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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): July 1, 1999
ETOYS INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 000-25709 95-4633006
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(State of incorporation) (Commission File No.) (I.R.S. Identification No.)
3100 OCEAN PARK BLVD., SUITE 300, SANTA MONICA, CALIFORNIA 90405
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 664-8100
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N/A
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(Former name or former address, if changed since last report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 1, 1999, eToys Inc., a Delaware corporation ("eToys"), acquired
BabyCenter, Inc., a Delaware corporation ("BabyCenter") via a merger pursuant
to an Agreement and Plan of Reorganization (the "Agreement") dated as of
April 18, 1999, by and among eToys, BabyCenter and, with respect solely to
Article VII of the Agreement, Pat Kenealy as Stockholder Representative.
Based on an exchange ratio of 2.09 shares of eToys' common stock for each
share of BabyCenter capital stock, eToys issued on July 1, 1999 an aggregate
of approximately 16.0 million shares of its common stock in exchange for all
outstanding shares of BabyCenter capital stock and has reserved approximately
2.7 million shares of its common stock for issuance upon exercise of assumed
BabyCenter options. The exchange ratio was determined by negotiations between
the parties. eToys will account for the acquisition using the purchase method
of accounting, and the acquisition is intended to qualify as a tax-free
reorganization for federal income tax purposes.
BabyCenter.com is an information and commerce Web site providing content
on pregnancy and baby, an interactive community for parents and
parents-to-be, and a store featuring thousands of baby products and supplies.
It is expected that BabyCenter will operate as a wholly owned subsidiary of
eToys and that BabyCenter.com will remain a separate Web site.
A press release related to the aforementioned merger is attached as
Exhibit 99.4.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired:
Attached on Exhibit (99.1) are the financial statements of BabyCenter,
Inc.
(b) Pro Forma Financial Information:
Attached on Exhibit (99.3) is unaudited pro forma financial
information for the Registrant.
(c) Exhibits:
(2.1) Agreement and Plan of Reorganization by and among Etoys Inc.,
BabyCenter, Inc., and, with respect to Article VII only, Pat Kenealy as
Stockholder Representative, dated as of April 18, 1999.
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(99.1) Audited balance sheets of BabyCenter, Inc. as of September
30, 1997 and 1998 and March 31, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the period from
inception (February 11, 1997) to September 30, 1997, for the year ended
September 30, 1998, and for the six months ended March 31, 1999.
(99.2) The Registrant's audited balance sheets of as of March 31,
1998 and 1999, and the related statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended.
(99.3) The Registrant's Unaudited Pro Forma Condensed Combined
Statement of Operations for the year ended March 31, 1999, and the Unaudited
Pro Forma Condensed Combined Balance Sheet as of March 31, 1999.
(99.4) Press Release of eToys issued July 1, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ETOYS INC.
By: /s/ Edward C. Lenk
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Edward C. Lenk
President, Chief Executive Officer
and Uncle of the Board
Date: July 13, 1999
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AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
ETOYS INC.
BABYCENTER, INC.,
AND, WITH RESPECT TO ARTICLE VII ONLY,
PAT KENEALY
AS STOCKHOLDER REPRESENTATIVE
DATED AS OF APRIL 18, 1999
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of April 18, 1999 by and among eToys Inc., a Delaware
corporation ("Buyer"), BabyCenter, Inc., a Delaware corporation (the "Company"),
and, with respect to Article VII only, Pat Kenealy as Stockholder
Representative.
RECITALS
WHEREAS, the Boards of Directors of each of the Company and Buyer
believe it is in the best interests of each company and their respective
Stockholders that Buyer acquire the Company through the statutory merger of a
to-be-formed, wholly owned subsidiary of Buyer with and into the Company (the
"Merger") and, in furtherance thereof, have approved the Merger.
WHEREAS, pursuant to the Merger, among other things, all of the issued
and outstanding shares of capital stock of the Company shall be converted into
the right to receive shares of common stock of Buyer.
WHEREAS, a portion of the shares of common stock of Buyer otherwise
issuable by Buyer in connection with the Merger shall be placed in escrow by
Buyer for purposes of satisfying damages, losses, expenses and other similar
charges which result from breaches of the representations, warranties and
covenants of the Company contained herein.
WHEREAS, the parties intend that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
WHEREAS, the Company and Buyer desire to make certain representations,
warranties, covenants and other agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1. FORMATION OF MERGER SUBSIDIARY.
1.1.1. As promptly as practicable following the execution
of this Agreement, Buyer shall cause BCI
Acquisition Company, a Delaware corporation
("Merger Sub"), to be organized for the sole
purpose of effectuating the Merger contemplated
hereby.
1.1.2. The Certificate of Incorporation and Bylaws of
Merger Sub shall be in such forms as shall be
determined by Buyer.
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1.1.3. The unauthorized capital stock of Merger Sub shall
initially consist of 1,000 shares of common stock,
$.0001 par value per share, which shall be issued
to Buyer at a price of $1.00 per share.
1.1.4. As promptly as practicable following the execution
of this Agreement and the organization of Merger
Sub, Buyer shall (i) elect the directors of Merger
Sub, (ii) cause the directors of Merger Sub to
elect the officers of Merger Sub, and (iii) cause
the directors of Merger Sub to ratify and approve
this Agreement and to approve the form of the
Merger Agreement (as defined below).
1.2. THE MERGER. At the Effective Time (as defined in Section 1.3)
and subject to and upon the terms and conditions of this Agreement
and the applicable provisions of the Delaware General Corporation
Law ("DGCL"), Merger Sub shall be merged with and into the
Company, the separate corporate existence of Merger Sub shall
cease and the Company shall continue as the surviving corporation
and as a wholly-owned subsidiary of Buyer. The surviving
corporation after the Merger is hereinafter sometimes referred
to as the "Surviving Corporation."
1.3. EFFECTIVE TIME. Unless this Agreement is earlier terminated
pursuant to Section 8.1, the closing of the Merger (the "Closing")
will take place as promptly as practicable, but no later than
two (2) business days following the approval of the Merger by
either (i) written consent of the Company's Stockholders or
(ii) consent of the Company's Stockholders at the Company
Stockholders Meeting (as described in Section 5.1) and the
satisfaction or waiver of the conditions set forth in
Article VI, at the offices of Irell & Manella LLP, 333 South
Hope Street, Suite 3300, Los Angeles, California, 90071 unless
another place or time is agreed to in writing by Buyer and the
Company. The date upon which the Closing actually occurs is
herein referred to as the "Closing Date." On the Closing Date,
the parties hereto shall cause the Merger to be consummated by
filing an Agreement of Merger (or like instrument) substantially
in the form attached hereto as Exhibit A (the "Merger Agreement")
with the Secretary of State of the State of Delaware, in
accordance with the applicable provisions of the DGCL (the time
of acceptance by such Secretary of State of such filing being
referred to herein as the "Effective Time").
1.4. EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of
Delaware law. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of the Company and
Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
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1.5. CERTIFICATE OF INCORPORATION; BYLAWS.
1.5.1. Unless otherwise determined by Buyer prior to the
Effective Time, at the Effective Time, the
Certificate of Incorporation of Merger Sub shall be
the Certificate of Incorporation of the Surviving
Corporation until thereafter amended as provided by
law and such Certificate of Incorporation.
1.5.2. Unless otherwise determined by Buyer prior to the
Effective Time, the Bylaws of Merger Sub, as in
effect immediately prior to the Effective Time,
shall be the Bylaws of the Surviving Corporation
until thereafter amended.
1.6. DIRECTORS AND OFFICERS. The directors of Merger Sub
immediately prior to the Effective Time shall be the
directors of the Surviving Corporation immediately after the
Effective Time, each to hold the office of director of the
Surviving Corporation in accordance with the provisions of
the applicable laws of the State of Delaware and the
Certificate of Incorporation and Bylaws of the Surviving
Corporation until their successors are duly qualified and
elected. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving
Corporation immediately after the Effective Time, each to
hold office in accordance with the provisions of the Bylaws
of the Surviving Corporation. In particular, Matthew
Glickman shall be the Chief Executive Officer of the
Surviving Corporation and Mark Selcow shall be President of
the Surviving Corporation.
1.7. CERTAIN DEFINITIONS. For all purposes of this Agreement,
the following terms shall have the following meanings:
"Buyer Common Stock" shall mean shares of the common stock,
$.0001 par value per share, of Buyer.
"Buyer IPO" shall mean the initial public offering of Buyer
Common Stock to be made pursuant to the Buyer Registration
Statement, which is anticipated to be consummated prior to
the consummation of the Merger.
"Buyer Registration Statement" means Amendment No. 1 to the
Registration Statement on Form S-1 of Buyer pertaining to
the Buyer IPO, which was filed with the SEC on April 5,
1999.
"Buyer Stock Split" shall mean the 3-for-1 stock split of
Buyer Common Stock that is expected to be effected
concurrently with the consummation of the Buyer IPO. All
references to numbers of shares of Buyer Common Stock herein
are to numbers of such shares before consummation of the
Buyer Stock Split.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Company Capital Stock" shall mean all shares of Company
Common Stock, Company Preferred Stock and any other capital
stock of the Company.
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"Company Common Stock" shall mean shares of the Common Stock
of the Company.
"Company Option Plan" shall mean the BabyCenter, Inc. 1997
Stock Plan.
"Company Options" shall mean all issued and outstanding
options, warrants and other rights to acquire or receive
Company Capital Stock (whether or not vested).
"Company Preferred Stock" shall mean shares of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock and any other Series of preferred stock of
the Company.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Exchange Ratio" shall equal the quotient obtained by
dividing (i) 6,240,000 by (ii) the sum of: (x) the aggregate
number of Total Outstanding Company Shares and (y) the
aggregate number of shares of Company Capital Stock subject
to Company Options (in the case of Company Options, if any,
exercisable for convertible securities, computed on a
Company Common Stock equivalent basis, giving effect to the
conversion ratio governing each such convertible security)
outstanding immediately prior to the Effective Time.
"GAAP" shall mean generally accepted accounting principles
in effect from time to time in the United States, applied on
a consistent basis for the relevant entity.
"Knowledge" of a person shall mean the actual knowledge of
the person, and knowledge of a corporation shall mean the
actual knowledge of an officer or director of the
corporation, in each case following reasonable
investigation.
"Material Adverse Effect" shall mean any change, event or
effect that is materially adverse to the business, assets
(including intangible assets), financial condition, results
of operations or prospects of the entity referred to.
"Related Agreements" shall mean all such ancillary
agreements required in this Agreement to be executed and
delivered in connection with the transactions contemplated
hereby.
"SEC" shall mean the Securities Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Stockholder" shall mean each holder of any Company Capital
Stock immediately prior to the Effective Time.
"Total Outstanding Company Shares" shall be the aggregate
number of shares of Company Capital Stock outstanding
immediately prior to the Effective Time (in the case of
convertible securities, computed on a Company Common Stock
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equivalent basis, giving effect to the conversion ratio
governing each such convertible security).
1.8. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS.
1.8.1. EFFECT ON COMPANY CAPITAL STOCK. At the Effective
Time, by virtue of the Merger and without any
action on the part of Merger Sub, the Company or
the Stockholders, each share of Company Capital
Stock issued and outstanding immediately prior to
the Effective Time (other than any Dissenting
Shares (as defined in Section 1.8.6)) will be
canceled and extinguished and be converted
automatically into the right to receive, upon
surrender of the certificate representing such
share of Company Capital Stock in the manner
provided for in this Section 1.8.1, a fraction of a
share of Buyer Common Stock (subject to
Section 1.8.5) equal to the Exchange Ratio. In the
case of Company Capital Stock consisting of
convertible securities (including, without
limitation, shares of Company Preferred Stock that
remain outstanding immediately prior to the
Effective Time), the Exchange Ratio shall be
applied to such shares on a Company Common Stock
equivalent basis, giving effect to the conversion
ratio governing each such convertible security.
All shares of Buyer Common Stock issued in exchange
for shares of Company Capital Stock subject to
Company repurchase rights or vesting schedules
shall be subject to the same repurchase rights
and/or vesting schedules and other terms as
applicable to such shares of Company Capital Stock,
with Buyer succeeding to the rights of the Company
thereunder and with a proportionate adjustment to
any per share repurchase price applicable to such
shares to reflect the Exchange Ratio.
Notwithstanding anything contained in this Section
1.8.1 to the contrary, each share of Company
Capital Stock issued and held in the Company's
treasury immediately prior to the Effective Time
shall, by virtue of the Merger, cease to be
outstanding and shall be canceled and retired
without payment of any consideration therefor.
1.8.2. EFFECT ON COMPANY OPTIONS; AGREEMENT CONCERNING
WARRANTS. At the Effective Time, each Company
Option will, in connection with the Merger, be
assumed by Buyer. Each Company Option so assumed by
Buyer under this Agreement shall continue to have,
and be subject to, the same terms and conditions,
including vesting, applicable thereto prior to the
Effective Time, except that (A) such assumed
Company Option will be exercisable for that number
of whole shares of Buyer Common Stock equal to the
product obtained by multiplying the number of
shares of Company Capital Stock that were issuable
upon exercise in full of such assumed Company
Option immediately prior to the Effective Time (in
the case of Company Options, if any, exercisable
for convertible securities, computed on a Company
Common Stock equivalent basis, giving effect to the
conversion ratio governing each such convertible
security) by the Exchange Ratio, rounded down to
the nearest whole number of shares of
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Buyer Common Stock and (B) the per share exercise price
for the shares of Buyer Common Stock issuable upon
exercise of such assumed Company Option shall be equal
to the quotient obtained by dividing the exercise
price per share of Company Capital Stock at which
such Company Option was exercisable immediately
prior to the Effective Time (in the case of Company
Options, if any, exercisable for convertible
securities, computed on a Company Common Stock
equivalent basis, giving effect to the conversion
ratio governing each such convertible security) by
the Exchange Ratio, rounded up to the nearest whole
cent. It is the intention of the parties that
options issued by Buyer following the Closing will,
to the extent permitted by applicable law, qualify
as incentive stock options as defined in Section
422 of the Code, to the extent Company Options in
respect of which Buyer options were issued
qualified as incentive stock options immediately
prior to the Closing. The Company agrees to use its
commercially reasonable efforts to cause all other
warrants to acquire Company Capital Stock
(including without limitation that certain Warrant
Agreement dated as of October 28, 1998 issued to
Comdisco, Inc., a Delaware corporation) to be
exercised in full or otherwise cancelled (without
the payment of any consideration) prior to the
Effective Time, and to provide evidence thereof
reasonably satisfactory to the Buyer prior to or at
the Closing. Notwithstanding anything herein to
the contrary, prior to the Effective Time, the
Company shall cause all commitments to issue or
grant options or similar rights to purchase or
receive Company Capital Stock to be terminated or,
to the extent the Company elects not to or is
unable to terminate such commitments, to be treated
as outstanding Company Options for purposes of
computing the Exchange Ratio; PROVIDED, HOWEVER,
that the Company covenants to terminate prior to
the Effective Time the commitment previously made
to Mr. Steve Fram relating to the possible issuance
to him of up to .25% equity interest in the
Company.
1.8.3. EFFECT ON CAPITAL STOCK OF MERGER SUB. Each share
of common stock, $.0001 par value per share, of
Merger Sub issued and outstanding immediately prior
to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and
nonassessable share of common stock, $.0001 par
value per share, of the Surviving Corporation. Each
stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to
evidence ownership of such shares of capital stock
of the Surviving Corporation.
1.8.4. ADJUSTMENT TO BUYER COMMON STOCK. The number of
shares of Buyer Common Stock issuable hereunder
shall be adjusted to reflect fully the effect of
any stock split (including, without limitation, the
anticipated Buyer Stock Split, if consummated prior
to the consummation of the Merger), reverse split,
stock dividend (including any dividend or
distribution of securities convertible into Buyer
Common Stock or Company Capital Stock),
reorganization, recapitalization or other like
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change with respect to Buyer Common Stock or
Company Capital Stock occurring after the date
hereof and prior to the Effective Time.
1.8.5. FRACTIONAL SHARES. Notwithstanding anything to the
contrary in this Agreement, no fractional shares of
Buyer Common Stock shall be issued pursuant to the
Merger. In lieu of the issuance of any fractional
share of Buyer Common Stock pursuant to the Merger,
cash adjustments will be paid to holders in respect
of any fractional share of Company Capital Stock
that would otherwise be issuable, and the amount of
such cash adjustment shall be equal to the product
of (a) such fractional amount and (b) either (i) if
Buyer Common Stock is then publicly traded, the
average closing price of Buyer Common Stock on the
Nasdaq National Market for the five (5) trading
days ending on the trading day prior to the
Effective Time or (ii) if Buyer Common Stock is not
then publicly traded, the fair market value of a
share of Buyer Common Stock as determined by the
Buyer's Board of Directors in good faith.
1.8.6. DISSENTING SHARES. Notwithstanding any provision
of this Agreement to the contrary, any shares of
Company Capital Stock issued and outstanding
immediately prior to the Effective Time that are
held by a Stockholder who has exercised and
perfected appraisal rights for such shares in
accordance with the DGCL and who, as of the
Effective Time, has not effectively withdrawn or
lost such appraisal rights ("Dissenting Shares"),
shall not be converted into or represent a right to
receive Buyer Common Stock pursuant to Section
1.8.1, but the holder thereof shall only be
entitled to such rights as are granted by the DGCL.
Notwithstanding the provisions of this Section, if
any holder of Dissenting Shares shall effectively
withdraw or lose (through failure to perfect or
otherwise) his or her appraisal rights, then, as of
the later of the Effective Time and the occurrence
of such event, such holder's shares shall
automatically be converted into and represent only
the right to receive the shares of Buyer Common
Stock to which such Stockholder would otherwise be
entitled under Section 1.8.1 (less the number of
shares allocable to such Stockholder that have been
deposited into the Escrow Fund on such holder's
behalf pursuant to Article VII), upon surrender of
the certificate representing such shares. The
Company shall give Buyer (i) prompt notice of any
written demand for appraisal received by the
Company pursuant to the applicable provisions of
the DGCL and (ii) the opportunity to participate in
all negotiations and proceedings with respect to
such demands. The Company shall not, except with
the prior written consent of Buyer, voluntarily
make any payment with respect to any such demands
or offer to settle or settle any such demands. To
the extent that the Company makes any payments in
respect of any Dissenting Shares prior to the
Effective Time, Buyer shall be entitled to recover
under the terms of Article VII hereof the aggregate
amount by which such payment or payments exceed the
aggregate consideration that otherwise would have
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been payable in respect of such shares (for this
purpose, valued in the same manner specified in
Section 7.2.5(b) below).
1.8.7. SURRENDER OF CERTIFICATES.
(a) Buyer shall appoint a reputable
institution to serve as exchange agent
(the "Exchange Agent") in the Merger.
(b) Within three (3) business days after the
Effective Time, Buyer shall make available
to the Exchange Agent for exchange in
accordance with this Article I the shares
of Buyer Common Stock issuable pursuant to
Section 1.8.1 in exchange for all the
outstanding shares of Company Capital
Stock; provided, however, that on behalf
of the Stockholders, pursuant to Section
7.2 hereof, Buyer shall deposit into an
escrow account 100,000 of the shares of
Buyer Common Stock otherwise issuable to
the Stockholders pursuant to Section 1.8.1
(the "Escrow Amount"). The portion of the
Escrow Amount contributed on behalf of
each Stockholder shall be in proportion to
the aggregate number of shares which such
Stockholder would otherwise be entitled to
receive in the Merger by virtue of
ownership of outstanding shares of Company
Capital Stock unless so otherwise agreed
by certain Stockholders.
(c) On the Closing Date or promptly
thereafter, the Stockholders will
surrender the certificates representing
their Company Capital Stock (the
"Certificates") to the Exchange Agent for
cancellation together with a letter of
transmittal in such form and having such
provisions as Buyer may reasonably
request. Buyer shall provide such letter
of transmittal to the Stockholders on the
Closing Date or as promptly thereafter as
practicable. Upon surrender of a
Certificate for cancellation to the
Exchange Agent, together with such letter
of transmittal, duly completed and validly
executed in accordance with the
instructions thereto, the Exchange Agent
will promptly deliver to the holder of
such Certificate in exchange therefor a
certificate representing the number of
whole shares of Buyer Common Stock (less
the number of shares of Buyer Common Stock
to be deposited in the Escrow Fund on such
holder's behalf pursuant to
Section 1.8.7(b) and Article VII) to which
such Stockholder is entitled pursuant to
Section 1.8.1, and the Certificate so
surrendered shall forthwith be canceled.
Until so surrendered, each outstanding
Certificate that, prior to the Effective
Time, represented shares of Company
Capital Stock will be deemed from and
after the Effective Time, for all
corporate purposes, other than the payment
of dividends, to evidence only the right
to receive the number of full shares of
Buyer Common Stock into which such shares
of Company Capital Stock shall have been
converted pursuant to this Article I
(except as may otherwise
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be provided under the DGCL with respect to
Dissenting Shares), together with any cash in
lieu of fractional shares. As soon as
practicable after the Effective Time, and subject
to and in accordance with the provisions of
Article VII hereof, Buyer shall cause to
be distributed to the Escrow Agent (as
defined in Article VII) a certificate or
certificates representing that number of
shares of Buyer Common Stock equal to the
Escrow Amount, which shall be registered
in the name of the Escrow Agent. Such
shares shall be beneficially owned by the
holder on whose behalf such shares were
deposited in the Escrow Fund and shall be
available to compensate Buyer as provided
in Article VII.
(d) No dividends or other distributions
declared or made after the Effective Time
with respect to Buyer Common Stock with a
record date after the Effective Time will
be paid to any holder of any unsurrendered
Certificate with respect to the shares of
Buyer Common Stock represented thereby
until the holder of record of such
Certificate shall surrender such
Certificate. Subject to applicable law,
following surrender of any such
Certificate, there shall be paid to the
record holder of the certificates
representing whole shares of Buyer Common
Stock issued in exchange therefor, without
interest, at the time of such surrender,
the amount of dividends or other
distributions with a record date after the
Effective Time theretofore paid with
respect to such whole shares of Buyer
Common Stock.
(e) If any certificate for shares of Buyer
Common Stock is to be issued in a name
other than that in which the certificate
surrendered in exchange therefor is
registered, it will be a condition to the
issuance thereof that the certificate so
surrendered will be properly endorsed and
otherwise in proper form for transfer and
that the person requesting such exchange
will have paid to Buyer or any agent
designated by it any transfer or other
taxes required by reason of the issuance
of a certificate for shares of Buyer
Common Stock in any name other than that
of the registered holder of the
certificate surrendered, or established to
the satisfaction of Buyer or any agent
designated by it that such tax has been
paid or is not payable.
(f) In the event any certificates evidencing
shares of Company Capital Stock shall have
been lost, stolen or destroyed, the
Exchange Agent shall issue in exchange for
such lost, stolen or destroyed
certificates, upon the making of an
affidavit of that fact by the holder
thereof, the number of shares of Buyer
Common Stock, if any, as may be required
pursuant to Section 1.8.1; provided,
however, that Buyer may, in its discretion
and as a condition precedent to the
issuance thereof, require the owner of
such lost,
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stolen or destroyed certificates to
deliver a bond in such sum as it may
reasonably direct against any claim that
may be made against Buyer or the Exchange
Agent with respect to the certificates
alleged to have been lost, stolen or
destroyed.
(g) Notwithstanding anything to the contrary
in this Section 1.8, none of the Exchange
Agent, the Surviving Corporation or any
party hereto shall be liable to a holder
of shares of Buyer Common Stock or Company
Capital Stock for any amount properly paid
to a public official pursuant to any
applicable abandoned property, escheat or
similar law.
(h) All shares of Buyer Common Stock issued
upon the surrender for exchange of shares
of Company Capital Stock in accordance
with the terms hereof shall be deemed to
be issued in full satisfaction of all
rights pertaining to such shares of
Company Capital Stock, and there shall be
no further registration of transfers on
the records of the Surviving Corporation
of shares of Company Capital Stock that
were outstanding immediately prior to the
Effective Time. If, after the Effective
Time, Certificates are presented to the
Surviving Corporation for any reason, they
shall be canceled and exchanged as
provided in this Article I.
(i) Dissenting Shares, if any, after payments
of fair value in respect thereto have been
made to dissenting Stockholders of the
Company pursuant to the DGCL and this
Article I, shall be canceled.
1.8.8. TAX CONSEQUENCES. It is intended by the parties
hereto that the Merger shall constitute a
reorganization within the meaning of Section 368 of
the Code. Each party has consulted with its own
tax advisors with respect to the tax consequences
of the Merger.
1.8.9. FURTHER ASSURANCES. If, at any time after the
Effective Time, any further action is necessary or
desirable to consummate the Merger, to carry out
the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and
possession to all assets, property, rights,
privileges, powers and franchises of the Company
and Merger Sub, the officers and directors of the
Company and Buyer are fully authorized in the name
of their respective corporations or otherwise to
take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Buyer, subject to such
exceptions as are specifically disclosed in the disclosure schedule referencing
the appropriate section and paragraph numbers (provided that the failure to
refer to a particular section or paragraph will not
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affect the applicability of a disclosure to such section or paragraph if the
nature of such disclosure makes reasonably clear the applicability thereof to
the subject matter of such section or paragraph) supplied by the Company to
Buyer (the "Disclosure Schedule") and dated as of the date hereof, that on
the date hereof and as of the Effective Time as though made at the Effective
Time as follows:
2.1. ORGANIZATION OF THE COMPANY. The Company is a corporation
duly organized, validly existing and in good standing under
the laws of the State of Delaware. The Company has the
corporate power to own its properties and to carry on its
business as now being conducted. The Company is duly
qualified to do business and in good standing as a foreign
corporation in each jurisdiction in which the failure to be
so qualified would be reasonably likely to have a Material
Adverse Effect. The Company has delivered a true and correct
copy of its Certificate of Incorporation and Bylaws, each as
amended to date, to Buyer. Section 2.1 of the Disclosure
Schedule lists the directors and officers of the Company.
The operations now being conducted by the Company have not
been conducted under any other name.
2.2. SUBSIDIARIES. The Company does not have, and has never
had, any subsidiaries or affiliated companies and does not
otherwise own, and has not otherwise owned, any shares in
the capital of or any interest in, or control, directly or
indirectly, any corporation, partnership, association, joint
venture or other business entity.
2.3. COMPANY CAPITAL STRUCTURE.
2.3.1. The authorized capital stock of the Company
consists of (i) 11,000,000 shares of Company Common
Stock, of which 2,297,096 shares were outstanding
as of March 31, 1999; (ii) 1,307,693 shares of
Series A Preferred Stock, of which 1,202,046 shares
are outstanding; (iii) 1,860,672 shares of Series B
Preferred Stock, of which 1,693,884 shares are
outstanding; and (iv) 2,500,000 shares of Series C
Preferred Stock, of which 2,000,000 shares are
outstanding. In addition, there are outstanding
warrants exercisable for 120,000 shares of Common
Stock and 22,000 shares of Series C Preferred
Stock. The Company Capital Stock is held by the
persons, with the domicile addresses and in the
amounts set forth in Section 2.3.1 of the
Disclosure Schedule. All outstanding shares of
Company Capital Stock are duly authorized, validly
issued, fully paid and nonassessable and not
subject to preemptive rights created by statute,
the Certificate of Incorporation or Bylaws of the
Company or any agreement to which the Company is a
party or by which it is bound and have been issued
in compliance with federal and state securities
laws. There are no declared or accrued unpaid
dividends with respect to any shares of the Company
Capital Stock. The Company has no other capital
stock authorized, issued or outstanding.
2.3.2. Except for the Company Option Plan, the Company has
never adopted or maintained any stock option plan
or other plan providing for equity
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compensation of any person. The Company has
reserved 2,261,500 shares of Company Capital Stock
for issuance to employees and consultants pursuant
to the Company Option Plan. Of such shares, as of
March 31, 1999, 537,958 have been issued upon
exercise of Company Options and 893,608 shares are
subject to outstanding unexercised options. Section
2.3.2.1 of the Disclosure Schedule sets forth for
each outstanding Company Option, the name of the
holder of such option, the domicile address of such
holder, the number and class or series of shares of
Company Capital Stock subject to such option, the
exercise price of such option, the vesting schedule
for such option, including the extent vested to
date and whether the exercisability of such option
will be accelerated by the transactions
contemplated by this Agreement, and whether such
option is intended to qualify as an incentive stock
option as defined in Section 422 of the Code.
Except for the Company Options as set forth in
Section 2.3.2.2 of the Disclosure Schedule, there
are no options, warrants, calls, convertible
securities (other than the Company Preferred
Stock), exchangeable securities, rights,
commitments or agreements of any character, written
or oral, to which the Company is a party or by
which it is bound obligating the Company to issue,
deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed,
any shares of Company Capital Stock or obligating
the Company to grant, extend, accelerate the
vesting of, change the price of, otherwise amend or
enter into any such option, warrant, call,
convertible security, exchangeable security, right,
commitment or agreement. Except as set forth on
Section 2.3.2.3 of the Disclosure Schedule, there
is no outstanding Company Capital Stock which is
subject to vesting. Section 2.3.2.3 of the
Disclosure Schedule sets forth the name of the
holder of any Company Capital Stock subject to
vesting, the number of shares of Company Capital
Stock subject to vesting and the vesting schedule
for such Company Capital Stock, including the
extent vested to date and whether the vesting of
such shares of Company Capital Stock will be
accelerated by the transactions contemplated by
this Agreement.
2.3.3. There are no outstanding or authorized stock
appreciation, phantom stock, profit participation,
or other similar rights with respect to the
Company. The Company is not a party to and, to the
Company's knowledge, there are no voting trusts,
proxies, or other agreements or understandings with
respect to the voting stock of the Company.
2.3.4. As a result of the Merger, Buyer will be the record
and sole beneficial owner of all outstanding
Company Capital Stock and all rights to acquire or
receive any Company Capital Stock, whether or not
such Company Capital Stock is outstanding.
2.4. AUTHORITY. The Company has all requisite power and
authority to enter into this Agreement and the Related
Agreements to which it is a party and to consummate the
transactions contemplated hereby and thereby. The execution
and delivery of
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this Agreement and any Related Agreements to which it is a
party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all
necessary corporate action on the part of the Company, and
no further action is required on the part of the Company to
authorize this Agreement, any Related Agreements to which
it is a party and the transactions contemplated hereby and
thereby, subject only to the approval of this Agreement by
the Stockholders and the receipt of required third party
consents (which material third party consents are identified
in Section 2.6 of the Disclosure Schedule). This Agreement,
the Merger and any Related Agreements to which the Company
is a party have been unanimously approved by the Board of
Directors of the Company. This Agreement has been, and any
Related Agreements to which the Company is a party have been
or will have been prior to the Effective Time, duly executed
and delivered by the Company and, assuming the due
authorization, execution and delivery by the other parties
hereto and thereto, constitute the valid and binding
obligation of the Company, enforceable in accordance with
their respective terms, except as such enforceability may be
limited by principles of public policy and subject to the
laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law
governing specific performance, injunctive relief or other
equitable remedies.
2.5. NO CONFLICT. Except as set forth in Section 2.5 of the
Disclosure Schedule, the execution and delivery of this
Agreement and any Related Agreements to which it is party by
the Company do not, and, the consummation of the
transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or
give rise to a right of termination, cancellation,
modification or acceleration of any obligation or loss of
any benefit (any such event, a "Conflict") under (i) any
provision of the Certificate of Incorporation and Bylaws of
the Company, (ii) any mortgage, indenture, lease, contract
or other agreement or instrument, permit, concession,
franchise or license to which the Company or any of its
properties or assets are subject, or (iii) any judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or its properties or assets;
except for a Conflict under subsection (ii) or (iii) above
that would not have a Material Adverse Effect on the Company
or on the ability of the parties to consummate the Merger or
the other transactions contemplated by this Agreement and
the Related Agreements.
2.6. CONSENTS. Except as set forth in Section 2.6 of the
Disclosure Schedule, no consent, waiver, approval, order or
authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or
other federal, state, county, local or other foreign
governmental authority, instrumentality, agency or
commission ("Governmental Entity") or any third party,
including a party to any agreement with the Company (so as
not to trigger any Conflict), is required by or with respect
to the Company in connection with the execution and delivery
of this Agreement and any Related Agreements to which the
Company is a party or the consummation of the transactions
contemplated hereby and thereby, except for (i)
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<PAGE>
such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required
under applicable securities laws, (ii) any applicable
filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (iii)
the filing of the Merger Agreement with the Secretary of
State of the State of Delaware, (iv) the approval of the
Merger by the Company's Stockholders, (v) any other filings
or approvals as may be required under Delaware state law,
and (vi) consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings
which, if not obtained or made, would not have a Material
Adverse Effect on the Company or on the ability of the
parties to consummate the Merger or the other transactions
contemplated by this Agreement.
2.7. COMPANY FINANCIAL STATEMENTS. Section 2.7 of the
Disclosure Schedule sets forth the Company's unaudited
balance sheets as of January 31, 1999, December 31, 1998 and
September 30, 1998 and the Company's unaudited statements of
income and cash flow for the one-month period ended
January 31, 1999, three-month period ended December 31, 1998
and the year ended September 30, 1998 (collectively, the
"Financials"). The Financials are correct in all material
respects and have been prepared in accordance with GAAP,
applied on a basis consistent throughout the periods
indicated and consistent with each other (except that the
interim period Financials may not contain all the notes that
may be required by GAAP). The Financials present fairly the
financial condition and operating results of the Company as
of the dates and during the periods indicated therein,
subject to normal year-end adjustments, which will not be
material in amount or significance. The Company's Balance
Sheet as of January 31, 1999 shall be hereinafter referred
to as the "Current Balance Sheet."
2.8. NO UNDISCLOSED LIABILITIES. Except as set forth in
Section 2.8 of the Disclosure Schedule, the Company has no
liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether
accrued, absolute, contingent, matured, unmatured or
otherwise (collectively, "Contingent Liabilities") (whether
or not required to be reflected in financial statements in
accordance with GAAP), other than (i) Contingent Liabilities
that are reserved or otherwise reflected expressly in the
Current Balance Sheet and (ii) Contingent Liabilities that
have arisen in the ordinary course of business consistent
with past practices since January 31, 1999 (which, in the
aggregate, are not material in amount or significance).
2.9. NO CHANGES. Except as set forth in Section 2.9 of the
Disclosure Schedule or as contemplated by this Agreement or
the Related Agreements, from January 31, 1999 through the
date of this Agreement, there has not been, occurred or
arisen any:
(a) amendments or changes to the Certificate
of Incorporation or Bylaws of the Company;
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<PAGE>
(b) capital expenditure or commitment by the
Company, either individually exceeding
$50,000 or in the aggregate exceeding
$100,000;
(c) destruction of, damage to or loss of any
material assets, business or customer of
the Company (whether or not covered by
insurance);
(d) labor trouble or claim of wrongful
discharge or other unlawful labor practice
or action;
(e) change in accounting methods or practices
(including any change in depreciation,
revenue recognition or amortization
policies or rates) by the Company;
(f) revaluation by the Company of any of its
assets;
(g) declaration, setting aside or payment of a
dividend or other distribution with
respect to the Company Capital Stock or
any direct or indirect redemption,
purchase or other acquisition by the
Company of Company Capital Stock;
(h) increase in the salary or other
compensation payable or to become payable
by the Company to any of its officers,
directors, employees or advisors, or the
declaration, payment or commitment or
obligation of any kind for the payment, by
the Company, of a bonus or other
additional salary or compensation to any
such person;
(i) any agreement, contract, covenant,
instrument, lease, license or commitment
to which the Company is a party or by
which it or any of its assets are bound or
any termination, extension, amendment or
modification of the terms of any
agreement, contract, covenant, instrument,
lease, license or commitment to which the
Company is a party or by which it or any
of its assets are bound other than in the
ordinary course of the Company's business,
consistent with past practice;
(j) sale, lease, license or other disposition
of any of the assets or properties of the
Company or any creation of any security
interest in such assets or properties
other than in the ordinary course of the
Company's business, consistent with past
practice;
(k) loan by the Company to any person or
entity, incurring by the Company of any
indebtedness, guaranteeing by the Company
of any indebtedness, issuance or sale of
any debt securities of the Company or
guaranteeing of any debt securities of
others, except for advances to employees
for travel and business expenses in the
ordinary course of business, consistent
with past practice;
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<PAGE>
(l) incurrence by the Company of any liability
in excess of $50,000 individually or
$100,000 in the aggregate;
(m) waiver or release of any right or claim of
the Company including any write-off or
other compromise of any account receivable
of the Company (other than compromises of
invoices with customers in the ordinary
course of business consistent with past
practice, which compromises are not in the
aggregate material in amount or
significance);
(n) the commencement or notice or threat of
any lawsuit or proceeding or investigation
against the Company or its affairs;
(o) notice of any claim or potential claim of
ownership by any person other than the
Company of the Company Intellectual
Property (as defined in Section 2.13) or
of infringement by the Company of any
other person's Intellectual Property (as
defined in Section 2.13);
(p) issuance or sale, or contract to issue or
sell, by the Company of any shares of
Company Capital Stock or securities
exchangeable, convertible or exercisable
therefor, or any securities, warrants,
options or rights to purchase any of the
foregoing, except for options to purchase
capital stock of the Company granted to
employees of and consultants to the
Company in the ordinary course of business
consistent with past practice;
(q) (i) selling or entering into any material
license agreement with respect to the
Company Intellectual Property with any
third party or (ii) buying or entering
into any material license agreement with
respect to the Intellectual Property of
any third party;
(r) any event or condition of any character
that has had a Material Adverse Effect on
the Company;
(s) any transaction by the Company except in
the ordinary course of business as
conducted on that date and consistent with
past practices; or
(t) negotiation or agreement by the Company or
any officer thereof to do any of the
things described in the preceding clauses
(a) through (s) (other than negotiations
with Buyer and its representatives
regarding the transactions contemplated by
this Agreement).
2.10. TAX MATTERS.
2.10.1. DEFINITION OF TAXES. For the purposes of this
Agreement, "Tax" or, collectively, "Taxes", means
(i) any and all federal, state, local and foreign
taxes, assessments and other governmental charges,
duties, impositions
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and liabilities, including taxes based upon or
measured by gross receipts, income, profits, sales,
use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll,
recapture, employment, excise and property taxes,
together with all interest, penalties and additions
imposed with respect to such amounts; (ii) any
liability for the payment of any amounts of the type
described in clause (i) as a result of being a
member of an affiliated, consolidated, combined or
unitary group for any period; and (iii) any
liability for the payment of any amounts of the
type described in clause (i) or (ii) as a result of
any express or implied obligation to indemnify any
other person or as a result of any obligations
under any agreements or arrangements with any other
person with respect to such amounts and including
any liability for taxes of a predecessor entity.
2.10.2. TAX RETURNS AND AUDITS.
(a) As of the Effective Time, the Company will
have prepared and timely filed all
required federal, state, local and foreign
returns, estimates, information statements
and reports ("Returns") relating to any
and all Taxes concerning or attributable
to the Company or its operations and such
Returns are true and correct and have been
completed in accordance with applicable
law (other than Taxes not yet due for
which adequate reserves may have been
established on the Current Balance Sheet).
(b) As of the Effective Time, the Company (A)
will have paid all Taxes it is required to
pay and will have withheld with respect to
its employees all federal and state income
taxes, Federal Insurance Contribution Act
("FICA"), Federal Unemployment Tax Act
("FUTA") and other Taxes required to be
withheld, (other than Taxes not yet due
for which adequate reserves may have been
established on the Current Balance Sheet)
and (B) will have accrued on the Current
Balance Sheet all unpaid Taxes (whether or
not due) attributable to all periods
through the date of the Current Balance
Sheet and will not have incurred any
liability for Taxes for the period from
the date of the Current Balance Sheet to
the Effective Time other than in the
ordinary course of business, consistent
with past practice.
(c) The Company has not been delinquent in the
payment of any Tax (other than items for
which adequate reserves may have been
established on the Current Balance Sheet)
nor is there any Tax deficiency
outstanding, assessed or proposed against
the Company, nor has the Company executed
any waiver of any statute of limitations
on or extending the period for the
assessment or collection of any Tax.
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(d) No audit or other examination of any
Return of the Company is presently in
progress, nor has the Company been
notified of any request for such an audit
or other examination.
(e) No adjustment relating to any Returns
filed by the Company has been proposed
formally or informally by any Tax
authority to the Company or any
representative thereof.
(f) The Company has no liabilities for unpaid
federal, state, local and foreign Taxes
which have not been accrued or reserved
against in accordance with GAAP on the
Current Balance Sheet, whether asserted or
unasserted, contingent or otherwise, and
the Company has not incurred any liability
for Taxes since the date of the Current
Balance Sheet other than in the ordinary
course of business, consistent with past
practice.
(g) The Company has made available to Buyer or
its legal counsel, copies of all foreign,
federal and state income and all state
sales and use Returns for the Company
filed for all periods since its inception.
(h) There are (and immediately following the
Effective Time there will be) no liens,
pledges, charges, claims, restrictions on
transfer, mortgages, security interests or
other encumbrances of any sort
(collectively, "Liens") on the assets of
the Company relating to or attributable to
Taxes other than Liens for Taxes not yet
due and payable.
(i) None of the Company's assets are treated
as "tax-exempt use property," within the
meaning of Section 168(h) of the Code.
(j) The Company is not subject to any
contract, agreement, plan or arrangement,
including but not limited to the
provisions of this Agreement, covering any
employee or former employee of the
Company that, individually or
collectively, could give rise to the
payment of any amount that would not be
deductible by the Company as an expense
under applicable law (including, without
limitation, Sections 280G, 404 and 162(m)
of the Code).
(k) The Company has not filed any consent
agreement under Section 341(f) of the Code
or agreed to have Section 341(f)(4) of the
Code apply to any disposition of a
subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by
the Company.
(l) The Company is not a party to any tax
sharing, indemnification or allocation
agreement nor does the Company owe any
amount under any such agreement.
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(m) The Company is not, and has not been at
any time, a "United States Real Property
Holding Corporation" within the meaning of
Section 897(c)(2) of the Code.
2.11. RESTRICTIONS ON BUSINESS ACTIVITIES. Except as set forth on
Section 2.11 of the Disclosure Schedule, to the Company's
Knowledge, there is no agreement (noncompete or otherwise),
commitment, judgment, injunction, order or decree to which
the Company is a party or otherwise binding upon the Company
which has or may have the effect of prohibiting or impairing
any business practice of the Company, any acquisition of
property (tangible or intangible) by the Company or the
conduct of business as currently run by the Company. Without
limiting the foregoing, the Company has not entered into any
agreement under which the Company is restricted from
selling, licensing or otherwise distributing any of its
technology or products to or providing services to,
customers or potential customers or any class of customers,
in any geographic area, during any period of time or in any
segment of the market.
2.12. TITLE OF PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES;
CONDITION OF EQUIPMENT.
2.12.1. The Company does not own any real property, and has
never owned any real property. Section 2.12.1 of
the Disclosure Schedule sets forth a list of all
real property currently leased by the Company, the
name of the lessor and the date of the lease and
each amendment thereto. All such current leases are
in full force and effect, are valid and effective
in accordance with their respective terms, and
there is not, under any of such leases, any
existing default or event of default (or event
which with notice or lapse of time, or both, would
constitute a default).
2.12.2. The Company has good and valid title to, or, in the
case of leased properties and assets, valid
leasehold interests in, all of its tangible
properties and assets, real, personal and mixed,
used or held for use in its business, free and
clear of any Liens, except as reflected in the
Current Balance Sheet and except for Liens for
Taxes not yet due and payable and such
imperfections of title and encumbrances, if any,
which are not material in character, amount or
extent, and which do not detract from the value, or
interfere with the present use, of the property
subject thereto or affected thereby.
2.12.3. All material items of equipment (the "Equipment")
owned or leased by the Company are (i) adequate for
the conduct of the business of the Company as
currently conducted and (ii) in acceptable
operating condition, regularly and properly
maintained, subject to normal wear and tear.
2.12.4. The Company has not transferred rights to customer
or end-user files or other customer or end-user
information it compiles relating to customers or
end-users of the Company's current and former
customers or end-users
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(the "Customer Information"). To the Company's
Knowledge, no person other than the Company
possesses any claims or rights with respect to use
of the Customer Information.
2.13. INTELLECTUAL PROPERTY.
2.13.1. For the purposes of this Agreement, the following
terms have the following definitions:
(a) "Intellectual Property" shall mean any or
all of the following and all rights in,
arising out of, or associated therewith:
(i) all United States and foreign patents
and applications therefor and all
reissues, divisions, renewals, extensions,
provisionals, continuations and
continuations-in-part thereof; (ii) all
inventions (whether patentable or not),
invention disclosures, improvements, trade
secrets, proprietary information, know
how, technology, technical data and
customer lists, and all documentation
relating to any of the foregoing; (iii)
all copyrights, copyrights registrations
and applications therefor and all other
rights corresponding thereto throughout
the world; (iv) all mask works, mask work
registrations and applications therefor;
(v) all industrial designs and any
registrations and applications therefor
throughout the world; (vi) all trade
names, logos, common law trademarks and
service marks; trademark and service mark
registrations and applications therefor
and all goodwill associated therewith
throughout the world; (vii) all databases
and data collections and all rights
therein throughout the world; (viii) all
computer software including all source
code, object code, firmware, development
tools, files, records and data, all media
on which any of the foregoing is recorded,
all Internet and Worldwide Web addresses,
URLs, sites and domain names; (ix) any
similar, corresponding or equivalent
rights to any of the foregoing; and (x)
all documentation related to any of the
foregoing.
(b) "Company Intellectual Property" shall mean
any Intellectual Property that is owned by
or exclusively licensed to the Company.
(c) "Registered Intellectual Property" shall
mean all United States, international and
foreign: (i) patents, patent applications
(including provisional applications); (ii)
registered trademarks, applications to
register trademarks, intent-to-use
applications, or other registrations or
applications related to trademarks; (iii)
registered copyrights and applications for
copyright registration; (iv) any mask work
registrations and applications to register
mask works; and (v) any other Company
Intellectual Property that is the subject
of an application, certificate, filing,
registration or other document
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issued by, filed with, or recorded by, any
state, government or other public legal
authority.
2.13.2. Section 2.13.2 of the Disclosure Schedule lists all
Registered Intellectual Property owned by, or filed
in the name of, the Company (the "Company
Registered Intellectual Property") and lists any
proceedings or actions before any court, tribunal
(including the United States Patent and Trademark
Office (the "PTO") or equivalent authority anywhere
in the world) related to any of the Company
Registered Intellectual Property Rights.
2.13.3. Except as set forth in Section 2.13.3 of the
Disclosure Schedule, each item of Company
Intellectual Property, including all Company
Registered Intellectual Property listed in Section
2.13.3 of the Disclosure Schedule and all
Intellectual Property licensed to the Company, is
free and clear of any Liens other than subject to
existing UCC's, which UCC's are listed on Section
2.13.3 of the Disclosure Schedule. The Company has
rights to the trademarks, trade names and
copyrights used in connection with the operation or
conduct of the business of the Company that are
sufficient to enable the Company to conduct its
business as the business is currently conducted,
including the sale of any products or technology or
the provision of any services by the Company (other
than with respect to products acquired from third
parties). The Company, to its knowledge, owns
exclusively, and has good title to, all copyrighted
works that are Company products or other works of
authorship that the Company otherwise purports to
own.
2.13.4. To the extent that any Intellectual Property has
been developed or created by any person other than
the Company for which the Company has, directly or
indirectly, paid, the Company has a written
agreement with such person with respect thereto and
the Company thereby has obtained ownership of, and
is the exclusive owner of, by operation of law or
by valid assignment, all such Intellectual
Property.
2.13.5. Except as set forth in Section 2.13.5 of the
Disclosure Schedule, the Company has not
transferred ownership of or granted any license of
or right to use or authorized the retention of any
rights to use any Intellectual Property that is or
was Company Intellectual Property, to any other
person.
2.13.6. The Company Intellectual Property constitutes all
the Intellectual Property used in and/or necessary
to the conduct of its business as it currently is
conducted, including, without limitation, the
design, development, manufacture, use, import and
sale of the products, technology and services of
the Company (including products, technology or
services currently under development).
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2.13.7. Except as listed in Section 2.13.7 of the
Disclosure Schedule, to the Company's Knowledge, no
person who has licensed Intellectual Property from
the Company has ownership in such Intellectual
Property.
2.13.8. To the Company's Knowledge, Section 2.13.8 of the
Disclosure Schedule lists all contracts, licenses
and agreements between the Company and any other
person wherein or whereby the Company has agreed
to, or assumed, any obligation or duty to assume or
incur any obligation or liability or provide a
right of rescission with respect to the
infringement or misappropriation by the Company or
such other person of the Intellectual Property of
any person other than the Company.
2.13.9. To the Company's Knowledge, the operation of the
business of the Company as it currently is
conducted, including but not limited to the
Company's design, development, use, import,
manufacture and sale of the Company's website and
the Company's products, technology or services
(including portions of the Company's website or the
Company's products, technology or services
currently under development) does not infringe or
misappropriate any Intellectual Property of any
person, violate the rights of any person (including
rights to privacy or publicity), or constitute
unfair competition or trade practices under the
laws of any jurisdiction. The Company has not
received any notice from any person that the
operation of the business of the Company as it
currently is conducted, including but not limited
to the Company's design, development, use, import,
manufacture and sale of the products, technology or
services (including products, technology or
services currently under development) of the
Company infringes or misappropriates the
Intellectual Property (other than trademarks, trade
names and service marks) of any person or
constitutes unfair competition or trade practices
under the laws of any jurisdiction.
2.13.10. All necessary registration, maintenance
and renewal fees in connection with such Registered
Intellectual Property have been paid and all
necessary documents and certificates in connection
with such Company Registered Intellectual Property
have been filed with the relevant patent,
copyright, trademark or other authorities in the
United States or foreign jurisdictions, as the case
may be, for the purposes of maintaining such
Registered Intellectual Property.
2.13.11. To the Company's knowledge, there are no
contracts, licenses or agreements between the
Company and any other person with respect to
Company Intellectual Property under which there is
any dispute known to the Company regarding the
scope of such agreement, or performance under such
agreement including with respect to any payments to
be made or received by the Company thereunder.
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2.13.12. To the Company's Knowledge, as of the date
of this Agreement, no person is infringing or
misappropriating any Company Intellectual Property.
2.13.13. The Company has, and enforces, a policy
requiring each employee, consultant and contractor
to execute proprietary information, confidentiality
and assignment agreements substantially in the
Company's standard forms, and all current
employees, consultants and contractors of the
Company have executed such an agreement.
2.13.14. To the Company's Knowledge, as of the date
of this Agreement, no Company Intellectual Property
or product, technology or service of the Company,
including its website, is subject, or may
reasonably be expected to become subject to, any
proceeding or outstanding decree, order, judgment,
agreement or stipulation that restricts in any
manner the use, transfer or licensing thereof by
the Company or may affect the validity, use or
enforceability of such Company Intellectual
Property.
2.13.15. To the Company's Knowledge, no: (i)
product, technology, service or publication of the
Company, including its website, (ii) material
published or distributed by the Company, including
its website, or (iii) conduct or statement of
Company constitutes obscene material, a defamatory
statement or material false advertising.
2.13.16. Except as set forth in Section 2.13.16 of
the Disclosure Schedule, all of the Company's
products (including its website and products
currently under development) will record, store,
process, calculate and present calendar dates
falling on and after (and if applicable, spans of
time including) January 1, 2000, and will calculate
any information dependent on or relating to such
dates in the same manner, and with the same
functionality, data integrity and performance, as
the products record, store, process, calculate and
present calendar dates on or before December 31,
1999, or calculate any information dependent on or
relating to such dates.
2.14. AGREEMENTS, CONTRACTS AND COMMITMENTS.
2.14.1. Except as set forth in Section 2.14.1 of the
Disclosure Schedule, as of the date of this
Agreement, the Company is not a party to nor is it
bound by:
(a) any employment or consulting agreements,
contracts or commitments with employees or
individual consultants or salespersons or
consulting or sales agreements, contracts
or commitments with a firm or other
organization, which agreements, contracts
or commitments are not terminable by the
Company without further liability upon
payment in the aggregate of more than
$50,000 with respect to all such
agreements, contracts and
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commitments; and the Company has no
employment agreements providing for
employment other than on an at-will basis;
(b) any agreement or plan, including, without
limitation, any stock option plan, stock
appreciation rights plan or stock purchase
plan, any of the benefits of which will be
increased, or the vesting of benefits of
which will be accelerated, by the
occurrence of any of the transactions
contemplated by this Agreement or the
value of any of the benefits of which will
be calculated on the basis of any of the
transactions contemplated by this
Agreement;
(c) any fidelity or surety bond or completion
bond;
(d) any lease of personal property with fixed
annual rental payments in excess of
$100,000;
(e) any agreement, contract or commitment
containing any covenant limiting the
freedom of the Company to engage in any
line of business or to compete with any
person;
(f) any agreement, contract or commitment
relating to capital expenditures and
involving future payments in excess of
$50,000 either individually or $100,000 in
the aggregate;
(g) any agreement, contract or commitment
relating to the disposition or acquisition
of assets or any interest in any business
enterprise outside the ordinary course of
the Company's business;
(h) any mortgages, indentures, loans or credit
agreements, security agreements or other
agreements or instruments relating to the
borrowing of money or extension of credit;
(i) any purchase order or contract for the
purchase of materials involving in excess
of $50,000 individually or $100,000 in the
aggregate;
(j) any construction contracts;
(k) any agreement for the provision of
advertising content or space or for the
licensing of content from third parties
for inclusion in the Company's website, or
any other dealer, distribution, joint
marketing or development agreement;
(l) any sales representative, original
equipment manufacturer, value added
reseller, remarketer or other agreement
for distribution of the Company's products
or services; or
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(m) any other agreement, contract or
commitment that involves $100,000 or more
or is not cancelable without penalty
within forty-five (45) days.
2.14.2. To its knowledge, the Company is in compliance with
and has not breached, violated or defaulted under,
or received notice that it has breached, violated
or defaulted under, any of the terms or conditions
of any agreement, contract, covenant, instrument,
lease, license or commitment to which the Company
is a party or by which it is bound (collectively a
"Contract"), nor is the Company aware of any event
that would constitute such a breach, violation or
default with the lapse of time, giving of notice or
both. Each Contract is in full force and effect and
is not subject to any default thereunder by any
party obligated to the Company pursuant thereto.
2.15. INTERESTED PARTY TRANSACTIONS. No officer, director or
Stockholder of the Company (nor any ancestor, sibling,
descendant or spouse of any of such persons, or any trust,
partnership or corporation in which any of such persons has
or has had an interest), has or has had, directly or
indirectly, (i) an interest in any entity which furnished or
sold, or furnishes or sells, services, products or
technology that the Company furnishes or sells, or proposes
to furnish or sell, or (ii) any interest in any entity that
purchases from or sells or furnishes to the Company any
goods or services, or (iii) a beneficial interest in any
Contract; provided, that ownership of no more than one
percent (1%) of the outstanding voting stock of a publicly
traded corporation shall not be deemed an "interest in any
entity" for purposes of this Section 2.15.
2.16. GOVERNMENTAL AUTHORIZATION. The Company has obtained all
necessary consents, licenses, permits, grants or other
authorizations necessary to operate or conduct its business
as currently conducted or hold any interest in its
properties or assets (collectively "Company
Authorizations").
2.17. LITIGATION. There is no action, suit or proceeding of any
nature pending nor has the Company received notice (oral or
written) of any actions, suits or proceedings threatened
against the Company, its properties or any of its officers
or directors, nor to the Company's Knowledge as of the date
of this Agreement is there any reasonable basis therefor. To
the Company's Knowledge, there is no investigation pending
or threatened against the Company, its properties or any of
its officers or directors by or before any Governmental
Entity, nor to the Company's Knowledge as of the date of
this Agreement is there any reasonable basis therefor. No
Governmental Entity has at any time challenged or questioned
the legal right of the Company to conduct its operations as
presently or previously conducted.
2.18. ACCOUNTS RECEIVABLE. All accounts receivable, including,
without limitation, all accounts receivable derived from
advertising, charter sponsorships and merchandise sales of
the Company arose in the ordinary course of business, are
carried at values determined in accordance with GAAP
consistently applied and
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are collectible except to the extent of reserves therefor
set forth in the Current Balance Sheet. No person has any
lien, encumbrance or other similar right with respect to any
of such accounts receivable and no request or agreement for
deduction or discount has been made with respect to any of
such Accounts Receivable.
2.19. MINUTE BOOKS. The minutes of the Company made available to
counsel for Buyer are the only minutes of the Company and
contain a reasonably accurate summary of all meetings of the
Board of Directors (or committees thereof) of the Company
and its Stockholders or actions by written consent since the
incorporation of the Company.
2.20. ENVIRONMENTAL MATTERS.
2.20.1. To the Company's knowledge, the Company has not
transported, stored, used, manufactured, disposed
of, released or exposed its employees or others to
Hazardous Materials in violation of any law in
effect on or before the Effective Time, nor has the
Company disposed of, transported, sold, or
manufactured any product containing a Hazardous
Material (any or all of the foregoing being
collectively referred to as "Hazardous Materials
Activities") in violation of any rule, regulation,
treaty or statute promulgated by any Governmental
Entity in effect prior to or as of the date hereof
to prohibit, regulate or control Hazardous
Materials or any Hazardous Material Activity.
2.20.2. To the Company's knowledge, the Company currently
holds all environmental approvals, permits,
licenses, clearances and consents (the
"Environmental Permits") necessary for the conduct
of the Company's Hazardous Material Activities,
respectively, and other businesses of the Company
as such activities and businesses are currently
being conducted.
2.20.3. No action, proceeding, revocation proceeding,
amendment procedure, writ, injunction or claim is
pending nor has the Company received notice (oral
or written) of any action, proceeding, revocation
proceeding, amendment procedure, writ, injunction
or claim threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous
Materials Activity of the Company.
2.21. BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES. Except as
set forth in Section 2.21 of the Disclosure Schedule, the
Company has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
Section 2.21 of the Disclosure Schedule sets forth the
principal terms and conditions of any agreement, written or
oral, with respect to such fees. Section 2.21 of the
Disclosure Schedule also sets forth the Company's current
estimate of Third Party Expenses (as defined in Section
5.4.1) expected to be incurred by the Company in connection
with the negotiation and
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effectuation of the terms and conditions of this Agreement
and the transactions contemplated hereby.
2.22. EMPLOYEE MATTERS AND BENEFIT PLANS.
2.22.1. DEFINITIONS. With the exception of the definition
of "Affiliate" set forth in Section 2.22.1(a) below
(which definition shall apply only to this Section
2.22), for purposes of this Agreement, the
following terms shall have the meanings set forth
below:
(a) "Affiliate" shall mean any other person or
entity under common control with the
Company within the meaning of Section
414(b), (c), (m) or (o) of the Code and
the regulations issued thereunder;
(b) "Company Employee Plan" shall mean any
plan, program, policy, practice, contract,
agreement or other arrangement providing
for compensation, severance, termination
pay, deferred compensation, performance
awards, stock or stock-related awards,
fringe benefits or other employee benefits
or remuneration of any kind, whether
written or unwritten or otherwise, funded
or unfunded, including without
limitation, each "employee benefit plan,"
within the meaning of Section 3(3) of
ERISA which is or has been maintained,
contributed to, or required to be
contributed to, by the Company or any
Affiliate for the benefit of any Employee,
or with respect to which the Company or
any Affiliate has or may have any
liability or obligation;
(c) "COBRA" shall mean the Consolidated
Omnibus Budget Reconciliation Act of 1985,
as amended;
(d) "DOL" shall mean the Department of Labor;
(e) "Employee" shall mean any current or
former employee, consultant or director of
the Company or any Affiliate;
(f) "Employee Agreement" shall mean each
management, employment, severance,
consulting, relocation, repatriation,
expatriation, visas, work permit or other
agreement, contract or understanding
between the Company or any Affiliate and
any Employee;
(g) "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended;
(h) "FMLA" shall mean the Family Medical Leave
Act of 1993, as amended;
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(i) "International Employee Plan" shall mean
each Company Employee Plan that has been
adopted or maintained by the Company or
any Affiliate, whether informally or
formally, or with respect to which the
Company or any Affiliate will or may have
any liability, for the benefit of
Employees who perform services outside the
United States;
(j) "IRS" shall mean the Internal Revenue
Service;
(k) "Multiemployer Plan" shall mean any
"Pension Plan" (as defined below) which is
a "multiemployer plan," as defined in
Section 3(37) of ERISA;
(l) "PBGC" shall mean the Pension Benefit
Guaranty Corporation; and
(m) "Pension Plan" shall mean each Company
Employee Plan which is an "employee
pension benefit plan," within the meaning
of Section 3(2) of ERISA.
2.22.2. SCHEDULE. Schedule 2.22.2 contains an accurate and
complete list of each Company Employee Plan. The
Company has no agreements with employees other than
the offer letters substantially similar in form to
that previously provided to the Buyer. The Company
does not have any plan or commitment to establish
any new Company Employee Plan or Employee
Agreement, to modify any Company Employee Plan or
Employee Agreement (except to the extent required
by law or to conform any such Company Employee Plan
or Employee Agreement to the requirements of any
applicable law, in each case as previously
disclosed to Buyer in writing, or as required by
this Agreement), or to enter into any Company
Employee Plan or Employee Agreement.
2.22.3. DOCUMENTS. The Company has provided to Buyer: (i)
correct and complete copies of all documents
embodying each Company Employee Plan and each
Employee Agreement including (without limitation)
all amendments thereto and all related trust
documents; (ii) the most recent annual actuarial
valuations, if any, prepared for each Company
Employee Plan; (iii) the three (3) most recent
annual reports (Form Series 5500 and all schedules
and financial statements attached thereto), if any,
required under ERISA or the Code in connection with
each Company Employee Plan; (iv) if the Company
Employee Plan is funded, the most recent annual and
periodic accounting of Company Employee Plan
assets; (v) the most recent summary plan
description together with the summary(ies) of
material modifications thereto, if any, required
under ERISA with respect to each Company Employee
Plan; (vi) all IRS determination, opinion,
notification and advisory letters, and all
applications and correspondence to or from the IRS
or the DOL with respect to any such application or
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letter; (vii) all material written agreements and
contracts relating to each Company Employee Plan,
including, but not limited to, administrative
service agreements, group annuity contracts and
group insurance contracts; (viii) all
communications material to any Employee or
Employees relating to any Company Employee Plan and
any proposed Company Employee Plans, in each case,
relating to any amendments, terminations,
establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or
other events which would result in any liability to
the Company; (ix) all correspondence to or from any
governmental agency relating to any Company
Employee Plan; (x) all COBRA forms and related
notices; (xi) all policies pertaining to fiduciary
liability insurance covering the fiduciaries for
each Company Employee Plan; (xii) all
discrimination tests for each Company Employee Plan
for the most recent plan year, if required; and
(xiii) all registration statements, annual reports
Form 11-K and all attachments thereto) and
prospectuses prepared in connection with each
Company Employee Plan.
2.22.4. EMPLOYEE PLAN COMPLIANCE. (i) The Company has
performed all material obligations required to be
performed by it under, is not in default or
violation of, and has no knowledge of any material
default or violation by any other party to each
Company Employee Plan, and each Company Employee
Plan has been established and maintained in
accordance with its terms and in material
compliance with all applicable laws, statutes,
orders, rules and regulations, including but not
limited to ERISA or the Code; (ii) each Company
Employee Plan intended to qualify under Section
401(a) of the Code and each trust intended to
qualify under Section 501(a) of the Code has either
received a favorable determination, opinion,
notification or advisory letter from the IRS with
respect to each such Plan as to its qualified
status under the Code, including all amendments to
the Code effected by the Tax Reform Act of 1986 and
subsequent legislation, or has remaining a period
of time under applicable Treasury regulations or
IRS pronouncements in which to apply for such a
letter and make any amendments necessary to obtain
a favorable determination as to the qualified
status of each such Company Employee Plan; (iii) no
"prohibited transaction," within the meaning of
Section 4975 of the Code or Sections 406 and 407 of
ERISA, and not otherwise exempt under Section 408
of ERISA, has occurred with respect to any Company
Employee Plan; (iv) there are no actions, suits or
claims pending or threatened or reasonably
anticipated (other than routine claims for
benefits) against any Company Employee Plan or
against the assets of any Company Employee Plan;
(v) each Company Employee Plan can be amended,
terminated or otherwise discontinued after the
Effective Time in accordance with its terms,
without liability to Buyer, the Surviving
Corporation, the Company or any Affiliate (other
than ordinary administration expenses); (vi) there
are no audits, inquiries or proceedings pending or,
to the Knowledge of the Company or any Affiliates,
threatened by the IRS or DOL with respect to any
Company Employee Plan; and (vii) neither the
Company nor any
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Affiliate is subject to any penalty or tax with
respect to any Company Employee Plan under Section
502(i) of ERISA or Sections 4975 through 4980 of the
Code.
2.22.5. PENSION PLAN. Neither the Company nor any Affiliate
has ever maintained, established, sponsored,
participated in, or contributed to, any Pension
Plan which is subject to Title IV of ERISA or
Section 412 of the Code.
2.22.6. MULTIEMPLOYER PLANS. At no time has the Company or
any Affiliate contributed to or been required to
contribute to any Multiemployer Plan.
2.22.7. NO POST-EMPLOYMENT OBLIGATIONS. No Company Employee
Plan provides, or reflects or represents any
liability to provide, retiree life insurance,
retiree health or other retiree employee welfare
benefits to any person for any reason, except as
may be required by COBRA or other applicable
statute, and the Company has never represented,
promised or contracted (whether in oral or written
form) to any Employee (either individually or to
Employees as a group) or any other person that such
Employee(s) or other person would be provided with
retiree life insurance, retiree health or other
retiree employee welfare benefit, except to the
extent required by statute.
2.22.8. COBRA. Neither the Company nor any Affiliate has,
prior to the Effective Time, violated any of the
health care continuation requirements of COBRA, the
requirements of FMLA or any similar provisions of
state law applicable to its Employees where such
violation could result in material liability to the
Company.
2.22.9. EFFECT OF TRANSACTION. (i) The execution of this
Agreement and the consummation of the transactions
contemplated hereby will not constitute an event
under any Company Employee Plan, Employee
Agreement, trust or loan that will or may result in
any payment (whether of severance pay or
otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with
respect to any Employee (excluding from this
representation the effect of any termination of an
Existing Employee under Section 5.11.2 or 5.11.3 of
this Agreement). (ii) No payment or benefit which
will or may be made by the Company or its
Affiliates with respect to any Employee as a result
of the transactions contemplated by this Agreement
or otherwise will be characterized as a "parachute
payment," within the meaning of Section 280G(b)(2)
of the Code (but without regard to clause (ii)
thereof).
2.22.10. EMPLOYMENT MATTERS. The Company: (i) is in
material compliance in all respects with all
applicable foreign, federal, state and local laws,
rules and regulations respecting employment,
employment practices, terms and conditions of
employment and wages and hours, in
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each case, with respect to Employees; (ii) has
withheld and reported all amounts required by law or
by agreement to be withheld and reported with
respect to wages, salaries and other payments to
Employees; (iii) is not liable for any arrears of
wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not
liable for any payment to any trust or other fund
governed by or maintained by or on behalf of any
governmental authority, with respect to unemployment
compensation benefits, social security or other
benefits or obligations for Employees (other than
routine payments to be made in the normal course of
business and consistent with past practice). There
are no pending, or to the Knowledge of the Company,
threatened or reasonably anticipated claims or
actions against the Company under any worker's
compensation policy or long-term disability policy.
2.22.11. LABOR. No work stoppage or labor strike
against the Company is pending, threatened or
reasonably anticipated. The Company does not know
of any activities or proceedings of any labor union
to organize any Employees. There are no actions,
suits, claims, labor disputes or grievances pending
or threatened or reasonably anticipated against the
Company relating to any labor, safety or
discrimination matters involving any Employee,
including, without limitation, charges of unfair
labor practices or discrimination complaints,
which, if adversely determined, would, individually
or in the aggregate, result in any liability to
the Company, Buyer, the Surviving Corporation or
any Affiliate. Neither the Company nor any of its
subsidiaries has engaged in any unfair labor
practices within the meaning of the National Labor
Relations Act. The Company is not presently, nor
has it been in the past, a party to, or bound by,
any collective bargaining agreement or union
contract with respect to Employees and no
collective bargaining agreement is being negotiated
by the Company.
2.22.12. NO INTERFERENCE OR CONFLICT. To the
Company's knowledge, no officer, director,
consultant or employee of the Company is obligated
under any contract or agreement subject to any
judgement, decree or order of any court or
administrative agency that would interfere with
such person's efforts to promote the interests of
the Company or that would interfere with the
Company's business. Neither the execution nor
delivery of this Agreement, nor the carrying on of
the Company's business as presently conducted or
proposed to be conducted nor any activity of such
officers, directors, employees or consultants in
connection with the carrying on of the Company's
business as presently conducted or proposed to be
conducted, will conflict with or result in a breach
of the terms, conditions or provisions of, or
constitute a default under, any contract or
agreement under which any of such officers,
directors, employees or consultants is now bound.
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2.23. INSURANCE. Section 2.23 of the Disclosure Schedule lists
all insurance policies and fidelity bonds covering the
assets, business, equipment, properties, operations,
employees, officers and directors of the Company. There is
no claim pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by
the underwriters of such policies or bonds. All premiums due
and payable under all such policies and bonds have been
paid, and the Company and any covered parties are otherwise
in compliance with the terms of such policies and bonds (or
other policies and bonds providing substantially similar
insurance coverage).
2.24. COMPLIANCE WITH LAWS. To the Company's knowledge, the
Company has complied with, in all material respects, is not
in violation of, and has not received any notices of
violation with respect to, any foreign, federal, state or
local statute, law or regulation.
2.24 WARRANTIES; INDEMNITIES. Except for the warranties and
indemnities contained in those contracts and agreements set
forth in Section 2.24 of the Disclosure Schedule, the
Company has not issued any warranties or indemnities
relating to products or technology sold or licensed or
services rendered by the Company, other than warranties and
indemnities that are not in the aggregate, reasonably
expected to have a Material Adverse Effect.
2.25. PROXY STATEMENT AND STOCKHOLDER INFORMATION STATEMENT. The
information supplied by the Company for inclusion in (x) the
Proxy Statement or the Stockholder Information Statement or
the Form S-4 Registration Statement (each as defined below)
or any application filed in connection with a "fairness
hearing" pursuant to Section 5.1 hereof, will not on the
date it (or any amendment or supplement thereto) is first
sent to Stockholders, on either (i) the date of circulation
of the written consent or (ii) the date of the Company's
Stockholder Meeting and at the Effective Time, and (y) the
Buyer Registration Statement (or any amendment or supplement
thereto) will not at any time prior to the Effective Time,
contain any statement which, at such time and in light of
the circumstances under which it is made, is false or
misleading with respect to any material fact, or will omit
to state any material fact necessary in order to make the
statements therein not false or misleading. If at any time
prior to the Effective Time any event relating to the
Company or any of its respective affiliates, officers or
directors should be discovered by the Company which should
be set forth in an amendment or a supplement to the Proxy
Statement or the Stockholder Information Statement or the
Form S-4 Registration Statement or the Buyer Registration
Statement, the Company will promptly inform the Buyer.
Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to any information
supplied by Buyer that is contained in any of the foregoing
documents.
2.26 VOTING AGREEMENTS. The Stockholders delivering to Buyer
executed Stockholder Agreements (as defined in Section 5.18
of this Agreement) simultaneously with the execution and
delivery of this Agreement possess sufficient voting power
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to approve (without the consent or approval of any other
Stockholders) this Agreement, the Merger and all of the
other transactions contemplated by this Agreement and the
Stockholder Agreements, and such Stockholder Agreements
constitute the due and valid approval thereof.
2.27 REPRESENTATIONS COMPLETE. None of the representations or
warranties made by the Company (as modified by the
Disclosure Schedule), nor any statement made in any schedule
or certificate furnished by the Company pursuant to this
Agreement or furnished in or in connection with documents
mailed or delivered to the Shareholders for use in
soliciting their consent to this Agreement and the Merger
contains or will contain at the Effective Time (when read
together with the Proxy Statement or Shareholder Information
Statement (as amended or supplemented) and the Form S-4
Registration Statement at the Effective Time), any untrue
statement of a material fact, or omits or will omit at the
Effective Time (when read together with the Proxy Statement
or Shareholder Information Statement) (as amended or
supplemented) and the Form S-4 Registration Statement at the
Effective Time), to state any material fact necessary in
order to make the statements contained herein or therein, in
the light of the circumstances under which made, not
misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Company that on the date hereof
and, except as expressly provided otherwise below and except as may be modified
to appropriately reflect the transactions contemplated hereby, the Buyer IPO and
the Buyer Stock Split, and as of the Effective Time as though made at the
Effective Time as follows:
3.1. ORGANIZATION, STANDING AND POWER. Buyer is a corporation
duly organized, validly existing and in good standing under
the laws of the State of Delaware. As of the Effective Time,
Merger Sub will be a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware. Buyer has the corporate power to own its
properties and to carry on its business as now being
conducted and is duly qualified to do business and is in
good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a
Material Adverse Effect on the ability of Buyer to
consummate the Merger or the other transactions contemplated
hereby.
3.2. CHARTER AND BYLAWS. The Certificate of Incorporation and
Bylaws of Buyer filed as exhibits to the Buyer Registration
Statement are complete and accurate copies thereof and are
in full force and effect. Buyer is not in violation of any
of the provisions of its Certificate of Incorporation or
Bylaws.
3.3. AUTHORITY.
3.3.1. Buyer has all requisite power and authority to
enter into this Agreement and any Related
Agreements to which it is a party and to consummate
the
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transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and
any Related Agreements to which it is a party and
the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all
necessary corporate action on the part of Buyer,
and no further action is required on the part of
Buyer to authorize this Agreement, any Related
Agreements to which it is a party or the
transactions contemplated hereby and thereby. Buyer
has duly executed and delivered this Agreement and,
as of the Effective Time, will have duly executed
and delivered each Related Agreement to which it is
a party. Assuming the due authorization, execution
and delivery by the other parties hereto and
thereto, this Agreement and such Related Agreements
constitute or, as of the Effective Time in the case
of the Related Agreements, will constitute, the
valid and binding obligations of Buyer, enforceable
in accordance with their respective terms, except
as such enforceability may be limited by principles
of public policy and subject to the laws of general
application relating to bankruptcy, insolvency and
the relief of debtors and rules of law governing
specific performance, injunctive relief or other
equitable remedies.
3.3.2. As of the Effective Time, Merger Sub will have all
requisite power and authority to enter into any
Related Agreements to which it is a party and to
consummate the transactions contemplated hereby and
thereby. As of the Effective Time, the execution
and delivery of any Related Agreements to which it
is a party and the consummation of the transactions
contemplated hereby and thereby will have been duly
authorized by all necessary corporate action on the
part of Merger Sub, and no further action will be
required on the part of Merger Sub to authorize any
Related Agreements to which it is a party or the
transactions contemplated hereby and thereby
(except that, with respect to Section 5.19 of this
Agreement, Buyer will be required to obtain the
consent of certain of its Stockholders to an
increase in the size of Buyer's Board of Directors,
in order to permit the election of the
representative of the Company in accordance with
such Section 5.19). As of the Effective Time,
Merger Sub will have duly executed and delivered
each Related Agreement to which it is a party.
Assuming the due authorization, execution and
delivery by the other parties thereto, as of the
Effective Time such Related Agreements will
constitute the valid and binding obligations of
Merger Sub, enforceable in accordance with their
respective terms, except as such enforceability may
be limited by principles of public policy and
subject to the laws of general application relating
to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance,
injunctive relief or other equitable remedies.
3.3.3. MERGER SHARES. The shares of Buyer Common Stock to
be issued pursuant to the Merger will be duly
authorized, validly issued, fully paid,
non-assessable and will be issued in compliance with
all applicable federal and state securities laws.
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3.4. NO CONFLICT. The execution and delivery of this Agreement
and any Related Agreement to which Buyer or Merger Sub is or
will be a party by Buyer or Merger Sub, as the case may be,
do not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with, or
result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a
Conflict under (i) any provision of the Certificate of
Incorporation or Bylaws of Buyer or Merger Sub, (ii) any
mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise or license to
which Buyer or Merger Sub or any of their respective
properties or assets are subject and that has been filed as
an exhibit to the Buyer Registration Statement, or (iii) any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Buyer or Merger Sub or their
respective properties or assets, except for a Conflict under
subsection (ii) or (iii) above that would not have a
Material Adverse Effect on the ability of the parties to
consummate the Merger or the other transactions contemplated
by this Agreement.
3.5. CONSENTS. No consent, waiver, approval, order or
authorization of, or registration, declaration or filing
with, any Governmental Entity or any third party is
required, including a party to any agreement with Buyer or
Merger Sub (so as not to trigger any Conflict), by or with
respect to Buyer or Merger Sub in connection with the
execution and delivery of this Agreement and any Related
Agreements to which Buyer or Merger Sub is or will be a
party or the consummation of the transactions contemplated
hereby and thereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable
securities laws, (ii) any applicable filings required under
the HSR Act, (iii) the filing of the Merger Agreement with
the Secretary of State of the State of Delaware, (iv) any
other filings or approvals as may be required under Delaware
state law, and (v) consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings
which, if not obtained or made, would not have a Material
Adverse Effect on Buyer or on the ability of the parties to
consummate the Merger or the other transactions contemplated
by this Agreement.
3.6. PROXY STATEMENT AND STOCKHOLDER INFORMATION STATEMENT. The
information supplied by Buyer for inclusion in the Proxy
Statement or Stockholder Information Statement and the Form
S-4 Registration Statement or any application filed in
connection with "fairness hearing" pursuant to Section 5.1
hereof will not, on the date it (or any amendment or
supplement thereto) is first mailed to Stockholders, at the
time of the Company Stockholders Meeting and at the
Effective Time, contain any statement which, at such time
and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or
will omit to state any material fact necessary in order to
make the statements therein not false or misleading. If at
any time prior to the Effective Time any event relating to
Buyer, Merger Sub or any of their respective affiliates,
officers or directors should be discovered by Buyer or
Merger Sub which should be set forth in an amendment or a
supplement to the Proxy Statement or Stockholder Information
Statement, Buyer or Merger Sub will promptly inform
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the Company. Notwithstanding the foregoing, Buyer and Merger
Sub make no representation or warranty with respect to any
information supplied by the Company that is contained in any
of the foregoing documents.
3.7. MERGER SUB. Merger Sub will be formed for the sole purpose
of effecting the Merger and, except as contemplated by this
Agreement, Merger Sub will not conduct any business
activities and will not have any material liabilities or
obligations.
3.8 SEC FILINGS; FINANCIAL STATEMENTS.
3.8.1 The Buyer Registration Statement (including,
without limitation information concerning capitalization
included on pages 5 and 19 therein) (i) at the time it was
filed, complied as to form in all material respects with the
requirements of the Securities Act and (ii) did not at the
time it was filed (or if amended or superseded by a filing
prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated
therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
3.8.2 The financial statements (including, in each case,
any related notes thereto) (the "Buyer Financial
Statements") contained in the Buyer Registration Statement
have been prepared in accordance with GAAP applied on a
consistent basis throughout the period involved (except as
may be indicated in the notes thereto) and fairly present in
all material respects the financial position of Buyer as at
the respective dates thereof and the results of its
operations and cash flows for the periods indicated, except
that any unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which
were not or are not expected to be, individually or in the
aggregate, materially adverse to Buyer.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1. CONDUCT OF BUSINESS OF THE COMPANY. During the period from
the date of this Agreement and continuing until the earlier
of the termination of this Agreement or the Effective Time,
the Company agrees (except to the extent that Buyer shall
otherwise consent in writing), to carry on the Company's
business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to
pay the debts and Taxes of the Company when due, to pay or
perform other obligations when due consistent with the past
practices of the Company, and, to the extent consistent with
such business, use its commercially reasonable efforts
consistent with past practice and policies to preserve
intact the Company's present business organizations, keep
available the services of the Company's present officers and
key employees and preserve the Company's relationships with
customers, advertisers, suppliers, distributors, licensors,
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licensees, and others having business dealings with it, all
with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The
Company shall promptly notify Buyer of any event or
occurrence or emergency not in the ordinary course of
business of the Company and any material event involving the
Company. Except as expressly contemplated by this Agreement
or as set forth in Section 4.1 of the Disclosure Schedule,
the Company shall not, without the prior written consent or
e-mail of Buyer:
4.1.1. Except in the ordinary course of business and
consistent with past practice, (i) sell or enter
into any license agreement with respect to the
Company Intellectual Property with any person or
entity or (ii) buy or enter into any license
agreement with respect to the Intellectual Property
of any person or entity;
4.1.2. Except in the ordinary course of business and
consistent with past practice, transfer to any
person or entity any rights to the Company
Intellectual Property;
4.1.3. Enter into or amend any single Contract (or series
of related Contracts) with a potential obligation
or value of $750,000 or more or multiple Contracts
in any calendar month with aggregate potential
obligations or value of $1,500,000 or more,
excluding the entering into of charter sponsorship
arrangements in the ordinary course of business
consistent with past practice;
4.1.4. Amend or otherwise modify (or agree to do so),
except in the ordinary course of business, or
violate, in any material respect, the terms of, any
of the Contracts set forth or described in the
Disclosure Schedule, (for this purpose, an
amendment to the agreement with Blue Shield of
California dated October 4, 1998, shall not be
deemed in the ordinary course of business);
4.1.5. Commence any litigation or settle: (I) any
litigation for $50,000 or more or (ii) any
litigation relating to intellectual property
rights; provided that the Company shall have the
right to settle litigation outstanding as of the
date hereof, so long as the terms of such
settlement involve no monetary obligation or other
liability imposed on the Company;
4.1.6. Declare, set aside or pay any dividends on or make
any other distributions (whether in cash, stock or
property) in respect of any of its capital stock,
or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in
substitution for shares of capital stock of the
Company, or repurchase, redeem or otherwise
acquire, directly or indirectly, any shares of the
capital stock of the Company or options, warrants
or other rights exercisable therefor (except for
the Company's repurchase of Company
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Capital Stock from its employees at the purchase
price paid by such employees for such stock);
4.1.7. Issue, grant, deliver or sell, contract to issue,
grant, deliver or sell, or authorize or propose the
issuance, grant, delivery or sale of, or purchase
or propose the purchase of, any shares of its
capital stock (other than the exercise of currently
outstanding stock options and the exercise of
outstanding warrants) or securities convertible
into or exchangeable for, or subscriptions, rights,
warrants or options to acquire, or other agreement
or commitments of any character obligating it to
issue or purchase any such shares or other
convertible securities (excluding employee and
consultant stock options or exercises thereof and
grants of restricted stock pursuant to the Company
Option Plan);
4.1.8. Cause or permit any amendments to its Certificate
of Incorporation or Bylaws or other organizational
documents;
4.1.9. Acquire or agree to acquire any assets or business
which are material, individually or in the
aggregate, to the Company's business;
4.1.10. Make any capital expenditures in excess of $750,000
individually or $1,500,000 in the aggregate;
4.1.11. Sell, lease, license or otherwise dispose of any of
its properties or assets, except in the ordinary
course of business and consistent with past
practices;
4.1.12. Incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell
any debt securities or guarantee any debt
securities of others or issue or become subject to
any fidelity, surety or completion bond, except
pursuant to existing agreements set forth on the
Disclosure Schedule;
4.1.13. Incur liabilities outside of the ordinary course of
business in excess of $50,000 individually or
$100,000 in the aggregate;
4.1.14. Grant any loans to others outside ordinary course
of business or purchase debt securities of others
or amend the terms of any outstanding loan
agreement;
4.1.15. Grant (or enter into or amend any contract or
arrangement providing for) any severance or
termination pay: (i) to any director or officer or
(ii) to any other employee except payments made
pursuant to written agreements outstanding on the
date hereof and disclosed in the Disclosure
Schedule;
4.1.16. Adopt any employee benefit plan, or enter into any
employment contract or pay or agree to pay any
special bonus or special remuneration to any
director;
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4.1.17. Revalue any of its assets, including without
limitation writing down the value of inventory or
writing off notes or accounts receivable other than
in the ordinary course of business;
4.1.18. Pay, discharge or satisfy, in an amount in excess
of $50,000 (in any one case) or $100,000 (in the
aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved
against in the Current Balance Sheet;
4.1.19. Make or change any material election in respect of
Taxes, adopt or change any accounting method in
respect of Taxes, enter into any closing agreement,
settle any claim or assessment in respect of Taxes,
or consent to any extension or waiver of the
limitation period applicable to any claim or
assessment in respect of Taxes provided that Buyer
shall not unreasonably withhold its consent for any
of the foregoing;
4.1.20. Enter into any strategic alliance or joint
marketing arrangement or agreement that (i) would
substantially change any line of business in which
the Company operates or (ii) relates to any
business segment of the Buyer, including toys,
videos, video game books and software;
4.1.21. Accelerate the vesting schedule of any of the
outstanding Company Options or Company Capital
Stock;
4.1.22. (i) Terminate any officer or key employee, (ii)
hire an employee with an annual salary in excess of
$130,000, (iii) hire an officer or (iv) hire any
material number of employees (for these purposes,
an increase of 30% or more in the size of the
Company's workforce shall be deemed material);
4.1.23 Agree in writing to take any of the actions
described in Sections 4.1.1 through 4.1.22; or
4.1.24 Take, or agree in writing to take any other action
that would prevent the Company from performing or
cause the Company not to perform its covenants
hereunder.
4.2. NO SOLICITATION.
4.2.1. For purposes of this Section 4.2, the following
terms shall have the following meanings:
(a) "Acquisition Proposal" shall mean any
offer or proposal (other than an offer or
proposal by Buyer) contemplating or
otherwise relating to any Company
Acquisition Transaction.
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(b) A party's "Associates" shall include such
party's subsidiaries and other affiliates
and the respective directors, officers,
employees, agents, representatives,
consultants, accountants, attorneys and
financial advisors of such party and its
affiliates.
(c) "Company Acquisition Transaction" shall
mean any transaction not contemplated by
this Agreement involving: (A) any sale,
lease, exchange, transfer or other
disposition of the assets of the Company
or any subsidiary of the Company
constituting more than 5% of the assets of
the Company or accounting for more than 5%
of the revenues of the Company in any one
transaction or in a series of related
transactions; or (B) any offer to
purchase, tender offer, exchange offer or
any similar transaction or series of
related transactions made by any person,
group or entity involving more than 5% of
the outstanding shares of capital stock of
the Company; or (C) any merger,
consolidation, business combination, share
exchange, reorganization or similar
transaction or series of related
transactions involving the Company other
than any transaction which results in the
Stockholders of the Company before the
transaction continuing to hold at least
95% of the outstanding voting securities
of the Company after such transaction.
(d) "Termination Date" shall mean the earlier
of (i) the Effective Time, or (ii) the
date that this Agreement is terminated in
accordance with its terms.
4.2.2. The Company agrees that prior to and through the
Termination Date, it shall not, directly or
indirectly, and shall not authorize or permit any
Associate of the Company to (i) solicit, initiate,
encourage or induce the making, submission or
announcement of any Acquisition Proposal or take
any action that could reasonably be expected to
lead to an Acquisition Proposal, (ii) furnish any
information regarding the Company or any subsidiary
of the Company to any person, group or entity in
connection with or in respect to any Acquisition
Proposal, (iii) continue or engage in discussions
with any person, group or entity with respect to
any Acquisition Proposal, (iv) approve, endorse or
recommend any Acquisition Proposal or (v) enter
into any letter of intent, term sheet or similar
document or any contract, commitment or other
obligation of any kind contemplating or otherwise
relating to any Company Acquisition Transaction
(other than with Buyer and Merger Sub). Without
limiting the generality of the foregoing, the
Company acknowledges and agrees that any violation
of any of the restrictions set forth in the
preceding sentence by an Associate of the Company
shall be deemed to constitute a breach of this
Section 4.2. In addition, the Company agrees that
any negotiations with respect to any of the above
activities (other than negotiations with Buyer and
Merger Sub) in progress as of the date hereof will
be suspended during the period from the date hereof
through the Termination Date. In
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the event that the Company receives, directly or
indirectly, any Acquisition Proposal, the Company
shall immediately notify Buyer thereof, including
information as to the identity of the offeror or
the party making any such Acquisition Proposal and
the specific terms of such Acquisition Proposal.
The Company agrees that its obligations under this
Section 4.2 are necessary and reasonable in order
to protect Buyer and its business, and expressly
agrees that monetary damages would be inadequate
to compensate Buyer for any breach of this
Section 4.2. Accordingly, the Company agrees and
acknowledges that any such violation or
threatened violation will cause irreparable injury
to Buyer and that, in addition to any other
remedies that may be available in law, in equity or
otherwise, Buyer shall be entitled to obtain
injunctive relief against the threatened breach of
this Agreement or the continuation of any such
breach, without the necessity of proving damages.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1. FAIRNESS HEARING; PROXY STATEMENT AND STOCKHOLDER
INFORMATION STATEMENT; REGISTRATION STATEMENTS.
5.1.1. Notwithstanding anything in this Agreement to the
contrary, the parties agree to use commercially
reasonable efforts to qualify the issuance of Buyer
Common Stock in the Merger under the exemption
provided by Section 3(a)(10) of the Securities Act.
Consistent therewith, the parties agree to
cooperate with one another, commencing promptly
following the date hereof, to prepare and file with
the Commissioner of Corporations of the State of
California an application for qualification of the
Buyer Common Stock in the Merger pursuant to a
"fairness hearing" procedure, and to take such
other actions as may be reasonably necessary to
perfect such exemption. If, despite the parties'
commercially reasonable efforts, such qualification
is denied or such exemption cannot otherwise be
perfected by June 30, 1999, (a "Fairness Hearing
Failure") then the provisions of this Agreement
calling for registration of the Buyer Common Stock
to be issued in the Merger on Form S-4 (or another
appropriate form) under the Securities Act shall
immediately be invoked and complied with in order
to have such registration declared effective at the
earliest practicable time. All references in this
Agreement to the Form S-4 Registration Statement
(as hereinafter defined), the filing thereof with
the SEC and similar matters shall be deemed
applicable only following a Fairness Hearing
Failure, notwithstanding anything in this Agreement
to the contrary. The foregoing limitation shall
not, however, otherwise affect the parties'
obligations with respect to the Stockholder
Information Statement and the Proxy Statement.
Subject to the foregoing, Buyer and the Company
shall jointly prepare and cause to be filed with
the SEC preliminary Stockholder solicitation
materials, which shall be in the form of a
Stockholder information statement (the "Stockholder
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Information Statement") or a proxy statement (the
"Proxy Statement"), as determined jointly by Buyer
and the Company, for the solicitation of approval
of the Stockholders of the Company of this
Agreement, the Merger and the transactions
contemplated hereby. Buyer shall also prepare and
cause to be filed with the SEC a Registration
Statement on Form S-4 (or other appropriate form)
of Buyer pertaining to the shares of Buyer Common
Stock to be issued pursuant to the Merger (the
"Form S-4 Registration Statement"), in which the
Stockholder Information Statement or Proxy
Statement, as the case may be, will be included as
a prospectus. Each of Buyer and the Company shall
provide promptly to the other such information
concerning its business and financial statements
and affairs as, in the reasonable judgment of the
providing party or its counsel, may be required or
appropriate for inclusion in the Stockholder
Information Statement or Proxy Statement, as the
case may be, or in any amendments or supplements
thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in
the preparation of the Stockholder Information
Statement or Proxy Statement, as the case may be.
The Stockholder Information Statement or Proxy
Statement, as the case may be, shall include
information regarding the Company, the terms of the
Merger and this Agreement and the unanimous
recommendation of the Board of Directors of the
Company in favor of the Merger. Each of Buyer and
the Company shall use all reasonable efforts to
cause the Form S-4 Registration Statement and the
Stockholder Information Statement or Proxy
Statement, as the case may be, to comply with
applicable law and the rules and regulations
promulgated by the SEC and to cause the Stockholder
Information Statement or Proxy Statement, as the
case may be, to be mailed to the Company's
Stockholders as promptly as practicable If any
event relating to Buyer or the Company occurs, or
if Buyer or the Company becomes aware of any
information, that should be disclosed in an
amendment or supplement to the Stockholder
Information Statement or Proxy Statement, as the
case may be, then Buyer or the Company, as
applicable, shall inform the other thereof and
shall cooperate with each other in completing such
amendment or supplement, and, if appropriate, in
mailing such amendment or supplement to the
Company's Stockholders.
5.1.2. Prior to the Effective Time, Buyer shall use
commercially reasonable efforts to obtain all
regulatory approvals needed to ensure that the
Buyer Common Stock to be issued in the Merger: (i)
will be registered or qualified under the
securities law of every jurisdiction of the United
States in which any registered holder of the
Company Capital Stock who is receiving shares of
registered Buyer Common Stock has an address of
record or be exempt from such registration; and
(ii) will be approved for quotation at the
Effective Time on the Nasdaq National Market;
provided, however, that, in the case of clause (i)
above, Buyer shall not, pursuant to the foregoing,
be required (I) to qualify to do business as a
foreign corporation in any jurisdiction in which it
is not currently qualified or (II) to file a
general consent to service of process in any
jurisdiction with
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respect to matters unrelated to the issuance of
Buyer Common Stock pursuant hereto.
5.1.3. Each of Buyer and the Company (in respect of the
information respectively supplied by it) agrees
that: (i) none of the information to be supplied
by it or its Affiliates for inclusion in the
Stockholder Information Statement or Proxy
Statement, as the case may be, will, at the time
such document is mailed to the Stockholders of the
Company, or as of the Effective Time, contain any
untrue statement of a material fact or omit to
state any material fact required to be stated
therein or necessary in order to make the
statements therein, in light of the circumstances
under which they were made, not misleading; and
(ii) as to matters respecting it, the Stockholder
Information Statement or the Proxy Statement, as
the case may be, will comply as to form in all
material respects with the provisions of the
Securities Act and the Exchange Act, as applicable,
and the rules and regulations promulgated by the
SEC thereunder, except that no covenant,
representation or warranty is made by Buyer with
respect to statements made or incorporated by
reference therein based on information supplied by
the Company for inclusion or incorporation by
reference therein and no covenant, representation
or warranty is made by the Company with respect to
statements made or incorporated by reference
therein based on information supplied by Buyer for
inclusion or incorporation by reference therein.
5.1.4. The Company shall promptly after the date hereof
take all action necessary in accordance with
applicable law and its Certificate of Incorporation
and Bylaws to approve this transaction by written
consent of the stockholders. It is understood and
intended by the parties hereto that the Stockholder
Agreements and the irrevocable proxies delivered to
Buyer by the Company are sufficient to approve the
transactions contemplated hereby by the Company's
Stockholders, and the Company shall not in any way
challenge the validity, enforceability or
effectiveness of the Stockholder Agreements or
proxies.
5.1.5. The Company and Buyer will prepare and file any
other filings required under any Blue Sky laws
relating to the Merger and the transactions
contemplated by this Agreement (the "Other
Filings"). Each of the Company and Buyer will
notify the other promptly upon the receipt of any
correspondence or communications from any
government officials concerning the Stockholder
Information Statement, the Proxy Statement or any
Other Filing and will supply the other with copies
of all correspondence between such party or any of
its representatives, on the one hand, and any other
government officials, on the other hand, with
respect to the Stockholder Information Statement,
the Proxy Statement, the Merger or any Other
Filing. The Proxy Statement, the Stockholder
Information Statement and the Other Filings will
comply in all material
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respects with all applicable requirements of law
and the rules and regulations promulgated
thereunder.
5.1.6. Promptly after the date of this Agreement, the
Company shall provide to Buyer such information
concerning its business and financial statements
and affairs as, in the reasonable judgment of Buyer
and its counsel, may be required or appropriate for
inclusion in the Buyer Registration Statement or in
any amendments or supplements thereto in order to
reflect the transactions contemplated hereby and
other information concerning the Company, and to
cause the Company's counsel and auditors to
cooperate with Buyer's counsel and auditors in the
preparation of the Buyer Registration Statement or
any amendments or supplements thereto. The Company
shall use all reasonable efforts to ensure that the
information provided by it for inclusion in the
Buyer Registration Statement complies with
applicable law and the rules and regulations
promulgated by the SEC, to assist Buyer in
responding promptly to any comments of the SEC or
its staff, and to assist Buyer in having the Buyer
Registration Statement declared effective under the
Securities Act as promptly as practicable. If any
event relating to the Company occurs, or if the
Company becomes aware of any information, that
should be disclosed in an amendment or supplement
to the Buyer Registration Statement, then the
Company shall inform Buyer thereof and shall
cooperate with Buyer in filing such amendment or
supplement with the SEC. The Company represents
and warrants to Buyer that all information provided
by the Company for inclusion in the Buyer
Registration Statement shall not, at the time it
was provided, contain any untrue statement of a
material fact or omit to state a material fact
required to be stated therein or necessary in order
to make the statements therein, in light of the
circumstances under which they were made, not
misleading.
5.2. COOPERATION; ACCESS TO INFORMATION. The Company shall
afford Buyer and its accountants, counsel and other
representatives, reasonable access during normal business
hours and upon reasonable notice during the period prior to
the Effective Time to (a) all of the Company's properties,
books, contracts, commitments and records, (b) all other
information concerning the business, properties and
personnel (subject to restrictions imposed by applicable
law) of the Company as Buyer may reasonably request and (c)
all officers and, as scheduled through officers, key
employees of the Company. The Company agrees to provide to
Buyer and its accountants, counsel and other representatives
copies of internal financial statements (including by
returns and supporting documentation) promptly upon
request. No information or knowledge obtained in any
investigation pursuant to this Section 5.2 shall affect or
be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of
the parties to consummate the Merger.
5.3. CONFIDENTIALITY. Each of the parties hereto hereby agrees
that the information obtained in any investigation pursuant
to Section 5.2, or pursuant to the
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negotiation and execution of this Agreement or the
effectuation of the transaction contemplated hereby, shall
be governed by the terms of the Confidentiality Agreement
effective as of April 15, 1999 between the Company and
Buyer.
5.4. EXPENSES.
5.4.1. Whether or not the Merger is consummated, except as
set forth in Section 5.4.2, all fees and expenses
incurred in connection with the Merger including,
without limitation, all legal, accounting,
investment banking, broker, financial advisory,
consulting and all other fees and expenses of third
parties ("Third Party Expenses") incurred by a
party in connection with the negotiation and
effectuation of the terms and conditions of this
Agreement and the transactions contemplated hereby,
shall be the obligation of the respective party
incurring such fees and expenses; provided, however
that Buyer and the Company shall share equally in
all fees and expenses, other than Third Party
Expenses, incurred in relation to any 3(a)(10)
filing or filing of the Form S-4 Registration
Statement any required HSR filings and printing the
Proxy Statement or Stockholder Information
Statement (as the case may be and the Form S-4
Registration Statement, if required).
5.4.2. In the event that the Merger is consummated, Buyer
agrees to pay those Third Party Expenses incurred
by the Company, provided that Buyer shall have full
recourse to the Escrow Fund (as defined herein) for
payment of all Third Party Expenses incurred by the
Company exceeding $400,000 (excluding the expense
of the Company's accounting professionals to
prepare an audit of the Company's
post-September 30, 1998 financial statements, if
required for the Buyer Registration Statement).
5.5. PUBLIC DISCLOSURE. Unless otherwise required by law, prior
to the Effective Time, no disclosure (whether or not in
response to an inquiry) of the subject matter of this
Agreement shall be made by any party hereto unless approved
by Buyer and Company prior to release. Any public
announcement by Buyer regarding the subject matter of this
Agreement shall be delivered to and approved by the Company
prior to release (such approval to not be unreasonably
withheld).
5.6. CONSENTS. The Company shall use reasonable commercial
efforts to obtain the consents, waivers, assignments and
approvals under any of the Contracts set forth in Section
2.6 of the Disclosure Schedule so as to preserve all rights
of, and benefits to, the Company thereunder.
5.7. FIRPTA COMPLIANCE. On the Closing Date, the Company shall
deliver to Buyer a properly executed statement in a form
reasonably acceptable to Buyer for purposes of satisfying
Buyer's obligations under Treasury Regulation Section
1.1445-2(c)(3).
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5.8. REASONABLE EFFORTS. Subject to the terms and conditions
provided in this Agreement, each of the parties hereto shall
use commercially reasonable efforts to take promptly, or
cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make
effective the transactions contemplated hereby, to obtain
all necessary waivers, consents and approvals and to effect
all necessary registrations and filings and to remove any
injunctions or other impediments or delays, legal or
otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated
by this Agreement (including, without limitation the Buyer
IPO); provided that Buyer shall not be required to agree to
any divestiture by Buyer or the Company or any of Buyer's
subsidiaries or affiliates of shares of capital stock or of
any business, assets or property of Buyer or its
subsidiaries or affiliates or of the Company, its
affiliates, or the imposition of any material limitation on
the ability of any of them to conduct their businesses or to
own or exercise control of such assets, properties and
stock.
5.9. NOTIFICATION OF CERTAIN MATTERS. The Company and Buyer shall
give prompt notice to the other of: (i) the occurrence or
nonoccurrence of any event, the occurrence or nonoccurrence
of which is likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate at or
prior to the Effective Time and (ii) any failure to comply
with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided,
however, that the delivery of any notice pursuant to this
Section 5.9 shall not limit or otherwise affect any remedies
available to the party receiving such notice and no
disclosure pursuant to this Section 5.9 shall be deemed to
amend or supplement the disclosure schedules or prevent or
cure any misrepresentations, breach of warranty or breach of
covenant.
5.10. ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES. Each party
hereto, at the request of another party hereto, shall use
reasonable commercial efforts to execute and deliver such
other instruments and do and perform such other acts and
things as may be necessary in the written opinion of counsel
to the requesting party for effecting the consummation of
this Agreement and the transactions contemplated hereby.
5.11. CERTAIN EMPLOYEE MATTERS.
5.11.1. FOR PURPOSES OF THIS SECTION 5.11:
(a) "Applicable Company Options" shall mean
any Company Options granted to an Existing
Employee at any time prior to the
Effective Time.
(b) "Approved by Senior Management" shall mean
an action has been approved in writing or
by e-mail by (i) the Chief Executive
Officer
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of Buyer and (ii) both Matt Glickman and
Mark Selcow (or, if only one such officer
shall remain employed by the Surviving
Corporation or Buyer, that remaining
officer, or if neither such officer
remains employed by the Surviving
Corporation or Buyer, then neither such
officer).
(c) "Cause" exists if any one or more of the
following should occur as determined in
good faith by Buyer: An Existing Equity
Employee's (i) failure to perform his or
her duties or failure to follow the
directions of any supervisor, after a
written warning except in the case of a
willful failure to perform his or her
duties, in each such case provided that
Matt Glickman and Mark Selcow acknowledge
such failure in writing, (ii) breach of
his or her fiduciary duties to Buyer
and/or the Surviving Corporation, as
evidenced by a written acknowledgement or
opinion regarding such breach by Buyer's
counsel, or (iii) conviction by a court of
competent jurisdiction of a felony or
other serious crime.
(d) "Constructive Termination" shall mean
(i) providing an Existing Employee with a
base salary, an amount or level of
employee benefits or a title, position or
responsibility that is not reasonably
comparable to the base salary, amount and
level of employee benefits or title,
position or responsibility that such
Existing Employee enjoyed as of the date
of this Agreement if employed as of such
date or as of the Effective Time if hired
after the date of this Agreement (for this
purpose, disregarding any enhancement in
the salary, benefits, title, position or
responsibility of comparably positioned
employees at any time between the date of
this Agreement and the Effective Time
outside of the ordinary course of business
consistent with past practice) or
(ii) requiring any Existing Employee to
relocate outside of the San Francisco Bay
Area.
(e) "Existing Employee" shall mean each
Company employee who, as of the Closing
Date, is actively employed by the Company
on a full-time basis. Without limiting
the generality of the foregoing, for
purposes of clarification, an "Existing
Employee" would not include any part-time
employee (i.e., a person hired for less
than 1000 hours per year or less than 20
hours per week), any person on disability
leave, leave of absence or other
non-active status (other than any person
on maternity, paternity or family leave),
or any person who is merely an independent
contractor or consultant of the Company or
in any comparable non-employee
relationship with the Company.
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5.11.2. No Existing Employee may be terminated without
Cause or pursuant to a Constructive Termination
prior to the second anniversary of the Closing Date
unless such termination has been approved by Senior
Management.
5.11.3. In the event that, at any time prior to the second
anniversary of the Closing Date, notwithstanding
Section 5.11.2 hereof, Buyer terminates the
employment of any Existing Employee (i) without
Cause or pursuant to a Constructive Termination and
(ii) without such termination having been Approved
by Senior Management, then the terminated Existing
Employee shall be entitled either to (i) enforce
the terms of this Section 5.11 as a third-party
beneficiary hereof and seek damages from Buyer or
(ii) obtain the following benefits as liquidated
damages for such employee's claims hereunder, in
which event the following shall be the sole and
exclusive remedy of the terminated Existing
Employee: (i) all Applicable Company Options held
by such Existing Employee as of the date of such
termination will vest an additional 24 months
following the date of such termination or in the
event such termination is by a successor to or
acquiror of Buyer, then all Applicable Company
Options held by such Existing Employee shall have
their vesting fully accelerated; and (ii) if such
Existing Employee has a title of Vice President or
above, such Existing Employee shall also be paid by
Buyer a cash severance payment equal to one
(1) year's base salary as of the date of
termination.
5.11.4. Nothing contained in this Section 5.11 shall
create, or be deemed to create or imply, any
specified term of employment, any promise of
continued employment or any other agreement
regarding duration of employment or the necessity
for "Cause" for purposes of terminating employment
with respect to any Existing Employee. Following
the Closing Date, all employees of the Company will
be employed on an at-will basis, unless otherwise
specified in a written agreement between the
respective employee and the Company or Buyer.
5.11.5. The provisions of this Section 5.11 shall be
binding upon any successor to Buyer or Buyer's
business by way of merger, consolidation,
reorganization, sale of substantially all of
Buyer's assets or other comparable transaction.
5.12. NON-DISCLOSURE AGREEMENTS. The Company agrees to use its
commercially reasonable efforts to cause all of its current
employees and consultants to execute, to the extent they
have not already done so, a Non-Disclosure Agreement (with
Intellectual Property assignment provisions) in
substantially the form currently used by the Company.
5.13. AFFILIATE AGREEMENTS. Schedule 5.13 sets forth those persons
who, in the Company's reasonable judgment, are or may be
"affiliates" of the Company within the meaning of Rule 145
(each such person a "Rule 145 Affiliate") promulgated under
the Securities Act ("Rule 145"). The Company shall provide
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Buyer such information and documents as Buyer shall
reasonably request for purposes of reviewing such list. The
Company shall deliver or cause to be delivered to Buyer,
concurrently with the execution of this Agreement (and in
any case prior to the Closing Date) from each of the Rule
145 Affiliates of the Company, an executed Affiliate
Agreement ("Affiliate Agreement") in the form attached
hereto as Exhibit B, each of which will be in full force and
effect as of the Effective Time. Buyer shall be entitled to
place appropriate legends on the certificates evidencing any
Buyer Common Stock to be received by such Affiliates
pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent
for Buyer Common Stock, consistent with the terms of such
Affiliate Agreements.
5.14. TAX-FREE REORGANIZATION. The parties intend to adopt this
Agreement and the Merger as a tax-free plan of
reorganization under Section 368(a)(1)(A) of the Code by
virtue of the provisions of Section 368(a)(2)(E) of the
Code. The Buyer Common Stock issued in the Merger will be
issued solely in exchange for the Company Capital Stock, and
no other transaction other than the Merger represents,
provides for or is intended to be an adjustment to the
consideration paid for the Company Capital Stock. No
consideration that could constitute "other property" within
the meaning of Section 356(b) of the Code is being
transferred by Buyer for the Company Capital Stock in the
Merger. The parties shall not take a position on any tax
return inconsistent with this Section 5.14. From and after
the Closing, neither Buyer nor the Surviving Corporation
shall take any action that could reasonably be expected to
cause the Merger not to be treated as a reorganization
within the meaning of Section 368 of the Code.
5.15. POOLING ACCOUNTING. Buyer may, following consultation with
the Company, to the extent it deems advisable in its sole
discretion, cause or attempt to cause the business
combination to be effected by the Merger to be accounted for
as a pooling of interests. In the event that Buyer
determines at any time, in its sole discretion, for any
reason or no reason (and no reason need be given), that it
is not possible, expedient, advisable or convenient to
obtain such pooling treatment, then Buyer may cease any and
all efforts to obtain such pooling treatment without any
liability hereunder and without being deemed in breach of
this Agreement. The Company acknowledges and agrees that
the business combination to be effected by the Merger may be
accounted for either as a pooling of interests or as a
purchase, which determination shall be made by Buyer in its
sole discretion. However, the Company shall not take any
actions, and it shall, to the extent possible, cause its
Affiliates not to take any actions that would adversely
affect the ability of Buyer to account for the business
combination to be effected by the Merger as a pooling of
interests.
5.16. DIRECTORS' AND OFFICERS' INDEMNIFICATION. From and after
the Effective Time, Buyer shall (i) assume, as of the
Effective Time, all obligations of the Company under Article
VII(B) of the Company's Certificate of Incorporation, as
currently in effect and the Company's Indemnification
Agreements with the Company's officers and directors, and
(ii) pay or cause the Surviving Corporation to pay all
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amounts that become due and payable under such provisions.
This Section 5.16 shall survive the consummation of the
Merger, is intended to benefit the Company, the Surviving
Corporation and each indemnified party, shall be binding,
jointly and severally, on all successors and assigns of the
Surviving Corporation and Buyer, and shall be enforceable by
the indemnified parties.
5.17. BOARD REPRESENTATION. Prior to the Effective Time, Buyer
will take such action as may be required so that Matthew
Glickman, if he is then ready and willing so to serve, will
be elected effective as of the Effective Time as a member of
Buyer's Board of Directors.
5.18. VOTING AGREEMENTS. The Company has delivered to Buyer,
concurrently with the execution of this Agreement, an
executed Voting and Lock-Up Agreement substantially in the
form attached hereto as Exhibit C (the "Stockholder
Agreement"), duly executed and delivered by a majority in
interest of the Stockholders (as described in Section 2.26
hereof). The Company agrees to obtain and deliver to Buyer
duly authorized and executed Stockholder Agreements from
additional Stockholders such that, within ten (10) business
days following the date of this Agreement, Buyer shall have
received Agreements from Stockholders owning not less than
ninety-five percent (95%) of the Total Outstanding Company
Shares (the "Stockholder Requirement"). Further, the
Company agrees to commence to seek, promptly following the
date hereof, from the holders of all outstanding Company
Options a lock-up agreement or arrangement identical to that
contained in the Stockholder Agreement or provided by
Buyer's underwriters in the Buyer IPO (a "Lock-Up"). The
parties agree to condition any opportunity of a Company
Option holder to purchase directed shares in the Buyer IPO
that is made available to such holder by the Company or
Buyer upon such holder's execution and delivery to Buyer of
a Lock-Up.
5.19. REGULATORY FILINGS. As soon as may be reasonably
practicable, to the extent required by applicable law, Buyer
and the Company each shall file with the United States
Federal Trade Commission (the "FTC") and the Antitrust
Division of the United States Department of Justice ("DOJ")
Notification and Report Forms relating to the transactions
contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the
merger notification or control laws and regulations of any
applicable jurisdiction, as agreed to by the parties. Buyer
and the Company each shall promptly (a) supply the other
with any information which may be required in order to
effectuate such filings and (b) supply any additional
information which reasonably may be required by the FTC, the
DOJ or the competition or merger control authorities of any
other jurisdiction and which the parties may reasonably deem
appropriate.
5.20. DIRECTOR ACTION WITH RESPECT TO OPTION PLANS. Prior to the
Effective Time, the Board of Directors of the Company shall
take such actions as shall ensure that Company Options do
not have their vesting accelerated as a result of the
consummation of the Merger and the transactions contemplated
hereby other than
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pursuant to agreements in existence prior to the date of
this agreement as set forth in the Disclosure Schedule.
5.21. MAINTENANCE OF BUSINESS LINES. Buyer agrees that, during the
twelve-month period following the Closing, it will not
(unless Approved By Senior Management) materially change or
cause to be discontinued any of the Company's or Surviving
Corporation's current business lines (i.e., charter sponsors
and advertising, e-commerce and Consumer Health
Interactive).
5.22 LEGAL OPINIONS. Buyer agrees to use commercially reasonable
efforts to cause Irell & Manella LLP to deliver a legal
opinion in substantially the Form of Exhibit D. The Company
agrees to use commercially reasonable efforts to cause
Venture Law Group, A Professional Corporation, to deliver a
legal opinion in substantially the Form of Exhibit E.
5.23 EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE. Each of
the parties hereto, as applicable, and each of Matthew
Glickman and Mark Selcow agree to execute and deliver at the
Closing (i) an Employment Agreement for each of Matthew
Glickman and Mark Selcow in the form attached hereto as
Exhibit F and (ii) a Covenant Not to Compete for each of
Matthew Glickman and Mark Selcow in the form attached hereto
as Exhibit G.
5.24 PIGGYBACK REGISTRATION RIGHTS. Buyer agrees to use
commercially reasonable efforts to cause the parties to the
Company's Amended and Restated Investors' Rights Agreements
to be added to Buyer's existing registration rights
agreement effective upon the Effective Date, or to provide
upon the Effective Date substantially similar registration
rights to such persons.
5.25 ADVICE CONCERNING CERTAIN TRANSACTIONS. Prior to the
Effective Time, in the event that Buyer's management
proposes to make a formal presentation to Buyer's Board of
Directors concerning a transaction that would result in a
change of control of Buyer or the sale of twenty percent
(20%) or more of Buyer's assets or the issuance (in
connection with the acquisition of another business) of
securities representing twenty percent (20%) or more of
Buyer's outstanding securities, then Matthew Glickman shall
be entitled to notice of such presentation and to be present
for such presentation (provided that in Buyer's sole
discretion, Buyer may condition the foregoing on the receipt
of a confidentiality agreement from Mr. Glickman reasonably
satisfactory in form and substance to Buyer). This
provision shall terminate upon the Effective Time or upon
the termination of this Agreement in accordance with its
terms.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1. CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE
MERGER. The respective obligations of each party to this
Agreement to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the
following conditions:
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6.1.1. NO INJUNCTION OR RESTRAINTS; ILLEGALITY. No
temporary restraining order, preliminary or
permanent injunction or other order issued by any
court of competent jurisdiction or other legal
restraint or prohibition preventing the
consummation of the Merger shall be in effect, nor
shall any proceeding brought by an administration,
agency or commission or other governmental
authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; nor shall
there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or
deemed applicable to the Merger, which makes the
consummation of the Merger illegal.
6.1.2. GOVERNMENTAL APPROVAL. No Governmental Approval
shall be required to be obtained which, if not so
obtained, would render consummation of the Merger
illegal.
6.1.3. NO ORDER; HSR ACT. No Governmental Entity shall
have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in
effect and which has the effect of making the
Merger illegal or otherwise prohibiting
consummation of the Merger. All waiting periods
under the HSR Act relating to the transactions
contemplated hereby (if any) will have expired or
terminated early.
6.1.4. TAX OPINIONS. Buyer and the Company shall each have
received written opinions from their respective tax
counsel (Irell & Manella LLP and Venture Law Group,
A Professional Corporation, respectively), in form
and substance reasonably satisfactory to them, to
the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a)
of the Code and such opinions shall not have been
withdrawn; provided, however, that if counsel to
either Buyer or the Company does not render such
opinion, this condition shall nonetheless be deemed
to be satisfied with respect to such party if the
other party's counsel renders such opinion to such
party. The parties to this Agreement agree to make
reasonable representations as requested by such
counsel for the purpose of rendering such opinions.
6.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligations of the Company to consummate and effect this
Agreement and the transactions contemplated hereby shall be
subject to the satisfaction at or prior to the Closing Date
of each of the following conditions, any of which may be
waived, in writing, exclusively by the Company:
6.2.1. REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations and warranties of Buyer in this
Agreement shall be true and correct in all material
respects (except that in the case of any
representation or warranty that is itself qualified
by reference to materiality, such representation or
warranty shall be true and correct) on and as of
the Effective Time as
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though such representations and warranties were made
on and as of such time and Buyer shall have
performed and complied in all material respects with
all covenants of this Agreement (including without
limitation those in Article IV) required to be
performed and complied with by it as of the
Effective Time; PROVIDED, HOWEVER, that any
inaccuracies in such representations, warranties or
failure to observe such covenants shall not
constitute a failure of this condition unless the
aggregate of such matters would reasonably be likely
to have a Material Adverse Effect valued at $25
million or more (the "$25 Million Condition"),
PROVIDED, FURTHER, that for purposes of this Section
6.2.1., any change, event, effect or condition on or
of the business in the existing business of the
Buyer that is primarily attributable (i) to the
Merger or the announcement or effects of
announcement of the Merger or (ii) to general
industry-wide changes in such existing lines of
business shall be disregarded. The $25 Million
Condition shall not be applicable, however, in the
case of a knowing and intentional breach of any
covenant of Buyer in this Agreement by or at the
direction or pursuant to the authorization of Edward
Lenk, Steve Schoch or Peter Juzwiak (it being
understood that each of those individuals has
reviewed and is fully familiar with all of the terms
included in this Agreement; however, the parties do
not intend for any of such named individuals to have
personal liability as a result of the foregoing
provision.).
6.2.2. CERTIFICATE OF BUYER. The Company shall have been
provided with a certificate executed on behalf of
Buyer by the Chief Financial Officer or Chief
Executive Officer of Buyer certifying (i) as to
compliance with the matters set forth in Section
6.2.1 above and (ii) that all covenants (including
without limitation those in Article IV) of this
Agreement to be performed by Buyer on or before
such date have been so performed in all material
respects.
6.2.3 NO MATERIAL ADVERSE CHANGES. Except as set forth in
the Disclosure Schedule, there shall not have
occurred any material adverse change in the
business, assets (including intangible assets),
results of operations, liabilities (contingent or
accrued), prospects or financial condition of the
Buyer since the date of this Agreement; PROVIDED,
HOWEVER, that any such material adverse changes
shall not constitute a failure of this condition
unless such matters in the aggregate would be
reasonably likely to have a Material Adverse Effect
valued at $700 million or more, and PROVIDED
FURTHER that no third party litigation claim (other
than any claim asserted by a governmental agency or
authority) shall constitute material adverse
changes for purposes of this Section 6.2.3.
6.2.4 BUYER IPO CONSUMMATED. The Buyer IPO shall have
closed.
6.3. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF BUYER. The
obligations of Buyer to consummate and effect this Agreement
and the transactions contemplated
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hereby shall be subject to the satisfaction at or prior to
the Effective Time of each of the following conditions, any
of which may be waived, in writing, exclusively by Buyer:
6.3.1. REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations and warranties of the Company (as
modified by the Disclosure Schedule) in this
Agreement shall be true and correct in all material
respects (except that in the case of any
representation or warranty that is itself qualified
by reference to materiality, such representation or
warranty shall be true and correct) on and as of
the Effective Time as though such representations
and warranties were made on and as of the Effective
Time, the Company shall have performed and complied
in all material respects with all covenants of this
Agreement (including without limitation those in
Article IV) required to be performed and complied
with by it as of the Effective Time and each of
Matthew Glickman and Mark Selcow shall have
executed and delivered the agreements specified
above in Section 5.23; PROVIDED, HOWEVER, that any
inaccuracies in such representations and warranties
or failure to observe such covenants shall not
constitute a failure of this condition unless the
aggregate of such matters would reasonably be
likely to have a Material Adverse Effect valued at
$25 million or more (the "$25 Million Condition"),
PROVIDED; FURTHER, that for purposes of this
Section 6.3.1., any change, event, effect or
condition on or of the business in the existing
lines of the Company that is primarily attributable
(i) to the Merger or the announcement or effects of
the announcement of the Merger or (ii) to general
industry-wide changes in such existing lines of
business shall be disregarded. The $25 Million
Condition shall not be applicable, however, in the
case of a knowing and intentional breach of any
covenant of the Company in this Agreement by or at
the direction or pursuant to the authorization of
Matthew Glickman, Mark Selcow or Jason Lemkin (it
being understood that each of those individuals has
reviewed and is fully familiar with all of the
terms included in this Agreement; however, the
parties do not intend for any of such named
individuals to have personal liability as a result
of the foregoing provision).
6.3.2. NO MATERIAL ADVERSE CHANGES. Except as set forth in
the Disclosure Schedule, there shall not have
occurred any material adverse change in the
business, assets (including intangible assets),
results of operations, liabilities (contingent or
accrued), prospects or financial condition of the
Company since the date of this Agreement; PROVIDED,
HOWEVER, that any such material adverse changes
shall not constitute a failure of this condition
unless such matters in the aggregate would be
reasonably likely to have a Material Adverse Effect
valued at $100 million or more, and PROVIDED
FURTHER that no third party litigation claim (other
than any claim asserted by a governmental agency or
authority) shall constitute material adverse
changes for purposes of this Section 6.3.2.
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6.3.3. STOCKHOLDER APPROVAL. The Stockholders of the
Company shall have approved this Agreement, the
Merger and the transactions contemplated hereby;
the Stockholder Requirement shall have been
satisfied and Lock-Ups shall have been obtained
from holders of Company Options representing 85% of
the shares issuable upon exercise of such options.
6.3.4. CERTIFICATE OF THE COMPANY. Buyer shall have been
provided with a certificate executed on behalf of
the Company by its Chief Executive Officer or its
Chief Financial Officer certifying (i) as to
compliance with the matters set forth in Section
6.3.1 above and (ii) that all covenants (including
without limitation those in Article IV) of this
Agreement to be performed by the Company on or
before such date have been so performed in all
material respects.
6.3.5. LISTING; EFFECTIVENESS OF REGISTRATION STATEMENT.
The shares of Buyer Common Stock to be issued in
the Merger shall have been approved for listing
(subject to notice of issuance) on the Nasdaq
National Market. In addition, either (i) the
issuance of Buyer Common Stock pursuant to the
Merger contemplated hereby shall be qualified for
the exemption provided under Section 3(a)(10) of
the Securities Act or (ii) the Form S-4
Registration Statement shall have become effective
in accordance with the provisions of the Securities
Act, and no stop order shall have been issued by
the SEC with respect to the Form S-4 Registration
Statement. Further, no proceeding similar to a
stop order in respect of the Proxy Statement or
Information Statement (as the case may be), shall
have been initiated or threatened in writing by the
SEC.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
7.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
Company's representations and warranties in this Agreement
or in any instrument delivered pursuant to this Agreement
shall survive the Merger and continue until the date that is
six (6) months following the Closing Date (the "Expiration
Date"). All of Buyer's representations and warranties
contained herein or in any instrument delivered pursuant to
this Agreement shall terminate on the Closing Date.
7.2. INDEMNIFICATION; ESCROW ARRANGEMENTS.
7.2.1. INDEMNIFICATION. The Company (on behalf of itself
and the Stockholders) agrees to indemnify and hold
Buyer and its officers, directors and affiliates
(the "Indemnified Parties") harmless against all
claims, losses, liabilities, damages, deficiencies,
costs and expenses, including reasonable attorneys'
fees and expenses of investigation (hereinafter
individually a "Loss" and collectively "Losses")
incurred by the Indemnified Parties directly or
indirectly as a result of: (i) any inaccuracy or
breach of a representation or
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warranty of the Company set forth in this Agreement
or in any certificate of any officer of the Company
delivered pursuant to this Agreement, (ii) any
failure by the Company to perform or comply with any
covenant (including, without limitation, those
contained in Article IV) contained in this
Agreement, and (iii) the Third Party Expenses
incurred by the Company exceeding $400,000
(excluding the expense of the Company's accounting
professionals to prepare an audit of the Company's
March 31, 1999 financial statements or any other
supplemental auditing work for a post-September 30,
1998 audit, if required for the Buyer Registration
Statement); PROVIDED, HOWEVER, that (x) the
aggregate amount recoverable by the Indemnified
Parties pursuant to this Article VII shall not
exceed the amount deposited in the Escrow Fund (as
defined below), and (y) the Indemnified Parties
shall not be entitled to indemnification hereunder
(1) with respect to any individual claim for less
than $5,000 ($25,000 in the case of breach of solely
Section 2.8) in value, or (2) unless the aggregate
amount for which valid indemnification claims are
made exceeds $100,000, in which case the Indemnified
Parties shall be entitled to indemnification from
the first dollar of indemnification claims. The
Escrow Fund shall be available to compensate the
Indemnified Parties for any such Losses. Nothing
herein shall limit the liability of the Company for
any breach of any representation, warranty or
covenant if the Merger is not consummated.
7.2.2. ESCROW FUND. As security for the indemnity provided
for in Section 7.2.1 and by virtue of this
Agreement, as soon as practicable after the
Effective Time, the Escrow Amount, without any act
of the Company, will be deposited with an
institution selected by Buyer and approved by the
Stockholder Representative (as defined in Section
7.2.9(L)) as Escrow Agent (the "Escrow Agent"),
provided that Stockholder Representative shall not
withhold such approval if Buyer selects a third
party that is unrelated to Buyer and that is
generally engaged in the escrow industry or the
financial services industry. The Escrow Agent will
either execute an acknowledgement and agreement to
the terms of this Article VII or enter into a
separate agreement that sets forth substantially
the same terms provided herein. The deposit of the
Escrow Amount will constitute an escrow fund (the
"Escrow Fund") to be governed by the terms set
forth herein. The Escrow Amount shall be
contributed on behalf of each Stockholder of the
Company in proportion to the aggregate Buyer Common
Stock which each such holder would otherwise be
entitled to under Section 1.8 hereof. The
Stockholders of the Company will be deemed to have
received and deposited with the Escrow Agent (as
defined below) the Escrow Amount (plus any
additional shares as may be issued upon any stock
split, stock dividend or recapitalization effected
by Buyer after the Effective Time with respect to
the Escrow Amount) without any act of any
Stockholder.
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7.2.3. ESCROW PERIOD; DISTRIBUTION UPON TERMINATION OF
ESCROW PERIODS. Subject to the following
requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall
terminate at 5:00 p.m., Los Angeles, California
local time on the Expiration Date (the "Escrow
Period"); provided, however, that the Escrow Period
shall not terminate with respect to any amount
which, in the reasonable judgment of Buyer, is
necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate (as defined
below) delivered to the Escrow Agent prior to
termination of such Escrow Period with respect to
facts and circumstances existing prior to the
termination of such Escrow Period. As soon as all
such claims have been resolved, the Escrow Agent
shall deliver to the Stockholders of the Company
the remaining portion of the Escrow Fund not
required to satisfy such claims. Deliveries of
Escrow Amounts to the Stockholders of the Company
pursuant to this Section 7.2 shall be made in
proportion to their respective original
contributions to the Escrow Fund.
7.2.4. PROTECTION OF ESCROW FUND.
(a) The Escrow Agent shall hold and safeguard
the Escrow Fund during the Escrow Period,
shall treat such fund as a trust fund in
accordance with the terms of this
Agreement and not as the property of Buyer
and shall hold and dispose of the Escrow
Fund only in accordance with the terms
hereof.
(b) Any shares of Buyer Common Stock or other
equity securities issued or distributed by
Buyer (including shares issued upon a
stock split) ("New Shares") in respect of
Buyer Common Stock in the Escrow Fund
which have not been released from the
Escrow Fund shall be added to the Escrow
Fund and become a part thereof. New Shares
issued in respect of shares of Buyer
Common Stock which have been released from
the Escrow Fund shall not be added to the
Escrow Fund but shall be distributed to
the record holders thereof. Cash dividends
on Buyer Common Stock shall not be added
to the Escrow Fund but shall be
distributed to the record holders thereof.
(c) Each Stockholder shall have voting rights
and the right to distributions of cash
dividends with respect to the shares of
Buyer Common Stock contributed to the
Escrow Fund by such Stockholder (and on
any voting securities added to the Escrow
Fund in respect of such shares of Buyer
Common Stock). As the record holder of
such shares, the Escrow Agent shall vote
such shares in accordance with the
instructions of the Stockholders having
the beneficial interest therein and shall
promptly deliver copies of all proxy
solicitation materials to such
Stockholders.
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7.2.5. CLAIMS UPON ESCROW FUND.
(a) (a) Upon receipt by the Escrow Agent at
any time on or before the last day of the
Escrow Period of a certificate signed by
any officer of Buyer (an "Officer's
Certificate"): (A) stating that Buyer has
paid or properly accrued or, with respect
to third-party claims of which Buyer, the
Company or the Surviving Corporation has
received notice, reasonably anticipates
that it will have to pay or accrue Losses,
and (B) specifying in reasonable detail
the individual items of Losses included in
the amount so stated, the date each such
item was paid or properly accrued, or the
basis for such anticipated liability, and
the nature of the misrepresentation,
breach of warranty or covenant to which
such item is related, the Escrow Agent
shall deliver to Buyer out of the Escrow
Fund, as promptly as practicable subject
to Section 7.2.6, shares of Buyer Common
Stock held in the Escrow Fund with a value
equal to such Losses; provided, however,
that in the event of a third party claim
that is the subject of the demand on the
Escrow Fund, no shares shall be delivered
out of the Escrow Fund until the claim is
settled or adjudicated.
(b) For the purposes of determining the number
of shares of Buyer Common Stock to be
delivered to Buyer out of the Escrow Fund
as indemnity pursuant to Section 7.2.5(a)
hereof, the shares of Buyer Common Stock
shall be valued at $33 per share, unless
the average closing price of the Buyer
Common Stock for any five (5) consecutive
trading days during the thirty (30) day
period preceding the assertion of a
particular indemnity claim exceeds $50 per
share, in which case the shares of Buyer
shall be valued at $50 per share or, if
the average closing price of the Buyer
Common Stock for any five (5) consecutive
days during the thirty (30) day period
preceding the assertion of a particular
indemnity claim is less than $16 per
share, then the shares of Buyer shall be
valued at $16 per share (subject to in
each case to the adjustment as a result of
the Buyer Stock Split).
7.2.6. OBJECTIONS TO CLAIMS. At the time of delivery of
any Officer's Certificate to the Escrow Agent, a
duplicate copy of such certificate shall be
delivered to the Stockholder Representative, and
for a period of thirty (30) days after such
delivery, the Escrow Agent shall make no delivery
to Buyer of any Escrow Amounts pursuant hereto
unless the Escrow Agent shall have received written
authorization from the Stockholder Representative
to make such delivery. After the expiration of such
thirty (30) day period, the Escrow Agent shall make
delivery of shares of Buyer Common Stock from the
Escrow Fund in accordance herewith; provided,
however, that no such payment or delivery may be
made if the Stockholder Representative shall object
in a written statement to the claim made in the
Officer's
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Certificate, and such statement shall have been
delivered to the Escrow Agent prior to the
expiration of such thirty (30) day period.
7.2.7. RESOLUTION OF CONFLICTS; ARBITRATION.
(a) In case the Stockholder Representative
shall object in writing to any claim or claims made
in any Officer's Certificate, the Stockholder
Representative and Buyer shall attempt in good
faith to agree upon the rights of the respective
parties with respect to each of such claims. If the
Stockholder Representative and Buyer should so
agree, a memorandum setting forth such agreement
shall be prepared and signed by both parties and
shall be furnished to the Escrow Agent. The Escrow
Agent shall be entitled to rely on any such
memorandum and distribute shares of Buyer Common
Stock from the Escrow Fund in accordance with the
terms thereof.
(b) If no such agreement can be reached after
good faith negotiation, either Buyer or
the Stockholder Representative may demand
arbitration of the matter unless the
amount of the damage or Loss is at issue
in pending litigation with a third party,
in which event arbitration shall not be
commenced until such amount is ascertained
or both parties agree to arbitration; and
in either such event the matter shall be
settled by arbitration conducted by one
arbitrator mutually agreeable to Buyer and
the Stockholder Representative. In the
event that within forty-five (45) days
after submission of any dispute to
arbitration, Buyer and the Stockholder
Representative cannot mutually agree on
one arbitrator, Buyer and the Stockholder
Representative shall each select one
arbitrator, and the two arbitrators so
selected shall select a third arbitrator.
The arbitrator or arbitrators, as the case
may be, shall set a limited time period
and establish procedures designed to
reduce the cost and time for discovery
while allowing the parties an opportunity,
adequate in the sole judgment of the
arbitrator or majority of the three
arbitrators, as the case may be, to
discover relevant information from the
opposing parties about the subject matter
of the dispute. The arbitrator or a
majority of the three arbitrators, as the
case may be, shall rule upon motions to
compel or limit discovery and shall have
the authority to impose sanctions,
including attorneys' fees and costs, to
the same extent as a competent court of
law or equity, should the arbitrators or a
majority of the three arbitrators, as the
case may be, determine that discovery was
sought without substantial justification
or that discovery was refused or objected
to without substantial justification. The
decision of the arbitrator or a majority
of the three arbitrators, as the case may
be, as to the validity and amount of any
claim in such Officer's Certificate shall
be binding and conclusive upon the parties
to this Agreement. Such decision shall
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be written and shall be supported by
written findings of fact and conclusions
which shall set forth the award, judgment,
decree or order awarded by the
arbitrator(s).
(c) Judgment upon any award rendered by the
arbitrator(s) may be entered in any court
having jurisdiction. Any such arbitration
shall be held in Los Angeles County,
California, under the rules then in effect
of the American Arbitration Association.
The arbitrator(s) shall determine how all
expenses relating to the arbitration shall
be paid, including without limitation, the
respective expenses of each party, the
fees of each arbitrator and the
administrative fee of the American
Arbitration Association.
7.2.8. THIRD-PARTY CLAIMS. In the event Buyer becomes
aware of a third-party claim which Buyer believes
may result in a demand against the Escrow Fund,
Buyer shall notify the Stockholder Representative
of such claim. Buyer may not settle any such claim
without the consent of the Stockholder
Representative, which consent shall not be
unreasonably withheld or delayed. In the event that
the Stockholder Representative has consented to any
such settlement, the Stockholders shall have no
power or authority to object under any provision of
this Article VII to the amount of any claim by
Buyer against the Escrow Fund with respect to such
settlement.
7.2.9. ESCROW AGENT.
(A) The Escrow Agent shall be
obligated only for the
performance of such duties as
are specifically set forth
herein, and as set forth in any
additional written escrow
instructions which the Escrow
Agent may receive after the date
of this Agreement which are
signed by an officer of Buyer
and the Stockholder
Representative, and may rely and
shall be protected in relying or
refraining from acting on any
instrument reasonably believed
to be genuine and to have been
signed or presented by the
proper party or parties. The
Escrow Agent shall not be liable
for any act done or omitted
hereunder as Escrow Agent while
acting in good faith and in the
exercise of reasonable judgment,
and any act done or omitted
pursuant to the advice of
counsel shall be conclusive
evidence of such good faith.
(B) The Escrow Agent is hereby
expressly authorized to
disregard any and all warnings
given by any of the parties
hereto or by any other person,
excepting only orders or process
of courts of law or of the
arbitrator(s) appointed pursuant
to Section 7.2.7, and is hereby
expressly authorized to comply
with and obey orders, judgments
or decrees of any
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court or of the arbitrator(s)
appointed pursuant to Section 7.2.7.
In case the Escrow Agent obeys or
complies with any such order,
judgment or decree of any court
or of the arbitration panel
appointed by Section 7.2.7, the
Escrow Agent shall not be liable
to any of the parties hereto or
to any other person by reason of
such compliance, notwithstanding
any such order, judgment or
decree being subsequently
reversed, modified, annulled,
set aside, vacated or found to
have been entered without
jurisdiction.
(C) The Escrow Agent shall not be
liable in any respect on account
of the identity, authority or
rights of the parties executing
or delivering or purporting to
execute or deliver this
Agreement or any documents or
papers deposited or called for
hereunder.
(D) The Escrow Agent shall not be
liable for the expiration of any
rights under any statute of
limitations with respect to this
Agreement or any documents
deposited with the Escrow Agent.
(E) In performing any duties under
this Agreement, the Escrow Agent
shall not be liable to any party
for damages, losses, or
expenses, except for negligence
or willful misconduct on the
part of the Escrow Agent. The
Escrow Agent shall not incur any
such liability for any action
taken or omitted in reliance
upon any instrument, including
any written statement of
affidavit provided for in this
Agreement that the Escrow Agent
shall in good faith believe to
be genuine, nor will the Escrow
Agent be liable or responsible
for forgeries, fraud,
impersonations, or determining
the scope of any representative
authority. In addition, the
Escrow Agent may consult with
legal counsel in connection with
Escrow Agent's duties under this
Agreement and shall be fully
protected in any act taken,
suffered, or permitted by
him/her in good faith in
accordance with the advice of
counsel. The Escrow Agent is not
responsible for determining and
verifying the authority of any
person acting or purporting to
act on behalf of any party to
this Agreement.
(F) If any controversy arises
between the parties to this
Agreement, or with any other
party, concerning the subject
matter of this Agreement, its
terms or conditions, the Escrow
Agent will not be required to
determine the controversy or to
take any action regarding it.
The Escrow Agent may hold all
documents and shares of Buyer
Common Stock and may wait for
settlement of any such
controversy by final appropriate
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legal proceedings or other means
as, in the Escrow Agent's
discretion, may be required,
despite what may be set forth
elsewhere in this Agreement. In
such event, the Escrow Agent
will not be liable for damage.
Furthermore, the Escrow Agent
may at its option, file an
action of interpleader requiring
the parties to answer and
litigate any claims and rights
among themselves. The Escrow
Agent is authorized to deposit
with the clerk of the court all
documents and shares of Buyer
Common Stock held in escrow,
except in respect of all costs,
expenses, charges and reasonable
attorney fees incurred by the
Escrow Agent due to the
interpleader action and which
the parties jointly and
severally agree to pay. Upon
initiating such action, the
Escrow Agent shall be fully
released and discharged of and
from all obligations and
liability imposed by the terms
of this Agreement.
(G) The parties and their respective
successors and assigns agree
jointly and severally to
indemnify and hold Escrow Agent
harmless against any and all
losses, claims, damages,
liabilities, and expenses,
including reasonable costs of
investigation, counsel fees,
including allocated costs of
in-house counsel and disbursements
that may be imposed on Escrow
Agent or incurred by Escrow
Agent in connection with the
performance of his/her duties
under this Agreement, including
but not limited to any
litigation arising from this
Agreement or involving its
subject matter other than
arising out of the Escrow
Agent's negligence or willful
misconduct.
(H) The Escrow Agent may resign at
any time upon giving at least
thirty (30) days written notice
to the parties; provided,
however, that no such
resignation shall become
effective until the appointment
of a successor escrow agent
which shall be accomplished as
follows: the parties shall use
their commercially reasonable
efforts to mutually agree on a
successor escrow agent within
thirty (30) days after receiving
such notice. If the parties fail
to agree upon a successor escrow
agent within such time, the
Escrow Agent shall have the
right to appoint a successor
escrow agent authorized to do
business in the State of
California. The successor escrow
agent shall execute and deliver
an instrument accepting such
appointment and it shall,
without further acts, be vested
with all the estates,
properties, rights, powers, and
duties of the predecessor escrow
agent as if originally named as
escrow agent. Upon appointment
of a successor escrow agent, the
Escrow Agent shall be discharged
from any further duties and
liability under this Agreement.
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(I) All fees of the Escrow Agent for
performance of its duties
hereunder shall be paid by Buyer
in accordance with the standard
fee schedule of the Escrow
Agent. It is understood that the
fees and usual charges agreed
upon for services of the Escrow
Agent shall be considered
compensation for ordinary
services as contemplated by this
Agreement. In the event that the
conditions of this Agreement are
not promptly fulfilled, or if
the Escrow Agent renders any
service not provided for in this
Agreement, or if the parties
request a substantial
modification of its terms, or if
any controversy arises, or if
the Escrow Agent is made a party
to, or intervenes in, any
litigation pertaining to the
Escrow Fund or its subject
matter, the Escrow Agent shall
be reasonably compensated for
such extraordinary services and
reimbursed for all costs,
attorney's fees, including
allocated costs of in-house
counsel, and expenses occasioned
by such default, delay,
controversy or litigation.
(J) In no event shall the Escrow
Agent be liable for special,
indirect or consequential loss
or damage of any kind whatsoever
(including but not limited to
lost profits), even if the
Escrow Agent has been advised of
the likelihood of such loss or
damage and regardless of the
form of action.
(K) Any corporation into which the
Escrow Agent in its individual
capacity may be merged or
converted or with which it may
be consolidated, or any
corporation resulting from any
merger, conversion or
consolidation to which the
Escrow Agent in its individual
capacity shall be a party, or
any corporation to which
substantially all the corporate
trust business of the Escrow
Agent in its individual capacity
may be transferred, shall be the
Escrow Agent under this Escrow
Agreement without further act.
(L) In the event that the Merger is
approved, upon the Effective
Time, and without further act of
any Stockholder, Pat Kenealy
shall be appointed as agent and
attorney-in-fact (the
"Stockholder Representative")
for each Stockholder, for and on
behalf of the Stockholders, to
give and receive notices and
communications, to authorize
delivery to Buyer of shares of
Buyer Common Stock from the
Escrow Fund in satisfaction of
claims by Buyer, to object to
such deliveries, to agree to,
negotiate, enter into
settlements and compromises of,
and demand arbitration and
comply with orders of courts and
awards of arbitrators with
respect to such claims, and to
take all actions necessary or
appropriate in the judgment of
the Stockholder Representative
for the accomplishment of the
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foregoing. Such agency may be
changed by the Stockholders from
time to time upon not less than
thirty (30) days prior written
notice to Buyer; provided,
however, that the Stockholder
Representative may not be
removed unless holders of a
majority in interest in the
Escrow Fund agree to such
removal and to the identity of
the substituted agent. Any
vacancy in the position of
Stockholder Representative may
be filled by approval of the
holders of a majority in
interest in the Escrow Fund. No
bond shall be required of the
Stockholder Representative, and
the Stockholder Representative
shall not receive compensation
for his or her services. Notices
or communications to or from the
Stockholder Representative shall
constitute notice to or from
each of the Stockholders. The
Stockholder Representative shall
not be liable for any act done
or omitted hereunder as
Stockholder Representative while
acting without gross negligence,
bad faith and willful
misconduct. The Stockholders on
whose behalf the Escrow Amount
was contributed to the Escrow
Fund shall severally indemnify
the Stockholder Representative
and hold the Stockholder
Representative harmless against
any loss, liability or expense
incurred without gross
negligence, bad faith or willful
misconduct on the part of the
Stockholder Representative and
arising out of or in connection
with the acceptance or
administration of the
Stockholder Representative's
duties hereunder, including the
reasonable fees and expenses of
any legal counsel retained by
the Stockholder Representative.
A decision, act, consent or
instruction of the Stockholder
Representative shall constitute
a decision of all Stockholders
for whom a portion of the Escrow
Amount otherwise issuable to
them are deposited in the Escrow
Fund and shall be final, binding
and conclusive upon each of such
Stockholders, and the Escrow
Agent and Buyer may rely upon
any such decision, act, consent
or instruction of the
Stockholder Representative as
being the decision, act, consent
or instruction of each and every
such Stockholder. The Escrow
Agent and Buyer are hereby
relieved from any liability to
any person for any acts done by
them in accordance with such
decision, act, consent or
instruction of the Stockholder
Representative.
7.3. MAXIMUM PAYMENTS; REMEDY. From and after the Effective Time,
this Article VII shall provide the sole and exclusive remedy
for any and all damages or other liability sustained or
incurred by the Indemnified Parties or their successors and
assigns as the result of any breach of any representation,
warranty or covenant contained in this Agreement or any
claim of negligent misrepresentation against the Company in
connection with this Agreement or the Merger. No
Stockholder
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shall have any right to contribution from the Company for
any claim made by Buyer after the Effective Time.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1. TERMINATION. Except as provided in Section 8.2, this
Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time:
(a) by mutual written consent of the Company
and Buyer;
(b) by Buyer or the Company if the Effective
Time has not occurred by December 31,
1999; provided, however, that the right to
terminate this Agreement under this
Section 8.1(b) shall not be available to
any party whose action or failure to act
has been a principal cause of or resulted
in the failure of the Merger to occur on
or before such date and such action or
failure to act constitutes a breach of
this Agreement;
(c) by Buyer or the Company if (i) there shall
be a final nonappealable order of a
federal or state court in effect
preventing consummation of the Merger; or
(ii) there shall be any statute, rule,
regulation or order enacted, promulgated
or issued or deemed applicable to the
Merger by any Governmental Entity that
would make consummation of the Merger
illegal;
(d) by Buyer if there shall be any action
taken, or any statute, rule, regulation or
order enacted, promulgated or issued or
deemed applicable to the Merger by any
Governmental Entity, which would: (i)
prohibit Buyer's or Merger Sub's ownership
or operation of any portion of the
business of the Company or (ii) compel
Buyer or the Company to dispose of or hold
separate all or a portion of the business
or assets of the Company or Buyer as a
result of the Merger;
(e) by Buyer if it is not in material breach
of its obligations under this Agreement
and there has been a breach of any
representation, warranty or covenant
contained in this Agreement on the part of
the Company, or if any representation or
warranty on the part of the Company has
become untrue, in either case such that
the condition set forth in Section 6.3.1
would not be satisfied as of the time of
such breach or as of the time such
representation or warranty shall have
become untrue and such inaccuracy in such
representation or warranty or breach shall
not have been cured within thirty (30)
calendar days after written notice to the
Company; provided, however, that, no cure
period shall be required for a breach
which by its nature cannot be cured;
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(f) by the Company if it is not in material
breach of its obligations under this
Agreement and there has been a breach of
any representation, warranty or covenant
contained in this Agreement on the part of
Buyer, or if any representation or
warranty on the part of Buyer has become
untrue, in either case such that the
condition set forth in Section 6.2.1 would
not be satisfied as of the time of such
breach or as of the time such
representation or warranty shall have
become untrue and such inaccuracy in such
representation or warranty or breach shall
not have been cured within thirty (30)
calendar days after written notice to
Buyer; provided, however, that, no cure
period shall be required for a breach
which by its nature cannot be cured;
(g) by Buyer if a majority of the Stockholders
of the Company vote against the Merger at
the Company Stockholders Meeting;
(h) by Buyer if an event having a Material
Adverse Effect on the Company shall have
occurred after the date of this Agreement,
such that the condition set forth in
Section 6.3.2 would not be satisfied; or
(i) by the Company if the Buyer IPO (whether
pursuant to the Buyer Registration
Statement or any other registration
statement declared effective under the
Securities Act) has not been consummated
by October 15, 1999.
8.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 8.1, this Agreement shall
forthwith become void and there shall be no liability or
obligation on the part of Buyer or the Company or their
respective officers, directors or Stockholders, provided
that each party shall remain liable for any breaches of this
Agreement prior to its termination; provided further that
the provisions of Sections 5.3 (confidentiality), 5.4
(expenses), 8.2 (effect of termination), 8.3 (termination
fees) and 9 (notices) shall remain in full force and effect
and survive any termination of this Agreement.
8.3. TERMINATION FEES. If this Agreement is terminated by (i)
Buyer pursuant to its rights under Section 8.1(e) or (ii)
the Company pursuant to its rights under Section 8.1(f),
then the terminating party shall be entitled, at its option,
to demand payment as liquidated damages from the
non-terminating party in the amount of $15 million in
immediately available funds. The parties agree that, if the
terminating party elects to demand such payment from the
non-terminating party, such payment shall be treated for all
purposes as a liquidated damage award and as the terminating
party's sole and exclusive remedy for any breach of any
representation, warranty, covenant or agreement by the
non-terminating party under this Agreement. Notwithstanding
anything to the contrary contained in this Section 8.3, if
one party fails to pay to the other any fee due hereunder
within 5 business days of the event giving rise to the
payment of such fees, in addition to
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any amounts paid or payable pursuant to this Section, the
defaulting party shall pay the out-of-pocket costs and
expenses (including reasonable legal fees and expenses)
in connection with any action, including the filing of any
lawsuit or other legal action, taken to collect payment
together with interest on the amount of any unpaid fee at
the publicly announced prime rate of Citibank N.A. from
the date such fee was required to be paid.
8.4. AMENDMENT. This Agreement may be amended by the parties
hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
8.5. EXTENSION; WAIVER. At any time prior to the Effective Time,
Buyer and the Company may, to the extent legally allowed,
(i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any
inaccuracies in the representations and warranties made to
such party contained herein or in any document delivered
pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only
if set forth in an instrument in writing signed on behalf of
such party.
ARTICLE IX
GENERAL PROVISIONS
9.1. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered
personally or by commercial messenger or courier service, or
mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of
complete transmission) to the parties at the following
addresses (or at such other address for a party as shall be
specified by like notice), provided, however, that notices
sent by mail will not be deemed given until received:
If to Buyer:
eToys Inc.
2850 Ocean Park Drive, Suite 225
Santa Monica, CA 90405
Attention: Steven Schoch
Peter Juzwiak, Esq.
Telephone No.: (310) 664-8100
Facsimile No: (310) 664-8101
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<PAGE>
with a copy to:
Irell & Manella LLP
333 South Hope Street, Suite 3300
Los Angeles, CA 90071
Attention: Anthony T. Iler, Esq.
Telephone No.: (213) 620-1555
Facsimile No.: (213) 229-0515
If to the Company:
BabyCenter, Inc.
539 Bryant, Suite 200
San Francisco, CA 94107
Attention: Matt Glickman
Telephone No.: (415) 537-0900
Facsimile No: (415) 537-0909
with a copy to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Attention: Mark B. Weeks
Telephone No.: 650/854-4488
Facsimile No: 650/854-1121
If to the Stockholder Representative:
with a copy to:
9.2. INTERPRETATION. The words "include," "includes" and
"including" when used herein shall be deemed in each case to
be followed by the words "without limitation." The table of
contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.3. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the
same agreement and shall become effective when one or more
counterparts have been signed by each of the parties and
delivered to the other party, it being understood that all
parties need not sign the same counterpart.
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<PAGE>
9.4. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the Exhibits
hereto, the Disclosure Schedule, and the documents and
instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings both
written and oral, among the parties with respect to the
subject matter hereof; (b) except as specifically provided
herein, are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned
(other than by operation of law).
9.5. SEVERABILITY. In the event that any provision of this
Agreement or the application thereof becomes or is declared
by a court of competent jurisdiction to be illegal, void or
unenforceable, the remainder of this Agreement will continue
in full force and effect and the application of such
provision to other persons or circumstances will be
interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such
void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the
extent possible, the economic, business and other purposes
of such void or unenforceable provision.
9.6. EQUITABLE REMEDIES; CUMULATIVE REMEDIES. The parties hereto
acknowledge that monetary damages may be inadequate to
compensate a party for a breach of this Agreement by the
other party. Accordingly, each party hereto shall be
entitled to seek equitable relief, including, without
limitation, the remedy of specific performance, in the event
of a breach of this Agreement by the other party. Except as
otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a
party of any one remedy will not preclude the exercise of
any other remedy.
9.7. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of
California, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws
thereof.
9.8. RULES OF CONSTRUCTION. The parties hereto agree that they
have been represented by counsel during the negotiation and
execution of this Agreement and, therefor, waive the
application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or
other document will be construed against the party drafting
such agreement or document.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed, all as of the date first written above.
eToys Inc.,
a Delaware corporation
By /s/ Edward C. Lenk
----------------------
Name:
Title:
BabyCenter, Inc.,
a Delaware corporation
By /s/ Matthew Glickman
----------------------
Name:
Title:
Stockholder Representative:
/s/ Pat Kenealy
-------------------------
Pat Kenealy
/s/ Matthew Glickman
-------------------------
Matthew Glickman
(solely with respect to Section 5.23)
/s/ Mark Selcow
-------------------------
Mark Selcow
(solely with respect to Section 5.23)
<PAGE>
Exhibit A = Certificate of Merger
Exhibit B = 145 Letter
Exhibit C = Lock-up Agreement
Exhibit D = Irell & Manella LLP Opinion [intentionally omitted]
Exhibit E = Venture Law Group Opinion [intentionally omitted]
Exhibit F = Employment Agreement
Exhibit G = Covenant Not to Compete
The Disclosure Schedules have been intentionally omitted.
<PAGE>
Exhibit A
CERTIFICATE OF MERGER
MERGING
BABYCENTER, INC.
WITH AND INTO
ETOYS INC.
Pursuant to Section 251 of the
Delaware General Corporation Law
The undersigned, being the __________________ of eToys Inc., a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, DOES HEREBY CERTIFY AS FOLLOWS:
FIRST: That the names and states of incorporation of each of the
constituent corporations of the merger is as follows:
NAME STATE OF INCORPORATION
BabyCenter, Inc. Delaware
eToys Inc. [Delaware]
SECOND: That the Agreement and Plan of Reorganization, dated as of
_________, 1996, by and among eToys Inc., BabyCenter, Inc. and [_________] as
of ____________, 1999, has been approved, adopted, certified, executed and
acknowledged by each of the constituent corporations in accordance with the
requirements of Section 251 of the General Corporation Law of the State of
Delaware.
THIRD: That eToys Inc. shall be the surviving corporation of the
merger.
FOURTH: That the certificate of incorporation of eToys Inc. shall be
the certificate of incorporation of the surviving corporation.
FIFTH: That the executed Agreement and Plan of Reorganization is on
file at the principal place of business of the surviving corporation. The
address of said principal place of business is [____________], California
[_____].
SIXTH: That a copy of the aforesaid Agreement and Plan of
Reorganization, will be furnished by the aforesaid surviving corporation, on
request, and without cost, to any stockholder of each of the aforesaid
constituent corporations.
IN WITNESS WHEREOF, eToys Inc. has caused this Certificate of Merger to
be signed by _____________, its _______________ this ____ day of _________,
1999.
ETOYS INC.
By:____________________________
Name:
Title:
<PAGE>
EXHIBIT B
[Form of Affiliate Agreement]
____________, 1999
[Toy]
__________________
__________________, California, ________
Ladies and Gentlemen:
The undersigned has been advised that as of the date hereof the
undersigned may be deemed to be an "affiliate" of [Toy], a Delaware corporation
("Toy"), or [Blue]., a Delaware corporation ("Blue"), as the term "affiliate" is
(i) defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and
Regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), and/or (ii) used in and for purposes of Accounting Series Releases 130
and 135, as amended, of the Commission. Pursuant to the terms of the Agreement
and Plan of Merger and Reorganization, dated as of [_____], 1999 (the
"Agreement"), between Toy and Blue, at the Effective Time (as defined in the
Agreement) Blue will be merged with and into Toy, with Toy remaining as the
surviving corporation.
As a result of the Merger (as defined in the Agreement), the undersigned
may receive shares of Common Stock, par value $___ per share of Toy ("Toy Common
Stock"). The undersigned would receive such shares in exchange for shares of
capital stock of Blue owned by the undersigned.
The undersigned hereby represents and warrants to, and covenants with, Toy
that in the event the undersigned receives any Toy Common Stock in the Merger:
(A) The undersigned shall not make any sale, transfer or other disposition
of (including a reduction of interest in or risk relating to) the Toy Common
Stock in violation of the Act or the Rules and Regulations.
(B) The undersigned has carefully read this letter and discussed its
requirements and other applicable limitations upon the undersigned's ability to
sell, transfer or otherwise
<PAGE>
dispose of the Toy Common Stock, to the extent the undersigned has felt it
necessary, with the undersigned's counsel.
(C) The undersigned has been advised that the issuance of shares of Toy
Common Stock to the undersigned in the Merger may be registered under the Act by
a Registration Statement on Form S-4 or qualified for issuance under the
exemption provided by Section 3(a)(10) of the Act. However, the undersigned has
also been advised and agrees that because (i) at the time of the Merger's
submission for a vote of the stockholders of Blue or Toy the undersigned may be
deemed an affiliate of Blue or Toy, as the case may be, and (ii) the
distribution by the undersigned of the Toy Common Stock has not been registered
under the Act, the undersigned may not sell, transfer or otherwise dispose of
Toy Common Stock issued to the undersigned in the Merger unless (a) such sale,
transfer or other disposition has been registered under the Act, (b) such sale,
transfer or other disposition is made in conformity with the volume and other
applicable limitations imposed by Rule 145 under the Act, or (c) in the opinion
of counsel reasonably acceptable to Toy, such sale, transfer or other
disposition is otherwise exempt from registration under the Act.
(D) The undersigned understands that Toy will be under no obligation to
register the sale, transfer or other disposition of the Toy Common Stock by the
undersigned or on the undersigned's behalf under the Act or to take any other
action necessary in order to make compliance with an exemption from such
registration available.
(E) The undersigned understands that stop transfer instructions will be
given to Toy's transfer agent with respect to the Toy Common Stock owned by the
undersigned and that there may be placed on the certificates for the Toy Common
Stock issued to the undersigned, or any substitutions therefor, a legend stating
in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 under the Securities Act of 1933
applies. The shares represented by this certificate may only be
transferred in accordance with the terms of a letter agreement
dated __________, 1999, a copy of which agreement is on file at
the principal offices of [Toy]."
(F) The undersigned also understands that unless the transfer by the
undersigned of the undersigned's Toy Common Stock has been registered under the
Act or is a sale made in conformity with the provisions of this letter, Toy
reserves the right, in its sole discretion, to place the following legend on the
certificates issued to any transferee of shares from the undersigned:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired
from a person who received such shares in a transaction to
which Rule 145 under the Securities Act of 1933 applies. The
shares have been acquired by the holder not with a view to, or
for resale in connection with, any distribution thereof within
the meaning of the Securities Act of 1933 and may not be
offered, sold, pledged or otherwise transferred except in
accordance with an exemption from the registration requirements
of the Securities Act of 1933."
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<PAGE>
It is understood and agreed that the legend set forth in paragraph E or F
above shall be removed by delivery of substitute certificates without such
legend if the undersigned shall have delivered to Toy (i) a copy of a letter
from the staff of the Commission, or an opinion of counsel, in form and
substance reasonably satisfactory to Toy to the effect that such legend is not
required for purposes of the Act or (ii) reasonably satisfactory evidence or
representations that the shares represented by such certificates are being or
have been transferred in a transaction made in conformity with the provisions of
Rule 145.
This agreement shall be governed by and construed in accordance with the
laws of the State of California, without giving effect to principles of
conflicts of laws. This agreement shall be binding on the undersigned's
successors and assigns, including his or her heirs, executors and
administrators.
Very truly yours,
---------------------------
---------------------------
Print name
Acknowledged this ____ day
of _____________, 1999.
TOY
By:
-------------------------
Name:
Its:
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<PAGE>
EXHIBIT C
VOTING AND LOCK-UP AGREEMENT
THIS VOTING AND LOCK-UP AGREEMENT is made and entered into as of April __,
1999 (this "Voting Agreement"), by and between [Toy], a Delaware corporation
("Buyer"), and the party identified on the signature page hereto
("Stockholder").
RECITALS
A. Buyer and [Blue], a Delaware corporation (the "Company"), have
contemporaneously with the execution of this Voting Agreement entered into an
Agreement and Plan of Reorganization dated as of even date herewith (the "Merger
Agreement") which provides, among other things, that a wholly-owned subsidiary
of Buyer to be formed ("Merger Sub") shall be merged (the "Merger") with and
into the Company pursuant to the terms and conditions thereof;
B. As an essential condition and inducement to Buyer to enter into the
Merger Agreement and in consideration therefor, Stockholder and Buyer have
agreed to enter into this Voting Agreement; and
C. As of the date hereof, the Stockholder owns of record and beneficially
the shares of common stock, par value $0.001 per share ("Company Common Stock")
and, if applicable, the shares of preferred stock, par value $0.001 per share
("Company Preferred Stock"), of the Company (collectively, the Company Common
Stock and the Company Preferred Stock are referred to herein as the "Company
Stock") set forth on the signature page hereto and desires to enter into this
Agreement with respect to such shares of Company Stock.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein and in the Merger Agreement, the parties hereto
agree as follows:
ARTICLE I
1. VOTING OF SHARES; CONVERSION OF SHARES.
1.1 VOTING AGREEMENT. Stockholder hereby agrees to (a) appear, or
cause the holder of record on any applicable record date (the "Record Holder")
to appear for the purpose of obtaining a quorum at any annual or special meeting
of stockholders of the Company and at any adjournment thereof at which matters
relating to the Merger, the Merger Agreement or any transaction contemplated
thereby are considered and (b) vote, or cause the Record Holder to vote, in
person or by proxy, all of the shares of Company Stock owned by Stockholder, or
with respect to which such Stockholder has or shares voting power or control,
and all of the shares of Company Stock which shall, or with respect to which
voting power or control shall, hereafter be acquired by Stockholder
(collectively, the "Shares") (i) in favor of the Merger, the Merger Agreement
and the transactions contemplated by the Merger Agreement and (ii) against any
amendment of the Company's certificate of incorporation or by-laws or other
proposal or transaction involving the Company, which would be reasonably likely
to impede, frustrate, prevent or nullify the
<PAGE>
Merger, the Merger Agreement or any of the other transactions contemplated by
the Merger Agreement or change in any manner the voting rights of any class
of Company Stock. In the event written consents are solicited or otherwise
sought from stockholders of the Company with respect to approval or adoption
of the Merger Agreement, with respect to the approval of the Merger or with
respect to any of the other actions contemplated by the Merger Agreement,
Stockholder shall (unless otherwise directed by Buyer) execute, or cause the
Record Holder to execute, with respect to all Shares, a written consent or
written consents to such proposed action.
1.2 GRANT OF PROXY. In furtherance of the foregoing, Stockholder,
by this Agreement, with respect to all Shares now owned of record or that may
hereafter be acquired by Stockholder at anytime prior to the Effective Time
(as defined in the Merger Agreement), does hereby constitute and appoint
Buyer and Merger Sub, or any nominee of Buyer and Merger Sub, with full power
of substitution, from the date hereof to the earlier to occur of the
termination of this Voting Agreement or the Effective Time, as its true and
lawful attorney-in-fact and proxy (its "Proxy"), for and in its name, place
and stead, to demand that the Secretary of the Company call a special meeting
of stockholders of the Company for the purpose of considering any action
related to the Merger Agreement and to vote each of such Shares as its Proxy
at every annual, special or adjourned meeting of stockholders of the Company,
including the right to sign its name (as stockholder) to any consent,
certificate or other document relating to the Company that the law of the
State of Delaware may permit or require, in favor of the Merger, the Merger
Agreement and the transactions contemplated by the Merger Agreement. This
Proxy and power of attorney is irrevocable to the fullest extent permitted by
the law of the State of Delaware and is coupled with an interest.
1.3 FURTHER ASSURANCES. Stockholder shall perform such further acts
and execute such further documents and instruments as may reasonably be required
to vest in Buyer and Merger Sub the power to carry out and give effect to the
provisions of this Voting Agreement.
1.4 NO OWNERSHIP INTEREST. Nothing contained in this Voting
Agreement shall be deemed to vest in Buyer any direct or indirect ownership or
incidence of ownership of or with respect to any Shares. All rights, ownership
and economic benefits of and relating to the Shares shall remain and belong to
Stockholder, and Buyer shall have no authority to manage, direct, superintend,
restrict, regulate, govern, or administer any of the policies or operations of
the Company or exercise any power or authority to direct Stockholder in the
voting of any of the Shares, except as otherwise provided herein, or the
performance of Stockholder's duties or responsibilities as a stockholder of the
Company.
1.5 DOCUMENTS DELIVERED. Stockholder acknowledges receipt of copies
of the following document: the Merger Agreement and all Exhibits and Schedules
thereto.
1.6 NO INCONSISTENT AGREEMENTS. Each Stockholder hereby covenants
and agrees that, except as contemplated by this Voting Agreement and the Merger
Agreement, the Stockholder (a) has not entered, and shall not enter at any time
while this
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<PAGE>
Voting Agreement remains in effect, into any voting agreement and (b) has not
granted, and shall not grant at any time while this Voting Agreement remains
in effect, a proxy or power of attorney.
1.7 CONVERSION OF SHARES; OTHER ACTIONS. The Stockholder agrees to
take, or cause to be taken, all actions (including, without limitation, by
causing any director designee of such Stockholder to cause the Company to take
action) necessary to:
(a) terminate, not later than the Effective Time, the Amended
and Restated Investors Rights Agreement dated as of October 13, 1998 (as amended
to the date hereof) without requiring any payment, performance or obligation by
the Company;
(b) terminate, not later than the Effective Time, any other
agreement or arrangement between the Stockholder and the Company or
between/among the Stockholder and any other stockholder of the Company
restricting the registration, voting or transfer of Shares, or granting the
Stockholder registration rights without requiring any payment, performance or
obligation by the Company;
(c) convert, not later than the Effective Time, all shares of
Company Preferred Stock owned or held by the Stockholder into Company Common
Stock pursuant to Section 5(a) of the Company's Fourth Amended and Restated
Articles of Incorporation and to cause the automatic conversion of all
outstanding shares of Company Preferred Stock as a class into Company Common
Stock pursuant to, and by giving the consents required by, Section 5(b) of said
articles; PROVIDED, HOWEVER, that the effectiveness of each of the foregoing
actions described in clauses (a) - (c) shall be contingent upon consummation of
the Merger.
The Stockholder also agrees to provide Buyer with reasonably satisfactory
evidence of all of the preceding actions.
ARTICLE II
2. TRANSFER.
2.1 TRANSFER OF TITLE.
(a) Stockholder hereby covenants and agrees that Stockholder
will not, prior to the termination of this Voting Agreement, either directly or
indirectly, sell, assign, pledge, hypothecate, transfer, exchange, or dispose
("Transfer") of any Shares or options to purchase Company Stock ("Options") or
any other securities or rights convertible into or exchangeable for shares of
Company Stock, owned either directly or indirectly by Stockholder or with
respect to which Stockholder has the power of disposition, whether now or
hereafter acquired, without the prior written consent of Buyer; PROVIDED that
nothing contained herein will be deemed to restrict the exercise of Option; and
PROVIDED FURTHER that the foregoing requirements shall not prohibit any Transfer
to any person or entity where as a pre-condition to such Transfer the transferee
agrees to be bound by all the terms and conditions of this Voting Agreement and
deliver a duly executed copy of the Voting Agreement to Toy to evidence such
agreement.
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<PAGE>
(b) Stockholder hereby agrees and consents to the entry of stop
transfer instructions by the Company against the transfer of any Shares or
Options consistent with the terms of Section 2.1(a) hereof.
ARTICLE III
3. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. Stockholder hereby
represents and warrants to Buyer as follows:
3.1 AUTHORITY RELATIVE TO THIS AGREEMENT. Stockholder is competent
to execute and deliver this Voting Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. This Voting
Agreement has been duly and validly executed and delivered by Stockholder and,
assuming the due authorization, execution and delivery by Buyer, constitutes a
legal, valid and binding obligation of Stockholder, enforceable against
Stockholder in accordance with its terms. If the Stockholder is a natural
person and is married, and the Shares and Options held or owned by the
Stockholder constitute community property or otherwise need spousal or other
approval for this Voting Agreement to be legal, valid and binding, this
Agreement has been duly authorized, executed and delivered by, and (making the
same assumption in the preceding sentence) constitutes a valid and binding
agreement of, the Stockholder's spouse, enforceable against such spouse in
accordance with its terms. No trust of which such Stockholder is a trustee
requires the consent of any beneficiary to the execution and delivery of this
Voting Agreement or to the consummation of the transactions contemplated hereby.
3.2 NO CONFLICT. The execution and delivery of this Voting Agreement
by Stockholder does not, and the performance of this Voting Agreement by
Stockholder shall not, result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance, on any of
the Shares or Options pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Stockholder is a party or by which Stockholder or the Shares
or Options are bound or affected.
3.3 TITLE TO THE SHARES. The Stockholder is the record and
beneficial owner of, and has good and marketable title to, the Shares and
Options set forth on the signature page hereto, and the Shares and Options held
by Stockholder are owned free and clear of all security interests, liens,
claims, pledges, options, rights of first refusal, agreements, limitations on
Stockholder's voting rights, charges and other encumbrances of any nature
whatsoever, and Stockholder has not appointed or granted any proxy, which
appointment or grant remains effective, with respect to the Shares (other than
under this Voting Agreement).
ARTICLE IV
4. LOCK-UP. Stockholder acknowledges that Buyer is currently in
registration with the Securities and Exchange Commission for the initial public
offering (the "IPO") of
-4-
<PAGE>
shares of Buyer's Common Stock, par value $.0001 per share ("Buyer Common
Stock"). Stockholder further acknowledges that, in connection with the IPO,
certain stockholders of Buyer will become bound by a 180-day lock-up
arrangement with the underwriters in the IPO that restricts the ability of
such stockholders to sell or otherwise transfer any interest in shares of
Buyer Common Stock held by them during such time period following the IPO
(the "Lock-Up"). As additional consideration for Buyer's agreement to enter
into and consummate the transactions contemplated by the Merger Agreement,
Stockholder agrees to be bound by the Lock-Up effective as of the Effective
Time of the Merger (as defined in the Merger Agreement) and continuing
through the end of such 180-day Lock-Up period, as if Stockholder were a
direct party thereto with the underwriters in the IPO, with respect to all
shares of Buyer Common Stock that may have been or are acquired by
Stockholder at any time, whether pursuant to the exchange of shares in the
Merger or otherwise.
ARTICLE V
5. MISCELLANEOUS.
5.1 NO SOLICITATION. From the date hereof until the Effective Time
or, if earlier, the termination of the Merger Agreement, Stockholder shall not
(whether directly or indirectly through advisors, agents or other
intermediaries) engage in any discussions or take any actions that, if engaged
in or taken by the Company, would violate Section 4.2 of the Merger Agreement.
5.2 TERMINATION. This Agreement shall terminate upon the earliest to
occur of (a) the termination of the Merger Agreement in accordance with its
terms or (b) the Effective Time. Upon such termination, no party shall have any
further obligations or liabilities hereunder other than as provided in Section 4
hereof, PROVIDED that no such termination shall relieve any party from liability
for any breach of this Voting Agreement prior to such termination.
5.3 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Voting Agreement were not performed in accordance with its specified terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Voting
Agreement and to specific performance of the terms and provisions hereof in
addition to any other remedy to which they are entitled at law or in equity.
5.4 SUCCESSORS AND AFFILIATES. This Voting Agreement shall inure to
the benefit of and shall be binding upon the parties hereto and their respective
heirs, legal representatives and permitted assigns. If Stockholder shall at any
time hereafter acquire ownership of, or voting power with respect to, any
additional Shares in any manner, whether by the exercise of any options or any
securities or rights convertible into or exchangeable for shares of Company
Stock, by operation of law or otherwise, such Shares shall be held subject to
all of the terms and provisions of this Voting Agreement. Without limiting the
foregoing, Stockholder specifically agrees that the obligations of Stockholder
-5-
<PAGE>
hereunder shall not be terminated by operation of law, whether by death or
incapacity of Stockholder or otherwise.
5.5 ENTIRE AGREEMENT. This Voting Agreement together with the
Affiliates Agreements, in the form attached as EXHIBIT B to the Merger
Agreement, if and to the extent entered into by Stockholder and Buyer,
constitutes the entire agreement among Buyer and Stockholder with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
both written and oral, among Buyer and Stockholder with respect to the subject
matter hereof.
5.6 CAPTIONS AND COUNTERPARTS. The captions in this Voting Agreement
are for convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Voting Agreement. This
Voting Agreement may be executed in several counterparts, each of which shall
constitute one and the same instrument.
5.7 AMENDMENT. This Voting Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
5.8 WAIVERS. Except as provided in this Voting Agreement, no action
taken pursuant to this Voting Agreement, including without limitation any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Voting Agreement. The
waiver by any party hereto of a breach of any provision hereunder shall not
operate or be construed as a wavier of any prior or subsequent breach of the
same or any other provision hereunder.
5.9 SEVERABILITY. If any term or other provision of this Voting
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Voting Agreement
shall nevertheless remain in full force and effect. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this Voting
Agreement so as to effect the original intent of the parties as closely as
possible to the fullest extent permitted by applicable law in a mutually
acceptable manner in order that the terms of this Voting Agreement remain as
originally contemplated to the fullest extent possible.
5.10 NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made and shall be effective upon receipt, if delivered personally, upon
receipt of a transmission confirmation if sent by facsimile (with a confirming
copy sent by overnight courier) and on the next business day if sent by Federal
Express, United Parcel Service, Express Mail or other reputable overnight
courier to the parties at the following addresses (or at such other address for
a party as shall be specified by notice):
If to Stockholder: At the address set forth opposite Stockholder's name on
the signature page hereto
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<PAGE>
With a copy to:
----------------------------
----------------------------
----------------------------
Attention:
-----------------
Telephone:
-----------------
Telecopy No.:
--------------
If to Buyer or
Merger Sub: [Toy]
----------------------------
----------------------------
Attention:
-----------------
Telephone:
-----------------
Telecopy No.:
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With a copy to: Irell & Manella LLP
333 South Hope Street, Suite 3300
Los Angeles, CA 90071
Attention: Anthony T. Iler
Telephone: (213) 620-1555
Telecopy No.: (213) 229-0515
5.11 GOVERNING LAW. This Voting Agreement shall be governed by, and
construed in accordance with, the laws of the State of California regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law.
5.12 DEFINITIONS. Capitalized terms used and not defined herein shall
have the meaning set forth in the Merger Agreement.
5.13 OFFICERS AND DIRECTORS. No person who is or becomes (during the
term hereof) a director or officer of the Company makes any agreement or
understanding herein in his or her capacity as such director or officer, and
nothing herein will limit or affect, or give rise to any liability to
Stockholder by virtue of, any actions taken by any Stockholder in his or her
capacity as an officer or director of the Company in exercising its rights under
the Merger Agreement.
5.14 INTERPRETATION. The parties have participated jointly in the
negotiation of this Voting Agreement. In the event that an ambiguity or
question of intent or interpretation arises, this Voting Agreement shall be
construed as if drafted jointly by the parties, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of the provisions of this Voting Agreement.
5.15 VOIDABILITY. If prior to the execution hereof, the Board of
Directors of the Company shall not have duly and validly authorized and approved
by all necessary corporate action, this Voting Agreement, the Merger Agreement
and the transactions contemplated hereby and thereby, so that by the execution
and delivery hereof Buyer or Merger Sub would become, or could reasonably be
expected to become, an
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"interested stockholder" with whom the Company would be prevented for any
period pursuant to Section 203 of the Delaware General Corporation Law from
engaging in any "business combination" (as such terms are defined in Section
203 of the Delaware General Corporation Law), then this Voting Agreement
shall be void and unenforceable until such time as such authorization and
approval shall have been duly and validly obtained.
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IN WITNESS WHEREOF, each of the parties hereto have caused this Voting
Agreement to be duly executed as of the date first written above.
[TOY]
By:
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Name:
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Title:
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STOCKHOLDER
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By:
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Name:
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Title:
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Address:
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Spouse (if necessary)
Number of Shares of Company
Common Stock owned:
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Number of Shares of Company
Preferred Stock owned: Series A:___________;
Series B:___________;
Series C:___________
Number of Options:
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EXHIBIT F
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of _______, 1999,
is made and entered by and among Matthew Glickman [Mark Selcow] (the
"Executive"), eToys Inc., a Delaware corporation ("Parent"), and BabyCenter,
Inc., a Delaware corporation and wholly owned subsidiary of Parent (the
"Company").
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Reorganization dated as of
April __, 1999 (the "Merger Agreement"), between the Company and Parent, as of
the date hereof Parent has acquired the Company by way of a merger;
WHEREAS, Parent and the Company desire to be assured of the continued
provision of services by the Executive and therefore wish to have the Company
employ the Executive in the capacity and on the terms set forth below;
WHEREAS, the Executive desires to commit himself to serve the Company on
the terms set forth below;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the parties hereto agree as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Executive and the
Executive shall continue in the employ of the Company for the period
commencing on the date of this Agreement, and ending on ______________,
2004, unless sooner terminated in accordance with the provisions of this
Agreement or otherwise (the "Initial Term"). This Agreement may be
renewed or extended for one or more additional periods after the Initial
Term only by mutual written agreement to that effect by the parties
(each, a "Renewal Period"); provided, that any such Renewal Period may be
terminated as provided herein. The "Term" shall mean the period
beginning on the date hereof and ending on the date of termination of
Executive's services for the Company. Upon expiration of the Term,
except as expressly set forth herein (including in Section 6), this
Agreement and all of its provisions shall terminate and shall cease to
have any force or effect.
2. DUTIES
(a) During the Term, the Executive shall serve as the Chief Executive
Officer [President in the case of Selcow] of the Company, with
such authority and duties as are assigned to him from time to time
by the Board of Directors of the Company or the Board of Directors
of Parent, that are consistent with the customary duties
associated with such title and position. During the Term,
Executive shall report to the Chief Executive Officer of Parent or
the Board of Directors of the Company and/or Parent, as determined
by the Company or Parent from time to time.
<PAGE>
(b) During the Term, the Executive shall devote substantially all his
working time, attention, skill and efforts to the business and
affairs of the Company, will use his best efforts to promote the
success of the Company's business, and shall not enter the employ
of or serve as a consultant to, or in any way perform any
services, with or without compensation, for any other person,
enterprise, business, company, corporation, partnership, firm,
association or organization.
3. COMPENSATION AND RELATED MATTERS
(a) SALARY. During the Term, the Executive shall receive a salary at
the rate of $150,000 per annum, payable in accordance with the
Company's regular payroll practices. Executive's annual base
salary shall be subject to review from time to time for possible
increases by the Board of Directors of the Company or of Parent.
(Executive's base salary, as increased from time to time, shall be
referred to as the "Base Salary.")
(b) EXPENSES. The Company shall reimburse the Executive for all
reasonable travel and other reasonable out-of-pocket business
expenses incurred by the Executive in the performance of his
duties under this Agreement upon evidence of payment and otherwise
in accordance with the Company's procedures in effect from time to
time.
(c) EMPLOYEE BENEFITS. During the Term, except as provided in Section
2(d) below, the Executive shall be entitled to participate in or
receive benefits under any employee health benefit plan or other
arrangement made available by the Company or its subsidiaries to
its employees ("Health Benefit Plan") on terms no less favorable
than those generally applicable to other employees of the Company
or its subsidiaries, subject to and on a basis consistent with the
terms, conditions and overall administration of such Health
Benefit Plan. The Executive shall also be entitled to participate
in or receive benefits under any other employee benefit plans on
terms no less favorable than those generally applicable to
employees of the Company or its subsidiaries, subject to and on a
basis consistent with the terms, conditions and overall
administration of such other employee benefit plans.
(d) VACATION. The Executive shall be entitled to three weeks vacation
during each year of the Term.
(e) DEDUCTIONS AND WITHHOLDINGS. All amounts payable or which become
payable hereunder shall be subject to all deductions and
withholding required by law.
(f) STOCK OPTIONS. On the date hereof, the Board of Directors of
Parent shall cause to be issued to Executive, from Parent's 1999
Employee Stock Option Plan, options (the "Executive Options") to
purchase ____ [insert the product of 50,000 multiplied by the
ratio of the stock split effected in connection with the Parent
IPO] shares of the common stock, par value $.0001 per share, of
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Parent ("Parent Common Stock"). Such options shall have an
exercise price equal to the closing sales price of the Parent
Common Stock on the Nasdaq National Market on the date of this
Agreement. All other terms of the options, including the
four-year vesting schedule, shall be as specified in the 1999
Employee Stock Option Plan.
(g) ACCELERATED VESTING UNDER CERTAIN CIRCUMSTANCES. Parent agrees
that, in the event of a Change of Control of Parent (as defined
below), if Executive is terminated without Cause or pursuant to a
Constructive Termination (each as defined below) at any time prior
to the second anniversary of such Change of Control, then the
vesting of all options to acquire shares of Parent Common Stock
held by Executive shall be immediately accelerated and all such
options shall become exercisable in full
4. TERMINATION. The Executive's services for the Company and the Term of
this Agreement may be terminated under the following circumstances:
(a) DEATH. The Executive's services hereunder shall terminate upon
his death. In the case of the Executive's death, the Company
shall pay to the Executive's beneficiaries or estate, as
appropriate, after his death, his then current accrued and unpaid
Base Salary as well as 100% of any earned and unpaid bonus for any
years preceding the year of termination ("Unpaid Bonus") and other
benefits and payments then due (including, without limitation,
reimbursement of amounts under Section 3) to which the Executive
is then entitled hereunder. Executive and his beneficiaries, as
appropriate, shall be entitled to no other compensation under this
Agreement following, or as a result of, a termination under these
circumstances.
(b) DISABILITY
(i) If a Disability (as defined below) of the Executive occurs
during the Term, the Company may give the Executive written
notice of its intention to terminate his employment. In
such event, the Executive's services with the Company shall
terminate on the effective date specified in such notice.
In the case of a termination as a result of a Disability,
the Company shall pay to the Executive after his
termination his then current accrued and unpaid Base
Salary, Unpaid Bonus and other benefits and payments then
due (including, without limitation, reimbursement of
amounts under Section 3 to which the Executive is entitled
hereunder). Executive and his beneficiaries, as
appropriate, shall be entitled to no other compensation
under this Agreement following, or as a result of, a
termination under these circumstances.
(ii) For the purpose of this subsection 4(b), "Disability" shall
mean the Executive's inability to perform his duties to the
Company on a full-time basis for 90 consecutive days or a
total of 120 days in any twelve
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month period as reasonably determined by the Board of
Directors of the Company or of Parent.
(c) TERMINATION BY THE COMPANY FOR CAUSE
The Company may terminate the Executive's services hereunder
for Cause (as defined below) at any time upon written notice
to the Executive. In such event, the Executive's services
shall terminate on the effective date specified in such
notice. In the case of the Executive's termination for Cause,
the Company shall promptly pay to the Executive his then
current accrued and unpaid Base Salary and other benefits and
payments then due (including, without limitation,
reimbursement of amounts under Section 3 (other than payments
under any bonus plan for the year of termination)) to which
the Executive is entitled hereunder. The Executive and his
beneficiaries, as appropriate, shall be entitled to no other
compensation under this Agreement following, or as a result
of, a termination under these circumstances. For purposes of
this Agreement, the Company shall have "Cause" to terminate
Executive's services hereunder in the event the Company or
Parent shall determine in good faith that any of the following
has occurred: (A) acts or omissions by the Executive which
constitute material misconduct or a knowing violation of a
material written policy of the Company or any of its
subsidiaries (provided Executive has been provided with a copy
of such material written policy), (B) the Executive or any
affiliated or related person or entity receiving a benefit in
money, property or services from the Company or any of its
subsidiaries or from another person dealing with the Company
or any of its subsidiaries, in material violation of
applicable law or Company policy, (C) an act of fraud,
conversion, misappropriation, or embezzlement by the Executive
or his conviction of, or entering a guilty plea or plea of no
contest with respect to, a felony, or the equivalent thereof,
(D) a material breach by the Executive of any of the
provisions of Section 6 or Section 7 hereof, (E) the
Executive's failure or refusal (whether intentional, reckless
or negligent) to perform his duties under this Agreement or
(F) any other breach by the Executive of this Agreement in any
material respect.
(d) TERMINATION BY THE EXECUTIVE. The Executive may terminate his
employment hereunder, PROVIDED that Executive first gives the
Company a written notice of termination at least 30 calendar days
prior to the effective date of any such termination. In the event
the Executive terminates his employment, the Company shall pay to
the Executive his then current accrued and unpaid Base Salary and
other benefits and payments then due (including, without
limitation, reimbursement of amounts under Section 3 (other than
payments under any bonus plan for the year of termination)) to
which the Executive is entitled hereunder. The Executive and his
beneficiaries shall be entitled to no other compensation under
this Agreement following, or as a result of, a termination under
these circumstances.
(e) TERMINATION BY THE COMPANY WITHOUT CAUSE AND CONSTRUCTIVE
TERMINATION. The Company may terminate the Executive's services
hereunder without
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Cause at any time upon 30 days' written notice to the
Executive. Further, in the event that the Company either (i)
requires, as a condition of his employment and without his
consent, that Executive relocate outside of the San Francisco
Bay Area, or (ii) re-assigns Executive to a position, or
delegates to Executive duties and responsibilities, that are
materially less than those generally associated with the title
specified in Section 2(a) hereof for an executive in a company
that is reasonably comparable in size and nature of business to
the Company (either clause (i) or clause (ii), a "Constructive
Termination"), then Executive shall be entitled to elect to
treat such events specified in clause (i) or (ii) as a
constructive termination of his employment hereunder by
providing written notice of such election to the Company. In
the event that Executive is terminated without Cause or
pursuant to a Constructive Termination as provided herein,
Executive's services shall terminate on the effective date
specified in the respective notice specified above, all options
to acquire Parent Common Stock held by Executive will become
fully vested and immediately exerciseable, and the Company
shall pay to the Executive (A) his current accrued and unpaid
Base Salary, Unpaid Bonus and other benefits and payments
(including, without limitation, reimbursement of amounts under
Section 3) to which the Executive is entitled hereunder as of
such effective date and (B) either (x) if such termination
occurs at any time prior to the second anniversary of the date
hereof, 18 months of the Executive's then applicable Base
Salary, or (y) if such termination occurs at any time from the
second anniversary of the date hereof through and including the
fifth anniversary of the date hereof, 12 months of the
Executive's then applicable Base Salary (provided, however,
that under no circumstance shall any severance payment be made
in respect of any month that follows the fifth anniversary of
the date hereof), in each case subject to the Executive's
compliance with the terms of Section 6 and Section 7 hereof.
Notwithstanding the foregoing subclause (B), in the event that
Executive becomes employed in a position that is reasonably
comparable to his position with the Company in terms of base
salary and level of duties and responsibilities, then the
Company shall no longer be required to make the payments under
subclause (B) from and after the date of Employee's
commencement of such alternative employment. The Executive and
his beneficiaries shall be entitled to no other compensation
under this Agreement following, or as a result of, a
termination without Cause or a Constructive Termination under
this paragraph. Salary and bonus payments referred to in this
Section 4(e) will be paid in accordance with Sections 3(a) and
3(c), as applicable.
5. LIMITATIONS ON STOCK TRANSFER.
(a) DEFINED TERMS. For purposes of this Section 5, the following
terms shall have the following meanings:
"Change of Control" shall mean (a) a sale of all or substantially
all of the assets of Parent or (b) a merger, consolidation,
reorganization, combination or other comparable business
transaction involving Parent following which
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the shareholders of Parent immediately prior to such transaction
cease to own at least a majority of the outstanding voting
power of all classes of Parent capital stock following such
transaction.
"Exchange Ratio" shall have the meaning specified therefor in the
Merger Agreement.
"Subject Shares" means a number of shares of Parent Common Stock
owned by Executive as of the date hereof equal to the product of
(A) 875,199 [875,198 in the case of Selcow] MULTIPLIED BY (B) the
Exchange Ratio MULTIPLIED BY (C) 0.666667, rounded down to the
nearest even number. The number of Subject Shares shall be
adjusted from time to time to reflect any stock split, stock
dividend, reverse stock split or other comparable transaction of
Parent following the date hereof, and such adjusted number of
shares shall be subject to the terms of this Section 5.
"Transfer" means to sell, offer to sell, contract to sell, assign,
pledge, hypothecate, transfer, exchange, grant any option to
purchase or otherwise transfer or dispose of.
(b) LIMITATION ON TRANSFERS OF SUBJECT SHARES.
(i) LOCK-UP. Executive hereby agrees that, without Parent's
prior written consent, he will not, directly or indirectly,
Transfer (A) any of the Subject Shares at any time prior to
the first anniversary of the date of this Agreement or (B)
more than one-half of the Subject Shares at any time from
the first anniversary of the date of this Agreement through
and including the second anniversary of the date of this
Agreement; PROVIDED, HOWEVER, that the foregoing provisions
shall become null and void and of no further force or
effect in the event that (i) Parent terminates Executive
without Cause or pursuant to a Constructive Termination or
(ii) Parent experiences a Change of Control.
(ii) STOP TRANSFER; LEGEND. Executive hereby agrees and consents
to the entry of stop transfer instructions by Parent
against the Transfer of the Subject Shares consistent with
the terms of this Section 5. In addition, Executive hereby
agrees and consents to the placement of a legend on any
certificate representing the Subject Shares stating that
the Transfer of such Subject Shares is restricted by the
terms of this Agreement.
(iii) NO OWNERSHIP INTEREST BY PARENT. Nothing contained in this
Section 5 shall be deemed to vest in Parent any direct or
indirect ownership or incidence of ownership of or with
respect to any Subject Shares. All rights of ownership and
economic benefits of and relating to the Subject Shares,
including, without limitation, the right to vote the
Subject Shares and to receive dividends thereon, shall
remain and
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belong to Executive, subject only to the Transfer
restrictions contained in this Section 5.
(c) CERTAIN TRANSFERS OF SHARES OF PARENT COMMON STOCK. Executive
agrees that, if Executive elects at any time to Transfer 100,000
or more shares of Parent Common Stock in any single transaction or
series of related transactions, then Executive and Parent will
retain a nationally recognized investment banking firm, which
shall be approved in writing by both Executive and Parent, such
approval not to be unreasonably withheld by either party (the
"Investment Bank"). Executive and Parent will request that the
Investment Bank provide Executive and Parent with advice regarding
the manner of Transferring the respective shares that will most
effectively achieve the two goals of maximizing Executive's price
for the respective shares and minimizing any negative impact of
such Transfer on the public trading price of Parent Common Stock.
Each of Executive and Parent agrees to follow such advice of the
Investment Bank in connection with any such Transfer; provided
that, if the Investment Bank recommends a registered, underwritten
secondary offering of the respective shares, then Parent shall be
entitled to decline to follow such advice, in which event
Executive shall be entitled to sell the respective shares in a
manner designed solely to maximize the price paid to Executive for
the respective shares. All sales commissions payable to the
Investment Bank in connection with any Transfer under this
paragraph shall be paid by Executive, and the reasonable expenses
of the Investment Bank in connection with providing such services
to Executive and Parent will be paid by Parent.
6. CONFIDENTIAL AND PROPRIETARY INFORMATION.
(a) The parties agree and acknowledge that during the course of the
Executive's employment, the Executive has been given and will have access
to and be exposed to trade secrets and confidential information in
written, oral, electronic and other forms regarding Parent, the Company
and their subsidiaries (which includes but is not limited to all of its
business units, divisions and subsidiaries) and their business,
equipment, products and employees, including, without limitation: the
identities of Parent's and the Company's and their subsidiaries'
customers and key accounts and potential customers and key accounts
(hereinafter referred to collectively as "Customers"), including, without
limitation, the identity of Customers the Executive cultivates or
maintains while providing services at Parent, the Company or any of their
subsidiaries using Parent's the Company's, or any of their subsidiaries'
products, name and infrastructure, and the identities of contact persons
at those Customers; the particular preferences, likes, dislikes and needs
of those Customers and contact persons with respect to product types,
pricing, sales calls, timing, sales terms, rental terms, lease terms,
service plans, and other marketing terms and techniques; Parent's and the
Company's and their subsidiaries' business methods, practices,
strategies, forecasts, pricing, and marketing techniques; the identities
of
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Parent's and the Company's and their subsidiaries' licensors, vendors
and other suppliers and the identities of Parent's and the Company's
and their subsidiaries' contact persons at such licensors, vendors and
other suppliers; the identities of Parent's and the Company's and
their subsidiaries' key sales representatives and personnel and other
employees; advertising and sales materials; research, computer
software and related materials; and other facts and financial and
other business information concerning or relating to the Parent and
the Company or any of their subsidiaries and their business,
operations, financial condition, results of operations and prospects.
The Executive expressly agrees to use such trade secrets and
confidential information only for purposes of carrying out his duties
for the Company and its subsidiaries, and not for any other purpose,
including, without limitation, not in any way or for any purpose
detrimental to Parent, the Company or any of their subsidiaries. The
Executive shall not at any time, either during the course of his
employment hereunder or after the termination of such employment, use
for himself or others, directly or indirectly, any such trade secrets
and confidential information, and, except as required by law, the
Executive shall not disclose such trade secrets and confidential
information, directly or indirectly, to any other person or entity;
PROVIDED THAT the obligations under this sentence will not be
construed to restrict the Executive from calling on or otherwise
maintaining a relationship with Customers or suppliers of Parent, the
Company or any of their subsidiaries during or after the termination
of the Executive's employment with the Company. Trade secret and
confidential information hereunder shall not include any information
which (i) is already in or subsequently enters the public domain,
other than as a result of any direct or indirect disclosure by the
Executive, (ii) becomes available to the Executive on a
non-confidential basis from a source other than the Company or any of
its subsidiaries, PROVIDED THAT such source is not subject to a
confidentiality agreement or other obligation of secrecy or
confidentiality (whether pursuant to a contract, legal or fiduciary
obligation or duty or otherwise) to the Company or any of its
subsidiaries or any other person or entity or (iii) is approved for
release by the Company or any of its subsidiaries or which the Company
or any of its subsidiaries makes available to third parties without an
obligation of confidentiality.
(b) All physical property and all notes, memoranda, files, records, writings,
documents and other materials of any and every nature, written or
electronic, which the Executive shall prepare or receive in the course of
his employment with the Company and which relate to or are useful in any
manner to the business now or hereafter conducted by Parent, the Company
or any of their subsidiaries are and shall remain the sole and exclusive
property of the Company and its subsidiaries, as applicable. The
Executive shall not remove from the Company's premises any such physical
property, the original or any reproduction of any such materials nor the
information contained therein except for the purposes of carrying out his
duties to the Company or any of its subsidiaries and all such property
(except for any items of personal property not owned by the Company or
any of its subsidiaries), materials and information in his possession or
under his custody or control upon the termination of his employment shall
be immediately turned over to the Company and its subsidiaries, as
applicable.
(c) All inventions, improvements, trade secrets, reports, manuals, computer
programs, tapes and other ideas and materials developed or invented by
the Executive during the period of his employment, either solely or in
collaboration with others, which
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relate to the actual or anticipated business or research of Parent,
the Company or any of their subsidiaries which result from or are
suggested by any work the Executive may do for Parent, the Company or
any of their subsidiaries or which result from use of Parent's, the
Company's or any of their subsidiaries' premises or property
(collectively, the "Developments") shall be the sole and exclusive
property the Company and its subsidiaries, as applicable. The
Executive assigns and transfers to the Company his entire right and
interest in any such Development, and the Executive shall execute and
deliver any and all documents and shall do and perform any and all
other acts and things necessary or desirable in connection therewith
that the Company or any of its subsidiaries may reasonably request.
This paragraph does not apply to any inventions which the Executive
made prior to his employment by the Company (all of which are listed
on Exhibit A, which the Executive has attached hereto).
(d) The provisions of this Section 6 shall survive any termination of this
Agreement and termination of the Executive's employment with the Company
for any reason or no reason.
7. NO SOLICITATION OF EMPLOYEES. The Executive acknowledges and agrees that
he has gained and during the time of his employment with the Company,
will gain, valuable information about the identity, qualifications and
on-going performance of the employees of Parent, the Company and their
subsidiaries. During the Term and for a period of one year thereafter,
except pursuant to Executive's duties as an employee of the Company, the
Executive shall not directly or indirectly (i) seek to hire or employ any
of Parent's, the Company's or any of their subsidiaries' employees, (ii)
solicit or encourage any such employee to seek or accept employment with
any other person or entity or (iii) disclose any information, except as
required by law, about such employee to any prospective employer.
8. INJUNCTIVE RELIEF. The Executive and the Company (a) intend that the
provisions of Sections 6 and 7 be and become valid and enforceable, (b)
acknowledge and agree that the provisions of Sections 6 and 7 are
reasonable and necessary to protect the legitimate interests of Parent,
the Company and their business and (c) agree that any violation of
Section 6 or 7 will result in irreparable injury to Parent, the Company
and their subsidiaries, the exact amount of which will be difficult to
ascertain and the remedies at law for which will not be reasonable or
adequate compensation to Parent, the Company and their subsidiaries for
such a violation. Accordingly, the Executive agrees that if the
Executive violates the provisions of Section 6 or 7, in addition to any
other remedy which may be available at law or in equity, the Company
shall be entitled to specific performance and injunctive relief, without
posting bond or other security, and without the necessity of proving
actual damages.
9. ASSIGNMENT; SUCCESSORS AND ASSIGNS. The Executive agrees that he shall
not assign, sell, transfer, delegate or otherwise dispose of, whether
voluntarily or involuntarily, any rights or obligations under this
Agreement, nor shall the Executive's rights hereunder be subject to
encumbrance of the claims of creditors. Any purported assignment,
transfer, delegation, disposition or encumbrance in violation of this
Section 9 shall be null and void and of no force or effect. Nothing in
this Agreement
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shall prevent the consolidation or merger of Parent or the Company
with or into any other entity, or the sale by Parent or the Company of
all or any portion of its properties or assets, or the assignment by
Parent or the Company of this Agreement and the performance of the
Company's obligations hereunder to any successor in interest or any
affiliated entity, and the Executive hereby consents to any and all
such assignments. Subject to the foregoing, this Agreement shall be
binding upon and shall inure to the benefit of the parties and their
respective heirs, legal representatives, successors, and permitted
assigns, and, except as expressly provided herein, no other person or
entity shall have any right, benefit or obligation under this
Agreement as a third party beneficiary or otherwise.
10. GOVERNING LAW; JURISDICTION AND VENUE, WAIVER OF JURY TRIAL. This
Agreement shall be governed, construed, interpreted and enforced in
accordance with the substantive laws of the State of California without
regard to the conflicts of law principles thereof. Suit to enforce this
Agreement or any provision or portion thereof may be brought in the
federal courts located in Los Angeles, California, unless subject matter
jurisdiction is lacking, in which case suit may be brought in the state
courts located in Los Angeles, California. EACH OF THE PARTIES HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
11. SEVERABILITY OF PROVISIONS. In the event that any provision or any
portion thereof should ever be adjudicated by a court of competent
jurisdiction to exceed the time or other limitations permitted by
applicable law, as determined by such court in such action, then such
provisions shall be deemed reformed to the maximum time or other
limitations permitted by applicable law, the parties hereby acknowledging
their desire that in such event such action be taken. In addition to the
above, the provisions of this Agreement are severable, and the invalidity
or unenforceability of any provision or provisions of this Agreement or
portions thereof shall not affect the validity or enforceability of any
other provision, or portion of this Agreement, which shall remain in full
force and effect as if executed with the unenforceable or invalid
provision or portion thereof eliminated. Notwithstanding the foregoing,
the parties hereto affirmatively represent, acknowledge and agree that it
is their intention that this Agreement and each of its provisions are
enforceable in accordance with their terms and expressly agree not to
challenge the validity or enforceability of this Agreement or any of its
provisions, or portions or aspects thereof, in the future. The parties
hereto are expressly relying upon this representation, acknowledgement
and agreement in determining to enter into this Agreement.
12. WARRANTY. As an inducement to the Company to enter into this Agreement,
the Executive represents and warrants that he is not a party to any other
agreement or obligation for personal services, and that there exists no
impediment or restraint, contractual or otherwise, on his power, right or
ability to enter into this Agreement and to perform his or her duties and
obligations hereunder. As an inducement to the Executive to enter into
this Agreement, Company represents and warrants that the person signing
this Agreement for the Company has been duly authorized to do so by all
necessary corporate action and has the corporate power and authority to
execute
-10-
<PAGE>
this Agreement on the Company's behalf. The execution and delivery of
this Agreement and the consummation of the transactions contemplated
have been duly and effectively authorized by all necessary corporate
action of the Company.
13. NOTICES. All notices, requests, demands and other communications which
are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally
delivered; when transmitted if transmitted by telecopy, electronic or
digital transmission method upon receipt of telephonic or electronic
confirmation; the day after it is sent, if sent for next day delivery to
a domestic address by recognized overnight delivery service (E.G.,
Federal Express); and upon receipt, if sent by certified or registered
mail, return receipt requested. In each case notice will be sent to:
If to the Company:
(a) BabyCenter, Inc.
c/o eToys Inc.
2850 Ocean Park Blvd., Suite 225
Santa Monica, CA 90405
Attention: __________________
Telephone No. _______________
Telecopy No. ________________
with a copy to:
Irell & Manella LLP
333 South Hope Street
Suite 3300
Los Angeles, California 90071
Attention: Anthony T. Iler
Telephone No. (213) 620-1555
Telecopy: (213) 229-0515
(b) if to the Executive, to:
Matthew Glickman
___________________________
___________________________
or to such other place and with other copies as either party may
designate as to itself or himself by written notice to the others.
14. CUMULATIVE REMEDIES. All rights and remedies of either party hereto are
cumulative of each other and of every other right or remedy such party
may otherwise have at law or in equity, and the exercise of one or more
rights or remedies shall not prejudice or impair the concurrent or
subsequent exercise of other rights or remedies.
-11-
<PAGE>
15. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which will be deemed to be an original, but all of which together
shall constitute one and the same Agreement.
16. ENTIRE AGREEMENT. The terms of this Agreement are intended by the
parties to be the final expression of their agreement with respect to the
employment of the Executive by the Company and supersede, and may not be
contradicted by, modified or supplemented by, evidence of any prior or
contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statements of its
terms and that no extrinsic evidence whatsoever may be introduced in any
judicial, administrative or other legal proceeding to vary the terms of
this Agreement.
17. AMENDMENTS; WAIVERS. This Agreement may not be modified, amended, or
terminated except by an instrument in writing, approved by the Company
and signed by the then existing parties hereto. No waiver of any of the
provisions of this Agreement, whether by conduct or otherwise, in any one
or more instances, shall be deemed to be construed as a further,
continuing or subsequent waiver of any such provision or as a waiver of
any other provision of this Agreement. No failure to exercise and no
delay in exercising any right, remedy or power hereunder shall preclude
any other or further exercise of any other right, remedy or power
provided herein or by law or in equity.
18. REPRESENTATION OF COUNSEL; MUTUAL NEGOTIATION. Each party has had the
opportunity to be represented by counsel of its choice in negotiating
this Agreement. This Agreement shall therefore be deemed to have been
negotiated and prepared at the joint request, direction and construction
of the parties, at arm's-length, with the advice and participation of
counsel, and shall be interpreted in accordance with its terms without
favor to any party.
[signature page to follow]
-12-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
BabyCenter, Inc.
By:
-------------------------------
Name:
Title:
eToys Inc.
By:
-------------------------------
Name:
Title:
EXECUTIVE
-----------------------------------
Name:
-13-
<PAGE>
Exhibit A
INVENTIONS MADE PRIOR TO EMPLOYMENT
[List]
-14-
<PAGE>
EXHIBIT G
COVENANT NOT TO COMPETE
THIS COVENANT NOT TO COMPETE (the "Agreement"), dated as of ______, 1999,
by and between eToys Inc., a Delaware corporation (including its subsidiaries,
"Buyer"), and Matthew Glickman [Mark Selcow], an individual ("Stockholder"), is
to evidence the following agreements and understandings. Capitalized terms used
herein have the respective meanings in the Merger Agreement (as hereinafter
defined) unless otherwise specified herein.
RECITALS
WHEREAS, prior to the date hereof, Stockholder was a stockholder of
BabyCenter, Inc., a Delaware Corporation (the "Company");
WHEREAS, the Company carries on the business of advertising, marketing,
promoting, distributing and selling, through the online medium of the Internet,
a variety of products, services and content about or related to infants,
children, parents and families, including but not limited to commerce (i.e.,
merchandise sales), content (i.e., information), community (i.e., e-mail and
other interactive elements), and advertising and sponsorship components, as well
as website creation and hosting services for third parties, together with
various other related operations and services (the "Business");
WHEREAS, as of the date hereof, pursuant to that certain Agreement and Plan
of Reorganization, dated as of April ___, 1999 (the "Merger Agreement"), between
Buyer and the Company, Buyer acquired the Company by way of a merger, and as a
result the Business and associated goodwill as a going concern of the Company
was acquired by Buyer;
WHEREAS, as the holder of a significant equity position in the Company,
Stockholder is deriving substantial value from the transactions contemplated by
the Merger Agreement;
WHEREAS, by agreeing to enter into the Merger Agreement and consummate the
Merger, Buyer desires and is seeking to acquire the Business, including the
business and goodwill as a going concern of the Business; and if Stockholder
were able to compete with Buyer in any manner that is hereinafter proscribed or
to engage in any of the other activities that are hereinafter proscribed, then
Buyer would be deprived of a substantial portion of the goodwill and going
concern value sought to be obtained through the Merger;
WHEREAS, pursuant to Section _____ of the Merger Agreement, Stockholder is
required to enter into this Agreement;
<PAGE>
WHEREAS, Stockholder now desires to enter into this Agreement as required
under the Merger Agreement, and the parties desire to set forth the terms,
conditions and provisions of Stockholder's ongoing obligations during the Term
(as defined below);
NOW, THEREFORE, in consideration of the mutual promises, covenants,
agreements, representations and warranties hereinafter set forth and set forth
in the Merger Agreement and other good and valuable consideration, the receipt,
adequacy and sufficiency of which is hereby acknowledged, all subject to the
completion of the closing of the Merger, the parties hereto agree as follows:
1. DEFINITION OF TERM. The Term of this Agreement shall commence on the
date hereof and shall continue throughout the term of Stockholder's employment
with the Company under the Employment Agreement of even date herewith among
Buyer, the Company and Stockholder (the "Employment Agreement") and for a period
following the termination of Stockholder's employment under the Employment
Agreement equal to either (A) 18 months, in the event that Stockholder's
employment under the Employment Agreement terminates for any reason at any time
prior to the second anniversary of the date hereof or (B) 12 months, in the
event that Stockholder's employment under the Employment Agreement terminates
for any reason (including termination of the Employment Agreement in accordance
with its terms) at any time from or after the second anniversary of the date
hereof (the "Term"); provided, however, that (i) under no circumstances shall
the Term of this Agreement extend beyond the fifth anniversary of the date
hereof and (ii) in the event of a Change of Control (as defined in the
Employment Agreement) of Buyer, if Stockholder's employment under the Employment
Agreement is terminated without Cause or pursuant to a Constructive Termination
(each as defined in the Employment Agreement) following such Change of Control,
then the Term of this Agreement shall terminate immediately.
-2-
<PAGE>
2. AGREEMENT NOT TO COMPETE. As a condition to the transactions being
completed as of the Effective Time pursuant to the Merger Agreement, and as a
means reasonably designed to protect the intellectual property, confidential and
proprietary information concerning the Business during the Term, Stockholder
will not, without the prior written consent of Buyer, directly or indirectly,
engage in, assist (financially or otherwise), associate with, or perform
services (other than on behalf of Buyer or any of its Affiliates) in any
Restricted Business (as hereinafter defined), including, without limitation,
whether such engagement, assistance, association or performance is as an
individual, principal, officer, director, consultant, advisor, proprietor,
employee, partner, stockholder or other investor (other than as a holder of less
than one percent (1%) of the outstanding capital stock or other equity interest
of or in any corporation or other business enterprise, provided that
Stockholder's participation therein is solely as a passive investor and does not
include any role as director, officer, manager or other service provider),
creditor, guarantor, agent, sales representative or other participant. For
purposes of this Agreement, "Affiliate" shall mean any person, partnership,
limited liability company, joint venture, trust, corporation or other entity,
directly or indirectly, controlling, controlled by or under common control with
such person, partnership, limited liability company, joint venture, trust,
corporation or other entity. For purposes of this Agreement, "Restricted
Business" shall mean (a) the Business together with any other business or
industry being considered or proposed to be conducted or engaged in by the
Company as of the date of this Agreement and (b) the business of Amazon.com,
Toys R Us and iVillage, together with any of their respective subsidiaries,
Affiliates or related parties. For purposes of clarification, "Restricted
Business" shall not include the business of any entity that is engaged
principally in the healthcare industry, notwithstanding the fact that such
entity may be incidentally or insubstantially involved in any Restricted
Business.
3. NON-INTERFERENCE. During the Term, Stockholder will not, without the
prior written consent of Buyer or any of its Affiliates, directly, indirectly or
as an agent on behalf of or in conjunction with any person, firm, partnership,
corporation or other entity (a) solicit, encourage the resignation of, or in any
other manner seek to engage or seek to employ, any person who is as of the
Effective Time, or within the prior three (3) months had been, an employee of
Buyer, the Company or any of their Affiliates, whether or not for compensation
and whether as an officer, employee, consultant, adviser, independent sales
representative, vendor, independent contractor or participant, or (b) contact,
solicit or service, in connection with the operation of any Restricted Business,
any person or entity with whom Buyer, the Company or any of their Affiliates
have a former, current or prospective (as of the Effective Time) business
relationship or who is or was at any time during the Term a customer or client
of Buyer, the Company or any of their Affiliates, or a prospective (as of the
Effective Time) customer or client to which Buyer, the Company or any of their
Affiliates have made a business proposal.
-3-
<PAGE>
4. CONFIDENTIALITY. Stockholder agrees not to disclose, use, transfer or
sell any intellectual property, confidential or proprietary information
concerning the Business, whether Stockholder has such information in his or her
memory or embodied in writing or other physical form, unless such activities are
on behalf of Buyer, the Company or any of their Affiliates. For purposes of
this Agreement, the phrase "intellectual property, confidential or proprietary
information concerning the Business" means all information concerning the
business, affairs, products, suppliers, customers or employees of, or relating
to, the Business, including, without limitation, that which relates to marketing
or brand recognition matters, such as logos, typestyles, copyrights, trade
names, brand names, user names, service names, service marks and trademarks, or
to technical matters, such as patents, designs, drawings, specification sheets,
schematics, test data, technical literature, manufacturing and process
information, know-how, trade secrets, in process research efforts and technical
data of Buyer, the Company or any of their Affiliates, or to business matters
such as the identity of suppliers, customers or business partners or terms of
business relationships with suppliers, customers or business partners. The
phrase "intellectual property, confidential or proprietary information
concerning the Business" shall not, however, include any information to the
extent that (i) Stockholder is required to disclose any of the foregoing
pursuant to the provisions of applicable law; (ii) any such information becomes
generally known and available to the public otherwise than by reason of a
disclosure or communication of such information by Stockholder; or (iii) any
such information is disclosed after the written approval of Buyer, the Company
or any of their Affiliates. Stockholder agrees that the restrictions contained
in this Section 3 shall continue to apply without time restrictions, so long as
any information remains intellectual property, confidential or proprietary
information concerning the Business.
5. CONSIDERATION. Stockholder acknowledges that the consideration for
the covenants in Sections 2, 3 and 4 consists of substantial economic value to
be provided to Stockholder pursuant to the Merger Agreement, and that no
separate consideration shall be payable pursuant to this Agreement. Stockholder
also acknowledges that Buyer would not consummate the Merger unless Stockholder
entered into this Agreement.
6. MISCELLANEOUS.
6.1 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and any document
referred to herein or executed contemporaneously herewith set forth the entire
understanding of the parties relating to the subject matter hereof and supersede
all agreements, representations, warranties, statements, promises and
understandings, with respect to the subject matter hereof. None of the terms or
provisions hereof shall be modified or waived, and this Agreement may not be
amended or terminated, except by a written instrument signed by the party
against which modifications or waiver or amendment or termination is to be
enforced. No waiver of any one provision shall be considered a waiver of any
other provision, and the fact that an obligation is waived for a period of time
or in one instance shall not be considered to be a continuing waiver.
-4-
<PAGE>
6.2 REMEDIES NOT EXCLUSIVE. No remedy conferred by any of the
specific provisions of this Agreement is intended to be exclusive of any other
remedy, and each and every remedy will be cumulative and will be in addition to
every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise. The election of any one or more remedies
will not constitute a waiver of the right to pursue other available remedies.
6.3 NOTICES. All notices under this Agreement will be in writing and
will be delivered by personal service or telegram, telecopy or certified mail
(if such service is not available, then by first class mail), postage prepaid,
to such address as may be designated from time to time by the relevant party,
and which will initially be as set forth below. Any notice sent by certified
mail will be deemed to have been given three (3) days after the date on which it
is mailed. All other notices will be deemed given when received. No objection
may be made to the manner of delivery of any notice actually received in writing
by an authorized agent of a party. Notices will be addressed as follows or to
such other address as the party to whom the same is directed will have specified
in conformity with the foregoing:
(i) If to Buyer:
eToys Inc.
2850 Ocean Park Boulevard, Suite 220
Santa Monica, CA 90405
Attention:
Telephone No.:
Telecopy No.:
with a copy to:
Irell & Manella LLP
333 South Hope Street, Suite 3300
Los Angeles, California 90071
Attention: Anthony T. Iler
Telephone No.: (213) 620-1555
Telecopy No.: (213) 229-0515
-5-
<PAGE>
(ii) If to Stockholder:
Matthew Glickman
_________________________
_________________________
with a copy to:
_________________________
_________________________
_________________________
Attention:
Telephone:
Telecopy No.:
6.4 EQUITABLE RELIEF; ACCOUNTING. Stockholder acknowledges that the
covenants contained in Sections 2, 3 and 4 hereof are reasonable and necessary
to protect the legitimate interests of Buyer, that any breach or threatened
breach of such covenants will result in irreparable injury to Buyer and that the
remedy at law for such breach or threatened breach would be inadequate.
Accordingly, in the event of the breach by Stockholder of any of the provisions
of this Agreement, Buyer, in addition and as a supplement to such other rights
and remedies as may exist in its favor, may apply to any court of law or equity
having jurisdiction to enforce this Agreement, and/or may apply for injunctive
relief against any act that would violate any of the provisions of this
Agreement (without being required to post a bond). Stockholder further
understands that monetary damages will not be sufficient to avoid or compensate
for a breach of the covenants contained in Sections 2, 3 and 4 hereof and that
injunctive relief would be appropriate to prevent any such breach or threatened
breach. Such right to obtain injunctive relief may be exercised, at the option
of Buyer, concurrently with, prior to, after, or in lieu of, the exercise of any
other rights or remedies that Buyer may have as a result of any such breach or
threatened breach. In addition, Stockholder shall account for and pay over to
Buyer all compensation, profits and other benefits inuring to Stockholder's
benefit that are derived or received by Stockholder thereof resulting from any
action or transaction constituting a breach of the covenants contained in
Sections 2, 3 and 4 hereof.
6.5 THIRD-PARTY BENEFITS. None of the provisions of this Agreement
will be for the benefit of, or enforceable by, any third-party beneficiary.
6.6 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and
inure to the benefit of the parties, their respective successors and permitted
assigns. None of the parties hereto may assign any of their rights or
obligations under this Agreement without the prior written consent of all other
parties hereto, except that this Agreement may be assigned by Buyer to any
corporation or other business entity that succeeds to all or substantially all
of the business of Buyer through merger, consolidation, corporate
-6-
<PAGE>
reorganization or by acquisition of all or substantially all of the assets or
capital stock of Buyer.
6.7 GOVERNING LAW. All questions with respect to this Agreement and
the rights and liabilities of the parties shall be governed by the laws of the
state of California, regardless of the choice of law provisions of that state or
any other jurisdiction.
6.8 RULES OF CONSTRUCTION.
6.8.1 HEADINGS. The Section headings in this Agreement are
inserted only as a matter of convenience, and in no way define, limit, extend or
interpret the scope of this Agreement or any particular Section.
6.8.2 TENSE AND CASE. Throughout this Agreement, as the
context may require, references to any word used in one tense or case shall
include all other appropriate tenses or cases.
6.8.3 SEVERABILITY. The validity, legality or enforceability
of the remainder of this Agreement will not be affected even if one or more of
the provisions of this Agreement are held to be invalid, illegal or
unenforceable in any respect. Further, if the period of time, the extent of the
geographic area or the scope of the prescribed activities covered by this
Agreement should be deemed unenforceable, then this Agreement shall be construed
to cover the maximum period of time, geographic area and scope of prescribed
activities (not to exceed the maximum time, geographic area or scope set forth
herein) as may be valid under applicable law. The parties specifically intend
that any court determining the extent of the enforceability of this Agreement
shall, if it determines that the Agreement is not fully enforceable in
accordance with its terms, modify the period of time, geographic area or scope
of prescribed activities provided for herein to the minimum extent necessary
such that the provisions hereof as so modified are enforceable.
6.9 ATTORNEYS' FEES. If any action or proceeding is brought to
enforce or interpret any provision of this Agreement, the prevailing party shall
be entitled to recover as an element of its costs, and not its damages,
reasonable attorneys' fees and costs incurred in connection with such action or
proceeding.
6.10 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the first date set forth above.
eToys Inc.
By:________________________
Name:
Title:
STOCKHOLDER
___________________________
Name: Matthew Glickman
-8-
<PAGE>
Exhibit 99.1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BabyCenter, Inc.
We have audited the accompanying balance sheets of BabyCenter, Inc. as
of September 30, 1997 and 1998 and March 31, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the period from inception
(February 11, 1997) to September 30, 1997, for the year ended September 30,
1998, and for the six months ended March 31, 1999. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of BabyCenter, Inc. at
September 30, 1997 and 1998 and March 31, 1999, and the results of its
operations and its cash flows for the period from inception (February 11, 1997)
to September 30, 1997, for the year ended September 30, 1998 and for the six
months ended March 31, 1999, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Palo Alto, California
April 30, 1999
1
<PAGE>
BABYCENTER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1998 MARCH 31,
---- ---- 1999
SEPTEMBER 30, ----
-------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $1,795,941 $1,201,786 $8,999,635
Short-term investments.................................................... 972,713 -- --
Accounts receivable, net of allowance of $30,000 at March 31, 1999........ 11,500 706,136 669,388
Inventories............................................................... -- -- 201,286
Other current assets...................................................... 18,913 69,367 80,149
Total current assets......................................................... 2,799,067 1,977,289 9,950,458
Property and equipment, net.................................................. 91,538 601,867 1,304,404
Other assets................................................................. 29,906 36,892 40,025
$2,920,511 $2,616,048 $11,294,887
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $34,004 $292,439 $693,418
Accrued liabilities....................................................... 6,206 25,202 604,930
Deferred revenue.......................................................... 53,876 464,920 713,161
Current portion of capital lease obligations.............................. 33,421 124,135 117,659
Total current liabilities.................................................... 127,507 906,696 2,129,168
Capital lease obligations, net of current portion............................ 51,079 38,661 564,089
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value, 5,700,000 shares authorized, issuable
in series: 2,862,717, 2,895,930, and 4,895,930 convertible shares
issued and outstanding at September 30, 1997 and 1998 and March 31,
1999, respectively (aggregate liquidation preference of $13,331,330 at
March 31, 1999)........................................................ 3,260,981 3,310,981 13,245,642
Common stock, $0.001 par value, 11,000,000 shares authorized, 1,759,138
and 2,297,096 shares issued and outstanding at September 30, 1997 and
1998 and March 31, 1999, respectively.................................. 1,759 1,759 1,104,606
Additional paid-in capital................................................ -- -- 9,874,296
Notes receivable from officers............................................ -- -- (1,102,000)
Deferred compensation..................................................... -- -- (8,896,144)
Accumulated deficit....................................................... (520,815) (1,642,049) (5,624,770)
Total stockholders' equity................................................... 2,741,925 1,670,691 8,601,630
$2,920,511 $2,616,048 $11,294,887
</TABLE>
See accompanying notes.
2
<PAGE>
BABYCENTER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 11,
1997) TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1999
---- ---- ---- ----
SIX MONTHS ENDED
MARCH 31,
---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues........................................... $7,624 $1,935,668 $250,869 $3,083,355
Costs and expenses:
Cost of revenues................................ -- 178,924 10,021 812,569
Technology and development...................... 200,057 1,374,012 364,605 2,742,789
Marketing and sales............................. 56,918 853,015 210,184 1,817,701
General and administrative...................... 280,621 744,761 282,691 1,912,386
Total costs and expenses........................... 537,596 3,150,712 867,501 7,285,445
Loss from operations............................... (529,972) (1,215,044) (616,632) (4,202,090)
Interest and other income, net..................... 9,157 93,810 57,201 219,369
Net loss........................................... $(520,815) $(1,121,234) $(559,431) $(3,982,721)
Basic and diluted net loss per share............... $(1.17) $(1.41) $(0.82) $(3.78)
Weighted-average shares used in per share calculation 446,340 792,778 683,374 1,053,685
</TABLE>
See accompanying notes.
3
<PAGE>
BABYCENTER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES AMOUNT SHARES AMOUNT ADDITIONAL
------ ------ ------ ------ PAID-IN
CAPITAL
-------
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
<S> <C> <C> <C> <C> <C>
Issuance of common
stock for cash and
conversion of debt.. -- $-- 1,759,138 $1,759 $--
Issuance of Series A
convertible
preferred stock for
cash, net of
issuance costs of
$10,000............. 1,202,046 771,333 -- -- --
Issuance of Series B
convertible
preferred stock for
cash, net of
issuance costs of
$10,350............. 1,660,671 2,489,648 -- -- --
Net loss............... -- -- -- -- --
Balance at
September 30, 1997.. 2,862,717 3,260,981 1,759,138 1,759 --
Issuance of Series B
convertible
preferred stock for
cash................ 33,213 50,000 -- -- --
Net loss............... -- -- -- -- --
Balance at
September 30, 1998.. 2,895,930 3,310,981 1,759,138 1,759 --
Issuance of Series C
convertible
preferred stock for
cash, net of
Issuance costs of
$65,339............. 2,000,000 9,934,661 -- -- --
Issuance of common
stock upon exercises
of stock options.... -- -- 537,958 1,102,847 --
Issuance of warrant for
services............ -- -- -- -- 405,523
Deferred compensation.. -- -- -- -- 9,468,773
Amortization of
deferred compensation -- -- -- -- --
Net loss............... -- -- -- -- --
Balance at March 31,
1999................ 4,895,930 $13,245,642 2,297,096 $1,104,606 $9,874,296
<CAPTION>
NOTES DEFERRED TOTAL
RECEIVABLE STOCK ACCUMULATED STOCKHOLDERS'
FROM COMPENSATION DEFICIT EQUITY
OFFICERS ------------ ------- ------
--------
<S> <C> <C> <C> <C>
Issuance of common
stock for cash and
conversion of debt.. $-- $-- $-- $1,759
Issuance of Series A
convertible
preferred stock for
cash, net of
issuance costs of
$10,000............. -- -- -- 771,333
Issuance of Series B
convertible
preferred stock for
cash, net of
issuance costs of
$10,350............. -- -- -- 2,489,648
Net loss............... -- -- (520,815) (520,815)
Balance at
September 30, 1997.. -- -- (520,815) 2,741,925
Issuance of Series B
convertible
preferred stock for
cash................ -- -- -- 50,000
Net loss............... -- -- (1,121,234) (1,121,234)
Balance at
September 30, 1998.. -- -- (1,642,049) 1,670,691
Issuance of Series C
convertible
preferred stock for
cash, net of
Issuance costs of
$65,339............. -- -- -- 9,934,661
Issuance of common
stock upon exercises
of stock options.... (1,102,000) -- -- 847
Issuance of warrant for
services............ -- -- -- 405,523
Deferred compensation.. -- (9,468,773) -- --
Amortization of
deferred compensation -- 572,629 -- 572,629
Net loss............... -- -- (3,982,721) (3,982,721)
Balance at March 31,
1999................ $(1,102,000) $(8,896,144) $(5,624,770) $8,601,630
</TABLE>
See accompanying notes.
4
<PAGE>
BABYCENTER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 11,
1997) TO YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 1998 1999
------------------ ------------------ ---- ----
SIX MONTHS ENDED
MARCH 31,
---------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(520,815) $(1,121,234) $(559,431) $(3,982,721)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation.................................. 9,443 80,101 26,225 188,211
Issuance of warrant for services.............. -- -- -- 405,523
Amortization of deferred compensation......... -- -- -- 572,629
Changes in operating assets and liabilities:
Accounts receivable........................ (11,500) (694,636) 3,000 36,748
Inventories................................ -- -- -- (201,286)
Other current assets....................... (18,913) (50,454) (162,041) (10,782)
Other assets............................... (29,906) (6,986) (8,329) (3,133)
Accounts payable........................... 34,004 258,435 29,526 400,979
Accrued liabilities........................ 6,206 18,996 5,051 579,728
Deferred revenue........................... 53,876 411,044 87,257 248,241
Net cash used in operating activities............ (477,605) (1,104,734) (578,742) (1,765,863)
INVESTING ACTIVITIES
Purchases of property and equipment.............. -- (400,112) (2,900) (659,682)
Purchase of short-term investments............... (972,713) -- -- --
Proceeds from maturity of short-term investments. -- 972,713 972,713 --
Net cash provided by (used in) investing activities (972,713) 572,601 969,813 (659,682)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock........ 3,260,981 50,000 -- 9,934,661
Proceeds from issuance of common stock........... 1,759 -- -- 847
Proceeds from lease financing of equipment....... -- -- -- 400,112
Repayments of principal on capital leases........ (16,481) (112,022) (40,407) (112,226)
Net cash provided by (used in) financing activities 3,246,259 (62,022) (40,407) 10,223,394
Net increase (decrease) in cash and cash
equivalents................................... 1,795,941 (594,155) 350,664 7,797,849
Cash and cash equivalents at beginning of period. -- 1,795,941 1,795,941 1,201,786
Cash and cash equivalents at end of period....... $1,795,941 $1,201,786 $2,146,605 $8,999,635
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.................................... $-- $17,008 $5,234 $11,513
Property and equipment acquired under lease
financing..................................... $100,981 $190,318 $102,623 $231,066
</TABLE>
See accompanying notes.
5
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
1. Summary of Significant Accounting Policies
ORGANIZATION AND NATURE OF BUSINESS
BabyCenter, Inc. (the "Company") is an Internet information and commerce
company serving new and expectant parents. BabyCenter, Inc. produces
BabyCenter.com, the Web's information source on preconception, pregnancy and
baby, and operates the BabyCenter Store, an online store with related
products and supplies. BabyCenter, Inc. also develops Internet information
and marketing products for healthcare companies. BabyCenter, Inc. was
incorporated in Delaware on February 11, 1997. BabyCenter, Inc. conducts its
business within one industry segment and all operations through September 30,
1998 were based in the United States.
Since its incorporation, BabyCenter, Inc. has incurred cumulative
losses totaling approximately $5,625,000 and expects to incur additional losses
for the next several years. BabyCenter, Inc.'s current operating plan shows that
BabyCenter, Inc. will continue to require additional capital to fund its
operations and market its products. To date, BabyCenter, Inc. has financed its
operations with the net proceeds from private placements of its equity
securities, and capital equipment lease financing. BabyCenter, Inc. plans to
seek additional funding through public or private financing or other
arrangements with third parties. If the financing arrangements contemplated by
management are not consummated, BabyCenter, Inc. may have to seek other sources
of capital or reevaluate its operating plans.
INTERIM FINANCIAL STATEMENTS
The accompanying statements of operations and cash flows for the six months
ended March 31, 1998 are unaudited. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary for fair presentation of the results of operations and
cash flows for the interim period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ materially from these estimates.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
BabyCenter, Inc. considers all highly liquid investments with a maturity
from date of purchase of three months or less to be cash equivalents. Management
has designated these
6
<PAGE>
investments as available for sale. BabyCenter, Inc. invests its excess cash
in money market funds and corporate debt obligations of financial
institutions in the United States. The short-term investments at September
30, 1997 were comprised of corporate debt obligations with maturities of less
than one year. These investments are reported at amortized cost which
approximates fair value. BabyCenter, Inc. had no short-term investments at
September 30, 1998 and March 31, 1999. The carrying amount reported on the
balance sheet for cash and cash equivalents approximates their fair value.
Fair values are estimated based on quoted market prices or pricing models
using current market rates. Realized gains or losses for the period from
inception (February 11, 1997) to September 30, 1997 ("period ended September
30, 1997"), the year ended September 30, 1998, and the six months ended March
31, 1998 and 1999 were not material.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject BabyCenter, Inc. to concentrations of
credit risk consist principally of cash investments and accounts receivable.
BabyCenter, Inc. invests cash which is not required for immediate operating
needs principally in deposits and money market funds, which bear minimal
risk. BabyCenter, Inc. has not experienced any significant losses on these
investments.
For the period ended September 30, 1997, 3 customers (Health Trac,
Inc., Charles Schwab, Inc. and Palo Alto Medical Foundation) accounted for 41%,
41%, and 18%, respectively, of total revenue. At September 30, 1997, 1 customer
represented 100% of the total balance of accounts receivable. For the year ended
September 30, 1998, 3 customers (The Procter and Gamble Distributing Company,
SmithKline Beecham, Inc. and Blue Shield of California) accounted for 31%, 18%,
and 16%, respectively, of total revenue. At September 30, 1998, 2 customers
represented 66% and 11% of the total balance of accounts receivable. For the six
months ended March 31, 1999, 3 customers (Blue Shield of California, The Procter
and Gamble Distributing Company and Johnson & Johnson Consumer Company, Inc.)
represented 36%, 13%, and 10%, respectively, of total revenue. At March 31,
1999, 2 customers represented 60% and 10% of the total balance of accounts
receivable. BabyCenter, Inc. performs ongoing credit evaluations of its
customers but does not require collateral. There have been no material losses on
individual customer receivables.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist primarily of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets, typically three to five
years. Assets acquired under lease and leasehold improvements are amortized
using the straight-line method over the shorter of the estimated life of the
asset or the remaining term of the lease.
REVENUE RECOGNITION
7
<PAGE>
Revenues primarily consist of online and publishing services revenues.
Online revenues are derived principally from the sale of banner advertisements
and sponsorship advertising. In general, the sponsorship advertising contracts
have longer terms than standard banner advertising contracts and also involve
more integration, such as the placement of buttons which provide users with
direct links to the advertiser's website. Advertising revenues on each banner
and sponsorship contract are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of a minimum number of "impressions,"
or times that an advertisement appears in pages viewed by users of BabyCenter,
Inc.'s online properties. To the extent minimum guaranteed impressions are not
met, BabyCenter, Inc. defers recognition of the corresponding revenues until the
remaining guaranteed impression levels are achieved.
BabyCenter, Inc. also earns revenue on sponsorship and Internet
marketing contracts which generally involve fees relating to the design,
coordination, editorial content, website hosting, and integration of the
customer's content and links into BabyCenter, Inc.'s online properties. These
fees are generally recognized as revenue as earned over the period in which
related impressions or services are delivered.
Publishing services revenue consists of developing customized print
products. Such revenue is recorded when earned, generally upon delivery of the
product. Payments received which are related to future performance are deferred
and recognized as revenue when earned.
Revenues from electronic commerce transactions, which consist primarily
of merchandise sold via the Internet, include outbound shipping and handling
charges and are recognized when the products are shipped. Revenues from
electronic commerce transactions from inception through September 30, 1998 were
not significant. Such revenues and cost of revenues were approximately $610,000
and $560,000 for the six months ended March 31, 1999.
COST OF REVENUES
Cost of online revenues consist of merchandise sold, inbound, and outbound
shipping costs and direct cost of order fulfillment. Cost of publishing services
revenue comprises direct printing and publishing cost. Such costs are expensed
as incurred.
TECHNOLOGY AND DEVELOPMENT
Technology and development expenses consist principally of payroll and
related expense for development, editorial, systems and telecommunications
operations personnel and consultants, systems and telecommunications
infrastructure, store management, and costs of acquired content. To date, all
such development costs have been expensed as incurred.
ADVERTISING COSTS
Advertising costs are accounted for as expenses in the period in which they
are incurred. Advertising expense for the period ended September 30, 1997 and
the year ended
8
<PAGE>
September 30, 1998 was approximately $14,500 and $260,000. Advertising
expense for the six months ended March 31, 1998 and 1999 was approximately
$60,450 and $609,000.
STOCK-BASED COMPENSATION
BabyCenter, Inc. grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
grant date. BabyCenter, Inc. accounts for stock option grants in accordance with
the provisions of the Accounting Principles Board's Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and, accordingly, recognizes no
compensation expense for stock options granted with exercise prices that are not
less than the fair value of BabyCenter, Inc.'s common stock on the date of
grant.
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period
less shares subject to repurchase. Had BabyCenter, Inc. been in a net income
position, diluted earnings per share would have included the shares used in the
computation of basic net income per share as well as the impact of outstanding
options and warrants to purchase common stock, using the treasury stock method,
to purchase an additional 281,895 shares for the period ended September 30,
1997, 677,320 shares for the year ended September 30, 1998 and 537,507 and
1,024,858 shares for the six months ended March 31, 1998 and 1999. Such shares
have been excluded because they are antidilutive for all periods presented.
Shares of convertible preferred stock have been excluded from the computation.
A reconciliation of shares used in the calculation of basic and diluted
net loss per share follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 1998 1999
------------------ ------------------ ---- ----
SIX MONTHS ENDED
MARCH 31,
---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss......................... $(520,815) $(1,121,234) $(559,431) $(3,982,721)
Basic and diluted:
Weighted-average shares of
common stock outstanding... 1,759,138 1,759,138 1,759,138 1,827,702
Less weighted-average
shares subject to
repurchase................. (1,312,798) (966,360) (1,075,764) (774,017)
Shares used in computing
basic and diluted net
loss per share............. 446,340 792,778 683,374 1,053,685
Basic and diluted net loss
per share..................... $(1.17) $(1.41) $(0.82) $(3.78)
</TABLE>
9
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), and No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131") (collectively, the "Statements").
BabyCenter, Inc. adopted these Statements as of October 1, 1998. SFAS 130
establishes new standards for reporting and displaying comprehensive income and
its components. The adoption of SFAS 130 had no impact on the BabyCenter, Inc.'s
results of operations or financial condition. SFAS 131 requires disclosure of
certain information regarding operating segments, products and services,
geographic areas of operation, and major customers. BabyCenter, Inc. operates as
one reportable segment and has determined that the specific additional
information and disclosure requirements under SFAS 131 are not material to
BabyCenter, Inc. for the period ended March 31, 1999.
In June 1998, the FASB issued Statement of Financial Accounting
Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," which will be effective for the year ending September 30,
2000. This statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. BabyCenter, Inc. believes the adoption of
SFAS 133 will not have a material effect on the financial statements, since it
currently does not invest in derivative instruments and engage in hedging
activities.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities
capitalize certain costs related to internal use software once certain criteria
have been met. BabyCenter, Inc. is required to implement SOP 98-1 for the year
ending September 30, 2000. Adoption of SOP 98-1 is expected to have no material
impact on BabyCenter, Inc.'s financial condition or results of operations.
2. Property and Equipment Property and equipment consists of the
following:
<TABLE>
<CAPTION>
1997 1998 MARCH 31,
---- ---- 1999
SEPTEMBER 30, ----
-------------
<S> <C> <C> <C>
Furniture and equipment........................................ $98,593 $685,858 $1,458,850
Software....................................................... 2,388 2,653 120,409
Leasehold improvements......................................... -- 2,900 2,900
100,981 691,411 1,582,159
Less accumulated depreciation.................................. (9,443) (89,544) (277,755)
Property and equipment, net.................................... $91,538 $601,867 $1,304,404
</TABLE>
10
<PAGE>
Property and equipment includes certain furniture, computers, and
equipment financed under capital leases. The cost of such assets under capital
leases was $100,981 and $285,745 at September 30, 1997 and 1998, and $916,924 at
March 31, 1999. Accumulated amortization for these assets was $9,443 and $88,748
at September 30, 1997 and 1998 and $169,616 at March 31, 1999.
3. Commitments
OPERATING LEASE COMMITMENTS
BabyCenter, Inc. leases its facilities under noncancelable operating leases
expiring in May and July 1999. Rent expense for facilities under operating
leases was approximately $25,300 and $107,000 for the period ended September
1997 and for the year ended September 30, 1998. Rent expense was approximately
$65,600 and $141,600 for the six months ended March 31, 1998 and 1999. Future
minimum rental commitments under operating leases at March 31, 1999 are as
follows:
<TABLE>
<S> <C>
1999................................................... $121,328
2000................................................... 125,818
$247,146
</TABLE>
CAPITAL LEASE OBLIGATIONS
BabyCenter, Inc. leases certain furniture, computers and equipment under
noncancelable capital leases. Obligations under capital leases represent the
present value of future noncancelable rental payments under various lease
agreements.
Future minimum lease payments under capital leases are as follows at
March 31, 1999:
<TABLE>
<S> <C>
Fiscal year ended
1999................................................ $144,166
2000................................................ 259,018
2001................................................ 170,032
2002................................................ 160,166
2003................................................ 39,272
2004 and thereafter................................. 2,355
Total minimum lease payments.......................... 775,009
Less amount representing interest..................... (93,261)
Present value of net minimum lease payments........... 681,748
Less current portion.................................. (117,659)
Long-term portion..................................... $564,089
</TABLE>
11
<PAGE>
4. Stockholders' Equity
CONVERTIBLE PREFERRED STOCK
BabyCenter, Inc.'s Certificate of Incorporation provide for the issuance of
up to 5,700,000 shares of convertible preferred stock, 1,307,693 of which have
been designated as Series A, 1,860,672 as Series B, and 2,500,000 as Series C.
Shares outstanding at March 31, 1999 are 1,202,046 Series A, 1,693,884 Series B
and 2,000,000 Series C.
Each share of Series A, B and C preferred stock is convertible, at the
option of the holder, into a share of common stock, on a one-for-one basis,
subject to certain adjustments for dilution, if any, resulting from future stock
issuances. Additionally, the preferred shares automatically convert into common
stock concurrent with the closing of an underwritten public offering of common
stock under the Securities Act of 1933 in which BabyCenter, Inc. receives at
least $15,000,000 in gross proceeds and the price per share is at least $10.00
(subject to adjustment for a recapitalization or certain other stock
adjustments).
Series A, B and C preferred stockholders are entitled to annual
noncumulative dividends, before and in preference to any dividends paid on
common stock, when and as declared by the board of directors. No dividends have
been declared through March 31, 1999.
The Series A, B and C preferred stockholders are entitled to receive,
upon liquidation or merger, a distribution of $0.65, $1.51 and $5.00 per share
(subject to adjustment for a recapitalization) plus all declared but unpaid
dividends. Thereafter, the remaining assets and funds, if any, shall be
distributed ratably on a per-share basis among the common stockholders and the
Series A, B and C preferred stockholders.
The Series A, B and C preferred stockholders have voting rights equal
to the common shares they would own upon conversion.
As of March 31, 1999, BabyCenter, Inc. has reserved 4,895,930 shares of
common stock for issuance upon conversion of its Series A, B and C preferred
stock.
COMMON STOCK
12
<PAGE>
Since inception (February 11, 1997), BabyCenter, Inc. issued 2,277,397
shares of common stock to founders and officers for cash and notes receivable.
The common stock is subject to repurchase, at the Company's option, until
vested. Shares generally vest over a period of three to four years. At March 31,
1999, approximately 928,113 shares were subject to repurchase. The
weighted-average fair value of unvested stock issued during the period since
inception (February 11, 1997) is $3.11 per share.
WARRANTS
In October 1998, BabyCenter, Inc. entered into an agreement with a vendor
for the supply goods and certain fulfillment services to support electronic
commerce transactions of BabyCenter, Inc. In connection with this agreement,
BabyCenter, Inc. granted the vendor a warrant to purchase up to 120,000 shares
of common stock of BabyCenter, Inc. at a price of $0.25 per share. The warrant
becomes exercisable ratably over the term of the agreement. At March 31, 1999,
warrants for 60,000 shares were not exercisable. The warrant expires in November
2003. The warrant has been accounted for as a variable award and as such during
the six months ended March 31, 1999, the Company recorded a charge of $405,523
related to the value of the warrants which became exercisable during the period.
This amount is included in marketing and sales expense in the accompanying
Statement of Operations.
In October 1998, BabyCenter, Inc. issued warrants to purchase up to
22,000 shares of Series C convertible preferred stock at $5.00 per share in
connection with an equipment lease financing arrangement. These warrants are
immediately exercisable and expire in October 2003 or earlier upon completion of
the merger. No amount was allocated to the value these warrants as such amounts
were not significant.
NOTES RECEIVABLE FROM OFFICERS
Notes receivable from officers, totaling $1,102,000 at March 31, 1999
represent interest bearing full recourse notes from certain officers issued to
finance the purchase of 527,000 shares of common stock of BabyCenter, Inc. The
notes bear interest at a rate of 4.77% per annum, with principal and interest
due and payable on various dates in March 2003.
1997 STOCK PLAN
In February 1997, the board of directors adopted the 1997 Stock Plan (the
"Plan") for issuance of options of common stock to eligible participants.
Options granted may be either incentive stock options or nonstatutory stock
options. Incentive stock options may be granted to employees with exercise
prices of no less than the fair value and nonstatutory options may be granted to
eligible participants at exercise prices of no less than 85% of the fair value
of the common stock on the grant date as determined by the board of directors.
Options generally vest at the rate of 25% after one year from the date of grant,
with the remaining balance vesting monthly over the next three years with a term
of 10 years. BabyCenter, Inc. has reserved 2,261,500 shares of common stock for
the grant of options under the Plan.
Pro forma information regarding net loss is required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and has been determined as if BabyCenter, Inc. had
accounted for its employee stock options
13
<PAGE>
under the fair value method as specified by SFAS 123. The fair value of these
options was estimated at the date of grant using the minimum value method
with the following weighted-average assumptions: no dividends; an expected
life of five years; and a risk-free interest rate of approximately 6% for the
period ended September 30, 1997, for the year ended September 30, 1998 and
for the six months ended March 31, 1998 and 1999.
The effect of applying the FASB statement's minimum value method to
BabyCenter, Inc.'s stock options granted did not result in pro forma net loss
amounts that are materially different from the reported historical amounts.
Therefore, such pro forma information is not separately presented herein. Future
pro forma net income (loss) results may be materially different from actual
amounts reported.
A summary of activity under BabyCenter, Inc.'s stock option plan was as
follows:
<TABLE>
<CAPTION>
SHARES AVAILABLE SHARES UNDER WEIGHTED-
FOR GRANT OPTIONS AVERAGE
--------- OUTSTANDING EXERCISE PRICE
----------- --------------
<S> <C> <C> <C>
Shares authorized for issuance............ 559,440 -- --
Options granted........................... (281,895) 281,895 $0.07
Balance at September 30, 1997............. 277,545 281,895 $0.07
Additional authorization.................. 602,060 -- --
Options granted........................... (521,612) 521,612 $0.17
Options exercised......................... -- -- --
Options forfeited......................... 126,187 (126,187) $0.08
Balance at September 30, 1998............. 484,180 677,320 $0.14
Additional authorization.................. 1,100,000 -- --
Options granted........................... (792,038) 792,038 $2.38
Options exercised......................... -- (537,958) $2.05
Options forfeited......................... 48,542 (48,542) $0.40
Balance at March 31, 1999................. 840,684 882,858 $1.34
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-
OPTIONS AVERAGE WEIGHTED- OPTIONS WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
RANGE 1998 LIFE PRICE 1998 PRICE
----- ---- ---- ----- ---- -----
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.07-$0.95 688,570 8.92 $0.31 215,208 $0.13
$2.00-$4.00 194,288 9.93 $3.50 7,750 $3.20
$0.07-$4.00 882,858 9.25 $1.34 222,958 $0.47
</TABLE>
14
<PAGE>
The weighted-average fair value of options granted during the period
ended September 30, 1997, the year ended September 30, 1998 and the six months
ended March 31, 1999 was $0.04, $0.04 and $0.56.
DEFERRED COMPENSATION
BabyCenter, Inc. recorded deferred compensation of $9,469,000 for the six
months ended March 31, 1999. The amount recorded represents the difference
between the grant price and the deemed fair value of BabyCenter, Inc.'s common
stock subject to options granted. The amortization of deferred compensation is
being amortized to operations over the vesting period of the options, which is
typically four years. Total amortization recognized was $573,000 for the six
months ended March 31, 1999.
5. Income Taxes As of March 31, 1999, BabyCenter, Inc. had federal net
operating loss carryforwards of approximately $4,800,000. The net operating loss
and credit carryforwards will expire at various dates beginning in 2012 through
2019, if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of September
30, 1997 and 1998, and March 31, 1999, BabyCenter, Inc. had deferred tax assets
of approximately $200,000, $600,000 and $2,000,000. The net deferred tax assets
relate primarily to net operating loss carryforwards and have been fully offset
by a valuation allowance.
6. Year 2000 Issue (Unaudited) Many currently installed computer
systems and software products are coded to accept only two-digit entries in the
date code field. Beginning in the year 2000, these date code fields will need to
accept four-digit entries in order to distinguish 21st century dates from 20th
century dates. As a result, computer systems and/or software used by many
companies will need to be upgraded to comply with Year 2000 requirements.
Significant uncertainty exists concerning the potential effects associated with
this issue. Although BabyCenter, Inc. believes that its products and services
are Year 2000 compliant, there can be no assurance that Year 2000 errors or
defects will not be discovered in BabyCenter, Inc.'s current and future products
or services. Any failure by BabyCenter, Inc. to make its products Year 2000
compliant could result in a decrease in revenue and an increase in the
allocation of resources to address Year 2000 problems without additional revenue
commensurate with such dedication of resources, or an increase in litigation
costs relating to losses suffered by BabyCenter, Inc.'s customers due to such
Year 2000 problems.
15
<PAGE>
BabyCenter is in the process of reviewing the year 2000 compliance of
its internally developed proprietary software. This review has included testing
to determine how its systems will function at and beyond the year 2000.
BabyCenter expects to complete these tests during the summer of 1999. Since
inception, BabyCenter has internally developed substantially all of the systems
for the operation of its Web site. These systems include the software used to
provide its Web site's search, customer interaction, and transaction-processing
and distribution functions, as well as monitoring and back-up capabilities.
Based upon its assessment to date, BabyCenter believes that its internally
developed proprietary software is year 2000 compliant.
BabyCenter is currently assessing the year 2000 readiness of its
third-party supplied software, computer technology and other services, which
include software for use in its accounting, database and security systems. The
failure of such software or systems to be year 2000 compliant could have a
material negative impact on BabyCenter's corporate accounting functions and the
operation of its Web site. As part of the assessment of the year 2000 compliance
of these systems, BabyCenter has sought assurances from these vendors that their
software, computer technology and other services are year 2000 compliant.
BabyCenter has expensed amounts incurred in connection with year 2000 assessment
since its formation through March 31, 1999. Such amounts have not been material.
BabyCenter expects this assessment process to be completed during the summer of
1999. Based upon the results of this assessment, BabyCenter will develop and
implement, if necessary, a remediation plan with respect to third-party
software, third-party vendors and computer technology and services that may fail
to be year 2000 compliant. BabyCenter expects to complete any required
remediation during the summer of 1999. At this time, the expenses associated
with this assessment and potential remediation plan that may be incurred in the
future cannot be determined; therefore, BabyCenter has not developed a budget
for these expenses. The failure of BabyCenter's software and computer systems
and of its third-party suppliers to be year 2000 compliant would have a material
adverse effect on it.
The year 2000 readiness of the general infrastructure necessary to
support its operations is difficult to assess. For instance, BabyCenter depends
on the integrity and stability of the Internet to provide its services.
BabyCenter also depends on the year 2000 compliance of the computer systems and
financial services used by consumers. Thus, the infrastructure necessary to
support its operations consists of a network of computers and telecommunications
systems located throughout the world and operated by numerous unrelated entities
and individuals, none of which has the ability to control or manage the
potential year 2000 issues that may impact the entire infrastructure.
BabyCenter's ability to assess the reliability of this infrastructure is limited
and relies solely on generally available news reports, surveys and comparable
industry data. Based on these sources, BabyCenter believes most entities and
individuals that rely significantly on the Internet are carefully reviewing and
attempting to remediate issues relating to year 2000 compliance, but it is not
possible to predict whether these efforts will be successful in reducing or
eliminating the potential negative impact of year 2000 issues. A significant
disruption in the ability of consumers to reliably access the Internet or
portions of it or to use their credit cards would have an adverse effect on
demand for BabyCenter's services and would have a material adverse effect on
BabyCenter.
At this time, BabyCenter has not yet developed a contingency plan to
address situations that may result if BabyCenter or its vendors are unable to
achieve year 2000 compliance because BabyCenter currently does not believe that
such a plan is necessary. The cost of
16
<PAGE>
developing and implementing such a plan, if necessary, could be material. Any
failure of its material systems, BabyCenter's vendors' material systems or
the Internet to be year 2000 compliant could have material adverse
consequences for BabyCenter. Such consequences could include difficulties in
operating BabyCenter's Web site effectively, taking product orders, making
product deliveries or conducting other fundamental parts of BabyCenter's
business.
7. Subsequent Event On April 18, 1999, BabyCenter, Inc. and eToys Inc.
signed a definitive agreement to merge BabyCenter, Inc. with eToys Inc.
Consummation of the merger is expected by the end of the quarter ended June 30,
1999 and is subject to certain closing conditions, including governmental
approvals and approval by the stockholders of BabyCenter, Inc. Under the terms
of agreement, eToys Inc. would issue its shares to the stockholders of
BabyCenter, Inc. The merger is to be treated as a purchase by eToys Inc. for
accounting purposes.
17
<PAGE>
Exhibit 99.2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
eToys Inc.
We have audited the accompanying balance sheets of eToys Inc. as of
March 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended.
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of eToys Inc. as of
March 31, 1998 and 1999, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Los Angeles, California
May 3, 1999
1
<PAGE>
eTOYS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
MARCH 31, MARCH 31, MARCH 31,
1998 1999 1999(UNAUDITED)
---- ---- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $1,552,000 $20,173,000
Inventories.......................................................... 224,000 5,067,000
Prepaid expenses and other current assets............................ 35,000 1,577,000
Total current assets.................................................... 1,811,000 26,817,000
Property and equipment:
Equipment............................................................ 155,000 1,393,000
Furniture and fixtures............................................... 8,000 10,000
Leasehold improvements............................................... 15,000 371,000
Assets under capital lease........................................... -- 731,000
178,000 2,505,000
Accumulated depreciation and amortization............................ (18,000) (369,000)
160,000 2,136,000
Goodwill (net of accumulated amortization of $319,000 at
March 31, 1999)...................................................... 956,000 637,000
Other assets............................................................ -- 1,076,000
Total assets............................................................ $2,927,000 $30,666,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................................... $346,000 $4,236,000
Accrued expenses..................................................... 9,000 530,000
Current portion of capital lease obligations......................... 230,000
Total current liabilities............................................... 355,000 4,996,000
Long-term capital lease obligations..................................... -- 477,000
Redeemable Convertible Preferred Stock, 19,593,089 shares authorized:
Series A Preferred Stock; $.0001 par value; 6,318,017 and
7,023,645 shares issued and outstanding at March 31, 1998 and
1999, respectively.............................................. 3,917,000 4,355,000 --
Series B Preferred Stock, $.0001 par value, 11,886,649 shares
issued and outstanding.......................................... -- 24,952,000 --
Series C Preferred Stock, $.0001 par value, 666,666 shares issued --
and outstanding................................................. -- 19,984,000 --
Commitments and contingencies...........................................
Stockholders' equity:
Common Stock, $.0001 par value, 150,000,000 shares authorized;
32,799,276 and 34,535,415 shares issued and outstanding at
March 31, 1998 and 1999, respectively............................. 3,000 3,000 9,000
Additional paid-in capital........................................... 1,003,000 45,837,000 95,122,000
Receivables from stockholders........................................ (30,000) (138,000) (138,000)
Deferred compensation................................................ (53,000) (38,974,000) (38,974,000)
Accumulated deficit.................................................. (2,268,000) (30,826,000) (30,826,000)
Total stockholders' equity (deficit).................................... (1,345,000) (24,098,000) $25,193,000
Total liabilities and stockholders' equity (deficit).................... $2,927,000 $30,666,000
</TABLE>
See accompanying notes.
2
<PAGE>
eTOYS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1999
---- ----
YEARS ENDED MARCH 31,
---------------------
<S> <C> <C>
Net sales........................................................................ $687,000 $29,959,000
Cost of sales.................................................................... 568,000 24,246,000
Gross profit..................................................................... 119,000 5,713,000
Operating expenses:
Marketing and sales........................................................... 1,290,000 20,719,000
Product development........................................................... 421,000 3,608,000
General and administrative.................................................... 678,000 10,485,000
2,389,000 34,812,000
Operating loss................................................................... (2,270,000) (29,099,000)
Other income (expense):
Interest income............................................................... 18,000 589,000
Interest expense.............................................................. (15,000) (47,000)
Loss before provision for income taxes........................................... (2,267,000) (28,557,000)
Provision for income taxes....................................................... 1,000 1,000
Net loss......................................................................... $(2,268,000) $(28,558,000)
Basic net loss per equivalent share.............................................. $(0.09) $(0.85)
Pro forma basic net loss per equivalent share.................................... $(0.08) $(0.35)
Shares used to compute basic net
loss per equivalent share........................................................ 25,129,888 33,427,908
Shares used to compute pro forma basic net loss per equivalent share............. 30,232,902 81,923,187
</TABLE>
See accompanying notes.
3
<PAGE>
eTOYS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL RECEIVABLES
PAID-IN FROM DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT TOTAL
---------- ------- ---------- ------------ ------------ ----------- -----
COMMON STOCK
------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997....... -- $-- $-- $-- $-- $-- $--
Issuance of Common Stock.... 26,569,275 3,000 917,000 -- -- -- 920,000
Restricted stock issued..... 6,080,001 -- 30,000 (30,000) -- -- --
Exercise of stock options... 150,000 -- 1,000 -- -- -- 1,000
Deferred compensation....... -- -- 55,000 -- (55,000) -- --
Amortization of deferred
compensation............. -- -- -- -- 2,000 -- 2,000
Net loss.................... -- -- -- -- -- (2,268,000) (2,268,000)
Balance at March 31, 1998...... 32,799,276 3,000 1,003,000 (30,000) (53,000) (2,268,000) (1,345,000)
Restricted stock issued..... 525,000 -- 35,000 (140,000) -- -- (105,000)
Exercise of stock options... 1,211,139 -- 32,000 -- -- -- 32,000
Issuance of warrants........ -- -- 32,000 -- -- -- 32,000
Deferred compensation....... -- -- 44,735,000 -- (44,735,000) -- --
Amortization of deferred
compensation............. -- -- -- -- 5,814,000 5,814,000
Repayment of receivables
from stockholders........ -- -- -- 32,000 -- -- 32,000
Net loss.................... -- -- -- -- -- (28,558,000) (28,558,000)
Balance at March 31, 1999...... 34,535,415 $3,000 $45,837,000 $(138,000) $(38,974,000) $(30,826,000) $(24,098,000)
</TABLE>
See accompanying notes.
4
<PAGE>
eTOYS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1999
---- ----
YEARS ENDED
MARCH 31,
---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................................ $(2,268,000) $(28,558,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash interest............................................................. 15,000 70,000
Nonemployee stock compensation............................................... 33,000 --
Amortization of deferred compensation........................................ 2,000 5,814,000
Depreciation................................................................. 18,000 411,000
Amortization................................................................. -- 319,000
Loss on disposal of property and equipment................................... -- 6,000
Changes in operating assets and liabilities:
Inventories............................................................... (198,000) (4,843,000)
Prepaid expenses and other current assets................................. (35,000) (1,542,000)
Accounts payable.......................................................... 297,000 3,890,000
Accrued expenses.......................................................... 9,000 503,000
Net cash used in operations..................................................... (2,127,000) (23,930,000)
INVESTING ACTIVITIES:
Capital expenditures for property and equipment................................. (178,000) (2,119,000)
Proceeds from sale of property and equipment.................................... -- 475,000
Acquisition of Toys.com......................................................... (270,000) --
Other assets.................................................................... -- (1,076,000)
Net cash used in investing activities........................................... (448,000) (2,720,000)
FINANCING ACTIVITIES:
Proceeds from bridge loan....................................................... -- 5,000,000
Payments on bridge loan......................................................... -- (2,238,000)
Proceeds from the issuance of Common Stock...................................... 224,000 --
Exercise of stock options....................................................... 1,000 32,000
Proceeds from the issuance of Redeemable Convertible Preferred Stock............ 3,007,000 42,031,000
Proceeds from the issuance of convertible
notes........................................................................... 895,000 --
Payments on capital leases...................................................... -- (24,000)
Proceeds from receivables from stockholders..................................... -- 32,000
Proceeds from exercise of warrants.............................................. -- 438,000
Net cash provided by financing activities....................................... 4,127,000 45,271,000
Net increase in cash and cash equivalents....................................... 1,552,000 18,621,000
Cash and cash equivalents at beginning of period................................ -- 1,552,000
Cash and cash equivalents at end of period...................................... $1,552,000 $20,173,000
Supplemental disclosures:
Income taxes paid............................................................... $1,000 $1,000
Interest paid................................................................... $-- $9,000
</TABLE>
See accompanying notes.
5
<PAGE>
eTOYS INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
1. Significant Accounting Policies
GENERAL
eToys Inc. (the Company) was incorporated in November 1996 in the state
of Delaware. Prior to June 1997, the Company had no operations or activities.
In June 1997, initial issuances of Common Stock occurred. The Company
launched its Web site in October 1997. The Company is a Web-based retailer
focused exclusively on children's products, including toys, video games,
software, videos and music.
The accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern. The Company has incurred
significant operating losses since inception of operations and has limited
working capital. Management believes that the proceeds raised through the
sale of equity securities, in addition to revenue generated from product
sales, will support the Company's operations through 1999. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the eventual outcome of
this uncertainty.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ materially from those
estimates.
CASH EQUIVALENTS
The Company considers those investments which are highly liquid, readily
convertible to cash and which mature within three months from the date of
purchase as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (using the first in-first out
method) or market and consist primarily of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using
the straight-line method based upon estimated useful lives, which range from
three to five years. Leasehold
6
<PAGE>
improvements are recorded at cost. Amortization is provided using the
straight-line method over the shorter of the term of the related lease or
estimated useful lives of the assets.
GOODWILL
Goodwill represents the excess of the purchase price over the estimated
fair market value of net assets acquired in a business combination. Goodwill
is amortized on a straight-line basis over three years.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment
loss would be recognized when estimated future cash flows expected to result
from the use of the asset and its eventual disposition is less than its
carrying amount. No such impairment losses have been identified by the
Company.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of Common Stock outstanding. Shares associated with stock options and
the Redeemable Convertible Preferred Stock are not included because they are
antidilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share is computed using the weighted average
number of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's Redeemable Convertible Preferred Stock
into shares of the Company's Common Stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on April 1,
1997, or at the date of original issuance, if later.
The following table sets forth the computation of basic and pro forma
net loss per share for the periods indicated:
7
<PAGE>
<TABLE>
<CAPTION>
1998 1999
---- ----
YEARS ENDED DECEMBER 31,
------------------------
<S> <C> <C>
Numerator:
Net loss.......................................................... $(2,268,000) $(28,558,000)
Denominator:
Weighted average shares........................................... 25,129,888 33,427,908
Denominator for basic calculation................................. 25,129,888 33,427,908
Weighted average effect of pro forma securities:
Series A Redeemable Convertible Preferred Stock................ 5,103,014 19,195,678
Series B Redeemable Convertible Preferred Stock................ -- 29,255,765
Series C Redeemable Convertible Preferred Stock................ -- 43,836
Denominator for pro forma calculation............................. 30,232,902 81,923,187
Net loss per share:
Basic............................................................. $(0.09) $(0.85)
Pro forma......................................................... $(0.08) $(0.35)
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to customers. Outbound shipping and handling
charges are included in net sales. The Company provides an allowance for
sales returns in the period of sale, based upon historical experience.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. For the years ended
March 31, 1998 and 1999, the Company incurred advertising costs of $917,000
and $10,745,000, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," requires that
stock awards granted subsequent to January 1, 1995, be recognized as
compensation expense based on their fair value at the date of grant.
Alternatively, a company may use Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," and disclose pro forma
income amounts which would have resulted from recognizing such awards at
their fair value. The Company has elected to account for stock-based
compensation expense under APB No. 25 and make the required pro forma
disclosures for compensation (see Note 6).
8
<PAGE>
SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended March 31, 1998:
Convertible notes in the amount of $895,000, plus accrued
interest of $15,000, were converted into Series A Redeemable
Convertible Preferred Stock.
The Company expensed approximately $33,000 for services
rendered from several vendors in exchange for Common Stock.
The Company issued stock in return for notes receivable
totaling $30,000 from employees. Such notes have been
classified in the equity section of the balance sheet.
The Company issued 2,340,000 shares of Common Stock as part
of the acquisition of Toys.com. See Note 2.
During the year ended March 31, 1999:
The Company financed the purchase of fixed assets under
capital leases in the amount $731,000.
The Company issued notes receivable for Common Stock and
Series B Redeemable Convertible Preferred Stock in the amounts
of $35,000 and $105,000, respectively.
Convertible notes in the amount of $2,762,000, plus accrued
interest of $38,000, were converted into Series B Redeemable
Convertible Preferred Stock.
2. Acquisition of Toys.com In March 1998, the Company acquired certain
assets and assumed certain liabilities and obligations of one of its online
competitors, Toys.com, including $25,000 in toy inventories and assumed
certain advertising liabilities in the amount of $48,000, and the assumption
of future contingent advertising contracts. The acquisition was accounted for
under the purchase method of accounting and included a cash payment of
$270,000 and the issuance of 2,340,000 shares of Common Stock with an
estimated deemed fair value of approximately $663,000. Goodwill resulting
from the acquisition was $956,000. Subsequent to the acquisition, Toys.com
ceased operations as a separate entity.
3. Income Taxes As a result of the net operating losses, the provision
for income taxes consists solely of minimum state taxes. The following is a
reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate:
9
<PAGE>
<TABLE>
<CAPTION>
1998 1999
------ ------
YEARS ENDED MARCH 31,
---------------------
<S> <C> <C>
Statutory federal income tax expense (benefit)....................... (34)% (34)%
State income tax expense (benefit)................................... (6) (6)
Valuation allowance.................................................. 40 24
Non-deductible stock compensation.................................... -- 15
Non-deductible goodwill amortization................................. -- 1
--% --%
</TABLE>
The components of the deferred tax assets and related valuation
allowance at March 31, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
MARCH 31,
---------
<S> <C> <C>
Other............................................................ $-- $792,000
Net operating loss carryforwards................................. 914,000 9,731,000
Deferred tax assets.............................................. 914,000 10,523,000
Valuation allowance.............................................. (914,000) (10,523,000)
$-- $--
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
The Company has net operating losses for both federal and state tax
purposes of approximately $24,430,000 expiring beginning in the years 2012 for
federal and 2005 for state. The net operating losses can be carried forward to
offset future taxable income. Utilization of the above carryforwards may be
subject to utilization limitations, which may inhibit the Company's ability to
use carryforwards in the future.
4. Convertible Notes and Bridge Financing During the year ended March
31, 1998, the Company received $895,000 in proceeds from the issuance of 6.07%
convertible notes. The notes were automatically converted into Series A
Redeemable Convertible Preferred Stock due to certain conditions as specified
within the initial note agreement. As a result of the conversion, the initial
proceeds from the convertible notes of $895,000, plus $15,000 of accrued
interest, were converted into 1,468,018 shares of Series A Redeemable
Convertible Preferred Stock.
10
<PAGE>
In conjunction with the issuance of the 6.07% convertible notes, the
Company issued to the purchasers of the 6.07% convertible notes, 721,757 stock
warrants for the purchase of Series A Redeemable Convertible Preferred Stock at
$.62 per share. As of March 31, 1999, 705,628 warrants have been exercised. The
warrants are immediately exercisable and expire on December 31, 2002, or on the
closing date of an initial public offering, if sooner. No value has been
allocated to the warrants as the amount is not deemed to be significant.
On May 6, 1998, the Company entered into a $5,000,000 bridge financing
agreement with a group of investors. The bridge financing was in the form of
Convertible Subordinated Promissory Notes (the Notes) which were payable on
demand after May 6, 1999 accruing interest at a rate of 8% per annum until paid
and compounded annually. In July 1998, $2.8 million of the Notes plus interest
were converted into 1,331,235 shares of Series B Redeemable Convertible
Preferred Stock. The remaining balance of the Notes of $2.2 million plus accrued
interest was repaid in cash to the investors in June 1998.
5. Capital Structure
COMMON AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 19, 1999, the Company amended its Certificate of Incorporation to,
among other matters, increase the authorized number of shares of Preferred Stock
to 19,593,089.
In conjunction with this amendment, the Company authorized 666,666
shares of Series C Redeemable Convertible Preferred Stock (Series C). In
December 1997, the issuance of Series A Redeemable Convertible Preferred Stock
(Series A) resulted in proceeds of $3,007,000, representing 4,849,999 shares
issued and outstanding at $0.62 per share. In conjunction with this offering,
$895,000 of convertible notes, plus related accrued interest of $15,000, were
converted into 1,468,018 shares of Series A (see Note 4). In June 1998, the
issuance of Series B resulted in proceeds of $25,000,000 representing 11,886,649
shares issued and outstanding at $2.1032 per share. In March 1999, the Company
issued Series C which resulted in proceeds of approximately $20,000,000,
representing 666,666 shares issued and outstanding at $30 per share. The
following summarizes the Series A, Series B and Series C activity:
<TABLE>
<CAPTION>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
SERIES A SERIES B SERIES C
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997........ -- $-- -- $-- -- $--
Issuance of Series A............ 6,318,017 3,917,000 -- -- -- --
Balance at March 31, 1998....... 6,318,017 3,917,000 -- -- -- --
Issuance of Series A............ 705,628 438,000 -- -- -- --
Issuance of Series B............ -- -- 11,886,649 24,952,000 -- --
Issuance of Series C............ -- -- -- -- 666,666 19,984,000
Balance at March 31, 1999....... 7,023,645 $4,355,000 11,886,649 $24,952,000 666,666 $19,984,000
</TABLE>
11
<PAGE>
eTOYS INC.
NOTES TO FINANCIAL STATEMENTS
5. Capital Structure
The following table is presented to summarize the Common Stock
authorized at March 31, 1999:
<TABLE>
<CAPTION>
COMMON
SHARES ISSUED
DESCRIPTION OF INSTRUMENT OR RESERVED
------------------------- -------------
<S> <C>
Common Stock outstanding 34,535,415
Series A Redeemable Convertible Preferred Stock 21,070,935
Series B Redeemable Convertible Preferred Stock 35,659,947
Series C Redeemable Convertible Preferred Stock 1,999,998
1997 Employee Incentive Stock Option Plan 17,400,000
1999 Employee Incentive Stock Option Plan 21,600,000
1999 Employee Stock Purchase Plan 900,000
1999 Directors Stock Option Plan 600,000
Preferred and Common Stock warrants 209,799
Common Stock issued or reserved 133,976,094
Common Stock available 16,023,906
</TABLE>
Each share of Redeemable Convertible Preferred Stock is convertible, at
the stockholder's option, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing $0.62 in the case of Series
A, $2.1032 in the case of Series B and $30 in the case of Series C by the
Conversion Price, as defined. In the event of a public offering of the Company's
equity securities resulting in gross proceeds to the Company of $20 million or
greater, all outstanding Redeemable Convertible Preferred Stock will
automatically be converted into Common Stock.
In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of Series A, Series B and
Series C are entitled to receive preference to the Common Stock holders to any
distribution of any assets of the Company in an amount per share equal to $0.62,
$2.1032 and $30 per share, respectively. After the initial distribution of
assets, the holders of Series A, Series B and Series C are entitled to
participate with the holders of the Common Stock on a pro rata basis until the
holders of Series A, Series B
12
<PAGE>
and Series C have received an aggregate of $1.86, $6.31 and $90, respectively
(as adjusted for any stock splits, stock dividends, recapitalizations, or the
like).
On or at any time after November 26, 2002, subject to the written
consent of 662'3% of the then outstanding shares of Series A, Series B and
Series C, the Redeemable Convertible Preferred Stock may be redeemed for cash in
whole or in part for $0.62, $2.1032 and $30 per share (as adjusted for any stock
dividends, combinations or splits with respect to such share) plus all declared
but unpaid dividends, for Series A, Series B and Series C, respectively.
The voting rights of the Series A, Series B and Series C are equal to
one vote for each share of Common Stock into which such Redeemable Convertible
Preferred Stock may be converted. Each share of Series A, Series B and Series C
entitles the holder to receive dividends in cash at an annual rate of $0.043,
$0.1472 and $2.40 per share, respectively (as adjusted for any stock splits,
stock dividends, recapitalizations, or the like). Dividends are payable
quarterly when and if declared by the board of directors and are not cumulative.
RECEIVABLES FROM STOCKHOLDERS
Receivables from stockholders, totaling $30,000 and $138,000 at March 31,
1998 and 1999, respectively, represent interest bearing notes from certain
stockholders issued to finance the purchase of 6,605,001 and 50,000 shares of
the Company's Common and Series B, respectively. The notes bear interest rates
between 6.0% and 8.0% per year with interest due upon payment of the notes. The
notes are payable on different dates ranging from December 1, 1999 to July 27,
2002, or upon termination of employment or transfer of any of the purchased
shares.
DEFERRED COMPENSATION
The Company recorded deferred compensation of $55,000 and $44,735,000 for
the years ended March 31, 1998 and 1999, respectively. The amounts recorded
represent the difference between the grant price and the deemed fair value of
the Company's Common Stock for shares subject to options granted. The
amortization of deferred compensation will be charged to operations over the
vesting period of the options, which is typically four years. Total amortization
recognized was $2,000 and $5,814,000 for the years ended March 31, 1998 and
1999, respectively.
6. Stock Option Plans In February 1999, the Board of Directors adopted
the 1999 Stock Plan, the 1999 Directors' Stock Option Plan and the 1999 Employee
Stock Purchase Plan. In March 1999 the stockholders approved these plans. The
1999 Stock Plan provides for 21,600,000 shares of Common Stock to be granted
under terms similar to the 1997 Stock Plan. The 1999 Directors' Stock Option
Plan reserves a total of 600,000 shares of Common Stock for grants of options to
nonemployee directors. The 1999 Employee Stock Purchase Plan reserves a total of
900,000 shares of Common Stock for limited purchases by employees through
payroll deductions, with a purchase price equal to 85% of the fair market value
of the Common Stock.
13
<PAGE>
The Company adopted the 1997 Stock Plan, as amended June 1998 (the
Plan), which provides for the granting of options for purchases up to 17,400,000
shares of the Company's Common Stock. Under the terms of the Plan, options may
be granted to employees, nonemployees, directors or consultants at prices not
less than the fair value at the date of grant. Options granted to nonemployees
are recorded at the value of negotiated services received. Options vest over
four years, 25% for the first year and ratably over the remaining three years
and generally expire ten years from the date of grant.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
NUMBER OF PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
------ --------- --------------
<S> <C> <C> <C>
Outstanding at March 31, 1997..... --
Granted........................ 4,407,000 $0.005 to $0.033 $0.010
Exercised...................... (150,000) 0.005 to 0.005 0.005
Canceled....................... -- --
Outstanding at March 31, 1998..... 4,257,000 0.005 to 0.033 0.010
Granted........................ 14,116,650 0.033 to 9.000 1.695
Exercised...................... (1,736,136) 0.005 to 3.333 0.037
Canceled....................... (1,709,838) 0.005 to 3.333 0.053
Outstanding at March 31, 1999..... 14,927,676 0.005 to 9.000 1.595
</TABLE>
Options granted during the years ended March 31, 1998 and 1999 resulted
in a total compensation amount of $55,000 and $44,735,000, respectively, and
were recorded as deferred compensation in stockholders' equity. The deferred
compensation amount will be recognized as compensation expense over the vesting
period. During the years ended March 31, 1998 and 1999, such compensation
expense amounted to $2,000 and $5,814,000, respectively. Options outstanding at
March 31, 1998 and 1999 were exercisable for 321,000 and 535,944 shares of
Common Stock, respectively. Common Stock available for future grants at March
31, 1998 and 1999 were 4,165,500 and 22,786,188 shares, respectively.
Additional information with respect to the outstanding options as of
March 31, 1999 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE REMAINING SHARES EXERCISE
------ PRICE CONTRACTUAL ------ PRICE
----- LIFE -----
----
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
<S> <C> <C> <C> <C> <C>
RANGE OF EXERCISE PRICES
$0.005 to $0.033....... 2,773,626 $0.019 8.98 305,994 $0.016
$0.140 to $0.140....... 702,000 0.014 9.60 -- --
$0.143 to $1.667....... 8,095,500 0.494 9.85 52,500 1.667
$2.833 to $9.000 3,356,550 5.856 10.14 177,450 2.892
$0.005 to $9.000....... 14,927,676 535,944
</TABLE>
14
<PAGE>
The Company calculated the minimum fair value of each option grant on
the date of the grant using the minimum value option pricing model as prescribed
by SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
1998 1999
---- ----
YEARS ENDED
MARCH 31,
---------
<S> <C> <C>
Risk-free interest rates................................... 6.0% 5.14%
Expected lives (in years).................................. 5 4
Dividend yield............................................. 0% 0%
Expected volatility........................................ 0% 0%
</TABLE>
The compensation cost associated with the stock-based compensation
plans did not result in a material difference from the reported net loss for the
years ended March 31, 1998 or 1999.
7. Commitments and Contingencies
LEASES
The Company leases its office and warehouse facilities under long-term
noncancelable operating leases. For the years ended March 31, 1998 and 1999,
total rent expense incurred related to these leases amounted to $52,000 and
$636,000, respectively.
At March 31, 1999, future lease commitments under these agreements were as
follows:
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASES LEASES
---------------- -------
<S> <C> <C>
2000................................................. $2,404,000 $273,000
2001................................................. 3,040,000 273,000
2002................................................. 3,101,000 246,000
2003................................................. 3,916,000 --
2004................................................. 1,294,000 --
Thereafter........................................... 431,000 --
14,186,000 792,000
Less amounts representing interest................... -- (85,000)
$14,186,000 $707,000
</TABLE>
15
<PAGE>
EQUIPMENT FINANCING ARRANGEMENT
During December 1998, the Company entered into a line of credit arrangement
with a leasing institution that provides for sale and leaseback transactions of
capital equipment up to a maximum of $2,000,000. Under this agreement,
$1,344,000 was available for future financing transactions at March 31, 1999. In
addition, the agreement provides the leasing institution warrants, with value
equal to approximately $112,000 with the number of shares to be determined
pursuant to a formula, as defined, at the time of issuance. Such warrants were
issued on January 31, 1999.
ADVERTISING COMMITMENTS
During 1998 and the first part of 1999, the Company entered into a number of
commitments for online, print and broadcast advertising. At March 31, 1999, the
advertising commitments amounted to approximately $8,828,000 to be incurred
through March 2000.
PURCHASE COMMITMENTS
At March 31, 1999, the Company had approximately $30.5 million in
outstanding orders with certain suppliers for the purchase of inventory. Such
purchase commitments are expected to be fulfilled from April to December 1999.
LEGAL MATTERS
The Company is involved in litigation and other legal matters which have
arisen in the normal course of business. Although the ultimate outcome of these
matters is not currently determinable, management does not expect that they will
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
8. Initial Public Offering and Stock Split
In February 1999, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its Common Stock to the public. Upon
completion of the Company's initial public offering, the Series A, Series B and
Series C Redeemable Convertible Preferred Stock will convert into 58,730,880
shares of Common Stock. Unaudited pro forma stockholders' equity reflects the
assumed conversion of the Redeemable Convertible Preferred Stock as of March 31,
1999.
In March 1999, the Company's Board of Directors declared a stock split
of 3 shares for every 1 share of Common Stock then outstanding. The stock split
will become effective at the
16
<PAGE>
date the Company's public offering of Common Stock is closed. Accordingly, the
accompanying financial statements and footnotes have been restated to reflect
the stock split. The par value of the shares of Common Stock to be issued in
connection with the stock split was credited to Common Stock and a like amount
charged to additional paid-in capital.
9. Subsequent Event In April 1999, the Company entered into a merger
agreement with BabyCenter. In connection with this proposed merger, an aggregate
of 18,720,000 shares of the Company's Common Stock will be issued and reserved
for issuance upon the exercise of assumed BabyCenter options included in the
proposed merger.
In addition, in May 1999, the Company increased the number of shares
eligible to be granted under the 1999 Stock Plan to 24,800,000 and the number of
shares available for purchase under the 1999 Employee Stock Purchase Plan to
1,000,000.
17
<PAGE>
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information for eToys consists of the Unaudited Pro Forma Condensed Combined
Statement of Operations for the year ended March 31, 1999, and the Unaudited Pro
Forma Condensed Combined Balance Sheet as of March 31, 1999.
On April 18, 1998, eToys entered into a merger agreement to acquire
BabyCenter in exchange for 18,720,000 shares of eToys' common stock. The
Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended March 31, 1999 gives effect to the BabyCenter acquisition as if it had
taken place on April 1, 1998. The Unaudited Pro Forma Condensed Combined Balance
Sheet gives effect to the BabyCenter acquisition as if it had taken place on
March 31, 1999.
The Unaudited Pro Forma Condensed Combined Statement of Operations
combines eToys' historical results of operations for the year ended March 31,
1999 with BabyCenter's historical results for the year ended March 31, 1999. The
pro forma financial information is not necessarily indicative of what the actual
financial results would have been had the transaction taken place on April 1,
1998 or March 31, 1999 and does not purport to indicate the results of future
operations.
The BabyCenter acquisition will be accounted for using the purchase
method of accounting. The pro forma financial information has been prepared on
the basis of assumptions described in the notes.
The pro forma financial information should be read in conjunction with
the related notes included in this document and the audited financial statements
and notes of eToys, and the audited financial statements and notes of
BabyCenter, included elsewhere in this Form 8-K.
1
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations For the
Year Ended March 31, 1999 (Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
ETOYS BABYCENTER ADJUSTMENTS TOTAL
----- ----------- ----------- -----
<S> <C> <C> <C> <C>
Net sales...................................................... $29,959 $4,768 $-- $34,727
Cost of sales.................................................. 24,246 981 -- 25,227
Gross profit................................................... 5,713 3,787 -- 9,500
Operating expenses
Marketing and sales......................................... 20,719 2,461 -- 23,180
Product development......................................... 3,608 3,752 -- 7,360
General and administrative.................................. 10,166 2,375 3,864(5) 16,405
Goodwill amortization....................................... 319 -- 36,136(6) 36,455
34,812 8,588 40,000 83,400
Operating loss................................................. (29,099) (4,801) (40,000) (73,900)
Other income:
Interest income............................................. 589 280 -- 869
Interest expense............................................ (47) (24) -- (71)
Loss before provision for taxes................................ (28,557) (4,545) (40,000) (73,102)
Provision for taxes............................................ 1 -- -- 1
Net loss....................................................... $(28,558) $(4,545) $(40,000) $(73,103)
Basic net loss per equivalent share............................ $(0.85) $(1.46)
Pro forma for conversion of preferred stock basic net
loss per equivalent share............................... $(0.35) $(0.74)
Shares used to compute basic net loss per equivalent share..... 33,428 16,709 50,137
Shares used to compute pro forma for conversion
of preferred stock basic net loss per equivalent share...... 81,923 16,709 98,632
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
2
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet As of March 31, 1999
(Amount in thousands)
<TABLE>
<CAPTION>
PRO FORMA
ETOYS BABYCENTER ADJUSTMENTS TOTAL
----- ---------- ----------- -----
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $20,173 $9,000 $-- $29,173
Inventories......................................................... 5,067 201 -- 5,268
Prepaid expenses and other current assets........................... 1,577 750 -- 2,327
Total current assets................................................... 26,817 9,951 -- 36,768
Property and equipment................................................. 2,505 1,582 -- 4,087
Accumulated depreciation and amortization.............................. (369) (278) -- (647)
2,136 1,304 -- 3,440
Goodwill (net of accumulated amortization)............................. 637 -- 180,678 (2) 181,315
Other assets........................................................... 1,076 40 -- 1,116
Total assets........................................................... $30,666 $11,295 $180,678 $222,639
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................... $4,236 $693 $-- $4,929
Deferred revenues................................................... -- 713 -- 713
Accrued expenses.................................................... 760 723 -- 1,483
Total current liabilities.............................................. 4,996 2,129 -- 7,125
Long-term capital lease obligations.................................... 477 564 -- 1,041
Redeemable convertible preferred stock................................. 49,291 -- -- 49,291
Stockholders' equity (deficit)......................................... (24,098) 8,602 $(15,457)(3) 165,182
196,135 (4)
Total liabilities and stockholders' equity (deficit)................... $30,666 $11,295 $180,678 $222,639
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
3
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The pro forma information gives effect to eToys' acquisition of
BabyCenter through a merger and exchange of shares. The Unaudited Pro Forma
Condensed Combined Statement of Operations for the year ended March 31, 1999
reflects this transaction as if it had taken place on April 1, 1998. The
Unaudited Pro Forma Condensed Combined Balance Sheet reflects this transaction
as if it had taken place on March 31, 1999.
The BabyCenter acquisition will be accounted for using the purchase
method of accounting. The pro forma financial information has been prepared on
the basis of assumptions described in the following notes and include
assumptions relating to the allocation of the consideration paid for the assets
and liabilities of BabyCenter based on preliminary estimates of their fair
value. The actual allocation of such consideration may differ from that
reflected in the pro forma financial information after valuations and other
procedures to be performed after the closing of the BabyCenter acquisition.
eToys does not expect that the final allocation of the purchase price will
differ materially from the preliminary allocations. In the opinion of eToys'
management, all adjustments necessary to present fairly such pro forma financial
information have been based on the proposed terms and structure of the
BabyCenter merger.
The pro forma financial information is not necessarily indicative of
what the actual financial results would have been had this transaction taken
place on April 1, 1998 or March 31, 1999 and does not purport to indicate the
results of future operations.
The pro forma financial information gives effect to the following pro
forma adjustments:
1. In accordance with the reorganization agreement for the BabyCenter
merger:
The BabyCenter merger will be accounted for using the purchase method
of accounting. The purchase price was based on $11.00 per share, which is the
mid-point of eToys' filing range at the announcement of the BabyCenter merger.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
BABYCENTER FAIR VALUE
SHARES ETOYS SHARES (IN THOUSANDS)
------ ------------ --------------
<S> <C> <C> <C>
Shares...................................... 7,335,026 16,708,886 $183,798
Vested stock options........................ 222,958 507,889 5,482
Unvested stock options...................... 659,900 1,503,225 15,457
Totals................................... 8,217,884 18,720,000 $204,737
</TABLE>
4
<PAGE>
The BabyCenter shares were first converted to eToys equivalent shares
by taking the number of BabyCenter shares multiplied by the exchange ratio of
approximately 2.28 eToys shares for each BabyCenter share.
The fair value of "shares" was calculated by taking the fair value of
the stock ($11.00 per share) times the number of eToys shares to be exchanged.
With respect to stock options exchanged as part of the BabyCenter
merger, all vested and unvested BabyCenter options exchanged for eToys options
are included as part of the purchase price based on their fair value.
The fair value of the stock was calculated by taking the vested and
unvested options to purchase eToys shares (2,011,114 options) times the fair
value of the stock ($11.00 per share) less the proceeds which will be received
from the optionholders upon exercise.
The pro forma financial information has been prepared on the basis of
assumptions described in these notes and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of
BabyCenter based on preliminary estimates of their fair value. The actual
allocation of such consideration may differ from that reflected in the pro forma
financial information after valuations and other procedures to be performed
after the closing of the BabyCenter acquisition. Below is a table of the
estimated acquisition cost, purchase price allocation and annual amortization of
the intangible assets acquired (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION OF
LIFE INTANGIBLES
---- -----------
<S> <C> <C> <C>
ESTIMATED ACQUISITION COST:
Estimated purchase price............................ $204,737
PURCHASE PRICE ALLOCATION:
Estimated fair value of net tangible assets of
BabyCenter at March 31, 1999..................... $8,602
Deferred compensation on unvested stock options
assumed.......................................... 15,457 4 $3,864
Intangible assets acquired :
Goodwill............................................ 180,678 5 36,136
$204,737
</TABLE>
Tangible assets of BabyCenter acquired in the BabyCenter merger
principally include cash, and fixed assets. Liabilities of BabyCenter assumed in
the BabyCenter merger principally include accounts payable, accrued payroll and
other current liabilities.
2. The pro forma adjustment is for goodwill allocation of $180.7 million.
5
<PAGE>
3. The pro forma adjustment is for deferred stock compensation associated
with the unvested BabyCenter stock options to acquire approximately 1,503,225
shares of common stock to be assumed by eToys.
4. The pro forma adjustment to "stockholders' equity" reflects the
elimination of BabyCenter's stockholders' equity ($8.6 million) and the impact
of the issuance of eToys' common stock ($204.7 million) in connection with the
BabyCenter merger.
5. The pro forma adjustment is for amortization of deferred stock
compensation associated with the unvested BabyCenter stock options assumed by
eToys over the remaining vesting period.
6. The pro forma adjustment is for amortization of goodwill.
6
<PAGE>
Exhibit 99.4
FOR IMMEDIATE RELEASE
- ---------------------
CONTACT: Suki Shattuck
eToys Inc.
(310) 664-8356
[email protected]
eTOYS COMPLETES ACQUISITION OF BABYCENTER
SANTA MONICA, Calif.--July 1, 1999--eToys Inc. (Nasdaq: ETYS), a leading
Internet retailer of children's products, today completed its acquisition of
BabyCenter, Inc. BabyCenter.com is an information and commerce Web site
providing content on pregnancy and baby, an interactive community for parents
and parents-to-be, and a store featuring thousands of baby products and
supplies.
With the acquisition of BabyCenter, eToys has combined two of the strongest
online brands for families and strengthened its ability to establish a
relationship with its customers from the time they are planning a pregnancy
through the pre-teen years. The combination of BabyCenter's leadership in
focused content and community with eToys' expertise in children's commerce
creates one of the most comprehensive children's businesses on the Internet. It
is expected that BabyCenter will operate as a wholly owned subsidiary of eToys
and that BabyCenter.com will remain a separate Web site.
Based on an exchange ratio of 2.09 shares of eToys' common stock for each share
of BabyCenter capital stock, eToys has issued an aggregate of approximately 16.0
million shares of its common stock in exchange for all outstanding shares of
BabyCenter capital stock and has reserved approximately 2.7 million shares of
its common stock for issuance upon exercise of assumed BabyCenter options. In
the aggregate, these 18.7 million shares represent approximately 14% of eToys
outstanding shares of common stock as of July 1, 1999, assuming the issuance of
the shares in the BabyCenter transaction. eToys will account for the acquisition
using the purchase method of accounting, and the acquisition is intended to
qualify as a tax-free reorganization for federal income tax purposes. With the
completion of the acquisition, Matthew Glickman, BabyCenter's chief executive
officer, will join eToys' board of directors.
ABOUT eTOYS.COM
Based in Santa Monica, California, eToys Inc. (www.etoys.com; AOL keyword:
eToys) is a leading Internet retailer for children's products, carrying more
than 15,000 items, including both nationally advertised and specialty toys,
software, videos, music, video games and baby-oriented products. By combining
this extensive selection, an attractive, easy-to-use Web site and excellent
customer service, eToys offers consumers a unique one-stop source for children's
products. Through its wholly owned subsidiary, BabyCenter, Inc.
1
<PAGE>
(www.babycenter.com), eToys offers Webby-award winning content and community for
new and expectant parents.
# # #
2
