At Toysmart, in which Disney owns a majority stake, more than 10 staff members in the marketing department have resigned in the past three days following last week's resignation of Kel Kelly, the firm's chief marketing officer, sources within the company told CNET News.com. Toysmart spokeswoman Anne Sawyer confirmed that several executives have left the company and that Toysmart is in the middle of a "restructuring."

"We will release a statement next week with the results of our restructuring efforts," Sawyer said. She added that among those that left this week was the firm's director of communications.

KBkids, a week after laying off 45 employees, or 30 percent of its workforce, said today its board of directors had sacked the company's chief executive, Srikant Srinivasan. Srinivasan said his firing was due to differences between him and Consolidated Stores, the parent company of KB Toys and KBkids. "Basically, we had different visions about where to take the company," he said.

The highly competitive toy sector, dominated by eToys, Amazon.com and Toysrus.com, will continue to trim its ranks, analysts said. The industry is known for having to grapple with razor thin margins, seasonal sales and for online outfits, shipping and fulfillment issues that cut deeply into profits.

"We may see a sort of epidemic of layoffs and executive departures," said Yankee Group analyst Rebecca Nidositko. "As employees and executives realize that their companies have hit a brick wall, they will be looking to move to higher ground."

Disney acquired the privately owned Toysmart last August for between $45 and $50 million, Toysmart executives said. The move touched off speculation that Disney would steer Toysmart away from its core business of selling educational and toys and move the company's offering toward the mainstream.

So far that has not happened, according to a current employee. "Everybody worried that we would be Disneynified," said the source, who asked to remain anonymous. "But they've left us to run the company."

But one of those that left, said the resignations in the marketing department were a result of Disney insisting that Toysmart change its strategy.

"We came to build a certain kind of toy site and now Disney wants it to move in another direction," said one former Toysmart employee.

Disney officials were not immediately available for comment.

KBkids also seems to be switching gears. After delaying its initial public offering in March, the Denver-based firm decided to shift some of its operations to its parent company, KB Toys, to decrease its costs.

For the six months ended September 30, 1999, the most recent period for which figures were available, KBkids.com lost $14.1 million on $1.5 million in sales. The company had negative gross profit margins for the period, losing $553 million before operating and marketing expenses.

Srinivasan founded BrainPlay.com, which merged with KBToys.com last year to form KBkids.com. As part of the merger, BrainPlay got a 20 percent stake in KBkids. According to the regulatory filing made in January, Srinivasan owned 1.37 million shares of KBkids' class A stock.

According to the Securities and Exchange Commission filing, Srinivasan's base salary was $150,000, with a guaranteed bonus of between $50,000 and $100,000. He was granted 875,000 stock options.

As part of the merger agreement, KB Toys agreed to buy Srinivasan's stake in KBkids.com for $1.9 million if KBkids.com did not complete an IPO by June 2002. As part of his employment agreement, all of Srinivasan's unvested stock options vested immediately upon his termination.

Srinivasan confirmed that he still owns his stake in Kbkids, but he declined to comment further on his financial relationship with the company or whether he was forced to give up his posts as president and member of the company's board of managers. Srinivasan said he plans to start another company in the near future.

"Right now I'm going to take a long vacation," Srinivasan said.

By Greg Sandoval and Troy Wolverton, CNET News.com

[Posted 5/18/2000]