UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-KSB
x
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
fiscal year ended December 31, 2006
o
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from _______ to _______
Commission
file number: 000-29611
THE
CHILDREN’S INTERNET, INC.
(Name
of
small business issuer in its charter)
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20-1290331
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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94588
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer's
telephone number:
(925)
737-0144
Securities
registered under Section 12(b) of
the
Exchange Act:
None
Securities
registered under Section 12(g) of
the
Exchange Act:
Common
Stock, $.001 par value
(Title
of
class)
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.
o
Note
-
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligation under
those Sections.
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
x
No
o
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B contained in this form, and no disclosure will be contained, to the best
of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB.
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
For
the
fiscal year ended December 31, 2006, the Company’s revenue was
$875.
As
of
March 31, 2007, the aggregate market value of the common equity held by
non-affiliates computed by reference to the closing price at which the common
equity was sold, was $2,149,899.
As
of
March 31, 2007, there were 26,873,738 post-split shares of the Company’s common
stock outstanding.
TABLE
OF CONTENTS
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Page
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PART
I
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ITEM
1
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DESCRIPTION
OF BUSINESS
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1
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ITEM
2
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DESCRIPTION
OF PROPERTY
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6
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ITEM
3
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LEGAL
PROCEEDINGS
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7
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ITEM
4
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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9
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PART
II
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ITEM
5
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MARKET
FOR THE REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER
MATTERS
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ITEM
6
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND PLAN OF OPERATIONS
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ITEM
7
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FINANCIAL
STATEMENTS
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16
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ITEM
8
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
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ITEM
8A
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CONTROLS
AND PROCEDURES
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17
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PART
III
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ITEM
9
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS & CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
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18
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ITEM
10
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EXECUTIVE
COMPENSATION
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20
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ITEM
11
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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22
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ITEM
12
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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23
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PART
IV
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ITEM
13
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EXHIBITS
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24
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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25
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SIGNATURES
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PART
I
ALL
SHARE AMOUNTS REFLECT THE COMPANY’S 2:1 FORWARD SPLIT OF ITS ISSUED AND
OUTSTANDING SHARES OF COMMON STOCK AS DECLARED EFFECTIVE BY NASDAQ ON MARCH
11,
2005 UNLESS OTHERWISE INDICATED.
Forward-Looking
Statements
Certain
portions of this Annual Report on Form 10-KSB contain “forward-looking
statements”. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of The Children’s Internet, Inc. (the Company) to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements, including that the Company’s lack of
revenue is not necessarily indicative of its future revenue levels or future
financial performance. The Company’s future operating results are dependent upon
many factors, including but not limited to: (i) whether the Company is able
to
obtain sufficient funding to fund its operations and business; (ii) whether
the
Company is able to build the management and human resources and infrastructure
necessary to support the growth of its business; (iii) competitive factors
and
developments in the industry in which the Company competes; (iv) intellectual
property protection; and (v) any economic conditions that would negatively
affect the Company’s business and expansion plans.
ITEM
1.
DESCRIPTION
OF BUSINESS.
Business
Development
We
were
incorporated in the State of Nevada on September 25, 1996 as D.W.C.
Installations, Inc. We changed our name to The Children’s Internet, Inc. on
December 27, 2002. We are a development stage company and currently have no
significant revenues, no marketing budget, only minimal assets, and have
incurred losses since our inception.
On
July
3, 2002, Shadrack Films, Inc. (“Shadrack”) purchased 2,333,510 newly issued
post-split shares of our common stock for $150,000, thereby obtaining a majority
ownership interest in the company. Our Chief Executive Officer and one of our
directors, Sholeh Hamedani, is the sole officer, director and shareholder of
Shadrack.
On
September 10, 2002, we entered into a Wholesale Sales & Marketing Agreement
with Two Dog Net, Inc., a related party. This Wholesale Sales and Marketing
Agreement gives us the exclusive worldwide right to market, sell, and distribute
The Children’s Internet® service and wholesale dial-up Internet service of Two
Dog Net, Inc. We agreed to pay Two Dog Net a per user charge of $3.00 per month
for each subscriber accessing The Children’s Internet® service. The Wholesale
Sales & Marketing Agreement has a term of five years and renews for
additional five year terms automatically unless either we or Two Dog Net give
written notice of termination of the agreement not less than one year before
the
end of any five year term. Two Dog Net did not give written notice to terminate
the contract one year prior to the expiration of the initial five year term,
therefore the licensing agreement was automatically renewed for an additional
five years expiring in 2013.
In
February 2005, we amended the Wholesale Sales & Marketing Agreement reducing
the per user charge from $3.00 to $1.00 paid per month. In consideration for
this decrease, on February 15, 2005, the Company granted Two Dog Net, or its
designees an option (the “Option”) to acquire up to 18,000,000 post-split shares
of our restricted common stock at a price of $0.07 per share, exercisable in
whole or in part at any time for five years from the date of grant. The Option
also provides for “piggy back’ registration rights for all shares underlying the
Option on any registration statement filed by the Company for a period of one
year following any exercise of the Option.
Our
Chief
Executive Officer, and one of our directors, Sholeh Hamedani, was President
of
Two Dog Net until she resigned on August 1, 2002. Ms. Hamedani, a co-founder,
currently owns approximately 10% of the total outstanding shares of common
stock
of Two Dog Net. Ms. Hamedani’s father, Nasser Hamedani, is the current
President, Chairman and majority shareholder of Two Dog Net. See Item 12,
“Certain Relationships and Related Transactions.”
Principal
products or services and their markets
The
Children’s Internet
Ò
offers
access to pre-selected and pre-approved educational and entertaining age
appropriate web pages as well as secure e-mail, homework help, games, news,
super portals to learning activities and educational resources all within
a
protected online environment. We believe that the proprietary security software,
SafeZone Technology®, offers security against Internet predators and Internet
content that is inappropriate for children. The target market for The Children’s
Internet
Ò
is the
48 million children on-line in 2002 (Report from Internet Commerce &
Communications Division, Information Technology Association of America,
February, 2002), as well as America’s schools, which are connected to the
Internet. The rate of general Internet use in the United States is expected
to
grow by 2 million new users per month. (Report from Internet Commerce &
Communications Division, Information Technology Association of America,
February, 2002.) Nearly two-thirds (62%) of US families have computers at
home,
but roughly 1 out of 5 (17%) of those with computers do not have Internet
access
due to safety concerns.
(Report
from Internet Commerce & Communications Division, Information Technology
Association of America, February, 2002) A third of parents with kids in grades
K-5 say they have, or will, use the Internet as a learning tool at home with
their child. Nearly 56 percent of parents are concerned that their kids view
only age-appropriate content when logging on from the classroom. (Consumer
Internet Barometer study done in 3
rd
quarter
of 2005) Risk of exposure to pornography and online predators is a growing
danger. The number of pornographic websites has increased by 140% to 372
million
web pages and continues to grow. Child pornography requests online have
accumulated to 43 billion per year. (Pew Internet and American Life Project
study 2005)
Competition
In
the
past five years, competition in our market segment of protective software and
secure online browsers and services for children ages pre-school to junior
high
has significantly declined as many of the companies providing these services
and
products have gone out of business. However, the market for Internet products
and services is still highly competitive and there is no substantial barrier
to
entry in these markets. Although we currently believe that the diverse segments
of the Internet market provide opportunities for more than one supplier of
products and services similar to ours, it is possible that a single supplier
may
dominate one or more market segments.
Our
management believes that the principal competitive factors in our market are
brand recognition, ease of use, comprehensiveness of available content,
customization by the consumer, quality and responsiveness of search results,
the
availability of high-quality, focused value added services, and required
technology to offer access to end users with few interruptions. Competition
among current and future suppliers of Internet navigational and informational
services, high-traffic websites, ISPs and broadband providers could result
in
significant price competition and reductions in revenues. There can be no
assurance that we will be able to compete successfully.
We
compete with other providers of security software, information and community
services. Many companies offer competitive products or services addressing
filtering of Internet content, including, among others, Net Nanny (Net Nanny
Software, Inc.), Cyber Patrol (The Learning Company), Cyber Sentinel (Security
Software Systems, Inc.), Cybersitter 9.0 (Solid Oak Software, Inc.), Clever
Island (Alfy, Inc.) and 8e6 Home (Log On Data, Inc.). Inc). In addition, we
compete with online services such as Yahoo! Kids (Yahoo!), an Internet navigator
designed for children in grades K-12; America Online (America Online, Inc.),
which offers parental control options for Internet access; and Disney's Blast
Online, which also offers child-oriented Internet navigation. These companies
already have an established market presence, and are far ahead of us in gaining
market share. Also, entities that sponsor or maintain high-traffic websites
or
that provide an initial point of entry for Internet users, such as the Regional
Bell Operating Companies or commercial online services such as the Microsoft
Network (“MSN”) and America Online (“AOL”), currently offer and could further
develop, acquire or license Internet search and navigation functions that could
compete with our product.
Many
of
our existing competitors, as well as a number of potential new competitors,
have
significantly greater financial, technical, marketing and distribution
resources. In addition, providers of Internet tools and services may be acquired
by, receive investments from, or enter into other commercial relationships
with
larger, well-established and well-financed companies, such as Microsoft or
AOL.
Greater competition resulting from such relationships could have a material
adverse effect on our business, operating results and financial condition.
Sources
and availability of raw materials and principal suppliers
We
currently offer one product,
The
Children’s Internet® service
,
through
our agreement with Two Dog Net
.
Because
our plan is to initially focus on establishing a base of subscribers to the
primary service, we currently do not have plans to offer dial-up Internet
service as allowed by our agreement with Two Dog Net. A
ny
events
adversely affecting Two Dog Net will also affect us as we are entirely dependent
on our agreement with Two Dog Net for any revenues, hardware and technical
support of The Children’s Internet® service and SafeZone Technology® software
and infrastructure. If Two Dog Net were to cease its operations, we would need
to find alternative sources of revenues, which we may be unable to do. In such
an event, we could be forced to cease operations entirely.
We
are
also dependent upon private third party providers such as EmeryTech Data Center
to host our servers and provide the principal Internet connections for The
Children’s Internet®. Any disruption in the Internet access provided by
third-party providers or any failure of third-party providers to handle higher
volumes of user traffic could have a material adverse effect on our business,
operating results, and financial condition.
Dependence
on one or a few major customers
Since
our
recent product launch in March of 2006 we have acquired minimal retail
customers, but do not have any major customers.
Intellectual
property
Our
success is dependent on the proprietary technology developed by Two Dog Net
that
we market and sell. Two Dog Net owns the proprietary technology underlying
The
Children’s Internet® service. We do not have any patents, pending or otherwise.
The following is a list of the intellectual property we have the exclusive
rights to use from Two Dog Net under a Licensing Agreement:
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“The
Children's Internet®" registered
trademark;
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“SafeZone
Technology®” registered trademark;
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The
SafeZone Technology® proprietary software;
and
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“Two
Dog Net™” trademark.
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“Children’s
Internet” is a trademark of Two Dog Net and was registered with the U.S. Patent
and Trademark Office on October 9, 2001 as Registration Number Serial Number
75378450. We do not hold any registered service marks or
trademarks.
Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of products or to obtain and use information that we regard
as
proprietary. Policing unauthorized use of our products is difficult, and while
we cannot determine the extent to which piracy of our software products exists,
such piracy can be expected to be a persistent problem, particularly in
international markets and as a result of the growing use of the Internet. Some
courts have held that shrink-wrap licenses, because they are not signed by
the
licensee, are not enforceable. In addition there can be no assurance that Two
Dog Net’s proprietary software will not be reverse engineered or designed around
by others or that others will not obtain patents that we would need to license
or design around. Impairment of our intellectual property rights could
negatively affect our business or could allow competitors to minimize any
advantage that our proprietary technology may give us.
Government
approval and effect of existing or probable governmental regulations on the
Business
Due
to
the increasing popularity and use of the Internet, laws and regulations with
respect to the Internet may be adopted at federal, state and local levels,
covering issues such as user privacy, freedom of expression, pricing,
characteristics and quality of products and services, taxation, advertising,
intellectual property rights, information security and the convergence of
traditional telecommunications services with Internet communications. We cannot
predict the nature of future legislation and the manner in which government
authorities may interpret and enforce that legislation. As a result, we could
be
subject to potential liability under future legislation, which in turn could
restrict our operations or cause additional expenses or losses. For example,
if
legislation were adopted in the U.S. or internationally that makes transacting
business over the Internet less favorable or otherwise curtails the growth
of
the Internet, this could reduce demand for our products and services and reduce
sales and profits.
In
addition, applicability to the Internet of existing laws governing issues such
as property ownership, copyright and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. These laws
generally pre-date the advent of the Internet and related technologies and,
as a
result, do not consider or address the unique issues of the Internet and related
technologies. Changes to laws intended to address these issues could create
uncertainty in the marketplace, reducing demand for our services or increasing
the cost of doing business as a result of litigation costs or increased service
delivery costs.
Research
and Development
Based
on
our agreement with Two Dog Net, we will continue to look to Two Dog Net for
research and development and will continue to rely on Two Dog Net to keep The
Children’s Internet
Ò
technology current. To date, all of the research and development efforts have
been performed by Two Dog Net.
Over
the
course of the past eight years, Two Dog Net has been focused on the development
of SafeZone Technology®, The Children’s Internet
Ò
,
and the
creation of unique user interfaces and feature functionality for The Children’s
Internet
Ò
.
In the
future, in association with Two Dog Net, we will explore ways to leverage our
current knowledge on compatible product enhancements. For example, some of
the
development may focus on interactive learning systems, a parent’s portal,
multiple participant interactive games for children, a companion product to
The
Children’s Internet
Ò
aimed at
the teen market, and on-line books.
We
will
only begin development of new products after we have successfully launched
The
Children’s Internet
Ò
and feel
comfortable that the research and development effort will not dilute our focus
and resources from the success of The Children’s Internet
Ò
.
Staff
and Consultants
We
currently have five individuals serving as our full-time staff: Sholeh Hamedani,
Roaya Hamedani, Tyler Wheeler, John Heinke and Bill Arnold. On December 30,
2005, we hired Bill Arnold as our president. Bill Arnold had served as our
Investor Relations consultant during the last ten months of 2005, through
Crosslink Financial Communications, Inc. as discussed in the following
paragraph. Except for Sholeh Hamedani and Bill Arnold, the services of our
staff
have been provided to the Company through Shadrack or Two Dog Net, Inc. without
charge. On September 1, 2006 Mr. Arnold took a voluntary unpaid leave of
absence.
We
hire
independent contractors on an “as needed” basis only. We have no collective
bargaining agreements.
On
February 25, 2005 we entered into a Consulting Agreement with Crosslink
Financial Communications, Inc., of which Bill Arnold is the principal
shareholder. The agreement, which was originally for a 12-month term commencing
February 25, 2005. The agreement was terminated at the end of December 2005
after Bill Arnold was named President of the Company. Crosslink represented
the
Company in stockholder communications and public relations with existing
shareholders, brokers, dealers and other investment professionals as to the
Company's current and proposed activities, and in consulting with management.
For
undertaking this engagement the Company issued to Crosslink a “Commencement
Bonus” payable in the form of 200,000 restricted post-split shares of the
Company's common stock. In addition, the Company agreed to a monthly stock
compensation of 8,000 post-split shares of common stock every month on the
contract anniversary date, and a cash fee of $5,000 per month for the term
of
the agreement. Out of this fee, Crosslink paid for complementary services (e.g.,
other mailing services, email services, data base extensions) up to an average
of $2,500 per month, never less than $1,500 per month. During the months of
March through December 2005, Crosslink received an additional 80,000 restricted
post-split shares, bringing their total remuneration to 280,000 shares and
$50,000.00 in cash fees under this agreement.
On
March
29, 2007, the Company entered into an Executive Employment Agreement with Tim
T.
Turner, whereby by Mr. Turner will become the Director of Finance and Operations
for the Company. Upon the Company obtaining Directors and Officers Insurance
Mr.
Turner will be appointed an officer of the Company and made a member of the
Company’s Board of Directors. The agreement states that Mr. Turner
shall
receive a yearly salary of $157,500. He shall earn a monthly salary of $13,125
of which $5,000 will be paid in cash and $8,125 shall be deferred and accrued
for a maximum period of twelve months from the date of this Agreement. In the
event that the Company raises, during this twelve-month period, additional
capital, through loans, equity investment or both, in the aggregate sum of
one
million dollars, Mr. Turners monthly cash compensation shall be increased to
$6,562.50. The balance of Mr. Turner’s monthly compensation of $6,562.50 shall
be deferred and accrued.
At
the
end of the twelve month period, the total amount of the Mr. Turner’s deferred
compensation shall be payable by the Company, and the cash compensation will
be
increased to $13,125 per month. In the event that the Company, acting in good
faith, determines that it does not have the resources to pay Mr. Turner deferred
compensation, Mr. Turner and the Company agree that the total amount of deferred
compensation will be converted into a note payable to Mr. Turner by the Company.
The Note shall have a term of one year and shall accrue interest at the annual
rate of 7.75%, or 2.5 % above the Federal Funds Rate then in effect, whichever
amount is higher, payable at the end of each calendar month.
At
the
end of the Note term, the principal amount and any unpaid earned interest shall
be due and payable. The Note will have a Warrant attached to it that will enable
the holder to purchase shares of the Company’s common stock. The number of
shares of the Company’s common stock that will be purchasable under the terms of
the Warrant will be equal to the principal amount of the Note multiplied by
four
and divided by the then current market price of the Company’s common stock. The
Warrant Shares will be unregistered and subject to Rule 144. The Warrant Shares
shall have piggyback registration rights. The term of the Warrant will be five
years from the date of issue. Mr. Turner’s monthly salary will otherwise be
payable pursuant to the Company’s normal payroll practices. The Note will
continue to be due and payable with interest from the date issued. In addition
to the Base Salary, Mr. Turner shall participate in a bonus program in which
Mr.
Turner will earn an annual bonus equal to 50% of Mr. Turner’s Base Salary
subject to Mr. Turner meeting the performance objectives established by the
Company.
ITEM
2. DESCRIPTION OF PROPERTY
Our
majority shareholder, Shadrack, has agreed to allow us to operate from its
offices located at 5000 Hopyard Rd., Suite 320, Pleasanton, CA under a
verbal lease revocable at any time without prior notice. These offices are
2,059
square feet and are leased by Shadrack from Principal Life Insurance Company,
an
Iowa corporation. From March 22, 2004 until April 30, 2004, we occupied the
office space on a rent-free basis. From month two (May 2004) through 13 the
basic rent per month was
$3,603,
for months 14 through 25
the
basic
rent per month was
$3,706
and for months 26 through 37
the
basic
rent per month is $3,809 under a lease agreement that expires on May 1,
2007.
ITEM
3. LEGAL PROCEEDINGS
Oswald
& Yap v. The Children’s Internet, Inc.
On
November 24, 2004, Oswald & Yap, A Professional Corporation (“O&Y”),
formerly counsel to the Company, filed a complaint in the Superior Court of
California, County of Orange, Case No. 04CC11623, against the Company, seeking
recovery of allegedly unpaid legal fees in the amount of $50,984.86 in
connection with the legal representation of the Company. Subsequently the amount
claimed of unpaid legal fees was reduced to $37,378.43 because it was discovered
that O&Y did not properly credit all of the payments that were made by the
Company to O&Y. The amount of $37,378.43 was deposited in an escrow account
by the Company on July 5, 2005. The complaint includes causes of action for
breach of contract. The Company disputes the amounts claimed alleging that
O&Y’s services were otherwise unsatisfactory. On May 9, 2005, O&Y
submitted an Offer to Compromise for a $0 payment by the Company to O&Y in
exchange for mutual releases which the Company rejected.
The
Company filed a cross-complaint against O&Y alleging breach of contract,
professional negligence, negligent representation, and breach of good faith
and
fiduciary duty. The Company is seeking damages in an unspecified amount for
costs, legal fees and losses incurred. O&Y has vigorously disputed the
claims set forth in the cross-complaint and has indicated its intention, should
it prevail in its defense, to institute a malicious prosecution action against
the Company, Nasser Hamedani, Sholeh Hamedani and Company counsel.
A
cross-claim was filed in the Superior Court of California, County of Orange,
Case No. 04CC11623 by the Company
against
O&Y, and the principal allegation is that O&Y was retained to assist its
predecessor company in the purchase and acquisition of D.W.C. Installations
with
the expectation that D.W.C. had available free-trading shares such that the
Company
could
immediately raise capital on the relevant markets and that in advising the
Company
through
the purchase, O&Y failed to properly advise the Company as to the status of
D.W.C. Installations and its shares which in fact were not free-trading. As
a
result of this conduct, the Company
alleges
damages in an unspecified amount but including purchase costs, extended
operation costs, refiling costs, audit costs, legal fees, loan fees, lost market
share, and costs for registration. Trial on the complaint and cross-complaint
is
set to proceed on December 17, 2007.
Stock
Purchase Agreement
There
is
a contingent liability in connection with a Stock Purchase Agreement executed
on
October 11, 2002 between identified Shareholders and identified Purchasers.
Under the terms of Stock Purchase Agreement, a payment of $150,000 is due to
be
paid into escrow in part consideration for purchase of the stock of D.W.C.
Installations, Inc. The payment date is designated as 90 days from the date
that
the Company’s [D.W.C. Installations, Inc., a Nevada Corporation] shares of
common stock become quoted on the over-the-counter bulletin board system. The
shares became quoted on the over-the-counter bulletin board system on December
23, 2004. If this payment is not made, there could be exposure in connection
with the identified shareholders’ efforts to collect the amounts allegedly due.
Stonefield
Josephson, Inc. Arbitration
The
Company was subject to a claim by Stonefield Josephson, Inc., the former
accountants for the Company, seeking reimbursement costs for legal fees spent
in
connection with the Securities and Exchange Commission inquiry of the Company.
Stonefield Josephson, Inc.’s claim seeks recovery of $29,412.74. The Company
disputes any amounts owed because of a settlement agreement entered into between
the respective parties in December 2004 effectively terminating their
relationship. This matter was submitted to binding arbitration through AAA
in
January 2007. The arbitrator’s decision was issued on February 2, 2007, awarding
Stonefield Josephson, Inc. the sum of $19,000 accruing at an interest rate
of
10% per annum. The decision also awarded costs and fees to Stonefield Josephson,
Inc. in the amount of $1,425.00 both of which remain unpaid.
The
Children’s Internet, Inc. v. Stonefield Josephson, Inc.
On
August
25, 2006, the Company filed a complaint against its former accountants
Stonefield Josephson, Inc., and its principal Dean Skupen, in the Superior
Court
of California, County of Alameda, Case No. VG06286054 alleging breach of
contract, promissory estoppel, breach of implied covenant of good faith and
fair
dealing, negligent misrepresentation, fraud, and unfair business practices
arising out of defendants’ alleged failure to properly perform contractual
obligations. The matter was subsequently transferred to Los Angeles Superior
Court and is presently pending there.
SEC
Complaint
On
September 27, 2006, the Securities and Exchange Commission (“SEC”) filed a
complaint in the United States District Court Northern District of California
Case No. C066003CW, against among others the Company, and its CEO Sholeh
Hamedani, alleging against one or more defendants violations of Section 10(b)
of
the Exchange Act and Rule 10b-5, violations of Section 13(a) of the Exchange
Act
and Rules 12b-20, 13a-1, 13a-11, 13a-13, violations of Section 13(b)(2)(A)
of
the Exchange Act by the Company
,
Violations of Section 13(b)(2)(B) of the Exchange Act by the Company, Violations
of Section 13(b)(5) of the Exchange Act and Rule 13b2-1, 13b2-2, 13a-14, 16(a).
The complaint generally alleges that the Company and the individual defendants
made false or misleading public statements regarding the Company’s business and
operations, made false statements in various filings with the Commission and
in
particular the June 2005 Annual Report and Restatement and 2005 Current and
Quarterly Reports, and that defendants or some of them induced investment in
the
Company through misrepresentation and omissions. The complaint seeks
disgorgement, unspecified monetary damages, injunctive relief and other relief
against the defendants. The Company has answered the complaint. Trial in the
matter has been set for March 31, 2008.
The
Company is currently seeking resolution of the SEC complaint by virtue of
settlement. A potential settlement likely may include the Company and/or
its principals consenting, without admitting or denying the allegations, to
a
judgment alleging negligent, reckless, and intentional violations of the
federal securities laws, and other sanctions including substantial penalties.
These penalties could range from current key members of management being barred
from serving as either directors or officers of the Company to also including
financial penalties and disgorgement of all profits derived by the Company
and/or its principals who raised funds through the sale of Company stock to
third parties.
Any
proposed settlement will be subject to the Commission’s approval and the Company
cannot predict the outcome of these settlement negotiations. Additionally,
there
is no assurance that the Company will receive a settlement offer. Moreover,
there is no assurance that the settlement offer (if any) will be acceptable
to
the Company and the prospect of litigation could ensue which could
seriously compromise the Company's ability to achieve its goals.
Adverse
outcomes in some or all of the claims pending against us may result in
significant monetary damages or injunctive relief against us that could
adversely affect our ability to conduct our business. Although management
currently believes that resolving all of these matters, individually or in
the
aggregate, will not have a material adverse impact on our financial position
or
results of operations, the litigation and other claims are subject to inherent
uncertainties and management’s view of these matters may change in the future.
There exists the possibility of a material adverse impact on our financial
position and the results of operations for the period in which the effect of
an
unfavorable final outcome becomes probable and reasonably estimable.
We
are
not aware of any other pending or threatened litigation that could have a
material adverse effect on our business.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5.
MARKET
FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The
Company's common stock was approved for trading in the OTC Bulletin Board on
December 23, 2004 under the trading symbol CITC.OB. Actual trading of our shares
began on February 23, 2005. The following are the approximate high and low
closing bid quotations on the OTC Bulletin Board since the first quarterly
period of trading as reported on the online resources of Market Watch and Yahoo!
Finance:
|
Period
|
|
High
Closing Bid
|
|
Low
Closing Bid
|
|
|
1
st
Quarter 2005
|
|
$
|
6.35
|
|
$
|
1.75
|
|
|
2
nd
Quarter 2005
|
|
$
|
8.40
|
|
$
|
1.37
|
|
|
3
rd
Quarter 2005
|
|
$
|
1.61
|
|
$
|
0.58
|
|
|
4
th
Quarter 2005
|
|
$
|
0.75
|
|
$
|
0.42
|
|
|
1
st
Quarter 2006
|
|
$
|
1.15
|
|
$
|
0.43
|
|
|
2
nd
Quarter 2006
|
|
$
|
0.71
|
|
$
|
0.21
|
|
|
3
rd
Quarter 2006
|
|
$
|
0.35
|
|
$
|
0.125
|
|
|
|
|
$
|
0.17
|
|
$
|
0.06
|
|
|
1
st
Quarter 2007
|
|
$
|
0.17
|
|
$
|
0.07
|
|
Holders
As
of
March 31, 2007, there were 283 shareholders of record. The Company's transfer
agent is Transfer Online, 317 SW Alder Street, 2nd Floor, Portland, OR
97204.
Dividend
Policy
The
Company has not paid any cash dividends on its Common Stock since its inception
and does not anticipate or contemplate paying cash dividends in the foreseeable
future.
Shares
Issued During Fiscal 2005 and 2006
The
Company issued post-split 13,334,628 restricted common shares during the 2005
fiscal year. 13,054,628 post-split shares
were
issued in the conversion of debt owed by the Company to Shadrack Films, Inc.
(the majority shareholder) as explained in Item 6 under the heading “Plan of
Operation”.
280,000
shares were issued to Crosslink Financial Communications, Inc., as discussed
previously in Item 1 under the heading “Staff and Consultants”.
During
the year ended December 31, 2006, 15,600 post-split restricted common shares
were issued to two principals of Brazer Communications under a public relations
consulting agreement. No other new shares were issued by the Company during
2006.
On
April
30, 2007, the Company and the Board of Directors adopted “The Children’s
Internet, Inc. 2007 Equity Incentive Plan” (the “Plan”). The purpose of the Plan
is to provide incentives to attract retain and motivate eligible persons whose
present and potential contributions are important to the success of the Company
by offering them an opportunity to participate in the Company's future
performance through awards of Options, Restricted Stock and Stock
Bonuses
.
Under
the
terms of the Plan the Company has made available six million (6,000,000) Shares
of the Company’s stock to be issued to Officers, Directors, Employees,
Consultants and Advisors to the Company with certain restrictions as set forth
in the Plan, and can be found in Exhibit 10.14 to this 10-KSB. The plan will
be
administered by a Committee of the Board of Directors. The plan will terminate
ten (10) years from the effective date of the plan unless terminated earlier
under the terms of the Plan.
Other
Matters
In
a
Stock Purchase Agreement dated October 11, 2002, twenty-five D.W.C.
Installations shareholders sold 2,237,000 of the original 2,242,000
“freely-tradable” post-split shares of common stock to six individuals, two of
whom are related to the Company’s Chief Executive Officer, Chief Financial
Officer and Chairman of the Board, Sholeh Hamedani. Together, the two related
individuals purchased 27% of the 2,237,000 shares sold. At the time the shares
were issued, the Company believed the shares were "freely tradeable" based
on
the representations made by our attorney at the time, Oswald & Yap, who
structured the agreement. Subsequently the company determined that the
shares were, in fact, not "freely tradeable" and those shares would have to
be registered. The said shares were then registered in a SB-2 Registration
Statement declared effective on May 5, 2004.
Also
on
October 11, 2002, the Company entered into a subsequent agreement with the
six
new shareholders holding the 2,237,000 “freely-tradable” post-split shares, to
issue four shares of restricted common stock to these shareholders or their
designees, for every one “freely-tradable” share held.
At
the
time the shares were issued, the Company believed the shares were "freely
tradeable" based on the representations made by our attorney at the time, Oswald
& Yap, who structured the agreement. Subsequently the company
determined that the shares were, in fact, not "freely tradeable" and those
shares would have to be registered. The said shares were then registered
in a SB-2 Registration Statement declared effective on May 5, 2004. Pursuant
to
this agreement,
8,948,000
newly-issued restricted post-split shares of common stock were issued in
exchange for an agreement
to
loan
to TDN, the proceeds of the sales of a portion of their shares. TDN in turn
agreed to loan a portion of these proceeds to Shadrack to finance the ongoing
operations of the Company. TDN retained the remainder of the proceeds to help
fund development costs of The Children’s Internet system and to make payments on
TDN’s existing debts. The
8,948,000
newly-issued
post-split shares were recorded at a value of $575,356 based on the $0.0643
per
share paid by Shadrack in a previous transaction where Shadrack acquired the
2,333,510 newly-issued post-split shares it purchased on July 3, 2002. The
$575,356 value was recorded by the Company as a debt financing fee. The loan
agreement is such that Shadrack will not charge the Company any interest on
the
amounts loaned. Shares sold under this agreement included 1,218,990 of the
“freely-tradable” shares and 2,650,108 of the newly-issued restricted shares,
for a total of 3,869,098 post-split shares, which were sold for a total of
$2,722,341. After deducting the $494,049 in commissions paid by TDN, the
resulting net proceeds were $2,228,292. As of December 31, 2006 and 2005, the
net amount loaned to the Company by Shadrack was $1,471,258 and $1,078,146,
respectively.
ITEM
6.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS.
Critical
Accounting Policies and Estimates
The
Company’s financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America,
which
contemplate continuation of the Company as a going concern
.
The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual
results could differ from those estimates.
Selected
Financial Data
|
|
|
For
the year
ended
December 31,
2006
|
|
For
the period from September 25, 1996 (inception) through December 31,
2006
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
875
|
|
$
|
875
|
|
|
Operating
expenses
|
|
$
|
1,067,414
|
|
$
|
4,127,606
|
|
|
Operating
loss
|
|
|
($1,066,694
|
)
|
|
($4,126,886
|
)
|
|
Net
Loss
|
|
|
($1,086,994
|
)
|
|
($4,150,386
|
)
|
|
|
|
As
of December 31, 2006
|
|
|
Balance
Sheet Data:
|
|
|
|
|
Total
assets
|
|
$
|
48,840
|
|
|
Current
liabilities
|
|
$
|
895,384
|
|
|
Long-term
Liabilities
|
|
$
|
1,014,346
|
|
|
Total
stockholders' deficit
|
|
$
|
1,860,890
|
|
Our
operating expenses decreased by $192,744 for the year ended December 31, 2006,
as compared to the year ended December 31, 2005. The decrease was primarily
due
to decreases of $145,681 in officers and directors compensation and $183,257
in
investor relations expenses, offset by an increase in legal expenses of
$183,901. The decrease in officers and directors compensation resulted primarily
from more stock options granted during the year ended December 31, 2005. The
decrease in investor relations expense is because the principal of our former
investor relations consulting firm, which received 280,000 restricted post-split
shares valued at $126,600 in addition to $55,000 in cash fees during the year
ended December 31, 2005, performed these functions as an officer of the Company
during the year ended December 31, 2006. The increase in legal expenses is
due
primarily to the Oswald & Yap litigation and responding to the SEC
investigation and complaint.
Plan
of Operation
This
plan
of operation contains forward-looking statements that involve risks,
uncertainties, and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those described elsewhere in this
report.
On
September 10, 2002, we entered into a License Agreement with Two Dog Net for
an
exclusive worldwide license to market and sell The Children’s Internet® service.
We subsequently replaced the royalty and license agreement with a new Wholesale
Sales & Marketing Agreement with the same effective date of September 10,
2002. The new agreement provides for us to be the exclusive marketers of Two
Dog
Net’s proprietary secured Internet service for pre-school to junior high school
aged children called The Children’s Internet®. We further amended this agreement
in February 2005 to decrease the per user fee to Two Dog Net from $3.00 to
$1.00. In consideration for this decrease, Two Dog Net was granted an option
to
acquire 18,000,000 post-split shares of the Company’s restricted common stock at
an exercise price of $.07 per share for five years from the date of grant.
The
shares underlying the option have “piggy back” registration rights for a period
of one year following any exercise of the option.
Two
Dog
Net did not give written notice to terminate the contract one year prior to
the
expiration of the initial five year term, therefore the licensing agreement
was
automatically renewed for an additional five years expiring in 2013.
The
Company released The Children’s Internet®, version 9.0, to the market on March
2, 2006. The Company is the exclusive marketer and distributor of The Children's
Internet® membership-based service created just for kids. In the August 2004
issue of PC Magazine The Children's Internet® was ranked as Editors' Choice in
the category of "Kids' Browsers and Services," and was voted number one over
AOL, EarthLink and MSN Premium 9. Additionally in August 2006
The
Children's Internet® was declared winner of Outstanding Products of 2006 by
iParenting Media Awards in the software category. Shortly thereafter on
September 2006 The Children's Internet® received the coveted National Parenting
Center's Seal of Approval.
We
believe The Children's Internet® is the most comprehensive, smart solution to
the problems inherent to a child’s unrestricted and unsupervised Internet
access. We offer a protected online service and "educational super portal"
specifically designed for children, pre-school to junior high, providing them
with SAFE, real-time access to the World Wide Web; access to hundreds of
thousands of the best pre-selected, pre-approved educational and entertaining
web pages accessed through a secure propriety browser and search
engine.
During
2006 the technology on which the product is based was updated and the
functionality of the service was improved. During 2006 the Company increased
the
number of approved websites within the search engine and portals data base
by
over 50%. The Company, through Two Dog Net also substantially upgraded the
underlying system infrastructure by increasing redundant servers and improving
control procedures which in turn increased the reliability of the
service.
Additionally
during 2006, where appropriate, the Company contracted with third party
companies to outsource administrative support services and effectively put
in
place the infrastructure to support the marketing initiatives. These outsource
providers handle telemarketing and the order taking process and media placement.
The
Business Model
The
product sells for $9.95 per month to the consumer. The user must already have
internet access, either through dial-up, DSL or cable broadband. We utilize
both
retail and wholesale channels of distribution.
The
Company will focus on establishing long term, value-driven relationships
with:
|
|
·
|
The
School Market: School Administrators and
Teachers
|
|
|
·
|
Major
ISP’s such as Comcast, Yahoo, AOL,
etc.
|
|
|
·
|
Non-profit
organizations such as religious groups, Boy Scouts and Girl Scouts,
etc.
|
|
|
·
|
ISP
customers with an interest in protecting their families
|
With
the
product now launched and generating minimal revenues, we are affecting a broad
based Sales and Marketing Plan. We will focus our sales and marketing programs
on five distinct areas where we can produce revenue:
|
|
1.
|
Consumer
Sales
-
We are selling monthly subscriptions of the service directly to consumers
via a nationwide Sales Agent program. We introduced a Sales Agent
program
on January 11, 2006 and began enrolling independent Sales Agents
to sell
subscriptions to The Children’s Internet® service on a commission only
basis. A monthly commission of $2.00 per subscriber is paid to the
sales
agent and continues as long as the subscriber is enrolled with our
service. These independent Sales Agents have already demonstrated
the
ability to introduce the product to some of the nations largest ISPs,
retailers, merchandisers and fast food companies.
Consumers
may also acquire the product directly from the Company via our website
at:
www.thechildrensinternet.com.
|
|
|
2.
|
Wholesalers
-
We sell The Children's Internet® to independent distributors, resellers
and ISPs who will sell it as a value-added service to their current
customer base. Targets would include companies such as Comcast, AT&T,
EarthLink and the hundreds of “local” ISPs throughout the United States.
In these situations, the business model changes dramatically as we
would
not be engaged in billing, collecting, customer service or level
one
technical support.
|
|
|
3.
|
Charitable
organizations-
We
will “partner” with non-profit organizations to have them market the
product. Targets would include large religious organizations, various
scout programs, Internet safety activists, law enforcement agencies,
etc.
Moreover, we offer any age-appropriate school, public or private,
20 free
licenses for a year. From there, we expect Parent Teacher Associations
to
use the product as a fund raiser, deepening our penetration into
the homes
of children.
|
|
|
4.
|
Infomercials-
Subject to securing financing, the cornerstone of our consumer marketing
plan is a national television advertising campaign which includes
a
30-minute infomercial that was produced over a two-year period of
time by
Two Dog Net. This infomercial will be re-edited and updated. We then
intend to utilize the infomercial to launch the advertising and consumer
marketing program to build brand recognition and to generate revenues
from
customer monthly subscriptions. We plan to first conduct a limited
media
test to identify what television stations in various geographical
markets
generate the most response. From the media test we will be able to
build
the media plan to launch the advertising campaign on a national basis
thereafter and will be the basis for the ongoing infomercial media
schedule.
|
Channels
of Distribution:
The
Children's Internet, Inc. will employ both direct and indirect sales channels.
Also
subject to secure financing we will hire a direct sales force. The primary
targets will be the largest Internet Service Providers as well as other national
organizations that market to the most appropriate demographic for our service.
We believe one or more of the largest ISPs in the United States will recognize
the first mover advantage opportunity and will use The Children’s Internet to
not only offer this much needed product to their existing customers, but also
to
take significant market share from their competition. We also believe that
almost any company that markets to our demographic will want to seize the public
relations good will that will accrue to any company offering our
service.
The
indirect channel, composed of non-salaried independent sales agents and
wholesale distributors, will target a wide range of opportunities, from local
charities to national organizations where they may have an influential contact.
These sales agents will have the opportunity to employ secondary resellers
to
work for them, but we will not market using a multi-level marketing plan.
Through grassroots efforts during 2006 the Company entered into sales agent
agreements with ten individuals. Through 2007 the company intends to continue
to
support these sales agents in their efforts to distribute the product on an
individual basis, through organizations and through key strategic online service
providers.
Future
products and services
In
the
future we anticipate generating revenues via advertising sold to the purveyors
of children goods and services. As well, we intend to engage in the
merchandising of
The
Children’s Internet® themed products, from clothing to toys to books, but for
the foreseeable future we will focus strictly on the successful distribution
of
our core service.
Market
Share, Cash Flow and Profitability
Although
market data is not exact, and varies depending on the source, our plan is based
on the belief that in the United States alone there are an approximately 48
million homes with internet access with children under the age of 16. Our model,
with a mix of business generated from the respective channels of distribution,
indicates we can be cash flow positive and profitable with less than 0.5% of
the
market.
As
of
December 31, 2006, we had net loss from inception of approximately $4,150,000.
Of this amount, approximately $595,000 represents the estimated fair market
value for the cost of wages, if paid, for the services rendered by our Chief
Executive Officer and an outside consultant (we have recorded these amounts
for
the cost of wages, and since they did not charge the Company, as additional
paid
in capital), $1,598,000 represents professional fees such as legal and
accounting expenses, $575,000 represents a debt financing fee, $315,000
represents officers compensation for which an option to purchase common stock
was issued, $449,000 represents accrued officers compensation, and the balance
of $618,000 consists primarily of occupancy and telecommunications costs
including internet costs. To date Shadrack, the majority shareholder, has funded
all of our expended costs.
Currently,
we are dependent on funding from Shadrack for our current operations and for
providing office space and utilities that for the year ended December 31, 2006,
averaged $14,200 per month in operating costs, exclusive of professional fees,
time donated by our staff and officers’ time paid or accrued during the year
2006. Through December 31, 2006, the amount funded by Shadrack totaled
approximately $1,471,000. On December 31, 2006, the balance due to Shadrack
was
approximately $1,014,000. The difference of approximately $457,000 was converted
to common stock on February 15, 2005, when the Company’s Board of Directors
authorized the conversion of all debt owed to Shadrack into 13,054,628
post-split shares of restricted common stock at a conversion price of $0.07
per
pre-split share. Shadrack is under no obligation to continue funding our
operations and could stop at any time without notice.
Where
practicable we plan to contract with third party companies to outsource
administrative support services that effectively support the growth of the
business. These outsource providers handle technical support, telemarketing
and
the order taking process and media placement. We believe this strategy will
minimize the number of employees required to manage our intended growth through
2007.
On
February 25, 2005, we entered into a Consulting Agreement with Crosslink
Financial Communications, Inc., of which Bill Arnold is the principal
shareholder. Crosslink represented the Company in stockholder communications
and
public relations with existing shareholders, brokers, dealers and other
investment professionals as to the Company's current and proposed activities,
and in consulting with management. For undertaking this engagement the Company
agreed to issue a “Commencement Bonus” payable in the form of 200,000 restricted
post-split shares of the Company's common stock. In addition, the Company agreed
to a monthly stock compensation of 8,000 post-split shares of common stock
every
month on the contract anniversary date, and a cash fee of $5,000 per month
for
the term of the Agreement. Out of this fee, Crosslink paid for complementary
services (e.g., other mailing services, email services, data base extensions)
up
to an average of $2,500 per month. The agreement, which was originally for
a
term commencing February 25, 2005 and ending twelve months thereafter, was
terminated at the end of December 2005 because there was a mutual desire for
Mr.
Arnold to be involved on a daily basis. Hence on December 30, 2005, Bill Arnold
was hired as the Company’s President. Beginning on September 1, 2006 Mr. Arnold
took a voluntary unpaid leave of absence.
Going
Concern Uncertainty
Since
our
anticipated offering of new shares to the public was terminated, we have relied
exclusively on loans from Shadrack to fund all of our expenses. There is no
assurance that Shadrack will be able or be willing to continue such funding.
We
will be required to obtain additional funds through private placements of debt
or equity securities or by other borrowing. We do not have any arrangements
with
potential investors or lenders to provide such funds as of the date of this
filing and there is no assurance that such additional financing will be
available when required in order to proceed with our business plan. Further,
our
ability to respond to competition or changes in the market place or to exploit
opportunities will be significantly limited by lack of available capital
financing. If we are unsuccessful in securing the additional capital needed
to
continue operations within the time required, we will not be in a position
to
continue operations. In this event, we would attempt to sell the Company or
file
for bankruptcy.
Off-Balance
Sheet Arrangements
None.
ITEM
7.
FINANCIAL
STATEMENTS.
The
financial statements required to be filed pursuant to this Item 7 begin on
page
F-1 of this report.
ITEM
8.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
On
October 3, 2006, the Company received notice from its independent accountant,
Marc Lumer & Co. (“Lumer”) that they had resigned as auditors of the Company
effective immediately. On October 9, 2006, the Company received a second letter
from Lumer stating that they had withdrawn their opinions on our previous
financial statements for unstated reasons.
During
the prior fiscal year, Lumer’s report on the Company’s financial statements did
not contain an adverse opinion or a disclaimer of opinion, audit scope, or
accounting principles nor were the reports qualified or modified except as
to
uncertainty with respect to going concern, audit scope, or accounting
principles. During the prior two fiscal years ended December 31, 2004 and
December 31, 2005, and the subsequent interim periods through the, date of
resignation, there were no disagreements with Lumer on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or
procedure which, if not resolved to the satisfaction of Lumer would have caused
Lumer to make reference to the matter in their reports. There were no
"reportable events", as that term is described in Item 304(a)(1)(v) of
Regulation S-K.
On
March
29, 2007, the Company entered into an agreement with the firm of Hunter,
Flemmer, Renfro & Whitaker, LLP of Sacramento, California to replace Lumer
as the Company’s independent accountants. On May 14, 2006 the agreement was
replaced with an agreement for Hunter, Flemmer, Renfro & Whitaker, LLP to
audit the financial statements for the year ended December 31, 2006 and the
year ended December 31, 2005. This agreement was approved by the Company’s Board
of Directors.
ITEM
8A. CONTROLS AND PROCEDURES
In
the
course of the due diligence for the Annual Report on Form 10-KSB of the Company
for the fiscal year ended December 31, 2004, our management identified an
agreement that the Company had entered into with five of our shareholders on
October 11, 2002. This agreement provided that in consideration for the
agreement of these shareholders to loan an affiliate of the Company proceeds
from the sale of their shares of common stock of the Company to third parties,
the Company would issue four shares of its restricted common stock for every
one
share owned. The aggregate number of shares of restricted common stock that
the
Company was obligated to issue pursuant to the agreement was 4,474,000 pre-split
(8,948,000 post-split) shares. The agreement was not disclosed in any of the
Company’s previous SEC filings or otherwise included as an exhibit as a result
of an error of omission. In addition, the 4,474,000 pre-split (8,948,000
post-split) shares to be issued were not included in any of the Company’s
financial statements for the fiscal years ended December 31, 2003 or 2002,
or in
any interim reporting period through September 30, 2004.
Management
brought this matter to the attention of its Board of Directors and the Board
of
Directors brought it to the attention of the Company’s independent auditor.
After discussions with management, the Board of Directors determined that
previously reported financial information for the Company be restated to reflect
the agreement. In light of the expected restatement, the Company filed a Form
8-K on April 21, 2005 under Item 4.02 (a) advising that due to an error, its
previously issued financial statements for the fiscal years ended December
31,
2003 and 2002 and such interim periods covered thereby and for the interim
periods in fiscal 2004 should no longer be relied upon.
|
|
(b)
|
Evaluation
of Disclosure Controls and Procedures and
Remediation
|
In
connection with the restatement, under the direction of our Chief Executive
Officer and Controller, we have reevaluated our disclosure controls and
procedures. We identified a material weakness in our internal controls and
procedures relating to the handling and disclosure of material agreements.
In
order to prevent the same kind of mistake noted above, the Company implemented
a
new review system whereby all agreements which have a material effect on the
Company will be reviewed by the Company’s Chief Executive Officer and outside
counsel. Agreements are now forwarded to the Company’s auditor which keeps
copies in its files for reporting purposes. Additional copies will be forwarded
to the Company’s accounting department where it is logged and processed for
follow-up. In addition to the above we constantly monitor our procedures and
when necessary hire outside consultants to make sure that the Company’s
corporate compliance program is up to date with all SEC Rules and
recommendations.
We
believe that as of the date of this filing, the process enumerated above
remediates the weaknesses that were identified in our internal controls and
procedures.
ITEM
8B. OTHER INFORMATION
None.
PART
III
ITEM
9.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a)
OF THE EXCHANGE ACT.
Our
directors and executive officers are as follows:
|
Name
|
|
Age
|
|
Position
|
|
Sholeh
Hamedani
|
|
39
|
|
Chief
Executive Officer, Chief Financial Officer, Chairman of the Board
of
Directors
|
|
Jamshid
Ghosseiri
|
|
67
|
|
Secretary,
Director
|
|
Tyler
Wheeler
|
|
36
|
|
Director
|
|
Roger
Campos, Esq.
|
|
60
|
|
Director
|
|
William
L. Arnold
|
|
60
|
|
President
|
Ms.
Sholeh Hamedani
has
been
our Chief Executive Officer, Chief Financial Officer and Chairman of the Board
since August 23, 2002. From May 2002 through the present, she has served as
the
President, CEO and founder of Shadrack Films, Inc.,
the
majority shareholder. From July 1995 to August 2002, she was President and
Co-Founder of Two Dog Net, a security solutions provider and software developer
and an affiliate of the Company. She was responsible for managing product
development of new technologies, as well as creating and implementing their
marketing strategies. Ms. Hamedani’s experience includes local and national
advertising campaigns on television, radio and print, as well as producing,
scripting and directing educational video programs and television infomercials.
Prior to Two Dog Net, Ms. Hamedani was part of the founding team at SyberVision
Systems in the Production and TV Media Department from 1985 to 1989.
Mr.
William L. Arnold
was
appointed President of the Company on December 30, 2005. Mr. Arnold has nearly
30 years of senior management experience in companies ranging from startups
to
Fortune 500 companies. After serving in senior level general management
positions, including President of its second largest subsidiary, at Fortune
500
U. S. Leasing International. Subsequently he was President of LeasePartners,
Inc. and later President of MicroResources, Inc. Prior to joining The Children's
Internet, he co-founded Crosslink Financial Communications, Inc., specializing
in consulting with microcap companies with respect to issues ranging from
product positioning and sales management to conveying their value proposition
to
Wall Street. He has a history of successful implementation of leveraged business
relationships with companies such as IBM, Hewlett-Packard, Merrill Lynch and
Discovercard, making him highly qualified to both develop a field sales presence
and negotiate and close the large-scale relationships the company will pursue.
Mr. Arnold has an MBA from Auburn University.
Mr.
Jamshid Ghosseiri
has
been
a director since August 23, 2002 and Secretary since January 2, 2003. From
January 9, 1989 through the present, he has served as Chief of the Microbiology
Department at Mt. Diablo Medical Center. Mr. Ghosseiri has over 36 years of
experience in the field of clinical microbiology and research in infectious
diseases. He received a B.S. from San Jose State University in 1966 and
completed his Post Graduate Studies in Infectious Diseases at Stanford
University in 1969.
Mr.
Tyler Wheeler
has
been
our Chief Software Architect and a director since August 23, 2002. He co-founded
Micro Tech Systems in 1989. In 1993, he and his father founded Integrative
Systems, Inc., a hardware and software computer consulting firm. From January
1996 to August 2002, Mr. Wheeler served as Vice President of Technology at
Two
Dog Net. Mr. Wheeler completed a B.A. in Finance and Business Law at California
State University, Fresno in 1996.
Mr.
Roger Campos, Esq.
has
been
a director since August 23, 2002. Mr. Campos received his B.A. in 1969 from
the
University of California at Santa Barbara and received his J.D. (law) degree
in
June 1972 from the United States International University (San Diego, CA).
From
February 2002 through the present, he has served as President and CEO of the
Minority Business Roundtable, a national membership organization, based in
Washington DC, for CEOs of the nation’s largest minority-owned companies. From
January 2000 to February 2002, Mr. Campos was Executive Director of the Minority
Business Roundtable. From January 1997 to January 2000, he served as Vice
President of government relations for the Hispanic Association of Colleges
and
Universities. Mr. Campos provides consulting services in the areas of
contracting, marketing, and business transactions.
Mr.
Dale Boehm
was
appointed a director on August 23, 2002. From September 2002 through the
present, Mr. Boehm is the Founder and President of Caspian Technology Concepts,
a consulting firm specializing in network management services. Previous to
this,
Mr. Boehm served as Director of Sales at Qwest Telecommunications, Inc from
July
2001 continuing until August 2002 where he was responsible for 90+ direct
reports and all of the revenue in the National Accounts division in Illinois
and
Wisconsin. From December 2000 to July 2001, Mr. Boehm was the Regional Vice
President of Central Region Sales at One Secure Inc., a managed security
services provider enabling clients to co-manage firewalls. Mr. Boehm received
his Certificate of Telecommunications Analysis from the University of
Wisconsin-Milwaukee in 1994. Mr. Boehm resigned as a director on May 11, 2006
and his seat has not been replaced.
Key
Staff
John
J. Heinke, C.P.A.
has
been
our Controller since September 2004. He received his B.A. Degree in Economics
from California State University, Chico, and became a Certified Public
Accountant in the District of Columbia in 1967. From 1996 to 2004, he was
Accounting Manager at HighSoft, Inc., a software development company and
reseller of computer products and services. Previously, Mr. Heinke served as
Controller of SyberVision Systems where he directed the accounting and
management information systems, as SyberVision grew from a startup to a $100
million company in four years. Other experience includes managing
the
accounting for a $1.7 billion investment portfolio at Prudential’s Real Estate
Investment Department in San Francisco from 1978 through 1982. Previously,
he
was with Price Waterhouse, serving as Manager of the El Salvador office from
1974 through 1977.
Directors
are elected to serve until the next annual meeting of stockholders or until
their successors have been elected. Officers are appointed to serve until the
meeting of the Board of Directors following the next annual meeting of
stockholders, or it continues as composed unless shareholders demand a meeting.
Meetings
of The Board of Directors and Information Regarding
Committees
There
currently are no committees of the Board of Directors. The Board of Directors
met twice during the year 2005, on February 22, 2005 and on April 20, 2005,
to
manage various company issues. There were no Board meetings in
2006.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
officers, as well as persons who own more than 10% of our common stock
("Reporting Persons") to file reports of ownership and changes in ownership
on
Forms 3, 4 and 5 with the Securities and Exchange Commission. The Company
believes that all Reporting Persons have complied on a timely basis with all
filing requirements applicable to them.
ITEM
10.
EXECUTIVE
COMPENSATION.
General
Compensation Discussion
All
decisions regarding compensation for our executive officers and executive
compensation programs are reviewed, discussed, and approved by the Board of
Directors. All compensation decisions are determined following a detailed review
and assessment of external competitive data, the individual’s contributions to
our success, any significant changes in role or responsibility, and internal
equity of pay relationships.
Summary
Compensation Table
The
following table sets forth the total compensation earned by or paid to the
executive officers for the last three fiscal years.
|
|
|
|
|
ANNUAL
COMPENSATION
|
|
LONG
TERM COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
Payouts
|
|
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Other
Annual Compensation
($)
|
|
Restricted
Stock Awards ($)
|
|
Securities
Underlying Options/
SARs
(#)
|
|
LTIP
Payouts
($)
|
|
All
Other Compensation ($)
|
|
|
Sholeh
Hamedani,
CEO,
CFO
|
|
|
2004
2005
2006
|
|
$
$
$
|
180,000
1
180,000
2
180,000
2
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
0
0
0
|
|
|
-0-
-0-
-0-
|
|
$
$
$
|
0
0
0
|
|
$
$
$
|
0
0
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Arnold, President
|
|
|
2006
|
|
$
|
77,096
3
|
|
$
|
40,000
3
|
|
$
|
0
|
|
$
|
0
|
|
$
|
52,223
|
|
$
|
0
|
|
$
|
0
|
|
On
February 15, 2005, the Company’s Board of Directors granted Tyler Wheeler, the
Company’s Chief Software Architect Consultant and a director, an option to
purchase up to 1,000,000 post-split shares of the Company’s restricted common
stock at an exercise price of $0.07, and a fair value of $315,000 if all the
options were to be converted. The option is exercisable, in whole or in part
at
any time and from time to time, for a period of five years from the date of
grant.
The
option was valued using the Black-Scholes option pricing model, which was
developed for estimating the fair value of traded options, and taking into
account that all of the acquirable shares are restricted.
No
other
options or SARs (Stock Appreciation Rights) were granted to any directors or
executive officers during 2005 and 2006.
Employment
and Related Agreements
William
L. Arnold was appointed by the Chairman to act as the President of the Company
beginning December 30, 2005, under an Executive Employment Agreement executed
on
the same date. Compensation includes a monthly salary of $10,000, of which
$2,500 per month is deferred with 9% accrued interest until January 2007. The
agreement also includes a performance bonus of up to 50% of the annual salary
and a combination of nonqualified and qualified stock options (the Stock
Option). The Stock Option is for the purchase of up to 1,000,000 post-split
shares at an option price of $0.55 per share, which was more than the closing
market price of $0.48 on the date of the agreement. One half of the Stock Option
vests immediately and the remaining 500,000 option shares will vest at the
rate
of 1/36
th
each
month until fully vested. Of the 500,000 option shares which vest immediately,
360,000 are Incentive Stock Options (ISO’s). The remaining 640,000 option shares
are non-qualified. Beginning on September 1, 2006 Mr. Arnold took a voluntary
unpaid leave of absence. During Mr. Arnold’s leave of absence the vesting of his
options were suspended.
1
The
officer did not charge the Company for her services - this amount was the
estimated fair market value for comparable services and was recorded as
additional paid in capital as of December 31, 2004.
2
The
officer’s salary was accrued but has not been paid through the date of this
report.
3
Salary
of $27,822 has been paid. The balance of $49,274 was accrued. The bonus of
$40,000 has been accrued.
Compensation
of Directors
Directors
of the Company do not receive any cash compensation, but are entitled to
reimbursement of their reasonable expenses incurred in attending directors'
meetings.
ITEM
11.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The
following table sets forth information with respect to the number of shares
of
common stock beneficially owned by (i) each of our directors, (ii) each our
executive officers, (iii) all executive officers and directors as a group,
and
(iv) each shareholder known by us to be a beneficial owner of more than 5%
of
any class of our voting securities as of March 31, 2007.
|
Name
|
|
Number
of Post-Split Shares
|
|
Percentage
Beneficially Owned
|
|
|
Sholeh
Hamedani, CEO, CFO, Director
3
,
5
|
|
|
14,040,988
|
|
|
52.2
|
%
|
|
William
L. Arnold, President
7
|
|
|
891,112
|
|
|
3.2
|
%
|
|
Jamshid
Ghosseiri, Ph.D., Secretary, Director
|
|
|
-0-
|
|
|
-0-
|
|
|
Tyler
Wheeler, CTO, Director
4
|
|
|
1,000,000
|
|
|
3.6
|
%
|
|
Roger
Campos, Esq., Director
|
|
|
-0-
|
|
|
-0-
|
|
|
Dale
Boehm, Director
6
|
|
|
-0-
|
|
|
-0-
|
|
|
All
Officers and Directors as a group (5 people)
|
|
|
15,040,988
|
|
|
54.0
|
%
|
|
Shadrack
Films, Inc.
3,
5
|
|
|
14,040,988
|
|
|
52.2
|
%
|
|
Two
Dog Net, Inc.
|
|
|
18,000,000
|
4
|
|
39.3
|
%
|
3
Except
as otherwise indicated, we believe that the beneficial owners of common stock
listed above, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable. Beneficial ownership is determined in accordance
with the rules of the SEC and generally includes voting or investment power
with
respect to securities. Shares of common stock subject to options or warrants
currently exercisable, or exercisable within 60 days, are deemed outstanding
for
purposes of computing the percentage of the person holding such options or
warrants, but are not deemed outstanding for purposes of computing the
percentage of any other person.
4
Shares
of common stock subject to options granted and currently exercisable, but
not
exercised as of March 31, 2007.
5
Consists
of 14,040,988 post-split shares of common stock owned by Shadrack Films,
Inc.
formerly known as The Children’s Internet, Inc., a California corporation, of
which Sholeh Hamedani is the sole shareholder.
6
Mr.
Boehm resigned as a Director on May 11, 2006.
7
Consists
of 280,000 post-split shares of common stock issued and 611,112 post
-split
shares of common stock subject to options granted and currently exercisable,
but
not exercised as of the date of this report.
ITEM
12.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
Our
Chief
Executive Officer, and our Chairman, Sholeh Hamedani, is the sole officer,
director and shareholder of Shadrack, the majority shareholder. Ms. Hamedani
was
also President of Two Dog Net, the owner of The Children’s Internet® technology
until she resigned on August 1, 2002. Ms. Hamedani also owns approximately
10%
of the total outstanding shares of common stock of Two Dog Net.
Ms.
Hamedani’s father, Nasser Hamedani, is the current President, Chairman and
majority shareholder of Two Dog Net.
On
July
3, 2002, we entered into a Plan of Reorganization and Acquisition agreement
with
Shadrack thereby obtaining a majority ownership interest and becoming the
majority shareholder of the company. Pursuant to the agreement, we sold
2,333,510 newly issued post-split shares of our common stock to Shadrack in
exchange for an aggregate purchase price of $150,000. Sholeh Hamedani is the
sole officer, director and shareholder of Shadrack.
On
September 10, 2002, we entered into a License Agreement with Two Dog Net to
license Children’s Internet® technology and intellectual property. This
agreement was subsequently cancelled and on March 3, 2003, we entered into
a new
Wholesale Sales & Marketing Agreement with Two Dog Net. Under the terms of
this agreement, we were to pay Two Dog Net $3.00 per month for each user
accessing The Children’s Internet® service. On February 15, 2005 the Company’s
Board of Directors granted Two Dog Net an option to purchase 18,000,000
post-split shares of restricted common stock at an exercise price of $.07 per
share exercisable for five years. The option was granted in consideration of
amending the Wholesale Sales & Marketing Agreement reducing the per user
charge from $3.00 to $1.00.
In
a
Stock Purchase Agreement dated October 11, 2002 and in reliance on an exemption
from registration pursuant to Section 4(1) of the Securities Act of 1933, our
original shareholders sold 2,237,000 of their post-split shares of our common
stock to various purchasers, two of who are related to our management, Nasser
Hamedani, Sholeh Hamedani’s father, and Soraiya Hamedani, Sholeh Hamedani’s
sister. Some of these purchasers were introduced to the original shareholders
by
Sholeh Hamedani, our President, Chief Financial Officer, and Director. Some
of
these purchasers resold their shares to unrelated third parties, relying on
an
exemption from registration pursuant to Section 4(1) of the Securities Act
of
1933. The proceeds received from the stock sale was loaned to Two Dog Net who,
in turn, loaned a portion of such proceeds to Shadrack, and Shadrack loaned
a
portion of these funds to the Company to finance our operations. These amounts
are reflected on the financial statements as “Due to Related Party.” The
original shareholders received their shares from us in reliance on the exemption
from registration pursuant to Section 4(2) of the Securities Act of 1933.
On
February 15, 2005, the Company’s Board of Directors agreed to convert the debt
owed to Shadrack of $456,912 into 13,054,628 post-split shares of restricted
common stock at a conversion price of $0.07 per pre-split share based upon
the
only sale by the Company of shares of its common stock on July 3,
2002.
ITEM
13.
EXHIBITS
Exhibits
|
|
3.1
|
Articles
of Incorporation, dated September 25, 1996
6
|
|
|
3.2
|
Certificate
of Amendment of Articles of Incorporation, dated February 10,
2000
6
|
|
|
3.3
|
Certificate
of Amendment of Articles of Incorporation, dated December 27,
2002
6
|
|
|
3.4
|
Certificate
of Designation of Series A Preferred Stock, dated November 8,
2002
6
|
|
|
10.1
|
Plan
of Reorganization and Acquisition, July 3, 2002
6
|
|
|
10.2
|
Consulting
Agreement with Alan Schram, dated June 28, 2002
6
|
|
|
10.3
|
License
Agreement dated September 10, 2002
6
|
|
|
10.4
|
Amendment
to License Agreement, dated November 5, 2002
6
|
|
|
10.5
|
Wholesale
Sales & Marketing Agreement, dated March 3, 2003
7
|
|
|
10.6
|
Stock
Purchase Agreement, dated October 11, 2002
8
|
|
|
10.7
|
Co-Location
Agreement, dated July 11, 2003
9
|
|
|
10.8
|
Independent
Sales Agreement with Infolink, dated August 14, 2003
8
|
|
|
10.9
|
Licensing
Agreement with Infolink, dated August 14, 2003
8
|
|
|
10.10
|
Co-Location
Agreement, dated September 26, 2003
1
0
|
|
|
10.11
|
Exhibit
number 10.11 not used
|
|
|
10.12
|
Agreement
between the Company and Crosslink Financial Communications dated
February
25, 2005
1
1
|
|
|
10.13
|
Loan
Agreement, dated October 11, 2002
1
2
|
|
|
10.14
|
TCI
2007 Equity Incentive Plan dated April 30,
2007
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to the Securities Exchange Act
of
1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to the Securities Exchange Act
of
1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002
|
|
|
32
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
6
Incorporated by reference from the Company's Registration Statement on Form
SB-2, filed on February 10, 2003, as amended (Registration No.
333-103072).
7
Incorporated by reference from the Company's Annual Report on Form 10-KSB
for
the fiscal year ended December 31, 2002, filed on March 31, 2003 (SEC File
No.
000-29611).
10
Incorporated by reference from the Company's Registration Statement on Form
SB-2, filed on February 2, 2004, as amended (Registration No.
333-103072).
8
Incorporated by reference from Amendment 2 to the Company's Registration
Statement on Form SB-2, filed on September 11, 2003, as amended (Registration
No. 333-103072).
9
Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended June 30, 2003 (File No. 000-29611) filed on EDGAR August
14,
2003.
10
Incorporated by reference from the Company's Registration Statement on Form
SB-2, filed on February 2, 2004, as amended (Registration No.
333-103072).
11
Incorporated by reference from the Company's Annual Report on Form 10-KSB
for
the fiscal year ended December 31, 2004, filed on June 9, 2005 (SEC File
No.
000-29611).
12
Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended June 30, 2005 (File No. 000-29611) filed on EDGAR August
15,
2005.
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
Marc
Lumer & Company was the Company’s independent accountant beginning with the
second quarter of 2004 through the second quarter of 2006. The third quarter
review of 2006 was performed by DeJoya Griffith & Company, LLC. The
independent accountant for the year 2006 and 2005 is Hunter, Flemmer, Renfro
& Whitaker, LLC.
Audit
Fees
Marc
Lumer & Co. billed aggregate fees of approximately $43,000 and $52,000 for
the years ended December 31, 2006 and 2005, respectively, for professional
services rendered in the audit of the Company's 2005 annual financial statements
and the review of the Company’s Quarterly
Reports
on Form 10-QSB through the second quarter of 2006. Marc Lumer & Co., after
resigning billed additional fees of approximately $6,000 with which the Company
does not agree with and therefore has not recorded in the accompanying financial
statements. DeJoya Griffith & Company, LLC billed fees of $6,500 for the
review of the Company’s
financial
statements included in the Quarterly
Reports
on Form 10-QSB through the third quarter of 2006. The current accountants,
Hunter,
Flemmer, Renfro & Whitaker, LLC have billed fees of $26,494.50 through April
30, 2007 for the audit of the financial statements for the year ended December
31, 2006 and the year ended December 31, 2005.
Tax
Fees
Su-Gene,
Inc. provided professional services in preparing the income tax returns for
the
Company and for advice on tax compliance and tax planning, for which
approximately $1,000 was billed for each of the years 2006 and
2005.
Neither
Marc Lumer & Company,
DeJoya
Griffith & Company, LLC
,
nor
Hunter, Flemmer, Renfro & Whitaker, LLC provided or billed for any
professional services during the two years ended December 31, 2006 in connection
with tax advise, tax compliance or tax planning.
All
Other Fees
Neither
Marc Lumer & Company
DeJoya
Griffith & Company, LLC
,
nor
Hunter, Flemmer, Renfro & Whitaker, LLC provided any other professional
services for the Company during the years ended December 2006 and
2005.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, duly authorized.
|
|
|
|
|
|
THE
CHILDREN’S INTERNET, INC.
|
|
|
|
|
DATED:
May 18, 2007
|
By:
|
/s/
Sholeh Hamedani
|
|
|
Sholeh
Hamedani
|
|
|
Chief
Executive Officer, Director
(Principal Executive
Officer)
|
|
|
|
|
|
DATED:
May 18, 2007
|
By:
|
/s/
Sholeh Hamedani
|
|
|
Sholeh
Hamedani
|
|
|
Chief
Financial Officer, Director
|
(Principal
Financial Officer and Principal Accounting Officer). In accordance with the
Securities Exchange Act of 1934, this Report has been signed by the following
persons on behalf of the registrant in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Jamshid Ghosseiri
|
|
Secretary,
Director
|
|
May
18, 2007
|
|
Jamshid
Ghosseiri
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Tyler Wheeler
|
|
Director
|
|
May
18, 2007
|
|
Tyler
Wheeler
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Roger Campos
|
|
Director
|
|
May
18, 2007
|
|
Roger
Campos
|
|
|
|
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Shareholders
The
Children’s Internet
We
have
audited the balance sheet of The Children’s Internet, Inc. (formerly DWC
Installations) (a development stage company) (the “Company”) as of December 31,
2006 and as of December 31, 2005, and the related statements of operations,
stockholders’ deficit, and cash flows for each of the two years ended December
31, 2006 and 2005 and the period from September 25, 1996 (inception) to December
31, 2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that
it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provided
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 The Children’s Internet, Inc.
(formerly DWC Installations) (a Development Stage Company) as of December 31,
2006 and December 31, 2005, and the results of its operations and its cash
flows
for each of the two years in the period ended December 31, 2006 and December
31,
2005, and the period from September 25, 1996 (inception) to December 31, 2006
in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred a net loss of $1,086,944 and had negative
cash flow from operations of $495,081. In addition, the Company had an
accumulated deficit of $4,150,386 and a stockholders’ deficit of $1,860,890 at
December 31, 2006. These factors, among others, as discussed in Note 1 to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
HUNTER,
FLEMMER, RENFRO & WHITAKER, LLP
Sacramento,
California
May
18,
2007
THE
CHILDREN'S INTERNET, INC.
(A
Development Stage Company)
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
1,106
|
|
$
|
103,849
|
|
|
Deposit
held in escrow, offsets $37,378 account
|
|
|
|
|
|
|
|
|
payable
to Oswald & Yap (Note 4)
|
|
|
37,378
|
|
|
37,378
|
|
|
Prepaid
marketing expenses
|
|
|
1,260
|
|
|
-
|
|
|
Total
Current Assets
|
|
|
39,744
|
|
|
141,227
|
|
|
Equipment:
|
|
|
|
|
|
|
|
|
Equipment
at cost
|
|
|
12,196
|
|
|
11,422
|
|
|
Accumulated
depreciation
|
|
|
(5,100
|
)
|
|
(1,077
|
)
|
|
Equipment,
net
|
|
|
7,096
|
|
|
10,345
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Deposit
- State Board of Equalization
|
|
|
2,000
|
|
|
-
|
|
|
Deferred
tax asset, net of valuation allowance of
|
|
|
|
|
|
|
|
|
$980,141
(2006) and $547,281 (2005)
|
|
|
-
|
|
|
-
|
|
|
TOTAL
ASSETS
|
|
$
|
48,840
|
|
$
|
151,572
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
422,369
|
|
$
|
181,939
|
|
|
Accrued
officers' compensation
|
|
|
449,274
|
|
|
180,000
|
|
|
Payroll
taxes on accrued officers' compensation
|
|
|
21,184
|
|
|
-
|
|
|
Taxes
payable
|
|
|
2,557
|
|
|
2,318
|
|
|
Total
Current Liabilities
|
|
|
895,384
|
|
|
364,257
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
Due
to related party
|
|
|
1,014,346
|
|
|
621,234
|
|
|
TOTAL
LIABILITIES
|
|
|
1,909,730
|
|
|
985,491
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (NOTES 3 & 4)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 10,000,000 shares
|
|
|
|
|
|
|
|
|
authorized;
zero shares issued and outstanding.
|
|
|
-
|
|
|
-
|
|
|
Common
stock, $0.001 par value; 75,000,000 shares
|
|
|
|
|
|
|
|
|
authorized;
26,873,738 shares (2006) and
|
|
|
|
|
|
|
|
|
26,858,138
shares (2005), issued and outstanding
|
|
|
26,874
|
|
|
26,858
|
|
|
Additional
paid-in capital
|
|
|
2,262,622
|
|
|
2,202,615
|
|
|
Deficit
accumulated during the development stage
|
|
|
(4,150,386
|
)
|
|
(3,063,392
|
)
|
|
TOTAL
STOCKHOLDERS' DEFICIT
|
|
|
(1,860,890
|
)
|
|
(833,919
|
)
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
48,840
|
|
$
|
151,572
|
|
The
accompanying notes are an integral part of the financial
statements.
THE
CHILDREN'S INTERNET, INC.
(A
Development Stage Company)
|
|
|
For
the Year
|
|
For
the period from Inception through
|
|
|
|
|
Ended
December 31,
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
NET
REVENUES
|
|
$
|
875
|
|
$
|
-
|
|
$
|
875
|
|
|
COSTS
OF REVENUES
|
|
|
155
|
|
|
-
|
|
|
155
|
|
|
Gross
margin
|
|
|
720
|
|
|
-
|
|
|
720
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
31,244
|
|
|
2,651
|
|
|
33,895
|
|
|
General
and administrative
|
|
|
682,828
|
|
|
761,430
|
|
|
2,649,292
|
|
|
Officers'
compensation
|
|
|
349,319
|
|
|
495,000
|
|
|
1,439,319
|
|
|
Depreciation
expense
|
|
|
4,023
|
|
|
1,077
|
|
|
5,100
|
|
|
Total
operating expenses
|
|
|
1,067,414
|
|
|
1,260,158
|
|
|
4,127,606
|
|
|
Loss
from operations
|
|
|
(1,066,694
|
)
|
|
(1,260,158
|
)
|
|
(4,126,886
|
)
|
|
Interest
expense
|
|
|
19,500
|
|
|
-
|
|
|
19,500
|
|
|
Loss
before income taxes
|
|
|
(1,086,194
|
)
|
|
(1,260,158
|
)
|
|
(4,146,386
|
)
|
|
Provision
for income taxes
|
|
|
800
|
|
|
800
|
|
|
4,000
|
|
|
NET
LOSS
|
|
$
|
(1,086,994
|
)
|
$
|
(1,260,958
|
)
|
$
|
(4,150,386
|
)
|
|
Net
loss per common share, after giving retroactive effect
to 2 for 1
stock split on March 11, 2005
|
|
|
|
|
|
|
|
|
|
|
|
-
basic and diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing basic and diluted net loss per
share
|
|
|
26,866,942
|
|
|
25,170,154
|
|
|
9,380,463
|
|
The
accompanying notes are an integral part of the financial
statements.
THE
CHILDREN'S INTERNET, INC.
(A
Development Stage Company)
STATEMENTS
OF STOCKHOLDERS' DEFICIT
|
|
|
Common
Stock,
after giving
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
retroactive
effect
to 2 for 1
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
split on March 11, 2005
|
|
Paid-In
Capital
|
|
-
Related Company
|
|
|
|
|
|
Stockholders'
Deficit
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2001
|
|
|
2,242,000
|
|
$
|
2,242
|
|
$
|
6,363
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(8,605
|
)
|
$
|
-
|
|
|
Issuance
of common stock for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
July 3, 2002 at $0.0643 per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
post-split
share to activate the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
stage
|
|
|
2,333,510
|
|
|
2,334
|
|
|
147,666
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
150,000
|
|
|
Issuance
of common stock for debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financing
fee on October 11, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
$0.0643 per post-split share
|
|
|
8,948,000
|
|
|
8,948
|
|
|
566,408
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
575,356
|
|
|
Expenses
paid by former officer on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
behalf
of the Company
|
|
|
-
|
|
|
-
|
|
|
2,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,000
|
|
|
Services
performed as capital contribution
|
|
|
-
|
|
|
-
|
|
|
125,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
125,000
|
|
|
Net
Loss (restated)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(966,894
|
)
|
|
(966,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2002
|
|
|
13,523,510
|
|
|
13,524
|
|
|
847,437
|
|
|
-
|
|
|
-
|
|
|
(975,499
|
)
|
|
(114,538
|
)
|
|
Services
performed as capital contribution
|
|
|
-
|
|
|
-
|
|
|
290,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
290,000
|
|
|
Net
Loss (restated)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(449,056
|
)
|
|
(449,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2003
|
|
|
13,523,510
|
|
|
13,524
|
|
|
1,137,437
|
|
|
-
|
|
|
-
|
|
|
(1,424,555
|
)
|
|
(273,594
|
)
|
|
Services
performed as capital contribution
|
|
|
-
|
|
|
-
|
|
|
180,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,000
|
|
|
Net
Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(377,879
|
)
|
|
(377,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
13,523,510
|
|
|
13,524
|
|
|
1,317,437
|
|
|
-
|
|
|
-
|
|
|
(1,802,434
|
)
|
|
(471,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in exchange for debt to parent company on 2/15/05 at
$0.035 per post-split share
|
|
|
13,054,628
|
|
|
13,054
|
|
|
443,858
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
456,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
to purchase 18,000,000 post-split shares at an exercise price of
$0.07 per share granted to Two Dog Net, Inc. on 2/15/05,
valued at option
price
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
THE
CHILDREN'S INTERNET, INC.
(A
Development Stage Company)
STATEMENTS
OF STOCKHOLDERS' DEFICIT (Continued)
|
|
|
Common
Stock,
after giving
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
retroactive
effect
to 2 for 1
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
split on March 11, 2005
|
|
Paid-In
Capital
|
|
-
Related Company
|
|
|
|
|
|
Stockholders'
Deficit
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Option
to purchase 1,000,000 post-split shares at an exercise
price of $0.07 per
share granted to Tyler Wheeler on 2/15/05, valued
at $0.315 per
share
|
|
|
-
|
|
|
-
|
|
|
315,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
315,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for consulting services by Crosslink
Financial
Communications, Inc. on 2/25/05 at $0.33 per post-split
share
|
|
|
200,000
|
|
|
200
|
|
|
65,800
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
66,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for consulting services by Crosslink
Financial
Communications, Inc. - 8,000 shares on the 25th
of each month from March
through December 2005 at an average of $0.76 per
share
|
|
|
80,000
|
|
|
80
|
|
|
60,520
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
60,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,260,958
|
)
|
|
(1,260,958
|
)
|
|
Balance,
December 31, 2005
|
|
|
26,858,138
|
|
$
|
26,858
|
|
$
|
2,202,615
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(3,063,392
|
)
|
$
|
(833,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
to purchase 111,112 post-split shares at an exercise
price of $0.55 per
share granted to William L. Arnold, valued at $0.47
per
share
|
|
|
-
|
|
|
-
|
|
|
52,223
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
52,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for prepaid public relations consulting
services under
agreement with Brazer Communications dated 6/9/06,
valued at $0.50 per
share
|
|
|
15,600
|
|
|
16
|
|
|
7,784
|
|
|
-
|
|
|
(7,800
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred charges -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
company
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Amortization
of prepaid expenses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,800
|
|
|
-
|
|
|
7,800
|
|
|
Net
Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,086,994
|
)
|
|
(1,086,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
26,873,738
|
|
$
|
26,874
|
|
$
|
2,262,622
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(4,150,386
|
)
|
$
|
(1,860,890
|
)
|
The
accompanying notes are an integral part of the financial
statements.
THE
CHILDREN'S INTERNET, INC.
(A
Development Stage Company)
|
|
|
For
the Year
|
|
For
the period from Inception through
|
|
|
|
|
Ended
December 31,
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS USED IN OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,086,994
|
)
|
$
|
(1,260,958
|
)
|
$
|
(4,150,386
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
on equipment
|
|
|
4,023
|
|
|
1,077
|
|
|
5,100
|
|
|
Stock
compensation to director
|
|
|
-
|
|
|
315,000
|
|
|
315,000
|
|
|
Stock
compensation to President
|
|
|
52,223
|
|
|
-
|
|
|
52,223
|
|
|
Shares
issued for services
|
|
|
7,800
|
|
|
126,600
|
|
|
709,756
|
|
|
Services
performed as capital contribution
|
|
|
-
|
|
|
-
|
|
|
595,000
|
|
|
Expenses
paid by former officer on behalf of company
|
|
|
-
|
|
|
-
|
|
|
5,000
|
|
|
Deposit
- State Board of Equalization
|
|
|
(2,000
|
)
|
|
-
|
|
|
(2,000
|
)
|
|
Increase
in current assets -
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
held in escrow
|
|
|
-
|
|
|
(37,378
|
)
|
|
(37,378
|
)
|
|
Prepaid
marketing expenses
|
|
|
(1,260
|
)
|
|
|
|
|
(1,260
|
)
|
|
Increase
in current liabilities -
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
261,853
|
|
|
105,374
|
|
|
446,110
|
|
|
Accrued
officers' compensation
|
|
|
269,274
|
|
|
180,000
|
|
|
449,274
|
|
|
Net
cash used in operating activities
|
|
|
(495,081
|
)
|
|
(570,285
|
)
|
|
(1,613,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
USED IN INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of equipment
|
|
|
(774
|
)
|
|
(11,422
|
)
|
|
(12,196
|
)
|
|
Net
cash used in investing activities
|
|
|
(774
|
)
|
|
(11,422
|
)
|
|
(12,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PROVIDED BY FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
-
|
|
|
456,912
|
|
|
612,517
|
|
|
Advances
from majority shareholder
|
|
|
393,112
|
|
|
685,556
|
|
|
1,471,258
|
|
|
Majority
Shareholder advances converted to stock
|
|
|
-
|
|
|
(456,912
|
)
|
|
(456,912
|
)
|
|
Net
cash provided by financing activities
|
|
|
393,112
|
|
|
685,556
|
|
|
1,626,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(102,743
|
)
|
|
103,849
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - Beginning of period
|
|
|
103,849
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - End of period
|
|
$
|
1,106
|
|
$
|
103,849
|
|
$
|
1,106
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
3,122
|
|
$
|
-
|
|
$
|
3,122
|
|
|
Cash
paid for taxes
|
|
$
|
800
|
|
$
|
800
|
|
$
|
4,000
|
|
The
accompanying notes are an integral part of the financial
statements.
THE
CHILDREN'S INTERNET, INC.
(A
Development Stage Company)
NOTES
TO
FINANCIAL STATEMENTS
December
31, 2006
NOTE
1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Operations
The
Children's Internet, Inc. (the Company) was incorporated under the laws of
the
State of Nevada on September 25, 1996 under the name D.W.C. Installations.
At
that date, 2,242,000 post-split shares were issued to a small group of founders.
The Company was primarily inactive until July 2002.
The
Company is currently authorized to conduct business in California and is
headquartered in Pleasanton, California. The Company’s primary operations
consist of marketing, selling, and administering a computer software system
for
internet usage by children. The system, known as The Children’s Internet, is not
owned by the Company, but is owned by a related party, Two Dog Net, Inc.
(“TDN”). The Company’s marketing, selling and administration rights derive from
a Wholesale Sales & Marketing Agreement with TDN, through the year 2013
which includes the ability to obtain five year extensions.
On
July
3, 2002, Shadrack Films, Inc. (Shadrack) purchased 2,333,510 newly issued
post-split shares of the Company’s common stock for $150,000, thereby obtaining
a majority ownership interest. The total issued and outstanding shares of the
Company were increased to 4,575,510 post-split shares as a result of this sale
to Shadrack. On December 27, 2002, the Company’s name was changed from D.W.C.
Installations to The Children’s Internet, Inc.
In
a
Stock Purchase Agreement dated October 11, 2002, twenty-five D.W.C.
Installations shareholders sold 2,237,000 of the original 2,242,000
“freely-tradable” post-split shares of common stock to six individuals, two of
whom are related to the Company’s Chief Executive Officer, Chief Financial
Officer and Chairman of the Board, Sholeh Hamedani. Together, the two related
individuals purchased 27% of the 2,237,000 shares sold. At the time the shares
were issued, the Company believed the shares were "freely tradeable" based
on
the representations made by our attorney at the time, Oswald & Yap, who
structured the agreement. Subsequently the company determined that the
shares were, in fact, not "freely tradeable" and those shares would have to
be registered. The said shares were then registered in a SB-2 Registration
Statement declared effective on May 5, 2004.
Also
on
October 11, 2002, the Company entered into a subsequent agreement with the
six
new shareholders holding the 2,237,000 freely-tradable post-split shares, to
issue four shares of restricted common stock to these shareholders or their
designees, for every one “freely-tradable” share held. At the time the shares
were issued, the Company believed the shares were "freely tradeable" based
on
the representations made by our attorney at the time, Oswald & Yap, who
structured the agreement. Subsequently the company determined that the
shares were, in fact, not "freely tradeable" and those shares would have to
be registered. The said shares were then registered in a SB-2 Registration
Statement declared effective on May 5, 2004. Pursuant to this agreement,
8,948,000
newly-issued restricted post-split shares of common stock were issued in
exchange for an agreement
to
loan
to TDN, the proceeds of the sales of a portion of their shares. TDN in turn
agreed to loan a portion of these proceeds to Shadrack to finance the ongoing
operations of the Company. TDN retained the remainder of the proceeds to help
fund development costs of The Children’s Internet system and to make payments on
TDN’s existing debts. The
8,948,000
newly-issued
post-split shares were recorded at a value of $575,356 based on the $0.0643
per
share paid by Shadrack in a previous transaction where Shadrack acquired the
2,333,510 newly-issued post-split shares it purchased on July 3, 2002. The
$575,356 value was recorded by the Company as a debt financing fee. The loan
agreement is such that Shadrack will not charge the Company any interest on
the
amounts loaned. Shares sold under this agreement included 1,218,990 of the
“freely-tradable” shares and 2,650,108 of the newly-issued restricted shares,
for a total of 3,869,098 post-split shares, which were sold for a total of
$2,722,341. After deducting the $494,049 in commissions paid by TDN, the
resulting net proceeds were $2,228,292. As of December 31, 2006 and 2005, the
net amount loaned to the Company by Shadrack was $1,471,258 and $1,078,146,
respectively.
On
February 15, 2005, the Company's Board of Directors authorized a 2 for 1 forward
split of the Company's issued and outstanding common stock to shareholders
of
record as of March 7, 2005, in the form of a 100% stock dividend. The effective
date of the forward split on the OTC:BB was March 11, 2005.
During
the year ended December 31, 2005, an additional 13,334,628 restricted post-split
shares of common stock were issued
.
Of
these
shares, 13,054,628 were issued to Shadrack, a related party and majority
shareholder, for conversion of existing debt and 280,000 shares were issued
to
Crosslink Financial Communications, a non related party
1
in
payment of investor relation services, as explained in Notes 3, 4 and
7
.
On
June
9, 2006, 15,600 shares were issued to two principals of Brazer Communications
under a public relations consulting agreement, as explained in Note 5,
bringing
the total
of
the
Company's issued and outstanding post-split shares to 26,873,738 at December
31,
2006.
Development
Stage Enterprise
The
Company is a development stage enterprise as defined by Statement of Financial
Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development
Stage Enterprises.” All losses accumulated since the inception of the Company
have been considered as part of the Company’s development stage activities.
The
Company is devoting the majority of its efforts to activities
focused
on marketing The Children’s Internet® service and
on
financial planning, raising capital, developing sales strategies and new
marketing materials and implementing its business plan. The Company is
considered to be a development stage company even though its planned principal
operations have commenced, because there have been no significant revenues
earned by the Company to date.
Additionally,
the Company is not a shell company as defined in Rule 12b-2 of the Exchange
Act.
Basis
of Presentation
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
pursuant to Regulation S-B of the Securities and Exchange Commission, which
contemplates continuation of the Company as a going concern. At present, the
Company has not generated any significant revenues from its established sources
of revenue and has had net losses and negative cash flow since its inception.
These factors raise substantial doubt about the Company's ability to continue
as
a going concern. Without the realization of additional capital or established
revenue sources, it would be unlikely for the Company to continue as a going
concern. The financial statements do not include any adjustments relating to
the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Use
of
Estimates
The
preparation of financial statement in conformity with accounting principals
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid, short-term investments purchased with
original maturities of three months or less to be cash equivalents. There
were
no cash equivalents as of December 31, 2006 and 2005.
Fair
Value of Financial Instruments
The
carrying amounts of financial instruments, including accounts payable and
accrued expenses, professional fees, and payable to related parties approximate
fair value as of December 31, 2006.
Property
and Equipment
Property
and equipment are recorded at cost, less accumulated depreciation. In accordance
with FASB 144, the Company reviews its long-lived assets for impairment on
a
yearly basis. Whenever events or changes in circumstances indicate that the
carrying amount of the assets might not be recovered through undiscounted future
cash flows, such losses are recognized in the statement of
operations.
1
Although
Crosslink Financial Communications was not a related party at the time of
the
issuance, the principal shareholder of Crosslink, William L. Arnold, became
President of the Company under an Executive Employment Agreement on December
30,
2005.
The
cost
of property and equipment is depreciated over the remaining useful lives of
the
assets, all of which currently are based on a three-year life. Depreciation
is
computed using the straight-line method for financial reporting and for income
tax purposes. Expenditures for maintenance and repairs are expensed when
incurred, while betterments are capitalized. Gains and losses on the sale of
property and equipment are reflected in the statement of
operations.
Going
Concern
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. As reflected in the
accompanying financial statements, the Company had net losses and a negative
cash flow from operations for the years ended December 31, as
follows:
|
|
|
2006
|
|
2005
|
|
|
Net
loss
|
|
$
|
1,086,994
|
|
$
|
1,260,958
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operations
|
|
$
|
(495,081
|
)
|
$
|
(567,385
|
)
|
The
Company has been sued by the Securities and Exchange Commission as explained
in
Note 4. This action raises substantial doubt concerning the Company’s ability to
continue as a going concern. The ability of the Company to continue as a going
concern is dependent on its ability to generate profitable operations in the
future by implementing its business plan and/or to obtain the necessary
financing to meet its obligations and repay its liabilities arising from normal
business operations when they come due. The outcome of these matters cannot
be
predicted with any certainty at this time. Management plans to continue to
provide for its capital needs during the year ended December 31, 2007 by
incurring additional debt financing from related parties and intends to seek
debt or equity financing from unrelated parties, with the proceeds to be used
to
fund continuing operations. Management may also seek to find a buyer for the
Company. The financial statements do not include any adjustments that might
be
necessary if the Company is unable to continue as a going concern.
Advertising
The
Company expenses advertising expenses as they are incurred. Advertising expenses
for the years ended December 31, 2006 and 2005 were $6,008 and $2,417,
respectively.
Income
Taxes
Income
taxes are provided for based on the liability method of accounting pursuant
to
SFAS No. 109, "Accounting for Income Taxes". This method requires the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. Under this method, deferred income taxes, if any, are recorded
to
reflect the tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
year-end.
Valuation
allowances are established, when necessary, to reduce deferred tax assets when
evidence is such that it appears that a portion of the assets may not be
realized. Deferred tax assets and liabilities are measured using the enacted
tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
As
of
December 31, 2006 and 2005, the deferred tax assets related to the Company’s net
operating loss carry-forwards are fully reserved. Due to the provisions of
Internal Revenue Code Section 382, the Company may not have any net operating
loss carry-forwards available to offset financial statement or tax return
taxable income in future periods as a result of a change in control involving
50
percentage points or more of the issued and outstanding securities of the
Company.
Loss
Per Share
SFAS
No.
128, "Earnings (Loss) Per Share", requires the presentation of basic loss per
share and diluted loss per share. The computation of basic loss per share is
computed by dividing loss available to common stockholders by the weighted
average number of outstanding common shares during the period. Diluted loss
per
share is computed the same way but the denominator is increased to include
the
number of additional common shares that would have been outstanding if the
potential common shares had been issued during the period and if the additional
common shares were dilutive. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive. As of December 31, 2006, the
Company had 19,611,112 potentially dilutive post-split common shares
outstanding, but did not include these shares in its computation of loss per
share because doing so would decrease the loss per share, which is anti-dilutive
and not permitted by SFAS No. 128.
Comprehensive
Income
The
company utilizes SFAS No. 130, “Reporting on Comprehensive Income.” This
statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments, minimum
pension liability adjustments, and unrealized gains and losses on
available-for-sale marketable securities. As of December 31, 2006, the Company
had no items that represent comprehensive income and therefore, has not included
a Statement of Comprehensive Income in the accompanying financial
statements.
Revenue
Recognition
In
December 2003, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104 “Revenue Recognition, corrected copy” to
revise and clarify SAB No. 101, “Revenue Recognition in Financial Statements”,
issued in 1999 and 2000. Pursuant to these bulletins and the relevant generally
accepted accounting principles, the Company recognizes revenue when services
are
rendered to subscribers under contractual obligation to pay monthly subscription
amounts for such services.
Segment
Reporting
The
Company identifies its operating segments based on how management internally
evaluates separate financial information (if available), business activities
and
management responsibility. The Company believes it operates in a single business
segment. Through December 31, 2006 there have been no foreign
operations.
Concentrations
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash and cash equivalents. The Company places its cash and
cash
equivalents with high credit, quality financial institutions. At times, such
cash and cash equivalents may be in excess of the Federal Deposit Insurance
Corporation insurance limit of $100,000. The Company has not experienced
any
losses in such accounts and believes it is not exposed to any significant
credit
risk on cash and cash equivalents.
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”,
an amendment of APB Opinion No. 29. SFAS No 153 eliminates the exception
from
fair value measurement for nonmonetary exchanges of similar productive assets
in
paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary
Transactions,” and replaces it with an exception for exchanges that do not have
commercial substance. This Statement specifies that a nonmonetary exchange
has
commercial substance if future cash flows of the entity are expected to change
significantly as a result of the exchange, and is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15,
2005.
The
Company does not expect the adoption of SFAS No. 153to have a material impact
on
the Company’s future financial position, cash flows or results of
operations.
In
December 2004, the FASB issued SFAS No. 123R, “Share-Based
Payment
.
”
SFAS No. 123R addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange
for
(a) equity instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprise’s equity instruments or that may be
settled by the issuance of such equity instruments. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25 and generally requires
that such transactions be accounted for using a fair-value-based method.
The Company is required to adopt SFAS No. 123(R) in the third quarter of
fiscal 2005, beginning July 1, 2005. The Company has implemented this
pronouncement, which included its application in fair valuing options granted
in
February 2005.
In
May
2005, the FASB issued Statement of Accounting Standard (SFAS) No. 154,
“Accounting
Changes and Error Corrections”, an amendment to Accounting Principles Bulletin
(APB) Opinion No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting
Changes in Interim Financial Statements” though SFAS No. 154 carries forward the
guidance in APB No. 20 and SFAS No. 3 with respect to accounting for changes
in
estimates, changes in reporting entity, and the correction of errors. SFAS
No.
154 requires retrospective application to prior period financial statements
for
changes in accounting principle, unless it is impracticable to determine
either
the period-specific effects or the cumulative effect of the change. SFAS
No. 154
also requires that retrospective application of a change in accounting principle
be limited to the direct effects of the change. Indirect effects of a change
in
accounting principle should be recognized in the period of the accounting
change. SFAS No. 154 will become effective for the Company’s fiscal year
beginning January 1, 2006. The impact of SFAS No. 154 will depend on the
nature
and extent of any voluntary accounting changes and correction of errors after
the effective date, but management does not expect this pronouncement to
have a
material impact on the Company’s current results of operations, financial
condition or cash flows.
NOTE
2 - PROPERTY AND EQUIPMENT
The
following is a summary of property and equipment at cost, less accumulated
depreciation. Depreciation on these assets is based on a 3-year life. The
majority of the office furniture and equipment utilized by the Company is owned
by Two Dog Net, Inc., a related party, and provided to the Company without
fee.
|
|
|
2006
|
|
2005
|
|
|
Computer
Hardware
|
|
$
|
6,281
|
|
$
|
6,281
|
|
|
Computer
Software
|
|
|
5,915
|
|
|
5,141
|
|
|
|
|
|
12,196
|
|
|
11,422
|
|
|
Less:
Accumulated Depreciation
|
|
|
(5,100
|
)
|
|
(1,077
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,096
|
|
$
|
10,345
|
|
NOTE
3 - RELATED PARTY TRANSACTIONS
Leases
Shadrack,
the majority shareholder and a related party, leases the office space utilized
by the Company from Principal Life Insurance Company, an Iowa Corporation.
Shadrack allows the Company use of the space under a verbal lease agreement
at
the same rental rate charged to Shadrack. The basic rent includes utilities
and
janitorial services, and under Shadrack’s current lease agreement is $3,603 per
month through April 2005, $3,706 per month from May 2005 through April 2006,
and
$3,809 per month from May 2006 through April 2007. The Company is under no
obligation to reimburse the majority shareholder for the rent payments but
the
majority shareholder is under no obligation to continue to allow the Company
use
of the space and may terminate the lease agreement and evict the Company upon
demand. Annual rent expense was as follows:
|
Year
|
|
|
Amount
|
|
|
2006
|
|
$
|
45,072
|
|
|
2005
|
|
$
|
44,629
|
|
Services
Provided
On
January 26, 2005, the Company’s Board of Directors resolved that starting
January 1, 2005, all salary due and payable to the Company's Chief Executive
Officer, Chief Financial Officer, and Director, Sholeh Hamedani, would be
accrued when earned. The decision will be made at the end of each year whether
to make the payment in cash, shares of the Company’s restricted common stock, or
a combination of both. Accordingly, for each of the years ended December 31,
2006 and 2005, $180,000 has been accrued and charged to General and
Administrative Expense. Prior to the year ended December 31, 2005, Sholeh
Hamedani provided services to the Company at a total cumulative fair market
value of $435,000, which was contributed to Additional Paid-in Capital.
Accordingly, she will not seek payment for the services provided during that
period. Also, the salary of the Company’s President, William L. Arnold, was not
fully paid, but was accrued from May 1, 2006 through August 31, 2006. Beginning
on September 1, 2006 Mr. Arnold took a voluntary unpaid leave of
absence.
Advances
As
of the
date of this report, all of the Company’s funding has been provided by Shadrack
Films, Inc., its majority stockholder and a related party. The total amount
advanced through December 31, 2006 and 2005 was $1,471,258 and $1,078,146,
respectively. In February 2005, the Company owed Shadrack approximately $457,000
for loans made by Shadrack to the Company for funding all of the Company’s
operations since entering the development stage on July 3, 2002. On February
15,
2005, the Company's Board of Directors authorized and approved the conversion
of
debt totaling $456,912 owed by the Company to Shadrack, into 13,054,628
post-split shares of the Registrant's restricted common stock at a conversion
price of $.035 per post-split share.
Shadrack
Films, Inc. is an entity owned and controlled by the Company's Chief Executive
Officer, Chief Financial Officer and Chairman of the Board, Sholeh Hamedani,
who
is the sole officer, director and shareholder of Shadrack. Shadrack also
owned
2,333,510 post-split shares of the Company's common stock, of which it sold
1,277,150 of its restricted shares
in
reliance on an exemption from registration pursuant to Section 4 (1-1/2)
of the
Securities Act of 1933, to approximately 130 investors between July 2004
and
June 2005. In addition, Shadrack paid for services, on behalf of the Company,
valued at $35,000 with 70,000 restricted shares of the Company’s common stock.
Together with the 13,054,628 post-split shares issued upon conversion of
the
debt, Shadrack owns an aggregate of 14,040,988 post-split shares of the
Company's common stock or 52.2% without giving effect to any presently
exercisable options.
Beneficial
Ownership
The
Company, Shadrack and
Two
Dog
Net, Inc. (TDN),
are
related parties, in that, the Company's Chief Executive Officer, Chief Financial
Officer, and Director, Sholeh Hamedani, is the sole shareholder of Shadrack
which as of December 31, 2006 owns 52.2% of the Company's common stock and
as of
December 31, 2005 owned 52.3% of the Company’s common stock. Ms. Hamedani was
President of TDN until she resigned on August 1, 2002 and is a 10% shareholder
of TDN. In addition, the current President, Chairman and Founder of TDN,
Nasser
Hamedani, is the father of the Company’s Chief Executive Officer, Chief
Financial Officer, and Director, Sholeh Hamedani.
Licensing
Agreement
The
Wholesale Sales and Marketing Agreement between the Company and Two Dog Net,
Inc., dated March 3, 2003, is an exclusive and renewable five-year agreement
for
the Company to be the exclusive marketers of TDN’s proprietary secured internet
service for children pre-school to junior high called The Children's Internet®.
Under the terms of the agreement, it is automatically renewed for additional
five year periods on the same terms unless either party terminates by written
notice to the other party no less than one year before the end of the term.
Accordingly, the earliest date on which the agreement could be terminated
is
March 3, 2013.
On
February 15, 2005, the Company's Board of Directors authorized and approved
an
amendment to the Wholesale Sales and Marketing Agreement between the Company
and
Two Dog Net, Inc., dated March 3, 2003. The amended license agreement reduces
the license fee for The Children's Internet® technology payable to TDN from
$3.00 to $1.00 per subscriber per month. In consideration for the reduction
of
the fee, the Company granted TDN or its designees, an option to purchase
the
Company's currently restricted common stock as described below.
Stock
Options Granted
As
noted
above, on February 15, 2005, because TDN agreed to reduce their licensing
fee,
the Company issued an option to purchase up to 18,000,000 post-split shares
of
the
Company's
restricted common stock
at
an
exercise price of $0.07
per
share
,
and a
fair value of $0.
The
Option is exercisable, in whole or in part at any time and from time to time,
for a period of five years from the date of grant. The Option also provides
TDN
with "piggyback" registration rights for all shares underlying the Option
on any
registration statement filed by the Company for a period of one year following
any exercise of the Option.
This
issuance was valued at $0 because as of the date of issuance, the Company
was
under no obligation for payment to TDN since no sales of the product had
occurred and no liability, therefore, had been generated. The issuance was
granted primarily to induce TDN to reduce its future right to a royalty from
sales of the product.
NOTE
4 - COMMITMENTS AND CONTINGENCIES
On
November 24, 2004, Oswald & Yap, A Professional Corporation (“O&Y”),
formerly counsel to the Company, filed a complaint in the Superior Court of
California, County of Orange, Case No. 04CC11623, against the Company, seeking
recovery of allegedly unpaid legal fees in the amount of $50,984.86 in
connection with the legal representation of the Company. Subsequently the amount
claimed of unpaid legal fees was reduced to $37,378.43 because it was discovered
that O&Y did not properly credit all of the payments that were made by the
Company to O&Y. The amount of $37,378.43 was deposited in an escrow account
by the Company on July 5, 2005. The complaint includes causes of action for
breach of contract. The Company disputes the amounts claimed alleging that
O&Y’s services were otherwise unsatisfactory. On May 9, 2005, O&Y
submitted an Offer to Compromise for a $0 payment by the Company to O&Y in
exchange for mutual releases which the Company rejected.
The
Company filed a cross-complaint against O&Y alleging breach of contract,
professional negligence, negligent representation, and breach of good faith
and
fiduciary duty. The Company is seeking damages in an unspecified amount for
costs, legal fees and losses incurred. O&Y has vigorously disputed the
claims set forth in the cross-complaint and has indicated its intention, should
it prevail in its defense, to institute a malicious prosecution action against
the Company, Nasser Hamedani, Sholeh Hamedani and Company counsel.
A
cross-claim was filed in the Superior Court of California, County of Orange,
Case No. 04CC11623 by the Comapny against O&Y, and the principal allegation
is that O&Y was retained to assist its predecessor company in the purchase
and acquisition of D.W.C. Installations with the expectation that D.W.C. had
available free-trading shares such that the Comapny could immediately raise
capital on the relevant markets and that in advising
the
Company through the purchase, O&Y failed to properly advise the Comapny as
to the status of D.W.C. Installations and its shares which in fact were not
free-trading. As a result of this conduct, the Comapny alleges damages in an
unspecified amount but including purchase costs, extended operation costs,
refiling costs, audit costs, legal fees, loan fees, lost market share, and
costs
for registration. Trial on the complaint and cross-complaint is set to proceed
on December 17, 2007.
There
is
a contingent liability in connection with a Stock Purchase Agreement executed
on
October 11, 2002 between identified Shareholders and identified Purchasers.
Under the terms of Stock Purchase Agreement, a payment of $150,000 is due to
be
paid into escrow in part consideration for purchase of the stock of D.W.C.
Installations, Inc. The payment date is designated as 90 days from the date
that
the Company’s [D.W.C. Installations, Inc., a Nevada Corporation] shares of
common stock become quoted on the over-the-counter bulletin board system. The
shares became quoted on the over-the-counter bulletin board system on December
23, 2004. If this payment is not made, there could be exposure in connection
with the identified shareholders’ efforts to collect the amounts allegedly due.
The
Company was subject to a claim by Stonefield Josephson, Inc., the former
accountants for the Company, seeking reimbursement costs for legal fees spent
in
connection with the Securities and Exchange Commission inquiry of the Company.
Stonefield Josephson, Inc.’s claim seeks recovery of $29,412.74. The Company
disputes any amounts owed because of a settlement agreement entered into between
the respective parties in December 2004 effectively terminating their
relationship. This matter was submitted to binding arbitration through AAA
in
January 2007. The arbitrator’s decision was issued on February 2, 2007, awarding
Stonefield Josephson, Inc. the sum of $19,000 accruing at an interest rate
of
10% per annum. The decision also awarded costs and fees to Stonefield
Josepheson, Inc. in the amount of $1,425.00 both of which remain unpaid.
On
August
25, 2006, the Company filed a complaint against its former accountants
Stonefield Josephson, Inc., and its principal Dean Skupen, in the Superior
Court
of California, County of Alameda, Case No. VG06286054 alleging breach of
contract, promissory estoppel, breach of implied covenant of good faith and
fair
dealing, negligent misrepresentation, fraud, and unfair business practices
arising out of defendants’ alleged failure to properly perform contractual
obligations. The matter was subsequently transferred to Los Angeles Superior
Court and is presently pending there.
On
September 27, 2006, the Securities and Exchange Commission (“SEC”) filed a
complaint in the United States District Court Northern District of California
Case No. C066003CW, against among others the Company, and its CEO Sholeh
Hamedani, alleging against one or more defendants violations of Section 10(b)
of
the Exchange Act and Rule 10b-5, violations of Section 13(a) of the Exchange
Act
and Rules 12b-20, 13a-1, 13a-11, 13a-13, violations of Section 13(b)(2)(A)
of
the Exchange Act by the Comapny, Violations of Section 13(b)(2)(B) of the
Exchange Act by the Comapny, Violations of Section 13(b)(5) of the Exchange
Act
and Rule 13b2-1, 13b2-2, 13a-14, 16(a). The complaint generally alleges that
the
Company and the individual defendants made false or misleading public statements
regarding the Company’s business and operations, made false statements in
various filings with the Commission and in particular the June 2005 Annual
Report and Restatement and 2005 Current and Quarterly Reports, and that
defendants or some of them induced investment in the Company through
misrepresentation and omissions. The complaint seeks disgorgement, unspecified
monetary damages, injunctive relief and other relief against the defendants.
The
Company has answered the complaint. Trial in the matter has been set for March
31, 2008.
The
Company is currently seeking resolution of the SEC complaint by virtue of
settlement. A potential settlement likely may include the Company and/or
its principals consenting, without admitting or denying the allegations, to
a
judgment alleging negligent, reckless, and intentional violations of the
federal securities laws, and other sanctions including substantial penalties.
These penalties could range from current key members of management being barred
from serving as either directors or officers of the Company to also including
financial penalties and disgorgement of all profits derived by the Company
and/or its principals who raised funds through the sale of Company stock to
third parties. Any proposed settlement will be subject to the Commission’s
approval and the Company cannot predict the outcome of these settlement
negotiations. Additionally, there is no assurance that the Company will receive
a settlement offer. Moreover, there is no assurance that the settlement offer
(if any) will be acceptable to the Company and the prospect of litigation
could ensue which could seriously compromise the Company's ability to achieve
its goals.
Adverse
outcomes in some or all of the claims pending against the Company may result
in
significant monetary damages or injunctive relief against the Company that
could
adversely affect the Company’s ability to conduct its business. Although
management currently believes that resolving all of these matters, individually
or in the aggregate, will not have a material adverse impact on the Company’s
financial position or results of operations, the litigation and other claims
are
subject to inherent uncertainties and management’s view of these matters may
change in the future. There exists the possibility of a material adverse impact
on the Company’s financial position and the results of operations for the period
in which the effect of an unfavorable final outcome becomes probable and
reasonably estimable.
We
are
not aware of any other pending or threatened litigation that could have a
material adverse effect on our business. From inception, Shadrack, the majority
shareholder of the company, has advanced to the Company approximately $1.5
million for operations. While the exact amount of the disgorgement of profits
and/or penalties cannot be determined at this time, the ability to pay them
by
the Company or the Chief Executive Officer is a serious question. Any proposed
settlement will be subject to the Commission’s approval. The Company
cannot predict the outcome of any settlement negotiations, the staff’s
investigation, or the ultimate Commission action should these settlement
negotiations fail. The Company does not yet have a settlement offer. Management
and counsel to the Company are currently waiting to see if they will receive
one
from the Commission's staff. Additionally, there is no assurance that the
Company will receive a settlement offer. Moreover, there is no assurance that
their settlement offer (if any) will be acceptable to the Company and
the prospect of litigation could ensue which could seriously compromise the
Company's ability to achieve its goals.
On
September 27, 2006, the Securities and Exchange Commission (“SEC”) filed a
complaint in the United States District Court Northern District of California
Case No. C066003CW, against among others the Company, and certain of its
officers alleging against one or more defendants violations of Section 10(b)
of
the Exchange Act and Rule 10b-5, violations of Section 13(a) of the Exchange
Act
and Rules 12b-20, 13a-1, 13a-11, 13a-13, violations of Section 13(b)(2)(A)
of
the Exchange Act by the Company, Violations of Section 13(b)(2)(B) of the
Exchange Act by the Company, Violations of Section 13(b)(5) of the Exchange
Act
and Rule 13b2-1, 13b2-2, 13a-14, 16(a). The complaint generally alleges that
the
Company and the individual defendants made false or misleading public statements
regarding the Company’s business and operations, made false statements in
various filings with the Commission and in particular the June 2005 Annual
Report and Restatement and 2005 Current and Quarterly Reports, and that
defendants or some of them induced investment in the Company through
misrepresentation and omissions. The complaint seeks disgorgement, unspecified
monetary damages, injunctive relief and other relief against the defendants.
The
Company has not yet filed its formal response.
As
discussed above, the Company has claims and lawsuits against it that may result
in adverse outcomes. Adverse outcomes in some or all of the claims pending
against the Company may result in significant monetary damages or injunctive
relief against it that could adversely affect its ability to conduct business.
Although management currently believes that resolving all of these matters,
individually or in the aggregate, will not have a material adverse impact on
the
Company’s financial position or results of operations, the litigation and other
claims are subject to inherent uncertainties and management’s view of these
matters may change in the future. There exists the possibility of a material
adverse impact on the Company’s financial position and the results of operations
for the period in which the effect of an unfavorable final outcome becomes
probable and reasonably estimable.
On
February 25, 2005, the Company entered into a one-year agreement with Crosslink
Financial Communications, Inc., a California corporation, for consulting
services related to stockholder communications and public relations with
existing shareholders, brokers, dealers and other investment professionals.
The
principal shareholder of Crosslink is William L. Arnold. As compensation for
these services, Crosslink received 200,000 restricted post-split shares of
the
Company's common stock valued at $0.33 per share, monthly stock compensation
of
8,000 restricted post-split shares of common stock, and $5,000 per month from
which Crosslink paid for complementary services (e.g., other mailing services,
email services, data base extensions) of not less than $1,500 per month up
to an
average of $2,500 per month. During the year ended December 31, 2005, Crosslink
received a total of 280,000 restricted post-split shares of the Company’s common
stock under this agreement. The agreement with Crosslink Financial
Communications, Inc. was terminated at the end of December 2005.
On
December 30, 2005, William L. Arnold, the principal shareholder of Crosslink
was
appointed by the Chairman to act as President of the Company under an Executive
Employment Agreement with the same date. Compensation includes a monthly salary
of $10,000, of which $2,500 per month is deferred with 9% accrued interest
until
January 2007.
The
agreement also includes
a
combination of nonqualified and qualified stock options (the Stock Option).
The
Stock Option is for the purchase of up to 1,000,000 post-split shares at an
option price of $0.55 per share, and expires on December 31, 2010. The closing
market price was $0.48 per share on the date of the agreement. One half of
the
Stock Option vested immediately and the remaining 500,000 option shares will
vest at the rate of 1/36
th
each
month until fully vested. Commencing on September 1, 2006 Mr. Arnold took a
voluntary unpaid leave of absence. During Mr. Arnold’s leave of absence the
vesting of his options were suspended. Of the 500,000 option shares which vest
immediately, 360,000 are Incentive Stock Options (ISO’s). The remaining 640,000
option shares are non-qualified.
Additionally the agreement includes a performance bonus of up to 50% of the
annual salary to be paid on or before the sixtieth day following the
close of the Company's fiscal year, provided that the Employee meets the
performance standards as established by Board of Directors. Pursuant to
this provision, $40,000 was accrued as an expense for the period of January
1
through August 31, 2006. If the stock-based compensation provisions of
SFAS No. 123R had been adopted prior to January 1, 2006, the fair
value of the 500,000 shares which vested on December 30, 2005 under the Stock
Option would have been recorded at $235,000
.
On
February 15, 2005, the Company’s Board of Directors granted Tyler Wheeler, the
Company’s Chief Software Architect Consultant and a director, an option to
purchase up to 1,000,000 post-split shares of the Company’s restricted common
stock at an exercise price of $0.07, and a fair value of $315,000. The option
is
exercisable, in whole or in part at any time and from time to time, for a period
of five years from the date of grant. This option to purchase Company shares
was
based on a fair market value of $0.315 per post-split share. The option was
valued using the Black-Scholes option pricing model, which was developed for
estimating the fair value of traded options, and taking into account that the
exercisable option shares are restricted.
On
April
7, 2005, the Company entered into an agreement with Convergys Customer
Management Group Inc. of Cincinnati, Ohio to provide subscriber management
services, including inbound telephone coverage 24/7, capturing caller
information, providing toll-free numbers and daily reporting of orders and
leads. The term of the agreement begins on April 7, 2005 and continues until
the
expiration of 30 days after either party gives the other party written notice
of
its intent to terminate. Under this agreement, inbound live phone services
are
billed at $0.75 per minute for the first million minutes annually, $0.732 for
the second million minutes and $0.714 per minute thereafter. The minimum
purchase commitment is $2,500 per month, which is waived for the first year
of
service. The Convergys relationship is established, but their telemarketing
services will not commence until the Infomercial marketing begins. On February
12, 2007, this agreement was replaced by a new agreement as explained in Note
9
- Subsequent Events.
On
April
21, 2006, the Company announced that it had entered into a six-month consulting
agreement with Karin Tobiason for public relations services. This agreement
was
terminated shortly thereafter. No services were performed under the agreement,
and the initial payment of $5,000 was fully refunded.
On
June
9, 2006, the Company entered into a public relations consulting agreement with
Brazer Communications of Mill Valley, CA to launch a media relations campaign
to
increase public awareness of the Company and its product. Under this agreement,
overall fees were set at $4,700 per month for the contract period of six months
ended on December 8, 2006. In addition to the monthly fees, on the date of
the
agreement 15,600 restricted post-split shares were awarded to two principals
of
Brazer Communications. The fair market value of these shares was $7,800, and
was
amortized over the period of the agreement.
NOTE
5 - COMMON STOCK
On
February 15, 2005, the Company’s Board of Directors authorized a 2 for 1 forward
split of the Company's issued and outstanding common stock to shareholders
of
record on March 7, 2005, in the form of a 100% stock dividend. The effective
date of the forward split on the NASDAQ OTC: BB was March 11, 2005.
During
the year ended December 31, 2006, 15,600 common shares were issued to Brazer
Communications under a public relations consulting agreement, as explained
in
Note 4. No other new shares were issued by the Company during 2006.
NOTE
6 - INCOME TAX
ES
As
of
December 31, 2006, the Company had a net operating loss carryforward for federal
income tax purposes of $2,459,577. This net operating loss carryforward, if
not
used, will begin to expire in 2022. Deferred tax assets (liabilities) are
comprised of the following as of December 31, 2006:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
980,141
|
|
$
|
547,281
|
|
|
Less
-Valuation allowance
|
|
|
(980,141
|
)
|
|
(547,281
|
)
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
For
the
year ended December 31, 2006, the valuation allowance was increased by $432,860
due to uncertainties surrounding the realization of the deferred tax assets,
resulting from the Company’s net book loss of $1,086,994 for the year and an
accumulated deficit of $4,150,386 at December 31, 2006.
The
valuation allowance has been estimated in an amount equal to the projected
future benefit of the loss carryforward due to the assumption the Company may
not generate sufficient income to utilize the future tax benefit.
The
valuation allowance is provided to reduce the deferred tax asset to a level
which, more likely than not, will be realized.
The
provision (benefit) for income taxes differs from the provision (benefit) amount
computed by applying the statutory federal tax rate (34%) to the taxable loss
due to the following:
|
|
|
2006
|
|
2005
|
|
|
Statutory
regular federal income benefit rate
|
|
|
34.00
|
%
|
|
34.00
|
%
|
|
State
taxes (net of federal benefit)
|
|
|
5.85
|
%
|
|
5.85
|
%
|
|
Change
in valuation allowance
|
|
|
-39.85
|
%
|
|
-39.85
|
%
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income tax
|
|
$
|
-
|
|
$
|
-
|
|
State
Franchise Taxes have been recorded as an expense. All returns due have been
filed and the 2006 tax was paid when due. The Company made a provision of $2,318
as of December 31, 2005, for the actual amount due for 2002 through 2004, which
was paid in full on January 26, 2006.
NOTE
7 - NON-MONETARY TRANSACTIONS
Deferred
Charge
As
explained in Note 3, the Company’s Board of Directors granted an option to Two
Dog Net, Inc. to purchase currently restricted common shares. This option was
valued at $0
Conversion
of Debt to Common Stock
As
explained in Note 3,
on
February 15, 2005, the Company's Board of Directors authorized and approved
the
conversion of debt totaling $456,912 owed to Shadrack Films, Inc., the majority
shareholder, into 13,054,628 post-split shares of the Company’s restricted
common stock at a conversion price of $.035 per post-split share
Stock-based
Compensation
On
February 15, 2005, the Company’s Board of Directors granted Tyler Wheeler, the
Company’s Chief Software Architect Consultant and a director, an option to
purchase up to 1,000,000 post-split shares of the Company’s restricted common
stock at an exercise price of $0.07, and a fair value of $315,000. The option
is
exercisable, in whole or in part at any time and from time to time, for a period
of five years from the date of grant. This option to purchase Company shares
was
based on a fair market value of $0.315 per post-split share. The option was
valued using the Black-Scholes option pricing model, which was developed for
estimating the fair value of traded options, and taking into account that the
exercisable option shares are restricted. The value of $315,000 was recorded
as
an expense for services and is included with officers’ compensation in the
Company’s Statement of Operations for the year ended December 31,
2005.
During
the year ended December 31, 2006, options to purchase 611,112 shares at $0.55
per share, granted to
William
L. Arnold
,
became
vested under his executive employment agreement based on his service as
President of the Company.
The
vested options were valued at $52,223 using the Black-Scholes option pricing
model based on the grant-date fair value in accordance with
SFAS No. 123R.
As
explained in Note 4, on June 9, 2006, 15,600 restricted post-split shares were
awarded to two principals of Brazer Communications under a six-month contract
to
perform public relations consulting services for the Company. The fair market
value of these shares was $7,800.
NOTE
8 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized
unaudited financial information for the years ended December 31, 2006 and 2005
are noted below:
|
|
|
|
|
2006
|
|
|
|
|
|
|
Dec.
31
|
|
Sept.
30
|
|
June
30
|
|
March
31
|
|
|
Net
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Gross
Profit
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Net
(loss)
|
|
$
|
(153,477
|
)
|
$
|
(253,627
|
)
|
$
|
(396,710
|
)
|
$
|
(283,180
|
)
|
|
Net
(loss) per share - basic and diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
Dec.
31
|
|
Sept.
30
|
|
June
30
|
|
March
31
|
|
|
Net
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Gross
Profit
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Net
(loss)
|
|
$
|
(271,033
|
)
|
$
|
(207,345
|
)
|
$
|
(297,458
|
)
|
$
|
(485,122
|
)
|
|
Net
(loss) per share - basic and diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
NOTE
9 - SUBSEQUENT EVENTS
On
January 9, 2007, the Company signed a 12-month co-location agreement with
Evocative, Inc. to house the Company’s search engine, servers and related
equipment at Evocative’s data center in Emeryville, California. This agreement
replaced a similar 13-month agreement which began in October 2003 and was
continued on a month to month basis. The new agreement adds a managed firewall
service. The basic annual cost under this agreement is $35,988.
On
February 12, 2007, a new agreement was executed with Convergys Customer
Management Group Inc to replace the existing agreement for subscriber management
services described in Note 4. The term of the agreement continues until the
expiration of 30 days after either party gives the other party written notice
of
its intent to terminate. Under this agreement, inbound live phone services
are
billed at $0.738 per minute for the first million minutes annually, $0.72 for
the second million minutes and $0.702 per minute thereafter. The minimum
purchase commitment is $2,500 per month, which is waived for the first three
months of service.
On
March
29, 2007, the Company entered into an Executive Employment Agreement with Tim
T.
Turner, whereby Mr. Turner will become the Director of Finance and Operations
for the Company upon the Company obtaining Directors and Officers Insurance
Mr.
Turner will be appointed an officer of the Company and made a member of the
Company’s Board of Directors. The agreement states that Mr. Turner
shall
receive
a yearly salary of $157,500. He shall earn a monthly salary of $13,125 of which
$5,000 will be paid in cash and $8,125 shall be deferred and accrued for a
maximum period of twelve months from the date of this Agreement. In the event
that the Company raises, during this twelve-month period, additional capital,
through loans, equity investment or both, in the aggregate sum of one million
dollars, Mr. Turners monthly cash compensation shall be increased to $6,562.50.
The balance of Mr. Turner’s monthly compensation of $6,562.50 shall be deferred
and accrued.
At
the
end of the twelve month period, the total amount of Mr. Turner’s deferred
compensation shall be payable by the Company, and the cash compensation will
be
increased to $13,125 per month.
In
the
event that the Company, acting in good faith, determines that it does not have
the resources to pay Mr. Turner deferred compensation, Mr. Turner and the
Company agree that the total amount of deferred compensation will be converted
into a note payable to Mr. Turner by the Company. The Note shall have a term
of
one year and shall accrue interest at the annual rate of 7.75%, or 2.5 % above
the Federal Funds Rate then in effect, whichever amount is higher, payable
at
the end of each calendar month. At the end of the Note term, the principal
amount and any unpaid earned interest shall be due and payable. The Note will
have a Warrant attached to it that will enable the holder to purchase shares
of
the Company’s common stock. The number of shares of the Company’s common stock
that will be purchasable under the terms of the Warrant will be equal to the
principal amount of the Note multiplied by four and divided by the then current
market price of the Company’s common stock. The Warrant Shares will be
unregistered and subject to Rule 144. The Warrant Shares shall have piggyback
registration rights. The term of the Warrant will be five years from the date
of
issue. Mr. Turner’s monthly salary will otherwise be payable pursuant to the
Company’s normal payroll practices. The Note will continue to be due and payable
with interest from the date issued.
In
addition to the Base Salary, Mr. Turner shall participate in a bonus program
in
which Mr. Turner will earn an annual bonus equal to 50% of Mr. Turner’s Base
Salary subject to Mr. Turner meeting the performance objectives established
by
the Company.
On
April
30, 2007, the Company and the Board of Directors adopted “The Children’s
Internet, Inc. 2007 Equity Incentive Plan” (the “Plan”). The purpose of the Plan
is to provide incentives to attract retain and motivate eligible persons whose
present and potential contributions are important to the success of the Company
by offering them an opportunity to participate in the Company's future
performance through awards of Options, Restricted Stock and Stock Bonuses.
Under
the terms of the Plan the Company has made available six million (6,000,000)
Shares of the Company’s stock to be issued to Officers, Directors, Employees,
Consultants and Advisors to the Company with certain restrictions as set forth
in the Plan, and can be found in Exhibit 10.14 to this 10-KSB. The plan will
be
administered by a Committee of the Board of Directors. The plan will terminate
ten (10) years from the effective date of the plan unless terminated earlier
under the terms of the Plan.
Exhibit
10.14
ACTION
BY WRITTEN CONSENT OF THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF
THE
CHILDREN’S INTERNET, INC.
The
undersigned, being the directors and the holders of a majority in interest
of
the stockholders of The Children’s Internet, a Nevada corporation, by their
signatures below or on a counterpart hereof, hereby adopt the following
resolutions on behalf of this corporation, pursuant to Nevada Revised Statutes
Sections 78.315 and 78.320.
Adoption
of The Children’s Internet, Inc. 2007 Equity Incentive
Plan
.
WHEREAS,
a proposed draft of The Children’s Internet, Inc. 2007 Equity Incentive Plan
(the “Plan”) attached hereto as
Exhibit A
has been
distributed to the undersigned and the Plan provides for the granting to
employees, officers, directors, consultants and advisors of this corporation
or
any parent, subsidiary or affiliate of this corporation of options to acquire
stock in this corporation intended to qualify as “incentive stock options”
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the “Code”), and certain other options to purchase shares of Common
Stock in this corporation which are not intended to receive special income
tax
treatment under the Code; and
WHEREAS,
it has been proposed that six million (6,000,000) shares of the Common Stock
of
this corporation be reserved for issuance upon the exercise of stock options
granted pursuant to the Plan; and
WHEREAS,
the undersigned deem it to be in the best interests of this corporation and
its
stockholders that the undersigned, as members of the Board and stockholders
of
this corporation adopt the Plan and take certain other actions necessary to
ensure that this corporation continue to have the authority to grant stock
options to employees, officers, directors, consultants and advisors of this
corporation or any parent, subsidiary or affiliate of this corporation as a
means of attracting and retaining such persons for the long-term success of
this
corporation.
NOW,
THEREFORE, BE IT RESOLVED, that the Plan, in the form attached hereto as
Exhibit A
be,
and
the same hereby is, approved and adopted, to be effective as of the date of
adoption of this resolution; and
RESOLVED
FURTHER, that, there hereby is reserved for issuance upon the exercise of stock
options granted pursuant to the six million (6,000,000) shares of Common Stock;
and
RESOLVED
FURTHER, that the Board is hereby appointed to act as the members of the Stock
Option Committee of the Board (the “Stock Option Committee”) for the purpose of
administering the Plan and, commencing on the date of adoption of this
resolution and until otherwise provided by resolution of the Board, such Stock
Option Committee shall have all the powers and exercise all the duties conferred
upon it by the Plan; and
RESOLVED
FURTHER, that the form of Stock Option Agreement (the “Option Agreement”)
attached hereto as
Exhibit
B
hereby
is approved, and that all stock options granted under the Plan shall be
evidenced by the execution and delivery by this corporation and each optionee
of
an agreement substantially in the form of the Option Agreement, with such
changes thereto as the Stock Option Committee shall approve, such approval
to be
conclusively evidenced by the execution and delivery thereof; and
RESOLVED
FURTHER, that the Plan shall be subject to such changes and amendments as may
be
approved from time to time by the undersigned in their capacities as members
of
the Board and/or stockholders, as may be required by law; and
RESOLVED
FURTHER, that the officers of the corporation be, and each acting alone is,
hereby authorized, empowered and directed, for and on behalf of this
corporation, to take or cause to be taken any and all actions, including,
without limitation, the execution, acknowledgment, filing and delivery of any
and all papers, agreements, documents, instruments and certificates, as such
officers may deem necessary or advisable to carry out and perform the
obligations of this corporation under the Plan and the Option Agreements,
consummate the transactions contemplated therein, cause this corporation to
comply with the Securities Act of 1933, as amended, and any applicable state
securities laws, including any such action or execution, acknowledgment, filing
and delivery of documents as may be required to register or qualify the Plan
and
the Option Agreements thereunder or to qualify for an exemption from
registration or qualification provided thereunder, and otherwise carry out
the
purposes and intent of the foregoing resolutions; the performance of any such
acts and the execution, acknowledgment, filing and delivery by such officers
of
any such papers, agreements, documents, instruments and certificates shall
conclusively evidence their authority therefore.
Omnibus
Resolutions.
RESOLVED,
that the officers of this corporation are, and each acting alone is, hereby
authorized to do and perform any and all such acts, including execution of
any
and all documents and certificates, as such officers shall deem necessary or
advisable, to carry out the purposes and intent of the foregoing
resolutions.
RESOLVED
FURTHER, that any actions taken by such officers prior to the date of the
foregoing resolutions adopted hereby that are within the authority conferred
thereby are hereby ratified, confirmed and approved as the acts and deeds of
this corporation.
This
written consent may be executed in one or more counterparts, each of which
shall
be an original and all of which together shall be one and the same instrument.
This written consent shall be filed in the Minute Book of this corporation
and
become a part of the records of this corporation. This written consent is
effective as of the last date set forth below.
|
|
|
|
|
Dated:
April 30, 2007
|
|
/s/
Sholeh Hamedani
|
|
|
Sholeh
Hamedani, Stockholder
|
|
|
|
|
|
|
|
/s/
Sholeh Hamedani
|
|
|
Sholeh
Hamedani, Director
|
|
|
|
|
|
|
|
|
|
|
Jamshid
Ghosseiri, Director
|
Exhibit
A
The
Children’s Internet, Inc. 2007 Equity Incentive Plan
The
Children’s Internet, Inc.
2007
Equity Incentive Plan
1
.
Purpose
.
The
purpose of The Children’s Internet, Inc. 2007
Equity
Incentive Plan
(the
“Plan”) of
The
Children’s Internet, Inc., a Nevada
corporation
(the “Company”, is to provide incentives to attract, retain and motivate
eligible persons whose present and potential contributions are important to
the
success of the Company by offering them an opportunity to participate in the
Company's future performance through awards of Options, Restricted Stock and
Stock Bonuses. Capitalized terms not defined in the text are defined in Section
23.
2
.
Shares
Subject to the Plan
.
2
.
1
Number
of Shares Available
.
Subject
to Sections 2.2 and 18, the total number of Shares reserved and available for
grant and issuance pursuant to the Plan shall be six million (6,000,000) Shares.
Subject to Sections 2.2 and 18, Shares shall again be available for grant and
issuance in connection with future Awards under the Plan that: (a) are subject
to issuance upon exercise of an Option but cease to be subject to such Option
for any reason other than exercise of such Option; (b) are subject to an Award
granted hereunder but are forfeited; or (c) are subject to an Award that
otherwise terminates without Shares being issued. No individual may receive
Awards or more than
Five
Million
(
5,000,000
)
Shares
hereunder.
2
.
2
Adjustment
of Shares
.
In the
event that the number of outstanding Shares is changed by a stock dividend,
recapitalization, stock split, reverse stock split, subdivision, combination,
reclassification or similar change in the capital structure of the Company
without consideration, then (a) the number of Shares reserved for issuance
under
the Plan; (b) the Exercise Prices of and number of Shares subject to outstanding
Options; and (c) the number of Shares subject to other outstanding Awards shall
be proportionately adjusted, subject to any required action by the Board or
the
stockholders of the Company and compliance with applicable securities laws;
provided,
however,
that
fractions of a Share shall not be issued but shall either be paid in cash at
Fair Market Value or shall be rounded up to the nearest Share, as determined
by
the Committee.
3
.
Eligibility
.
ISOs (as
defined in Section 5 below) may be granted only to employees (including officers
and directors who are also employees) of the Company, or of a Parent or
Subsidiary of the Company. All other Awards may be granted to employees,
officers, directors, consultants and advisors of the Company or any Parent,
Subsidiary or Affiliate of the Company;
provided,
however,
such
consultants and advisors render bona fide services not in connection with the
offer and sale of securities in a capital-raising transaction. A person may
be
granted more than one Award under the Plan.
4
.
Administration
.
4
.
1
Committee
Authority
.
The Plan
shall be administered by the Committee or the Board acting as the Committee.
Subject to the general purposes, terms and conditions of the Plan, and to the
direction of the Board, the Committee shall have full power to implement and
carry out the Plan. The Committee shall have the authority to:
|
|
(
a
)
|
construe
and interpret the Plan, any Award Agreement and any other agreement
or
document executed pursuant to the
Plan;
|
|
|
(
b
)
|
prescribe,
amend and rescind rules and regulations relating to the
Plan;
|
|
|
(
c
)
|
select
persons to receive Awards;
|
|
|
(
d
)
|
determine
the form and terms of Awards;
|
|
|
(
e
)
|
determine
the number of Shares or other consideration subject to
Awards;
|
|
|
(
f
)
|
determine
whether Awards will be granted singly, in combination, in tandem
with, in
replacement of, or as alternatives to, other Awards under the Plan
or any
other incentive or compensation plan of the Company or any Parent,
Subsidiary or Affiliate of the
Company;
|
|
|
(
g
)
|
grant
waivers of Plan or Award
conditions;
|
|
|
(
h
)
|
determine
the vesting, exercisability and payment of
Awards;
|
|
|
(
i
)
|
correct
any defect, supply any omission, or reconcile any inconsistency in
the
Plan, any Award or any Award
Agreement;
|
|
|
(
j
)
|
determine
whether an Award has been earned; and
|
|
|
(
k
)
|
make
all other determinations necessary or advisable for the administration
of
the Plan.
|
4
.
2
Committee
Discretion
.
Any
determination made by the Committee with respect to any Award shall be made
in
its sole discretion at the time of grant of the Award or, unless in
contravention of any express term of the Plan or Award, at any later time,
and
such determination shall be final and binding on the company and all persons
having an interest in any Award under the Plan. The Committee may delegate
to
one or more officers of the Company the authority to grant an Award under the
Plan to Participants who are not Insiders of the Company.
4
.
3
Exchange
Act Requirements
.
If the
Company is subject to the Exchange Act, the Company will take appropriate steps
to comply with the disinterested director requirements of Section 16(b) of
the
Exchange Act, including but not limited to, the appointment by the Board of
a
Committee consisting of not less than two (2) persons (who are members of the
Board), each of whom is a Disinterested Person.
5
.
Options
.
The
Committee may grant Options to eligible persons and shall determine whether
such
Options shall be Incentive Stock Options within the meaning of the Code
("
ISOs"
)
or
Nonqualified Stock Options ("NSOs"), the number of Shares subject to the Option,
the Exercise Price of the Option, the period during which the Option may be
exercised, and all other terms and conditions of the Option, subject to the
following:
5
.
1
Form
of Option Grant
.
Each
Option granted under the Plan shall be evidenced by an Award Agreement which
shall expressly identify the Option as an ISO or NSO ("
Stock
Option Agreement
"),
and
be in such form and contain such provisions (which need not be the same for
each
Participant) as the Committee shall from time to time approve, and which shall
comply with and be subject to the terms and conditions of the
Plan.
5
.
2
Date
of Grant
.
The date
of grant of an Option shall be the date on which the Committee makes the
determination to grant such Option, unless otherwise specified by the Committee.
The Stock Option Agreement and a copy of the Plan will be delivered to the
Participant within a reasonable time after the granting of the
Option.
5
.
3
Exercise
Period
.
Options
shall be exercisable within the times or upon the events determined by the
Committee as set forth in the Stock Option Agreement;
provided,
however,
that no
Option shall be exercisable after the expiration of ten (10) years from the
date
the Option is granted, and provided further that no Option granted to a person
who directly or by attribution owns more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent
or
Subsidiary of the Company ("
Ten
Percent Stockholder
")
shall
be exercisable after the expiration of five (5) years from the date the Option
is granted. The Committee also may provide for the exercise of Options to become
exercisable at one time or from time to time, periodically or otherwise, in
such
number or percentage as the Committee determines.
5
.
4
Exercise
Price
.
The
Exercise Price shall be determined by the Committee when the Option is granted
and may be not less than eighty-five percent (85%) of the Fair Market Value
of
the Shares on the date of grant; provided that (i) the Exercise Price of an
ISO
shall be not less than one hundred percent (100%) of the Fair Market Value
of
the Shares on the date of grant; and (ii) the Exercise Price of any Option
granted to a Ten Percent Stockholder shall not be less than one hundred ten
percent (110%) of the Fair Market Value of the Shares on the date of grant.
Payment for the Shares purchased may be made in accordance with Section 8 of
the
Plan.
5
.
5
Method
of Exercise
.
Options
may be exercised only by delivery to the Company of a written stock option
exercise agreement (the "
Exercise
Agreement
")
in a
form approved by the Committee (which need not be the same for each
Participant), stating the number of Shares being purchased, the restrictions
imposed on the Shares, if any, and such representations and agreements regarding
Participant's investment intent and access to information and other matters,
if
any, as may be required or desirable by the Company to comply with applicable
securities laws, together with appropriate payment of the Exercise Price for
the
number of Shares being purchased.
5
.
6
Termination
.
Notwithstanding the exercise periods set forth in the Stock Option Agreement,
exercise of an Option shall always be subject to the following:
|
|
(
a
)
|
If
Participant is Terminated for any reason, other than death or disability,
Participant may exercise his or her Option only within three (3)
months
following the Participant’s Termination, unless otherwise provided by the
Committee (but in no event later than the expiration of the term
of such
Option as set forth in the Stock Option Agreement). Except as provided
in
Section 5.6(b) below, any ISO that remains exercisable after three
(3)
months from the date of Termination shall be deemed a NSO. Any exercise
hereunder after the date of Termination shall be limited to those
Shares
under the Option that have vested as of the date of Termination.
If, on
the date of Termination, Participant is not vested as to his or her
entire
Option, the Shares covered by the unvested portion of the Option
shall
revert to the Plan. If, after Termination, Participant does not exercise
his or her Option within the time specified, the Option shall terminate,
and the Shares covered by such Option shall revert to the
Plan.
|
|
|
(
b
)
|
If
the Participant is terminated because of death or Disability (or
the
Participant dies within three (3) months of such termination), then
Participant's Options may be exercised only to the extent that such
Options would have been exercisable by Participant on the Termination
Date
and must be exercised by Participant (or Participant's legal
representative or authorized assignee) no later than twelve (12)
months
after the Termination Date (or such shorter time period as may be
specified in the Stock Option Agreement), but in any event no later
than
the expiration date of the Options;
provided,
however,
that in the event of termination due to Disability other than as
defined
in Section 22(e)(3) of the Code, any ISO that remains exercisable
after
ninety (90) days after the Termination Date shall be deemed a
NSO.
|
5
.
7
Limitations
on Exercise
.
The
Committee may specify a reasonable minimum number of Shares that may be
purchased on any exercise of an Option;
provided,
however,
that
such minimum number will not prevent Participant from exercising the Option
for
the full number of Shares for which it is then exercisable.
5
.
8
Limitations
on ISOs
.
The
aggregate Fair Market Value (determined as of the date of grant) of Shares
with
respect to which ISOs are exercisable for the first time by a Participant during
any calendar year (under the Plan or under any other incentive stock option
plan
of the Company or any Affiliate, Parent or Subsidiary of the Company) shall
not
exceed One Hundred Thousand Dollars ($100,000). If the Fair Market Value of
Shares on the date of grant with respect to which ISOs are exercisable for
the
first time by a Participant during any calendar year exceeds One Hundred
Thousand Dollars ($100,000), the Options for the first One Hundred Thousand
Dollars ($100,000) worth of Shares to become exercisable in such calendar year
shall be ISOs and the Options for the amount in excess of One Hundred Thousand
Dollars ($100,000) that become exercisable in that calendar year shall be NSOs.
In the event that the Code or the regulations promulgated thereunder are amended
after the Effective Date of the Plan to provide for a different limit on the
Fair Market Value of Shares permitted to be subject to ISOs, such different
limit shall be automatically incorporated herein and shall apply to any Options
granted after the effective date of such amendment.
5
.
9
Modification,
Extension or Renewal
.
The
Committee may modify, extend or renew outstanding Options and authorize the
grant of new Options in substitution therefore;
provided,
however,
that any
such action may not without the written consent of Participant, impair any
of
Participant's rights under any Option previously granted. Any outstanding ISO
that is modified, extended, renewed or otherwise altered shall be treated in
accordance with Section 424(h) of the Code. The Committee may reduce the
Exercise Price of outstanding Options without the consent of Participants
affected by a written notice to them;
provided,
however,
that the
Exercise Price may not be reduced below the minimum Exercise Price that would
be
permitted under Section 5.4 of the Plan for Options granted on the date the
action is taken to reduce the Exercise Price.
5
.
10
No
Disqualification
.
Notwithstanding any other provision in the Plan, no term of the Plan relating
to
ISOs shall be interpreted, amended or altered, nor shall any discretion or
authority granted under the Plan be exercised, so as to disqualify the Plan
under Section 422 of the Code or, without the consent of the Participant
affected, to disqualify any ISO under Section 422 of the Code.
6
.
Restricted
Stock
.
A
Restricted Stock Award is an offer by the Company to sell to an eligible person
Shares that are subject to restrictions. The Committee shall determine to whom
an offer will be made, the number of Shares the person may purchase, the price
to be paid (the "Purchase Price"), the restrictions to which the Shares shall
be
subject, and all other terms and conditions of the Restricted Stock Award,
subject to the following:
6
.
1
Form
of Restricted Stock Award
.
All
purchases under a Restricted Stock Award made pursuant to the Plan shall be
evidenced by an Award Agreement ("Restricted Stock Purchase Agreement") that
shall be in such form (which need not be the same for each Participant) as
the
Committee shall from time to time approve, and shall comply with and be subject
to the terms and conditions of the Plan. The offer of Restricted Stock shall
be
accepted by the Participant's execution and delivery of the Restricted Stock
Purchase Agreement and full payment for the shares to the Company within thirty
(30) days from the date the Restricted Stock Purchase Agreement is delivered
to
the person. If such person does not execute and deliver the Restricted Stock
Purchase Agreement along with full payment for the Shares to the Company within
thirty (30) days, then the offer shall terminate, unless otherwise determined
by
the Committee.
6
.
2
Purchase
Price
.
The
Purchase Price of Shares sold pursuant to a Restricted Stock Award shall be
determined by the Committee and shall be at least eighty-five percent (85%)
of
the Fair Market Value of the Shares on the date the Restricted Stock Award
is
granted, except in the case of a sale to a Ten Percent Stockholder, in which
case the Purchase Price shall be one hundred and ten percent (110%) of the
Fair
Market Value. Payment of the Purchase Price may be made in accordance with
Section 8 of the Plan.
6
.
3
Restrictions
.
Restricted Stock Awards shall be subject to such restrictions as the Committee
may impose. The Committee may provide for the lapse of such restrictions in
installments and may accelerate or waive such restrictions, in whole or in
part,
based on length of service, performance or such other factors or criteria as
the
Committee may determine. Restricted Stock Awards which the Committee intends
to
qualify under Code section 162(m) shall be subject to a performance-based goal.
Restrictions on such stock shall lapse based on one or more of the following
performance goals: stock price, market share, sales increases, earning per
share, return on equity, cost reductions, or any other similar performance
measure established by the Committee. Such performance measures shall be
established by the Committee, in writing, no later than the earlier of (a)
ninety (90) days after the commencement of the performance period with respect
to which the Restricted Stock award is made and (b) the date as of which
twenty-five percent (25%) of such performance period has elapsed.
7
.
Stock
Bonuses
.
7
.
1
Awards
of Stock Bonuses
.
A Stock
Bonus is an award of Shares (which may consist of Restricted Stock) for services
rendered to the Company or any Parent, Subsidiary or Affiliate of the Company.
A
Stock Bonus may be awarded for past services already rendered to the Company,
or
any Parent, Subsidiary or Affiliate of the Company pursuant to an Award
Agreement (the "Stock Bonus Agreement") that shall be in such form (which need
not be the same for each Participant) as the Committee shall from time to time
approve, and shall comply with and be subject to the terms and conditions of
the
Plan subject to Section 7.2 herein, a Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in
Participant's individual Award Agreement (the "Performance Stock Bonus
Agreement") that shall be in such form (which need not be the same for each
Participant) as the Committee shall from time to time approve, and shall comply
with and be subject to the terms and conditions of the Plan. Stock Bonuses
may
vary from Participant to Participant and between groups of Participants, and
may
be based upon such other criteria as the Committee may determine.
7
.
2
Code
Section 162(m)
.
A Stock
Bonus that the Committee intends to qualify for the performance-based exception
under Code section 162(m) shall only be awarded based upon the attainment of
one
or more of the following performance goals: stock price, market share, sales
increases, earning per share, return on equity, cost reductions, or any other
similar performance measure established by the Committee. Such performance
measures shall be established by the Committee, in writing, no later than the
earlier of: (a) ninety (90) days after the commencement of the performance
period with respect to which the Stock Bonus award is made; and (b) the date
as
of which twenty-five percent (25%) of such performance period has
elapsed.
7
.
3
Terms
of Stock Bonuses
.
The
Committee shall determine the number of Shares to be awarded to the Participant
and whether such Shares shall be Restricted Stock. If the Stock Bonus is being
earned upon the satisfaction of performance goals pursuant to a Performance
Stock Bonus Agreement, then the Committee shall determine: (a) the nature,
length and starting date of any period during which performance is to be
measured (the "Performance Period") for each Stock Bonus; (b) the performance
goals and criteria to be used to measure the performance, if any; (c) the number
of Shares that may be awarded to the Participant; and (d) the extent to which
such Stock Bonuses have been earned. Performance Periods may overlap and
Participants may participate simultaneously with respect to Stock Bonuses that
are subject to different Performance Periods and different performance goals
and
other criteria. The number of Shares may be fixed or may vary in accordance
with
such performance goals and criteria as may be determined by the Committee.
The
Committee may adjust the performance goals applicable to the Stock Bonuses
to
take into account changes in law and accounting or tax rules and to make such
adjustments as the Committee deems necessary or appropriate to reflect the
impact of extraordinary or unusual items, events or circumstances to avoid
windfalls or hardships.
7
.
4
Form
of Payment
.
The
earned portion of a Stock Bonus may be paid currently or on a deferred basis
with such interest or dividend equivalent, if any, as the Committee may
determine. Payment may be made in the form of cash, whole Shares, including
Restricted Stock, or a combination thereof, either in a lump sum payment or
in
installments, all as the Committee shall determine.
7
.
5
Termination
During Performance Period
.
If a
Participant is Terminated during a Performance Period for any reason, then
such
Participant shall be entitled to payment (whether in Shares, cash or otherwise)
with respect to the Stock Bonus only to the extent earned as of the date of
Termination in accordance with the Performance Stock Bonus Agreement, unless
the
Committee shall determine otherwise.
8
.
Payment
For Share Purchases
.
8
.
1
Payment
.
Payment
for Shares purchased pursuant to the Plan may be made in cash (by check) or,
where expressly approved for the Participant by the Committee and where
permitted by law:
|
|
(
a
)
|
by
cancellation of indebtedness of the Company to the Participant;
|
|
|
(
b
)
|
by
surrender of Shares that either (1) have been owned by Participant
for
more than six (6) months and have been paid for within the meaning
of SEC
Rule 144 (and, if such shares were purchased from the Company by
use of a
promissory note, such note has been fully paid with respect to such
Shares); or (2) were obtained by Participant in the public
market;
|
|
|
(
c
)
|
by
tender of a promissory note constituting legal consideration and
having
such terms as may be approved by the Committee and bearing interest
at a
rate sufficient to avoid imputation of income under Sections 483
and 1274
of the Code.
|
|
|
(
d
)
|
by
waiver of compensation due or accrued to Participant for services
rendered;
|
|
|
(
e
)
|
by
tender of property;
|
|
|
(
f
)
|
with
respect only to purchases upon exercise of an Option, and provided
that a
public market for the Company's stock
exists:
|
|
|
(
1
)
|
through
a "same day sale" commitment from Participant and a broker-dealer
that is
a member of the National Association of Securities Dealers (an "NASD
Dealer") whereby the Participant irrevocably elects to exercise the
Option
and to sell a portion of the Shares so purchased to pay for the Exercise
Price, and whereby the NASD Dealer irrevocably commits upon receipt
of
such Shares to forward the Exercise Price directly to the Company;
or
|
|
|
(
2
)
|
through
a "margin" commitment from Participant and an NASD Dealer whereby
Participant irrevocably elects to exercise the Option and to pledge
the
Shares so purchased to the NASD Dealer in a margin account as security
for
a loan from the NASD Dealer in the amount of the Exercise Price,
and
whereby the NASD Dealer irrevocably commits upon receipt of such
Shares to
forward the exercise price directly to the Company; or
|
|
|
(g)
|
with
respect only to purchases upon exercise of an
Option:
|
|
|
(1)
|
In
the event that the Option is exercised immediately prior to the closing
by
the Company of a "corporate transaction" as defined in Section 18.1
below,
or the closing of the initial public offering of the Company’s Common
Stock pursuant to a registration statement under the Securities Act
(the
“
Initial
Public Offering
”),
in lieu of exercising the Option in the manner provided above, the
Participant may elect to receive shares equal to the value of the
Option
(or the portion thereof being canceled) by surrender of the Option
at the
principal office of the Company together with notice of such election
in
which event the Company shall issue to holder a number of shares
of Common
Stock computed using the following
formula:
|
X
=
Y
(A -
B)
A
|
|
Where
|
X
=
The number of shares of Common Stock to be issued to the
Participant.
|
Y
= The
number of shares of Common Stock purchasable under the Option (at the date
of
such calculation).
A
= The
fair market value of one share of Common Stock (at the date of such
calculation).
B
= The
Purchase Price (as adjusted to the date of such calculation).
|
|
(2)
|
For
purposes of this Section (g), the fair market value of the Company’s
Common Stock shall be the price per share which the Company receives
for a
single share of Common Stock in the corporate transaction, or, if
the
Option is exercised in connection with the Initial Public Offering,
the
fair market value of the Company’s Common Stock shall be equal to the
mid-price of the range of prices set forth in the registration statement
relating to the Initial Public Offering or, if a subsequent amendment
thereto sets forth a different range of prices (other than a “pricing
amendment” setting forth a single, final price) then the mid-price of the
range of prices set forth in such amendment;
or
|
|
|
(h)
|
by
any combination of the foregoing.
|
8
.
2
Loan
Guaranties
.
The
Committee may help the Participant pay for Shares purchased under the Plan
by
authorizing a guaranty by the Company of a third-party loan to the
Participant.
9
.
Withholding
Taxes
.
9.1
Withholding
Generally
.
Whenever
Shares are to be issued in satisfaction of Awards granted under the Plan, the
Company may require the Participant to remit to the Company an amount sufficient
to satisfy federal, state and local withholding tax requirements prior to the
delivery of any certificate or certificates for such Shares. Whenever, under
the
Plan, payments in satisfaction of Awards are to be made in cash, such payment
shall be net of an amount sufficient to satisfy federal, state, and local
withholding tax requirements.
9.2
Stock
Withholding
.
When,
under applicable tax laws, a Participant incurs tax liability in connection
with
the grant, exercise or vesting of any Award that is subject to tax withholding
and the Participant is obligated to pay the Company the amount required to
be
withheld, the Committee may allow the Participant to satisfy the minimum
withholding tax obligation by electing to have the Company withhold from the
Shares to be issued that number of Shares having a Fair Market Value equal
to
the minimum amount required to be withheld, determined on the date that the
amount of tax to be withheld is to be determined (the "Tax Date"). All elections
by a Participant to have Shares withheld for this purpose shall be made in
writing in a form acceptable to the Committee and shall be subject to the
following restrictions:
|
|
(
a
)
|
the
election must be made on or prior to the applicable Tax Date;
|
|
|
(
b
)
|
once
made, then except as provided below, the election shall be irrevocable
as
to the particular Shares as to which the election is
made;
|
|
|
(
c
)
|
all
elections shall be subject to the consent or disapproval of the
Committee;
|
|
|
(
d
)
|
if
the Participant is an Insider and if the Company is subject to Section
16(b) of the Exchange Act: (1) the election may not be made within
six (6)
months of the date of grant of the Award, except as otherwise permitted
by
SEC Rule 16b-3(e) under the Exchange Act, and (2) either (A) the
election
to use stock withholding must be irrevocably made at least six (6)
months
prior to the Tax Date (although such election may be revoked at any
time
at least six (6) months prior to the Tax Date), or (B) the exercise
of the
Option or election to use stock withholding must be made in the ten
(10)
day period beginning on the third day following the release of the
Company's quarterly or annual summary statement of sales or earnings;
and
|
|
|
(
e
)
|
in
the event that the Tax Date is deferred under Section 83 of the Code,
the
Participant shall receive the full number of Shares with respect
to which
the exercise occurs, but such Participant shall be unconditionally
obligated to tender back to the Company the proper number of Shares
on the
Tax Date.
|
10
.
Privileges
of Stock Ownership
.
10
.
1
Voting
and Dividends
.
No
Participant shall have any of the rights of a stockholder with respect to any
Shares until the Shares are issued to the Participant. After Shares are issued
to the Participant, the Participant shall be a stockholder and have all the
rights of a stockholder with respect to such Shares, including the right to
vote
and receive all dividends or other distributions made or paid with respect
to
such Shares;
provided,
however,
that if
such Shares are Restricted Stock, then any new, additional or different
securities the Participant may become entitled to receive with respect to such
Shares by virtue of a stock dividend, stock split or any other change in the
corporate or capital structure of the Company shall be subject to the same
restrictions as the Restricted Stock.
10
.
2
Financial
Statements
.
The
Company shall provide financial statements to each Participant prior to such
Participant's purchase of Shares under the Plan, and to each Participant
annually during the period such Participant has Awards outstanding;
provided,
however,
the
Company shall not be required to provide such financial statements to
Participants whose services in connection with the Company assure them access
to
equivalent information.
11
.
Transferability
.
Awards
granted under the Plan, and any interest therein, shall not be transferable
or
assignable by Participant, and may not be made subject to execution, attachment
or similar process, otherwise than by will or by the laws of descent and
distribution or as consistent with the specific Plan and Award Agreement
provisions relating thereto. During the lifetime of the Participant an Award
shall be exercisable only by the Participant, and any elections with respect
to
an Award, may be made only by the Participant.
12
.
Restrictions
on Shares
.
At the
discretion of the Committee, the Company may reserve to itself and/or its
assignee(s) in the Award Agreement a right of first refusal to purchase all
Shares that a Participant (or a subsequent transferee) may propose to transfer
to a third party.
13
.
Certificates
.
All
certificates for Shares or other securities delivered under the Plan shall
be
subject to such stock transfer orders, legends and other restrictions as the
Committee may deem necessary or advisable, including restrictions under any
applicable federal, state or foreign securities law, or any rules, regulations
and other requirements of the SEC or any stock exchange or automated quotation
system upon which the Shares may be listed.
14
.
Escrow;
Pledge of Shares
.
To
enforce any restrictions on a Participant's Shares, the Committee may require
the Participant to deposit all certificates representing Shares, together with
stock powers or other instruments of transfer approved by the Committee,
appropriately endorsed in blank, with the Company or an agent designated by
the
Company to hold in escrow until such restrictions have lapsed or terminated,
and
the Committee may cause a legend or legends referencing such restrictions to
be
placed on the certificates. Any Participant who is permitted to execute a
promissory note as partial or full consideration for the purchase of Shares
under the Plan shall be required to place and deposit with the Company all
or
part of the Shares so purchased as collateral to secure the payment of
Participant's obligation to the Company under the promissory note;
provided,
however,
that the
Committee may require or accept other or additional forms of collateral to
secure the payment of such obligation and, in any event, the Company shall
have
full recourse against the Participant under the promissory note notwithstanding
any pledge of the Participant's Shares or other collateral. In connection with
any pledge of the Shares, Participant shall be required to execute and deliver
a
written pledge agreement in such form as the Committee shall from time to time
approve. The Shares purchased with the promissory note may be released from
the
pledge on a pro rata basis as the promissory note is paid.
15
.
Exchange
and Buyout of Awards
.
The
Committee may, at any time or from time to time, authorize the Company, with
the
consent of the respective Participants, to issue new Awards in exchange for
the
surrender and cancellation of any or all outstanding Awards. The Committee
may
at any time buy from a Participant an Award previously granted with payment
in
cash, Shares (including Restricted Stock) or other consideration, based on
such
terms and conditions as the Committee and the Participant shall
agree.
16
.
Securities
Law and Other Regulatory Compliance
.
An Award
shall not be effective unless such Award is in compliance with all applicable
federal and state securities laws, rules and regulations of any governmental
body, and the requirements of any stock exchange or automated quotation system
upon which the Shares may then be listed, as they are in effect on the date
of
grant of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in the Plan, the Company shall have no
obligation to issue or deliver certificates for Shares under the Plan prior
to
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable, and/or (b) completion of any registration
or other qualification of such shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company shall be under no obligation to register the Shares
with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company shall have no liability for any inability or failure
to
do so.
17
.
No
Obligation to Employ
.
Nothing
in the Plan or any Award granted under the Plan shall confer or be deemed to
confer on any Participant any right to continue in the employ of, or to continue
any other relationship with, the Company or any Parent, Subsidiary or Affiliate
of the Company or limit in any way the right of the Company or any Parent,
Subsidiary or Affiliate of the Company to terminate Participant's employment
or
other relationship at any time, with or without cause.
18
.
Corporate
Transactions
.
18
.
1
Assumption
or Replacement of Awards by Successor
.
In the
event of (a) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the stockholders
of
the company and the Awards granted under the Plan are assumed or replaced by
the
successor corporation, which assumption shall be binding on all Participants);
(b) a dissolution or liquidation of the Company; (c) the sale of substantially
all of the assets of the Company; or (d) any other transaction which qualifies
as a "corporate transaction" under Section 424(a) of the Code wherein the
stockholders of the Company give up all of their equity interest in the Company
(
except
for the
acquisition, sale or transfer of all or substantially all of the outstanding
shares of the Company), any or all outstanding Awards may be assumed or replaced
by the successor corporation (if any), which assumption or replacement shall
be
binding on all Participants. In the alternative, the successor corporation
may
substitute equivalent Awards or provide substantially similar consideration
to
Participants as was provided to stockholders (after taking into account the
existing provisions of the Awards). The successor corporation may also issue,
in
place of outstanding Shares of the Company held by the Participant,
substantially similar shares or other property subject to repurchase
restrictions no less favorable to the Participant.
In
the
event such successor corporation (if any) refuses to assume or substitute
Options, as provided above, pursuant to a transaction described in this
Subsection 18.1, the vesting of any unvested Options shall accelerate, and
the
holders thereof shall be provided notice of such acceleration and an opportunity
to exercise the Options in full in the transaction, and such Options shall
expire in such transaction at such time and on such conditions as the Board
shall determine.
18
.
2
Other
Treatment of Awards
.
Subject
to any greater rights granted to Participants under the foregoing provisions
of
this Section 18, in the event of the occurrence of any transaction described
in
Section 18.1, any outstanding Awards shall be treated as provided in the
applicable agreement or plan of merger, consolidation, dissolution, liquidation,
sale of assets or other "corporate transaction."
18
.
3
Assumption
of Awards by the Company
.
The
Company, from time to time, also may substitute or assume outstanding awards
granted by another company, whether in connection with an acquisition of such
other company or otherwise, by either (a) granting an Award under the Plan
in substitution of such other company's award; or (b) assuming such award
as if it had been granted under the Plan if the terms of such assumed award
could be applied to an Award granted under the Plan. Such substitution or
assumption shall be permissible if the holder of the substituted or assumed
award would have been eligible to be granted an Award under the Plan if the
other company had applied the rules of the Plan to such grant. In the event
the
Company assumes an award granted by another company, the terms and conditions
of
such award shall remain unchanged (
except
that the
exercise price and the number and nature of Shares issuable upon exercise of
any
such option will be adjusted approximately pursuant to Section 424(a) of the
Code). In the event the Company elects to grant a new Option rather than
assuming an existing option, such new Option may be granted with a similarly
adjusted Exercise Price.
19
.
Adoption
and Stockholder Approval
.
The Plan
shall become effective on the date that it is adopted by the Board (the
"Effective Date"). The Plan shall be approved by the stockholders of the Company
(excluding Shares issued pursuant to this Plan), consistent with applicable
laws, within twelve months before or after the Effective Date. Upon the
Effective Date, the Board may grant Awards pursuant to the Plan;
provided,
however,
that:
(a) no Option may be exercised prior to initial stockholder approval of the
Plan; (b) no Option granted pursuant to an increase in the number of Shares
approved by the Board shall be exercised prior to the time such increase has
been approved by the stockholders of the Company; and (c) in the event that
stockholder approval is not obtained within the time period provided herein,
all
Awards granted hereunder shall be cancelled, any Shares issued pursuant to
any
Award shall be cancelled and any purchase of Shares hereunder shall be
rescinded. After the Company becomes subject to Section 16(b) of the Exchange
Act, the Company will comply with the requirements of Rule 16b-3 (or its
successor), as amended, with respect to stockholder approval.
20
.
Term
of Plan
.
The Plan
will terminate ten (10) years from the Effective Date or, if earlier, the date
of stockholder approval of the Plan.
21
.
Amendment
or Termination of Plan
.
The
Board may at any time terminate or amend the Plan in any respect, including
without limitation amendment of any form of Award Agreement or instrument to
be
executed pursuant to the Plan;
provided,
however,
that the
Board shall not, without the approval of the stockholders of the Company, amend
the Plan in any manner that requires such stockholder approval pursuant to
the
Code or the regulations promulgated thereunder as such provisions apply to
ISO
plans or pursuant to the Exchange Act or Rule 16b-3 (or its successor), as
amended, thereunder. Any amendment, suspension or termination of the Plan shall
not affect Awards already granted, and such Awards shall remain in full force
and effect as if the Plan had not been amended, suspended or terminated, unless
mutually agreed otherwise between the Participant and the Company, which
agreement must be in writing and signed by the Participant and the
Company.
22
.
Nonexclusivity
of the Plan
.
Neither
the adoption of the Plan by the Board, the submission of the Plan to the
stockholders of the Company for approval, nor any provision of the Plan shall
be
construed as creating any limitations on the power of the Board to adopt such
additional compensation arrangements as it may deem desirable, including,
without limitation, the granting of stock options and bonuses otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
23
.
Definitions
.
As used
in the Plan, the following terms shall have the following meanings:
"Affiliate"
means
any corporation that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, another
corporation, where "control" (including the terms "controlled by" and "under
common control with") means the possession, direct or indirect, of the power
to
cause the direction of the management and policies of the corporation, whether
through the ownership of voting securities, by contract or
otherwise.
"Award"
means
any award under the Plan, including any Option, Restricted Stock or Stock
Bonus.
"Award
Agreement"
means,
with respect to each Award, the signed written agreement between the Company
and
the Participant setting forth the terms and conditions of the
Award.
"Board"
means
the Board of Directors of the Company.
"Code"
means
the Internal Revenue Code of 1986, as amended.
"Committee"
means
the committee appointed by the Board to administer the Plan, or if no committee
is appointed, the Board.
"Company"
means
The
Children’s Internet, Inc.,
a
corporation organized under the laws of the State of Nevada, or any successor
corporation.
"Continuous
Status"
means
that the employment, director or consulting relationship with the Company,
any
Parent, any Subsidiary or successor, is not interrupted or terminated.
Continuous Status as an employee, director or consultant shall not be considered
interrupted in the case of (i) any leave of absence approved by the Company
or
(ii) transfers between locations of the Company or between the Company, its
Parent, any Subsidiary, or any successor. A leave of absence approved by the
Company shall include sick leave, military leave, or any other personal leave
approved by an authorized representative of the Company. For purposes of
Incentive Stock Options, no such leave may exceed ninety (90) days, unless
reemployment upon expiration of such leave is guaranteed by statute or contract.
"Disability"
means a
disability, whether temporary or permanent, partial or total, as determined
by
the Committee.
"Disinterested
Person"
means a
director who has not, during the period that person is a member of the Committee
and for one (1) year prior to service as a member of the Committee, been granted
or awarded equity securities pursuant to the Plan or any other plan of the
Company or any Parent, Subsidiary or Affiliate of the Company, except in
accordance with the requirements set forth in Rule 16b-3(c)(2)(i) (and any
successor regulation thereto) as promulgated by the SEC under Section 16(b)
of
the Exchange Act, as such rule is amended from time to time and as interpreted
by the SEC.
"Exchange
Act"
means
the Securities Exchange Act of 1934, as amended.
"Exercise
Price"
means
the price at which a holder of an Option may purchase the Shares issuable upon
exercise of the Option.
"Fair
Market Value"
means,
as of any date, the value of a share of the Company's Common Stock determined
as
follows:
|
|
(
a
)
|
if
such Common Stock is then quoted on the Nasdaq National Market, its
last
reported sale price on the Nasdaq National Market or, if no such
reported
sale takes place on such date, the average of the closing bid and
asked
prices;
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|
|
(
b
)
|
if
such Common Stock is publicly traded and is then listed on a national
securities exchange, the last reported sale price or, if no such
reported
sale takes place on such date, the average of the closing bid and
asked
prices on the principal national securities exchange on which the
Common
Stock is listed or admitted to trading;
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|
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(
c
)
|
if
such Common Stock is publicly traded but is not quoted on the Nasdaq
National Market nor listed or admitted to trading on a national securities
exchange, the average of the closing bid and asked prices on such
date, as
reported by The Wall Street Journal, for the over-the-counter market;
or
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|
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(
d
)
|
if
none of the foregoing is applicable, by the Board of Directors of
the
Company in good faith.
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"Insider"
means an
officer or director of the Company or any other person whose transactions in
the
Company's Common Stock are subject to Section 16 of the Exchange
Act.
"Option"
means an
award of an option to purchase Shares pursuant to Section 5.
"Parent"
means
any corporation (other than the Company) in an unbroken chain of corporations
ending with the Company, if at the time of the granting of an Award under the
Plan, each of such corporations other than the Company owns stock possessing
fifty percent (50%), or more, of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
"Participant"
means a
person who receives an Award under the Plan.
"Plan"
means
this
The
Children’s Internet, Inc. 2007 Equity Incentive Plan
,
as
amended from time to time.
"Restricted
Stock Award"
means an
award of Shares pursuant to Section 6.
"SEC"
means
the Securities and Exchange Commission.
"Securities
Act"
means
the Securities Act of 1933, as amended.
"Shares"
means
shares of the Company's Common Stock reserved for issuance under the Plan,
as
adjusted pursuant to Sections 2 and 15, and any successor security.
"Stock
Bonus"
means an
award of Shares, or cash in lieu of Shares, pursuant to Section 7.
"Subsidiary"
means
any corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if, at the time of granting of the Award, each of
the
corporations other than the last corporation in the unbroken chain owns stock
possessing fifty percent (50%), or more, of the total combined voting power
of
all classes of stock in one of the other corporations in such
claim.
"Termination"
or
"Terminated"
means,
for purposes of the Plan with respect to a Participant, that the Participant
has
ceased to provide services as an employee, director, consultant or adviser,
to
the Company or a Parent, Subsidiary or Affiliate of the Company, except in
the
case of sick leave, military leave, or any other leave of absence approved
by
the Committee;
provided,
however,
that
such leave is for a period of not more than ninety (90) days, or reinstatement
upon the expiration of such leave is guaranteed by contract or statute. The
Committee shall have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "Termination Date").
Exhibit
B
Option
Agreement
THE
CHILDREN’S INTERNET, INC.
STOCK
OPTION AGREEMENT
Pursuant
to The Children’s Internet, Inc. 2007 Equity Incentive
Plan
NOTICE
OF STOCK OPTION GRANT
Jane
Doe:
100
Main
Street
Anywhere,
CA 94110
You
have
been granted an option to purchase shares of Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement,
as
follows:
|
Grant
Number
|
|
|
_
|
|
|
Date
of Grant
|
|
|
_______
|
|
|
Vesting
Commencement Date
|
|
|
_______
|
|
|
Exercise
Price per Share
|
|
$
|
_______
|
|
|
Total
Number of Shares Granted
|
|
|
_______
(the “
Shares
”
)
|
|
|
Total
Exercise Price
|
|
$
|
_______
|
|
|
Type
of Option
|
|
|
_______
|
|
|
Term/Expiration
Date:
|
|
|
_______
|
|
AGREEMENT
|
1.
|
Vesting
Schedule
:
Subject to other limitations set forth in this Agreement, and subject
to
the Optionee's right to exercise the Option prior to vesting as set
forth
herein, this Option may be exercised, in whole or in part, in accordance
with the following schedule:
|
Shares
will vest as follows: Shares shall vest at the monthly rate of ____ , on the
day
of the month corresponding to the Vesting Commencement Date (or if there is
no
corresponding day in any such month, on the last day of such month), until
fully
vested, unless vesting ceases as set forth in the Plan or this Stock Option
Agreement, and subject to the Optionee's right to exercise the Option prior
to
full vesting as set forth herein. If the Fair Market Value on the date of grant
of the shares that vest in any one year hereunder exceeds $100,000, then to
the
extent of the Shares covered thereby in excess of the foregoing limitation,
this
Option shall constitute a Non-Qualified Stock Option, regardless of its
designation above.
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2.
|
Termination
Period.
This Option may be exercised for
Sixty
days after termination of the Optionee's employment or consulting
relationship, or such longer period as may be applicable upon death
or
disability of Optionee as provided in the Agreement ("
Termination
Period
").
In the event of the Optionee's change in status from employee to
consultant or consultant to employee, this Option Agreement shall
remain
in effect; provided, however, that in the event of a change in status
from
employee to consultant, Optionee’s Incentive Stock Option shall cease to
be treated as an Incentive Stock Option and shall be treated as a
Non-Qualified Stock Option on the first day following the Sixty-day
period
after such change in status. In no event shall this Option be exercised
later than the Term/Expiration Date as provided
above.
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|
3.
|
Grant
of Option
.
THE
CHILDREN’S INTERNET, INC., a Nevada corporation (the “
Company
”),
hereby grants to the Optionee named in the Notice of Stock Option
Grant
(the “
Optionee
”),
an option (the “
Option
”)
to purchase the total number of shares of Common Stock (the “
Shares
”)
set forth in the Notice of Stock Option Grant, at the exercise price
per
share set forth in the Notice of Stock Option Grant (the “
Exercise
Price
”)
subject to the terms, definitions and provisions of the Company’s The
Children’s Internet, Inc. 2007 Equity Incentive Plan (the “
Plan
”)
adopted by the Company, which is incorporated herein by reference.
Unless
otherwise defined herein, the terms defined in the Plan shall have
the
same defined meanings in this Option
Agreement.
|
If
designated in the Notice of Stock Option Grant as an Incentive Stock Option,
this Option is intended to qualify as an Incentive Stock Option as defined
in
Section 422 of the Internal Revenue Code of 1986, as amended (the
"
Code
).
Nevertheless, to the extent that it exceeds the one hundred thousand dollar
($100,000) annual vesting limitation of Section 422(d) of the Code, this Option
shall be treated as a Non-Qualified Stock Option.
a.
Right
to Exercise
.
This
Option shall be exercisable during its term in accordance with the Vesting
Schedule set out in the Notice of Stock Option Grant and with the applicable
provisions of the Plan and this Option Agreement. In the event of termination
of
Optionee’s Continuous Status as an
employee
,
director or
consultant
,
this
Option shall be exercisable in accordance with the applicable provisions of
the
Plan and this Option Agreement. This Option shall be subject to the provisions
of Section 18 of the Plan relating to the exercisability or termination of
the
Option in the event of certain corporate transactions such as mergers,
reorganizations and the like.
b.
Method
of Exercise
.
This
Option shall be exercisable only by delivery of an Exercise Notice (attached
as
Exhibit A) which shall state the election to exercise the Option, the whole
number of Shares in respect of which the Option is being exercised, such other
representations and agreements as to the holder’s investment intent with respect
to such Shares and such other provisions as may be required by the
Administrator. Such Exercise Notice shall be signed by the Optionee and shall
be
delivered in person or by certified mail to the Secretary of the Company
accompanied by payment of the Exercise Price. The Option shall be deemed to
be
exercised upon receipt by the Company of such written notice accompanied by
the
Exercise Price
.
No
Shares will be issued pursuant to the exercise of the Option unless such
issuance and such exercise shall comply with all Applicable Laws. Assuming
such
compliance, for income tax purposes, the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
c.
Taxes
.
No
Shares will be issued to the Optionee or other person pursuant to the exercise
of the Option until the Optionee or other person has made arrangements
acceptable to the Administrator for the satisfaction of foreign, federal, state
and local income and employment tax withholding obligations.
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5.
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Method
of Payment
.
Payment of the Exercise Price shall be by any of the following, or
a
combination thereof, at the election of the Optionee, provided, however,
that such exercise method does not then violate an Applicable
Law:
|
(a)
cash;
(b)
check;
(c)
delivery of a properly executed Exercise Notice together with such other
documentation as the Administrator and the broker, if applicable, shall require
to effect an exercise of the Option and delivery to the Company of the sale
or
loan proceeds required to pay the Exercise Price.
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(d)
|
If
at the time of exercise the Company's Common Stock is publicly traded
and
quoted regularly in the Wall Street Journal, payment of the exercise
price, to the extent permitted by applicable statutes and regulations,
may
be made by delivery of already owned shares of Common Stock, or a
combination of cash and already owned Common Stock. Such Common Stock
shall be valued at its Fair Market Value (as defined in the Plan)
on its
date of exercise, and (ii) if originally acquired from the Company,
must
have been owned by Optionee for at least six months and be owned
free and
clear of any liens, claims, encumbrances or security
interests.
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|
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(e)
|
(1)
In the event that the Option is exercised immediately prior to the
closing
by the Company of a "
corporate
transaction
"
as defined in Section 18.1 of the Plan, or the closing of the initial
public offering of the Company’s Common Stock pursuant to a registration
statement under the Securities Act (the “
Initial
Public Offering
”),
in lieu of exercising the Option in the manner provided above, the
Optionee may elect to receive shares equal to the value of the Option
(or
the portion thereof being canceled) by surrender of this Option at
the
principal office of the Company together with notice of such election
in
which event the Company shall issue to holder a number of shares
of Common
Stock computed using the following
formula:
|
X
=
Y
(A -
B)
A
Where
X
= The
number of shares of Common Stock to be issued to the Participant.
Y
= The
number of shares of Common Stock purchasable under the Option (at the date
of
such calculation).
A
= The
fair market value of one share of Common Stock (at the date of such
calculation).
B
= The
Purchase Price (as adjusted to the date of such calculation).
(2)
For
purposes of this Section (f), the fair market value of the Company’s Common
Stock shall be the price per share which the Company receives for a single
share
of Common Stock in the corporate transaction, or, if the Option is exercised
in
connection with the Initial Public Offering, the fair market value of the
Company’s Common Stock shall be equal to the mid-price of the range of prices
set forth in the registration statement relating to the Initial Public Offering
or, if a subsequent amendment thereto sets forth a different range of prices
(other than a “pricing amendment” setting forth a single, final price) then the
mid-price of the range of prices set forth in such amendment.
(f)
The
Optionee may elect to exchange all or some of the Shares subject to the Option
for shares of Common Stock of the Company using the Net Issue Exercise method.
If the Optionee elects to exchange all or some of the Shares subject to the
Option using the Net Issue Exercise method, as provided herein, the Optionee
shall tender to the Company written notice of Optionee’s election to exchange
all or some of the Shares subject to the Option and the number of Shares under
the Option the Optionee wished to exchange and the Company shall issue to the
Optionee the number of Shares computed using the following formula:
X=(Y(A-B))/A
Where:
X=
the
number of Shares to be issued
Y=
the
number of Shares purchasable under the Option being exchanged.
A=
the
Fair Market Value of one share of the Common Stock
B=
Purchase Price as defined herein.
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6.
|
Optionee's
Representations
.
By receipt of this Option, by its execution, and by its exercise
in whole
or in part, Optionee represents to the Company
that:
|
a.
Optionee acknowledges that both this Option and any Shares purchased upon its
exercise are securities, the issuance by the Company of which requires
compliance with federal and state securities laws;
b.
Optionee acknowledges that these securities are made available to Optionee
only
on the condition that Optionee makes the representations contained in this
Section to the Company;
c.
Optionee has made a reasonable investigation of the affairs of the Company
sufficient to be well informed as to the rights and the value of these
securities;
d.
Optionee understands that the securities have not been registered under the
Securities Act of 1933, as amended, (the "
Act
"),
or
any applicable state law in reliance upon one or more specific exemptions
contained in the Act and any applicable state law, which may include reliance
on
Rule 701 promulgated under the Act, if available, or which may depend upon
(i)
Optionee's bona fide investment intention in acquiring these securities;
(ii) Optionee's intention to hold these securities in compliance with
federal and state securities laws; (iii) Optionee having no present intention
of
selling or transferring any part thereof (recognizing that the Option is not
transferable) in violation of applicable federal and state securities laws;
and
(iv) there being certain restrictions on transfer of the Shares subject to
the
Option;
e.
Optionee understands that the Shares subject to this Option, in addition to
other restrictions on transfer, must be held indefinitely unless subsequently
registered under the Act and any applicable state law, or unless an exemption
from registration is available; that Rule 144, the usual exemption from
registration under the Act, is only available after the satisfaction of certain
holding periods and in the presence of a public market for the Shares; that
there is no certainty that a public market for the Shares will exist, and that
otherwise it will be necessary that the Shares be sold pursuant to another
exemption from registration which may be difficult to satisfy; and
f.
Optionee understands that the certificate representing the Shares will bear
a
legend prohibiting their transfer in the absence of their registration or the
opinion of counsel for the Company that registration is not
required.
7.
Restrictions
on Exercise
.
This
Option, if an Incentive Stock Option, may not be exercised until such time
as
the Plan has been approved by the stockholders of the Company. In addition,
this
Option may not be exercised if the issuance of the Shares subject to the Option
upon such exercise would constitute a violation of any Applicable
Laws.
8.
Termination
of Relationship
.
In the
event the Optionee’s Continuous Status as an
employee
,
director or
consultant
terminates, the Optionee may, to the extent otherwise so entitled at the date
of
such termination (the “
Termination
Date
”),
exercise this Option during the Termination Period. Except as provided in the
following Sections concerning death and disability, to the extent that the
Optionee was not entitled to exercise this Option on the Termination Date,
or if
the Optionee does not exercise this Option within the Termination Period, the
Option shall terminate.
9.
Disability
of Optionee
.
In the
event the Optionee’s Continuous Status as an
employee
,
director or
consultant
terminates as a result of his or her disability, the Optionee may, but only
within twelve (12) months from the Termination Date (and in no event later
than
the Term/Expiration Date), exercise the Option to the extent otherwise entitled
to exercise it on the Termination Date; provided, however, that if such
disability is not a “disability” as such term is defined in Section 22(e)(3) of
the Code and the Option is an Incentive Stock Option, such Incentive Stock
Option shall cease to be treated as an Incentive Stock Option and shall be
treated as a Non-Qualified Stock Option on the ninety-first (91st) day
following the Termination Date. To the extent that the Optionee was not entitled
to exercise the Option on the Termination Date, or if the Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
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10.
|
Death
of Optionee
.
In the event of the Optionee’s death, the Option may be exercised at any
time within twelve (12) months following the date of death (and in
no
event later than the Term/Expiration Date), by the Optionee’s estate or by
a person who acquired the right to exercise the Option by bequest
or
inheritance, but only to the extent the Optionee could exercise the
Option
at the date of death.
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|
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11.
|
Transferability
of Option
.
This Option, if an Incentive Stock Option, may not be transferred
in any
manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of the Optionee only by
the
Optionee. This Option, if a Non-Qualified Stock Option, may be transferred
by the Optionee only in a manner and to the extent acceptable to
the
Administrator as evidenced by a writing signed by the Administrator
on
behalf of the Company and the Optionee consenting to such transfer,
which
consent may be withheld in the sole discretion of the Administrator.
The
terms of this Option shall be binding upon the executors, administrators,
heirs and successors of the
Optionee.
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12.
|
Term
of Option
.
This Option may be exercised only within the term set out in the
Notice of
Stock Option Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option
Agreement.
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|
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13.
|
Tax
Consequences
.
Set forth below is a brief summary as of the date of this Option
Agreement
of some of the federal tax consequences of exercise of this Option
and
disposition of the Shares.
THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS
ARE
SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING
THIS OPTION OR DISPOSING OF THE
SHARES.
|
a.
Incentive
Stock Options
.
i.
Exercise
of Incentive Stock Option
.
If this
Option qualifies as an Incentive Stock Option, there will be no regular federal
income tax liability upon the exercise of the Option, although the excess,
if
any, of the Fair Market Value of the Shares on the date of exercise over the
Exercise Price will be treated as an adjustment to alternative minimum taxable
income for federal tax purposes and may subject the Optionee to the alternative
minimum tax in the year of exercise.
ii.
Exercise
of Incentive Stock Option Following Disability
.
If the
Optionee’s Continuous Status as an employee, director or consultant terminates
as a result of disability that is not total and permanent disability as defined
in Section 22(e)(3) of the Code, to the extent permitted on the date of
termination, the Optionee must exercise an Incentive Stock Option within 90
days
of such termination for the Incentive Stock Option to be qualified as an
Incentive Stock Option.
iii.
Disposition
of Shares
.
In the
case of an Incentive Stock Option, if Shares received on exercise of the Option
are held for at least one year after receipt of the Shares and for at least
two
years after the Date of Grant, any gain realized on disposition of the Shares
would be treated as long-term capital gain for federal income tax purposes.
If
Shares purchased under an Incentive Stock Option are disposed of within the
one-year or two-year periods described above, then under federal tax law any
gain realized on such disposition would be treated as compensation income
taxable at ordinary income rates to the extent of the difference between the
Exercise Price and the lesser of (i) the Fair Market Value of the Shares on
the date of exercise or (ii) the sale price of the Shares.
b.
Non-Qualified
Stock Options
.
i.
Exercise
of Non-Qualified Stock Options
.
There
may
be a regular federal income tax liability upon the exercise of a Non-Qualified
Stock Option. The Optionee would generally recognize compensation income
(taxable at ordinary income tax rates) equal to the excess, if any, of the
Fair
Market Value of the Shares on the date of exercise over the Exercise Price.
If
Optionee is an employee or a former employee, the Company will be required
to
withhold from Optionee’s compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
ii.
Disposition
of Shares
.
In
the
case of a Non-Qualified Stock Option, if Shares are held for more than 12
months, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
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14.
|
Transfer
Restrictions
|
a.
Restriction
on Transfer
.
Upon
exercise of the Option, Optionee shall not transfer, assign, encumber, or
otherwise dispose of any of the Shares which are subject to any restrictions
or
repurchase rights contained herein.
Subject
to subparagraph (b) below, such restrictions on transfer (other than those
required by the Company to comply with applicable law), however, shall
not
be
applicable to (i) a transfer by gift of the Shares made to the Optionee's spouse
or children, including adopted children, or to a trust for the exclusive benefit
of the Optionee or the Optionee's spouse or children, or (ii) a transfer of
title to the Shares effected pursuant to the Optionee's will or the laws of
intestate succession.
b.
Transferee
Obligations
.
Each
person (other than the Company) to whom the Shares are transferred by means
of
one of the permitted transfers specified in subparagraph (a) above must, as
a
condition precedent to the validity of such transfer, be required to acknowledge
in writing to the Company that such person is bound by the provisions of this
Agreement to the same extent that such shares would be so subject if retained
by
the Optionee.
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15.
|
Right
of First Refusal
|
a.
Grant
.
The
Company is hereby granted the right of first refusal (the "
First
Refusal Right
"),
exercisable in connection with any proposed sale or other transfer of the
Shares. For purposes of this Section, the term "
transfer
"
shall
include any assignment, pledge, encumbrance or other disposition for value
of
the Shares intended to be made by the Owner, but shall not include any of the
transfers expressly permitted above.
b.
Notice
of Intended Disposition
.
In the
event the Owner desires to accept a bona fide third-party offer for any or
all
of the Shares (the shares subject to such offer to be hereinafter called, for
purposes of this Section, the "
Target
Shares
"),
the
Owner shall promptly (i) deliver to the Secretary of the Company written notice
(the "
Disposition
Notice
")
of the
offer and the basic terms and conditions thereof, including the proposed
purchase price, and (ii) provide satisfactory proof that the disposition of
the
Target Shares to the third-party offeror would not contravene the provisions
of
this Agreement.
c.
Exercise
of Right
.
The
Company (or its assignees) shall, for a period of
sixty
(60) days following receipt of the Disposition Notice, have the right to
repurchase all or any portion of the Target Shares specified in the Disposition
Notice upon substantially the same terms and conditions specified therein.
Such
right shall be exercisable by written notice (the "
Exercise
Notice
")
delivered to the Owner prior to the expiration of the sixty (60) day exercise
period. The Company (or its assignees) shall effect the repurchase of the Target
Shares, including payment of the purchase price, not more than five (5) business
days after delivery of the Exercise Notice; and at such time the Owner shall
deliver to the Company the certificates representing the Target Shares to be
repurchased, properly endorsed for transfer (unless already in the possession
of
the Company). The Target Shares so purchased shall thereupon be canceled and
cease to be issued and outstanding shares of the Company's Common
Stock.
d.
Non-Cash
Consideration
.
Should
the purchase price specified in the Disposition Notice be payable in property
other than cash or evidences of indebtedness, the Company (or its assignees)
shall have the right to pay the purchase price in the form of cash equal in
amount to the value of such property as determined by the Company in good faith.
If the Owner notifies the Company in writing that it does not agree with the
valuation proposed by the Company within
fifteen
days after the Company's proposed valuation, the valuation shall be made in
the
manner Fair Market Value is determined hereunder by an appraiser of recognized
standing selected by the Owner and the Company (or its assignees), or, if they
cannot agree on an appraiser within fifteen days after the Company's receipt
of
the Disposition Notice, each shall select an appraiser of recognized standing
and the two appraisers shall designate a third appraiser of recognized standing,
whose appraisal shall be determinative of such value. The cost of such appraisal
shall be shared equally by the Owner and the Company. The closing shall then
be
held on the latter of (i) the fifth business day following delivery of the
Exercise Notice or (ii) the 15th day after such cash valuation shall have been
made.
e.
Non-Exercise
of Right
.
In the
event the Exercise Notice is not given to the Owner within
sixty
(60) days following the date of the Company's receipt of the Disposition Notice,
the Owner shall have a period of thirty (30) days thereafter, in which to sell
or otherwise dispose of any or all of the Target Shares upon terms and
conditions (including the purchase price) no more favorable to the third-party
purchaser than those specified in the Disposition Notice; provided that any
such
sale or disposition must not the restrictions imposed hereunder to comply with
applicable law.
f.
Third
Party Obligations
.
The
third-party purchaser shall acquire the Target Shares
free
and
clear of all the terms and provisions of this Agreement (including the Company's
First Refusal Right hereunder). If the Owner does not sell or otherwise dispose
of the Target Shares within the specified sixty day period, the Company's First
Refusal Right shall continue to apply to any subsequent disposition of the
Target Shares by the Owner until such right lapses in accordance with Section
h
below.
g.
Recapitalization
.
In the
event of any stock dividend, stock split, recapitalization or other transaction
affecting the Company’s outstanding Common Stock as a class effected without
receipt of consideration, then any new, substituted or additional securities
or
other property which is by reason of such transaction distributed with respect
to the Shares shall be immediately subject to the Company's First Refusal Right
hereunder, but only to the extent the Shares are at the time covered by such
right.
h.
Lapse
.
The
First Refusal Right under this Article shall lapse and cease to have effect
upon
the
earliest to occur of (i) the determination by the Company's Board of Directors
that a public market exists for the outstanding shares of the Company's Common
Stock, or (ii) the first sale of Common Stock of the Company to the general
public pursuant to a registration statement filed with and declared effective
by
the Securities and Exchange Commission under the Act.
For
purposes of this Option, the term “
Owner
”
shall
include Optionee and all subsequent holders of the Shares who derive their
chain
of ownership through a transfer from Optionee expressly permitted
hereunder.
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16.
|
Repurchase
Right
.
Notwithstanding any other provision hereof, the Optionee may elect
to
exercise all but not less than all remaining Shares under the Option,
whether or not vested, subject to the Repurchase Right set forth
in the
form of exercise notice, provided however, that Optionee may not
elect to
exercise any unvested portion of the Option after Optionee’s Continuous
Status as an employee, director or consultant is terminated.
Any
Shares purchased under this Option are subject to the terms of any
repurchase right set forth in the form of exercise notice attached
hereto.
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17.
|
Market
Standoff
.
In connection with
the
initial underwritten public offering by the Company of its equity
securities pursuant to an effective registration statement filed
under the
Act, a person shall not sell, or make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise
dispose or transfer for value or otherwise agree to engage in any
of the
foregoing transactions with respect to, any Shares issued pursuant
to an
Option granted under the Plan without the prior written consent of
the
Company or its underwriters. The Company and its underwriters may
request
such additional written agreements in furtherance of such standoff
in the
form reasonably satisfactory to the Company and such underwriters.
Any
Shares issued under this Option shall be stamped or otherwise imprinted
with a legend substantially in the following
form:
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THE
SECURITIES REPRESENTED BY THIS INSTRUMENT ARE SUBJECT TO CERTAIN LOCK-UP
RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN STOCK OPTION AGREEMENT
BETWEEN THE ORIGINAL HOLDER HEREOF AND THE COMPANY.
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18.
|
Entire
Agreement: Governing Law
.
The Plan is incorporated herein by reference. Capitalized terms in
this
Option Agreement shall, unless otherwise specifically indicated,
have the
same meanings assigned to such terms in the Plan. The Plan and this
Option
Agreement constitute the entire agreement of the parties with respect
to
the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and the Optionee with
respect
to the subject matter hereof, and may not be modified adversely to
the
Optionee’s interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by
California
law as it applies to contracts entered into and to be performed entirely
within that state.
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19.
|
Headings
.
The captions used in this Option are inserted for convenience and
shall
not be deemed a part of this Option for construction or
interpretation.
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|
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20.
|
Interpretation
.
Any dispute regarding the interpretation of this Option Agreement
shall be
submitted by the Optionee or by the Company forthwith to the Board
or the
Administrator that administers the Plan, which shall review such
dispute
at its next regular meeting. The resolution of such dispute by the
Board
or the Administrator shall be final and binding on all persons.
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|
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|
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THE
CHILDREN’S INTERNET, INC.
|
|
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|
By:
|
|
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|
|
|
|
OPTIONEE
ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF
IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S THE CHILDREN’S INTERNET, INC.
2007 EQUITY INCENTIVE PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL
CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR
CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE’S
RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S EMPLOYMENT OR CONSULTANCY
AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee
acknowledges receipt of a copy of the Plan and represents that he is familiar
with the terms and provisions thereof, and hereby accepts this Option Agreement
subject to all of the terms and provisions thereof. Optionee has reviewed the
Plan and this Option Agreement in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option Agreement and fully
understands all provisions of the Option Agreement. Optionee hereby agrees
to
accept as binding, conclusive and final all decisions or interpretations of
the
Administrator upon any questions arising under the Plan or this Option
Agreement. Optionee further agrees to notify the Company upon any change in
the
residence address indicated below.
Optionee
acknowledges that this Option Agreement is in lieu of and supercedes and
replaces all previous commitments, undertakings or promises with regard to
the
option granted hereby
.
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Dated: _____________________
|
Signed:
|
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Jane
Doe
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Residence
Address:
100
Main Street
Anywhere,
CA 94110
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EXHIBIT
A
THE
CHILDREN’S INTERNET, INC.
2007
Equity Incentive Plan
EXERCISE
NOTICE
THE
CHILDREN’S INTERNET, INC.
5000
Hopyard Road, Suite 320
Pleasanton,
CA 94588
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1.
|
Exercise
of Option
.
Effective as of today, ____
,
______________, the undersigned, Jane Doe ("
Purchaser
"),
hereby elects to purchase _____
(__
)
shares (the "
Shares
")
of the Common Stock of
THE
CHILDREN’S INTERNET, INC., a Nevada corporation (the "
Company
"),
under and pursuant to The Children’s Internet, Inc. 2007 Equity Incentive
Plan (the "
Plan
"),
and the Stock Option Agreement dated ____________, 2007 (the "
Option
Agreement
").
The purchase price per share for the Shares shall be $____for an
aggregate
purchase price of $
,
as required by the Option
Agreement.
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2.
|
Delivery
of Payment
.
Purchaser herewith delivers to the Company the full purchase price
for the
Shares. I hereby elect to pay the exercise price by the method marked
below:
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a.
________ Cash
b.
________ Check
c.
_________ Same day exercise and sale
d.
_________ Net issue exercise
e.
_________ Delivery of already owned shares of Common Stock
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3.
|
Broker
Instructions.
In
the event I have elected to exercise options via the same day exercise
and
sale method, you are hereby authorized to instruct
________
(the "
Broker
")
to accept the proceeds deriving from the sale of the Shares, and
to take
the following actions: (i) to deduct from the proceeds of the sale
any
Company expenses; (ii) to deduct from the proceeds any tax withholding
requested by the Company and to request in writing from the Company
a
statement of the tax amounts to be withheld, if no request has been
given
by the Company; (iii) to deliver the above amounts so deducted to
the
Company; and (iv) to deliver the remaining proceeds to me as I shall
direct the Broker.
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These
instructions shall be construed as authorizing the Broker and the Company to
take any other actions reasonably necessary to effect the purposes hereof and
the Broker and the Company may rely upon any statements and undertakings made
herein by the undersigned, as if said statements and undertakings were made
directly to the Broker and the Company.
I
further
acknowledge that I shall bear sole responsibility for any commissions and fees
relating to the performance of these instructions by the Broker or the Company,
and any other banking activities and will, upon demand, indemnify and defend
the
Broker or the Company against any amounts which may be owing in this
regard.
a.
Grant.
The
Company is hereby granted the right (the "
Repurchase
Right
"),
exercisable at any time during the ninety (90)-day period following the date
the
Optionee’s Continuous Status as an employee, director or consultant ceases for
any reason, to repurchase at the Purchase Price all or any portion of the Shares
in which the Optionee has not acquired a vested interest in accordance with
the
vesting provisions hereof (such shares to be hereinafter called the
"
Unvested
Shares
").
b.
Exercise
of the Repurchase Right
.
The
Repurchase Right shall be exercisable by written notice delivered to the
Optionee prior to the expiration of the
ninety
(90)-day period after the Optionee’s Continuous Status as an employee, director
or consultant ceases for any reason. The notice shall indicate the number of
Unvested Shares to be repurchased and the date on which the repurchase is to
be
effected, such date to be not more than thirty (30) days after the date of
notice. The Company shall, concurrently with the receipt of the stock
certificates from escrow in accordance herewith, pay to Optionee in cash or
cash
equivalents (including the cancellation of any purchase-money indebtedness),
an
amount equal to the Purchase Price previously paid for the Unvested Shares
which
are to be repurchased by the Company.
c.
Termination
of the Repurchase Right/Vesting
.
The
Repurchase Right shall terminate with respect to any Shares for which it is
not
timely exercised hereunder.
In
addition, the Repurchase Right shall terminate, and cease to be exercisable,
with respect to any and all Shares in which Optionee vests in accordance with
the option vesting schedule set forth herein. Accordingly, Optionee shall
acquire a vested interest in, and the Repurchase Right shall lapse with respect
to, the Shares at such time as they would otherwise have vested
hereunder.
d.
Fractional
Shares
.
No
fractional shares shall be repurchased by the Company. Accordingly should the
Repurchase Right extend to a fractional share at the time the Optionee’s
Continuous Status as an employee, director or consultant ceases, then such
fractional share shall be added to any fractional share in which the Optionee
is
at such time vested in order to make one whole vested share no longer subject
to
the Repurchase Right.
e.
Additional
Shares or Substituted Securities
.
In the
event of any stock dividend, stock split, recapitalization, or other change
affecting the Company's outstanding Common Stock as a class effected without
receipt of consideration, then any new, substituted, or additional securities
or
other property (including money paid other than as a regular cash dividend)
which is by reason of any such transaction distributed with respect to the
Shares shall be immediately subject to the Repurchase Right, but only to the
extent the Shares are at the time covered by such right. Appropriate adjustments
to reflect the distribution of such securities or property shall be made to
the
number of Shares hereunder and to the price per share to be paid upon the
exercise of the Repurchase Right in order to reflect the effect of any such
transaction upon the Company's capital structure;
provided
.
however, that the aggregate purchase price shall remain the same.
f.
Corporate
Transaction
In the
event of any of the following transactions (a "
Corporate
Transaction
"):
(i)
a
merger or acquisition in which the Company is not the surviving entity, except
for a transaction the principal purpose of which is to change the State in
which
the Company is incorporated;
(ii)
the
sale, transfer or other disposition of all or substantially all of the assets
of
the Company; or
(iii)
any
reverse merger in which the Company is the surviving entity but in which fifty
percent (50%) or more of the Company's outstanding voting stock is transferred
to holders different from those who held the stock immediately prior to such
merger;
then
the
Repurchase Right shall automatically lapse in its entirety, and the Optionee
shall acquire a vested interest in all the Shares, upon the consummation of
such
Corporate Transaction, unless the acquiror of such assets or capital stock
or
successor corporation agrees that all consideration paid to or exchanged for
any
Unvested Shares shall continue to be subject to the option vesting schedule
set
forth herein based on the Optionee's Continuous Status as an employee, director
or consultant with such acquiror or successor corporation on the same terms
and
conditions as set forth herein.
g.
Assignment
.
In the
event the Company for any reason elects not to exercise the Repurchase Right
pursuant to this Article, the Company may assign it, provided that the
Repurchase Right shall not extend beyond the
ninety
(90)-day period described herein. In the event that the Company and such
assignees do not elect to exercise the Repurchase Right as to all of the shares
of stock subject to it, the Repurchase Right shall expire as to all shares
which
the Company and such assignees have not elected to purchase.
a.
Deposit
.
Upon
issuance, the certificate for any shares
subject
to repurchase rights hereunder shall be deposited in escrow with the Company
to
be held in accordance with the provisions of this Section. Such deposited
certificate shall be accompanied by a duly executed Assignment Separate from
Certificate in the form of Exhibit A attached hereto. The deposited certificate,
together with any other assets or securities from time to time deposited with
the Company pursuant to the requirements of this Agreement, shall remain in
escrow until such time or times as the certificate (or other assets and
securities) shall be released or otherwise surrendered for cancellation in
accordance herewith.
b.
Recapitalization
.
Any
cash dividends on the Shares (or other securities at the time held in escrow)
shall be paid directly to the Purchaser and shall not be held in escrow.
However, in the event of any stock dividend, stock split, recapitalization,
or
other change affecting the Company's outstanding Common Stock as a class
effected without receipt of consideration, any new, substituted, or additional
securities or other property which is by reason of such event distributed with
respect to the Shares shall be immediately delivered to the Company to be held
in escrow under this Section 6, but only to the extent the Shares are at the
time subject to the escrow requirements of paragraph 6.(a).
c.
Release/Surrender
.
The
Shares, together with any other assets or securities held in scrow hereunder,
shall be subject to the following terms and conditions relating to their release
from escrow or their surrender to the Company for repurchase and
cancellation:
(i)
Should the Company (or its assignees) elect to exercise the Repurchase Right
with respect to any Unvested Shares, then the escrowed certificates for such
Unvested Shares (together with any other assets or securities issued with
respect thereto) shall be delivered to the Company for cancellation,
concurrently with the payment to the Purchaser, in cash or cash equivalent
(including the cancellation of any purchase-money indebtedness), of an amount
equal to the aggregate Purchase Price for such Unvested Shares, and the
Purchaser shall cease to have any further rights or claims with respect to
such
Unvested Shares (or other assets or securities).
(ii)
As
the
interest of the Purchaser in the Shares (or any other assets or securities
issued with respect thereto) vests in accordance with the provisions of the
Option Agreement, the certificates for such vested Shares (as well as all other
vested assets and securities) shall be released from escrow and delivered to
the
Purchaser upon the request of the Purchaser, but in no event more frequently
than every 12 months.
(iii)
All
Shares (or other assets or securities) released from escrow in accordance with
the above provisions shall nevertheless remain subject to all other restrictions
applicable thereto (whether under this Agreement or otherwise), until such
provisions terminate in accordance with their terms.
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6.
|
Section
83(b) Election
.
The Purchaser understands that under Section 83 of the Internal Revenue
Code of 1986, as amended (the "
Code
"),
the excess of the fair market value of the Shares on the date any
forfeiture restrictions applicable to such shares lapse over the
Purchase
Price paid for such shares will be reportable as ordinary income
at that
time. For this purpose, the term "
forfeiture
restrictions
"
includes the right of the Company to repurchase a portion of the
Shares
pursuant to this Agreement. Purchaser understands, however, that
Purchaser
may elect to be taxed at the time such Shares are acquired hereunder,
rather than when and as such Shares cease to be subject to such forfeiture
restrictions, by filing an election under Section 83(b) of the Code
with
the Internal Revenue Service within thirty (30) days after the date
of
this Agreement. Even if the fair market value of the Shares at the
date of
this Agreement equals the Purchase Price paid (and thus no tax is
payable), the election must be made to avoid adverse tax consequences
in
the future. The form for making this election is attached as Exhibit
B
hereto. Purchaser understands that failure to make this filing within
the
thirty (30) day period will result in the recognition of ordinary
income
by the Purchaser as the forfeiture restrictions lapse. PURCHASER
ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY, AND NOT
THE
COMPANY'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(b), EVEN IF
PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS
FILING
ON HIS/HER BEHALF.
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7.
|
Representations
of Purchaser
.
Purchaser acknowledges that Purchaser has received, read and understood
the Plan and the Option Agreement, and agrees to abide by and be
bound by
their terms and conditions.
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8.
|
Rights
as Stockholder
.
Until the issuance (as evidenced by the appropriate entry on the
books of
the Company or of a duly authorized transfer agent of the Company)
of the
stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a Stockholder shall exist with respect
to
the Shares, notwithstanding the exercise of the Option. In the event
Purchaser has not sold the Shares in a same day exercise and sale,
a share
certificate for the number of Shares so acquired shall be issued
to the
Purchaser as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the
record
date is prior to the date the stock certificate is issued, except
as
provided in the Plan.
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9.
|
Tax
Consultation; Payment of Taxes
.
Purchaser understands that Purchaser may suffer adverse tax consequences
as a result of Purchaser's purchase or disposition of the Shares.
Purchaser represents that Purchaser has consulted with any tax consultants
Purchaser deems advisable in connection with the purchase or disposition
of the Shares and that Purchaser is not relying on the Company for
any tax
advice.
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Purchaser
agrees to satisfy all applicable federal, state and local income and employment
tax withholding obligations with respect to the exercise of the Option and,
if
applicable, the sale of the Shares and will, upon demand, indemnify and defend
the Company and, if applicable, the Broker, against any amounts which may be
owing in this regard. Purchaser also agrees, as partial consideration for the
designation of the Option as an Incentive Stock Option, if applicable, to notify
the Company in writing within thirty (30) days of any disposition of any
Shares acquired by exercise of the Option if such disposition occurs within
two (2) years from the Date of Grant or within one (1) year from the
date the Shares were transferred to Purchaser. If the Company is required to
satisfy any federal, state or local income or employment tax withholding
obligations as a result of such an early disposition, Purchaser agrees to
satisfy the amount of such withholding in a manner that the Administrator
prescribes.
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10.
|
Entire
Agreement
.
The Plan and Option Agreement are incorporated herein by reference.
This
Agreement, the Plan and the Option Agreement constitute the entire
agreement of the parties and supersede in their entirety all prior
undertakings and agreements of the Company and Purchaser with respect
to
the subject matter hereof
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11.
|
Successors
and Assigns
.
The Company may assign any of its rights under this Exercise Notice
to
single or multiple assignees, and this Agreement shall inure to the
benefit of the successors and assigns of the Company. This Exercise
Notice
shall be binding upon Purchaser and his or her heirs, executors,
administrators, successors and
assigns.
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12.
|
Headings
.
The captions used in this Agreement are inserted for convenience
and shall
not be deemed a part of this Agreement for construction or interpretation.
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|
13.
|
Interpretation
.
Any dispute regarding the interpretation of this Exercise Notice
shall be
submitted by Purchaser or by the Company forthwith to the Company’s Board
of Directors or the Administrator that administers the Plan, which
shall
review such dispute at its next regular meeting. The resolution of
such a
dispute by the Board or Administrator shall be final and binding
on all
persons.
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14.
|
Governing
Law; Severability
.
This Agreement shall be governed by and construed in accordance with
the
laws of the State of
California
as it applies to contracts entered into and to be performed entirely
within that state. Should any provision of this Agreement be determined
by
a court of law to be illegal or unenforceable, the other provisions
shall
nevertheless remain effective and shall remain enforceable.
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15.
|
Notices
.
Any notice required or permitted hereunder shall be given in writing
and
shall be deemed effectively given upon personal delivery or upon
deposit
in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below
beneath its signature, or to such other address as such party may
designate in writing from time to time to the other
party.
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16.
|
Further
Instruments
.
The parties agree to execute such further instruments and to take
such
further action as may be reasonably necessary to carry out the purposes
and intent of this agreement.
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Submitted
by:
|
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Accepted
by:
|
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PURCHASER:
|
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THE
CHILDREN’S INTERNET, INC.:
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By:
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By:
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(Signature)
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|
(Signature)
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(Print
Name)
|
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(Print
Name and Title)
|
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Address
:
|
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|
Address
:
|
|
________________________
|
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|
5000
Hopyard Road, Suite 320
|
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________________________
|
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Pleasanton
CA 94588
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EXHIBIT
A
ASSIGNMENT
SEPARATE FROM CERTIFICATE
FOR
VALUE
RECEIVED, the undersigned hereby sells, assigns and transfers unto
___________________________ ( ) shares of the Common Stock of The Children’s
Internet, Inc. (the "
Company
")
standing in the undersigned's name on the books of the Company represented
by
Certificate No. __________herewith and do hereby irrevocably constitute and
appoint _______________________ Attorney to transfer such Common Stock on the
books of the within named Company with full power of substitution in the
premises.
Dated:
___________
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Jane
Doe
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(Spouse's
Signature, if applicable)
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(Printed
Name)
|
Instruction:
Please
do
not fill in any blanks other than the signature line. The purpose of this
assignment is to enable the Company to exercise its Repurchase Right set forth
in the Agreement without requiring additional signatures on the part of the
Purchaser.
EXHIBIT
B
PROTECTIVE
SPECIAL ELECTION UNDER SECTION 83(b)
OF
THE INTERNAL REVENUE CODE OF 1986
The
undersigned, Jane Doe (the "
Taxpayer
"),
hereby makes the election, modified as described below, under Section 83(b)
of
the Internal Revenue Code of 1986, as amended (the "
Code
"),
with
respect to shares of common stock of The Children’s Internet, Inc. (the
"
Shares
"
or
"
Property
")
acquired by the undersigned pursuant to the exercise of an "
incentive
stock option
"
during
the taxable year.
The
following information with respect to such election is provided
below:
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1.
|
Name,
Address and Social Security Number of the
Taxpayer:
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Jane
Doe
100
Main
Street
Anywhere,
CA 94110
Social
Security Number: ____________________
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2.
|
A
Description of Each Property with Respect to Which the Election Is
Being
Made:
|
__________
Common stock shares of The Children’s Internet, Inc., a Nevada
corporation.
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3.
|
Date
on Which the Property Was Transferred and the Taxable Year for Which
the
Election Is Made
:
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Date
of
Transfer:
__________________
Taxable
Year:
__________________
Calendar Year
4.
Nature
of the Restrictions to Which the Property Is Subject
:
The
Taxpayer is required to sell the Shares back to The Children’s Internet, a
Nevada corporation, at its original purchase price if the Taxpayer voluntarily
terminates employment with The Children’s Internet, Inc. before the Taxpayer's
rights to the Shares have vested. Shares will vest at the rate of 1/36 per
month
on the day of the month corresponding to the Vesting Commencement Date (or
if
there is no corresponding day in any such month, on the last day of such month),
until fully vested, unless vesting ceases as set forth in The Children’s
Internet, Inc. 2007 Equity Incentive Plan or the Stock Option Agreement under
which the Shares were acquired.
5.
Fair
Market Value at the Time of Transfer of the
Property:
$___
per
share.
The
Property was transferred to the Taxpayer pursuant to the exercise of an
Incentive Stock Option described in Section 422 of the Code. Accordingly, no
income is recognized by the Taxpayer for purposes of the regular income upon
transfer of the Property.
6.
The
Amount Paid for the Property:
$____
per
share.
7.
Additional
Copies of Election
:
A
copy of
this election has been furnished to The Children’s Internet, Inc., a Nevada
corporation, the entity for which services were performed.
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8.
|
Limited
Nature of Election
:
|
Because
the Property is shares of Common Stock of The Children’s Internet, Inc. acquired
by exercise of an incentive stock option (within the meaning of Section 422
of
the Code), the undersigned will not recognize income upon exercise of the
option. Therefore this election is protective only, is made solely to bar
application of Section 83(a) of the Code and is not made to cause the
undersigned actually to recognize income which apart from this election
qualifies for nonrecognition treatment under Sections 421 and 422 of the
Code.
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9.
|
Alternative
Minimum Tax
:
|
The
Taxpayer intends that this election will be an effective election under Section
83(b) of the Code for all purposes of the Alternative Minimum Tax, and in
particular for purposes of computing the adjustment described in Section
56(b)(3) of the Code.
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10.
|
Performance
of Services and Beneficial Transferee
.
|
The
Taxpayer performed the services in connection with the transfer of the Property
and is the beneficial transferee of the Property.
*
* *
The
undersigned understands that the foregoing election may not be revoked except
with the consent of the Commissioner.
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Dated:
_____________
|
TAXPAYER:
|
|
|
|
|
|
Jane
Doe
|
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TAXPAYER'S
SPOUSE'S CONSENT:
|