LOUIS DeGRADI, individually and on behalf of all others similarly situated, Plaintiff, v. KB HOLDINGS, INC., a corporation; BIG LOTS, INC., a corporation; and KBKIDS.COM, LLC, a limited liability company, Defendants.

No. 02 CH 15838 Honorable Thomas P. Quinn

TO:

ALL PERSONS IN THE UNITED STATES, DISTRICT OF COLUMBIA, TERRITORY OF GUAM AND COMMONWEALTH OF PUERTO RICO WHO PURCHASED A PRODUCT FROM THE DEFENDANTS' STORES OPERATING UNDER THE TRADE NAMES "KB TOYS" OR "KAY-BEE TOYS," INCLUDING KB TOYS, KAY-BEE TOYS, KAY-BEE TOYS & HOBBY SHOPS, KB TOY WORKS, KB TOY OUTLET, TOY LIQUIDATOR, KB TOYS EXPRESS, KBTOYS.COM, KBKIDS.COM AND ETOYS.COM, BETWEEN SEPTEMBER 3, 1997 AND OCTOBER 1, 2003, INCLUSIVE, FOR WHICH BOTH A CURRENT PURCHASE PRICE AND A HIGHER COMPARISON OR "REFERENCE" PRICE WERE DISPLAYED FOR THE PRODUCT (THE "CLASS"). PLEASE READ THIS NOTICE CAREFULLY AND IN ITS ENTIRETY. YOUR RIGHTS MAY BE AFFECTED BY PROCEEDINGS IN THIS ACTION. PLEASE NOTE THAT IF YOU ARE A CLASS MEMBER, YOU MAY BE ENTITLED TO SHARE IN THE PROCEEDS OF THE SETTLEMENT DESCRIBED IN THIS NOTICE.

    This Notice is being provided pursuant to Section 2-803 of the Illinois Code of Civil Procedure and an Order of Judge Thomas P. Quinn of the Circuit Court of Cook County, Illinois (the "Court"). The purpose of this Notice is to inform you of the proposed settlement of this class action litigation (the "Action"), and of the hearing to be held by the Court to consider the fairness, reasonableness, and adequacy of the proposed settlement (the "Settlement"). This Notice describes the rights you may have in connection with the Settlement and what steps you may take in relation to the Settlement and the Action.

    The proposed Settlement creates a fund in the total amount of $3,000,000 (the "Settlement Fund"). Plaintiff and Defendants do not agree on liability or the amount of damages that would be recoverable if Plaintiff were to have prevailed on each claim asserted. The issues on which the Parties disagree include, but are not limited to: (1) whether Defendants' use of a comparison or "reference" price was unfair or deceptive or unjustly enriched Defendants; (2) whether a national class could be certified where the laws on comparison pricing differ from state to state; and (3) whether class members were injured or suffered any damages from Defendants' pricing practices.

    Class Counsel believes that the proposed Settlement is an excellent recovery and is in the best interests of the Class. Because of the risks associated with continuing to litigate and proceeding to trial, there was a danger that Plaintiff would not have prevailed on any of his claims, in which case the Class would receive nothing. Most significantly, the trial court had dismissed the complaint in part, including all claims for injunctive relief. In addition, Plaintiff would have faced the normal uncertainties of litigation. For example, Plaintiff faced the possibility that a jury would have found in favor of Defendants, or that all or many of the claims in this case could have been dismissed before or after trial or on appeal. In addition, the amount of damages recoverable by the Class was and is challenged by Defendants.

    Class Counsel has not received any payment for their services in prosecuting the Action on behalf of Plaintiff and the members of the Class, nor have they been reimbursed for their out-of-pocket expenditures. If the Settlement is approved by the Court, counsel for the Class Counsel will apply to the Court for attorneys' fees and expenses equal to $1,040,000 to be paid by Defendants. The attorneys' fees and expenses will not be paid from, nor reduce, the Settlement Fund.

    This Notice is not an expression of any opinion by the Court about the merits of any of the claims or defenses asserted by any party in this Action or the fairness or adequacy of the proposed Settlement. For further information regarding this settlement you may contact: Clinton A. Krislov, Krislov & Associates, Ltd., Civic Opera Building, Suite 1350, 20 N. Wacker Drive, Chicago, Illinois 60606, Telephone: (312) 606-0500, email: Clint@krislovlaw.com. Please do not call the Court.

    A settlement hearing (the "Final Settlement Hearing") will be held on October 1, 2003 at 10:30 a.m. before the Honorable Thomas P. Quinn, Circuit Court Judge, in Room 2410 of the Circuit Court of Cook County, Illinois, 50 West Washington Street, Chicago, Illinois, 60602. The purpose of the Final Settlement Hearing will be to: (1) whether the Class should be certified; (2) determine whether the proposed Settlement Fund consisting of $3,000,000 is fair, reasonable and adequate and whether final judgment should be entered dismissing the Action as to Defendants on the merits, with prejudice, and without costs; and (3) consider the petition by Class Counsel for payment by Defendants of a reasonable attorneys' Fee and Expense Award in addition to the Settlement Fund. The Court may adjourn or continue the Final Settlement Hearing without further notice to the Class.

(a)  The "Action" means DeGradi v. KB Holdings, Inc., et al, Case No. 02 CH 15838, currently pending before Judge Thomas P. Quinn in the Circuit Court of Cook County, Illinois, Chancery Division.

(b)  The "Class" means all Persons in the United States, District of Columbia, Territory of Guam and Commonwealth of Puerto Rico who purchased a product from the Defendants' retail and online subsidiaries operating under the trade names "KB Toys" or "Kay-Bee Toys," including KB Toys, Kay-Bee Toys, Kay-Bee Toys & Hobby Shops, KB Toy Works, KB Toy Outlet, Toy Liquidator, KB Toys Express, KBtoys.com, KBkids.com and etoys.com, between September 3, 1997 and October 1, 2003, inclusive, for which both a current purchase price and a higher comparative or "reference" price were displayed for the product.

(c)  "Class Counsel" means the law firm of Krislov & Associates, Ltd.

(d)  "Class Member" means any potential member of the Class who does not file a valid and timely Request for Exclusion, as defined below, from the Class.

(e)  "Class Period" means the period beginning September 3, 1997 through and including October 1, 2003.

(f) "Costs of Notice" means all costs and expenses incurred in discharging the obligation to notify potential Class Members of the Action against, and Settlement with, the Defendants through publication, as required by the Court.

(g)  "Defendants" mean KB Holdings, Inc., n/k/a KB Toys, Inc.; Big Lots, Inc.; and KB Online Holdings, LLC, a Delaware limited liability company, a limited successor to KBkids.com, LLC, an Ohio limited liability company.

(h)  "Effective Date" means the date upon which the Settlement shall become effective, as described in the Stipulation of Settlement (the "Stipulation").

(i)  "Fee and Expense Award" means the attorneys' fees, expenses and costs, allowed by the Court.

(j)  "Final Settlement Hearing" means the hearing held by the Court to consider final approval of this Settlement pursuant to Section 2-806 of the Illinois Code of Civil Procedure;

(k)  "Incentive Payment" is the payment by Defendants of $10,000 to Plaintiff pursuant to the terms of this Stipulation for his service as a representative of the Class.

(l)  "Net Settlement Fund" means the Settlement Fund minus the Costs of Notice (up to a maximum of $40,000) and minus the Incentive Payment.

(m)  "Notice" means this Notice of Pendency and Proposed Settlement of Class Action, which is available to the Class upon request and available online at www.kbtoys.com, in accordance with the terms of the Preliminary Approval Order.

(n)  "Parties" means Plaintiff and Defendants. (o) "Person" means natural persons, associations, corporations, limited liability companies, partnerships, governments (or governmental agencies), quasi-public entities, proprietorships, joint ventures, trusts, estates, and all other forms of legal entities.

(p)  "Plaintiff" means Louis DeGradi.

(q)  "Released Claims" shall mean all actual and potential claims, liabilities, demands, causes of action, or lawsuits by Plaintiff and each and every Class Member against any and all Released Parties, whether legal, equitable, statutory or of any other type or form, and which were brought or potentially could have been brought, in an individual, representative or any other capacity, that relate to or arise out of the events, acts, representations or omissions which were alleged in the Action against any of the Released Parties, including without limitation any claims arising from Defendants' payment of the Settlement Fund.

(r)  "Released Parties" means KB Holdings, Inc., n/k/a KB Toys, Inc.; Big Lots, Inc., and KB Online Holdings, LLC, a Delaware limited liability company, a limited successor to KBkids.com, LLC, an Ohio limited liability company; and their respective, past and present subsidiaries, affiliates, divisions, stockholders, officers, directors, members, managers, employees, heirs, executors, administrators, representatives, attorneys, agents, insurers, successors, predecessors, and assigns.

(s)  "Request for Exclusion" means a written request by any potential member of the Class to opt out of or otherwise be excluded from the Settlement in accordance with the terms of this Notice.

(t)  "Settlement" means the terms and conditions contemplated by the Stipulation.

(u)  "Settlement Fund" means the sum of Three Million United States Dollars ($3,000,000.00).

(v)  "Stipulation" means the Stipulation of Settlement and the attached Exhibits, filed with the Court on August 7, 2003, in connection with the Action.

(w)  "Summary Notice" means the Summary Notice of Pendency and Proposed Settlement of Class Action, attached as Exhibit E to the Stipulation, which is to be published once in USA Today (maximum 1/8 page) with terms in English and a reference to a website with a Spanish language Notice.

    On September 3, 2002, Plaintiff filed the Action against the Defendants. Plaintiff sued individually on his own behalf and on behalf of the class of all Persons in the United States, District of Columbia, Territory of Guam and Commonwealth of Puerto Rico who purchased a product from Defendants' retail and online subsidiaries operating under the trade names "KB Toys" or "Kay-Bee Toys," including KB Toys, Kay-Bee Toys, Kay-Bee Toys & Hobby Shops, KB Toy Works, KB Toy Outlet, Toy Liquidator, KB Toys Express, KBtoys.com, KBkids.com and etoys.com, during the last five years, for which both a current purchase price and a higher comparative or "reference" price were displayed for the product.

    Plaintiff alleges that Defendants implemented a pricing scheme that utilizes two different prices which are placed in near proximity of one another on price tags, on shelf tags, on in-store signs and in retail and online advertisements. One price, a comparative or "reference" price, is printed in black ink and then crossed out in red ink. A lower, second price, which the consumer must pay to purchase the product, is displayed in simulated handwritten red ink. Plaintiff alleges that the comparative or "reference" price for the product is not the prevailing market price for the product and that little or no actual sales were ever consummated or expected at this price. Rather, Plaintiff alleges that it is a fictitious amount used to make the actual purchase price for the product appear as a bargain and as a reduction from the comparative price. Plaintiff contends that Defendants' alleged conduct violates the Illinois Consumer Fraud and Deceptive Business Practices Act ("Consumer Fraud Act") and the Illinois Uniform Deceptive Trade Practices Act ("Uniform Act"), as well as similar consumer protection statutes in other states, and constitutes unjust enrichment. Plaintiff is seeking compensatory and punitive damages, an award of attorneys' fees and expenses for bringing the Action and a permanent injunction to prevent Defendants from continuing to use the alleged wrongful pricing scheme.

    In response, Defendants filed a motion to dismiss the Uniform Act claim and to strike all claims for injunctive relief. On January 31, 2003, the Court granted the Defendants' motion to dismiss the Uniform Act claim and to strike the claims for injunctive relief.

    Defendants thereafter answered the complaint by generally denying the remaining claims under the Consumer Fraud Act and for unjust enrichment. The Parties then exchanged written discovery, including document requests and interrogatories. Plaintiff also sought and obtained thousands of documents and all of the deposition transcripts from related litigation pending against Defendants in California. Defendants also deposed Plaintiff.

    The Parties then briefed the issue of class certification. On April 9, 2003, the Parties appeared before Judge Quinn for a hearing on the motion for class certification. After the hearing and prior to the Court's ruling on the motion for class certification, the Parties began to engage in settlement negotiations during which the Court's ruling on class certification has been held in abeyance. Those negotiations resulted in this Stipulation.

    Plaintiff believes that the claims asserted in the Action have substantial merit. However, Plaintiff and Class Counsel recognize and acknowledge the expense and length of continued proceedings necessary to prosecute the Action against the Defendants through trial and through appeals. Plaintiff and Class Counsel also have taken into account the uncertain outcome and the risk of any litigation, especially in complex litigation such as the Action, as well as the difficulties and delays inherent in such litigation. Plaintiff and Class Counsel also are mindful of the inherent problems of proof under and possible defenses to the violations asserted in the Action, as well as issues of damages recoverable if Plaintiff is successful. Plaintiff and Class Counsel believe that the proposed Settlement confers substantial benefits upon the Class. Based on their evaluation, Plaintiff and Class Counsel have determined that the Settlement is in the best interests of Plaintiff and the Class.

    Defendants deny liability in the Action arising out of any of the conduct, statements, acts or omissions alleged, or that could have been alleged, in the Action. Defendants also deny, inter alia, the allegations that Plaintiff or the Class Members have suffered any damages, that the Defendants' pricing systems and advertising were unfair or deceptive in any way, or that Plaintiff or the Class Members were harmed by the conduct alleged in the Action.

    Nonetheless, Defendants have concluded that further conduct of the Action would be protracted and expensive, and that it is desirable that the Action be fully and finally settled in the manner and upon the terms and conditions set forth in the Stipulation. Defendants also have taken into account the uncertainty and risks inherent in any litigation, especially in complex cases like the Action. Defendants have, therefore, determined that it is desirable and beneficial that the Action be settled in the manner and upon the terms and conditions set forth in the Stipulation.

    Subject to the terms and conditions of this Stipulation, Defendants will create a Settlement Fund for the benefit of the Class in the total amount of Three Million United States Dollars ($3,000,000.00) via a bookkeeping entry. A portion of the Settlement Fund will be used for certain administrative expenses, i.e., the costs of publishing this Notice up to a maximum of $40,000. In addition, $10,000 of the Settlement Fund will be paid to Plaintiff for his service as a representative of the Class (the "Incentive Payment"). The balance of the Settlement Fund (the "Net Settlement Fund") will be distributed as described below.

    Defendants will distribute the Net Settlement Fund by providing a discount at the cash registers of all KB Toys, KB Toy Works, KB Toy Outlet, Toy Liquidator and KB Toys Express stores nationwide, including Guam and Puerto Rico, equal to 30% off all qualifying purchases of $30 or more during October 8-14, 2003. This distribution (the "In-store Distribution") will be done without requiring a request of any store customer and will be separate and apart from, and in addition to, any previously planned promotional events for 2003. Defendants will not advertise or otherwise promote the distribution in advance of the In-store Distribution. Signs detailing the terms of the In-store Distribution, however, may be displayed in or around the stores during the In-store Distribution and up to 48 hours in advance of the In-store Distribution.

    If the total amount of discounts received by customers during the In-store Distribution is less than the amount of the Net Settlement Fund, Defendants will make an in-kind donation of toys, valued at Defendants' then regular retail price for such toys, in an amount equal to the remainder of the Net Settlement Fund (the "In-kind Donation Amount"). The donation, if any, will be to no more than four nationally recognized charities mutually agreed upon by Plaintiff and Defendants and will be made prior to December 31, 2003. Defendants will pay the cost of delivering the donated toys to no more than four locations. Defendants shall not be required to make more than one delivery to each location. The cost of delivering the toys will be separate and apart from the Settlement Fund.

    Each member of the Class shall be bound by all determinations and judgments in this Action concerning the Settlement, whether favorable or unfavorable, unless such person shall mail, by first class mail, a written Request for Exclusion from the Class, postmarked no later than September 10, 2003, to each of the following attorneys:

CLASS COUNSEL: Clinton A. Krislov Krislov & Associates, Ltd. Civic Opera House 20 North Wacker Drive Suite 1350 Chicago, Illinois 60606 (312) 606-0500

COUNSEL FOR DEFENDANTS: Christopher M. Murphy McDermott, Will & Emery 227 West Monroe Street Chicago, Illinois 60606

    No person may be excluded from the Class after that date. The request for exclusion must include (a) the name, address and telephone number of the person or entity requesting exclusion; (b) the title and case number of the Action ("DeGradi v. KB Holdings, et al., No. 02 CH 15838"); (c) a statement requesting exclusion from the Class; and (d) to the extent possible a general description of the products purchased from the Defendants during the Class Period with the approximate dates and locations of such purchases and the approximate number of each such product purchased. The request must be signed by the person or entity requesting exclusion and shall not be effective unless it is made in the manner and within the time as set forth above.

    If the proposed Settlement is approved, the Court will enter a final judgment. The judgment will dismiss the Released Claims with prejudice as to all Defendants. Thereafter the Action will be dismissed. The judgment will provide that all Class Members shall be deemed to have released and forever discharged all Released Claims against all Released Parties.

    At the Final Settlement Hearing, Class Counsel will request the Court to award attorneys' fees and expenses in an amount not to exceed $1,040,000 to be paid by Defendants and which shall not be paid from, nor reduce, the Settlement Fund. Class Counsel have not received any payment for their services in prosecuting this Action (which commenced in 2002) on behalf of the members of the Class, nor have Class Counsel been reimbursed for their out-of-pocket expenses. The fee requested by Class Counsel will compensate counsel for their efforts in achieving the Settlement Fund for the benefit of the Class, and for their risk in undertaking this representation on a contingency basis.

    The Settlement is conditioned upon the occurrence of certain events described in the Stipulation. Those events include, among others: (1) entry of the Order and Final Judgment by the Court, as provided for in the Stipulation; and (2) expiration of the time to appeal from or to alter or amend the Judgment. If, for any reason, any one of the conditions described in the Stipulation is not met, the Stipulation might be terminated and, if terminated, will become null and void, and the Parties to the Stipulation will be restored to their respective positions immediately prior to the date of final execution of the Stipulation.

    Class Counsel will represent all Class Members at the Final Settlement Hearing, except for those who choose to enter an appearance through counsel of their choice at their own expense. No Class Members are required to retain their own counsel, but for those who do, such counsel must file an appearance on their behalf. Such appearance must be served and filed so that it is received at least twenty-one (21) days prior to the Final Settlement Hearing by the Court and attorneys listed above.

    Any Class Member who objects to any aspect of the Settlement, the Settlement Fund, the certification of the Class or the application for attorneys' fees, costs and expenses, may appear and be heard at the Final Settlement Hearing. Any such Class Member must at least 21 days prior to the Final Settlement Hearing, serve, by hand or by first-class mail, a written statement of objections, including copies of any supporting papers and briefs (which must contain proof that the individual or entity is a Class Member), and a written notice of intent to appear (if the Class Member intends to appear at the Final Settlement Hearing), upon the attorneys listed above and the following:

CLERK OF THE COURT, CIRCUIT COURT OF COOK COUNTY, 50 West Washington Street, Chicago, Illinois, 60602.

    Only members of the Class who have submitted written notices of objection in this manner will be entitled to be heard at the Final Settlement Hearing, unless the Court orders otherwise.

    This Notice is a summary and does not describe all of the details of the Stipulation. For full details of the matters discussed in this Notice, you may review the Stipulation filed with the Court, which may be inspected during business hours, at the office of the Clerk of the Court, Circuit Court of Cook County, Illinois, 50 West Washington Street, Chicago, Illinois, 60602.

    If you have any questions about the settlement of the Action, you may contact Class Counsel by writing: Clinton A. Krislov, Krislov & Associates, Ltd., Civic Opera Building, Suite 1350, 20 N. Wacker Drive, Chicago, Illinois 60606, Telephone: (312) 606-0500, email: Clint@krislovlaw.com.

DATED: August 18, 2003
BY ORDER OF THE CIRCUIT COURT OF COOK COUNTY

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