Bodacious Studios

CASE: "Bodacious Studios" (includes Memorandum, Confidential

Business Plan, and Summary of Proposed Terms)

PREPARATION:
I. Read and study the Memo to Dr. Creator with attachments.
II. You will be assigned a role as either Dr. Creator or Mr.
Owens. In your role as a founder of Bodacious Studios, be
prepared to critique the Summary of Proposed Terms and
develop a "shopping list" of changes you would want in that
term sheet. Our session together will involve a mock
discussion among all of the session participants in their roles
as founders of Bodacious Studios (one-half of the participants
in the role of Dr. Creator and one-half in the role of Mr.
Owens).
 MEMORANDUM

TO: Christine Creator, Ph.D.

FROM: C. E. Owens

RE: Meeting to discuss venture capital financing proposal for

Bodacious Studios, Inc. (“BSI”)

As we’ve discussed, the ambitious plans of BSI will require us to

obtain additional finance. On a preliminary basis, I’ve approached a few

venture capitalists that appear to be quite interested, one of whom tendered the

attached "Summary of Proposed Terms" as an offer to finance us! That

investor would invest, as lead, $2 million of the proposed $4 million

financing.

In preparation for our meeting to discuss this term sheet, I’ve

drafted a very preliminary sketch of a Business Plan (attached).

© Copyright 1994 and 2001 by Ronald H. Star. All Rights Reserved.

 BODACIOUS STUDIOS, INC.

CONFIDENTIAL BUSINESS PLAN

Bodacious Studios, Inc. is a California corporation

that will produce and market a line of unique and
educational multimedia games.

This confidential document and its contents are for internal management use
and may not be reproduced, used or disclosed without the prior written
approval of Bodacious Studios, Inc.

© Copyright 1994 and 2001 by Ronald H. Star. All Rights Reserved.

Any relation or similarity between the fictional persons, places and situations
contained herein and real persons, places and situations are unintentional and
are expressly disclaimed.

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OVERVIEW

BODACIOUS STUDIOS, INC. (“BSI”) is a California corporation

formed by Christine Creator, Ph.D., and Chet Everett Owens to produce and
market a line of unique and educational multimedia games. BSI is seeking
four million dollars ($4,000,000) from investors through the sale of
convertible preferred stock to qualified investors.

Christine Creator, Ph.D., is a world-renowned expert on how

people “learn.” Her best-selling books, “Learn to Play; Play to Learn; Learn
to Learn; Play to Play” and “I’m OK; What’s Up With You, Dude?” have
given Dr. Creator national exposure (appearances on Larry King Live, Oprah
and Late Night with Barney (the new Fox late-night show for kids)), and
helped her to develop a national following for her novel approaches to
learning.

Most recently, Dr. Creator has developed a novel and proprietary

approach to creating multimedia games that actually teach the person playing
the game complex educational material in a way that is relatively transparent
to the user. That unique approach will be embodied in a core technology
called “Crash and Learn,” which takes the form of a prototypical racecar video
game. It is the novel aspects of Dr. Creator’s approach that permit the person
who plays the race car game to learn particular educational subjects while
playing the game.

Following completion of development and testing of the “Crash

and Learn” core technology, BSI intends to create a range of CD-ROM and
on-line educational titles incorporating that technology. Currently
contemplated titles include:

While Playing the Car Racing

Title Game, the User Will Learn

“Crash and Earn” To invest in the stock market

“Crash and Churn” All of the securities laws necessary

to become a registered broker-dealer

“Crash and Intern” Enough medicine to be a licensed

physician in three states

“Crash and Fern” Landscape Architecture

“Crash and Howard How to be a successful radio talk

Stern” show host

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 “Crash and Infirm” How to operate a successful
drugstore or old age home

“Crash and the Firm” How to write, produce and distribute

suspense movies about lawyers

Because of the uniqueness of BSI’s products, BSI currently

anticipates selling its products through a wide range of retail outlets including
software stores, video stores, fast food restaurants, department stores and
garden stores, along with catalog sales. There will also be on-line versions of
the products. A key to BSI’s strategy is to support its selling efforts with a
nationwide marketing campaign to include national magazine advertising,
television advertising and infomercials. BSI will launch its initial products
only once three products are ready for market.

The products themselves will utilize state-of-the-art multimedia

techniques and design. It is the richness offered in multimedia software that
makes possible the ability to graft onto the racing game paradigm
Dr. Creator’s novel learning approach.

Chet Everett Owens, an experienced manager, joined with

Dr. Creator in the formation of BSI, and will lead the development of the
company as its President.

DEVELOPMENT OF THE BUSINESS/USE OF PROCEEDS

BSI proposes to develop its business in the following stages, with

the indicated projected capital requirements.

I. Development, Implementation and Testing $ 800,000*

of Core “Crash and Learn” Technology

II. Patent Prosecution Associated with 50,000

Protection of Core Technology

III. Development of Initial 3 Titles 750,000

IV Initial launch 2,000,000

V Post-Launch Working Capital for Twelve- 700,000

Month Period

TOTAL $4,300,000

** $300,000 already spent; the funds

were contributed in purchase of common

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 shares as follows: Dr. Creator: $100,000
CE Owens: $200,000.

The first three phases are anticipated to take one year from funding.

FINANCIAL ASPECTS

Projections.

The following are projections of cash flow and net income for BSI,
based upon a conservative scenario.
BODACIOUS STUDIOS, INC.
SUMMARY OF PROJECTIONS
(in 000’s)

Yr l Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7

Total Revenue -0- 8,000 17,000 28,000 47,000 75,000 100,000

Total Cost 1,300 10,000 16,000 22,000 37,000 52,000 68,000

Net Income (1,600) (2,000) 1,000 6,000 10,000 23,000 32,000

Before Tax

Annual Cash (1,600) (2,700) 0 1,000 4,000 12,000 16,000

Flow Before
Financing

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MANAGEMENT

BSI’s officers are:

Chet Everett (“C.E.”) Owens President/Chief Executive Officer/

Director

Christine Creator, Ph.D. VP Engineering/Secretary/

Treasurer/Director

Mr. Owens will oversee all business and financial activities of BSI.

Dr. Creator will plan the company’s core technology and will work
with the production team to implement the core technology and create the
company’s products.

Brief biographical descriptions of the Founders are set forth below.

C.E. Owens—President and Chief Executive Officer

Before founding BSI, Mr. Owens served as Chief Operating

Officer of Pastrami Time Multimedia Theaters, a venture capital financed
startup company scheduled to be taken public the first quarter of next year.
Mr. Owens also has served as a Vice-President of Kids-Mean-Bucks, a chain
of retail stores. Mr. Owens received an M.B.A. from Stanford University. He
is forty (40) years old.

Christine Creator, Ph.D.—VP Engineering/Secretary/Treasurer

Dr. Creator’s background is indicated above. She received her

Ph.D. from U.C. Berkeley. She is thirty-eight (38) years old.

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 SUMMARY OF PROPOSED TERMS OF ISSUANCE AND SALE OF
PREFERRED STOCK

This memorandum summarizes the principal terms with respect to

a private placement of equity securities.

Introduction

The Bodacious Studios, Inc. (the "Company") is a California

corporation. The founders (“Founders”) of the Company are C.E. Owens and
Dr. Christine Creator. Pursuant to the private placement, certain investors will
purchase preferred stock in the Company. Contemporaneously herewith, the
Company will enter into a binding sixty day exclusive negotiating period with
the investor who has presented this Summary of Proposed Terms.

Proposed Private Placement

A private placement of preferred stock in the Company is proposed

on the following terms:

I. Preferred Stock in the Company

A. Amount: $4,000,000.00

B. Type of Securities: Convertible Preferred Stock

(“Preferred Stock”)

C. Equity Share: Investors will purchase shares of

Preferred Stock at a price of $1.00
per share (the “Original Purchase
Price”). The holders of Preferred
Stock in the aggregate initially will
own 55% of the Company’s equity.

D. Rights, Preferences, (1) Dividend Provisions. The

Privileges and Restrictions:
holders of the Preferred Stock will
be entitled to receive non-
cumulative dividends, when and if
declared by the Board of Directors
from time to time, at the rate of
10% of the Original Purchase Price
per annum. After payment of such
dividend, the Preferred Stock and
Common Stock will participate pro

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 rata in any further dividends paid.

(2) Liquidation Preference. In the

event of any liquidation or winding
up of the Company (including a
sale of the Company whether by
sale of assets, merger or otherwise),
the holders of the Preferred Stock
will be entitled to receive, in
preference to the holders of the
Common Stock, an amount
(“Liquidation Amount”) equal to
(i) three times the Original Purchase
Price plus any dividends declared
on the Preferred Stock but not paid,
plus (ii) their share of additional
distributions available to be made
among the holders of Common
Stock as if they had converted their
shares of Preferred Stock into
Common Stock.

(3) Redemption. Three years from

the date of issuance and purchase of
the Preferred Stock, a majority of
the holders of the Preferred Stock
will have the right to force the
Company to redeem the Preferred
Stock by paying the Liquidation
Amount in cash.

(4) Conversion. Each holder of the

Preferred Stock will have the right
to convert all or any portion of his
or her Preferred Stock, at the option
of the holder, at any time, into
shares of Common Stock of the
Company. The total number of
shares of Common Stock into
which the Preferred Stock may be
converted initially will be
determined by dividing the Original
Purchase Price by the conversion
price. The initial conversion price

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 will be the Original Purchase Price.
The conversion price will be subject
to adjustment as provided in
paragraph (6) below.

(5) Automatic Conversion. The

Preferred Stock will be converted
automatically into Common Stock
of the Company, at the then-
applicable conversion price, in the
event of an underwritten public
offering of shares of the Common
Stock of the Company at a public
offering price-per-share of
Common Stock (prior to
underwriter commissions and
expenses) which is not less than
five times the Original Purchase
Price in an offering of not less than
$10,000,000 (prior to underwriter
commissions and expenses).

(6) Antidilution Provisions. The

conversion price of the Preferred
Stock will be subject to adjustment
to prevent dilution in the event that
the Company issues additional
shares (other than the “Reserved
Employee Shares” provided for
below) at a purchase price less than
the applicable conversion price.
The conversion price will be subject
to adjustment on a weighted
average formula basis, provided
that a full ratchet formula will apply
for the initial eighteen months.

(7) Voting Rights. Except with

respect to the election of Directors,
the holder of a share of the
Preferred Stock will have the right
to that number of votes equal to the
number of shares of Common Stock
issuable upon conversion of the

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 Preferred Stock. Election of
Directors will be as described under
“Board Representation and
Meetings” below.

(8) Protective Provisions. Consent

of the holders of at least two-thirds
of the outstanding shares of
Preferred Stock will be required for
any sale by the Company of a
substantial portion of its assets, any
merger of the Company with
another entity, each amendment of
the Company’s articles of
incorporation, and for any action
which: (i) adversely alters or
changes the rights, preferences or
privileges of the Preferred Stock;
(ii) increases the authorized number
of shares of Preferred Stock;
(iii) creates any new series or class
of shares having preference over or
being on a parity with the Preferred
Stock; and (iv) causes the
repurchase of any Common Stock
except for repurchase of employee
and founders’ stock at the original
issue price thereof.

E. Information Rights: So long as an investor continues to

hold shares of Preferred Stock or of
Common Stock issued upon
conversion of the Preferred Stock,
the Company will deliver to such
investor comprehensive annual and
quarterly financial statements of the
Company and an annual budget. So
long as an investor holds not less
than 5% of the total Preferred Stock
(including Common Stock issued
upon conversion of the Preferred
Stock), the Company promptly will
furnish the investor with monthly
financial statements for the

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 Company and an annual budget.
The obligation of the Company to
furnish monthly financial
statements will terminate upon a
public offering of the Company’s
Common Stock. Inspection rights
(of the subject matters described in
California Corporation Code
Sections 1600, 1601 and 1602 and
other relevant subject materials)
related to the Company will be
available to any investor who has
purchased at least $250,000 of
Preferred Stock and who still holds
any amount of Preferred Stock or
Common Stock issued upon
conversion of any Preferred Stock.

F. Registration Rights: (1) Demand Rights. If holders of at

least 50% of the Preferred Stock
(including Common Stock issued
upon conversion of the Preferred
Stock) request that the Company
file a Registration Statement for an
offering of Common Stock issued
or issuable upon conversion of the
Preferred Stock, for an anticipated
aggregate offering price-per-share
(without regard to under writing
discounts and commissions) in
excess of five times the initial
purchase price from the Company
of the Preferred Stock and whose
anticipated aggregate offering price
(without regard to underwriting
discounts and commissions) would
exceed $4,000,000, the Company
will use its best efforts to cause
such shares to be registered. The
underwriter, in such offerings, will
be selected by the holders of Stock
initiating the registration. The
Company will not be obligated to
effect more than two registrations

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 (other than on Form S-3) under
these demand right provisions.

(2) Registration on Form S-3.

Holders of 10% or more of the
Preferred Stock (including
Common Stock issued and issuable
upon conversion of the Preferred
Stock) will have the right to require
the Company to file an unlimited
number of Registration Statements
on Form S-3 (or any equivalent
successor form).

(3) Piggy-Back Registration. For

five years after the Company’s
initial public offering of its
Common Stock, the holders of any
of the Preferred Stock (including
Common Stock issued upon
conversion of the Preferred) will be
entitled to “piggy-back” registration
rights on registrations of the
Company’s securities other than the
Company’s initial public offering of
the Company’s Common Stock,
subject to the right of the Company,
upon written demand of its
underwriters, to reduce pro-rata the
number of shares of the holders
proposed to be registered in view of
market conditions to not less than
10% of the shares so requested to
be registered (unless waived by
holders of a majority of shares of
the Preferred Stock including
Common Stock issued upon
conversion of the Preferred Stock).

(4) Registration Expenses. All

registration expenses (exclusive of
underwriting discounts and
commissions) will be borne by the
Company.

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 (5) Other Registration Provisions.
Other provisions will be contained
in the Stock Purchase Agreement
with respect to registration rights as
are reasonable, including cross-
indemnification, the Company’s
ability to delay the filing of a
demand registration for a period of
at least ninety days, the agreement
by purchasers of the Preferred
Stock if requested by the
underwriter in a public offering not
to sell any Common Stock which
they held prior to that offering for a
period of 180 days following the
effective date of the Registration
Statement of such offering, the
period of time in which the
Registration Statement will be kept
effective, underwriting
arrangements and the like.

G. Board Representations and The Articles of Incorporation will

Meetings: authorize five Directors. Holders of
the Preferred Stock will elect three
directors. The holders of Common
Stock will elect one director. The
holders of Common Stock and
Preferred Stock, voting together as
a single class, will elect one
director. Notwithstanding the
above, once no Preferred Stock
remains issued and outstanding, the
Common Stock, undifferentiated in
any manner, will elect all five
Directors. The Board will meet at
least quarterly. The bylaws will
provide that any two Directors may
call a meeting of the Board of
Directors. Members of the Board
of Directors will receive no cash
Directors’ fees, but will receive
options in the Company (Investor
directors will receive not less than

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H. Preemptive Right to
Purchase New Securities:
II. Arrangements With Founders
A. Employment Agreements:
B. Confidentiality Agreements:
C. Stock in the Company:
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the number of options given to
other outside directors), will be
reimbursed for reasonable expenses
incurred in attending meetings of
the Board of Directors and will be
Indemnified for their non-negligent
acts to the extent permitted under
applicable law.
If the Company proposes to offer
additional shares (other than
Reserved Employee Shares or
shares issued in the acquisition of
another company), the Company
will first offer all such shares to the
holders of Preferred Stock
(including holders of Common
Stock issued upon conversion of
Preferred Stock) on a pro rata
basis. This preemptive right will
terminate upon the first
underwritten public offering of
shares of the Company.
Each of the Founders will be bound
to work full time for the Company
as at-will employees. The
Company will have the right to
discharge a Founder for any reason
whatsoever, with no severance
payment.
The Company will enter into
confidentiality and invention
assignment agreements with each of
the Founders.
The Founders as a group initially
will hold (and may vote during their
ownership, whether or not vested)
Common Stock representing 45%
of the equity of the Company.
Common Stock in the hands of the
 Founders will be subject to Stock
Restriction Agreements providing
for vesting as follows: 25% vests
on each of the first, second, third
and fourth anniversaries of the
closing of the placement described
in this Memorandum. Upon the
death or permanent disability of a
Founder, no additional stock will
vest. Until the completion of the
Company’s initial public offering,
the Company will have a right of
first refusal as to the sale of any
vested stock of any Founder and co-
sale rights on any sale of shares by
a Founder. Unvested stock may not
be transferred.

In the event a Founder is discharged

or otherwise leaves the Company,
dies or becomes permanently
disabled, the Company will have an
option to buy all unvested stock of
that person at his original cost,
and/or all vested stock at fair
market value as determined by the
Board.

All of the Company’s repurchase

rights are subject to statutory
restrictions on repurchase of stock
by a California corporation.

III. Miscellaneous Matters

A. Key-man Insurance: The Company will carry at least a

$4 million key-man insurance
policy covering each of the
Founders.

B. Reserved Employee Shares: The Company may reserve up to

382,775 shares of Common Stock
(the “Reserved Employee Share”)
to be issued from time to time to
employees of the Company as

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 approved by the Board of Directors.

C. The Purchase Agreements: The purchase of the Preferred Stock

will be made pursuant to a Stock
Purchase Agreement that will
contain, among other things,
appropriate representations and
warranties of the Company,
covenants of the Company
reflecting the provisions set forth
herein, and appropriate conditions
of closing which will include,
among other things, qualification of
the securities being offered under
applicable Blue Sky laws and
opinions of counsel.

The terms and provisions of the

Stock Purchase Agreement may be
amended by approval of holders of
no less than two-thirds of the
Preferred Stock (including the
Common Stock issued upon
conversion of the Preferred) and of
the Company.

D. Expenses: The Company and each investor

will bear its or his own legal and
other expenses with respect to this
transaction, except that, assuming a
successful completion of this
offering, the Company will pay
reasonable legal fees incurred by a
single counsel to all Preferred Stock
investors.

E. Finders: The Company and the investors

each will indemnify the other for
any finder’s fees for which that
party is responsible.

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