Landlord's written consent to such assignment or sublease. In the event
that Landlord exercises such right to terminate, the termination shall be
effective as of such date as Landlord may specify in its notice which shall not
be later than the later of (i) the proposed date for possession by such assignee
or subtenant, or (ii) 90 days after the date of Landlord's notice of termination
to Tenant; provided that Tenant may invalidate Landlord's termination by
revoking its request to assign or sublet within thirty (30) days after
Landlord's termination notice.
If Landlord fails to exercise its termination right and its right to
withhold its consent as set forth in the preceding paragraphs, Tenant shall pay
to Landlord 50% of all profit derived by Tenant from the assignment or
sublease. Whenever requested by Landlord, Tenant shall furnish Landlord with a
sworn statement, setting forth in detail the computation of profit (which
computation shall be based upon generally accepted accounting principles), and
Landlord, or its representatives, shall have access to the books, records and
papers of Tenant in relation thereto, and to make copies thereof. Any rent in
excess of that paid by Tenant hereunder realized by reason of such assignment or
sublease shall be deemed an item of such profit. Such percentage of Tenant's
profits shall be paid to Landlord promptly by Tenant upon Tenant's receipt from
time to time of periodic payments from such assignee or subtenant or at such
other earlier time as Tenant shall realize its profits from such assignment or
sublease.
Landlord and Tenant further agree that Tenant shall not publish or
otherwise disseminate any printed advertising material in connection with any
proposed assignment or sublease of all or any portion of the Premises (the
"Advertising") without Landlord's prior written approval of the same, which
approval shall not be unreasonably withheld; provided, however, that no
Advertising shall contain any reference to the price to be charged in connection
with any proposed assignment or sublease, excluding, however, any proposal
letters or other such materials provided to prospects with which Tenant is
actively negotiating.
Notwithstanding anything to the contrary set forth in this Paragraph,
and subject to all of the provisions of this Lease, Tenant may assign this Lease
to or permit any corporation or other business entities which, directly or
indirectly, control, are controlled by, or are under common control with Tenant
(each, a "Related Corporation") to sublet the Premises for any of the purposes
permitted to tenant under this Lease (subject, however, to compliance with
Tenant's obligations under this Lease) provided that (a) Tenant shall not then
be in default (after any applicable grace and/or cure periods, in the
performance of any of its obligations under this Lease), and (b) prior to such
assignment or subletting, Tenant furnishes Landlord with the name of any such
Related Corporation, together with the written certification of Tenant that such
entity is a Related Corporation of Tenant. Any such subletting shall not be
deemed to vest in any such Related Corporation any right or interest in this
Lease or the Premises nor shall any such subletting or
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assignment relieve, release, impair or discharge any of Tenant's obligations
hereunder. For the purposes hereof, "control" shall be deemed to mean ownership
of not less than 51% of all of the legal and equitable interest in any other
business entities.
16. HOLDOVER. If Tenant or any person claiming through Tenant shall
retain possession of the Premises or any part thereof after the expiration or
earlier termination of the Term and if Landlord shall consent to such
continuation of possession, such possession shall be (unless the parties hereto
shall otherwise have agreed in writing) deemed to be under a month-to-month
tenancy which shall continue until either party shall notify the other in
writing, at least 30 days prior to the end of any calendar month, that the party
giving such notice elects to terminate such tenancy at the end of such calendar
month, in which event such tenancy shall so terminate. Anything contained in the
foregoing provisions of this paragraph to the contrary notwithstanding, with
respect to each such monthly period and in addition to other rent and charges
due under this Lease, Tenant shall pay rent equal to 1/9 of the per annum Base
Rent and 1/9 of the Tax Adjustment Amount, the Expense Adjustment Amount, and
Additional Services Charge (calculated in accordance with the provisions of
Paragraph 4 hereof) which would have been payable had this Lease been renewed
until the end of the calendar year which includes such month on the terms and
conditions in effect immediately prior to the expiration or termination of the
Term; and such month-to-month tenancy with Landlord's consent shall be upon the
same terms and subject to the same conditions as those which are set forth in
this Lease except as aforesaid. If Tenant or any person claiming through Tenant
shall retain possession of the Premises or any part thereof, after the
expiration or earlier termination of the term or of Tenant's right of
possession, and if such retention shall be without Landlord's consent, Tenant
shall pay Landlord (a) for each month or portion thereof during which such
possession continues, an amount equal to the rental to be paid for each month
pursuant to the foregoing provisions of this Paragraph when such possession is
with Landlord's consent, plus all other sums which would have been payable
hereunder had the term continued during such retention of possession and (b) all
other damages sustained by Landlord, whether direct or consequential, by reason
of such retention of possession. During any such retention of possession without
Landlord's consent, all of Tenant's obligations with respect to the use,
occupancy and maintenance of the Premises shall continue. The provisions of this
Paragraph 16 shall not be deemed to limit or constitute a waiver of any other
rights or remedies of Landlord provided herein or at law or in equity and
applicable to unlawful retention of possession or otherwise.
17. ESTOPPEL CERTIFICATE. Tenant shall from time to time, within ten
days after Tenant's receipt of Landlord's request therefor, execute, acknowledge
and deliver to Landlord a written instrument in recordable form (a) certifying
(i) that this Lease is in full force and effect and has not been modified,
supplemented or amended in any way (or, if there have been modifications,
supplements or amendments thereto, that it is in full force and effect as
modified, supplemented or amended, and stating such modifications, supplements
and amendments) and that this Lease (as modified, supplemented or amended, as
aforesaid) represents the entire agreement among Landlord and Tenant as to the
Premises and the leasehold; (ii) the dates to which the Base Rent, Additional
Rent and other charges arising hereunder have been paid, (iii) the amount of any
prepaid rents or credits due to Tenant, if any; and (iv) that if applicable,
Tenant has entered into occupancy of the Premises; and (b) stating, to the best
knowledge of Tenant, whether or not all conditions under the Lease to be
performed by Landlord prior to the date of such certificate have been satisfied
and whether or not Landlord is then in default in the performance of any
covenant, agreement or condition contained in this Lease and specifying, if any,
each such unsatisfied condition and each such default; and (c) stating any other
fact or certifying any other condition reasonably requested by Landlord,
Landlord's Mortgagee (as defined below), or any prospective mortgagee or
purchaser of the Property or of any interest therein.
18. SUBORDINATION.
(a) This Lease shall be subject and subordinate at all times to
the lien of any mortgage, deed of trust, or other security instrument, or ground
lease, master lease, or primary lease heretofore or hereafter placed by Landlord
on the Property or any part thereof and of all renewals, modifications,
consolidations, replacements and extensions thereof (all of which are
hereinafter referred to collectively as "Mortgage"), all automatically and
without the necessity of any further act on the part of Tenant to effectuate
such subordination. Tenant shall, at the request of the holder of any Mortgage
("Landlord's Mortgagee"), upon foreclosure thereof attorn to Landlord's
Mortgagee. Tenant shall also execute, acknowledge and deliver, within 15 days
after Tenant's receipt of demand
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from Landlord or Landlord's Mortgagee, such other instrument or instruments
evidencing such subordination of Tenant's right, title and interest under this
Lease to the lien of the Mortgage and such other instrument or instruments of
attornment, as shall be desired by Landlord's Mortgagee. With respect to any
Mortgage first encumbering the Building subsequent to the Commencement Date of
the Lease, upon Tenant's request, Landlord will use its good faith efforts to
cause Landlord's Mortgagee to agree that so long as Tenant is not in default of
its obligations under the Lease, the Lease will not be terminated and Tenant's
possession of the Premises will not be disturbed by the termination or
foreclosure, or proceeds for enforcement, of such Mortgage.
(b) Anything contained in the foregoing provisions of this
Paragraph 18 to the contrary notwithstanding, Landlord's Mortgagee may at any
time subordinate its Mortgage to this Lease, without the necessity of obtaining
Tenant's consent, by giving notice of the same in writing to Tenant, and
thereupon this Lease shall be deemed to be prior to the Mortgage without regard
to its date of execution, delivery, or recordation or the date of commencement
of Tenant's possession, and in that event Landlord's Mortgagee shall have the
same rights with respect to this Lease as though this Lease shall have been
executed, delivered and recorded prior to the execution and delivery of the
Mortgage.
(c) If Landlord is or becomes lessee of premises of which the
Premises are a part, Tenant agrees that, automatically and without the necessity
of any further act, Tenant's possession shall be as a subtenant and shall be
subordinate to the interest of Landlord's lessor, its heirs, personal
representatives, successors and assigns (which lessor, its heirs, personal
representatives, successors and assigns, or any of them, is hereinafter called
"Paramount Lessor"), but notwithstanding the foregoing, if Landlord's tenancy
shall terminate by expiration, by forfeiture or otherwise, then Tenant hereby
agrees, upon request of Paramount Lessor, to attorn to Paramount Lessor, and to
recognize such lessor as Tenant's landlord for the balance of the term of this
lease and any extensions or renewals hereof. Tenant shall execute, acknowledge
and deliver, upon demand by Landlord or Paramount Lessor, such other instrument
or instruments evidencing such subordination of Tenant's right, title and
interest under this Lease to the interest of such lessor, and such other
instrument or instruments of attornment, as shall be prescribed by such lessor.
19. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord shall have the
following rights, each of which Landlord may exercise without notice to Tenant
and without liability to Tenant for damage or injury to property, person or
business on account of the exercise thereof, and the exercise of any such rights
shall not be deemed to constitute an eviction or disturbance of Tenant's use or
possession of the Premises and shall not give rise to any claim for set-off or
abatement of rent or any other claim:
(a) to change the Building's name or street address;
(b) to install, affix and maintain any and all signs on the
exterior and on the interior of the Building;
(c) to decorate or to make changes, repairs, alterations,
additions, or improvements, whether structural or otherwise (including
alterations in the configuration of, and elimination of, any common areas), in
and about the Building and Property or any part thereof, and for such purposes
to enter upon the Premises, and during the continuance of any of said work, to
temporarily close doors, entry ways, public space and corridors in the Building
and to interrupt or temporarily suspend services or use of facilities; but
Landlord shall endeavor to perform any such work in or about the Premises so as
to cause the minimum inconvenience to Tenant practicable under the
circumstances;
(d) to designate and approve all window coverings used in the
Building;
(e) to approve, disapprove or restrict the weight, size and
location of safes, vaults and other heavy equipment and articles in and about
the Premises and the Building so as not to exceed the live load per square foot
designated by the structural engineers for the Building, and to require all such
items and furniture and similar items to be moved into or out of the Building
and Premises only at such times and in such manner as Landlord shall direct in
writing. Tenant shall not install or operate machinery or any mechanical devices
of a nature not directly related to Tenant's ordinary use of the Premises
without the prior written consent of Landlord. Tenant's movements of
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property into or out of the Building or Premises and within the Building are
entirely at the risk and responsibility of Tenant, and Landlord reserves the
right to require permits before allowing any property to be moved into or out of
the Building or Premises;
(f) to establish controls for the purpose of regulating all
property and packages, both personal and otherwise, to be moved into or out of
the Building and Premises and all persons using the Building after normal office
hours;
(g) to regulate delivery and service of supplies in order to
insure the cleanliness and security of the Premises and to avoid congestion of
the loading docks, receiving areas and freight elevators;
(h) to show the Premises to prospective tenants at reasonable
hours during the last twelve months of the Term and, if vacated or abandoned, to
show the Premises at any time and to prepare the Premises for re-occupancy;
(i) to erect, use and maintain pipes, ducts, wiring and conduits,
and appurtenances thereto, in and through the Premises at reasonable locations;
and
(j) to enter the Premises at any reasonable time to inspect the
Premises.
20. RULES AND REGULATIONS. Tenant shall, and shall cause all of its
subtenants and occupants, its and their agents, employees, invitees and
licensees to, observe faithfully, and comply strictly with, the rules and
regulations attached to this Lease as Exhibit "B", as they may be supplemented
and revised by Landlord from time to time, and such other rules and regulations
promulgated from time to time by Landlord, as in Landlord's judgment may be
desirable for the safety, care and cleanliness of the Building and the Premises,
or for the preservation of good order therein. Landlord shall not be liable to
Tenant for violation of such rules and regulations by, or for Landlord's failure
to enforce the same against, any other tenant, its subtenants and occupants and
its and their agents, employees, invitees or licensees, nor shall any such
violation or failure constitute, or be treated as contributing to, an eviction,
actual or constructive, or affect Tenant's covenants and obligations hereunder,
or allow Tenant to reduce, abate or offset the payment of any rent under this
Lease. Landlord shall use reasonable efforts to enforce the rules and
regulations against all tenants in a nondiscriminatory manner.
21. REMEDIES.
(a) If (1) default shall be made in the payment of any rent or any
installment thereof or in the payment of any other sum required to be paid by
Tenant under this Lease or under the terms of any other agreement between
Landlord and Tenant and such default shall continue for five (5) days after
notice by Landlord; provided, however, that Tenant shall not be entitled to more
than one (1) notice of delinquent rent or installments thereof (including
Expense and Tax Adjustment Amounts) in any two calendar years and, if thereafter
during that two-year calendar period any rent is not paid when due a default
shall occur, or (2) if default shall be made in the observance or performance of
any of the other agreements, covenants or conditions in this Lease (or in any
other agreement between Landlord and Tenant) which Tenant is required to observe
and perform and such default shall continue for fifteen (15) days after written
notice to Tenant, or (3) the interest of Tenant in this Lease shall be levied on
under execution or other legal process; or
(b) if Tenant becomes the subject of commencement of an
involuntary case under the federal bankruptcy law as now or hereafter
constituted, or there is filed a petition against Tenant seeking reorganization,
arrangement, adjustment or composition of or in respect of Tenant under the
federal bankruptcy law as now or hereafter constituted, or under any other
applicable federal or state bankruptcy, insolvency, reorganization or other
similar law, or seeking the appointment of a receiver, liquidator or assignee,
custodian, trustee, sequestrator (or similar official) of Tenant or any
substantial part of its property, or seeking the winding-up or liquidation of
its affairs and such involuntary case or petition is not dismissed within sixty
(60) days after the filing thereof, or if Tenant commences a voluntary case or
institutes proceedings to be adjudicated a bankrupt or insolvent, or consents to
the institution of bankruptcy or insolvency proceedings against it, under the
Federal bankruptcy laws as now or hereafter constituted, or any other applicable
Federal or state bankruptcy or insolvency or
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other similar law, or consents to the appointment of or taking possession by a
receiver or liquidator or assignee, trustee, custodian, sequestrator (or other
similar official) of Tenant or of any substantial part of its property, or makes
any assignment for the benefit of creditors or admits in writing its inability
to pay its debts generally as they become due or fails to generally pay its
debts as they become due or if Tenant or its stockholders or board of directors
or any committee thereof takes any corporate action in contemplation,
preparation or furtherance of or for any of the occurrences, steps, procedures,
proceedings or other items mentioned in this subparagraph (b); or
(c) Landlord may treat the occurrence of any one or more of the
foregoing events as a breach of this Lease, and thereupon at its option may,
without notice or demand of any kind to Tenant or any other person, have any one
or more of the following described remedies in addition to all other rights and
remedies provided at law or in equity or elsewhere herein:
(i) At the option of Landlord, the whole balance of Rent,
charges and all other sums payable hereunder, whether or not payable as Rent,
for the entire balance of the Term, herein reserved or agreed to be paid by
Tenant, discounted to present value at Prime Rate, as hereinafter defined, or
any part of such rent, charges and other sums, and also all or any costs and
sheriff's, marshall's, constable's or other official's fees and charges, whether
chargeable to Landlord or Tenant, shall be taken to be due and payable from
Tenant and in arrears as if by the terms of this Lease said balance of rent,
charges and other sums and expenses were on that date payable in advance; or
(ii) Landlord, by giving written notice to Tenant, may
terminate this Lease and the Term, in which event Landlord may immediately
repossess the Premises by legal proceedings, force or otherwise; or
(iii) Landlord, by giving written notice to Tenant, may
terminate Tenant's right of possession and may immediately repossess the
Premises by legal proceedings, force or otherwise, without terminating this
Lease.
(iv) After reentry, retaking, repossessing or recovering of
the Premises, whether or not Landlord has terminated this Lease, Landlord may,
but shall be under no obligation to, relet the same or any portion thereof for
such rent and upon such terms as shall be deemed advisable by Landlord; and
whether or not the Premises are relet, Tenant shall be liable for any loss of
rent for such period as would be the balance of the term of this Lease plus the
costs and expenses of reentry, retaking, repossession and recovering, and of
reletting and of redecorating, remodelling and making repairs and alterations to
the Premises for the purpose of reletting, the amount of such liability to be
computed monthly and paid by Tenant to Landlord at the end of each month after
deducting rents received from any reletting. Landlord shall in no event have any
duty to relet the Premises, nor shall any damages or other sums to be paid by
Tenant to Landlord be reduced by any failure to relet the Premises or failure to
collect the rent from any reletting. Tenant shall not be entitled to any rents
received by Landlord in excess of the rents provided for in this Lease. Tenant
agrees that Landlord may file suit to recover any sums falling due under the
terms of this Paragraph 21 from time to time and that no suit or recovery of any
portion due Landlord hereunder shall be any defense to any subsequent action
brought for any amount not theretofore reduced to judgment in favor of Landlord.
If Landlord relets the Premises, such reletting shall not be considered a
termination of this Lease unless Landlord has given Tenant a notice wherein
Landlord expressly states that this Lease is terminated.
(v) If Landlord shall terminate this Lease as provided in
subparagraph (b) above, Landlord, at its option, shall be entitled to recover as
damages the excess, if any, at the time of such termination, of the amount of
the Base Rent payable under this lease for the balance of the term of this Lease
(including, any extension options which have been exercised) over the then fair
rental value of the Premises for the same period, plus all costs and expenses of
Landlord caused by Tenant's default, including, but not limited to, reasonable
attorney's fees.
If any payment of Rent or any other sum, or any part of any such
payment, to be made by Tenant under the terms of this Lease shall become overdue
for a period in excess of five (5) days Tenant shall pay to Landlord (x) a "late
charge" of $.05 for each dollar so overdue, for the purpose of defraying the
expense incident to handling such overdue or delinquent payment, and (y)
interest on the overdue amount at the Lease Interest Rate (defined below) from
the date when such payment
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was due until the date paid, but in no event more than the amount or rate which
is the maximum amount or rate Landlord may lawfully charge in respect of Tenant
in such circumstances under applicable law. The "Lease Interest Rate" shall mean
the greater of 18% per annum or such variable rate which is from time to time
equal to 3% above the prime rate as stated by US Bank, Denver, Colorado or its
successor ("Prime Rate"), or, in the absence of there being a successor to US
Bank, by such other bank having an office in the City of Denver, as Landlord may
from time to time select. Nothing herein shall be construed as waiving any
rights of Landlord arising out of any default of Tenant by reason of Landlord's
accepting any such late charge or interest; the right to collect a late charge
and interest is separate and apart from any other rights or remedies of Landlord
after default by Tenant.
Without limiting the generality of the foregoing, if Tenant shall be in
default in the performance of any of its obligations hereunder, Landlord may
(but shall not be obligated to), in addition to any other rights it may have in
law or in equity, cure such default on behalf of Tenant, and Tenant shall
reimburse Landlord upon demand for any sums paid or costs incurred by Landlord
in curing such default, including reasonable attorneys' fees and other legal
expenses, together with interest at the Lease Interest Rate from the dates of
Landlord's incurring of costs or expenses.
All remedies available to Landlord hereunder and otherwise available at
law or in equity shall be cumulative and concurrent. No termination of this
Lease nor taking or recovering possession of the Premises shall deprive Landlord
of any remedies or actions against Tenant for Rent, for charges, or for damages
for the breach of any term, covenant or condition herein contained, nor shall
the bringing of any such action for Rent, charges or breach of term, covenant or
condition, nor the resort to any other remedy or right for the recovery of Rent,
charges or damages for such breach be construed as a waiver or release of the
right to insist upon the forfeiture and to obtain possession. The failure of
Landlord to insist upon strict or prompt performance of the terms, agreements,
covenants and conditions of this Lease or any of them, or the acceptance of such
performance thereafter shall not constitute or be construed as a waiver of
Landlord's right to thereafter enforce the same strictly according to the tenor
thereof in the event of a continuing or subsequent default.
Notwithstanding anything in this Paragraph 21 or any other provision of
this Lease to the contrary, this Lease shall not be terminated by service upon
Tenant of a notice from Landlord demanding payment of Rent or possession of the
Premises following default by Tenant, or by any action of Tenant to vacate the
Premises following receipt of such a notice, unless the notice served by
Landlord includes a statement expressly terminating this Lease. Further,
Landlord reserves the right to receive payment of all unaccrued Rent for the
balance of the Term originally contemplated under Paragraph 1 of this Lease (and
any extensions or renewals thereof to which Tenant shall have become bound,
discounted to present value at Prime Rate) following service of such a notice
for payment or possession, or a notice terminating this Lease for Tenant's
default.
22. EXPENSES OF ENFORCEMENT. Tenant shall pay upon demand all
Landlord's costs, charges and expenses, including the fees and out-of-pocket
expenses of counsel, agents and others retained by Landlord, incurred by
Landlord, whether or not suit brought, in enforcing Tenant's obligations
hereunder or in collecting any amounts due from Tenant or any subtenant or
assignee hereof or in enforcing any provision of this Lease or in any
litigation, negotiation or transaction in which Tenant causes landlord without
Landlord's fault to become involved or concerned or in reletting the premises or
any portion thereof after default by Tenant.
23. COVENANT OF QUIET ENJOYMENT. Landlord covenants that Tenant, on
paying the Rent, charges for services and other payments herein reserved or
required and on keeping, observing and performing all the other terms,
covenants, conditions, provisions and agreements herein contained on the part of
Tenant to be kept, observed and performed, shall, during the Term, peaceably and
quietly have, hold and enjoy the Premises free from interference by Landlord or
any person claiming by, from or under Landlord, subject, however, to the terms,
covenants, conditions, provisions and agreements hereof.
24. SECURITY DEPOSIT. Upon the execution of this Lease, Tenant shall
deposit with Landlord the sum of $39,064.48 (hereinafter referred to as
"Collateral"), as security for the prompt, full and faithful performance by
Tenant of each and every provision of this Lease and of all obligations of
Tenant hereunder. No interest shall be paid to Tenant on the Collateral and
Landlord may co-mingle the collateral with any other funds of Landlord.
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If Tenant fails to perform any of its obligations hereunder, Landlord
may use, apply or retain the whole or any part of the Collateral for the payment
of (a) any rent or other sums of money which Tenant may not have paid when due,
(b) any sum expended by Landlord on Tenant's behalf in accordance with the
provisions of this Lease, or (c) any damages which Landlord may sustain or sums
which Landlord may expend or be required to expend by reason of Tenant's
default, including, without limitation, any damage or deficiency in or from the
reletting of the Premises as provided in Paragraph 21. The use, application or
retention of the Collateral, or any portion thereof, by Landlord shall not
prevent Landlord from exercising any other right or remedy provided by this
Lease or by law (it being intended that Landlord shall not first be required to
proceed against the Collateral) and shall not operate as a limitation on any
recovery to which Landlord may otherwise be entitled. If any portion of the
Collateral is used, applied or retained by Landlord for the purposes set forth
above, Tenant agrees, within ten days after the written demand therefor is made
by Landlord, to deposit cash with Landlord in an amount sufficient to restore
the Collateral to its original amount.
If Tenant shall fully and faithfully comply with all of the provisions
of this Lease, the Collateral, or any balance thereof, shall be returned to
Tenant without interest after the expiration of the Term or upon any later date
after which Tenant has vacated the Premises. In the absence of evidence
satisfactory to Landlord of any permitted assignment of the right to receive the
Collateral, or of the remaining balance thereof, Landlord may return the same to
the original Tenant, regardless of one or more assignments of Tenant's interest
in this Lease or the Collateral. In such event, upon the return of the
Collateral, or the remaining balance thereof to the original Tenant, Landlord
shall be completely relieved of liability under this Paragraph 24 or otherwise
with respect to the Collateral.
Tenant acknowledges that Landlord has the right to transfer or mortgage
its interest in the Property and in this Lease and Tenant agrees that in the
event of any such transfer or mortgage, Landlord shall have the right to
transfer or assign the Collateral to the transferee or mortgagee. Upon written
acknowledgment of transferee's or mortgagee's receipt of such Collateral,
Landlord shall thereby be released by Tenant from all liability or obligation
for the return of such Collateral and Tenant shall look solely to such
transferee or mortgagee for the return of the Collateral.
The Collateral shall not be mortgaged, assigned or encumbered in any
manner whatsoever by Tenant.
25. REAL ESTATE BROKER. Tenant represents that Tenant has dealt with
(and only with) Amerimar Realty Management Co. - Colorado, Garth R.D. Tait,
Broker, Ltd., and The Clark Group as brokers in connection with this Lease, and
that insofar as Tenant knows, no other broker negotiated this Lease or is
entitled to any commission in connection therewith. Landlord and Tenant agree to
indemnify, defend and hold each other harmless from and against any claims, for
a commission or other compensation in connection with this Lease, made by any
broker or finder other than the brokers named above who claims to have dealt
with or communicated to Tenant in connection with this Lease, provided that
Landlord has not in fact retained such other broker or finder.
26. MISCELLANEOUS.
(a) RIGHTS CUMULATIVE. All rights and remedies of Landlord under
this Lease shall be cumulative and none shall exclude any other rights or
remedies allowed by law, in equity or otherwise.
(b) CAPTIONS AND USAGE. The titles appearing in connection with
the various sections and paragraphs of this lease are for convenience only; they
are not intended to indicate all of the subject matter in the text and they are
not to be used in interpreting this Lease nor for any other purpose in the event
of any controversy. As used herein (i) the term "person" shall be deemed to
include a natural person, a trustee, a corporation, a partnership, a
governmental unit and any other form of legal entity; (ii) all usages in the
singular or plural number shall be deemed to have been made, respectively, in
the plural or singular number as well; the use of any gender includes all
genders.
(c) BINDING EFFECT. Each of the provisions of this Lease shall
extend to and shall, as the case may require, bind or inure to the benefit not
only of Landlord and of Tenant, but also of their respective successors or
assigns, provided this clause shall not permit any assignment by Tenant contrary
to the provisions of Paragraph 15 hereof.
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(d) LEASE CONTAINS ALL TERMS. There are no promises,
representations, warranties or undertakings by, or binding upon, Landlord with
respect to the Building, the Premises or the Real Property, including, but not
limited to, any with regard to alteration, remodeling, redecorating or
installation of equipment or fixtures in the Premises, except those, if any,
that are expressly set forth in this Lease. No modification, waiver or amendment
of this Lease or of any of its conditions or provisions shall be binding upon
Landlord unless in writing signed by Landlord or by a duly authorized agent of
Landlord empowered by a written authority signed by Landlord.
(e) SUBMISSION OF LEASE. The submission of this Lease to Tenant,
or its broker or other agent, does not constitute an offer to Tenant to lease
the Premises. This Lease shall have no force and effect until (a) it is executed
and delivered by Tenant to Landlord and (b) it is fully reviewed and executed by
Landlord and delivered to Tenant.
(f) NO AIR RIGHTS. No rights to any view or to light or air over
any property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease.
(g) MODIFICATION OF LEASE. If any lender requires, as a condition
to its lending funds, the repayment of which is to be secured by a mortgage or
trust deed on the Property or any part thereof, that certain modifications be
made to this Lease, which modifications will not require Tenant to pay any
additional amounts or otherwise change materially the rights or obligations of
Tenant hereunder, Tenant shall, upon Landlord's request, execute appropriate
instruments effecting such modifications.
(h) SUBSTITUTION OF OTHER PREMISES. [Intentionally omitted]
(i) TRANSFER OF LANDLORD'S INTEREST. Notwithstanding anything
contained herein to the contrary, Tenant agrees that neither Landlord nor any
partner in Landlord, nor any other person having any interest, direct or
indirect, immediate or more removed than immediate, in Landlord, shall have any
personal liability with respect to any of the provisions of this Lease and
Tenant shall look solely to the estate and property of Landlord in the Property
for the satisfaction of Tenant's remedies, including without limitation, the
collection of any judgment or the enforcement of other judicial process
requiring the payment or expenditure of money by Landlord, subject, however, to
the prior rights of any holder of any mortgage covering all or part of the
Property, and no other assets of Landlord or its partners, or of any other
aforesaid person having an interest in Landlord, shall be subject to levy,
execution or other judicial process for the satisfaction of Tenant's claims.
Without limitation of the foregoing, upon each transfer of the Building and
Landlord's interest in this Lease, the transferor shall automatically be
released from all liability and obligations under this Lease.
(j) RECORDING; SHORT FORM MEMO. This Lease shall not be recorded
by Tenant. If it is recorded by Tenant, Landlord shall have the right to
terminate this Lease as of the date of recording or thereafter and Landlord
shall have all rights and remedies provided in the case of default by Tenant
hereunder. If requested by Landlord, Tenant shall execute, in recordable form, a
short form memorandum of lease that may, at Landlord's option, be placed of
record. In addition, if requested by Landlord, Tenant shall execute a memorandum
of lease to be filed with the Colorado Department of Revenue, on such form as
may be prescribed by said Department, within ten days after the execution of
this Lease, or any other such memorandum, so that Landlord may avail itself of
the provision of statutes such as C.R.S. Section 39-22-604(7)(c).
(k) COVENANTS AND CONDITIONS. All of the covenants of Tenant
hereunder shall be deemed and construed to also be "conditions", if Landlord so
elects, as well as "covenants" as though the words specifically expressing or
importing covenants and conditions were used in each separate instance. Tenant's
covenants to pay rent are independent of any other covenant, agreement, term or
condition of this Lease.
(1) APPLICATION OF PAYMENTS. Landlord shall have the right to
apply payments received from Tenant pursuant to this Lease (regardless of
Tenant's designation of such payments) to satisfy any obligations of Tenant
hereunder, in such order and amounts as Landlord in its sole discretion, may
elect.
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(m) SECURITY INTEREST. [Intentionally omitted]
(n) GOVERNING LAW; PARTIAL INVALIDITY. This Lease shall be
governed and construed in accordance with the law of the state in which the
Premises is located. If any term, provision of condition contained in this Lease
shall, to any extent, be invalid or unenforceable, the remainder of this Lease
(or the application of such term, provision or condition to persons or
circumstances other than those in respect of which it is invalid or
unenforceable) shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
(o) HAZARDOUS MATERIALS. Tenant shall not store highly flammable
materials or goods, explosives, perishable foodstuffs, contraband, live animals,
materials or goods which emit odors in or upon the Premises. The Tenant
covenants that it shall not store, use or possess nor permit the storage, use or
possession of any Hazardous Substance (hereinafter defined) upon the Premises.
Hazardous Substance for purposes of this Lease shall mean, without limitation,
any flammable explosives, radon, radioactive materials, asbestos,
urea-formaldehyde foam insulation, polychlorinated biphenyls, petroleum and
petroleum based products, methane, hazardous materials, hazardous wastes,
hazardous or toxic substances or related materials, as defined in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Sections 9601, et seq. (including the so-called "Superfund"
amendments thereto); the Toxic Substances Control Act, as amended, 15 U.S.C.
Sections 2601, et seq.; the Resource Conservation and Recovery Act of 1976, as
amended, 42 U.S.C. Sections 6901, et seq.; the Hazardous Materials
Transportation Act, as amended, 49 U.S.C. Sections 5101, et seq. (formerly 49
U.S.C. 1801, et seq.); or any other similar law, rule, regulation or statute
concerning the protection of the environment (collectively "Environmental
Laws"). Tenant hereby covenants and agrees, at its sole cost and expense, to
indemnify, protect and defend and save harmless the Landlord and any of its
members, managers, employees and agents from and against any and all damages,
losses, liabilities, obligations, penalties, claims, litigation, demands,
defenses,judgments, suits, actions, proceedings, costs, disbursements and
expenses (including, without limitation, attorneys' and experts' fees, expenses
and disbursements) of any kind or nature whatsoever which may at any time be
imposed upon, incurred by or asserted or awarded against the Landlord, its
members, managers, agents or employees relating to, resulting from or arising
out of Tenant's failure to comply with its obligations under the foregoing
section or Tenant's violation of any Environmental Law with respect to its use
of the Premises. Notwithstanding any provision contained in this Lease to the
contrary, the indemnification provisions set forth in this subparagraph 26(o)
shall survive any expiration or termination of this Lease. Landlord shall
indemnify Tenant with respect to any Hazardous Substance, as defined pursuant to
Environmental Laws in effect as of the date of this Lease, which existed in the
Premises prior to the date Tenant accepted possession thereof, or was placed
therein by Landlord, Agent, or their contractors, agents or employees.
(p) WARRANTY DISCLAIMER. LANDLORD AND TENANT EXPRESSLY DISCLAIM
ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED
COMMERCIAL PURPOSE, AND TENANT'S OBLIGATION TO PAY RENT HEREUNDER IS NOT
DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE PERFORMANCE BY LANDLORD OF
ITS OBLIGATIONS HEREUNDER, AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN,
TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT ABATEMENT, SETOFF OR DEDUCTION,
NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER,
WHETHER EXPRESS OR IMPLIED.
(q) WAIVER OF TRIAL BY JURY. LANDLORD AND TENANT SHALL, AND HEREBY
DO, WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY
EITHER OF THE PARTIES HERETO AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING
OUT OF OR IN ANY WAY CONNECTED WITH THE LEASE, THE RELATIONSHIP OF LANDLORD AND
TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND ANY EMERGENCY STATUTORY
OR ANY OTHER STATUTORY REMEDY.
(r) FORCE MAJEURE. Other than for Tenant's obligations under this
Lease that can be performed by the payment of money (e.g., payment of Rent and
maintenance of insurance), whenever a period of time is herein prescribed for
action to be taken by either party hereto, such party
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shall not be liable or responsible for, and there shall be excluded from the
computation of any such period of time, any delays due to strikes, riots, acts
of God, shortages of labor or materials, war, governmental laws, regulations, or
restrictions, or any other causes of any kind whatsoever which are beyond the
control of such party.
(s) LIST OF EXHIBITS. All exhibits and attachments attached hereto
are incorporated herein by this reference:
Addendum
Exhibit A Plan
Exhibit A-1 Suites 940 and 950
Exhibit A-2 Suite 300
Exhibit A-3 Suite 900
Exhibit A-4 Suite 450
Exhibit B Rules and Regulations
Exhibit C Lease Term Agreement
Exhibit D Parking Agreement
27. TELEPHONE AND TELECOMMUNICATIONS SERVICE.
(a) Tenant acknowledges and agrees that all telephone and
telecommunications services ("Telecommunications Services") desired by Tenant
shall be ordered and utilized at the sole expense of Tenant. Unless Landlord
otherwise requests or consents in writing, all equipment, apparatus and devices,
including without limitation wiring and cables, for the provisions of
Telecommunications Services (the "Telecommunications Equipment") shall be and
remain solely in the Premises. Unless otherwise specifically agreed in writing,
Landlord shall have no responsibility for the maintenance of Tenant's
Telecommunications Equipment, nor for any wiring or other infrastructure to
which Tenant's Telecommunications Equipment may be connected. Tenant agrees
that, to the extent any Telecommunications Services are interrupted, curtailed
or discontinued, Landlord shall have no obligation or liability with respect
thereto and it shall be the sole obligation of Tenant, at its sole expense, to
obtain substitute service.
(b) Landlord shall have the right, upon such notice as is
practicable in the case of emergencies, and otherwise upon reasonable prior
notice to Tenant, to interrupt or turn off telecommunications facilities in the
event of emergency or as necessary in connection with repairs to the Building or
installation of telecommunications equipment for other tenants of the Building.
(c) Any and all Telecommunications Equipment installed in the
Premises, or elsewhere in the Building by or on behalf of Tenant, including
wiring and other facilities for the provision of Telecommunications Services,
shall be removed by Tenant upon the expiration or earlier termination of the
Term of this Lease, by Tenant at its sole expense or, at Landlord's election, by
Landlord at Tenant's sole expense, with the cost thereof to be paid as
Additional Rent under this Lease.
(d) If the Telecommunications Equipment is not removed within
thirty (30) days of the termination or expiration ofthis Lease, the
Telecommunications Equipment shall conclusively be deemed to have been abandoned
and may be removed, appropriated, sold, stored, destroyed, otherwise disposed
of, or retained and used, by Landlord without notice to Tenant, without
obligation to account therefor, and without payment to Tenant or credit against
any amount due from Tenant to Landlord pursuant to this Lease. Tenant shall pay
to Landlord upon demand all costs of any such removal, disposition and storage
of the Telecommunications Equipment, as well as all costs to repair any damage
to the Building caused by such removal.
(e) In the event that Tenant wishes at any time to utilize the
services of a telephone or telecommunications provider whose equipment is not
then servicing the Building (a "New Provider"), no such New Provider shall be
permitted to install its lines or other equipment within the Building without
first securing the prior written approval of Landlord, which approval may be
withheld in Landlord's sole and absolute discretion. Landlord's approval shall
not be deemed any kind of warranty or representation by Landlord, including,
without limitation, any warranty or representation as to the suitability,
competence or financial strength of the New Provider. Without
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limitation of Landlord's right to withhold consent in its sole and absolute
discretion, Landlord may refuse to give its approval unless all of the following
conditions are satisfied: (i) Landlord shall incur no expense whatsoever with
respect to any aspect of the New Provider's provision of its services,
including, without limitation, the costs of installation, materials and
services; (ii) prior to commencement of any work in or about the Building by the
New Provider, the New Provider shall supply Landlord with such written
indemnities, insurance, financial statements, and such other items as Landlord,
in its sole and absolute discretion, determines to be necessary to protect its
financial interests and the interests of the Building related to the proposed
activities of the New Provider; (iii) the New Provider agrees in writing to
abide by such rules and regulations, building and other codes, job site rules
and such other requirements as are determined by Landlord, in its sole and
absolute discretion, to be necessary to protect the interest of the Building,
the tenants in the Building and Landlord; (iv) Landlord determines, in its sole
and absolute discretion, that there is sufficient space in the Building for the
placement of all of the New Provider's equipment and materials; (v) Landlord
receives from the New Provider such compensation as is determined by Landlord,
in its sole and absolute discretion, to compensate it for space used in the
Building for the storage and maintenance of the New Provider's equipment, for
the fair market value of the New Provider's access to the Building, and any
costs which may be expected to be incurred by Landlord; and (vi) all of the
foregoing matters are documented in a written agreement between Landlord and the
New Provider, the form and content of which are satisfactory to Landlord in its
sole and absolute discretion.
(f) Notwithstanding any provision of the preceding subparagraph to
the contrary, the refusal of Landlord the grant its approval to any New Provider
shall not be deemed a default or breach by Landlord of its obligation under this
Lease, and in no event shall Tenant have the right to terminate this Lease or
claim entitlement to rent abatement for Landlord's refusal to grant Tenant's
request for approval of a New Provider. The provisions ofthis Paragraph 27 may
be enforced solely by Tenant and Landlord and are not for the benefit of any
other party. Specifically, but without limitation, no telephone or
telecommunications provider is intended to be, nor shall be deemed, a third
party beneficiary of this Lease.
(g) Tenant shall not utilize any wireless communications equipment
(other than usual and customary cellular telephones), including antenna and
satellite receiver dishes, within the Premises or the Building, without
Landlord' prior written consent. Such consent shall be granted only in the sole
and absolute discretion of Landlord, and shall be conditioned in such a manner,
in Landlord's sole and absolute discretion, so as to protect Landlord's
financial interests and the interests of the Building, and the other tenants
therein.
28. NOTICES. All notices to be given under this Lease shall be in
writing and delivered personally or deposited in the United States mail,
certified or registered mail with return receipt requested, postage prepaid or
by reputable overnight courier, addressed as follows:
If to Landlord: Amerimar Realty Management Co.-Colorado
999 - 18th Street, Suite 1000
Denver, Colorado 80202
with a copy to: Denver-Stellar Associates Limited Partnership
210 West Rittenhouse Square, Suite 2000
Philadelphia, Pennsylvania 19103
or to such other person or such other address designed by notice sent by
Landlord or Tenant.
If to Tenant: KBKIDS.COM, L.L.C.
1099 18th Street
Suite 1000
Denver, CO 80202
and after occupancy of the Premises by Tenant, at the Premises, or to such other
address as is designated by Tenant in a notice to Landlord; it being agreed that
ifTenant shall vacate the Premises, notices to Tenant thereafter shall
nevertheless be properly given if addressed to Tenant at the Premises unless and
until another address is designated by Tenant by notice to Landlord.
Notice by mail shall be deemed to have been given seventy-two (72)
hours after being
26
<PAGE> 30
deposited in the United States mail or the following Business Day after deposit
with a reputable overnight carrier.
29. TIME IS OF THE ESSENCE. Time is of the essence hereof.
IN WITNESS WHEREOF, Landlord and Tenant, intending to be legally bound
hereby, have executed this Agreement of lease as of the day and year first above
written.
LANDLORD:
DENVER-STELLAR ASSOCIATES LIMITED PARTNERSHIP,
a Delaware limited partnership
By: ARC Denver Associates, L.L.C., a Delaware
limited liability company, its general partner
By: ARC Denver, Inc., a Delaware corporation,
its manager
By: /s/ David G. Marshall
------------------------------
David G. Marshall, President
TENANT:
Kbkids.com, L.L.C., an Ohio limited liability company
By /s/ Michael Wagner
-------------------------------------------------
Title Vice President and Chief Financial Officer
---------------------------------------------
27
<PAGE> 31
ADDENDUM
30. ADDITIONAL SPACE. Provided that this Lease shall be in full force
and effect and Tenant shall not be in default hereunder, Tenant shall have the
ability, exercisable by written notice to Landlord ("Tenant's Notice") given at
the respective time indicated below for the respective Suite, to lease
additional space located in Suites 940 and 950 as depicted on attached EXHIBIT
A-1 (also referred to herein collectively or singularly as"Additional Space").
Tenant acknowledges that it is required to take all of the respective Suite and
may not elect to lease only a portion thereof. If Tenant timely notifies
Landlord, the respective Suite shall be added to the Premises on the later of:
(i) the respective Occupancy Date set forth below, or (ii) the date the Tenant
Improvements have been substantially complete as determined solely by Landlord's
architect in charge of the completing the Tenant Improvements. If the delivery
date of a Suite is delayed beyond the Occupancy Date set forth below, Tenant's
obligations with respect to the respective Suite shall likewise be delayed to
the date the Suite is delivered substantially ready for occupancy.
Notwithstanding the foregoing, whether the delivery date is delayed or not, the
expiration of Tenant's right to occupy the Suite or Suites shall expire with the
term of the Lease. If Tenant leases Additional Space pursuant to the provisions
of this Paragraph, it shall be on all of the terms, covenants and conditions of
this Lease, except (a) the annual Base Rent for the Additional Space shall be at
the Base Rent rate set forth below for the respective Suite (b) Tenant's
Proportionate share shall be increased by the number of rentable square feet
contained in the then applicable Additional Space (c) Tenant shall be entitled
to lease one additional parking space for each 1000 rentable square feet within
the Applicable Space at the prevailing monthly rental rates for such parking
spaces, and (d) Tenant shall accept the Suite in its current "as is" condition,
subject to Landlord's provision of an allowance for Tenant Improvements up to,
but not exceeding, an amount equal to the square footage of the respective Suite
being added, multiplied times the amount set forth below as Tenant Improvements.
Landlord's contractor will perform the Tenant Improvements subject to and in
accordance with the provisions for Completion of Improvements in the Lease.
Further, the parties shall enter into an amendment to this Lease, evidencing the
addition of each Additional Space to the Premises hereunder. If Tenant fails to
timely give notice, Tenant's rights to the respective Suite shall terminate,
however, Tenant's rights to the remaining Suite shall be available in accordance
with the time period set forth below.
<TABLE>
<CAPTION>
Rentable Occupancy Base Rent SF Tenant
Suite Sq.Ft. Notice Date Date Annual Rate Improvements
<S> <C> <C> <C> <C> <C>
940 4588 02-15-00 07-01-00 $21.50 $9.50
950 6300 04-01-00 09-01-00 $21.50 $9.50
</TABLE>
31. EXPANSION SPACE. Provided that this Lease shall be in full force
and effect and Tenant shall not be in default hereunder and further conditioned
on Tenant having added Suite 940 to the Premises in accordance with Paragraph 30
of this Addendum, Tenant shall have the ability, exercisable by written notice
to Landlord ("Tenant's Notice") given at the respective time indicated below for
the respective Suite, to lease additional space located in Suites 300, 900 and
450, as depicted on attached EXHIBITS A-2, A-3 and A-4 respectively (also
referred to herein collectively or singularly as "Expansion Space"). Tenant
acknowledges that it is required to take all of the respective Suite and may not
elect to lease only a portion thereof. If Tenant timely notifies Landlord, the
respective Suite shall be added to the Premises on the later of: (i) the
respective Occupancy Date set forth below, or (ii) the date the Tenant
Improvements have been substantially complete as determined solely by Landlord's
architect in charge of the completing the Tenant Improvements. If the delivery
date of a Suite is delayed beyond the Occupancy Date set forth below, Tenant's
obligations with respect to the respective Suite shall likewise be delayed to
the date the Suite is delivered substantially ready for occupancy.
Notwithstanding the foregoing, whether the delivery date is delayed or not, the
expiration of Tenant's right to occupy the Suite or Suites shall expire with the
term of the Lease. If Tenant leases Expansion Space pursuant to the provisions
of this Paragraph, it shall be on all of the terms, covenants and conditions of
this Lease, except (a) the annual Base Rent for the Expansion Space shall be at
the Base Rent rate set forth below for the respective Suite (b) Tenant's
Proportionate Share shall be increased by the number of rentable square feet
contained in the then applicable Expansion Space, (c) Tenant shall be entitled
to lease one additional parking space for each 1000
28
<PAGE> 32
rentable square feet within the Applicable Space at the prevailing monthly
rental rates for such parking spaces, and (d) Tenant shall accept the Suite in
its current " as is" condition, subject to Landlord's provision of an allowance
for Tenant Improvements up to, but not exceeding, an amount equal to the square
footage of the respective Suite being added, multiplied times the amount set
forth below as Tenant Improvements. Landlord's contractor will perform the
Tenant Improvements subject to and in accordance with the provisions for
Completion of Improvements in the Lease. Further, the parties shall enter into
an amendment to this Lease, evidencing the addition of each Expansion Space to
the Premises hereunder. If Tenant fails to timely give notice, Tenant's rights
to the respective Suite shall terminate, however, Tenant's rights to the
remaining Suite(s) shall be available in accordance with the time period set
forth below.
<TABLE>
<CAPTION>
Rentable Occupancy Base Rent SF Tenant
Suite Sq.Ft. Notice Date Date Annual Rate Improvements
<S> <C> <C> <C> <C> <C>
300 10000 07-01-00 04-01-01 $22.50 $8.50
900 10606 02-01-01 11-01-01 $22.50 $7.50
450 15840 02-01-01 11-01-01 $22.50 $7.50
</TABLE>
32. TENANT'S RENEWAL OPTION. Tenant shall have the option to renew
("Renewal Option") the term of the Lease for one (1) additional term of three
(3) years ("Renewal Term"), commencing on the date following the expiration of
the Term, on the condition that Tenant is not in default under this Lease at the
time Tenant gives notice of exercise of its renewal option or at the time of
commencement of the Renewal Term. Such renewal shall be on all of the terms,
covenants and conditions of this Lease, except: (i) Tenant shall not have any
right to further renewal beyond such additional three-year term; and (ii) the
annual Base Rent for the Premises for the Renewal Term shall be at the
prevailing market rates for office space in the Building comparable to the
Premises at the time the Renewal Term begins, but in no event shall the Base
Rent payable for the Renewal Term be less than $19.50 per rentable square foot
of the Premises. Tenant's Renewal Option shall be exercised only by Tenant
giving Landlord written notice of Tenant's election to renew at least nine (9)
months prior to the expiration date, time being of the essence with respect to
such notice. As of the date the Renewal Term begins, this Lease shall be deemed
modified in the manner set forth above, without the necessity of any further
agreement or document; provided, however, that either party to this Lease shall,
upon request of the other party, execute, acknowledge, and deliver an instrument
evidencing such renewal and modification of this Lease.
33. ATHLETIC CLUB MEMBERSHIPS. During the original Term of this Lease,
Landlord agrees to cause the operator of the Athletic Club of Denver Place
("Athletic Club") located adjacent to the Building, to provide (i) one month's
fee trial use of the Athletic Club for Tenant's employees who join the Athletic
Club prior to June 30, 2000, and (ii) employees of the Tenant who join prior to
June 30, 2000 to receive the corporate membership rate which is Fifty-Two and
50/100 Dollars ($52.50) for the period from the date they join though December
31, 2000. After June 30, 2000, any joining Tenant employee shall be charged the
prevailing monthly rate charged by the Athletic Club. Tenant's employees shall
be subject to all rules and regulations adopted from time to time by the
operator of the Athletic Club and shall be responsible for the payment of any
applicable initiation fees imposed by the Athletic Club from time to time.
Landlord's obligation under this Paragraph 34 shall abate during any time that
the Athletic Club is not being operated during the Term.
29
<PAGE> 33
34. AFTER HOURS AC. Notwithstanding anything contained in the Lease to
the contrary, Landlord agrees to provide up to 195 hours of air conditioning to
the Premises beyond the hours specified in subparagraph 7(a) of the Lease during
the calendar months May 15th through September 15th each year during the initial
Term, at no additional cost to Tenant. Landlord shall install two ten ton air
conditioning units ("Units") to cool the Premises or utilizing the Building's
existing air conditioning system, to provide said after hours air conditioning.
Tenant acknowledges commencing with the 196th hour, Tenant shall be subject to
the provisions of subparagraph 7(b)(i) of the Lease.
35. CONTINGENCY. This Lease is expressly conditioned on Landlord
entering into an agreement with the current occupant of the Premises for
termination of its lease which currently encumbers the Premises. If Landlord
fails for any reason to enter into such an agreement by October 22, 1999, this
Lease, upon no by Tenant or Landlord, shall be deemed null and void and shall be
of no force and effect.
30
<PAGE> 1
Exhibit 10.24
PROMISSORY NOTE
$173,025.00 Denver, Colorado
December 29, 1999
FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay to
the order of BRAINPLAY.COM, INC., a Delaware corporation (the "Company"), at 475
17th Street, Suite 750, Denver, CO 80202, or at such other place as the holder
hereof may designate in writing, in lawful money of the United States of America
and in immediately available funds, the principal sum of One Hundred
Seventy-Three Thousand Twenty-Five ($173,025.00) together with interest accrued
from the date hereof on the unpaid principal at the rate of 5.74% per annum, or
the maximum rate permissible by law (which under the laws of the State of
Delaware shall be deemed to be the laws relating to permissible rates of
interest on commercial loans), whichever is less, as follows:
PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall be
due and payable in full on June 30, 2001 (the "Maturity Date"); and
(a) INTEREST PAYMENTS. Interest shall be payable on the Maturity Date and
shall be calculated on the basis of a 360-day year for the actual number of days
elapsed; provided, however, that in the event that the undersigned's employment
by or association with the Company or its Affiliate is terminated for any reason
prior to payment in full of this Note, this Note shall be accelerated and all
remaining unpaid principal and interest shall become due and payable ninety (90)
days following such termination. An Affiliate shall mean any parent corporation
or subsidiary corporation of the Company, whether now or hereafter existing, as
those terms are defined in Sections 424(e) and (f), respectively, of the
Internal Revenue Code of 1986, as amended.
If the undersigned fails to pay any of the principal and accrued interest
when due, the Company, at its sole option, shall have the right to accelerate
this Note, in which event the entire principal balance and all accrued interest
shall become immediately due and payable, and immediately collectible by the
Company pursuant to applicable law.
This Note may be prepaid at any time without penalty. All money paid toward
the satisfaction of this Note shall be applied first to the payment of interest
as required hereunder and then to the retirement of the principal.
The full amount of this Note is secured by a pledge of shares of Common
Stock of the Company, and is subject to all of the terms and provisions of the
Option Exercise Stock Purchase Agreement and Stock Pledge Agreement of even date
herewith between the undersigned and the Company.
1.
<PAGE> 2
The undersigned hereby represents and agrees that the amounts due under
this Note are not consumer debt, and are not incurred primarily for personal,
family or household purposes, but are for business and commercial purposes only.
The undersigned hereby waives presentment, protest and notice of protest,
demand for payment, notice of dishonor and all other notices or demands in
connection with the delivery, acceptance, performance, default or endorsement of
this Note.
The holder hereof shall be entitled to recover, and the undersigned agrees
to pay when incurred, all costs and expenses of collection of this Note,
including without limitation, reasonable attorneys' fees.
This Note shall be governed by, and construed, enforced and interpreted in
accordance with, the laws of the State of Delaware, excluding conflict of laws
principles that would cause the application of laws of any other
jurisdiction.
Signed /s/Srikant Srinivasan
------------------------------
Srikant Srinivasan
2.
<PAGE> 1
Exhibit 10.25
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT ("Pledge Agreement") is made by SRIKANT SRINIVASAN
("Pledgor"), in favor of BRAINPLAY.COM, INC., a Delaware corporation with its
principal place of business at 475 17th Street, Suite 750, Denver, CO 80202
("Pledgee").
WHEREAS, Pledgor has concurrently herewith executed that certain Promissory
Note (the "Note") in favor of Pledgee in the amount of $173,025.00 in payment of
the purchase price of 225,000 shares of the Common Stock of Pledgee; and
WHEREAS, Pledgee is willing to accept the Note from Pledgor, but only upon
the condition, among others, that Pledgor shall have executed and delivered to
Pledgee this Pledge Agreement and the Collateral (as defined below):
NOW, THEREFORE, in consideration of the foregoing recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound, Pledgor hereby agrees as
follows:
1. As security for the full, prompt and complete payment and performance
when due (whether by stated maturity, by acceleration or otherwise) of all
indebtedness of Pledgor to Pledgee created under the Note (all such indebtedness
being the "Liabilities"), together with, without limitation, the prompt payment
of all expenses, including, without limitation, reasonable attorneys' fees and
legal expenses, incidental to the collection of the Liabilities and the
enforcement or protection of Pledgee's lien in and to the collateral pledged
hereunder, Pledgor hereby pledges to Pledgee, and grants to Pledgee, a first
priority security interest in all of the following (collectively, the "Pledged
Collateral"):
(a) (i) 225,000 shares of Common Stock of Pledgee obtained through the
exercise of a stock option which is exercised as of the date hereof and
represented by a Certificate numbered CS-063 (the "Option Shares") and (ii)
60,790 shares of Common Stock which were previously owned by Pledgee and
represented by a Certificate numbered _______ (the "Owned Shares," and,
collectively with the Option Shares, the "Pledged Shares") and (iii) all
dividends, cash, instruments, and other property or proceeds from time to time
received, receivable, or otherwise distributed in respect of or in exchange for
any or all of the Pledged Shares;
(b) all voting trust certificates held by Pledgor evidencing the
right to vote any Pledged Shares subject to any voting trust; and
(c) all additional shares and voting trust certificates from time to
time acquired by Pledgor in any manner (which additional shares shall be deemed
to be part of the Pledged Shares), and the certificates representing such
additional shares, and all dividends, cash, instruments, and other property or
proceeds from time to time received, receivable, or otherwise distributed in
respect of or in exchange for any or all of such shares.
<PAGE> 2
The term "indebtedness" is used herein in its most comprehensive sense and
includes any and all advances, debts, obligations and Liabilities heretofore,
now or hereafter made, incurred or created, whether voluntary or involuntary and
whether due or not due, absolute or contingent, liquidated or unliquidated,
determined or undetermined, and whether recovery upon such indebtedness may be
or hereafter becomes unenforceable.
2. At any time, without notice, and at the expense of Pledgor, Pledgee in
its name or in the name of its nominee or of Pledgor may, but shall not be
obligated to: (1) collect by legal proceedings or otherwise all dividends
(except cash dividends other than liquidating dividends), interest, principal
payments and other sums now or hereafter payable upon or on account of said
Pledged Collateral; (2) enter into any extension, reorganization, deposit,
merger or consolidation agreement, or any agreement in any wise relating to or
affecting the Pledged Collateral, and in connection therewith may deposit or
surrender control of such Pledged Collateral thereunder, accept other property
in exchange for such Pledged Collateral and do and perform such acts and things
as it may deem proper, and any money or property received in exchange for such
Pledged Collateral shall be applied to the indebtedness or thereafter held by it
pursuant to the provisions hereof; (3) insure, process and preserve the Pledged
Collateral; (4) cause the Pledged Collateral to be transferred to its name or to
the name of its nominee; (5) exercise as to such Pledged Collateral all rights,
powers and remedies of an owner, except that so long as no default exists under
the Note or hereunder Pledgor shall retain all voting rights as to the Pledged
Shares.
3. Pledgor agrees to pay prior to delinquency all taxes, charges, liens and
assessments against the Pledged Collateral, and upon the failure of Pledgor to
do so, Pledgee at its option may pay any of them and shall be the sole judge of
the legality or validity thereof and the amount necessary to discharge the same.
4. At the option of Pledgee and without necessity of demand or notice, all
or any part of the indebtedness of Pledgor shall immediately become due and
payable irrespective of any agreed maturity, upon the happening of any of the
following events: (1) failure to keep or perform any of the terms or provisions
of this Pledge Agreement; (2) failure to pay any installment of principal or
interest on the Note when due; (3) the levy of any attachment, execution or
other process against the Pledged Collateral; or (4) the insolvency, commission
of an act of bankruptcy, general assignment for the benefit of creditors, filing
of any petition in bankruptcy or for relief under the provisions of Title 11 of
the United States Code of, by, or against Pledgor.
5. In the event of the nonpayment of any indebtedness when due, whether by
acceleration or otherwise, or upon the happening of any of the events specified
in the last preceding section, Pledgee may then, or at any time thereafter, at
its election, apply, set off, collect or sell in one or more sales, or take such
steps as may be necessary to liquidate and reduce to cash in the hands of
Pledgee in whole or in part, with or without any previous demands or demand of
performance or notice or advertisement, the whole or any part of the Pledged
Collateral in such order as Pledgee may elect, and any such sale may be made
either at public or private sale at its place of business or elsewhere, or at
any broker's board or securities exchange,
2.
<PAGE> 3
either for cash or upon credit or for future delivery; provided, however, that
if such disposition is at private sale, then the purchase price of the Pledged
Collateral shall be equal to the public market price then in effect, or, if at
the time of sale no public market for the Pledged Collateral exists, then, in
recognition of the fact that the sale of the Pledged Collateral would have to be
registered under the Securities Act of 1933 and that the expenses of such
registration are commercially unreasonable for the type and amount of collateral
pledged hereunder, Pledgee and Pledgor hereby agree that such private sale shall
be at a purchase price mutually agreed to by Pledgee and Pledgor or, if the
parties cannot agree upon a purchase price, then at a purchase price established
by a majority of three independent appraisers knowledgeable of the value of such
collateral, one named by Pledgor within ten (10) days after written request by
the Pledgee to do so, one named by Pledgee within such 10-day period, and the
third named by the two appraisers so selected, with the appraisal to be rendered
by such body within thirty (30) days of the appointment of the third appraiser.
The cost of such appraisal, including all appraiser's fees, shall be charged
against the proceeds of sale as an expense of such sale. Pledgee may be the
purchaser of any or all Pledged Collateral so sold and hold the same thereafter
in its own right free from any claim of Pledgor or right of redemption. Demands
of performance, notices of sale, advertisements and presence of property at sale
are hereby waived, and Pledgee is hereby authorized to sell hereunder any
evidence of debt pledged to it. Any officer or agent of Pledgee may conduct any
sale hereunder.
6. The proceeds of the sale of any of the Pledged Collateral and all sums
received or collected by Pledgee from or on account of such Pledged Collateral
shall be applied by Pledgee to the payment of expenses incurred or paid by
Pledgee in connection with any sale, transfer or delivery of the Pledged
Collateral, to the payment of any other costs, charges, attorneys' fees or
expenses mentioned herein, and to the payment of the indebtedness or any part
hereof, all in such order and manner as Pledgee in its discretion may determine.
Pledgee shall then pay any balance to Pledgor.
7. Upon the transfer of all or any part of the indebtedness Pledgee may
transfer all or any part of the Pledged Collateral and shall be fully discharged
thereafter from all liability and responsibility with respect to such Pledged
Collateral so transferred, and the transferee shall be vested with all the
rights and powers of Pledgee hereunder with respect to such Pledged Collateral
so transferred; but with respect to any Pledged Collateral not so transferred
Pledgee shall retain all rights and powers hereby given.
8. Until all indebtedness shall have been paid in full the power of sale
and all other rights, powers and remedies granted to Pledgee hereunder shall
continue to exist and may be exercised by Pledgee at any time and from time to
time irrespective of the fact that the indebtedness or any part thereof may have
become barred by any statute of limitations, or that the personal liability of
Pledgor may have ceased.
9. Pledgee may at any time deliver the Pledged Collateral or any part
thereof to Pledgor and the receipt of Pledgor shall be a complete and full
acquittance for the Pledged
3.
<PAGE> 4
Collateral so delivered, and Pledgee shall thereafter be discharged from any
liability or responsibility therefor.
10. The rights, powers and remedies given to Pledgee by this Pledge
Agreement shall be in addition to all rights, powers and remedies given to
Pledgee by virtue of any statute or rule of law. Any forbearance or failure or
delay by Pledgee in exercising any right, power or remedy hereunder shall not be
deemed to be a waiver of such right, power or remedy, and any single or partial
exercise of any right, power or remedy hereunder shall not preclude the further
exercise thereof; and every right, power and remedy of Pledgee shall continue in
full force and effect until such right, power or remedy is specifically waived
by an instrument in writing executed by Pledgee.
11. If any provision of this Pledge Agreement is held to be unenforceable
for any reason, it shall be adjusted, if possible, rather than voided in order
to achieve the intent of the parties to the extent possible. In any event, all
other provisions of this Pledge Agreement shall be deemed valid and enforceable
to the full extent possible.
12. This Pledge Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware as applied to contracts made
and performed entirely within the State of Delaware by residents of such State.
Dated: December 29, 1999 PLEDGOR
/s/ Srikant Srinivasan
----------------------------------
Printed Name: SRIKANT SRINIVASAN
4.
<PAGE> 1
Exhibit 10.26
[LOGO]
NETCENTIVES(TM)
Rewarding Relationships
PROMOTIONAL SPONSORSHIP AGREEMENT
This Promotional Sponsorship Agreement (the "Agreement") is made and entered
into as of September 23, 1999 (the "Effective Date") by and between NETCENTIVES
INC. ("NETCENTIVES") a Delaware corporation, and KBKIDS.COM ("KBKIDS.COM"), an
Ohio limited liability company.
KBKIDS.COM and NETCENTIVES hereby agree that KBKIDS.COM shall be a Platinum
sponsor of the 1999 ClickRewards Holiday Promotion.
1. OVERVIEW OF PROMOTION.
NETCENTIVES has developed a holiday promotion (the "Holiday Promotion") which
gives consumers the opportunity to earn bonus ClickMiles funded by NETCENTIVES,
designed to drive sales and repeat transactions to the KBKIDS.COM web site and
other participating ClickRewards Merchants' web sites.
2. TERM.
This Agreement shall take effect on the Effective Date and shall terminate on
January 15, 2000.
3. KBKIDS.COM DELIVERABLES.
KBKIDS.COM will provide:
(a) Premier promotional placement for the Holiday Promotion on the
KBKIDS.COM home page with a graphic incorporating the ClickRewards
logo.
(b) As payment for the holiday promotion sponsorship, KBKIDS.COM will pay
NETCENTIVES an amount of Two-hundred and Twenty-five Thousand Dollars
(US$225,000.00). NETCENTIVES shall invoice KBKIDS.COM for all amounts
due under this Agreement. Payments will be made within 30 days of
receipt of each invoice.
(c) A minimum of 25 high-value prizes (minimum retail value, $100.00 each)
to use as sweepstakes prizes.
(d) Email to the KBKids.com member base announcing the Double Miles
promotion.
<PAGE> 2
4. NETCENTIVES DELIVERABLES.
(a) NETCENTIVES will feature KBKIDS.COM as the "Merchant of the Week" the
week of 11/22/99 until 11/29/99. KBKIDS.COM will be the exclusive "Toy
Merchant of the Week" for the duration of the entire 7-week promotion.
(b) NETCENTIVES will provide Double ClickMiles on qualified purchases made
on KBKIDS.COM when consumers make qualified purchases on a total of
two or more featured merchant partner sites between 11/1/99 and
12/31/99.
(c) NETCENTIVES will provide Five-Hundred Thousand (500,000) ClickMiles to
KBKIDS.COM for usage during this promotion (11/1/99 - 12/19/99) in a
traffic building sweeps.
(d) NETCENTIVES will administer a series of "Shopping Spree" sweepstakes
for the duration of the promotion, from 11/1/99 until 12/19/99.
(e) NETCENTIVES will include KBKIDS.COM in a minimum of two (2) monthly
newsletters mailed to the entire base of ClickRewards members
(excluding members who have chosen not to receive email from
ClickRewards) with KBKIDS.COM's review and approval of the text, prior
to sending.
(f) NETCENTIVES will provide KBKIDS.COM with an exclusive email to the
ClickRewards member base during the featured week, for a total of 600M
delivered messages.
(g) NETCENTIVES will include KBKIDS.COM logo and copy on a minimum of 400M
electronic receipts mailed to ClickRewards members, November -
December.
(h) As a participating sponsor, KBKIDS.COM will be included in NETCENTIVES
scheduled brand advertising for the period as follows:
1) Radio Advertising: Weekly radio advertisements, beginning 11/8/99
and running through 12/12/99, will provide KBKIDS.COM with Brand
and copy mentions
- KBKIDS.COM will be mentioned in a minimum of 16% of the
radio schedule, for an estimated total of 17MM Adult 25-49
impressions
- The radio buy has been purchased in a minimum of 2 major
radio markets and may be expanded to 5 major radio markets,
accounting for 16% of U.S. TV HH
<PAGE> 3
2) Newspaper Advertising: NETCENTIVES will integrate KBKIDS.COM into
a minimum of two national newspaper ads during the promotion,
delivering an estimated 11MM impressions.
3) Frequent Flyer Statement Coupon: NETCENTIVES will provide
KBKIDS.COM brand copy inclusion in one (1) frequent flyer
statement coupon mailed to 4.1MM American AAdvantage program
members.
4) Online Advertising: NETCENTIVES will develop co-branded banners
featuring KBKIDS.COM to run in an online advertising campaign
across targeted websites, 11/1/99 - 12/19/99. KBKIDS.COM will
receive a minimum of 1MM advertising impressions.
5) ClickRewards Website Presence: NETCENTIVES will feature
KBKIDS.COM on the ClickRewards.com Home Page and Featured Offers
category pages during the featured week, 11/22 - 11/29/99, and in
the Toy category page premiere graphic position, 11/2 - 12/20/99.
In addition, NETCENTIVES will rotate a KBKIDS.COM banner in the
ClickRewards.com Home Page special offers position for the
remaining 6 weeks of the Holiday promotion.
6) NETCENTIVES will develop and produce the creative elements for
inclusion on the promotion advertising schedule and for
KBKIDS.COM's presence on the ClickRewards.com website, with
KBKIDS.COM's review and approval.
(i) NETCENTIVES will provide account management and back end support for
KBKIDS.COM to support the implementation of "KBKIDS.COM only" merchant
mileage offers.
5. INDEMNIFICATION.
Each party shall indemnify, defend and hold the other party harmless from and
against all claims, actions, suits or other proceedings, and any and all losses,
judgments, damages, expenses or other costs (including reasonable counsel fees
and disbursements), arising from or in any way relating to (i) any actual or
alleged violation or inaccuracy of any representation or warranty of the other
party contained in this agreement, (ii) any ad or omission or willful misconduct
of the indemnifying party or its directors, officers, employees, agents or
assigns in connection with the entry into or performance of this Agreement, and
(iii) any actual or alleged infringement of any trademark, copyright, trade name
or other proprietary ownership interest resulting from operation of the websites
provided by the indemnifying party as contemplated by this Agreement.
<PAGE> 4
6. GOVERNING LAW AND NOTICES.
The laws of the State of California, USA, shall govern this Agreement. The
prevailing party in any dispute concerning the subject matter hereof shall be
entitled to recover its reasonable attorneys' fees and costs. The parties agree
that this Agreement is deemed to have been made in the State of California, USA.
No joint venture, partnership, employment, or agency relationship exists between
NETCENTIVES and KBKIDS.COM. Neither party shall be deemed to have waived or
modified any of the terms and conditions of this Agreement except in writing
signed by its duly authorized representative. Neither party may assign its
rights hereunder to any third party unless the other expressly consents to such
assignment in writing. In the event that any provision of this Agreement is
found invalid or unenforceable pursuant to judicial decree or decision, the
remaining provisions shall remain valid and enforceable, and the unenforceable
provisions shall be deemed modified to the extent necessary to make them
enforceable. Either party may send electronic mail to the either party for any
notices or notifications. All notices to KBKIDS.COM relating to any legal claims
or matters must be made in writing to KBKIDS.COM, 475 17th St, Denver, CO 80202.
All notices to NETCENTIVES shall be made in writing to NETCENTIVES Inc., 690
Fifth Street, San Francisco, CA 94107, attn: Chief Financial Officer.
<PAGE> 5
AGREED AND ACCEPTED:
NETCENTIVES INC.
690 Fifth Street
San Francisco, CA 94107
Fax: (415) 538-1889
/s/ J. F. Longinotti
- -------------------------------
Signature
J. F. Longinotti
- -------------------------------
Print Name
EVP, Operations & CFO
- -------------------------------
Title
KBKIDS.COM LLC
475 17th St
Denver, CO 80202
Fax:303-382-1185
/s/ Doug Smooke
- -------------------------------
Signature
Doug Smooke
- -------------------------------
Print Name
Manager of Marketing Services
- -------------------------------
Title
<PAGE> 1
Exhibit 23.2
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
January 26, 2000,
Denver, Colorado.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
FINANCIAL STATEMENTS INCLUDED IN THE S-1 REGISTRATION STATEMENT NO. 333-XXXXXX
FOR THE PERIOD JUNE 26, 1999 THROUGH SPETEMBER 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 34,938,711
<SECURITIES> 0
<RECEIVABLES> 230,920
<ALLOWANCES> 13,425
<INVENTORY> 12,043,236
<CURRENT-ASSETS> 49,297,152
<PP&E> 3,037,894
<DEPRECIATION> 245,056
<TOTAL-ASSETS> 73,425,122
<CURRENT-LIABILITIES> 18,804,303
<BONDS> 372,298
0
0
<COMMON> 65,000,000
<OTHER-SE> (10,751,479)
<TOTAL-LIABILITY-AND-EQUITY> 73,425,122
<SALES> 1,046,029
<TOTAL-REVENUES> 1,046,029
<CGS> 1,247,542
<TOTAL-COSTS> 1,247,542
<OTHER-EXPENSES> 10,743,039
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,097
<INCOME-PRETAX> (10,751,479)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,751,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,751,479)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
FINANCIAL STATEMENTS INCLUDED IN THE S-1 REGISTRATION STATEMENT NO. 333-XXXXXX
FOR THE THREE YEARS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998 MAR-31-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998 MAR-31-1997
<CASH> 5,089,371 2,447,948 0
<SECURITIES> 0 0 0
<RECEIVABLES> 90,840 7,502 0
<ALLOWANCES> 40,886 0 0
<INVENTORY> 100,665 0 0
<CURRENT-ASSETS> 5,320,678 2,458,350 0
<PP&E> 404,184 34,341 0
<DEPRECIATION> 69,201 3,966 0
<TOTAL-ASSETS> 5,742,698 2,494,725 0
<CURRENT-LIABILITIES> 1,396,246 163,175 0
<BONDS> 287,982 0 0
9,579,999 3,100,001 0
0 0 0
<COMMON> 3,083 3,080 0
<OTHER-SE> (5,524,612) (771,531) 0
<TOTAL-LIABILITY-AND-EQUITY> 5,742,698 2,494,725 0
<SALES> 595,652 71,211 2,324
<TOTAL-REVENUES> 595,652 71,211 2,324
<CGS> 674,373 64,679 2,185
<TOTAL-COSTS> 674,373 64,679 2,185
<OTHER-EXPENSES> 4,729,244 1,103,432 318,992
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 29,836 0 0
<INCOME-PRETAX> (4,755,649) (1,046,654) (313,959)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (4,755,649) (1,046,654) (313,959)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (4,755,649) (1,046,654) (313,959)
<EPS-BASIC> 0 0 0
<EPS-DILUTED> 0 0 0
</TABLE>
