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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended JUNE 30, 1999 Commission File No. 000-25709
ETOYS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-4633006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
3100 Ocean Park Blvd., Suite 300
Santa Monica, CA 90405
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (310) 664-8100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes {X} No { }
114,890,727 shares of $0.0001 par value common stock outstanding as of July 31,
1999
Page 1 of 30
Exhibit Index on Page 30
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<PAGE>
eTOYS INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements........................................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 9
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 27
Item 2. Changes in Securities and Use of Proceeds................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders...................................... 27
Item 5. Other Information........................................................................ 28
Item 6. Exhibits and Reports on Form 8-K......................................................... 28
Signatures..................................................................................................... 29
Exhibit Index.................................................................................................. 30
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ETOYS INC.,
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales............................................................. $ 7,975 $ 381
Cost of sales......................................................... 6,457 311
----------- -----------
Gross profit.......................................................... 1,518 70
Operating expenses:
Marketing and sales................................................. 11,512 1,370
Product development................................................. 4,767 404
General and administrative.......................................... 3,165 418
Deferred compensation............................................... 3,782 44
----------- -----------
Total operating expenses............................................ 23,226 2,236
----------- -----------
Operating loss........................................................ (21,708) (2,166)
Interest income (expense), net........................................ 926 (5)
Provision for taxes................................................... (1) --
----------- -----------
----------- -----------
Net loss.............................................................. $ (20,783) $ (2,171)
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Basic net loss per equivalent share................................... $ (0.32) $ (0.07)
----------- -----------
----------- -----------
Pro forma basic net loss per equivalent share......................... $ (0.21) $ (0.04)
----------- -----------
----------- -----------
Shares used in computation of basic net loss per equivalent share
(1)................................................................. 65,959 32,838
----------- -----------
----------- -----------
Shares used to compute pro forma basic net loss per equivalent share
(2)................................................................. 97,959 61,482
----------- -----------
----------- -----------
</TABLE>
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(1) Includes shares associated with the Redeemable Convertible Preferred Stock
effective as of the closing of the Company's initial public offering. See
Note 5 to Consolidated Financial Statements.
(2) Includes shares associated with the Redeemable Convertible Preferred Stock
as if such conversion occurred on April 1, 1998. See Note 5 to Consolidated
Financial Statements.
See accompanying notes.
3
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ETOYS INC.,
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 176,350 $ 20,173
Inventories.......................................................... 11,017 5,067
Prepaids and other current assets.................................... 3,582 1,577
----------- -----------
Total current assets................................................... 190,949 26,817
Property and equipment................................................. 9,591 2,505
Accumulated depreciation............................................. (676) (369)
----------- -----------
8,915 2,136
Goodwill (net of accumulated amortization)............................. 558 637
Other assets........................................................... 3,375 1,076
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Total assets........................................................... $ 203,797 $ 30,666
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................................... $ 13,183 $ 4,236
Accrued expenses..................................................... 1,746 530
Current portion of capital lease obligations......................... 1,168 230
----------- -----------
Total current liabilities.............................................. 16,097 4,996
Long-term capital lease obligations.................................... 3,318 477
Redeemable Convertible Preferred Stock, 19,593,089 shares authorized:
Series A Preferred Stock; $.0001 par value; none and 7,023,645 shares
issued and outstanding at June 30, 1999 and March 31, 1999,
respectively....................................................... -- 4,355
Series B Preferred Stock; $.0001 par value; none and 11,886,649
shares issued and outstanding at June 30, 1999 and March 31, 1999,
respectively....................................................... -- 24,952
Series C Preferred Stock; $.0001 par value; none and 666,666 shares
issued and outstanding at June 30, 1999 and March 31, 1999,
respectively....................................................... -- 19,984
Commitments and contingencies
Stockholders' equity:
Common stock; $.0001 par value, 600,000,000 shares authorized;
103,420,885 and 34,535,415 issued and outstanding at June 30, 1999
and March 31, 1999, respectively................................... 10 3
Additional paid-in-capital........................................... 285,009 45,837
Receivables from stockholders........................................ (33) (138)
Deferred compensation................................................ (48,995) (38,974)
Accumulated deficit.................................................. (51,609) (30,826)
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Total stockholders' equity (deficit)................................... 184,382 (24,098)
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Total liabilities and stockholders' equity............................. $ 203,797 $ 30,666
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
4
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ETOYS INC.,
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss.............................................................. $ (20,783) $ (2,171)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation........................................................ 314 22
Amortization of intangibles......................................... 189 80
Amortization of deferred compensation related to stock options...... 3,782 44
Other, net.......................................................... 3 (46)
Changes in operating assets and liabilities:
Inventories....................................................... (5,950) (327)
Prepaid and other current assets.................................. (2,005) (221)
Accounts payable.................................................. 8,947 520
Accrued expenses.................................................. 1,216 4
----------- -----------
Net cash used in operations........................................... (14,287) (2,095)
INVESTING ACTIVITIES
Capital expenditures for property and equipment....................... (3,302) (231)
Other, net............................................................ (2,330) (616)
----------- -----------
Net cash used in investing activities................................. (5,632) (847)
FINANCING ACTIVITIES
Proceeds from issuance of Redeemable Convertible Preferred Stock...... -- 24,998
Proceeds from issuance of common stock and exercise of stock
options............................................................. 176,074 1
Payments on capital leases............................................ (85) --
Proceeds from receivables from stockholders........................... 107 (102)
----------- -----------
Net cash provided by financing activities............................. 176,096 24,897
Net increase in cash and cash equivalents............................. 156,177 21,955
Cash and cash equivalents at beginning of period...................... 20,173 1,552
----------- -----------
Cash and cash equivalents at end of period............................ $ 176,350 $ 23,507
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Supplemental disclosures:
Income taxes paid................................................... $ 1 $ --
Interest paid....................................................... $ 18 $ 38
</TABLE>
See accompanying notes.
5
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ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of June 30, 1999 and 1998 have been prepared by
eToys Inc. ("the Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). These statements are unaudited
and, in the opinion of management, include all adjustments (consisting of normal
recurring adjustments and accruals) necessary to present fairly the results for
the periods presented. The balance sheet at March 31, 1999 has been derived from
the audited financial statements at that date. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
SEC rules and regulations. Operating results for the quarter ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2000. These financial statements should be read in
conjunction with the audited financial statements and the accompanying notes
included in the Company's Form S-1 Registration Statement declared effective May
19, 1999 (the "S-1").
Certain prior-period balances have been reclassified to conform to the
current-period presentation.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE LOSS
As of April 1, 1999, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive loss and its components in the financial statements.
Comprehensive loss was $20.8 million and $2.2 million for the three-month
periods ended June 30, 1999 and 1998, respectively, which consisted entirely of
net losses.
NOTE 2--BABYCENTER ACQUISITION
On July 1, 1999, the Company acquired BabyCenter, Inc. ("BabyCenter") in a
transaction that will be accounted for as a purchase, pursuant to a
reorganization agreement executed in April 1999. As consideration for the
purchase, stockholders of BabyCenter have the right to receive 2.09 eToys shares
for each of their BabyCenter shares. The acquisition cost is $199.3 million
based upon the Company's common stock price as of the date the transaction was
announced.
BabyCenter produces BabyCenter.com, one of the Web's most complete
information sources on preconception, pregnancy, and baby, and operates an
online store offering thousands of baby products and supplies. BabyCenter also
creates pre/postnatal health education resources for health organizations.
Founded in 1997, BabyCenter has grown to be one of the most recognized online
communities for new and expectant parents.
6
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ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--BABYCENTER ACQUISITION (Continued)
The Company's consolidated results of operations will incorporate
BabyCenter's activity commencing upon the July 1, 1999 acquisition date. The
unaudited pro forma combined information below presents combined results of
operations of the Company as if the acquisition had occurred April 1, 1999 and
combined balance sheet information as if the acquisition had occurred on June
30, 1999. The unaudited pro forma combined information, based upon the
historical consolidated financial statements of the Company and BabyCenter, is
based on an acquisition cost of $199.3 million and assumes that an estimated
$198.2 million excess of acquisition cost over the book value of BabyCenter's
net tangible assets is allocated to intangible assets with a useful life of five
years.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
STATEMENT OF OPERATIONS DATA JUNE 30, 1999
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(IN MILLIONS EXCEPT PER SHARE AMOUNT)
<S> <C>
Revenues................................................................. $ 10.0
Net loss................................................................. (29.5)
Net loss per share (1)................................................... $ (0.26)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA JUNE 30, 1999
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(IN MILLIONS)
<S> <C>
Total assets............................................................. $ 410.6
Stockholder's equity..................................................... $ 383.6
</TABLE>
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(1) Net loss per share excluding amortization of intangible assets and deferred
compensation would be $(0.14). Net loss per share is calculated 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 and the issuance of 16.0 million shares to
stockholders of BabyCenter.
The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred April 1, 1999, or the financial position had the acquisition occurred
on June 30, 1999, nor is it necessarily indicative of future results or
financial position.
NOTE 3--STOCK SPLIT
In March 1999, the Company's Board of Directors declared a stock split of
three shares for every one share of Common Stock then outstanding. The stock
split was effective May 24, 1999, the date the Company's public offering of
Common Stock 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.
NOTE 4--COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims in
the ordinary course of business, including employment related claims and claims
of alleged infringement of trademarks,
7
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--COMMITMENTS AND CONTINGENCIES (Continued)
copyrights and other intellectual property rights. The Company currently is not
aware of any such legal proceedings or claims that it believes will have,
individually or in the aggregate, a material adverse effect on its business,
prospects, financial condition and operating results.
NOTE 5--STOCKHOLDERS' EQUITY
On May 24, 1999, the Company completed its initial public offering of
9,568,000 shares of its common stock. Net proceeds to the Company aggregated
$175.8 million. As of the closing date of the offering, all of the convertible
preferred stock outstanding was converted into an aggregate of 58,779,267 shares
of common stock.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Shares associated with stock options are not included
because they are antidilutive. The shares of Redeemable Convertible Preferred
Stock automatically converted into common stock effective upon the closing of
the Company's initial public offering and are included in the calculation of
weighted average number of shares as of that date.
PRO FORMA NET LOSS PER SHARE
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, 1998, 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 (in thousands, except per share
amount):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Numerator:
Net loss............................................................ $ (20,783) $ (2,171)
Denominator:
Weighted average shares............................................. 65,959 32,838
---------- ----------
Denominator for basic calculation................................... 65,959 32,838
Weighted average effect of pro forma securities
Series A Redeemable Convertible Preferred Stock..................... 11,496 18,954
Series B Redeemable Convertible Preferred Stock..................... 19,415 9,690
Series C Redeemable Convertible Preferred Stock..................... 1,089 --
---------- ----------
Denominator for pro forma calculation................................. 97,959 61,482
Net loss per share:
Basic............................................................... $ (0.32) $ (0.07)
---------- ----------
---------- ----------
Pro forma........................................................... $ (0.21) $ (0.04)
---------- ----------
---------- ----------
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q and the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact the Company makes in this Form 10-Q are forward-
looking. In particular, the statements herein regarding industry prospects and
the Company's future results of operations or financial position are
forward-looking statements. Forward-looking statements reflect the Company's
current expectations and are inherently uncertain. The Company's actual results
may differ significantly from the Company's expectations. The section entitled
"Additional Factors That May Affect Future Results" describes some, but not all,
of the factors that could cause these differences.
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
--------------------
1999 1998 % CHANGE
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales........................................................ $ 7,975 $ 381 1,993%
</TABLE>
Net sales consist of product sales to customers and charges to customers for
outbound shipping and handling and gift-wrapping and are net of product returns,
promotional discounts and coupons. Growth in net sales reflects a significant
increase in units sold due to the growth of the Company's customer base and
repeat purchases from the Company's existing customers. Cumulative customer
accounts increased during the quarter to 467,000 at June 30, 1999, an increase
of over 28% from 365,000 customer accounts at March 31, 1999 and a 2,290%
increase in customer accounts over June 30, 1998. Revenue from repeat customer
orders represented more than 40% of total revenues for the quarter ended June
30, 1999.
GROSS PROFIT
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
--------------------
1999 1998 % CHANGE
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross profit..................................................... $ 1,518 $ 70 2,069%
Gross margin..................................................... 19.0% 18.4%
</TABLE>
Gross profit is net sales less the cost of sales, which consists of the cost
of products sold to customers, outbound and inbound shipping and handling costs,
and gift wrapping costs. Gross profit increased in absolute dollars, reflecting
the Company's increased sales volume. Improved toy margins were somewhat offset
by the addition of lower margin video game and video titles, resulting in a 0.6%
improvement in gross margin from the quarter ended June 30, 1998. The Company
over time intends to expand its operations by the addition of new product
categories and by expanding the breadth and depth of its product or service
offerings. Gross margins attributable to new business areas may be lower than
those associated with the Company's existing business activities.
9
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MARKETING AND SALES
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
--------------------
1999 1998 % CHANGE
--------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Marketing and sales........................................... $ 11,512 $ 1,370 740%
Percentage of net sales....................................... 144.4% 359.6%
</TABLE>
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, distribution facility expenses, including equipment
and supplies, and payroll and related expenses for personnel engaged in
marketing, customer service and distribution activities. Marketing and sales
expenses increased, in absolute dollars, primarily due to increases in the
Company's advertising and promotional expenditures, increased payroll and
related costs associated with fulfilling customer demand. Such expenses
decreased as a percentage of net sales due to the significant increase in net
sales. The Company intends to continue to pursue an aggressive branding and
marketing campaign and, therefore, expects marketing and sales expenses to
increase significantly in absolute dollars in future periods. In addition, to
the extent that the Company's sales volume increases in future periods, the
Company expects marketing and sales expenses to increase in absolute dollars as
the Company expands its distribution facilities to accommodate such increases in
sales volume.
PRODUCT DEVELOPMENT
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
--------------------
1999 1998 % CHANGE
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Product development............................................. $ 4,767 $ 404 1,080%
Percentage of net sales......................................... 59.8% 106.0%
</TABLE>
Product development expenses consist primarily of payroll and related
expenses for merchandising, Web site development and information technology
personnel, Internet access and hosting charges and Web content and design
expenses. The absolute dollar increase in product development expenses was
primarily attributable to increased staffing and associated costs related to
enhancing the features, content and functionality of the Company's Web site and
transaction-processing systems, as well as increased investment in systems and
telecommunications infrastructure. Such expenses decreased as a percentage of
net sales due to the significant increase in net sales. To date, all product
development costs have been expensed as incurred. The Company believes that
continued investment in product development is critical to attaining its
strategic objectives. In addition to ongoing investments in its web site stores
and infrastructure, the Company intends to increase investments in product,
service and international expansion. As a result, the Company expects product
development expenses to increase significantly in absolute dollars.
10
<PAGE>
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
--------------------
1999 1998 % CHANGE
--------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
General and administrative...................................... $ 3,165 $ 418 657%
Percentage of net sales......................................... 39.7% 109.7%
</TABLE>
General and administrative expenses consist of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
services expenses, travel and other general corporate expenses. The increase in
general and administrative expenses was primarily due to increased headcount and
associated costs, legal and professional fees, facilities and other related
costs. The Company expects general and administrative expenses to increase in
absolute dollars as the Company expands its staff and incurs additional costs
related to the growth of its business and international expansion.
DEFERRED COMPENSATION
In the three months ended June 30, 1999, the Company recorded total deferred
stock compensation of $13.8 million in connection with stock options granted
during the period. Deferred stock compensation is amortized to expense over the
vesting periods of the applicable options, resulting in $3.8 million for the
three months ended June 30, 1999. The Company expects to record $10.6 million of
amortization over the remaining nine months ended March 31, 2000. These amounts
represent the difference between the exercise price of stock option grants and
the deemed fair value of the company's common stock at the time of such grants.
Amortization of deferred compensation expense for each of the next four
fiscal years is expected to be as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT IN THOUSANDS
- ------------------------------------------------------------------------ --------------------
<S> <C>
March 31, 2001.......................................................... $ 14,119
March 31, 2002.......................................................... 14,112
March 31, 2003.......................................................... 9,894
March 31, 2004.......................................................... 281
</TABLE>
GOODWILL AND INTANGIBLE ASSETS
Upon completion of the BabyCenter merger, the Company will record a
significant amount of goodwill, the amortization of which will significantly
reduce the Company's earnings and profitability for the foreseeable future. The
Company expects to record goodwill of approximately $198.2 million, to be
amortized over a five-year period. To the extent the amount of this recorded
goodwill is increased or the Company does not generate additional sufficient
cash flow to recover the amount of the investment recorded, the investment may
be considered impaired or be subject to earlier write-off. In such event, the
net loss in any given period could be greater than anticipated and the market
price of the Company's stock could decline.
11
<PAGE>
INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
--------------------
1999 1998 % CHANGE
--------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income.................................................. $ 944 $ -- n/a
Interest expense................................................. (18) (5) 260%
</TABLE>
Interest income increased due to higher cash balances resulting from the
proceeds in the Company's initial public offering. Interest expense for the
quarter ended June 30, 1999 consists primarily of interest on asset acquisitions
financed through capital leases. Interest income is expected to increase because
subsequent quarters will include a full three months of interest income on
proceeds of the initial public offering.
INCOME TAXES
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since inception. Utilization of the Company's
net operating loss carryforwards, which begin to expire in 2012, may be subject
to certain limitations under Section 382 of the Internal Revenue Code of 1986,
as amended. The Company has provided a full valuation allowance on the deferred
tax asset, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its realizability.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company's principal source of liquidity consisted of
$176.4 million of cash and cash equivalents compared to $20.2 million of cash
and cash equivalents at March 31, 1999.
Net cash used in operating activities was $14.3 million and $2.1 million for
the quarters ended June 30, 1999 and 1998, respectively. Net operating cash
flows were primarily attributable to quarterly net losses and increases in
inventories, prepaid expenses and other, offset by increases in accounts payable
and accrued expenses.
Net cash used in investing activities was $5.6 million and $0.8 million for
the quarters ended June 30, 1999 and 1998, respectively, and consisted of
purchases of fixed assets and other assets. Cash available for investment
purposes increased substantially in 1999 as a result of the proceeds from the
issuance of common stock in the initial public offering.
Net cash provided by financing activities of $176.1 million for the quarter
ended June 30, 1999 resulted from net proceeds from issuance of common stock in
the Company's initial public offering. Net cash provided by financing activities
of $24.9 million for the quarter ended June 30, 1998 resulted from net proceeds
from the issuance of redeemable convertible preferred stock.
The Company believes that current cash and marketable securities balances
will be sufficient to meet its anticipated cash needs through the remainder of
the fiscal year ended March 31, 2000. However, any projections of future cash
needs and cash flows are subject to substantial uncertainty. If current cash,
marketable securities and cash that may be generated from operations are
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or debt securities or to obtain a line of credit.
The sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders. In addition, the Company
will, from time to time, consider the acquisition of or investment in
complementary businesses, products, services and technologies, which might
impact the Company's liquidity requirements or cause the Company to issue
12
<PAGE>
additional equity or debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
YEAR 2000 IMPLICATIONS
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. The Company uses software, computer technology and other services
internally developed and provided by third-party vendors that may fail due to
the year 2000 phenomenon. For example, the Company is dependent on the financial
institutions involved in processing customers' credit card payments for Internet
services and a third party that hosts the web servers. The Company is also
dependent on telecommunications vendors to maintain its network and the United
States Postal Service and other third-party carriers to deliver orders to
customers.
The Company is in the process of reviewing the year 2000 compliance of its
internally developed proprietary software. This review has included testing to
determine how systems will function at and beyond the year 2000. The Company
expects to complete these tests during the summer of 1999. Since inception, the
Company has internally developed substantially all of the systems for the
operation of its Web site. These systems include the software used to provide
the Web site's search, customer interaction, and transaction-processing and
distribution functions, as well as monitoring and back-up capabilities. Based
upon an its assessment to date, the Company believes that its internally
developed proprietary software is year 2000 compliant.
The Company 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 the corporate accounting functions and the operation
of the Web site. As part of the assessment of the year 2000 compliance of these
systems, the Company has sought assurances from these vendors that their
software, computer technology and other services are year 2000 compliant. The
Company has expensed amounts incurred in connection with year 2000 assessment
since its formation through June 30, 1999. Such amounts have not been material.
The Company expects this assessment process to be completed during the summer of
1999. Based upon the results of this assessment, the Company 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. The Company 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, the Company has not developed a budget
for these expenses. The failure of the Company's software and computer systems
and of third-party suppliers to be year 2000 complaint would have a material
adverse effect on the Company.
The year 2000 readiness of the general infrastructure necessary to support
the Company's operations is difficult to assess. For instance, the Company
depends on the integrity and stability of the Internet to provide its services.
The Company 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. The
Company'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, the Company 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
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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 the Company's services and would have
a material adverse effect on the Company.
At this time, the Company has not yet developed a contingency plan to
address situations that may result if it or its vendors are unable to achieve
year 2000 compliance because the Company currently does not believe that such a
plan is necessary. The cost of developing and implementing such a plan, if
necessary, could be material. Any failure of material systems, vendors' material
systems or the Internet to be year 2000 compliant could have material adverse
consequences. Such consequences could include difficulties in operating the Web
site effectively, taking product orders, making product deliveries or conducting
other fundamental parts of the Company's business.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the Company's S-1, the
following additional factors may affect the Company's future results.
THE COMPANY'S LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING DIFFICULT
The Company was incorporated in November 1996. The Company began selling
products on the Company's Web site in October 1997. As a result of the Company's
limited operating history, it is difficult to accurately forecast its net sales
and the Company has limited meaningful historical financial data upon which to
base planned operating expenses. The Company bases its current and future
expense levels on its operating plans and estimates of future net sales, and the
Company's expenses are to a large extent fixed. Sales and operating results are
difficult to forecast because they generally depend on the volume and timing of
the orders the Company receives. As a result, the Company may be unable to
adjust its spending in a timely manner to compensate for any unexpected revenue
shortfall. This inability could cause the Company's net losses in a given
quarter to be greater than expected.
THE COMPANY ANTICIPATES FUTURE LOSSES AND NEGATIVE CASH FLOW
The Company expects operating losses and negative cash flow to continue for
the foreseeable future. The Company anticipates its losses will increase
significantly from current levels because it expects to incur additional costs
and expenses related to:
- brand development, marketing and other promotional activities;
- the expansion of the Company's inventory management and distribution
operations;
- the continued development of the Company's Web site, the systems that it
uses to process customers' orders and payments, and its computer network;
- the expansion of the Company's product offerings and Web site content; and
- development of relationships with strategic business partners
As of June 30, 1999, the Company had an accumulated deficit of $51.6
million. The Company incurred net losses of $2.2 million for the three months
ended June 30, 1998 and $20.8 million for the three months ended March 31, 1999.
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In addition, because of its acquisition of BabyCenter, the Company expects
that its losses will increase even more significantly because of additional
costs and expenses related to:
- an increase in the number of employees;
- an increase in sales and marketing activities;
- an increase in website development activities and associated content;
- additional facilities and infrastructure; and
- assimilation of operations and personnel.
Also, because of its acquisition of BabyCenter, the Company will record a
significant amount of goodwill and deferred compensation, the amortization of
which will significantly reduce the Company's earnings and profitability for the
foreseeable future. The Company expects to record goodwill of approximately
$198.2 million, to be amortized over a five-year period. To the extent the
Company does not generate sufficient cash flow to recover the amount of the
investment recorded, the investment may be considered impaired and could be
subject to earlier write-off. In such event, the Company's net loss in any given
period could be greater than anticipated and the market price of the Company's
stock could decline.
The Company's ability to become profitable depends on its ability to
generate and sustain substantially higher net sales while maintaining reasonable
expense levels. If the Company does achieve profitability, it cannot be certain
that it would be able to sustain or increase profitability on a quarterly or
annual basis in the future.
THE COMPANY'S OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF THE
COMPANY FAILS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS,
THE MARKET PRICE OF THE COMPANY'S COMMON STOCK MAY DECLINE SIGNIFICANTLY
The Company's annual and quarterly operating results have fluctuated in the
past and may fluctuate significantly in the future due to a variety of factors,
many of which are outside of the Company's control. Because the Company's
operating results are volatile and difficult to predict, the Company believes
that quarter-to-quarter comparisons of its operating results are not a good
indication of its future performance. It is likely that in some future quarter
the Company's operating results may fall below the expectations of securities
analysts and investors. In this event, the trading price of the Company's common
stock may decline significantly.
Factors that may harm the Company's business or cause its operating results
to fluctuate include the following:
- the Company's inability to obtain new customers at reasonable cost, retain
existing customers, or encourage repeat purchases;
- decreases in the number of visitors to the Company's Web site or the
Company's inability to convert visitors to its Web site into customers;
- the mix of children and baby products, including toys, video games,
software, videos, books and music sold by the Company;
- seasonality;
- the Company's inability to manage inventory levels or control inventory
theft;
- the Company's inability to manage its distribution operations;
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- the Company's inability to adequately maintain, upgrade and develop its
Web site, the systems that it uses to process customers' orders and
payments or its computer network;
- the ability of the Company's competitors to offer new or enhanced Web
sites, services or products;
- price competition;
- an increase in the level of the Company's product returns;
- fluctuations in the demand for children and baby products associated with
movies, television and other entertainment events;
- the Company's inability to obtain popular children and baby products,
including toys, video games, software, videos, books and music from its
vendors;
- fluctuations in the amount of consumer spending on children and baby
products, including toys, video games, software, videos, books and music;
- the termination of existing or failure to develop new marketing
relationships with key business partners;
- the extent to which the Company is not able to participate in advertising
campaigns such as those conducted by Visa and Intel;
- increases in the cost of online or offline advertising;
- the amount and timing of operating costs and capital expenditures relating
to expansion of the Company's operations;
- unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
- technical difficulties, system downtime or Internet brownouts;
- government regulations related to use of the Internet for commerce or for
sales and distribution of children and baby products, including toys,
video games, software, videos, books and music; and
- economic conditions specific to the Internet, online commerce and the
children and baby products industries
A number of factors will cause the Company's gross margins to fluctuate in
future periods, including the mix of children and baby products, including toys,
video games, software, videos, books and music sold by the Company, inventory
management, inbound and outbound shipping and handling costs, the level of
product returns and the level of discount pricing and promotional coupon usage.
Any change in one or more of these factors could reduce the Company's gross
margins in future periods.
BECAUSE THE COMPANY EXPERIENCES SEASONAL FLUCTUATIONS IN ITS NET SALES, ITS
QUARTERLY RESULTS WILL FLUCTUATE AND ITS ANNUAL RESULTS COULD BE BELOW
EXPECTATIONS
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales. These seasonal patterns will
cause quarterly fluctuations in the Company's operating results. In particular,
a disproportionate amount of the Company's net sales have been realized during
the fourth calendar quarter and the Company expects this trend to continue in
the future.
In anticipation of increased sales activity during the fourth calendar
quarter, the Company will hire a significant number of temporary employees to
bolster its permanent staff and the Company
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significantly increases its inventory levels. For this reason, if the Company's
net sales were below seasonal expectations during this quarter, the Company's
annual operating results could be below the expectations of securities analysts
and investors.
Due to the Company's limited operating history, it is difficult to predict
the seasonal pattern of its sales and the impact of such seasonality on its
business and financial results. In the future, the Company's seasonal sales
patterns may become more pronounced, may strain the Company's personnel and
warehousing and order shipment activities and may cause a shortfall in net sales
as compared to expenses in a given period.
THE COMPANY FACES SIGNIFICANT INVENTORY RISK BECAUSE CONSUMER DEMAND CAN CHANGE
FOR PRODUCTS BETWEEN THE TIME THAT THE COMPANY ORDERS PRODUCTS AND THE TIME THAT
THE COMPANY RECEIVES THEM
The Company carries a significant level of inventory. As a result, the
rapidly changing trends in consumer tastes in the market for children and baby
products, including toys, video games, software, videos, books and music subject
us to significant inventory risks. It is critical to the Company's success that
it accurately predicts these trends and does not overstock unpopular products.
The demand for specific products can change between the time the products are
ordered and the date of receipt. The Company is particularly exposed to this
risk because the Company derives a majority of its net sales in the fourth
calendar quarter of each year. The Company's failure to sufficiently stock
popular toys and other products in advance of such fourth calendar quarter would
harm the Company's operating results for the entire fiscal year.
In the event that one or more products do not achieve widespread consumer
acceptance, the Company may be required to take significant inventory markdowns,
which could reduce the Company's net sales and gross margins. This risk may be
greatest in the first calendar quarter of each year, after the Company has
significantly increased inventory levels for the holiday season. The Company
believes that this risk will increase as it opens new departments or enters new
product categories due to the Company's lack of experience in purchasing
products for these categories. In addition, to the extent that demand for the
Company's products increases over time, the Company may be forced to increase
inventory levels. Any such increase would subject the Company to additional
inventory risks.
THE COMPANY FACES THE RISK OF INVENTORY SHRINKAGE
If the security measures the Company uses at its distribution facility do
not prevent inventory shrinkage, the Company's gross profit margin may
significantly decrease. The Company has undertaken a number of measures designed
to address inventory shrinkage, including the installation of enhanced security
measures at its distribution facility. These measures may not successfully
reduce or prevent inventory shrinkage in future periods. The Company's failure
to successfully improve the security measures it uses at its distribution
facility may cause its gross profit margins and results of operations to be
significantly below expectations in future periods.
BECAUSE THE COMPANY DOES NOT HAVE LONG-TERM OR EXCLUSIVE VENDOR CONTRACTS, THE
COMPANY MAY NOT BE ABLE TO GET SUFFICIENT QUANTITIES OF POPULAR CHILDREN'S
PRODUCTS IN A TIMELY MANNER. AS A RESULT, THE COMPANY COULD LOSE CUSTOMERS
If the Company is not able to offer its customers sufficient quantities of
toys or other products in a timely manner, the Company could lose customers and
its net sales could be below expectations. The Company's success depends on its
ability to purchase products in sufficient quantities at competitive prices,
particularly for the holiday shopping season. As is common in the industry, the
Company does not have long-term or exclusive arrangements with any vendor or
distributor that guarantee the
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availability of toys or other children's products for resale. Therefore, the
Company does not have a predictable or guaranteed supply of toys or other
products.
TO MANAGE THE COMPANY'S GROWTH AND EXPANSION, THE COMPANY NEEDS TO IMPROVE AND
IMPLEMENT FINANCIAL AND MANAGERIAL CONTROLS AND REPORTING SYSTEMS AND
PROCEDURES. IF THE COMPANY IS UNABLE TO DO SO SUCCESSFULLY, ITS RESULTS OF
OPERATIONS WOULD BE IMPAIRED
The Company's rapid growth in personnel and operations has placed, and will
continue to place, a significant strain on the Company's management, information
systems and resources. In addition, upon consummation of the BabyCenter merger,
the Company added over 100 new employees, including managerial, technical and
operations personnel, and has been required to assimilate substantially all of
BabyCenter's operations into the Company's operations. In order to manage this
growth effectively, the Company needs to continue to improve its financial and
managerial controls and reporting systems and procedures. If the Company
continues to experience a significant increase in the number of its personnel,
the Company's existing management team may not be able to effectively train,
supervise and manage all of the Company's personnel. In addition, the Company's
existing information systems may not be able to handle adequately the increased
volume of information and transactions that would result from increased growth.
The Company's failure to successfully implement, improve and integrate these
systems and procedures would cause its results of operations to be below
expectations.
RISK OF INTERNATIONAL EXPANSION
The Company plans to expand its presence in foreign markets. The Company has
relatively little experience in purchasing, marketing and distributing products
or services for these markets and may not benefit from any first-to-market
advantages. It will be costly to establish international facilities and
operations, promote the Company's brand internationally, and develop localized
Web sites and stores and other systems. The Company may not succeed in its
efforts in these countries. If revenues from international activities do not
offset the expense of establishing and maintaining foreign operations, the
Company's business prospects, financial condition and operating results will
suffer.
As the international online commerce market continues to grow, competition
in this market will likely intensify. In addition, governments in foreign
jurisdictions may regulate Internet or other online services in such areas as
content, privacy, network security, encryption or distribution. This may affect
the Company's ability to conduct business internationally.
THE COMPANY MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS
The online commerce market is new, rapidly evolving and intensely
competitive. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could seriously
harm its net sales and results of operations. The Company expects competition to
intensify in the future because current and new competitors can enter its market
with little difficulty and can launch new Web sites at a relatively low cost. In
addition, the children and baby products industries, including toy, video game,
software, video, books and music are intensely competitive.
The Company currently or potentially competes with a variety of other
companies, including:
- traditional store-based toy and children and baby products retailers such
as Toys R Us, FAO Schwarz, Zany Brainy, Noodle Kidoodle, BabyGap,
Gymboree, The Right Start and Babies R Us;
- major discount retailers such as Wal-Mart, Kmart and Target;
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- online efforts of these traditional retailers, including the online stores
operated by Toys R Us, Wal-Mart, FAO Schwarz, BabyGap and Gymboree;
- physical and online stores of entertainment entities that sell and license
children and baby products, such as The Walt Disney Company and Warner
Bros.;
- catalog retailers of children and baby products and products for toddlers
and expectant mothers;
- vendors or manufacturers of children and baby products that currently sell
some of their products directly online, such as Mattel and Hasbro;
- other online companies that include children and baby products as part of
their product offerings, such as Amazon.com, Barnesandnoble.com, CDnow,
Beyond.com, Reel.com, iBaby, BabyCatalog.com, iVillage and Women.com;
- Internet portals and online service providers that feature shopping
services, such as AOL, Yahoo!, Excite and Lycos; and various smaller
online retailers of children and baby products, such as BrainPlay.com, Red
Rocket and Toysmart.com
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company
does. Many of these competitors can devote substantially more resources to Web
site development than the Company can. In addition, larger, well-established and
well-financed entities may join with online competitors or suppliers of children
and baby products, including toys, video games, software, videos, books and
music as the use of the Internet and other online services increases.
The Company's competitors may be able to secure products from vendors on
more favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than the Company can.
Traditional store-based retailers also enable customers to see and feel products
in a manner that is not possible over the Internet.
IF THE COMPANY ENTERS NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET
ACCEPTANCE, THE COMPANY'S BRAND AND REPUTATION COULD BE DAMAGED AND THE COMPANY
COULD FAIL TO ATTRACT NEW CUSTOMERS
Any new department or product category that is launched or acquired by the
Company, such as BabyCenter, which is not favorably received by consumers, could
damage the Company's brand or reputation. This damage could impair the Company's
ability to attract new customers, which could cause its net sales to fall below
expectations. The expansion of the Company's business to include BabyCenter or
any other new department or product category will require significant additional
expenses, and strain the Company's management, financial and operational
resources. This type of expansion would also subject us to increased inventory
risk. The Company may choose to expand its operations by developing other new
departments or product categories, promoting new or complementary products,
expanding the breadth and depth of products and services offered or expanding
the Company's market presence through relationships with third parties. In
addition, the Company may pursue the acquisition of other new or complementary
businesses, products or technologies, although it has no present understandings,
commitments or agreements with respect to any material acquisitions or
investments.
IF THE COMPANY DOES NOT SUCCESSFULLY EXPAND ITS DISTRIBUTION OPERATIONS, ITS NET
SALES MAY FALL BELOW EXPECTATIONS
If the Company does not successfully expand its distribution operations to
accommodate increases in demand, particularly during the fourth calendar quarter
of each year, the Company will not be able
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to increase its net sales in accordance with the expectations of securities
analysts and investors. The Company's success depends on its ability to rapidly
expand its distribution operations in order to accommodate a significant
increase in customer orders. The Company must also be able to rapidly grow its
distribution operations and information systems to accommodate significant
increases in demand, which may require us to automate tasks that are currently
performed manually.
The Company's planned expansion may cause disruptions in its business. The
Company's current distribution operations are not adequate to accommodate
significant increases in customer demand that may occur during the fourth
calendar quarter of 1999. The Company has leased a second distribution facility
located in Virginia, which the Company intends to begin using in early 2000. In
addition, the Company has entered into an agreement with a third party that will
provide the Company with warehouse and distribution services from its facility
in Utah. The Company is not experienced in coordinating and managing
distribution operations in geographically distant locations.
IF THE COMPANY EXPERIENCES PROBLEMS IN ITS DISTRIBUTION OPERATIONS, IT COULD
LOSE CUSTOMERS
The Company relies upon third-party carriers for product shipments,
including shipments to and from the Company's distribution facility. The Company
is therefore subject to the risks, including employee strikes and inclement
weather associated with such carriers' ability to provide delivery services to
meet the Company's shipping needs. In addition, failure to deliver products to
the Company's customers in a timely manner would damage its reputation and
brand. The Company also depends upon temporary employees to adequately staff the
Company's distribution facility, particularly during the holiday shopping
season. If the Company does not have sufficient sources of temporary employees,
it could lose customers.
IF THE COMPANY DOES NOT SUCCESSFULLY EXPAND ITS WEB SITE AND THE SYSTEMS THAT
PROCESS CUSTOMERS' ORDERS, THE COMPANY COULD LOSE CUSTOMERS AND ITS NET SALES
COULD BE REDUCED
If the Company fails to rapidly upgrade its Web site in order to accommodate
increased traffic, the Company may lose customers, which would reduce the
Company's net sales. Furthermore, if the Company fails to rapidly expand the
computer systems that it uses to process and ship customer orders and process
payments, the Company may not be able to successfully distribute customer
orders. As a result, the Company could lose customers and its net sales could be
reduced. In addition, the Company's failure to rapidly upgrade its Web site or
expand these computer systems without system downtime, particularly during the
fourth calendar quarter, would further reduce its net sales. The Company may
experience difficulty in improving and maintaining such systems if its employees
or contractors that develop or maintain its computer systems become unavailable
to it. The Company has experienced periodic systems interruptions, which it
believes will continue to occur, while enhancing and expanding these computer
systems.
THE COMPANY'S FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND
OTHER UNEXPECTED PROBLEMS. THE OCCURRENCE OF A NATURAL DISASTER OR OTHER
UNEXPECTED PROBLEM COULD DAMAGE THE COMPANY'S REPUTATION AND BRAND AND REDUCE
ITS NET SALES
The occurrence of an earthquake or other natural disaster or unanticipated
problems at the Company's leased facility in Southern California, or at the
third-party facility in Sunnyvale, California that houses substantially all of
the Company's computer and communications hardware systems, could cause
interruptions or delays in the Company's business, loss of data or render us
unable to accept and fulfill customer orders. The Company's leased facility in
Southern California houses substantially all of its product development and
information systems, as well as its inventory. Any such interruptions or
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delays at either of these facilities would reduce the Company's net sales. In
addition, the Company's systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events. The Company has no formal disaster
recovery plan and its business interruption insurance may not adequately
compensate us for losses that may occur. In addition, the failure by the
third-party facility to provide the data communications capacity required by the
Company, as a result of human error, natural disaster or other operational
disruptions, could result in interruptions in the Company's service. The
occurrence of any or all of these events could damage the Company's reputation
and brand and impair the Company's business.
THE COMPANY'S NET SALES COULD DECREASE IF ITS ONLINE SECURITY MEASURES FAIL
The Company's relationship with its customers may be adversely affected if
the security measures that the Company uses to protect their personal
information, such as credit card numbers, are ineffective. If, as a result, the
Company loses many customers, its net sales could decrease. The Company relies
on security and authentication technology that it licenses from third parties.
With this technology, the Company performs real-time credit card authorization
and verification with its bank. The Company cannot predict whether events or
developments will result in a compromise or breach of the technology it uses to
protect a customer's personal information.
Furthermore, the Company's servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. The Company may need
to expend significant additional capital and other resources to protect against
a security breach or to alleviate problems caused by any breaches. The Company
cannot assure that it can prevent all security breaches.
THE COMPANY'S NET SALES AND GROSS MARGINS WOULD DECREASE IF IT EXPERIENCES
SIGNIFICANT CREDIT CARD FRAUD
A failure to adequately control fraudulent credit card transactions would
reduce the Company's net sales and its gross margins because the Company does
not carry insurance against this risk. The Company has developed technology to
help us to detect the fraudulent use of credit card information. Nonetheless, to
date, the Company has suffered losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders. Under current credit card practices, the Company
is liable for fraudulent credit card transactions because it does not obtain a
cardholder's signature.
IF THE COMPANY DOES NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, THE COMPANY'S
SERVICES COULD BECOME OBSOLETE AND IT COULD LOSE CUSTOMERS
If the Company faces material delays in introducing new services, products
and enhancements, its customers may forego the use of its services and use those
of its competitors. To remain competitive, the Company must continue to enhance
and improve the functionality and features of its online store. The Internet and
the online commerce industry are rapidly changing. If competitors introduce new
products and services embodying new technologies, or if new industry standards
and practices emerge, the Company's existing Web site and proprietary technology
and systems may become obsolete.
To develop the Company's Web site and other proprietary technology entails
significant technical and business risks. The Company may use new technologies
ineffectively or it may fail to adapt its Web site, systems that the Company
uses to process customers' orders and payments and its computer network to
customer requirements or emerging industry standards.
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INTELLECTUAL PROPERTY CLAIMS AGAINST THE COMPANY CAN BE COSTLY AND COULD IMPAIR
ITS BUSINESS.
Other parties may assert infringement or unfair competition claims against
us. In the past, a toy distributor using a name similar to the Company's sent
the Company notice of a claim of infringement of proprietary rights, which claim
was subsequently withdrawn. The Company has also received a claim from the
holder of a home shopping video catalog patent that the Company's Internet
marketing program infringes such patent, which the Company is in the process of
reviewing. The Company expects to receive other notices from other third parties
in the future. The Company cannot predict whether third parties will assert
claims of infringement against us, or whether any past or future assertions or
prosecutions will harm the Company's business. If the Company is forced to
defend against any such claims, whether they are with or without merit or are
determined in the Company's favor, then the Company may face costly litigation,
diversion of technical and management personnel, or product shipment delays. As
a result of such a dispute, the Company may have to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may be unavailable on terms acceptable to us,
or at all. If there is a successful claim of product infringement against us and
the Company is unable to develop non-infringing technology or license the
infringed or similar technology on a timely basis, it could impair the Company's
business.
IF THE PROTECTION OF THE COMPANY'S TRADEMARKS AND PROPRIETARY RIGHTS IS
INADEQUATE, THE COMPANY'S BRAND AND REPUTATION COULD BE IMPAIRED AND IT COULD
LOSE CUSTOMERS
The steps the Company takes to protect its proprietary rights may be
inadequate. The Company regards its copyrights, service marks, trademarks, trade
dress, trade secrets and similar intellectual property as critical to its
success. The Company relies on trademark and copyright law, trade secret
protection and confidentiality or license agreements with its employees,
customers, partners and others to protect its proprietary rights. In September
1998, the United States Patent and Trademark Office granted the Company a
registered trademark for "eToys" for online retail services for toys and games.
The Company has filed a trademark application for "eToys" for toys, games and
playthings and for sales of toys, games and playthings. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which the Company will sell its products and services online.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore,
the Company may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of its
trademarks and other proprietary rights.
THE LOSS OF THE SERVICES OF ONE OR MORE OF THE COMPANY'S KEY PERSONNEL, OR THE
COMPANY'S FAILURE TO ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED
PERSONNEL IN THE FUTURE, COULD DISRUPT THE COMPANY'S OPERATIONS AND RESULT IN
LOSS OF NET SALES
The loss of the services of one or more of the Company's key personnel could
seriously interrupt its business. The Company depends on the continued services
and performance of the Company's senior management and other key personnel,
particularly Edward C. Lenk, the Company's President, Chief Executive Officer
and Uncle of the Board. The Company's future success also depends upon the
continued service of the Company's executive officers and other key sales,
marketing and support personnel. The majority of the Company's senior management
joined the Company in the last eight months, including the Company's Chief
Financial Officer, Chief Information Officer, Senior Vice President of
Operations and Senior Vice President of Marketing. The Company's future success
depends on these officers effectively working together with the Company's
original management team.
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The Company's success will also depend on a successful integration of
BabyCenter's management with the Company's senior management team. None of the
Company's officers or key employees is bound by an employment agreement for any
specific term other than the Chief Executive Officer and the President of
BabyCenter. The Company's relationships with these officers and key employees
are at will. The Company does not have "key person" life insurance policies
covering any of its employees.
THE COMPANY MAY BE ADVERSELY IMPACTED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND
OTHER SYSTEMS IT USES ARE NOT YEAR 2000 COMPLIANT
Any failure of the Company's material systems, its vendors' material systems
or the Internet to be year 2000 compliant would have material adverse
consequences for the Company. Such consequences would include difficulties in
operating the Company's Web site effectively, taking product orders, making
product deliveries or conducting other fundamental parts of the Company's
business. The Company is currently assessing the year 2000 readiness of the
software, computer technology and other services that it uses which may not be
year 2000 compliant. At this time, the Company has not yet developed a
contingency plan to address situations that may result if the Company or its
vendors are unable to achieve year 2000 compliance. The cost of developing and
implementing such a plan, if necessary, could be material.
The Company also depends on the year 2000 compliance of the computer systems
and financial services used by consumers. 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 the Company's
services and would have a material adverse effect on us.
THERE ARE RISKS ASSOCIATED WITH THE BABYCENTER MERGER AND OTHER POTENTIAL
ACQUISITIONS. AS A RESULT, THE COMPANY MAY NOT ACHIEVE THE EXPECTED BENEFITS OF
THE BABYCENTER MERGER AND OTHER POTENTIAL ACQUISITIONS
The Company may not realize the anticipated benefits from the BabyCenter
merger. The Company may not be able to successfully assimilate the additional
personnel, operations, acquired technology and products into its business. The
merger may further strain the Company's existing financial and managerial
controls and reporting systems and procedures. In addition, key BabyCenter
personnel may decide not to work for the Company. These difficulties could
disrupt its ongoing business, distract its management and employees or increase
its expenses. Further, the physical expansion in facilities that has occurred as
a result of this merger may result in disruptions that seriously impair the
Company's business. In particular, as a result of the BabyCenter merger, the
Company now has operations in multiple facilities in geographically distant
areas. The Company is not experienced in managing facilities or operations in
geographically distant areas.
If the Company is presented with appropriate opportunities, the Company
intends to make other investments in complementary companies, products or
technologies. The Company may not realize the anticipated benefits of any other
acquisition or investment. If the Company buys another company, the Company will
likely face the same risks, uncertainties and disruptions as discussed above
with respect to the Company and its BabyCenter merger. Furthermore, the Company
may have to incur debt or issue equity securities to pay for any additional
future acquisitions or investments, the issuance of which could be dilutive to
the Company or its existing stockholders.
23
<PAGE>
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE THE COMPANY EVEN IF DOING SO
WOULD BE BENEFICIAL TO THE COMPANY'S STOCKHOLDERS
Provisions of the Company's Amended and Restated Certificate of
Incorporation, its Bylaws and Delaware law could make it more difficult for a
third party to acquire the Company, even if doing so would be beneficial to the
Company's stockholders.
The Company is subject to Section 203 of the Delaware General Corporation
Law, which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless:
- the Board of Directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- on or subsequent to such date the business combination is approved by the
Board of Directors and authorized at an annual or special meeting of
stockholders
A "business combination" generally includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
The Company's Amended and Restated Certificate of Incorporation and Bylaws
do not provide for the right of stockholders to act by written consent without a
meeting or for cumulative voting in the election of directors. In addition the
Company's Amended and Restated Certificate of Incorporation permits the Board of
Directors to issue preferred stock with voting or other rights without any
stockholder action. Commencing at the Company's first annual meeting of
stockholders following the date on which it has at least 800 stockholders, the
Company's Amended and Restated Certificate of Incorporation provides for the
Board of Directors to be divided into three classes, with staggered three-year
terms. As a result, only one class of directors will be elected at each annual
meeting of stockholders. Each of the two other classes of directors will
continue to serve for the remainder of its respective three-year term. These
provisions, which require the vote of stockholders holding at least a majority
of the outstanding common stock to amend, may have the effect of deterring
hostile takeovers or delaying changes in the Company's management.
RISKS RELATED TO THE COMPANY'S INDUSTRY
IF THE COMPANY IS UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, ITS BRAND
AND REPUTATION COULD BE DAMAGED AND IT COULD LOSE CUSTOMERS
The Company may be unable to acquire or maintain Web domain names relating
to its brand in the United States and other countries in which it may conduct
business. As a result, the Company may be unable to prevent third parties from
acquiring and using domain names relating to its brand. Such use could damage
its brand and reputation and take customers away from its Web site. The Company
currently holds various relevant domain names, including the "eToys.com" domain
name. The acquisition and maintenance of domain names generally is regulated by
governmental agencies and their designees. For example, in the United States,
the National Science Foundation has appointed Network Solutions, Inc. as the
current exclusive registrar for the ".com", ".net" and ".org" generic top-level
domains. The regulation of domain names in the United States and in foreign
countries is
24
<PAGE>
subject to change in the near future. Such changes in the United States are
expected to include a transition from the current system to a system which is
controlled by a non-profit corporation and the creation of additional top-level
domains. Governing bodies may establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names.
THE COMPANY MAY NEED TO CHANGE THE MANNER IN WHICH IT CONDUCTS ITS BUSINESS IF
GOVERNMENT REGULATION INCREASES
The adoption or modification of laws or regulations relating to the Internet
could adversely affect the manner in which the Company currently conducts its
business. In addition, the growth and development of the market for online
commerce may lead to more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on the Company. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. The United States Congress recently enacted
Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The European Union recently enacted
its own privacy regulations. The law of the Internet, however, remains largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet.
In order to comply with new or existing laws regulating online commerce, the
Company may need to modify the manner in which it does business, which may
result in additional expenses. For instance, the Company may need to spend time
and money revising the process by which it fulfills customers' orders to ensure
that each shipment complies with applicable laws. The Company may need to hire
additional personnel to monitor its compliance with applicable laws. The Company
may also need to modify its software to further protect its customers' personal
information.
THE COMPANY MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT IT PUBLISHES
As a publisher of online content, the Company faces potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that the Company publishes
or distributes. If the Company faces liability, then its reputation and its
business may suffer. In the past, plaintiffs have brought these types of claims
and sometimes successfully litigated them against online services.
THE COMPANY'S NET SALES COULD DECREASE IF IT BECOMES SUBJECT TO SALES AND OTHER
TAXES
If one or more states or any foreign country successfully asserts that the
Company should collect sales or other taxes on the sale of its products, the
Company's net sales and results of operations could be harmed. The Company does
not currently collect sales or other similar taxes for physical shipments of
goods into states other than California. However, one or more local, state or
foreign jurisdictions may seek to impose sales tax collection obligations on the
Company. In addition, any new operation in states outside California could
subject the Company's shipments in such states to state sales taxes under
current or future laws. If the Company becomes obligated to collect sales taxes,
the Company will need to update its system that processes customers' orders to
calculate the appropriate sales tax for each customer order and to remit the
collected sales taxes to the appropriate authorities. These upgrades will
increase the Company's operating expenses. In addition, the Company's customers
may be discouraged from purchasing products from us because they have to pay
sales tax, causing the Company's net sales to decrease. As a result, the Company
may need to lower prices to retain these customers.
25
<PAGE>
RISKS RELATED TO SECURITIES MARKETS
THE COMPANY MAY BE UNABLE TO MEET ITS FUTURE CAPITAL REQUIREMENTS
The Company cannot be certain that additional financing will be available to
it on favorable terms when required, or at all. If the Company raises additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of the Company's common stock and the Company's stockholders may
experience additional dilution. The Company requires substantial working capital
to fund its business. Since the Company's inception, it has experienced negative
cash flow from operations and expects to experience significant negative cash
flow from operations for the foreseeable future. The Company currently
anticipates that the net proceeds of this offering, together with the Company's
available funds, will be sufficient to meet the Company's anticipated needs for
working capital and capital expenditures through at least the next 12 months.
The Company may need to raise additional funds prior to the expiration of such
period.
THE COMPANY'S COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INDIVIDUAL STOCKHOLDERS
The market price for the Company's common stock is likely to be highly
volatile and subject to wide fluctuations in response to factors including the
following, some of which are beyond the Company's control:
- actual or anticipated variations in the Company's quarterly operating
results;
- announcements of technological innovations or new products or services by
the Company or its competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and/or online commerce industries;
- changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies;
- announcements by the Company or its competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- additions or departures of key personnel;
- release of lock-up or other transfer restrictions on the Company's
outstanding shares of common stock or sales of additional shares of common
stock; and
- potential litigation
IF THE COMPANY'S STOCK PRICE IS VOLATILE, THE COMPANY COULD FACE A SECURITIES
CLASS ACTION LAWSUIT
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If the Company were sued in a securities class action, it could
result in substantial costs and a diversion of management's attention and
resources and would cause the Company's stock price to fall.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
26
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4--Commitments and Contingencies in Part I, Item 1, Financial
Statements
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Upon the closing of the initial public offering of the Company's common
stock, all outstanding shares of the Company's Series A Preferred Stock
(consisting of 21,119,322 shares), Series B Preferred Stock (consisting of
35,659,947 shares) and Series C Preferred Stock (consisting of 1,999,998 shares)
were converted on a share-for-share basis into shares of the Company's common
stock in accordance with the terms of each such series of preferred stock.
On July 1, 1999, the Company acquired BabyCenter via a merger pursuant to an
Agreement and Plan of Reorganization dated as of April 18, 1999. 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
15,986,114 shares of its common stock in exchange for all outstanding shares of
BabyCenter capital stock and has reserved 2,716,676 shares of its common stock
for issuance upon exercise of assumed BabyCenter options. The issuance of shares
of the Company's common stock in the BabyCenter merger was exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 3(a)(10) thereof.
On June 25, 1999, the Company issued 1,680 shares of common stock to a
former employee of the Company and 720 shares of common stock to the employee's
counsel, in connection with the resolution of an employment claim. The issuance
of such shares was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a written consent of the stockholders of the Company dated May
3, 1999, the stockholders of the Company approved the following matters, all of
which were reflected in the Company's S-1 or documents filed as exhibits
thereto:
(a) The following directors of the Company were elected for the ensuing year
and until their successors are elected: Edward C. Lenk, Peter C.M. Hart,
Tony A. Hung, Michael Moritz and Daniel J. Nova.
(b) The amendment of the Company's 1997 Stock Plan and awards granted
thereunder to provide that (a) such awards shall be assumed or equivalent
awards substituted by the successor corporation in a change of control,
unless the successor corporation does not agree to assume or substitute
such awards, in which case the vesting of such awards shall accelerate in
full prior to consummation of the transaction and (b) in the event awards
are assumed or substituted in connection with a change of control and the
employment of a participant holding such an assumed or substituted award
is involuntarily terminated within 24 months following consummation of
the change of control, the vesting of such assumed award shall accelerate
in full immediately prior to the effective date of the involuntary
termination.
(c) The amendment of the Company's 1999 Stock Plan to (i) increase the
number of shares of common stock reserved for issuance thereunder by
1,066,666.66 to 8,266,666.66, (ii) increase the set number of shares that
is part of the plan's "evergreen" provision by 233,333.33 to
27
<PAGE>
1,733,333.33, and (iii) provide that the maximum number of shares of
common stock currently reserved for issuance under the plan and the
maximum aggregate number of shares that may be added to the plan each
year through 2004 pursuant to the "evergreen" provision is 16,933,333.33
shares.
(d) The amendment of the Company's 1999 Employee Stock Purchase Plan to (i)
increase the number of shares of common stock reserved for issuance
thereunder by 33,333.33 to 333,333.33, (ii) increase the set number of
shares that is part of the plan's "evergreen" provision by 26,666.66 to
206,666.66, and (iii) provide that the maximum number of shares of common
stock currently reserved for issuance under the plan and the maximum
aggregate number of shares that may be added to the plan each year
through 2004 pursuant to the "evergreen" provision is 1,366,666.66.
Holders of 74.4% of the Company's common stock and 87.1% of the Company's
preferred stock consented to the foregoing actions, and no shareholders voted
against such actions.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
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.*
10.1 Employment Agreement dated as of July 1, 1999, among Matthew Glickman,
eToys Inc., and BabyCenter, Inc.
10.2 Employment Agreement dated as of July 1, 1999, among Mark Selcow, eToys
Inc., and BabyCenter, Inc.
10.3 Covenant Not to Compete dated as of July 1, 1999, between Matthew Glickman
and eToys Inc.
10.4 Covenant Not to Compete dated as of July 1, 1999, between Mark Selcow and
eToys Inc.
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to the registrant's Current Report on Form 8-K
dated July 1, 1999.
(b) Current Reports on Form 8-K
Immediately following the end of the quarter ended June 30, 1999, the
Company filed its Current Report on Form 8-K pertaining to the acquisition of
BabyCenter, Inc., which included the following financial statements:
(i) 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.
(ii) The Company'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.
28
<PAGE>
(iii) The Company'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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, eToys
Inc. has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
eTOYS INC.
By: /s/ STEVEN J. SCHOCH
-----------------------------------------
Steven J. Schoch
Senior Vice President and
Chief Financial Officer
DATED: August 13, 1999
29
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
10.1 Employment Agreement dated as of July 1, 1999, among Matthew Glickman, eToys Inc., and BabyCenter, Inc.
10.2 Employment Agreement dated as of July 1, 1999, among Mark Selcow, eToys Inc., and BabyCenter, Inc.
10.3 Covenant Not to Compete dated as of July 1, 1999, between Matthew Glickman and eToys Inc.
10.4 Covenant Not to Compete dated as of July 1, 1999, between Mark Selcow and eToys Inc.
27.1 Financial Data Schedule
</TABLE>
30
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of July 1,
1999, is made and entered by and among Matthew Glickman (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 18, 1999 (the "Merger Agreement"), between the Company, Parent
and the other parties thereto, 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 July 1, 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 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.
(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,
<PAGE>
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 150,000 shares of the common stock, par
value $.0001 per share, of 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-
-2-
<PAGE>
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 month period as
reasonably determined by the Board of Directors of
the Company or of Parent.
-3-
<PAGE>
(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 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
-4-
<PAGE>
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 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.
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"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 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 belong
to Executive, subject only to the Transfer
restrictions contained in this Section 5.
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(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 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
-7-
<PAGE>
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 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
-8-
<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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.
3100 Ocean Park Blvd., Suite 300
Santa Monica, CA 90405
Attention: Chief Financial Officer
Telephone No. 310-664-8100
Telecopy No. 310-664-8101
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
309 Emerson Street
Palo Alto, CA 94301
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.
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
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<PAGE>
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]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
BabyCenter, Inc.
By: /s/ Matthew Glickman
Name: Matthew Glickman
Title: CEO
eToys Inc.
By: /s/ Steven J. Schoch
Name: Steven J. Schoch
Title: Senior Vice President and
Chief Financial Officer
EXECUTIVE
Matthew Glickman
Name: Matthew Glickman
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<PAGE>
Exhibit A
INVENTIONS MADE PRIOR TO EMPLOYMENT
Not Applicable
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<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of July 1,
1999, is made and entered by and among 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 18, 1999 (the "Merger Agreement"), between the Company, Parent
and the other parties thereto, 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 July 1, 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 President 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.
(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,
<PAGE>
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 150,000 shares of the common stock, par
value $.0001 per share, of 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-
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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
month period as reasonably determined by the Board of
Directors of the Company or of Parent.
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<PAGE>
(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 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
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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 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.
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<PAGE>
"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) 875,198 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 belong
to Executive, subject only to the Transfer
restrictions contained in this Section 5.
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<PAGE>
(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 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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.
3100 Ocean Park Blvd., Suite 300
Santa Monica, CA 90405
Attention: Chief Financial Officer
Telephone No. 310-664-8100
Telecopy No. 310-664-8101
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:
Mark Selcow
357 Mississippi Street
San Francisco, CA 94107
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.
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
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<PAGE>
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]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written.
BabyCenter, Inc.
By: Matthew Glickman
Name: Matthew Glickman
Title: CEO
eToys Inc.
By: /s/ Steven J. Schoch
Name: Steven J. Schoch
Title: Senior Vice President and
Chief Financial Officer
EXECUTIVE
Mark Selcow
Name: Mark Selcow
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<PAGE>
Exhibit A
INVENTIONS MADE PRIOR TO EMPLOYMENT
Not Applicable
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<PAGE>
COVENANT NOT TO COMPETE
THIS COVENANT NOT TO COMPETE (the "Agreement"), dated as of July 1,
1999, by and between eToys Inc., a Delaware corporation (including its
subsidiaries, "Buyer"), and Matthew Glickman, 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 18, 1999 (the "Merger
Agreement"), among Buyer, the Company and the other parties thereto, 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 5.23 of the Merger Agreement,
Stockholder is required to enter into this Agreement;
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);
<PAGE>
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. 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
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<PAGE>
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.
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.
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<PAGE>
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.
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.
3100 Ocean Park Boulevard, Suite 300
Santa Monica, CA 90405
Attention: Chief Financial Officer
Telephone No.: 310-664-8100
Telecopy No.: 310-664-8101
-4-
<PAGE>
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
(ii) If to Stockholder:
Matthew Glickman
309 Emerson Street
Palo Alto, CA 94301
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 reorganization or by acquisition of all or substantially all of the
assets or capital stock of Buyer.
-5-
<PAGE>
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.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the first date set forth above.
eToys Inc.
By:/s/ Steven J. Schoch
Name: Steven J. Schoch
Title: Senior Vice President and
Chief Financial Officer
STOCKHOLDER
/s/ Matthew Glickman
Name: Matthew Glickman
-7-
<PAGE>
COVENANT NOT TO COMPETE
THIS COVENANT NOT TO COMPETE (the "Agreement"), dated as of July 1,
1999, by and between eToys Inc., a Delaware corporation (including its
subsidiaries, "Buyer"), and 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 18, 1999 (the "Merger
Agreement"), among Buyer, the Company and the other parties thereto, 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 5.23 of the Merger Agreement,
Stockholder is required to enter into this Agreement;
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);
<PAGE>
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. 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
-2-
<PAGE>
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.
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.
-3-
<PAGE>
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.
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.
3100 Ocean Park Boulevard, Suite 300
Santa Monica, CA 90405
Attention: Chief Financial Officer
Telephone No.: 310-664-8100
Telecopy No.: 310-664-8101
-4-
<PAGE>
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
(ii) If to Stockholder:
Mark Selcow
357 Mississippi Street
San Francisco, CA 94107
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 reorganization or by acquisition of all or substantially all of the
assets or capital stock of Buyer.
-5-
<PAGE>
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.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the first date set forth above.
eToys Inc.
By: /s/Steven J. Schoch
Name: Steven J. Schoch
Title: Senior Vice President and
Chief Financial Officer
STOCKHOLDER
Mark Selcow
Name: Mark Selcow
-7-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL STATEMENTS (IN THOUSANDS,
EXCEPT PER SHARE DATA).
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 176,350
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 11,017
<CURRENT-ASSETS> 190,949
<PP&E> 9,591
<DEPRECIATION> (676)
<TOTAL-ASSETS> 203,797
<CURRENT-LIABILITIES> 16,097
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 184,372
<TOTAL-LIABILITY-AND-EQUITY> 203,797
<SALES> 7,975
<TOTAL-REVENUES> 7,975
<CGS> 6,457
<TOTAL-COSTS> 6,457
<OTHER-EXPENSES> 23,226
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (20,782)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (20,783)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,783)
<EPS-BASIC> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
