<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 1999
REGISTRATION NO. 333-72469
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ETOYS INC.
(Exact Name of Registrant as Specified in Its Charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 5945 95-4633006
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
</TABLE>
2850 OCEAN PARK BLVD., SUITE 225
SANTA MONICA, CA 90405
(310) 664-8100
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
------------------------------
EDWARD C. LENK, PRESIDENT AND CEO
ETOYS INC.
2850 OCEAN PARK BLVD., SUITE 225
SANTA MONICA, CA 90405
(310) 664-8100
(Name, Address Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
COPIES TO:
GLEN R. VAN LIGTEN ROBERT V. GUNDERSON, JR.
AMY E. PAYE JEFFREY P. HIGGINS
MITCHELL S. ZUKLIE WILLIAM E. GROWNEY JR.
KRISTEN A. LAMB KIRIL M. DOBROVOLSKY
VENTURE LAW GROUP GUNDERSON DETTMER STOUGH
A PROFESSIONAL CORPORATION VILLENEUVE FRANKLIN &
2800 SAND HILL ROAD HACHIGIAN, LLP
MENLO PARK, CA 94025 155 CONSTITUTION AVENUE
(650) 854-4488 MENLO PARK, CA 94025
(650) 321-2400
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE (2)
<S> <C> <C>
Common Stock, par value $0.0001 $115,000,000.00 $31,970.00
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act.
(2) Previously paid by the registrant in connection with the filing of the
Registration Statement on February 17, 1999.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION. DATED APRIL 5, 1999.
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
8,200,000 Shares
[LOGO]
ETOYS INC.
Common Stock
------------------
This is an initial public offering of shares of common stock of eToys Inc.
All of the 8,200,000 shares of common stock are being sold by eToys.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $10.00 and $12.00. eToys intends to list the common stock
on the Nasdaq National Market under the symbol "ETYS".
SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
----------- ---------
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to eToys............................. $ $
</TABLE>
The underwriters may, under specific circumstances, purchase up to an
additional 1,230,000 shares from eToys at the initial public offering price,
less the underwriting discount.
------------------------
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
------------------------
Prospectus dated , 1999.
<PAGE>
The gatefold includes:
A TALE OF TWO ARTHURS.
<TABLE>
<CAPTION>
[A PICTURE OF ARTHUR] [A PICTURE OF ARTHUR]
with the following text below each picture:
<S> <C>
1. BUCKLE CHILDREN INTO CAR SEATS. 1. TURN ON COMPUTER.
2. DRIVE TO TOY STORE. 2. GO TO WWW.eTOYS.COM
3. CIRCLE PARKING LOT 4 TIMES FOR 3. ORDER ARTHUR.
PARKING SPACE. 4. ARTHUR IS DELIVERED, GIFT WRAPPED, TO
4. CHANGE ONE DIAPER. YOUR DOORSTEP.
5. LOSE ONE CHILD IN THE BARBIE SECTION.
6. FINALLY FIND ARTHUR.
7. COAX CHILD OUT OF PLAY HOUSE. [PICTURE OF ETOYS HOME PAGE]
8. WAIT IN LONG CHECK-OUT LINE.
9. PUT CANDY BARS BACK ON RACK. [ETOYS LOGO]
10. PLACATE CRYING CHILDREN. WE BRING THE TOY STORE TO YOU.(SM)
11. DRIVE HOME. WWW.ETOYS.COM
12. REMEMBER YOU NEED GIFT WRAP. AOL KEYWORD: ETOYS
</TABLE>
- -TM--C-Marc Brown 1999
At the bottom of the page is the following language:
eToys-Registered Trademark- is a registered trademark of eToys. Toysearch-TM-
and "We Bring The Toy Store To You."(sm) are trademarks of eToys. All other
brand names or trademarks appearing in this prospectus are the property of their
respective holders. The inclusion of the products in this prospectus is not an
endorsement of eToys or the offering of the securities being made hereby by the
vendors of such products.
The following text is contained on this gatefold:
Across the top of the two pages: [eToys logo] and We Bring The Toy Store To
You.(sm)
[Two page screen shot of eToys home page with textual descriptions of our Web
site shopping features, surrounded by the following text flowed to both sides in
a counter-clockwise fashion]
[PICTURE OF BLUE'S CLUES]
eToys.com shoppers will find an extensive selection of competitively priced
products, with over 9,500 SKUs representing more than 750 brands. We provide a
comprehensive selection of both traditional, well-known brands, such as Mattel,
Hasbro and LEGO, and specialty brands, such as BRIO, PLAYMOBIL and Learning
Curve.
Our Web site features detailed product information and innovative merchandising
through easy-to-use Web pages. We also provide our customers with helpful and
useful shopping services such as birthday reminders and wish lists. For shoppers
who are not certain what to get the kids, we offer product reviews,
recommendations and gift suggestions. Our online store is available 24 hours a
day, seven days a week and may be reached from the shopper's home or office.
eToys.com. Why go to the store, when the toy store can come to you?
TOYSEARCH.-TM-
OUR TOYSEARCH LETS CUSTOMERS BROWSE BY ANY COMBINATION OF AGE, CATEGORY, KEYWORD
OR PRICE.
<PAGE>
[PICTURE OF MADELINE DOLL]
GOOD ADVICE.
OUR AWARD WINNER SECTION FEATURES TOYS RECOMMENDED BY PROMINENT PARENTING AND
FAMILY PUBLICATIONS AS WELL AS ORGANIZATIONS WHO REVIEW CHILDREN'S TOYS,
SOFTWARE AND BOOKS. CUSTOMERS CAN ALSO VISIT OUR BESTSELLERS SECTION TO VIEW THE
MOST POPULAR TOYS SOLD OVER THE PAST 30 DAYS OR BROWSE THROUGH OUR OWN FAVORITES
BY AGE RECOMMENDATIONS.
TOY BRANDS.
WE CARRY BOTH TRADITIONAL, WELL-KNOWN BRANDS, SUCH AS MATTEL, HASBRO AND LEGO,
AND SPECIALTY TOY BRANDS, SUCH AS BRIO, PLAYMOBIL AND LEARNING CURVE.
[PICTURE OF WRAPPED GIFT]
GIFT CENTER.
WE SIMPLIFY GIFT SHOPPING THROUGH OUR GIFT CENTER, WHERE CUSTOMERS CAN OBTAIN
GIFT CERTIFICATES, GIFT RECOMMENDATIONS BY AGE AND GET INFORMATION ON A VARIETY
OF CHILD-APPROPRIATE GIFT WRAP STYLES AND PERSONALIZED MESSAGE CARDS TO
ACCOMPANY THE GIFT.
PICKS OF THE MONTH.
IN OUR PICKS OF THE MONTH SECTION, WE RECOMMEND TOYS FOR DIFFERENT AGE RANGES.
[PICTURE OF BRIO TRAIN]
TWENTY UNDER $20.
OUR TWENTY UNDER $20 SECTION HAS RECOMMENDATIONS ON TOYS THAT WON'T STRAIN THE
BUDGET.
DETAILED PRODUCT INFORMATION.
A SIMPLE CLICK OF THE MOUSE GIVES SHOPPERS ACCESS TO DETAILED PRODUCT
INFORMATION THEY NEED TO MAKE EDUCATED BUYING DECISIONS, INCLUDING PRODUCT
DESCRIPTIONS, ETOYS' OWN AGE RECOMMENDATIONS, A LIST OF ACCESSORIES AND RELATED
PRODUCTS AND INVENTORY STATUS.
[PICTURE OF PRODUCT DESCRIPTION OF TWO-WAY BATTERY-POWERED ENGINE]
MY ETOYS.
WE PERSONALIZE THE CUSTOMER'S SHOPPING EXPERIENCE BY OFFERING BIRTHDAY
REMINDERS, CHILDREN'S WISH LISTS AND AN ADDRESS BOOK.
EXTENSIVE PRODUCT SELECTION.
OUR ONLINE STORE IS EXCLUSIVELY FOCUSED ON CHILDREN'S PRODUCTS AND OFFERS AN
EXTENSIVE SELECTION OF TOYS, VIDEO GAMES, SOFTWARE, VIDEOS AND MUSIC.
[PICTURE OF SUPER MARIO BROS. VIDEO GAME, GOODNIGHT MOON BOOK, JUMPSTART
SOFTWARE BOX AND PADDINGTON BEAR]
At the bottom right of the two page gatefold is the following:
[ETOYS LOGO]
WE BRING THE TOY STORE TO YOU.(SM)
WWW.ETOYS.COM
AOL KEYWORD: ETOYS
The following text is centered on the inside back cover:
[ETOYS LOGO]
WE BRING THE TOY STORE TO YOU.(SM)
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING ETOYS AND THE FINANCIAL STATEMENTS AND NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THIS PROSPECTUS
ASSUMES THE AUTOMATIC CONVERSION OF OUR OUTSTANDING PREFERRED STOCK INTO
58,779,267 SHARES OF COMMON STOCK, ASSUMING FULL EXERCISE OF WARRANTS TO
PURCHASE 48,387 SHARES OF PREFERRED STOCK OUTSTANDING AS OF MARCH 31, 1999, UPON
CLOSING OF THE OFFERING AND THE THREE-FOR-ONE FORWARD SPLIT OF OUR COMMON STOCK
AND PREFERRED STOCK TO BE EFFECTED UPON THE CLOSING OF THIS OFFERING. THIS
PROSPECTUS ALSO ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
OUR FISCAL YEAR ENDS ON MARCH 31ST OF EACH YEAR AND IS NAMED FOR THE CALENDAR
YEAR JUST ENDED. FOR EXAMPLE, OUR FISCAL YEAR ENDED MARCH 31, 1998 IS CALLED
"FISCAL 1997".
ETOYS INC.
OUR BUSINESS
We are a leading Web-based retailer focused exclusively on children's
products, including toys, video games, software, videos and music. By combining
our expertise in children's products and our commitment to excellent customer
service with the benefits of Internet retailing, we are able to deliver a unique
value proposition to consumers. Our online store offers an extensive selection
of competitively priced children's products, with over 9,500 SKUs representing
more than 750 brands. Our Web site features detailed product information,
helpful and useful shopping services and innovative merchandising through
easy-to-use Web pages. In addition, we offer customers the convenience and
flexibility of shopping 24 hours a day, seven days a week, with reliable and
timely product delivery and excellent customer service.
As of March 31, 1999, we have sold children's products to approximately
365,000 customers, of which approximately 75,000 were added during the quarter
ended March 31, 1999. Our net sales for the quarter ended December 31, 1998
totaled $22.9 million as compared to $0.5 million for the quarter ended December
31, 1997.
OUR MARKET OPPORTUNITY
We believe that many consumers find the toy shopping experience, especially
at traditional mass market retail outlets, to be time-consuming, inconvenient
and unpleasant due to factors such as location, store layout, product selection,
level of customer service and the challenges of shopping with children.
Our online store was created to provide consumers with a convenient and
enjoyable shopping experience in a Web-based retail environment. Key components
of our solution include:
- - CONVENIENT SHOPPING EXPERIENCE. Our online store is available 24 hours a day,
seven days a week, may be reached from the shopper's home or office and
features sophisticated browsing and search technology.
- - EXTENSIVE PRODUCT SELECTION AND INNOVATIVE MERCHANDISING. We offer a broad
array of children's products, which we believe includes the largest selection
of toys available on the Internet. In addition, we believe that we are the
only retailer to provide a comprehensive selection of both traditional,
well-known brands, such as Mattel, Hasbro and LEGO, and specialty brands, such
as BRIO, PLAYMOBIL and Learning Curve.
- - HELPFUL AND USEFUL SHOPPING SERVICES. To assist our customers, who are
generally adults purchasing for children, we offer product reviews,
recommendations, gift suggestions and services such as birthday reminders and
wish lists. Many of these services are also designed to inform and involve
children in the shopping experience.
- - EXCELLENT CUSTOMER SERVICE. We are committed to providing the highest level of
customer service. We offer free pre- and post-sales support via telephone and
e-mail, online order tracking and helpful online shopping hints.
3
<PAGE>
OUR STRATEGY
Our objective is to be one of the world's leading retailers of children's
products. Key elements of our strategy include:
- - FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS. We intend to become the
primary shopping destination for purchasers of children's products by
enhancing our current product offerings and expanding into additional
categories.
- - BUILD STRONG BRAND RECOGNITION. We use online and offline marketing strategies
to enhance our brand recognition and we focus our efforts primarily towards
mothers, who we believe are the principal decision-makers for purchases of
children's products.
- - PURSUE INCREMENTAL REVENUE OPPORTUNITIES. We intend to leverage our brand,
operating infrastructure and customer base by opening new departments,
increasing product selection, adding more helpful and useful shopping
services, pursuing international opportunities and acquiring complementary
businesses, products or technologies.
- - PROMOTE REPEAT PURCHASES. We intend to maximize the number of repeat purchases
by our customers by targeting existing customers through direct marketing
techniques, building features unique to each individual customer and enhancing
our customer service.
- - MAINTAIN OUR TECHNOLOGY FOCUS AND EXPERTISE. We intend to enhance our service
offerings to take advantage of the unique characteristics of online retailing.
We plan to increase the efficiency of our relationships with product vendors
and manufacturers and our distribution operations.
RISK FACTORS
An investment in our common stock involves a high degree of risk. Since our
inception in November 1996, we have incurred significant losses, and as of
December 31, 1998, we had an accumulated deficit of $17.6 million. We expect our
operating losses and negative cash flow to continue for the foreseeable future.
In addition, we encounter a number of the risks, including unpredictability of
operating results, seasonality, inventory risk, reliance on key vendors and
distributors, and intense competition. You should carefully consider these risks
and uncertainties as well as those other risks and uncertainties described in
"Risk Factors" beginning on page 7 of this prospectus before deciding whether to
invest in shares of our common stock.
CORPORATE INFORMATION
We were incorporated as Toys.com in Delaware in November 1996. In May 1997,
we changed our name to eToys.com Inc., and in June 1997, we changed our name to
eToys Inc. Our corporate offices are located at 2850 Ocean Park Blvd., Suite
225, Santa Monica, CA 90405. Our telephone number at that location is (310)
664-8100. Information contained on our Web site does not constitute part of this
prospectus.
4
<PAGE>
THE OFFERING
The following information assumes that the underwriters do not exercise the
option granted by us to purchase additional shares in the offering. The number
of shares outstanding after the offering indicated below differs from the shares
outstanding as of December 31, 1998 as indicated in the financial statements
included in this prospectus. The number below includes an aggregate of 2,170,113
shares issuable upon the exercise of warrants outstanding as of December 31,
1998, substantially all of which are expected to be exercised prior to the
completion of this offering and 1,999,998 shares of preferred stock issued by us
in a private offering in March 1999. The number below excludes 11,412 shares
issuable upon exercise of a warrant we issued to an equipment lessor in January
1999. The number below also excludes 39,371,439 shares of common stock reserved
for issuance under our stock option and stock purchase plans, of which
14,951,301 shares were subject to outstanding options as of March 31, 1999 with
a weighted average exercise price of $1.592 per share. See "Underwriting",
"Management--Stock Plans" and Notes 6 and 8 of Notes to Financial Statements.
<TABLE>
<S> <C>
Shares offered by eToys...................... 8,200,000 shares
Shares to be outstanding after the 101,640,307 shares
offering...................................
Use of proceeds.............................. For general corporate purposes, principally
working capital and capital expenditures. See
"Use of Proceeds".
Proposed Nasdaq National Market symbol....... "ETYS"
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information is derived from our financial
statements included elsewhere in this prospectus and should be read in
conjunction with those financial statements and the related notes. The balance
sheet data displayed in the "As Adjusted" column reflect the application of the
net proceeds from the sale of 8,200,000 shares of common stock offered by us at
an assumed initial public offering price of $11.00 per share, after deducting
the underwriting discount and estimated offering expenses. See "Use of Proceeds"
and "Capitalization".
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL ENDED
YEAR ENDED DECEMBER 31,
MARCH 31, --------------------------
1998(1) 1997 1998
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................ $ 687 $ 530 $ 23,900
Gross profit..................................................... 119 92 4,892
Operating expenses:
Marketing and sales............................................ 1,290 632 14,354
Product development............................................ 421 206 2,006
General and administrative(2).................................. 678 366 4,345
------------ ------------ ------------
Operating loss................................................... (2,270) (1,112) (15,813)
Net loss......................................................... $ (2,268) $ (1,127) $ (15,375)
Basic net loss per share......................................... $ (0.09) $ (0.05) $ (0.46)
Pro forma basic net loss per share(3)............................ $ (0.08) $ (0.05) $ (0.19)
Shares used to compute basic net loss per share.................. 25,129,888 23,326,095 33,157,034
Shares used to compute pro forma basic net loss per share(3)..... 30,232,902 23,879,498 79,287,459
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................ $ 18,545 $ 121,649
Working capital.......................................................................... 10,117 113,221
Total assets............................................................................. 27,550 130,654
Long-term capital lease obligations, less current portion................................ 35 35
Total stockholders' equity (deficit)..................................................... (15,177) 116,826
</TABLE>
- ------------------------------
(1) Prior to June 1997, we had no operations or activities.
(2) Includes expense related to the amortization expense of deferred
compensation which is $2,000 for the fiscal year ended March 31, 1998 and
$1.6 million for the nine months ended December 31, 1998.
(3) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares and share equivalents used in
computing pro forma per share amounts.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST
IN SHARES OF OUR COMMON STOCK. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. IN SUCH
CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE PART
OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE ARE AN EARLY-STAGE COMPANY AND WE EXPECT TO ENCOUNTER RISKS AND DIFFICULTIES
FREQUENTLY FACED BY EARLY-STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS.
We were incorporated in November 1996. We began selling products on our Web
site in October 1997. Our limited operating history makes an evaluation of our
future prospects very difficult. We will encounter the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets. We cannot be certain that our business strategy will be successful or
that we will successfully address these risks.
WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW.
We expect operating losses and negative cash flow to continue for the
foreseeable future. We anticipate our losses will increase significantly from
current levels because we expect to incur additional costs and expenses related
to:
- - brand development, marketing and other promotional activities;
- - the expansion of our inventory management and distribution operations;
- - the continued development of our Web site, the systems that we use to process
customers' orders and payments, and our computer network;
- - the expansion of our product offerings and Web site content; and
- - development of relationships with strategic business partners.
As of December 31, 1998, we had an accumulated deficit of $17.6 million. We
incurred net losses of $2.3 million for the fiscal year ended March 31, 1998 and
$15.4 million for the nine months ended December 31, 1998.
Our ability to become profitable depends on our ability to generate and
sustain substantially higher net sales while maintaining reasonable expense
levels. If we do achieve profitability, we cannot be certain that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future. See "Selected Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
OUR LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING DIFFICULT.
As a result of our limited operating history, it is difficult to accurately
forecast our net sales and we have limited meaningful historical financial data
upon which to base planned operating expenses. We base our current and future
expense levels on our operating plans and estimates of future net sales, and our
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
we receive. As a result, we may be unable to adjust our spending in a timely
manner to compensate
7
<PAGE>
for any unexpected revenue shortfall. This inability could cause our net losses
in a given quarter to be greater than expected.
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF
OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our 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 our control. Because our operating results are volatile and
difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. It is
likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may fall significantly.
Factors that may harm our business or cause our operating results to
fluctuate include the following:
- - our inability to obtain new customers at reasonable cost, retain existing
customers, or encourage repeat purchases;
- - decreases in the number of visitors to our Web site or our inability to
convert visitors to our Web site into customers;
- - the mix of toys, video games, software, videos and music sold by us;
- - seasonality;
- - our inability to manage inventory levels;
- - our inability to manage our distribution operations;
- - our inability to adequately maintain, upgrade and develop our Web site, the
systems that we use to process customers' orders and payments or our computer
network;
- - the ability of our competitors to offer new or enhanced Web sites, services or
products;
- - price competition;
- - an increase in the level of our product returns;
- - fluctuations in the demand for children's products associated with movies,
television and other entertainment events;
- - our inability to obtain popular children's toys, video games, software, videos
and music from our vendors;
- - fluctuations in the amount of consumer spending on children's toys, video
games, software, videos and music;
- - the termination of existing, or failure to develop new, strategic marketing
relationships pursuant to which we receive exposure to traffic on third-party
Web sites;
- - the extent to which we are 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 our operations;
- - unexpected increases in shipping costs or delivery times, particularly during
the holiday season;
8
<PAGE>
- - technical difficulties, system downtime or Internet brownouts;
- - government regulations related to use of the Internet for commerce or for
sales and distribution of toys, video games, software, videos and music; and
- - economic conditions specific to the Internet, online commerce and the
children's toy, video game, software, video and music industries.
A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of toys, video games, software, videos and music sold
by us, 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 harm our gross
margins and operating results in future periods.
BECAUSE OUR MARKET IS HIGHLY SEASONAL, OUR QUARTERLY RESULTS WILL FLUCTUATE.
We have historically experienced and expect to continue to experience
seasonal fluctuations in our net sales. These seasonal patterns will cause
quarterly fluctuations in our operating results and could harm our financial
performance. In particular, a disproportionate amount of our net sales have been
realized during the fourth calendar quarter and we expect this trend to continue
in the future. Based on The NPD Group's TRSTS Report, approximately 52% of
retail sales in 1998 in the toy and video game markets occurred in the fourth
calendar quarter.
In anticipation of increased sales activity during the fourth calendar
quarter, we hire a significant number of temporary employees to bolster our
permanent staff and we significantly increase our inventory levels. For this
reason, if our net sales were below seasonal norms during this quarter, our
annual operating results would be harmed.
Due to our limited operating history, it is difficult to predict the
seasonal pattern of our sales and the impact of such seasonality on our business
and financial results. In the future, our seasonal sales patterns may become
more pronounced, may strain our personnel and warehousing and order shipment
activities and may cause a shortfall in net sales as compared to expenses in a
given period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
WE FACE SIGNIFICANT INVENTORY RISK BECAUSE CONSUMER DEMAND CAN CHANGE FOR
PRODUCTS BETWEEN THE TIME THAT WE ORDER PRODUCTS AND THE TIME THAT WE RECEIVE
THEM.
We carry a significant level of inventory. As a result, the rapidly changing
trends in consumer tastes in the market for children's toys, video games,
software, videos and music subject us to significant inventory risks. It is
critical to our success that we accurately predict these trends and do not
overstock unpopular products. The demand for specific products can change
between the time the products are ordered and the date of receipt. We are
particularly exposed to this risk because we derive a majority of our net sales
in the fourth calendar quarter of each year. Our failure to sufficiently stock
popular toys and other products in advance of such fourth calendar quarter would
harm our operating results for the entire fiscal year.
In the event that one or more products do not achieve widespread consumer
acceptance, we may be required to take significant inventory markdowns, which
would adversely affect our business. This risk may be greatest in the first
calendar quarter of each year, after we have significantly increased inventory
levels for the holiday season. We believe that this risk will increase as we
open new departments or enter new product categories due to our lack of
experience in purchasing products for these categories. In addition, to the
extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any such increase would
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subject us to additional inventory risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business".
OUR NET SALES ARE DEPENDENT UPON OUR ABILITY TO OFFER OUR CUSTOMERS SUFFICIENT
QUANTITIES OF CHILDREN'S PRODUCTS IN A TIMELY MANNER.
If we are not able to offer our customers sufficient quantities of toys or
other products in a timely manner, our net sales and results of operations will
be harmed. Our success depends on our ability to purchase products in sufficient
quantities at competitive prices, particularly for the holiday shopping season.
As is common in the industry, we do not have long-term or exclusive arrangements
with any vendor or distributor that guarantee the availability of toys or other
children's products for resale. Therefore, we do not have a predictable or
guaranteed supply of toys or other products.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF PRODUCTS FROM OUR KEY
VENDORS, OUR NET SALES WOULD BE ADVERSELY AFFECTED.
If we were unable to obtain sufficient quantities of products from our key
vendors, our net sales and results of operations would be harmed. We derive a
significant percentage of our net sales from sales of Mattel and Hasbro
products. We also derive a significant percentage of our net sales from the sale
of video game products that are primarily supplied to us by a single
distributor. From time to time, we have experienced difficulty in obtaining
sufficient product allocations from a key vendor. In addition, our key vendors
have established, and may continue to expand, their own online retailing
efforts, which may impact our ability to get sufficient product allocations from
such vendors.
TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT OUR
SYSTEMS, PROCEDURES AND CONTROLS. IF WE ARE UNABLE TO DO SO SUCCESSFULLY, OUR
BUSINESS WOULD BE SERIOUSLY HARMED.
Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management, information systems and
resources. In order to manage this growth effectively, we need to continue to
improve our financial and managerial controls and reporting systems and
procedures. Our failure to successfully implement, improve and integrate these
systems and procedures would harm our results of operations.
IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR NEW ACCOUNTING AND FINANCIAL
REPORTING SYSTEMS, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
If we fail to successfully implement and integrate our new financial
reporting and information systems with our existing systems or if we are not
able to expand these systems to accommodate our growth, we may not have
adequate, accurate or timely financial information. Our failure to have
adequate, accurate or timely financial information would harm our business and
could lead to volatility in our stock price. We recently implemented new
accounting and financial reporting software. In connection with the
implementation, we have encountered difficulties integrating this new software
with our other information systems. Additionally, we are in the process of
upgrading our other information systems and internal controls, including those
related to the purchase and receipt of inventory. If we grow rapidly, we will
face additional challenges in upgrading and maintaining such systems.
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WE 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 our net sales and results of operations. We expect competition to intensify
in the future because barriers to entry are minimal, and current and new
competitors can launch new Web sites at a relatively low cost. In addition, the
children's toy, video game, software, video and music retailing industries are
intensely competitive.
We currently or potentially compete with a variety of other companies,
including:
- - traditional store-based toy and children's product retailers such as Toys R
Us, FAO Schwarz, Zany Brainy and Noodle Kidoodle;
- - major discount retailers such as Wal-Mart, Kmart and Target;
- - online efforts of these traditional retailers, including the online stores
operated by Toys R Us, Wal-Mart and FAO Schwarz;
- - physical and online stores of entertainment entities that sell and license
children's products, such as The Walt Disney Company and Warner Bros.;
- - catalog retailers of children's products;
- - vendors or manufacturers of children's products that currently sell some of
their products directly online, such as Mattel and Hasbro;
- - other online retailers that include children's products as part of their
product offerings, such as Amazon.com, Barnesandnoble.com, CDnow, Beyond.com
and Reel.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's 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 we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-financed
entities may join with online competitors or children's toy, video game,
software, video and music publishers or suppliers as the use of the Internet and
other online services increases.
Our 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 we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. See "Business--Competition".
IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BUSINESS WOULD BE SERIOUSLY HARMED.
Any new department or product category that is launched by us but not
favorably received by consumers could damage our brand or reputation and harm
our net sales and results of operations. An expansion of our business in this
manner would require significant additional expenses, and strain our management,
financial and operational resources. This type of expansion would also subject
us to increased inventory risk. We may choose to expand our operations by
developing new departments or product categories, promoting new or complementary
products,
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expanding the breadth and depth of products and services offered or expanding
our market presence through relationships with third parties. In addition, we
may pursue the acquisition of new or complementary businesses, products or
technologies, although we have no present understandings, commitments or
agreements with respect to any material acquisitions or investments.
IF WE DO NOT SUCCESSFULLY EXPAND OUR DISTRIBUTION OPERATIONS, OUR BUSINESS WOULD
BE SERIOUSLY HARMED.
If we do not successfully expand our distribution operations to accommodate
increases in demand, particularly during the fourth calendar quarter of each
year, we will not be able to increase our net sales in accordance with the
expectations of securities analysts and investors. In such an event, our
business will be harmed. Our success depends on our ability to rapidly expand
our distribution operations in order to accommodate a significant increase in
customer orders. We must also be able to rapidly grow our distribution
operations and information systems to accommodate significant increases in
demand, which may require us to automate tasks that are currently performed
manually.
Our planned expansion may cause disruptions that harm our business, results
of operations and financial condition. Our current distribution operations are
not adequate to accommodate significant increases in customer demand that may
occur during the fourth calendar quarter of 1999. We intend to use a second
distribution facility that will be located outside of the greater Los Angeles
area. We are not experienced in coordinating and managing distribution
operations in geographically distant locations.
IF WE EXPERIENCE PROBLEMS IN OUR DISTRIBUTION OPERATIONS, OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
We rely upon third-party carriers for product shipments, including shipments
to and from our distribution facility. We are therefore subject to the risks,
including employee strikes and inclement weather, associated with such carriers'
ability to provide delivery services to meet our shipping needs. In addition,
failure to deliver products to our customers in a timely manner would harm our
reputation and brand. We also depend upon temporary employees to adequately
staff our distribution facility, particularly during the holiday shopping
season. If we do not have sufficient sources of temporary employees, our net
sales and results of operations will be harmed.
IF WE DO NOT SUCCESSFULLY EXPAND OUR WEB SITE AND THE SYSTEMS THAT PROCESS
CUSTOMERS' ORDERS, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
If we fail to rapidly upgrade our Web site in order to accommodate increased
traffic, we may lose customers, which would harm our net sales and results of
operations. Furthermore, if we fail to rapidly expand the computer systems that
we use to process and ship customer orders and process payments, our ability to
successfully distribute customer orders will be harmed, which would also harm
our net sales and results of operations. In addition, our failure to rapidly
upgrade our Web site or expand these computer systems without system downtime,
particularly during the fourth calendar quarter, would further harm our net
sales and results of operations. We may experience difficulty in improving and
maintaining such systems if our employees or contractors that develop or
maintain our computer systems become unavailable to us. We have experienced
periodic systems interruptions, which we believe will continue to occur, while
enhancing and expanding these computer systems.
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OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED PROBLEMS.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our leased facility in Southern California, or at the third-party
facility in Sunnyvale, California that houses substantially all of our computer
and communications hardware systems, could cause interruptions or delays in our
business, loss of data or render us unable to accept and fulfill customer
orders. Our leased facility in Southern California houses substantially all of
our product development and information systems, as well as our inventory. Any
such interruptions or delays at either of these facilities would harm our net
sales and results of operations. In addition, our systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. We have no
formal disaster recovery plan and our 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
us, as a result of human error, natural disaster or other operational
disruptions, could result in interruptions in our service. The occurrence of any
or all of the events could harm our reputation and brand and business.
OUR NET SALES WOULD BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL.
Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales and results of operations would be harmed. We rely on security and
authentication technology that we license from third parties. With this
technology, we perform real-time credit card authorization and verification with
our bank. We cannot predict whether events or developments will result in a
compromise or breach of the technology we use to protect a customer's personal
information.
Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any breaches. We cannot assure that we can
prevent all security breaches.
OUR NET SALES WOULD BE HARMED IF WE EXPERIENCE SIGNIFICANT CREDIT CARD FRAUD.
A failure to adequately control fraudulent credit card transactions would
harm our net sales and results of operations because we do not carry insurance
against this risk. We have developed technology to help us to detect the
fraudulent use of credit card information. Nonetheless, to date, we have
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, we are liable for fraudulent credit card
transactions because we do not obtain a cardholder's signature.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME
OBSOLETE AND OUR BUSINESS WOULD BE SERIOUSLY HARMED.
If we face material delays in introducing new services, products and
enhancements, our customers may forego the use of our services and use those of
our competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our 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, our existing Web site and proprietary technology and systems
may become obsolete.
To develop our Web site and other proprietary technology entails significant
technical and business risks. We may use new technologies ineffectively or we
may fail to adapt our Web site,
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systems that we use to process customers' orders and payments and our computer
network to customer requirements or emerging industry standards.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS.
Other parties may assert infringement or unfair competition claims against
us. In the past, a toy distributor using a name similar to ours sent us notice
of a claim of infringement of proprietary rights, which claim was subsequently
withdrawn. We expect to receive other notices from other third parties in the
future. We cannot predict whether third parties will assert claims of
infringement against us, or whether any past or future assertions or
prosecutions will harm our business. If we are forced to defend against any such
claims, whether they are with or without merit or are determined in our favor,
then we may face costly litigation, diversion of technical and management
personnel, or product shipment delays. As a result of such a dispute, we 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 we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely basis, it
could harm our business.
IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BUSINESS WILL BE SERIOUSLY HARMED.
The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success. We rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. In September 1998, the United States Patent and Trademark
Office granted us a registered trademark for "eToys" for online retail services
for toys and games. We have 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 we will sell our products and services
online. Furthermore, the relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights.
THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE
WOULD SERIOUSLY HARM OUR BUSINESS.
The loss of the services of one or more of our key personnel could seriously
harm our business. We depend on the continued services and performance of our
senior management and other key personnel, particularly Edward C. Lenk, our
President, Chief Executive Officer and Uncle of the Board. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel. The majority of our senior management
joined us in the last four months, including our Chief Financial Officer, Chief
Information Officer and Senior Vice President of Operations. Our future success
depends on these officers effectively working together with our original
management team. None of our officers or key employees is bound by an employment
agreement for any specific term. Our relationships with these officers and key
employees are at will. We do not have "key person" life insurance policies
covering any of our employees.
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WE MAY BE ADVERSELY IMPACTED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER
SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.
Any failure of our material systems, our vendors' material systems or the
Internet to be year 2000 compliant would have material adverse consequences for
us. Such consequences would include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business. We are currently assessing the year
2000 readiness of the software, computer technology and other services that we
use which may not be year 2000 compliant. At this time, we have not yet
developed a contingency plan to address situations that may result if we or our
vendors are unable to achieve year 2000 compliance. The cost of developing and
implementing such a plan, if necessary, could be material.
We also depend 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 our services and would
have a material adverse effect on us. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
THERE ARE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS.
If we are presented with appropriate opportunities, we intend to make
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any acquisition or investment. If we buy a
company, we could have difficulty in assimilating that company's personnel and
operations. In addition, the key personnel of the acquired company may decide
not to work for us. If we make other types of acquisitions, we could have
difficulty in assimilating the acquired technology or products into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. Furthermore, we may have to
incur debt or issue equity securities to pay for any future acquisitions or
investments, the issuance of which could be dilutive to us or our existing
stockholders.
EXISTING STOCKHOLDERS WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL OVER ETOYS.
Executive officers, directors and entities affiliated with them, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. These
stockholders will, in the aggregate, beneficially own approximately 70.9% of our
outstanding common stock following the completion of this offering. See
"Principal Stockholders".
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of our Amended and Restated Certificate of Incorporation, our
Bylaws and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. See
"Description of Capital Stock".
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION.
We expect the initial public offering price to be substantially higher than
the book value per share of the outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in this offering, you will
experience immediate dilution of approximately $9.85 in the book value per share
of the common stock from the price you pay for the common stock. See "Dilution".
RISKS RELATED TO OUR INDUSTRY
WE MAY BE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES.
We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
We currently hold various
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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
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.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION INCREASES.
The adoption or modification of laws or regulations relating to the Internet
could adversely affect the manner in which we currently conduct our 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 us. 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.
WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.
As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. If we face liability, particularly liability that is not covered by
our insurance or is in excess of our insurance coverage, then our reputation and
our business may suffer. In the past, plaintiffs have brought these types of
claims and sometimes successfully litigated them against online services.
Although we carry general liability insurance, our insurance may not cover
claims of these types or may be inadequate to indemnify us for all liability
that may be imposed on us.
OUR NET SALES COULD BE HARMED IF WE BECOME SUBJECT TO SALES AND OTHER TAXES.
If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do 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 us. In addition, any new operation
in states outside California could subject our shipments in such states to state
sales taxes under current or future laws.
RISKS RELATED TO SECURITIES MARKETS
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We cannot be certain that additional financing will be available to us on
favorable terms when required, or at all. If we raise 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 our
common stock and our stockholders may experience additional dilution. We require
substantial working capital to fund our business. Since our inception, we have
experienced negative cash flow from operations and expect to experience
significant negative cash flow from operations for the
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foreseeable future. We currently anticipate that the net proceeds of this
offering, together with our available funds, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the next 12 months. We may need to raise additional funds prior to the
expiration of such period.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INDIVIDUAL STOCKHOLDERS.
The market price for our 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 our control:
- - actual or anticipated variations in our quarterly operating results;
- - announcements of technological innovations or new products or services by us
or our 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 us or our 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 our outstanding shares of
common stock or sales of additional shares of common stock; and
- - potential litigation.
IF OUR STOCK PRICE IS VOLATILE, WE 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 we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
would harm our stock price.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
101,640,307 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after March 31,
1999. Of these shares, the shares sold in this offering are freely tradable.
This leaves 93,440,307 remaining shares. 91,440,309 of such shares will be
eligible for sale in the public market beginning 180 days after the date of this
prospectus and 1,999,998 of such shares will be eligible for sale in the public
market beginning 365 days after the date of this prospectus subject to volume
and other restrictions pursuant to Rule 144 under the Securities Act. See
"Management--Stock Plans", "Shares Eligible for Future Sale" and "Underwriting".
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USE OF PROCEEDS
The net proceeds to us from the sale of the shares being offered hereby at
an assumed public offering price of $11.00 per share are estimated to be $82.7
million, after deducting the underwriting discount and estimated offering
expenses payable by us, or $95.3 million if the underwriters' over-allotment
option is exercised in full.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate our future access
to the public capital markets, and to increase our visibility in the retail
marketplace. We expect to use up to approximately 30% of the net proceeds of
this offering for capital expenditures associated with technology and system
upgrades and the expansion of our distribution operations and corporate offices.
We have no specific plans for the remaining proceeds. The remainder of the net
proceeds will be used for general corporate purposes and working capital. This
allocation is only an estimate and we may adjust it as necessary to address our
operational needs in the future. For instance, we may also use a portion of the
net proceeds to acquire complementary technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998 on
an actual, pro forma and as adjusted basis. The "actual" column reflects our
capitalization as of December 31, 1998 on a historical basis, without any
adjustments to reflect subsequent events or anticipated events. The "pro forma"
column reflects our capitalization as of December 31, 1998 with adjustments for
the following:
- the filing of an amendment to our Certificate of Incorporation to provide
for authorized capital stock of 600,000,000 shares of common stock and
10,000,000 shares of undesignated preferred stock and a three-for-one
forward stock split of our common stock and preferred stock;
- the issuance of 1,999,998 shares of our preferred stock in a private
offering in March 1999; and
- the automatic conversion of all shares of outstanding preferred stock into
56,759,154 shares of common stock upon the closing of this offering.
The "as adjusted" column reflects our capitalization as of December 31, 1998
with the preceding "pro forma" adjustments plus:
- the exercise of warrants outstanding as of December 31, 1998, resulting in
the anticipated issuance of 2,170,113 shares of common stock; and
- the receipt of the estimated net proceeds from our sale of 8,200,000
shares of common stock at an assumed initial public offering price of
$11.00 per share.
None of the columns set forth below reflect the following:
- the 11,412 shares of common stock issuable upon exercise of a warrant that
we issued to an equipment lessor in January 1999; and
- the 39,371,439 shares reserved for issuance under our stock option plans
and stock purchase plans, of which 12,717,600 shares were subject to
outstanding options as of December 31, 1998.
The table below should be read in conjunction with our balance sheet as of
December 31, 1998 and the related notes, which are included elsewhere in this
prospectus:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term capital lease obligations, less current portion............. $ 35 $ 35 $ 35
Redeemable Convertible Preferred Stock, 18,926,423 shares authorized:
Series A Preferred Stock; $.0001 par value; 6,366,403 shares issued
and outstanding, actual; no shares authorized, issued or
outstanding, pro forma and as adjusted............................ 3,947 -- --
Series B Preferred Stock; $.0001 par value; 11,886,649 shares issued
and outstanding, actual; no shares authorized, issued or
outstanding, pro forma and as adjusted............................ 24,952 -- --
Series C Preferred Stock, $.0001 par value, 666,666 shares issued in
March 1999; no shares authorized, issued or outstanding, pro forma
and as adjusted................................................... -- -- --
Stockholders' equity (deficit):
Preferred Stock: $.0001 par value, 5,000,000 shares authorized, none
issued or outstanding actual, 10,000,000 shares authorized, none
issued or outstanding, pro forma and as adjusted.................. -- -- --
Common Stock: $.0001 par value, 150,000,000 shares authorized,
33,777,837 shares issued and outstanding actual; 600,000,000
shares authorized, 90,536,991 issued and outstanding, pro forma;
100,907,104 shares issued and outstanding, as adjusted............ 3 9 10
Additional paid-in capital............................................ 32,668 81,561 164,664
Receivables from stockholders......................................... (147) (147) (147)
Deferred compensation(1).............................................. (30,058) (30,058) (30,058)
Accumulated deficit................................................... (17,643) (17,643) (17,643)
--------- ---------- -----------
Total stockholders' equity (deficit).............................. (15,177) 33,722 116,826
--------- ---------- -----------
Total capitalization.......................................... $ 13,757 $ 33,757 $ 116,861
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
- ------------------------
(1) We recorded deferred compensation of $31.6 million for the nine months ended
December 31, 1998. See Note 5 of Notes to Financial Statements.
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1998 was
approximately $33.0 million or $0.36 per share. Net tangible book value per
share represents the amount of our total tangible assets reduced by the amount
of our total liabilities and divided by the total number of shares of common
stock outstanding after giving effect to the automatic conversion of the
preferred stock. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common stock
immediately after the completion of this offering. After giving effect to the
sale of the 8,200,000 shares of common stock offered by us at an assumed initial
public offering price of $11.00 per share, and after deducting the underwriting
discount and estimated offering expenses payable by us, our pro forma net
tangible book value at December 31, 1998 would have been approximately $116.1
million or $1.15 per share of common stock. This represents an immediate
increase in net tangible book value of $0.79 per share to existing stockholders
and an immediate dilution of $9.85 per share to new investors of common stock.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 11.00
Pro forma net tangible book value per share before the offering........... $ 0.36
Increase per share attributable to new investors.......................... 0.79
---------
Pro forma net tangible book value per share after the offering (as
adjusted)................................................................. 1.15
---------
Dilution per share to new investors......................................... $ 9.85
---------
---------
</TABLE>
The following table summarizes on a pro forma basis after giving effect to
the offering, as of December 31, 1998, the differences between the existing
stockholders and new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------------- --------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 92,707,104 91.9% $ 50,356,000 35.8% $ 0.54
New investors.................................. 8,200,000 8.1 90,200,000 64.2 11.00
-------------- --------- ---------------- ---------
Totals......................................... 100,907,104 100.0% $ 140,556,000 100.0%
-------------- --------- ---------------- ---------
-------------- --------- ---------------- ---------
</TABLE>
The preceding tables include an aggregate of 2,170,113 shares of common
stock issuable upon the exercise of warrants outstanding as of December 31,
1998, substantially all of which are expected to be exercised prior to the
completion of this offering. The preceding tables exclude 39,371,439 shares of
common stock reserved for issuance under our stock option plans and stock
purchase plans, of which 12,717,600 were subject to outstanding options as of
December 31, 1998 at a weighted average exercise price of $0.331 per share,
11,412 shares of common stock issuable upon exercise of a warrant that we issued
to an equipment lessor in January 1999.
20
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial and operating data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the notes included
elsewhere in this prospectus. The statement of operations data set forth below
for the fiscal year ended March 31, 1998 and for the nine months ended December
31, 1998, and the selected balance sheet data as of March 31, 1998 and December
31, 1998 have been derived from our audited financial statements appearing
elsewhere in this prospectus. The financial data for the nine months ended
December 31, 1997 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of the results of
operations for these periods. The historical results are not necessarily
indicative of results to be expected for any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31,
MARCH 31, ---------------------------
1998(1) 1997 1998
------------------ ------------ -------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales........................................................ $ 687 $ 530 $ 23,900
Cost of sales.................................................... 568 438 19,008
------------------ ------------ -------------
Gross profit..................................................... 119 92 4,892
Operating expenses:
Marketing and sales............................................ 1,290 632 14,354
Product development............................................ 421 206 2,006
General and administrative(2).................................. 678 366 4,345
------------------ ------------ -------------
Total operating expenses................................. 2,389 1,204 20,705
------------------ ------------ -------------
Operating loss................................................... (2,270) (1,112) (15,813)
Interest income (expense), net................................... 3 (15) 439
------------------ ------------ -------------
Loss before income taxes......................................... (2,267) (1,127) (15,374)
Provision for income taxes....................................... 1 -- 1
------------------ ------------ -------------
Net loss......................................................... $ (2,268) $ (1,127) $ (15,375)
------------------ ------------ -------------
------------------ ------------ -------------
Basic net loss per share......................................... $ (0.09) $ (0.05) $ (0.46)
------------------ ------------ -------------
------------------ ------------ -------------
Pro forma basic net loss per share(3)............................ $ (0.08) $ (0.05) $ (0.19)
------------------ ------------ -------------
------------------ ------------ -------------
Shares used to compute basic net loss per share.................. 25,129,888 23,326,095 33,157,034
------------------ ------------ -------------
------------------ ------------ -------------
Shares used to compute pro forma basic net loss per share(3)..... 30,232,902 23,879,498 79,287,459
------------------ ------------ -------------
------------------ ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1998
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 1,552 $ 18,545
Working capital....................................................................... 1,456 10,117
Total assets.......................................................................... 2,927 27,550
Long-term capital lease obligations, less current portion............................. -- 35
Total stockholders' equity (deficit).................................................. (1,345) (15,177)
</TABLE>
- --------------------------
(1) Prior to June 1997, we had no operations or activities.
(2) Included in general and administrative expenses related to the amortization
expense of deferred compensation is $2,000 for the fiscal year ended March
31, 1998 and $1.6 million for the nine months ended December 31, 1998.
(3) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares and share equivalents used in
computing pro forma per share amounts.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE
STATEMENTS REFER TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS.
THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "EXPECTS",
"ANTICIPATES", "INTENDS", "PLANS" AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO, THE RISKS DISCUSSED IN THE SECTION TITLED "RISK FACTORS" IN THIS
PROSPECTUS.
OVERVIEW
We are a leading Web-based retailer focused exclusively on children's
products, including toys, video games, software, videos and music. We currently
offer an extensive selection of competitively priced children's products
consisting of over 9,500 SKUs representing more than 750 brands.
We were incorporated in November 1996 and began offering products for sale
on our Web site and entered into a marketing agreement with AOL on October 1,
1997. For the period from inception through October 1, 1997, we had no sales and
our operating activities related primarily to the development of the necessary
computer infrastructure and initial planning and development of our Web site and
operations. Since launching our online store, we have continued these operating
activities and have also focused on building sales momentum, expanding our
product offerings, establishing vendor relationships, promoting our brand name
and establishing distribution and customer service operations. Our cost of sales
and operating expenses have increased significantly since inception. This trend
reflects the costs associated with our formation as well as increased efforts to
promote our brand, build market awareness, attract new customers, recruit
personnel, build operating infrastructure and develop our Web site and
associated systems that we use to process customers' orders and payments.
We have grown rapidly since launching our online store in October 1997.
During the fall of 1998, we launched our redesigned Web site and added video
game, software, video and music departments to our online store. Our net sales
increased to $22.9 million for the quarter ended December 31, 1998 from $0.5
million for the quarter ended December 31, 1997. The market for children's toys,
video games, software, videos and music is highly seasonal. A disproportionate
amount of our net sales have been realized during the fourth calendar quarter
and we expect this trend to continue in future periods. In addition, since a
disproportionate amount of our net sales are realized during the fourth calendar
quarter, we significantly increase our purchases of inventory during such
quarter. Accordingly, our accounts payable are at their highest levels during
the fourth calendar quarter. Our gross margin was 20.6% for the quarter ended
December 31, 1998. Our gross margin will fluctuate in future periods based on
factors such as product mix, inventory management, inbound and outbound shipping
costs, the level of product returns, and the level of discount pricing and
promotional coupon usage.
Since 1997, we have significantly increased the depth of our management team
to help implement our growth strategy. To facilitate our growth, we have
recently expanded our senior management team to include a Chief Financial
Officer, Chief Information Officer and Senior Vice President of Operations.
Since inception, we have incurred significant losses and, as of December 31,
1998, had an accumulated deficit of $17.6 million. We expect operating losses
and negative cash flow to continue for the foreseeable future. We anticipate our
losses will increase significantly from current levels because we expect to
incur additional costs and expenses related to brand development, marketing
22
<PAGE>
and other promotional activities; the expansion of our inventory management and
distribution operations; the continued development of our Web site, systems that
we use to process customers' orders and payments and our computer network; the
expansion of our product offerings and Web site content; and development of
relationships with strategic business partners.
We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as online commerce. Such risks for us include, but are not limited to, an
evolving and unpredictable business model and management of growth. To address
these risks, we must, among other things, maintain and expand our customer base,
implement and successfully execute our business and marketing strategy, continue
to develop and upgrade our technology and systems that we use to process
customers' orders and payments, improve our Web site, provide superior customer
service, respond to competitive developments and attract, retain and motivate
qualified personnel. We cannot assure that we will be successful in addressing
such risks, and our failure to do so could have a material adverse effect on our
business, prospects, financial condition and results of operations.
In connection with this offering of shares of our common stock, options
granted in the fiscal years ended March 31, 1997 and 1998 have been considered
to be compensatory. Deferred compensation associated with such options for the
nine months ended December 31, 1998 amounted to $31.6 million. Of this amount,
$1.6 million was charged to operations for the nine months ended December 31,
1998 and $30.0 million will be amortized over the vesting periods of the
applicable options through the fiscal year ending March 31, 2003.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS ENDED
ENDED DECEMBER 31,
MARCH 31, ------------------------
1998 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................................................. 100.0 % 100.0% 100.0%
Cost of sales.............................................................. 82.7 82.6 79.5
------ ----------- -----------
Gross profit............................................................... 17.3 17.4 20.5
Operating expenses:
Marketing and sales...................................................... 187.7 119.2 60.1
Product development...................................................... 61.3 38.9 8.4
General and administrative............................................... 98.7 69.1 18.2
------ ----------- -----------
Total operating expenses............................................. 347.7 227.2 86.6
------ ----------- -----------
Operating loss............................................................. (330.4) (209.8) (66.2)
Interest income (expense), net............................................. 0.4 (2.8) 1.8
Provision for income taxes................................................. 0.1 -- --
------ ----------- -----------
Net loss................................................................... (330.1)% (212.6)% (64.3)%
------ ----------- -----------
------ ----------- -----------
</TABLE>
23
<PAGE>
QUARTERS ENDED DECEMBER 31, 1997 AND 1998
NET SALES
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. Net sales increased to $22.9 million for the
quarter ended December 31, 1998 from $0.5 million for the quarter ended December
31, 1997 as a result of the significant growth of our customer base and an
increase in repeat purchases from our existing customers, reflecting the
relaunch of our Web site and the addition of new departments to our online store
during the fall of 1998.
COST OF SALES
Cost of sales consists primarily of the costs of products sold to customers,
outbound and inbound shipping and handling costs, and gift wrapping costs. Cost
of sales increased to $18.2 million for the quarter ended December 31, 1998 from
$0.4 million for the quarter ended December 31, 1997. This $17.8 million
increase was primarily attributable to our increased sales volume. We expect
cost of sales to increase in future periods to the extent that our sales volume
increases. Our gross profit margin increased to 20.6% of net sales for the
quarter ended December 31, 1998 from 17.4% of net sales for the quarter ended
December 31, 1997. This increase was primarily due to greater sales of higher
margin products as a percentage of our overall net sales and improved
purchasing. There can be no assurance that we will continue to achieve improved
purchasing in future periods.
OPERATING EXPENSES
MARKETING AND SALES. 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 to $10.6 million for the quarter ended December 31,
1998 from $0.4 million for the quarter ended December 31, 1997. This $10.2
million increase was primarily attributable to the expansion of our online and
offline advertising, including a comprehensive print and television advertising
campaign, as well as to increased personnel and related expenses required to
implement our marketing strategy. In addition, due to a significant increase in
our sales volume, we experienced higher distribution and customer service
expenses, including an increased level of temporary staffing during the holiday
season. Marketing and sales expenses as a percentage of net sales decreased to
46.3% for the quarter ended December 31, 1998 from 83.8% for the quarter ended
December 31, 1997. Such expenses decreased significantly as a percentage of net
sales during the quarter ended December 31, 1998 due to the significant increase
in net sales during such period. We intend to continue to pursue an aggressive
branding and marketing campaign and, therefore, expect marketing and sales
expenses to increase significantly in absolute dollars in future periods. In
addition, to the extent that our sales volume increases in future periods, we
expect marketing and sales expenses to increase in absolute dollars as we expand
our distribution facilities to accommodate such increases in sales volume.
PRODUCT DEVELOPMENT. 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. Product development expenses increased to $0.9
million for the quarter ended December 31, 1998 from $0.1 million for the
quarter ended December 31, 1997. This $0.8 million increase was primarily
attributable to increased staffing and associated costs related to enhancing the
features, content and functionality of our online store and increasing the
capacity of our systems that we use to process customers'
24
<PAGE>
orders and payments. Product development expenses as a percentage of net sales
decreased to 4.0% for the quarter ended December 31, 1998 from 27.4% for the
quarter ended December 31, 1997. Such expenses decreased significantly as a
percentage of net sales during the quarter ended December 31, 1998 due to the
significant increase in net sales during such period. We believe that continued
investment in product development is critical to attaining our strategic
objectives and, as a result, expect product development expenses to increase
significantly in absolute dollars.
GENERAL AND ADMINISTRATIVE. 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. General and administrative expenses increased to $3.2
million for the quarter ended December 31, 1998 from $0.2 million for the
quarter ended December 31, 1997. This $3.0 million increase was primarily
attributable to increased headcount and related expenses associated with the
hiring of additional personnel, and increased professional services expenses.
General and administrative expenses as a percentage of net sales decreased to
13.9% for the quarter ended December 31, 1998 from 44.2% for the quarter ended
December 31, 1997. Such expenses decreased significantly as a percentage of net
sales during the quarter ended December 31, 1998 due to the significant increase
in net sales during such period. We expect general and administrative expenses
to increase in absolute dollars as we expand our staff and incur additional
costs related to the growth of our business and being a public company.
In the quarter ended December 31, 1998, we recorded total deferred stock
compensation of $30.4 million in connection with stock options granted during
the period, including approximately $0.3 million which represents the fair value
of options granted to non-employees during this period. Such amount is amortized
to expense over the vesting periods of the applicable options, resulting in $1.5
million for the quarter ended December 31, 1998, which is included in general
and administrative expenses. These amounts represent the difference between the
exercise price of stock option grants and the deemed fair value of our common
stock at the time of such grants.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consists of earnings on our cash and cash
equivalents, net of interest expense attributable to convertible notes in the
approximate principal amount of $895,000. These convertible notes were
subsequently converted into shares of preferred stock in December 1997. Net
interest income increased to $0.2 million for the quarter ended December 31,
1998 from net interest expense of $15,000 for the quarter ended December 31,
1997. This $0.2 million increase was primarily attributable to earnings on
higher average cash and cash equivalent balances during the quarter ended
December 31, 1998.
INCOME TAXES
As of December 31, 1998, we had $15.4 million of net operating loss
carryforwards for federal income tax purposes, which expire beginning in 2012.
We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability. Changes in the ownership of our common stock, as
defined in the Internal Revenue Code of 1986, as amended, may restrict the
utilization of such carryforwards. See Note 3 of Notes to Financial Statements.
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1998
Our fiscal year runs from April 1 through March 31. We commenced offering
products for sale on our Web site on October 1, 1997, and, accordingly, the nine
months ended December 31, 1997 only include a period of three months during
which we were generating net sales and incurring
25
<PAGE>
expenses. Consequently, our net sales and expenses for the nine months ended
December 31, 1998 have increased due to a full nine months of net sales
generated and expenses incurred during such period as compared to three months
of net sales and expenses during the nine months ended December 31, 1997.
NET SALES
Net sales increased to $23.9 million for the nine months ended December 31,
1998 from $0.5 million for the nine months ended December 31, 1997 as a result
of the significant growth of our customer base and an increase in repeat
purchases from our existing customers, reflecting the relaunch of our Web site
and the addition of new departments to our online store during the fall of 1998.
COST OF SALES
Cost of sales increased to $19.0 million for the nine months ended December
31, 1998 from $0.4 million for the nine months ended December 31, 1997. This
$18.6 million increase was primarily attributable to our increased sales volume
and the addition of new departments to our online store during such period. Our
gross profit margin increased to 20.5% of net sales for the nine months ended
December 31, 1998 from 17.4% of net sales for the nine months ended December 31,
1997. This increase was primarily due to greater sales of higher margin products
as a percentage of our overall net sales.
OPERATING EXPENSES
MARKETING AND SALES. Marketing and sales expenses increased to $14.4
million for the nine months ended December 31, 1998 from $0.6 million for the
nine months ended December 31, 1997. This $13.8 million increase was primarily
attributable to the expansion of our online and offline advertising, including a
comprehensive print and television advertising campaign, as well as to increased
personnel and related expenses required to implement our marketing strategy. In
addition, due to a significant increase in our sales volume, we experienced
higher distribution and customer service expenses, including an increased level
of temporary staffing during the holiday season. Marketing and sales expenses as
a percentage of net sales decreased to 60.1% for the nine months ended December
31, 1998 from 119.2% for the nine months ended December 31, 1997. Such expenses
decreased significantly as a percentage of net sales during the nine months
ended December 31, 1998 due to the significant increase in net sales during such
period.
PRODUCT DEVELOPMENT. Product development expenses increased to $2.0 million
for the nine months ended December 31, 1998 from $0.2 million for the nine
months ended December 31, 1997. This $1.8 million increase was primarily
attributable to increased staffing and associated costs related to enhancing the
features, content and functionality of our online store and the systems that we
use to process customers' orders and payments. Product development expenses as a
percentage of net sales decreased to 8.4% for the nine months ended December 31,
1998 from 38.9% for the nine months ended December 31, 1997. Such expenses
decreased significantly as a percentage of net sales during the nine months
ended December 31, 1998 due to the significant increase in net sales during such
period.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $4.3 million for the nine months ended December 31, 1998 from $0.4 million
for the nine months ended December 31, 1997. This $3.9 million increase was
primarily attributable to increased headcount and related expenses associated
with the hiring of additional personnel, and increased professional services
expenses. General and administrative expenses as a percentage of net sales
decreased to 18.2% for the nine months ended December 31, 1998 from 69.1% for
the nine months ended
26
<PAGE>
December 31, 1997. Such expenses decreased significantly as a percentage of net
sales during the nine months ended December 31, 1998 due to the significant
increase in net sales during such period.
In the nine months ended December 31, 1998, we recorded total deferred stock
compensation of $31.6 million in connection with stock options granted during
the period, including approximately $0.3 million which represents the fair value
of options granted to non-employees during this period. Such amount is amortized
to expense over the vesting periods of the applicable options, resulting in $1.6
million for the nine months ended December 31, 1998, which is included in
general and administrative expenses. These amounts represent the difference
between the exercise price of stock option grants and the deemed fair value of
our common stock at the time of such grants.
In addition, during the three months ended March 31, 1999, we recognized
$7.9 million of additional deferred compensation. Amortization of deferred
compensation expense for each of the next five fiscal years is expected to be as
follows:
<TABLE>
<CAPTION>
AMOUNT (IN
YEAR ENDED THOUSANDS)
- ------------------------------------------------------------------------------ ---------------
<S> <C>
March 31, 1999................................................................ $ 4,060
March 31, 2000................................................................ 9,887
March 31, 2001................................................................ 9,887
March 31, 2002................................................................ 9,880
March 31, 2003................................................................ 5,831
</TABLE>
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net increased to $0.4 million for the nine months
ended December 31, 1998 from $3,000 for the nine months ended December 31, 1997.
This $0.4 million increase was primarily attributable to earnings on higher
average cash and cash equivalent balances during the nine months ended December
31, 1998.
INCOME TAXES
As of December 31, 1998, we had $15.4 million of net operating loss
carryforwards for federal income tax purposes, which expire beginning in 2012.
We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability. Changes in the ownership of our common stock, as
defined in the Internal Revenue Code of 1986, as amended, may restrict the
utilization of such carryforwards. See Note 3 of Notes to Financial Statements.
27
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for the five quarters ended December 31, 1998. This unaudited quarterly
information has been derived from our unaudited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods covered. The quarterly data should be read in conjunction with our
financial statements and related notes. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1998 1998 1998 1998
----------- ------------ ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 530 $ 157 $ 381 $ 608 $ 22,910
Cost of sales........................................ 438 130 311 496 18,201
----------- ------------ ----------- ----------- -----------
Gross profit......................................... 92 27 70 112 4,709
Operating expenses:
Marketing and sales................................ 444 658 1,370 2,372 10,611
Product development................................ 145 215 404 697 905
General and administrative(1)...................... 234 312 462 703 3,180
----------- ------------ ----------- ----------- -----------
Total operating expenses....................... 823 1,185 2,236 3,772 14,696
----------- ------------ ----------- ----------- -----------
Operating loss....................................... (731) (1,158) (2,166) (3,660) (9,987)
Interest income (expense), net....................... (15) 18 (5) 277 166
Provision for income taxes........................... -- 1 -- -- 1
----------- ------------ ----------- ----------- -----------
Net loss............................................. $ (746) $ (1,141) $ (2,171) $ (3,383) $ (9,822)
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
AS A PERCENTAGE OF NET SALES:
Net sales............................................ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales........................................ 82.6 82.8 81.6 81.6 79.4
----------- ------------ ----------- ----------- -----------
Gross profit......................................... 17.4 17.2 18.4 18.4 20.6
Operating expenses:
Marketing and sales................................ 83.8 419.1 359.6 390.1 46.3
Product development................................ 27.4 136.9 106.0 114.6 4.0
General and administrative(1)...................... 44.2 198.7 121.3 115.6 13.9
----------- ------------ ----------- ----------- -----------
Total operating expenses......................... 155.3 754.8 586.9 620.4 64.1
----------- ------------ ----------- ----------- -----------
Operating loss....................................... (137.9) (737.6) (568.5) (602.0) (43.6)
Interest income (expense), net....................... (2.8) 11.5 (1.3) 45.6 0.7
Provision for income taxes........................... -- 0.6 -- -- --
----------- ------------ ----------- ----------- -----------
Net loss............................................. (140.8)% (726.8)% (569.8)% (556.4)% (42.9)%
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
</TABLE>
- ------------------------------
(1) Included in general and administrative expenses are $2,000, $43,700, $69,300
and $1.51 million related to the amortization expense of deferred
compensation for the quarters ended March 31, 1998, June 30, 1998, September
30, 1998 and December 31, 1998, respectively.
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Our 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 our control. Factors that may harm our business or cause our
operating results to fluctuate include the following:
- - our inability to obtain new customers at reasonable cost, retain existing
customers, or encourage repeat purchases;
- - decreases in the number of visitors to our Web site or our inability to
convert visitors to our Web site into customers;
- - the mix of toys, video games, software, videos and music sold by us;
- - seasonality;
- - our inability to manage inventory levels;
- - our inability to manage our distribution operations;
- - our inability to adequately maintain, upgrade and develop our Web site,
systems that we use to process customers' orders and payments or our computer
network;
- - the ability of our competitors to offer new or enhanced Web sites, services or
products;
- - price competition;
- - an increase in the level of our product returns;
- - fluctuations in the demand for children's products associated with movies,
television and other entertainment events;
- - our inability to obtain popular children's toys, video games, software, videos
and music from our vendors;
- - fluctuations in the amount of consumer spending on children's toys, video
games, software, videos and music;
- - the termination of existing, or failure to develop new, strategic marketing
relationships pursuant to which we receive exposure to traffic on third-party
Web sites;
- - the extent to which we are 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 our 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 toys, video games, software, videos and music; and
- - economic conditions specific to the Internet, online commerce and the
children's toy, video game, software, video and music industries.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance. It
is likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may fall significantly.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of preferred stock which through December 31, 1998, totaled $28.7 million.
Net cash used in operating activities was $4.9 million in the nine months
ended December 31, 1998, and $1.0 million in the nine months ended December 31,
1997. Net cash used in operating activities for each of these periods primarily
consisted of net losses as well as increases in inventories and prepaid
expenses, partially offset by increases in accounts payable, accrued expenses
and depreciation and amortization. The significant increase in working capital
during the nine months ended December 31, 1998 was primarily due to significant
growth in our operations.
Net cash used in investing activities was $2.9 million in the nine months
ended December 31, 1998, and $0.1 million in the nine months ended December 31,
1997. Net cash used in investing activities for each of these periods primarily
consisted of leasehold improvements and purchases of equipment and systems,
including computer equipment and fixtures and furniture.
Net cash provided by financing activities was $24.9 million in the nine
months ended December 31, 1998, and $4.1 million in the nine months ended
December 31, 1997. Net cash provided by financing activities during the nine
months ended December 31, 1998 primarily consisted of proceeds of $24.8 million
from the issuance of preferred stock.
As of December 31, 1998 we had $18.5 million of cash and cash equivalents.
As of that date, our principal commitments consisted of obligations outstanding
under operating leases. Although we have no material commitments for capital
expenditures, we anticipate a substantial increase in our capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. We plan to open an additional distribution
facility during fiscal 1999, which may require us to purchase real estate or
commit to additional lease obligations and to purchase equipment and install
leasehold improvements.
We entered into a marketing agreement with AOL, the leading Internet online
service provider, in October 1997. This agreement established us as a provider
of children's toy products featured on the AOL Network and AOL's Web site,
aol.com. In addition, AOL agreed to prominently promote and advertise eToys on a
non-exclusive basis in online areas controlled by AOL specified in the
agreement. Furthermore, under the agreement, AOL has committed that AOL users
will annually access the online areas promoting eToys a specified number of
times. Over the 26-month term of the agreement, we are obligated to make minimum
payments totaling $3.1 million to AOL, of which $1.4 million remained to be paid
as of December 31, 1998. We have also agreed to offer for sale a substantial
selection of children's products, to feature different children's products each
week, to offer special deals to AOL users through the AOL online area, to
provide children's toy products that are competitive in price and performance
and to manage, operate and support such content and children's toy products. The
agreement with AOL expires on December 31, 1999; however, AOL may terminate the
agreement earlier in the event we materially breach the agreement or in the
event of bankruptcy or insolvency or similar adverse financial events specified
in the agreement. Although there can be no assurance, we do not believe that
there is any material risk that AOL would be able to terminate the agreement
earlier than December 31, 1999 because of insolvency or any of the other
specified adverse financial events.
During the fiscal year ended March 31, 1998, we entered into a number of
commitments for online and traditional offline advertising. As of December 31,
1998, our remaining commitments were $6.9 million, excluding amounts due under
our agreement with AOL, which will be paid by December 31, 1999.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through
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at least the next 12 months. We may need to raise additional funds prior to the
expiration of such period if, for example, we pursue business or technology
acquisitions or experience operating losses that exceed our current
expectations. If we raise 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 our common stock and our
stockholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all.
YEAR 2000
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. We use 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, we are dependent on the financial institutions involved
in processing our customers' credit card payments for Internet services and a
third party that hosts our servers. We are also dependent on telecommunications
vendors to maintain our network and the United States Postal Service and other
third-party carriers to deliver orders to customers.
We are in the process of reviewing the year 2000 compliance of our
internally developed proprietary software. This review has included testing to
determine how our systems will function at and beyond the year 2000. We expect
to complete these tests during the summer of 1999. Since inception, we have
internally developed substantially all of the systems for the operation of our
Web site. These systems include the software used to provide our Web site's
search, customer interaction, and transaction-processing and distribution
functions, as well as monitoring and back-up capabilities. Based upon our
assessment to date, we believe that our internally developed proprietary
software is year 2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services, which include
software for use in our accounting, database and security systems. The failure
of such software or systems to be year 2000 compliant could have a material
negative impact on our corporate accounting functions and the operation of our
Web site. As part of the assessment of the year 2000 compliance of these
systems, we have sought assurances from these vendors that their software,
computer technology and other services are year 2000 compliant. We have expensed
amounts incurred in connection with year 2000 assessment since our formation
through December 31, 1998. Such amounts have not been material. We expect this
assessment process to be completed during the summer of 1999. Based upon the
results of this assessment, we 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. We
expect 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. The failure of our
software and computer systems and of our third-party suppliers to be year 2000
complaint would have a material adverse effect on us.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
year 2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our 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. Our ability to
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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, we believe most entities and individuals that rely significantly
on the Internet are carefully reviewing and attempting to remediate issues
relating to year 2000 compliance, but it is not possible to predict whether
these efforts will be successful in reducing or eliminating the potential
negative impact of year 2000 issues. A significant disruption in the ability of
consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our services and would
have a material adverse effect on us.
At this time, we have not yet developed a contingency plan to address
situations that may result if we or our vendors are unable to achieve year 2000
compliance. The cost of developing and implementing such a plan, if necessary,
could be material. Any failure of our material systems, our vendors' material
systems or the Internet to be year 2000 compliant could have material adverse
consequences for us. Such consequences could include difficulties in operating
our Web site effectively, taking product orders, making product deliveries or
conducting other fundamental parts of our business.
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BUSINESS
ETOYS
We are a leading Web-based retailer focused exclusively on children's
products, including toys, video games, software, videos and music. By combining
our expertise in children's products and our commitment to excellent customer
service with the benefits of Internet retailing, we are able to deliver a unique
value proposition to consumers. Our online store offers an extensive selection
of competitively priced children's products, with over 9,500 SKUs representing
more than 750 brands. Our Web site features detailed product information,
helpful and useful shopping services and innovative merchandising through
easy-to-use Web pages. In addition, we offer customers the convenience and
flexibility of shopping 24 hours a day, seven days a week, with reliable and
timely product delivery and excellent customer service.
As of March 31, 1999, we have sold children's products to approximately
365,000 customers, of which approximately 75,000 were added during the quarter
ended March 31, 1999. Our net sales for the quarter ended December 31, 1998
totaled $22.9 million as compared to $0.5 million for the quarter ended December
31, 1997.
INDUSTRY OVERVIEW
ELECTRONIC COMMERCE
The Internet is an increasingly significant medium for communication,
information and commerce. International Data Corporation estimates that there
were 97 million Web users worldwide at the end of 1998 and anticipates this
number will grow to approximately 320 million users by the end of 2002. We
believe that growth in Internet usage and online commerce is being fueled by a
number of factors including:
- - a large and growing installed base of personal computers in the workplace and
home;
- - advances in the performance and speed of personal computers and modems;
- - improvements in network security, infrastructure and bandwidth;
- - easier and cheaper access to the Internet; and
- - the rapidly expanding availability of online content and commerce sites.
The unique characteristics of the Internet provide a number of advantages
for online retailers. Online retailers are able to "display" a larger number of
products than traditional store-based or catalog retailers at a lower cost. In
addition, online retailers are able to frequently adjust their featured
selections, editorial content and pricing, providing significant merchandising
flexibility. Online retailers also benefit from the minimal cost to publish on
the Web, the ability to reach a large group of customers from a central
location, and the potential for low-cost customer interaction. Unlike
traditional retail channels, online retailers do not have the burdensome costs
of managing and maintaining a retail store infrastructure or the significant
printing and mailing costs of catalogs. Online retailers can also easily obtain
demographic and behavioral data about customers, increasing opportunities for
direct marketing and personalized services.
TRADITIONAL CHILDREN'S PRODUCTS RETAIL INDUSTRY
The market for children's products includes many categories, from
traditional toys and books to video games and educational software. Toy
Manufacturers of America, Inc. estimates that the domestic toy category alone
had retail sales of approximately $23 billion in 1997. We believe that product
categories such as children's video games, software, videos and music also
represent significant market opportunities.
Traditional store-based toy retailers include mass market retailers such as
Toys R Us, Wal-Mart, Kmart and Target, as well as specialty chains such as Zany
Brainy and Noodle Kidoodle.
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Mass market retailers tend to carry a deep selection of well-known brand name
toys from leading vendors such as Mattel, Hasbro and LEGO. Specialty retailers
generally carry a broader selection of specialty toy brands such as BRIO,
PLAYMOBIL and Learning Curve. However, they do not typically have a significant
selection of well-known brand name toys. As a result, we believe that no
traditional store-based retailer currently offers an extensive product selection
of both popular, well-known brand name toys and diverse, harder-to-find,
specialty toys.
We believe that traditional store-based retailers face a number of
challenges in providing a satisfying shopping experience for consumers of
children's products:
- - The number of SKUs and the amount of product inventory that a traditional
store-based retailer can carry in any one store is constrained by the physical
space available in the store, thereby limiting selection for consumers.
- - Limited shelf space and store layout constraints limit the merchandising
flexibility of traditional store-based retailers. As a result, traditional
retailers generally display products by brand, category or packaging. They
cannot easily adjust or blend these merchandising strategies.
- - Due to the significant cost of carrying inventory in multiple store locations,
traditional store-based retailers focus their product selection on the most
popular products that produce the highest inventory turns, thereby further
limiting consumer selection.
- - Traditional store-based retailers can only serve those customers who have
convenient access to their stores. Traditional store-based retailers must open
new stores to serve additional geographic areas, resulting in significant
investments in inventory, leasehold improvements and the hiring and training
of store personnel.
- - Traditional store-based retailers face challenges in hiring, training and
maintaining knowledgeable sales staff. This limits the level of customer
service available to consumers.
In addition, we believe that many consumers find the toy shopping
experience, especially at traditional mass market retail outlets, to be
time-consuming, inconvenient and unpleasant due to factors such as location,
store layout, product selection, level of customer service and the challenges of
shopping with children.
THE ETOYS SOLUTION
We are a leading Web-based retailer focused exclusively on children's
products. Our online store is designed to provide consumers with a convenient
and enjoyable shopping experience in a Web-based retail environment. Our
exclusive focus on children's products and commitment to excellent customer
service enable us to uniquely address the needs and desires of our customers.
The key components of our solution include:
CONVENIENT SHOPPING EXPERIENCE. Our online store provides customers with an
easy-to-use Web site. It is available 24 hours a day, seven days a week and may
be reached from the shopper's home or office. Our online store enables us to
deliver a broad selection of products to customers in rural or other locations
that do not have convenient access to physical stores. We also make the shopping
experience convenient by categorizing our products into easy-to-shop
departments. These include toys, video games, software, videos and music. Our
advanced search technology makes it easy for consumers to locate products
efficiently based on pre-selected criteria depending upon the department. For
example, by using a quick keyword search or a sophisticated product search in
our toy department, a customer can search by any combination of age, category,
keyword or price.
EXTENSIVE PRODUCT SELECTION AND INNOVATIVE MERCHANDISING. We offer a broad
selection of children's products that would be economically or physically
impractical to stock in a traditional store. We believe that we offer the
largest selection of toys available on the Internet. We also
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believe we are the only retailer to provide a comprehensive selection of both
traditional, well-known brands, such as Mattel, Hasbro and LEGO, and specialty
toy brands, such as BRIO, PLAYMOBIL and Learning Curve. In addition we offer a
broad selection of children's video games, software, videos and music. We focus
exclusively on children's products. Many of our brand name and specialty
products are individually selected and tested to provide our customers with the
highest quality products. In addition, the unique environment of the Internet
enables us to dynamically adjust our merchandising strategy and product mix to
respond to changing customer demand.
HELPFUL AND USEFUL SHOPPING SERVICES. Through our online store, we offer
helpful and useful services to assist our customers, who are generally adults
purchasing for children. Many of these services are also designed to inform and
involve children in the shopping experience. Our services include:
- - PRODUCT REVIEWS AND RECOMMENDATIONS. To assist customers in selecting
appropriate products, we provide regularly updated product recommendations
through our PICKS OF THE MONTH, FAVORITES BY AGE, TOY BOX ESSENTIALS and our
TWENTY UNDER $20 recommended list of affordable toys. In addition, we feature
product reviews and lists of award-winning products from prominent parenting
and family publications as well as from organizations solely dedicated to
children's products, including the OPPENHEIM TOY PORTFOLIO, FAMILY FUN
magazine, PARENTING magazine and DR. TOY.
- - GIFT CENTER. We simplify gift shopping through our Gift Center. Here,
consumers can obtain gift recommendations by age and get information on a
variety of child-appropriate gift wrap styles and personalized message cards
to accompany the gift. We also sell electronic gift certificates through our
Gift Center.
- - MY ETOYS. Through My eToys, we personalize the customer's shopping experience
by offering the following services:
- BIRTHDAY REMINDERS, in which we notify shoppers of a child's birthday
three weeks in advance via e-mail and proactively offer age-appropriate
gift recommendations;
- WISH LISTS, in which parents and children can e-mail friends and family a
list of a child's most desired toys, video games, software, videos and
music; and
- ADDRESS BOOK, in which we record the addresses of people to whom our
customers send gifts so they do not need to re-enter the same addresses
multiple times.
- - IN-STOCK NOTIFICATION. If a product is out of stock, our customers can request
that we e-mail them when the product is back in stock. We believe this service
helps customers avoid extended store-to-store searches for hard-to-find
products.
- - PRODUCT NEWS. Our free monthly e-mail newsletter, THE ETOYS NEWS, delivers
updates about new products and services and special offers to our customers.
EXCELLENT CUSTOMER SERVICE. We provide free pre- and post-sales support via
both e-mail and toll-free telephone service during extended business hours. Once
an order is made, customers can view order-tracking information on our Web site
or contact our customer service department to obtain the status of their orders
and, when necessary, resolve order and product questions. Furthermore, the
customer service area of our Web site contains extensive information for
first-time and repeat visitors. These include helpful hints in searching for,
shopping for, ordering and returning our products.
BUSINESS STRATEGY
Our objective is to be one of the world's leading retailers of children's
products. Key elements of our strategy include:
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FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS. We intend to become the
primary shopping destination for consumers of children's products. Our online
store is exclusively focused on children's products and offers an extensive
selection of toys, video games, software, videos and music. We intend to enhance
our product offerings by expanding into additional children's product categories
in order to leverage our customer base, brand name, merchandising expertise and
distribution capabilities.
BUILD BRAND RECOGNITION. Through our advertising and promotional
activities, we target purchasers of children's products, with a primary focus on
mothers. We believe that mothers are the principal decision-makers for purchases
of children's products and strongly influence the purchasing decisions of family
and friends. We use offline and online marketing strategies to maximize customer
awareness and enhance our brand recognition:
- - OFFLINE ADVERTISING. We use offline advertising to promote both our brand name
and specific merchandising opportunities. Our traditional advertising efforts
have included print advertising in FAMILY FUN, FAMILY PC, PARENTING, PARENTS
and CHILD publications, and radio and television advertising in major markets.
In October 1998, we initiated television advertising, including a national
advertising campaign begun in November in which Visa co-promoted eToys in a
holiday commercial. We plan to increase our use of traditional offline
advertising in order to continue building our brand recognition.
- - ONLINE ADVERTISING. We partner with major online portals and Internet service
providers, parenting-related Web sites and children-oriented companies.
Accordingly, we have entered into relationships with AOL, Children's
Television Workshop and Moms Online. In addition, we advertise on the sites of
major online portals, including Excite, Infoseek, Microsoft Network, Yahoo!
and Lycos.
- - DIRECT ONLINE MARKETING. As our customer base grows, we continue to collect
significant data about our customers' buying preferences and habits and to
develop one-to-one relationships with our customers. We intend to leverage
this information by delivering valuable information, special offers and
inducements to our customers via e-mail and other means. In addition, we use
our in-house newsletter, THE ETOYS NEWS, to alert customers to important
developments and merchandising initiatives. We intend to continue to use the
unique resources of the Internet as a low-cost means of personalized marketing
in an effort to drive traffic and repeat purchases.
PURSUE INCREMENTAL REVENUE OPPORTUNITIES. We intend to leverage our brand,
operating infrastructure and customer base to develop additional revenue
opportunities. For example, we believe significant incremental revenue
opportunities exist through:
- - opening new departments on our Web site to expand into new and related
children's product categories;
- - increasing product selection in our existing departments;
- - adding more services to My eToys to further personalize the customer
experience;
- - pursuing international market opportunities; and
- - acquiring complementary businesses, products or technologies.
PROMOTE REPEAT PURCHASES. We are focused on promoting customer loyalty,
building repeat purchase relationships with our customers, leveraging our
customer acquisition costs and maximizing the number of return visits by our
customers. To accomplish this strategy, we intend to effectively use direct
marketing techniques targeted at existing customers, build features unique to
each individual customer and continually strive to enhance our customer service.
MAINTAIN OUR TECHNOLOGY FOCUS AND EXPERTISE. We intend to leverage our
scaleable commerce platform to enhance our service offerings and take advantage
of the unique
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characteristics of online retailing. To date, we have developed technologies and
implemented systems to support secure and reliable online retailing in an
intuitive, easy-to-navigate format. Among other technology objectives, we intend
to develop features unique to each individual customer and to enhance the look
and feel of our Web site. We also seek to continuously increase the efficiency
of our relationships with product vendors and manufacturers and our distribution
activities.
THE ETOYS ONLINE RETAIL STORE
We designed our online retail store to be the primary shopping destination
for children's products. We believe our attractive, easy-to-use, online store
offers consumers a unique value proposition and an enjoyable shopping experience
as compared to traditional store-based retailers. The look-and-feel of our Web
site is playful and entertaining, and navigation is consistent throughout. A
consumer shopping on our Web site can, in addition to ordering products, browse
the different departments of our store, conduct targeted searches, view
recommended products, visit our Gift Center, participate in promotions and check
order status. In contrast to a traditional retail store, the consumer can shop
in the comfort and convenience of his or her home or office.
OUR STORE DEPARTMENTS
We categorize products into different departments, including toys, video
games, software, videos and music. Within each department, products are
organized by brand, such as Mattel and Hasbro, by category, such as games, plush
toys and dolls, and by our recommendations, such as bestsellers and favorites.
The following is a summary of each of these departments:
TOYS. Since inception, we have focused on becoming the premier online
retailer of quality children's toys. We believe that we offer the largest
selection of toys available on the Internet. Through our toy department, we
offer an extensive selection of toys. We believe that we are the only retailer
of children's products to provide a comprehensive selection of both traditional,
well-known brands, such as Mattel, Hasbro and LEGO, and specialty toy brands,
such as BRIO, PLAYMOBIL and Learning Curve. We select and test many of our toys
before adding them to our online store collection.
VIDEO GAMES. Through our video game department, we offer an extensive
selection of game titles, including bestsellers and new releases, for the
popular Sony PlayStation, Nintendo 64 and Game Boy platforms. We provide our own
ratings for each video game with respect to content, language and level of
violence. In addition, we sell video game hardware and recommended accessories.
SOFTWARE. Through our children's software department, we offer a wide
selection of software with an emphasis on educational titles. We organize our
software into easy-to-use and understandable categories. We feature a variety of
well-known classic and currently popular brands including Broderbund, Disney
Interactive, Microsoft's Magic School Bus and Jumpstart.
VIDEOS. Through our children's video department, we offer videos for
children that are organized into easy-to-shop categories. We feature a variety
of well-known titles from popular television series, including Barney, Blue's
Clues, Dr. Seuss, Magic School Bus, Muppets, Peanuts, Rugrats, Teletubbies and
Winnie the Pooh. We also feature award-winning independent releases.
MUSIC. Through our children's music department, we offer an extensive
assortment of children's music in both cassette and CD format. Unlike most
retailers, we organize our children's music into different categories by
subject. We feature a variety of popular children's music categories, including
books on tape, Disney, educational, holiday, lullabies and bedtime, rock for
kids, soundtracks, storytelling and Sesame Street. We also carry music from
artists associated with
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independent labels. We listen to many of our music products in order to create
helpful product descriptions and recommendations.
SHOPPING AT OUR STORE
We believe that the sale of children's products over the Web can offer
attractive benefits to consumers. These include enhanced selection, convenience,
ease-of-use, depth of content and information, and competitive pricing. Key
features of our online store include:
BROWSING. Our Web site offers visitors a variety of highlighted subject
areas and special features arranged in a simple, easy-to-use format intended to
enhance product search, selection and discovery. By clicking on the permanently
displayed department names, the consumer moves directly to the home page of the
desired department and can quickly view promotions and featured products.
Customers can use a quick keyword search in order to locate a specific product.
They can also execute more sophisticated searches based on pre-selected criteria
depending upon the department. In addition, customers can browse our online
store by hot-linking to specially designed pages dedicated to products from key
national and specialty brands. Customers can also hot-link to pages featuring
key product categories such as construction toys, just-for-girls software and
movie soundtrack music.
GETTING ANSWERS. One of the unique advantages of an Internet retail store
is the ability to interweave product information and editorial content. On our
Web site customers can find detailed product information, including product
descriptions, manufacturers' and merchants' age recommendations, product
packaging, battery requirements, a list of accessories and related products that
are available and product awards. We provide editorial content for our customers
through regularly updated product recommendations, including TOYBOX ESSENTIALS,
FAVORITES BY AGE, PICKS OF THE MONTH and TWENTY UNDER $20. Furthermore, on our
Web site we highlight award-winning products from prominent parenting and family
publications as well as from organizations solely dedicated to children's
products.
FINDING A GIFT. In our Gift Center, consumers can obtain gift
recommendations by age and get information on a variety of child-appropriate
gift wrap styles and personalized message cards to accompany the gift. In
addition, we offer a birthday reminder service, in which we notify shoppers of a
child's birthday three weeks in advance via e-mail and proactively offer
age-appropriate recommendations to help our busy shoppers. We also provide a
children's wish list service, in which parents and children can e-mail friends
and family a list of a child's most desired gifts. Furthermore, we sell
electronic gift certificates through our Gift Center.
SELECTING A PRODUCT AND CHECKING OUT. To purchase products, customers
simply click on the "order now" button to add products to their virtual shopping
cart. Customers can add and subtract products from their shopping cart as they
browse around our store, prior to making a final purchase decision, just as in a
physical store. Because we maintain a fully-integrated inventory system and
stock each item we sell, we are able to notify customers in real-time whether a
selected product is currently in stock. To execute orders, customers click on
the "checkout" button and, depending upon whether the customer has previously
shopped with us, are prompted to supply shipping details online. We also offer
customers a variety of gift wrapping and shipping options during the checkout
process. Prior to finalizing an order by clicking the "submit order" button,
customers are shown their total charges along with the various options chosen at
which point customers still have the ability to change their order or cancel it
entirely.
PAYING. To pay for orders, a customer must use a credit card, which is
authorized during the checkout process, but which is charged when we ship the
customer's items from our distribution facility. Our Web site uses a security
technology that works with the most common Internet browsers and makes it
virtually impossible for unauthorized parties to read information sent by our
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customers. Our system automatically confirms receipt of each order via e-mail
within minutes and notifies the customer when we ship the order, which is
typically within one to two business days for in-stock items. We also offer our
customers a money-back return policy.
GETTING HELP. From every page of our Web site, a customer can click on a
"help" button to go to our customer service area. The customer service area of
our Web site contains extensive information for first-time and repeat visitors.
In this area, we assist customers in searching for, shopping for, ordering and
returning our products as well as provide information on our low price
guarantee, shipping charges and other policies. In addition, we provide
customers with answers to the most frequently asked questions and encourage our
visitors to send us feedback and suggestions via e-mail. Furthermore, customer
service agents are available to answer questions about products and the shopping
process during extended business hours via our toll-free number, which is
displayed in the customer service area of our Web site.
MERCHANDISING
We believe that the breadth and depth of our product selection, together
with the flexibility of our online store and our range of helpful and useful
shopping services, enable us to pursue a unique merchandising strategy. We
provide an extensive selection of children's products. These include traditional
mass market toys, specialty toys and a broad selection of related children's
products, including video games, software, videos and music, that would be
economically impractical to stock in a traditional store. We focus exclusively
on children's products and we individually select and test many of the products
in our online store to ensure quality. In addition, this level of product
evaluation enables us to deliver valuable additional product information to our
shoppers. For example, we are able to develop detailed and helpful descriptions
and our own recommendations by age for many of the products in our online store.
Unlike store-based retail formats, our online store provides us significant
flexibility with regard to the organization and presentation of our product
selection. Our easy-to-use Web site allows customers to browse our product
selection by brand, age, product category and price, as well as by combinations
of these attributes. For example, a customer can easily search for
science-oriented toys designed for eight-year-old children or view all Barbie
dolls and related accessories without consulting store personnel or walking
multiple aisles within one or more traditional stores. Our online store enables
us to dynamically adjust our product mix to respond to changing customer demand.
In addition, our online store gives us flexibility in featuring or promoting
specific toys without having to alter the physical layout of a store.
To encourage purchases, we feature various promotions on a rotating basis
throughout the store and continually update our online recommendations. We also
actively create and maintain pages that are artistically designed to highlight
the most prominent product brands we sell in our different departments. We
believe this strategy provides us with an excellent opportunity to cross-sell a
brand across our departments and promote impulse purchases by customers.
Finally, our range of helpful and useful shopping services such as our Gift
Center, our recommendations and our TWENTY UNDER $20 feature enable us to
display and promote our product selection in a flexible and targeted manner.
We believe that our merchandising strategy provides a unique value
proposition for our vendors. We are able to offer all our vendors access to
purchasers of children's products regardless of the size or influence of the
individual vendor.
MARKETING AND PROMOTION
Our marketing and promotion strategy is designed to:
- - build brand recognition;
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<PAGE>
- - increase consumer traffic to our store;
- - add new customers;
- - build strong customer loyalty;
- - maximize repeat purchases; and
- - develop incremental revenue opportunities.
Through our advertising and promotions, we target adult purchasers of
children's products, with a focus on mothers. We believe that mothers are the
principal decision-makers in purchases of children's products and strongly
influence children's products purchases by family and friends. Our advertising
campaigns are designed to identify with a mother's toy shopping experience. We
use offline and online marketing strategies to maximize customer awareness and
enhance brand recognition. To accomplish this strategy, we have entered into
relationships with AOL, Children's Television Workshop and Moms Online. Our
marketing agreements generally provide for us to be the preferred online toy
retailer on the sites of these providers specified in the agreements. We also
generally have the right to place banner advertisements and integrated links to
our store on specified children-related or other particular pages or through
keyword searches. In addition, we advertise on the sites of major online
portals, including Excite, Infoseek, Microsoft Network, Yahoo! and Lycos.
We entered into a marketing agreement with AOL, the leading Internet online
service provider, in October 1997. This agreement established us as a preferred
AOL provider of children's toy products featured on the AOL Network and AOL's
Web site, aol.com. In addition, AOL agreed to promote and advertise eToys on a
non-exclusive basis in online areas controlled by AOL specified in the
agreement. Furthermore, under the agreement, AOL has committed that AOL users
will annually access the online areas promoting eToys a specified number of
times. Over the 26-month term of the agreement, we are obligated to make minimum
payments totaling $3.1 million to AOL, of which $1.4 million remained to be paid
as of December 31, 1998. We have also agreed to offer for sale a substantial
selection of children's products, to feature different children's products each
week, to offer special deals to AOL users through the AOL online area, to
provide children's toy products that are competitive in price and performance
and to manage, operate and support such content and children's toy products. The
agreement with AOL expires on December 31, 1999; however, AOL may terminate the
agreement earlier in the event we materially breach the agreement or in the
event of bankruptcy or insolvency or similar adverse financial events specified
in the agreement. Although there can be no assurance, we do not believe that
there is any material risk that AOL would be able to terminate the agreement
earlier than December 31, 1999, because of insolvency or any of the other
specified adverse financial events.
We use traditional offline advertising, including print advertising in
FAMILY FUN, FAMILY PC, PARENTING, PARENTS and CHILD publications, and radio and
television advertising in major markets. In October 1998, we initiated
television advertising, including a national advertising campaign begun in
November in which Visa co-promoted eToys in a holiday commercial.
To direct traffic to our Web site, we have created inbound links that
connect directly to our Web site from other sites. Potential customers can
simply click on these links to become connected to our Web site from search
engines and community and affinity sites. In addition, in order to increase
exposure on the Internet and directly generate sales, we have an affiliates
program. Under this program, we pay one of our registered affiliates a referral
fee for any sale generated via their link to our Web site.
OPERATIONS
We obtain products from a network of large and small vendors, manufacturers
and distributors. We carry inventory of the products available for sale on our
Web site. We currently
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conduct our distribution operations in an approximately 60,000 square-foot
facility located in Commerce, California. Both the facility and the operations
within it are operated solely by us. We send orders from our Web site to our
distribution facility over a secure frame relay connection and a proprietary
warehouse management system optimizes the pick, pack and ship process. Our
proprietary warehouse management system provides the Web site with data on
inventory receiving, shipping, inventory quantities and inventory location,
which enables us to display information about the availability of the products
on our Web site. Our proprietary warehouse management system also enables us to
offer a variety of gift wrap choices, custom gift cards and custom to/from
labels for each individual gift. In addition, we offer an order tracking system
for our customers on our Web site.
We offer three levels of shipping service: next day delivery, three-day
delivery, and ground delivery. We have developed relationships with both United
Parcel Service and the United States Postal Service to maximize our overall
service level to all 50 states. Priority orders are flagged and expedited
through our distribution processes. These capabilities are required due to the
time-sensitive nature of the gifts that we deliver to our customers.
CUSTOMER SERVICE
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our customer service representatives
are available from 6:00 a.m. to 11:00 p.m. Pacific Time, seven days a week to
provide assistance via e-mail or telephone. We strive to answer all customer
inquiries within 24 hours. Our customer service representatives handle questions
about orders, assist customers in finding desired products and register
customers' credit card information over the telephone. Our customer service
representatives are a valuable source of feedback regarding user satisfaction.
We also use BizRate, an online market research company, to obtain monthly
customer feedback. Our Web site also contains a customer service page that
outlines store policies and provides answers to frequently asked questions.
OPERATIONS AND TECHNOLOGY
We have implemented a broad array of scaleable site management, search,
customer interaction, distribution services and the systems that we use to
process customers' orders and payments. These services and systems use a
combination of our own proprietary technologies and commercially available,
licensed technologies. The systems that we use to process customers' orders and
payments are integrated with our accounting and financial systems. We focus our
internal development efforts on creating and enhancing the specialized,
proprietary software that is unique to our business. We use a set of
applications for:
- - accepting and validating customer orders;
- - organizing, placing and managing orders with suppliers;
- - receiving product and assigning it to customer orders; and
- - managing shipment of products to customers based on various ordering criteria.
Our systems have been designed based on industry standard architectures and
have been designed to reduce downtime in the event of outages or catastrophic
occurrences. Our systems provide 24-hour-a-day, seven-day-a-week availability.
Our system hardware is hosted at a third-party facility in Sunnyvale,
California, which provides redundant communications lines and emergency power
backup. We have implemented load balancing systems and our own redundant servers
to provide for fault tolerance.
We incurred product development expenses of $0.4 million in the fiscal year
ended March 31, 1998 and $2.0 million in the nine months ended December 31,
1998. We anticipate that we will continue to devote significant resources to
product development in the future as we add new features and functionality to
our Web site. The market in which we compete is characterized by
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<PAGE>
rapidly changing technology, evolving industry standards, frequent new service
and product announcements and enhancements and changing customer demands.
Accordingly, our future success will depend on our ability to:
- - adapt to rapidly changing technologies;
- - adapt our services to evolving industry standards;
- - continually improve the performance, features and reliability of our service
in response to competitive service and product offerings and evolving demands
of the marketplace.
Our failure to adapt to such changes would have a material adverse effect on
our business, results of operations and financial condition. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require substantial
expenditures by us to modify or adapt our services or infrastructure. This could
have a material adverse effect on our business, results of operations and
financial condition.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly applicable
to electronic commerce. However, the Internet is increasingly popular. As a
result, it is possible that a number of laws and regulations may be adopted with
respect to the Internet. These laws may cover issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Furthermore, the growth of electronic commerce may prompt calls for more
stringent consumer protection laws. Several states have proposed legislation to
limit the uses of personal user information gathered online or require online
services to establish privacy policies. The Federal Trade Commission has also
initiated action against at least one online service regarding the manner in
which personal information is collected from users and provided to third
parties. We do not currently provide personal information regarding our users to
third parties. However, the adoption of such consumer protection laws could
create uncertainty in Web usage and reduce the demand for our products and
services.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of such laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws
intended to address such issues could create uncertainty in the Internet market
place. Such uncertainty could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs.
In addition, because our services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that we are
required to qualify to do business in each such state or foreign country. We are
qualified to do business only in California. Our failure to qualify in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. It could also hamper our ability to enforce contracts in such
jurisdictions. The application of laws or regulations from jurisdictions whose
laws do not currently apply to our business could have a material adverse effect
on our business, results of operations and financial condition.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could seriously harm our net sales and
results of operations. Barriers to entry are minimal, and current and new
competitors can
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launch new Web sites at a relatively low cost. In addition, the children's toy,
video game, software, video and music retailing industries are intensely
competitive.
We currently or potentially compete with a variety of other companies,
including:
- - traditional store-based toy and children's product retailers such as Toys R
Us, FAO Schwarz, Zany Brainy and Noodle Kidoodle;
- - major discount retailers such as Wal-Mart, Kmart and Target;
- - online efforts of these traditional retailers, including the online stores
operated by Toys R Us, Wal-Mart and FAO Schwarz;
- - physical and online stores of entertainment entities that sell and license
children's products, such as The Walt Disney Company and Warner Bros.;
- - catalog retailers of children's products;
- - vendors of children's products that currently sell some of their products
directly online, such as Mattel and Hasbro;
- - other online retailers that include children's products as part of their
product offerings, such as Amazon.com, Barnesandnoble.com, CDnow, Beyond.com
and Reel.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's products, such as
BrainPlay.com, Red Rocket and Toysmart.com.
We believe that the following are principal competitive factors in our
market:
- - brand recognition;
- - selection;
- - convenience;
- - price;
- - speed and accessibility;
- - customer service;
- - quality of site content; and
- - reliability and speed of order shipment.
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 we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-financed
entities may join with online competitors or children's toy, video game,
software, video and music publishers or suppliers as the use of the Internet and
other online services increases.
Our 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 we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. Some of our competitors such as Toys R
Us and Wal-Mart have significantly greater experience in selling children's
toys, video games, software, videos and music products.
Our online competitors are particularly able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of existing technologies, such as price
comparison programs, may increase competition.
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LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a materially adverse effect on us.
INTELLECTUAL PROPERTY
We rely on various intellectual property laws and contractual restrictions
to protect our proprietary rights in products and services. These include
confidentiality, invention assignment and nondisclosure agreements with our
employees, contractors, suppliers and strategic partners. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our intellectual property without our authorization. In addition, we
pursue the registration of our trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not be
available in every country in which our services are made available online.
We have licensed various proprietary rights to third parties. We attempt to
ensure that these licensees maintain the quality of our brand. However, these
licensees may nevertheless take actions that materially adversely affect the
value of our proprietary rights or reputation. We also rely on technologies that
we license from third parties. These licenses may not continue to be available
to us on commercially reasonable terms in the future. As a result, we may be
required to obtain substitute technology of lower quality or at greater cost,
which could materially adversely affect our business, results of operations and
financial condition.
To date, we have not been notified that our technologies infringe the
proprietary rights of third parties. However, there can be no assurance that
third parties will not claim infringement by us with respect to our current or
future technologies. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any such claim, with or without
merit, could be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements might not be available on terms acceptable to us
or at all. As a result, any such claim of infringement against us could have a
material adverse effect upon our business, results of operations and financial
condition.
EMPLOYEES
As of March 31, 1999, we had 306 full-time employees. None of our employees
are represented by a labor union. We have not experienced any work stoppages and
consider our employee relations to be good.
Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom are bound by an employment agreement requiring service for any defined
period of time. The loss of services of one or more of our key employees could
have a material adverse effect on our business, financial condition and results
of operations. Our future success also depends in part upon our continued
ability to attract, hire, train and retain highly qualified technical, sales and
managerial personnel. Competition of such personnel is intense and there can be
no assurance that we can retain our key personnel in the future.
FACILITIES
Our corporate offices are located in Santa Monica, California, where we
lease approximately 60,000 square feet under a lease that expires in July 2003.
In addition, we lease approximately 60,000 square feet in Commerce, California
for our distribution operations under a lease that expires in August 2003.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth specific information regarding our executive
officers and directors as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---------------------------- --- -----------------------------------------------------
<S> <C> <C>
Edward C. Lenk.............. 37 President, Chief Executive Officer and Uncle of the
Board
Steven J. Schoch............ 40 Senior Vice President and Chief Financial Officer
John R. Hnanicek............ 35 Senior Vice President and Chief Information Officer
Frank C. Han................ 35 Senior Vice President of Product Development
Louis V. Zambello III....... 41 Senior Vice President of Operations
Peter C.M. Hart............. 48 Director
Tony A. Hung................ 31 Director
Michael Moritz.............. 44 Director
Daniel J. Nova.............. 37 Director
</TABLE>
EDWARD C. LENK founded eToys and has served as our President, Chief
Executive Officer and a Director since June 1997. In December 1998, he was
appointed Uncle of the Board. Prior to founding eToys, from May 1994 to July
1996 Mr. Lenk was employed as Vice President of Strategic Planning at The Walt
Disney Company, where he was responsible for strategic planning and new business
development of Worldwide Attractions and Resorts. From May 1991 to May 1994, he
was a Director of Strategic Planning at The Walt Disney Company. Mr. Lenk
received a Bachelor of Arts SUMMA CUM LAUDE from Bowdoin College and a Masters
in Business Administration, with distinction, from Harvard Business School.
STEVEN J. SCHOCH has served as our Chief Financial Officer since January
1999. Prior to joining us, from December 1995 to January 1999, Mr. Schoch was
Vice President and Treasurer of Times Mirror Company, a newspaper and magazine
publishing company. He also served as Chief Executive Officer and President of a
wholly owned subsidiary of Times Mirror Company dedicated to the reduction and
containment of costs of the parent company. From March 1991 to October 1995, Mr.
Schoch worked at The Walt Disney Company, most recently as Vice President,
Treasurer--Euro Disney S.C.A. Mr. Schoch serves as a director of VDI Media. Mr.
Schoch received a Bachelor of Science from Tufts University and a Masters in
Business Administration from the Amos Tuck School of Business Administration at
Dartmouth College.
JOHN R. HNANICEK has served as our Chief Information Officer since December
1998. Prior to joining us, from October 1996 to December 1998, he was employed
as Senior Vice President of Information Systems for Hollywood Entertainment,
Inc., a nationwide retail video chain. From January 1996 to October 1996, Mr.
Hnanicek served as Chief Information Officer for Homeplace, Inc., a home
furnishings chain. From 1990 to 1995, he served as Senior Vice President of
Information Systems and Logistics at OfficeMax, Inc., a retail office supply
outlet. Mr. Hnanicek holds a Bachelor of Science in Computer Science and
Accounting from Cleveland State University.
FRANK C. HAN has served as our Senior Vice President of Product Development
since January 1999. From February 1997 to January 1999, Mr. Han was our Chief
Operating Officer and Vice President of Finance. Prior to joining us, Mr. Han
worked at Union Bank of California, serving as Vice President of Interactive
Markets from January 1995 to February 1997 and as Director of Strategic Planning
from 1993 to 1995. Mr. Han received a Bachelor of Science CUM LAUDE from Yale
University and a Masters in Business Administration from the Stanford Graduate
School of Business.
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LOUIS V. ZAMBELLO III has served as our Senior Vice President of Operations
since December 1998. Prior to joining us, from 1984 to 1998, he held a variety
of positions at L.L. Bean, Inc., an outdoor retailer. Most recently, Mr.
Zambello served as Senior Vice President of Operations and Creative from June
1998 to December 1998, as Senior Vice President of Operations from December 1993
to June 1998, as Vice President of Merchandise Services and Manufacturing from
December 1991 to August 1993 and in a variety of other positions since 1984. Mr.
Zambello received a Bachelor of Arts MAGNA CUM LAUDE from Cornell University and
a Masters in Business Administration from Harvard Business School.
PETER C.M. HART has served as a Director of eToys since October 1997. Since
January 1999, Mr. Hart has been a Managing Partner of Wildkin LLC, a distributor
of toys. Since November 1997, he has served as a business advisor to EdUsa, a
company that provides language instruction over the Internet. From 1983 to 1997,
he held a variety of positions at Ross Stores, Inc., an apparel retailer, most
recently as a Senior Vice President managing warehousing, distribution and MIS
operations. Previously, Mr. Hart was a Business Systems Analyst at Joseph Magnin
Department Store in San Francisco and at Rediffusion in Buckinghamshire,
England. Mr. Hart is a member of the Audit Committee of the Board of Directors.
TONY A. HUNG has served as a Director of eToys since December 1997. Since
1997, he has been a Vice President of DynaFund Ventures, a venture capital
partnership. Previously, Mr. Hung held a variety of positions at The Walt Disney
Company, serving as Manager of Corporate Strategic Planning from 1996 to 1997,
as Manager of Television and Telecommunications from 1995 to 1996, and as Senior
Analyst in the Corporate Treasury department from 1992 to 1995. Mr. Hung serves
on the boards of directors of a number of private companies. Mr. Hung holds a
Bachelor of Arts from Harvard University and a Masters in Business
Administration from The Anderson School at University of California at Los
Angeles. Mr. Hung is a member of the Audit Committee of the Board of Directors.
MICHAEL MORITZ has served as a Director of eToys since June 1998. He has
been a general partner of Sequoia Capital, a venture capital firm, since 1986.
Sequoia Capital provided the original venture capital financing to companies
such as Cisco Systems Inc., LSI Logic Corporation, Linear Technology
Corporation, Microchip Technology Inc. and International Network Services. Mr.
Moritz serves as a director of Yahoo! Inc. and Flextronics International Ltd.,
as well as several private companies. Mr. Moritz received a Master of Arts
degree from Oxford University and a Masters in Business Administration from the
Wharton School at the University of Pennsylvania. Mr. Moritz is a member of the
Compensation Committee of the Board of Directors.
DANIEL J. NOVA has served as a Director of eToys since June 1998. Since
August 1996, Mr. Nova has served as a general partner of Highland Capital
Partners, a venture capital firm. Previously, he was a general partner of
CMG@Ventures from January 1995 to August 1996 and a Senior Associate at Summit
Partners from June 1991 to January 1995. Mr. Nova is a director of Lycos, Inc.,
an online portal, and several private companies. Mr. Nova received a Bachelor of
Science in Computer Science and Marketing with honors from Boston College and a
Masters in Business Administration from Harvard Business School. Mr. Nova is a
member of the Audit and Compensation Committees of the Board of Directors.
Our Board of Directors currently consists of five members. Each director is
elected for a period of one year at our annual meeting of stockholders and
serves until the next annual meeting or until his successor is duly elected and
qualified.
Our executive officers serve at the discretion of the Board of Directors.
There are no family relationships among any of our directors or executive
officers.
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BOARD COMMITTEES
Our Board of Directors established the Compensation Committee in December
1998 and the Audit Committee in February 1999. The Compensation Committee
reviews and recommends to the Board of Directors the compensation and benefits
of all our officers and establishes and reviews general policies relating to
compensation and benefits of our employees. The Audit Committee reviews our
internal accounting procedures and consults with and reviews the services
provided by our independent accountants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our Compensation Committee of the Board of Directors are
currently Mr. Moritz and Mr. Nova, neither of whom has ever been an officer or
employee of eToys. Prior to establishing the Compensation Committee in December
1998, the Board of Directors as a whole performed the functions delegated to the
Compensation Committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation from us for
their service as members of the Board of Directors, although they are reimbursed
for travel and lodging expenses in connection with attendance at Board and
Committee meetings. Under our 1997 Stock Plan, nonemployee directors are
eligible to receive stock option grants and stock purchase rights at the
discretion of the Board of Directors or other administrator of the plan. Under
our 1999 Directors' Stock Option Plan, non-employee directors are eligible to
receive automatic stock option grants upon their initial appointment and at each
of our annual stockholders meetings. See "--Stock Plans". In September 1997 the
Board of Directors granted Mr. Hart an option to purchase 300,000 shares of
common stock at $0.005 per share in connection with his appointment as a member
of the Board of Directors. 1/4th of the shares vested upon June 15, 1998 and
1/48th of the total number of shares vest monthly from and after June 15, 1998.
From January 1998 to June 1998, Mr. Hart provided us consulting services. In
connection with these services, Mr. Hart received aggregate payments of $39,000,
reimbursement of his expenses and an option to purchase 63,000 shares of common
stock at $0.033 per share. This option, which vested at the rate of 1/6th per
month commencing upon February 1, 1998, is fully vested.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services
rendered to eToys during the fiscal years ended March 31, 1998 and March 31,
1999 by our Chief Executive Officer and our four other executive officers who
earned more than $100,000 during the fiscal year ended March 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------
------------------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- ------------------------- ----------- ----------- ----------- ----------------------- -------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Lenk .......... 1998 105,000 -- -- 3,000,000 --
President and Chief 1997 80,000 -- -- -- --
Executive Officer
Louis V. Zambello 1998 50,000 28,750 -- 825,000 --
III(1) ................
Senior Vice President
of Operations
John R. Hnanicek(2) ..... 1998 37,500 15,000 -- 600,000 --
Senior Vice President
and Chief Information
Officer
Steven J. Schoch(3) ..... 1998 20,833 4,167 -- 750,000 --
Senior Vice President
and Chief Financial
Officer
Frank C. Han ............ 1998 105,000 -- -- 825,750 --
Senior Vice President 1997 69,167 -- -- -- --
of Product Development
</TABLE>
- ------------------------------
(1) Louis V. Zambello III became Senior Vice President of Operations in December
1998. On an annual basis, Mr. Zambello's salary would have been $200,000.
Mr. Zambello is entitled to a bonus of $115,000 which vests monthly over the
first year of his employment; the amount in the table reflects the portion
of his bonus that vested in fiscal 1998.
(2) John R. Hnanicek became Senior Vice President and Chief Information Officer
in December 1998. On an annual basis, Mr. Hnanicek's salary would have been
$150,000. Mr. Hnanicek was paid a bonus of $60,000 which vests monthly over
the first year of his employment; the amount in the table reflects the
portion of his bonus that vested in fiscal 1998.
(3) Steven J. Schoch became Senior Vice President and Chief Financial Officer in
January 1999. On an annual basis, Mr. Schoch's salary would have been
$125,000. Mr. Schoch is entitled to a bonus of $25,000 which vests monthly
over the first year of his employment; the amount in the table reflects the
portion of his bonus that vested in fiscal 1998.
We did not pay to our Chief Executive Officer or any named executive officer
any compensation intended to serve as incentive for performance to occur over a
period longer than one year pursuant to a long-term incentive plan in the fiscal
year ended March 31, 1998. We do not have any defined benefit or actuarial plan
with respect to our Chief Executive Officer or any named executive officer under
which benefits are determined primarily by final compensation and years of
service.
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OPTION GRANTS
The following table provides summary information regarding stock options
granted to our Chief Executive Officer and our four other highest compensated
executive officers during the fiscal year ended March 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED IN TERM(3)
OPTIONS FISCAL 1998 EXERCISE PRICE EXPIRATION ------------------------------
NAME GRANTED(#) (%)(1) ($/SHARE)(2) DATE 5% 10%
- ------------------------ ----------- ------------- --------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Lenk.......... 3,000,000(4) 21.25% $ 0.143 10/21/08 $ 43,279,730 $ 68,915,737
Louis V. Zambello III... 825,000(5) 5.84 1.667 12/31/08 9,854,812 15,692,141
John R. Hnanicek........ 600,000(5) 4.25 1.667 12/31/08 7,167,136 11,412,466
Steven J. Schoch........ 750,000(6) 5.31 3.333 1/31/09 6,922,802 11,023,405
Frank C. Han............ 825,000(4) 5.84 0.143 10/21/08 11,901,925 18,951,827
750(7) 0.01 2.833 1/31/09 7,533 11,996
</TABLE>
- ------------------------------
(1) We granted options for an aggregate of 14,115,900 shares to our employees
and consultants under the 1997 Stock Plan and the 1999 Stock Plan during the
fiscal year ended March 31, 1999. See "Stock Plans".
(2) Options were granted at an exercise price equal to the fair market value of
the common stock, as determined by the Board of Directors on the date of
grant.
(3) The potential realizable value is calculated assuming the exercise price on
the date of grant appreciates at the indicated rate for the entire term of
the option and that the option is exercised at the exercise price and sold
on the last day of its term at the appreciated price. All options listed
have a term of 10 years. Stock price appreciation of 5% and 10% is assumed
pursuant to the rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price will appreciate over the 10-year
option term at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the common stock appreciates over the option
term, no value will be realized from the option grants made to the named
executive officers.
(4) The options become exercisable at the rate of 1/4th of the total number of
shares on October 21, 1999 and 1/48th of the total number of shares monthly
from and after October 21, 1999.
(5) The options are immediately exercisable. However, if exercised, the
underlying shares are subject to a right of repurchase at cost in our favor
which lapses at the rate of 1/4th of the total number of shares on December
31, 1999 and 1/48th of the total number of shares monthly from and after
December 31, 1999.
(6) The option is immediately exercisable. However, if exercised, the underlying
shares are subject to a right of repurchase at cost in our favor which
lapses at the rate of 1/4th of the total number of shares on January 31,
2000 and 1/48th of the total number of shares monthly from and after January
31, 2000.
(7) The option is immediately exercisable.
49
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by our Chief
Executive Officer and our four other highest compensated executive officers as
of March 31, 1999.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT MARCH 31,
OPTIONS AT MARCH 31, 1999(1) 1999(1)(2)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Edward C. Lenk(3).................................... -- 3,000,000 -- $ 26,570,000
Louis V. Zambello III(4)............................. 825,000 -- $6,050,000 --
John R. Hnanicek(4).................................. 600,000 -- 4,400,000 --
Steven J. Schoch(5).................................. 750,000 -- 4,250,000 --
Frank C. Han(6)...................................... 750 825,000 4,625 7,306,750
</TABLE>
- ------------------------------
(1) No options were exercised as of the completion of the fiscal year ended
March 31, 1999.
(2) Based on the estimated fair market value of $9.00 for our common stock on
March 31, 1999.
(3) The option becomes exercisable at the rate of 1/4th of the total number of
shares on October 21, 1999 and 1/48th of the total number of shares monthly
from and after October 21, 1999.
(4) The options are immediately exercisable. However, if exercised, the
underlying shares are subject to a right of repurchase at cost in our favor
which lapses at the rate of 1/4th of the total number of shares on December
31, 1999 and 1/48th of the total number of shares monthly from and after
December 31, 1999.
(5) The option is immediately exercisable. However, if exercised, the underlying
shares are subject to a right of repurchase at cost in our favor which
lapses at the rate of 1/4th of the total number of shares on January 31,
2000 and 1/48th of the total number of shares monthly from and after January
31, 2000.
(6) Mr. Han holds an immediately exercisable option to purchase 750 shares. Mr.
Han holds a second option to purchase 825,000 shares which becomes
exercisable at the rate of 1/4th of the total number of shares on October
21, 1999 and 1/48th of the total number of shares monthly from and after
October 21, 1999.
STOCK PLANS
1999 STOCK PLAN. The Board of Directors adopted our 1999 Stock Plan in
February 1999 and our stockholders approved it in March 1999. We have reserved a
total of 21,600,000 shares of common stock for issuance under the 1999 Stock
Plan, plus an automatic annual increase on the first day of our fiscal years
beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 4,500,000
shares, 3.0% of our outstanding common stock on the last day of the immediately
preceding fiscal year or such lesser number of shares as the Board of Directors
determines. As of March 31, 1999, options to purchase 1,536,300 shares of common
stock with a weighted average exercise price equal to $8.900 have been granted,
none of which have been exercised.
The 1999 Stock Plan provides for the granting to employees, including
officers and directors, of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, and for the granting to
employees, consultants and nonemployee directors, of stock purchase rights and
nonstatutory stock options. If an optionee would have the right in any calendar
year to exercise for the first time incentive stock options for shares having an
aggregate fair market value (under all of our plans and determined for each
share as of the date the option to purchase the shares was granted) in excess of
$100,000, any such excess options shall be treated as nonstatutory stock
options. Unless terminated earlier, the 1999 Stock Plan will terminate in
February 2009.
The 1999 Stock Plan may be administered by the Board of Directors or a
committee of the Board, each known as the "administrator". The Board of
Directors currently administers the 1999 Stock Plan. The administrator
determines the terms of options and stock purchase rights granted
50
<PAGE>
under the 1999 Stock Plan, including the number of shares subject to an option
or stock purchase right, the exercise or purchase price, and the term and
exercisability of options. The administrator may grant an individual employee
options or stock purchase rights under the 1999 Stock Plan during any one fiscal
year to purchase a maximum of 9,000,000 shares. The exercise price of all
incentive stock options granted under the 1999 Stock Plan generally must be at
least equal to the fair market value of our common stock on the date of grant.
The administrator has the authority to grant nonstatutory stock options and
stock purchase rights at prices below fair market value, although the exercise
price of such awards granted to our Chief Executive Officer or our four other
most highly compensated officers will generally equal at least 100% of the fair
market value of the common stock on the date of grant. Payment of the purchase
price of options and stock purchase rights may be made in cash or other
consideration as determined by the administrator.
Generally, options granted under the plan have a term of ten years and are
nontransferable. The administrator may grant nonstatutory stock options with
limited transferability rights in circumstances specified in the 1999 Stock
Plan. The administrator determines the vesting terms of options and stock issued
pursuant to stock purchase rights. We expect that options and stock purchase
rights granted under the 1999 Stock Plan generally will vest at the rate of
1/4th of the total number of shares subject to the options or stock purchase
rights 12 months after the date of grant, and 1/48th of the total number of
shares each month thereafter.
In the event that we are acquired by another company, we expect that awards
outstanding under the 1999 Stock Plan will be assumed or equivalent awards
substituted by our acquiror. If an acquiror did not agree to assume or
substitute awards, the vesting of outstanding options and stock issued pursuant
to stock purchase rights will accelerate in full prior to consummation of the
transaction. If we are acquired pursuant to a transaction in which outstanding
awards are assumed or substituted by our acquiror and a participant holding an
assumed or substituted award is involuntarily terminated within 24 months
following the acquisition, the vesting of any award held by such person would
accelerate in full immediately prior to the date of his or her termination.
The Board has the authority to amend or terminate the 1999 Stock Plan as
long as such action does not materially and adversely affect any outstanding
option and provided that stockholder approval for any amendments to the 1999
Stock Plan shall be obtained to the extent required by applicable law.
1997 STOCK PLAN. The Board of Directors adopted and our stockholders
approved our 1997 Stock Plan in March 1997. We have reserved a total of
17,400,000 shares of common stock for issuance under the 1997 Stock Plan. As of
March 31, 1999, options to purchase 1,861,761 shares of common stock with a
weighted average exercise price of $0.035 had been exercised and options to
purchase a total of 13,415,001 shares at a weighted average exercise price of
$0.755 per share were outstanding. As of March 31, 1999, 2,123,238 shares
remained available for future issuance under the 1997 Stock Plan. However, the
Board has determined that all future grants to employees and consultants will
take place under our 1999 Stock Plan and therefore any shares remaining
available for issuance under the 1997 Stock Plan as of the date of this offering
will be returned to our authorized but unissued capital stock and will not be
available for future grant. Shares returning to the 1997 Stock Plan upon
cancellation of outstanding options may be made subject to future grant after
the date of this offering. Unless terminated earlier, the 1997 Stock Plan will
terminate in March 2007.
The terms of options and stock purchase rights issued under the 1997 Stock
Plan are generally the same as those which may be issued under the 1999 Stock
Plan, except with respect to the following features. The 1997 Stock Plan does
not impose an annual limitation on the number of shares subject to options or
stock purchase rights which may be issued to any individual employee.
Nonstatutory stock options or stock purchase rights granted under the 1997 Stock
Plan
51
<PAGE>
are nontransferable in all cases and must generally be granted with an exercise
price or purchase price equal to at least 85% of the fair market value of the
common stock on the date of grant.
In the event that we are acquired by another company, we expect that awards
outstanding under the 1997 Stock Plan will be assumed or equivalent awards
substituted by our acquiror. If an acquiror did not agree to assume or
substitute awards, all outstanding awards under the 1997 Stock Plan would
terminate to the extent not previously exercised upon consummation of the
acquisition.
1999 DIRECTORS' STOCK OPTION PLAN. The Board of Directors adopted our 1999
Directors' Stock Option Plan in February 1999 and our stockholders approved it
in March 1999. We have reserved a total of 600,000 shares of common stock for
issuance under the 1999 Directors' Stock Option Plan. The 1999 Directors' Stock
Option Plan becomes effective upon the effective date of this offering and,
unless terminated earlier, it terminates in February 2009. As of the date of
this offering, no options to purchase shares of common stock have been issued
under the 1999 Directors' Stock Option Plan. The 1999 Directors' Stock Option
Plan is designed to work automatically without administration; however, to the
extent administration is necessary, it will be performed by the Board of
Directors. To the extent that conflicts of interest arise, we expect they will
be addressed by abstention of any interested director from both deliberations
and voting regarding matters in which such director has a personal interest.
The 1999 Directors' Stock Option Plan provides that each person who becomes
a nonemployee director after the date of this offering will be granted a
nonstatutory stock option to purchase 60,000 shares of common stock on the date
on which the optionee first becomes a nonemployee director. In addition, on the
date of each annual meeting of stockholders, each nonemployee director will
automatically be granted an additional option to purchase 15,000 shares of
common stock if, on such date, he or she has served on our Board of Directors
for at least six months. All options granted under the 1999 Directors' Stock
Option Plan shall have an exercise price equal to 100% of the fair market value
of the common stock as of the date of grant and will be exercisable in full
immediately upon grant. Options granted under the 1999 Directors' Stock Option
Plan are nontransferable.
A nonemployee director who ceases to serve as a director for any reason
other than death or disability has 90 days after the date he or she ceases to be
a director to exercise options granted under the 1999 Directors' Stock Option
Plan. To the extent that he or she does not exercise an option within such 90
day period, the option will terminate. If a director's service on our Board of
Directors terminates as a result of his or her death or disability, the director
or the director's estate will have the right to exercise an option for 12 months
following such termination date. Options granted under the 1999 Directors' Stock
Option Plan have a term of ten years.
In the event that we are acquired by another company, we expect that awards
outstanding under the 1999 Directors' Stock Option Plan will be assumed or
equivalent awards substituted by our acquiror. If an acquiror did not agree to
assume or substitute awards, all outstanding awards under the 1999 Directors'
Stock Option Plan would terminate to the extent not previously exercised upon
consummation of the acquisition. The Board of Directors may amend or terminate
the 1999 Directors' Stock Option Plan at any time as long as such action does
not adversely affect any outstanding option and stockholder approval for any
amendments is obtained to the extent required by applicable law.
52
<PAGE>
1999 EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors adopted our 1999
Employee Stock Purchase Plan in February 1999 and our stockholders approved it
in March 1999. We have reserved a total of 900,000 shares of common stock for
issuance under the 1999 Employee Stock Purchase Plan, plus an automatic annual
increase on the first day of each of our fiscal years beginning in 2000, 2001,
2002, 2003 and 2004 equal to the lesser of 540,000 shares, 0.5% of our
outstanding common stock on the last day of the immediately preceding fiscal
year, or such lesser number of shares as the Board of Directors shall determine.
The 1999 Employee Stock Purchase Plan becomes effective upon the date of this
offering and, unless terminated earlier by the Board of Directors, it will
terminate in February 2019.
The 1999 Employee Stock Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code. This plan consists of a series of overlapping
offering periods of 24 months' duration. The initial offering period is expected
to commence on the date of this offering and end on April 30, 2001 and the
initial purchase period is expected to begin on the date of this offering and
end on October 31, 1999.
The Board of Directors or a committee appointed by the Board of Directors
will administer the 1999 Employee Stock Purchase Plan. The 1999 Employee Stock
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation. The
purchase price is equal to the lower of 85% of the fair market value of the
common stock at the beginning of each offering period or at the end of each
purchase period. In circumstances specified in the 1999 Employee Stock Purchase
Plan, the purchase price may be adjusted during an offering period to avoid our
incurring adverse accounting charges. Our employees, including officers and
employee directors, are eligible to participate in the 1999 Employee Stock
Purchase Plan if they are employed by us for at least 20 hours per week and more
than five months per year. Employees may end their participation in the 1999
Employee Stock Purchase Plan at any time, and participation ends automatically
on termination of employment. If the fair market value of the common stock on a
purchase date is less than the fair market value at the beginning of the
offering period, each participant in the 1999 Employee Stock Purchase Plan shall
automatically be withdrawn from the offering period as of the end of the
purchase date and re-enrolled in the new 24-month offering period beginning on
the first business day following the purchase date.
The 1999 Employee Stock Purchase Plan limits the number of stock purchase
rights that can be granted to any single employee. An employee cannot be granted
rights to purchase stock under this plan if his or her rights accrue at a rate
which exceeds $25,000 worth of stock in any calendar year. In addition, no
employee may purchase more than 12,000 shares of common stock during any one
purchase period.
In the event that we are acquired by another company, the 1999 Employee
Stock Purchase Plan provides that each right to purchase stock will be assumed
or equivalent rights substituted by our acquiror. If an acquiror did not agree
to assume or substitute stock purchase rights, the offering period then in
progress would be shortened and a new exercise date occurring prior to
consummation of the acquisition would be set. The Board of Directors has the
power to amend or terminate the 1999 Employee Stock Purchase Plan and to change
or terminate offering periods as long as such action does not adversely affect
any outstanding rights to purchase stock thereunder. However, the Board of
Directors may amend or terminate the 1999 Employee Stock Purchase Plan or an
offering period even if it would adversely affect outstanding options in order
to avoid our incurring adverse accounting charges.
53
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- - any breach of their duty of loyalty to the corporation or its stockholders;
- - acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
- - unlawful payments of dividends or unlawful stock repurchases or redemptions;
or
- - any transaction from which the director derived an improper personal benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our Bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding arising out of such person's services as a
director or executive officer of eToys, any subsidiary of eToys or any other
entity to which the person provides services at our request. We believe that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
54
<PAGE>
CERTAIN TRANSACTIONS
In June 1997, we sold 7,500,000 shares of common stock to Edward C. Lenk at
$0.005 per share in exchange for $18,750 in cash and a promissory note in the
principal amount of $18,750. The note is full recourse and secured by 3,750,000
of Mr. Lenk's shares. 3,750,000 of Mr. Lenk's shares are subject to a repurchase
option in favor of us in the event of his termination of employment which lapses
according to the following schedule: 1/4th of such shares vested on December 1,
1997, and 1/48th of such total have vested monthly from and after December 1,
1997. In addition, all shares immediately vest upon a change of control. This
offering will not constitute such a change of control.
In October 1998, we issued Mr. Lenk an option to purchase 3,000,000 shares
of common stock at $0.143 per share. The option vests according to the following
schedule: 1/4th of the shares vest on October 21, 1999 and 1/48th of the total
number of shares vest monthly thereafter.
In June 1997, we sold 2,500,002 shares of common stock to Frank C. Han at
$0.005 per share in exchange for $6,250 in cash and a promissory note in the
principal amount of $6,250. The note is full recourse and secured by 1,250,001
of Mr. Han's shares. 1,250,001 of Mr. Han's shares are subject to a repurchase
option in favor of us in the event of his termination of employment which lapses
according to the following schedule: 1/4th of such shares vested on February 1,
1998, and 1/48th of such total have vested monthly from and after February 1,
1998. In addition, all shares immediately vest upon a change of control. This
offering will not constitute such a change of control.
In October 1998, we issued Mr. Han an option to purchase 825,000 shares of
common stock at $0.143 per share. The option vests according to the following
schedule: 1/4th of the shares vest on October 21, 1999 and 1/48th of the total
number of shares vest monthly from and after October 21, 1999. In January 1999,
we issued Mr. Han a fully vested option to purchase 750 shares of common stock
at $2.833 per share.
In September 1997 we issued Peter C.M. Hart a stock option to purchase
300,000 shares of common stock at $0.005 per share. 1/4th of the shares subject
to the option vested on June 15, 1998 and 1/48th of the total have vested
monthly from and after June 15, 1998. In September 1997, we sold Mr. Hart a
promissory note in the amount of $20,000 and a warrant to purchase 48,387 shares
of preferred stock at $0.207 per share. The note converted into 98,817 shares of
preferred stock in December 1997 and Mr. Hart exercised the warrant in full in
March 1999. Mr. Hart was appointed a Director in October 1997. In December 1997,
we sold Mr. Hart 98,817 shares of preferred stock at $0.207 per share. From
January 1998 to June 1998, Mr. Hart provided us part-time consulting services.
In connection with these services, in February 1998 we issued Mr. Hart a stock
option to purchase 63,000 shares of common stock at $0.033 per share. 1/6th of
the shares subject to this option vested monthly from and after February 1,
1998.
In December 1998, we entered into an Offer Letter with John R. Hnanicek, our
Chief Information Officer. The agreement entitles Mr. Hnanicek to a salary of
$150,000 per year and a signing bonus of $60,000 which vests monthly over the
first year of his employment. In December 1998, we granted Mr. Hnanicek an
option to purchase 600,000 shares of common stock at $1.667 per share. The
option is immediately exercisable and, if exercised, the underlying shares are
subject to a right of repurchase in our favor which lapses according to the
following schedule: 1/4th of the shares vest on December 31, 1999 and 1/48th of
the total number of shares vest monthly from and after December 31, 1999. If Mr.
Hnanicek is terminated without cause during the first six months of his
employment, an additional 1/8th of such shares shall vest. If Mr. Hnanicek is
terminated without cause during his first six to 12 months of employment, an
additional 1/48th of such shares shall vest per each month of completed
employment.
55
<PAGE>
In December 1998, we entered into an Offer Letter with Louis V. Zambello
III, our Senior Vice President of Operations. The agreement entitles Mr.
Zambello to a salary of $200,000 per year, a signing bonus of $115,000 which
vests monthly over the first year of his employment and severance benefits equal
to $100,000 if he is terminated without cause during the first 12 months of his
employment with us. In December 1998, we granted Mr. Zambello an option to
purchase 825,000 shares of common stock at $1.667 per share. The option is
immediately exercisable and, if exercised, the underlying shares are subject to
a right of repurchase in our favor which lapses according to the following
schedule: 1/4th of the shares vest on December 31, 1999 and 1/48th of the total
number of shares vest monthly from and after December 31, 1999. If Mr. Zambello
is terminated without cause during the first six months of his employment, an
additional 1/8th of such shares shall vest. If Mr. Zambello is terminated
without cause during his first six to 12 months of employment, an additional
1/48th of such shares shall vest per each month of completed employment.
Furthermore, if we experience a change of control within two years following his
commencement of employment, a total of 412,500 of such shares shall immediately
vest. This offering will not constitute such a change of control.
In January 1999, we entered into an Offer Letter with Steven J. Schoch, our
Chief Financial Officer. The agreement entitles Mr. Schoch to a salary of
$125,000 per year, a signing bonus of $25,000 which vests monthly over the first
year of his employment and severance benefits equal to $93,750 if he is
terminated without cause during the first 12 months of his employment with us.
In January 1999, we granted Mr. Schoch an option to purchase 750,000 shares of
common stock at $3.333 per share. The option is immediately exercisable and, if
exercised, the underlying shares are subject to a right of repurchase in our
favor which lapses according to the following schedule: 1/4th of the shares vest
on January 31, 2000 and 1/48th of the total number of shares vest monthly from
and after January 31, 2000. If Mr. Schoch is terminated without cause during the
first six months of his employment, an additional 1/8th of such shares shall
vest. If Mr. Schoch is terminated without cause during his first six to twelve
months of employment, an additional 1/48th of such shares shall vest per each
month of completed employment. Furthermore, if we experience a change of control
within 18 months following his commencement of employment, a total of 281,250 of
such shares shall immediately vest. This offering will not constitute such a
change of control.
In June 1997, we sold 19,400,001 shares of common stock at $0.005 per share
and issued a note in the principal amount of $100,000 to idealab!. Pursuant to a
Letter Agreement dated November 5, 1997, idealab! returned shares of common
stock to us in the form of a capital contribution such that idealab!'s ownership
was reduced to 18,320,001 shares of common stock. Pursuant to a second Letter
Agreement dated November 5, 1997, idealab! forgave our indebtedness in the
amount of $100,000 as a capital contribution.
We have entered into indemnification agreements with our officers and
directors which may require us, among other things, to indemnify our officers
and directors against liabilities that may arise by reason of their status or
service as officers or directors, other than liabilities arising from willful
misconduct of a culpable nature, and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified. See
"Management--Limitation of Liability and Indemnification Matters".
The following table summarizes the shares of common stock and preferred
stock purchased by our directors and 5% stockholders and persons and entities
associated with them in private placement transactions. Each share of preferred
stock automatically converts into one share of common stock upon the closing of
this offering. The shares of common stock were sold at $0.005 per share, the
shares of Series A preferred stock were sold at $0.207 per share, the shares of
56
<PAGE>
Series B preferred stock were sold at $0.701 per share and the shares of Series
C preferred stock were sold at $10.00 per share. See "Principal Stockholders".
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B SERIES C
ENTITIES AFFILIATED WITH DIRECTORS STOCK PREFERRED PREFERRED PREFERRED
- ---------------------------------------------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Entities affiliated with Highland Capital Partners (Daniel
Nova)(1)................................................ -- -- 11,411,184 999,999
Entities affiliated with Sequoia Capital (Michael
Moritz)(2).............................................. -- -- 7,131,990 999,999
Entities affiliated with DynaFund Ventures (Tony
Hung)(3)................................................ -- 4,838,709 2,852,796 --
Peter C.M. Hart........................................... -- 147,204 -- --
OTHER 5% STOCKHOLDERS
- ----------------------------------------------------------
Entities affiliated with idealab!(4)...................... 18,320,001 4,838,709 2,139,594 --
Intel Corporation......................................... -- 4,838,709 2,852,793 --
</TABLE>
- ------------------------
(1) Includes shares held by Highland Capital Partners III Limited Partnership,
Highland Entrepreneurs' Fund III Limited Partnership, Highland Capital
Partners IV Limited Partnership and Highland Entrepreneurs' Fund IV Limited
Partnership. Daniel Nova is a general partner of the general partner of the
Highland entities and is a Director of eToys. He disclaims beneficial
ownership of the shares held by the entities except to the extent of his
proportionate interest therein.
(2) Includes shares held by Sequoia Capital VIII, Sequoia International
Technology Partners VIII (Q), CMS Partners LLC, Sequoia International
Technology Partners VIII, Sequoia 1997, and Sequoia Capital Franchise Fund.
Michael Moritz is a general partner of the general partners of the Sequoia
entities and is a Director of eToys. He disclaims beneficial ownership of
the shares held by the entities except to the extent of his proportionate
interest therein.
(3) Includes shares held by DynaFund L.P. and DynaFund International L.P. Tony
Hung is a vice president of the general partners of the DynaFund entities
and is a Director of eToys. He disclaims beneficial ownership of the shares
held by the entities except to the extent of his proportionate interest
therein.
(4) Includes shares held by idealab!, idealab! Capital Partners I-A, LP and
idealab! Capital Partners 1-B, LP. In November 1997, idealab! returned
shares of common stock to us in the form of a capital contribution such that
idealab!'s ownership was reduced to 18,320,001 shares of common stock.
idealab! Capital Partners I-A, LP and idealab! Capital Partners I-B, LP
disclaim ownership of the shares held by idealab! except to the extent of
their respective proportionate interest therein.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 1999, as adjusted to
reflect the sale of the common stock offered hereby under this prospectus, by:
- - each stockholder known by us to own beneficially more than 5% of the common
stock,
- - each director,
- - our Chief Executive Officer and our four other highest compensated executive
officers, and
- - all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
---------------------------- ----------------------------
NUMBER PERCENTAGE(2) NUMBER PERCENTAGE(2)
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Entities affiliated with idealab!(3) .......... 25,298,304 27.07% 25,298,304 24.89%
130 West Union Street
Pasadena, CA 91103
Entities affiliated with Highland Capital
Partners(4) ................................. 12,411,183 13.28 12,411,183 12.21
Two International Place
Boston, MA 02110
Entities affiliated with Sequoia Capital
Partners(5) ................................. 8,131,989 8.70 8,131,989 8.00
3000 Sand Hill Road, Bldg. 4, Suite 280
Menlo Park, CA 94025
Entities affiliated with DynaFund
Ventures(6) ................................. 7,691,505 8.23 7,691,505 7.57
21311 Hawthorne Blvd., Suite 300
Torrance, CA 90503
Intel Corporation ............................. 7,691,502 8.23 7,691,502 7.57
2200 Mission Blvd.
Santa Clara, CA 95052
Daniel J. Nova(7) ............................. 12,411,183 13.28 12,411,183 12.21
Michael Moritz(8) ............................. 8,131,989 8.70 8,131,989 8.00
Tony Hung(9) .................................. 7,691,505 8.23 7,691,505 7.57
Edward C. Lenk ................................ 7,491,000 8.02 7,491,000 7.37
Peter C.M. Hart(10) ........................... 353,952 * 353,952 *
Frank C. Han(11) .............................. 2,488,752 2.66 2,488,752 2.45
Louis V. Zambello III(12) ..................... 825,000 * 825,000 *
Steven J. Schoch(13) .......................... 750,000 * 750,000 *
John R. Hnanicek(14) .......................... 600,000 * 600,000 *
All directors and executive officers as a group
(9 persons)(15) ............................. 40,743,381 42.45% 40,743,381 39.11%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Assumes no exercise of the Underwriters' over-allotment option. Except
pursuant to applicable community property laws or as indicated in the
footnotes to this table, to our knowledge, each stockholder identified in
the table possesses sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by such stockholder.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable
58
<PAGE>
within 60 days after March 31, 1999 are deemed outstanding, while such
shares are not deemed outstanding for computing percentage ownership of any
other person. Unless otherwise indicated in the footnotes below, the
persons and entities named in the table have sole voting and investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable.
(3) Includes 18,320,001 shares held by idealab!, 6,562,359 shares held by
idealab! Capital Partners I-A, LP and 415,944 shares held by idealab!
Capital Partners I-B, LP. idealab! Capital Partners I-A, LP and idealab!
Capital Partners I-B, LP disclaim beneficial ownership of the shares held
by idealab! except to the extent of their respective proportionate interest
therein.
(4) Includes 10,954,737 shares held by Highland Capital Partners III Limited
Partnership, 456,447 shares held by Highland Entrepreneurs' Fund III
Limited Partnership, 960,000 shares held by Highland Capital Partners IV
Limited Partnership and 39,999 shares held by Highland Entrepreneurs' Fund
IV Limited Partnership.
(5) Includes 6,463,722 shares held by Sequoia Capital VIII, 427,920 shares held
by Sequoia International Technology Partners VIII (Q), 142,641 shares held
by CMS Partners LLC, 82,017 shares held by Sequoia International Technology
Partners VIII, 15,690 shares held by Sequoia 1997, and 999,999 shares held
by Sequoia Capital Franchise Fund.
(6) Includes 4,155,894 shares held by DynaFund International L.P. and 3,535,611
shares held by DynaFund L.P.
(7) Includes 10,954,737 shares held by Highland Capital Partners III Limited
Partnership, 456,447 shares held by Highland Entrepreneurs' Fund III
Limited Partnership, 960,000 shares held by Highland Capital Partners IV
Limited Partnership and 39,999 shares held by Highland Entrepreneurs' Fund
IV Limited Partnership. Daniel Nova is a general partner of the general
partner of the Highland entities and is a Director of eToys. He disclaims
beneficial ownership of the shares held by the entities except to the
extent of his proportionate interest therein.
(8) Includes 6,463,722 shares held by Sequoia Capital VIII, 427,920 shares held
by Sequoia International Technology Partners VIII (Q), 142,641 shares held
by CMS Partners LLC, 82,017 shares held by Sequoia International Technology
Partners VIII, 15,690 shares held by Sequoia 1997, and 999,999 shares held
by Sequoia Capital Franchise Fund. Michael Moritz is a general partner of
the general partners of the Sequoia entities and is a Director of eToys. He
disclaims beneficial ownership of the shares held by the entities except to
the extent of his proportionate interest therein.
(9) Includes 4,155,894 shares held by DynaFund International L.P. and 3,535,611
shares held by DynaFund L.P. Tony Hung is a vice president of the general
partners of the DynaFund entities and is a Director of eToys. He disclaims
beneficial ownership of the shares held by the entities except to the
extent of his proportionate interest therein.
(10) Includes 206,748 shares issuable upon exercise of options which will be
vested within 60 days of March 31, 1999.
(11) Includes 750 shares issuable upon exercise of an option which will be
vested within 60 days of March 31, 1999.
(12) Includes 825,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of March 31, 1999, but which are subject to a
right of repurchase in our favor at cost in the event Mr. Zambello ceases
employment with us.
(13) Includes 750,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of March 31, 1999, but which are subject to a
right of repurchase in our favor at cost in the event Mr. Schoch ceases
employment with us.
(14) Includes 600,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of March 31, 1999, but which are subject to a
right of repurchase in our favor at cost in the event Mr. Hnanicek ceases
employment with us.
(15) Includes the shares described in Notes 7 through 14.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
600,000,000 shares of common stock, $0.0001 par value, and 10,000,000 shares of
undesignated preferred stock, $0.0001 par value. The following description of
our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our Certificate of Incorporation and Bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of March 31, 1999 there were 93,440,307 shares of common stock
outstanding, held of record by approximately 127 stockholders, which reflects
the conversion of all outstanding shares of preferred stock into common stock.
In addition, as of March 31, 1999, there were 14,951,301 shares of common stock
subject to outstanding options and 11,412 shares of common stock subject to
outstanding warrants. Upon completion of this offering, there will be
101,640,307 shares of common stock outstanding assuming no exercise of the
underwriter's overallotment option or additional exercise of outstanding options
under our stock option plans and warrants.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available for that purpose. See "Dividend
Policy". In the event of our liquidation, dissolution or winding up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any outstanding
preferred stock. The common stock has no preemptive or conversion rights, other
subscription rights, or redemption or sinking fund provisions. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and non-assessable.
PREFERRED STOCK
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 58,779,267 shares of common stock, which reflects full
exercise of warrants to purchase 48,387 shares of preferred stock outstanding as
of March 31, 1999, and automatically retired. Thereafter, the Board of Directors
will have the authority, without further action by the stockholders, to issue up
to 10,000,000 shares of preferred stock in one or more series and to designate
the rights, preferences, privileges and restrictions of each such series. The
issuance of preferred stock could have the effect of restricting dividends on
the common stock, diluting the voting power of the common stock, impairing the
liquidation rights of the common stock or delaying or preventing our change in
control without further action by the stockholders. We have no present plans to
issue any shares of preferred stock after the completion of this offering.
WARRANTS
As of March 31, 1999 there were warrants outstanding to purchase a total of
11,412 shares of common stock at a price of $7.01 per share. In addition, there
were warrants to purchase a total of 48,387 shares of preferred stock at a price
of $0.207 per share, which expire upon the closing of this offering.
REGISTRATION RIGHTS
The holders of 68,677,269 shares of common stock and options to purchase
3,825,750 shares of common stock (the "registrable securities") are entitled to
have their shares registered by us
60
<PAGE>
under the Securities Act under the terms of an agreement between us and the
holders of the registrable securities. Subject to limitations specified in the
agreement, these registration rights include the following:
- - The holders of at least 25% of the then outstanding registrable securities may
require, on two occasions beginning 180 days after the date of this
prospectus, that we use our best efforts to register the registrable
securities for public resale.
- - If we register any common stock, either for our own account or for the account
of other security holders, the holders of registrable securities are entitled
to include their shares of common stock in such registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering in view of market conditions.
- - The holders of at least 25% of the then outstanding registrable securities may
require us on three occasions to register all or a portion of their
registrable securities on Form S-3 when use of such form becomes available to
us, provided that the proposed aggregate selling price is at least $2,000,000.
We will bear all registration expenses other than underwriting discounts and
commissions. All registration rights terminate on the date five years following
the closing of this offering, or, with respect to each holder of registrable
securities, at such time as the holder is entitled to sell all of its shares in
any three month period under Rule 144 of the Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS
Provisions of Delaware law and our Certificate of Incorporation and Bylaws
could make more difficult our acquisition by a third party and the removal of
our incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of eToys to first negotiate
with us. We believe that the benefits of increased protection of our ability to
negotiate with the proponent of an unfriendly or unsolicited acquisition
proposal outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation could result in an improvement of their terms.
We are 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.
61
<PAGE>
Our 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, our Certificate of
Incorporation permits the Board of Directors to issue preferred stock with
voting or other rights without any stockholder action. Commencing at our first
annual meeting of stockholders following the date on which we have at least 800
stockholders, our 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 our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address and telephone number
is 400 South Hope Street, 4th Floor, Los Angeles, California 90071 and (213)
553-9730.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and impair our ability to raise
equity capital in the future.
Upon completion of the offering, we will have 101,640,307 outstanding shares
of common stock. Of these shares, the 8,200,000 shares sold in the offering,
plus any shares issued upon exercise of the underwriters' over-allotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors or 10%
stockholders.
The remaining 93,440,307 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Goldman, Sachs & Co. In
addition, some stockholders have entered into similar lock-up agreements
covering a period of 365 days from the date of this prospectus. Notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144, 144(k)
and 701, shares subject to lock-up agreements will not be salable until such
agreements expire or are waived by Goldman, Sachs & Co. Taking into account the
lock-up agreements, and assuming Goldman, Sachs & Co. does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:
- - Beginning on the effective date of this prospectus, only the shares sold in
the offering will be immediately available for sale in the public market.
- - Beginning 180 days after the effective date, approximately 7,940,763 shares
will be eligible for sale pursuant to Rule 701, approximately 1,701,000
additional shares will be eligible for sale pursuant to Rule 144(k), and
approximately 81,798,546 additional shares will be eligible for sale pursuant
to Rule 144. All but 20,089,620 of such shares are held by affiliates.
- - Beginning 365 days after the effective date, approximately 1,999,998 shares
will be eligible for sale pursuant to Rule 144, all of which are held by
affiliates.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- - one percent of the number of shares of common stock then outstanding which
will equal approximately 1,016,403 shares immediately after the offering; or
- - the average weekly trading volume of the common stock during the four calendar
weeks preceding the sale.
63
<PAGE>
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice, and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144 but without compliance
with specific restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirement and that non-affiliates may sell such shares in reliance on Rule 144
without complying with the holding period, public information, volume limitation
or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options or
rights exercised under the 1997 Stock Plan, the 1999 Stock Plan, the 1999
Employee Stock Purchase Plan, the 1999 Directors' Stock Option Plan or any other
benefit plan after the effectiveness of the registration statements will also be
freely tradable in the public market. However, such shares held by affiliates
will still be subject to the volume limitation, manner of sale, notice and
public information requirements of Rule 144 unless otherwise resalable under
Rule 701. As of March 31, 1999 there were outstanding options for the purchase
of 14,951,301 shares of common stock, of which options to purchase 448,194
shares were exercisable. See "Risk Factors--Substantial Sales of Our Common
Stock Could Cause Our Stock Price to Fall", "Management--Stock Plans" and
"Description of Capital Stock--Registration Rights".
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
eToys by Venture Law Group, A Professional Corporation, Menlo Park, California.
Glen R. Van Ligten, a director of Venture Law Group, serves as our Assistant
Secretary. Certain legal matters in connection with this offering will be passed
upon for the underwriters by Gunderson, Dettmer, Stough, Villeneuve, Franklin &
Hachigian, LLP. As of the date of this prospectus, a director of Venture Law
Group and an investment partnership affiliated with Venture Law Group own an
aggregate of 41,772 shares of common stock.
EXPERTS
The financial statements of eToys Inc. as of March 31, 1998 and December 31,
1998 and the related statements of operations, stockholders' equity (deficit)
and cash flows for the year ended March 31, 1998 and the nine months ended
December 31, 1998 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
64
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedule thereto. For further information with respect to eToys and the common
stock offered in this offering, we refer you to the registration statement and
to the attached exhibits and schedules. Statements made in this prospectus
concerning the contents of any document referred to in this prospectus are not
necessarily complete. With respect to each such document filed as an exhibit to
the registration statement, we refer you to the exhibit for a more complete
description of the matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
obtain copies of all or any part of our registration statement from the
Securities and Exchange Commission upon payment of prescribed fees. You may also
inspect reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission without charge at a Web site maintained by the Securities and
Exchange Commission at http://www.sec.gov.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONTENTS
Report of Independent Auditors....................................................... F-2
Balance Sheets at March 31, 1998 and December 31, 1998............................... F-3
Statements of Operations for the year ended March 31, 1998 and the nine months ended
December 31, 1997 (unaudited) and 1998............................................. F-4
Statements of Stockholders' Equity (Deficit) for the year ended March 31, 1998 and
the nine months ended December 31, 1998............................................ F-5
Statements of Cash Flows for the year ended March 31, 1998 and the nine months ended
December 31, 1997 (unaudited) and 1998............................................. F-6
Notes to Financial Statements........................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
eToys Inc.
We have audited the accompanying balance sheets of eToys Inc. as of March
31, 1998 and December 31, 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the year ended March 31, 1998
and the nine months ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eToys Inc. as of March 31,
1998 and December 31, 1998, and the results of its operations and its cash flows
for the year ended March 31, 1998 and the nine months ended December 31, 1998,
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 15, 1999, except for Note 8, as to which
the date is March 25, 1999
The foregoing report is in the form that will be signed upon the completion
of the stock split described in Note 8 to the financial statements.
/s/ Ernst & Young LLP
Los Angeles, California
March 25, 1999
F-2
<PAGE>
ETOYS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998
------------ -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,552,000 $ 18,545,000
Inventories...................................................... 224,000 4,971,000
Prepaid expenses and other current assets........................ 35,000 394,000
------------ --------------
Total current assets............................................... 1,811,000 23,910,000
Property and equipment:
Equipment........................................................ 155,000 1,749,000
Furniture and fixtures........................................... 8,000 10,000
Leasehold improvements........................................... 15,000 331,000
Assets under capital lease....................................... -- 75,000
------------ --------------
178,000 2,165,000
Accumulated depreciation and amortization........................ (18,000) (264,000)
------------ --------------
160,000 1,901,000
Goodwill (net of accumulated amortization of $239,000 at December
31, 1998)........................................................ 956,000 717,000
Other assets....................................................... -- 1,022,000
------------ --------------
Total assets....................................................... $ 2,927,000 $ 27,550,000
------------ --------------
------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $ 346,000 $ 12,314,000
Accrued expenses................................................. 9,000 1,455,000
Current portion of capital lease obligations..................... 24,000
------------ --------------
Total current liabilities.......................................... 355,000 13,793,000
Long-term capital lease obligations................................ -- 35,000
Redeemable Convertible Preferred Stock, 18,926,423 shares
authorized:
Series A Preferred Stock; $.0001 par value; 6,318,017 and
6,366,403 shares issued and outstanding at March 31, 1998 and
December 31, 1998, respectively.............................. 3,917,000 3,947,000 --
Series B Preferred Stock, $.0001 par value, 11,886,649 shares
issued and outstanding....................................... -- 24,952,000 --
Series C Preferred Stock, $.0001 par value, 666,666 shares
issued in March 1999......................................... -- -- --
Commitments and contingencies......................................
Stockholders' equity:
Common Stock, $.0001 par value, 150,000,000 shares authorized;
32,799,276 and 33,777,837 shares issued and outstanding at
March 31, 1998 and December 31, 1998, respectively............. 3,000 3,000 9,000
Additional paid-in capital....................................... 1,003,000 32,668,000 81,561,000
Receivables from stockholders.................................... (30,000) (147,000) (147,000)
Deferred compensation............................................ (53,000) (30,058,000) (30,058,000)
Accumulated deficit.............................................. (2,268,000) (17,643,000) (17,643,000)
------------ -------------- ---------------
Total stockholders' equity (deficit)............................... (1,345,000) (15,177,000) $ 33,722,000
------------ -------------- ---------------
---------------
Total liabilities and stockholders' equity (deficit)............... $ 2,927,000 $ 27,550,000
------------ --------------
------------ --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ETOYS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
YEAR ENDED MARCH ---------------------------------
31, 1998 1998
---------------- 1997 ----------------
---------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales................................................... $ 687,000 $ 530,000 $ 23,900,000
Cost of sales............................................... 568,000 438,000 19,008,000
---------------- --------------- ----------------
Gross profit................................................ 119,000 92,000 4,892,000
Operating expenses:
Marketing and sales....................................... 1,290,000 632,000 14,354,000
Product development....................................... 421,000 206,000 2,006,000
General and administrative................................ 678,000 366,000 4,345,000
---------------- --------------- ----------------
2,389,000 1,204,000 20,705,000
---------------- --------------- ----------------
Operating loss.............................................. (2,270,000) (1,112,000) (15,813,000)
Other income (expense):
Interest income........................................... 18,000 -- 485,000
Interest expense.......................................... (15,000) (15,000) (46,000)
---------------- --------------- ----------------
Loss before provision for income taxes...................... (2,267,000) (1,127,000) (15,374,000)
Provision for income taxes.................................. 1,000 -- 1,000
---------------- --------------- ----------------
Net loss.................................................... $ (2,268,000) $ (1,127,000) $ (15,375,000)
---------------- --------------- ----------------
---------------- --------------- ----------------
Basic net loss per equivalent share......................... $ (0.09) $ (0.05) $ (0.46)
---------------- --------------- ----------------
---------------- --------------- ----------------
Pro forma basic net loss per equivalent share............... $ (0.08) $ (0.05) $ (0.19)
---------------- --------------- ----------------
---------------- --------------- ----------------
Shares used to compute basic net
loss per equivalent share................................. 25,129,888 23,326,095 33,157,034
---------------- --------------- ----------------
---------------- --------------- ----------------
Shares used to compute pro forma basic net loss per
equivalent share.......................................... 30,232,902 23,879,498 79,287,459
---------------- --------------- ----------------
---------------- --------------- ----------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ETOYS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLES
----------------------- PAID-IN FROM DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT TOTAL
---------- ----------- ----------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997........ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock...... 26,569,275 3,000 917,000 -- -- -- 920,000
Restricted stock issued....... 6,080,001 -- 30,000 (30,000) -- -- --
Exercise of stock options..... 150,000 -- 1,000 -- -- -- 1,000
Deferred compensation......... -- -- 55,000 -- (55,000) -- --
Amortization of deferred
compensation................ -- -- -- -- 2,000 -- 2,000
Net loss...................... -- -- -- -- -- (2,268,000) (2,268,000)
---------- ----------- ----------- ------------- -------------- ------------- -------------
Balance at March 31, 1998....... 32,799,276 3,000 1,003,000 (30,000) (53,000) (2,268,000) (1,345,000)
Restricted stock issued....... 525,000 -- 35,000 (117,000) (82,000)
Exercise of stock options..... 453,561 -- 4,000 4,000
Deferred compensation......... 31,626,000 (31,626,000) --
Amortization of deferred
compensation................ 1,621,000 1,621,000
Net loss...................... (15,375,000) (15,375,000)
---------- ----------- ----------- ------------- -------------- ------------- -------------
Balance at December 31, 1998.... 33,777,837 $ 3,000 $32,668,000 $ (147,000) $(30,058,000) $(17,643,000) $ (15,177,000)
---------- ----------- ----------- ------------- -------------- ------------- -------------
---------- ----------- ----------- ------------- -------------- ------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ETOYS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
YEAR ENDED -------------------------
MARCH 31, 1998 1997 1998
-------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................... $ (2,268,000) $(1,127,000) $(15,375,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash interest......................................... 15,000 15,000 38,000
Nonemployee stock compensation........................... 33,000 -- --
Amortization of deferred compensation.................... 2,000 -- 1,621,000
Depreciation............................................. 18,000 7,000 246,000
Amortization............................................. -- -- 239,000
Changes in operating assets and liabilities:
Inventories............................................ (198,000) (105,000) (4,747,000)
Prepaid expenses and other current assets.............. (35,000) (147,000) (359,000)
Accounts payable....................................... 297,000 387,000 11,968,000
Accrued expenses....................................... 9,000 6,000 1,446,000
-------------- ----------- ------------
Net cash used in operations................................ (2,127,000) (964,000) (4,923,000)
INVESTING ACTIVITIES:
Capital expenditures for property and equipment............ (178,000) (102,000) (1,913,000)
Acquisition of Toys.com.................................... (270,000) -- --
Other assets............................................... -- -- (1,022,000)
-------------- ----------- ------------
Net cash used in investing activities...................... (448,000) (102,000) (2,935,000)
FINANCING ACTIVITIES:
Proceeds from bridge loan.................................. -- -- 5,000,000
Payments on bridge loan.................................... -- -- (2,238,000)
Proceeds from the issuance of Common Stock................. 224,000 224,000 4,000
Exercise of stock options.................................. 1,000 1,000 --
Proceeds from the issuance of Redeemable Convertible
Preferred Stock.......................................... 3,007,000 3,007,000 22,047,000
Proceeds from the issuance of convertible
notes.................................................... 895,000 895,000 --
Payments on capital leases................................. -- -- (15,000)
Proceeds from receivables from stockholders................ -- -- 23,000
Proceeds from exercise of warrants......................... -- -- 30,000
-------------- ----------- ------------
Net cash provided by financing activities.................. 4,127,000 4,127,000 24,851,000
-------------- ----------- ------------
Net increase in cash and cash equivalents.................. 1,552,000 3,061,000 16,993,000
Cash and cash equivalents at beginning of period........... -- -- 1,552,000
-------------- ----------- ------------
Cash and cash equivalents at end of period................. $ 1,552,000 $ 3,061,000 $ 18,545,000
-------------- ----------- ------------
-------------- ----------- ------------
Supplemental disclosures:
Income taxes paid.......................................... $ 1,000 $ -- $ 1,000
Interest paid.............................................. $ -- $ -- $ 8,000
</TABLE>
See accompanying notes.
F-6
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
GENERAL
eToys Inc. (the Company) was incorporated in November 1996 in the state of
Delaware. Prior to June 1997, the Company had no operations or activities. In
June 1997, initial issuances of Common Stock occurred. The Company launched its
Web site in October 1997. The Company is a Web-based retailer focused
exclusively on children's products, including toys, video games, software,
videos and music.
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern. The Company has incurred
significant operating losses since inception of operations and has limited
working capital. Management believes that the proceeds raised through the sale
of equity securities, in addition to revenue generated from product sales, will
support the Company's operations through 1999. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the eventual outcome of this uncertainty.
INTERIM FINANCIAL STATEMENTS
The accompanying statements of operations and cash flows for the nine months
ended December 31, 1997 are unaudited. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results of
operations and cash flows for the interim period.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ materially from those
estimates.
CASH EQUIVALENTS
The Company considers those investments which are highly liquid, readily
convertible to cash and which mature within three months from the date of
purchase as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (using the first in-first out
method) or market and consist primarily of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method based upon estimated useful lives, which range from three
to five years. Leasehold
F-7
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
improvements are recorded at cost. Amortization is provided using the
straight-line method over the shorter of the term of the related lease or
estimated useful lives of the assets.
GOODWILL
Goodwill represents the excess of the purchase price over the estimated fair
market value of net assets acquired in a business combination. Goodwill is
amortized on a straight-line basis over three years.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
No such impairment losses have been identified by the Company.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Shares associated with stock options and the
Redeemable Convertible Preferred Stock are not included because they are
antidilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Redeemable Convertible Preferred Stock into shares
of the Company's Common Stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on April 1, 1997, or at
the date of original issuance, if later.
F-8
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and pro forma net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
YEAR ENDED --------------------------------
MARCH 31, 1998 1997 1998
-------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Numerator:
Net loss..................................................... $ (2,268,000) $ (1,127,000) $ (15,375,000)
Denominator:
Weighted average shares...................................... 25,129,888 23,326,095 33,157,034
-------------- --------------- ---------------
Denominator for basic calculation............................ 25,129,888 23,326,095 33,157,034
Weighted average effect of pro forma securities:
Series A Redeemable Convertible Preferred Stock............ 5,103,014 553,403 19,000,760
Series B Redeemable Convertible Preferred Stock............ -- -- 27,129,665
-------------- --------------- ---------------
Denominator for pro forma calculation........................ 30,232,902 23,879,498 79,287,459
-------------- --------------- ---------------
-------------- --------------- ---------------
Net loss per share:
Basic........................................................ $ (0.09) $ (0.05) $ (0.46)
-------------- --------------- ---------------
-------------- --------------- ---------------
Pro forma.................................................... $ (0.08) $ (0.05) $ (0.19)
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to customers. Outbound shipping and handling
charges are included in net sales. The Company provides an allowance for sales
returns in the period of sale, based upon historical experience.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. For the year ended March
31, 1998 and the nine months ended December 31, 1997 and 1998, the Company
incurred advertising costs of $917,000, $299,000 and $7,747,000, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock
awards granted subsequent to January 1, 1995, be recognized as compensation
expense based on their fair value at the date of grant. Alternatively, a company
may use Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees," and disclose pro forma income amounts which would have
resulted from recognizing such awards at their fair value. The Company has
elected to account for stock-based compensation expense under APB No. 25 and
make the required pro forma disclosures for compensation (see Note 6).
F-9
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended March 31, 1998:
Convertible notes in the amount $895,000, plus accrued interest of $15,000,
were converted into Series A Redeemable Convertible Preferred Stock.
The Company expensed approximately $33,000 for services rendered from
several vendors in exchange for Common Stock.
The Company issued stock in return for notes receivable totaling $30,000
from employees. Such notes have been classified in the equity section of the
balance sheet.
The Company issued 2,340,000 shares of Common Stock as part of the
acquisition of Toys.com. See Note 2.
During the nine months ended December 31, 1998:
The Company financed the purchase of fixed assets under capital leases in
the amount $75,000.
The Company issued notes receivable for Common Stock and Series B Redeemable
Convertible Preferred Stock in the amounts of $35,000 and $105,000,
respectively.
Convertible notes in the amount of $2,762,000, plus $38,000 in accrued
interest, were converted into Series B Redeemable Convertible Preferred
Stock.
2. ACQUISITION OF TOYS.COM
In March 1998, the Company acquired the operations of one of its online
competitors, Toys.com, including $25,000 in toy inventories and assumed certain
advertising liabilities in the amount of $49,000, and the assumption of future
contingent advertising commitments. The acquisition was accounted for under the
purchase method of accounting and included a cash payment of $270,000 and the
issuance of 2,340,000 shares of Common Stock. Goodwill resulting from the
acquisition was $956,000. Subsequent to the acquisition, Toys.com ceased
operations as a separate entity.
F-10
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
As a result of the net operating losses, the provision for income taxes
consists solely of minimum state taxes. The following is a reconciliation of the
statutory federal income tax rate to the Company's effective income tax rate:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
31,
YEAR ENDED MARCH ----------------------------
31, 1998 1997 1998
----------------- --------------- -----
(UNAUDITED)
<S> <C> <C> <C>
Statutory federal income tax expense
(benefit)................................. (34)% (34)% (34)%
State income tax expense (benefit).......... (6) (6) (6)
Valuation allowance......................... 40 40 29
Non-deductible stock compensation........... -- -- 10
Non-deductible goodwill amortization........ -- -- 1
-- -- --
--% --% --%
-- -- --
-- -- --
</TABLE>
The components of the deferred tax assets and related valuation allowance at
March 31, 1998 and December 31, 1998, are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1998
------------ ---------------
<S> <C> <C>
Other......................................................... $ -- $ 161,000
Net operating loss carryforwards.............................. 914,000 6,121,000
------------ ---------------
Deferred tax assets........................................... 914,000 6,282,000
Valuation allowance........................................... (914,000) (6,282,000)
------------ ---------------
$ -- $ --
------------ ---------------
------------ ---------------
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
The Company has net operating losses for both federal and state tax purposes
of approximately $15,366,000 expiring beginning in the years 2012 for federal
and 2005 for state. The net operating losses can be carried forward to offset
future taxable income. Utilization of the above carryforwards may be subject to
utilization limitations, which may inhibit the Company's ability to use
carryforwards in the future.
4. CONVERTIBLE NOTES AND BRIDGE FINANCING
During the year ended March 31, 1998, the Company received $895,000 in
proceeds from the issuance of 6.07% convertible notes. The notes were
automatically converted into Series A Redeemable Convertible Preferred Stock due
to certain conditions as specified within the initial note agreement. As a
result of the conversion, the initial proceeds from the convertible notes of
$895,000, plus $15,000 of accrued interest, were converted into 1,468,018 shares
of Series A Redeemable Convertible Preferred Stock.
F-11
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE NOTES AND BRIDGE FINANCING (CONTINUED)
In conjunction with the issuance of the 6.07% convertible notes, the Company
issued to the purchasers of the 6.07% convertible notes, 721,757 stock warrants
for the purchase of Series A Redeemable Convertible Preferred Stock at $.62 per
share. As of December 31, 1998, 48,386 warrants have been exercised. The
warrants are immediately exercisable and expire on December 31, 2002, or on the
closing date of an initial public offering, if sooner. No value has been
allocated to the warrants as the amount is not deemed to be significant.
On May 6, 1998, the Company entered into a $5,000,000 bridge financing
agreement with a group of investors. The bridge financing was in the form of
Convertible Subordinated Promissory Notes (the Notes) which were payable on
demand after May 6, 1999 accruing interest at a rate of 8% per annum until paid
and compounded annually. In July 1998, $2.8 million of the Notes plus interest
were converted into 1,331,235 shares of Series B Redeemable Convertible
Preferred Stock. The remaining balance of the Notes of $2.2 million plus accrued
interest was repaid in cash to the investors in June 1998.
5. CAPITAL STRUCTURE
COMMON AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 2, 1998, the Company amended its Certificate of Incorporation to,
among other matters, increase the authorized number of shares of Common and
Preferred Stock to 150,000,000 and 18,926,423, respectively.
In conjunction with this amendment, the Company authorized 11,886,649 shares
of Series B Redeemable Convertible Preferred Stock (Series B). In December 1997,
the issuance of Series A Redeemable Convertible Preferred Stock (Series A)
resulted in proceeds of $3,007,000, representing 4,849,999 shares issued and
outstanding at $0.62 per share. In conjunction with this offering, $895,000 of
convertible notes, plus related accrued interest of $15,000, were converted into
1,468,018 shares of Series A Redeemable Convertible Preferred Stock (see Note
4). In June 1998, the issuance of Series B resulted in proceeds of $25,000,000
representing 11,886,649 shares issued and outstanding at $2.1032 per share. The
following summarizes the Series A and Series B activity:
<TABLE>
<CAPTION>
SERIES A SERIES B
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at April 1, 1997............................ -- $ -- -- $ --
Issuance of Series A................................ 6,318,017 3,917,000 -- --
------------- ------------- ------------- --------------
Balance at March 31, 1998........................... 6,318,017 3,917,000 -- --
Issuance of Series A................................ 48,386 30,000 -- --
Issuance of Series B................................ -- -- 11,886,649 24,952,000
------------- ------------- ------------- --------------
Balance at December 31, 1998........................ 6,366,403 $ 3,947,000 11,886,649 $ 24,952,000
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
F-12
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
The following table is presented to summarize the Common Stock authorized at
December 31, 1998:
<TABLE>
<CAPTION>
COMMON
SHARES ISSUED
DESCRIPTION OF INSTRUMENT OR RESERVED
- ------------------------------------------------------------------------------ --------------
<S> <C>
Common Stock outstanding 33,777,837
Series A Redeemable Convertible Preferred Stock 19,099,209
Series B Redeemable Convertible Preferred Stock 35,659,947
Employee Incentive Stock Option Plan 17,400,000
Preferred and Common Stock warrants 2,170,113
--------------
Common Stock issued or reserved 108,107,106
--------------
Common Stock available 41,892,894
--------------
--------------
</TABLE>
Each share of Redeemable Convertible Preferred Stock is convertible, at the
stockholder's option, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $0.62 in the case of Series A and
$2.1032 in the case of Series B by the Conversion Price, as defined. In the
event of a public offering of the Company's equity securities resulting in gross
proceeds to the Company of $20 million or greater, all outstanding Redeemable
Convertible Preferred Stock will automatically be converted into Common Stock.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A and Series B are
entitled to receive preference to the Common Stock holders to any distribution
of any assets of the Company in an amount per share equal to $0.62 and $2.1032
per share, respectively. After the initial distribution of assets, the holders
of Series A and Series B are entitled to participate with the holders of the
Common Stock on a pro rata basis until the holders of Series A and Series B have
received an aggregate of $1.86 and $6.31, respectively (as adjusted for any
stock splits, stock dividends, recapitalizations, or the like.)
On or at any time after November 26, 2002, subject to the written consent of
66 2/3% of the then outstanding shares of Series A and Series B, the Redeemable
Convertible Preferred Stock may be redeemed for cash in whole or in part for
$0.62 and $2.1032 per share (as adjusted for any stock dividends, combinations
or splits with respect to such share) plus all declared but unpaid dividends,
for Series A and Series B, respectively.
The voting rights of the Series A and Series B are equal to one vote for
each share of Common Stock into which such Redeemable Convertible Preferred
Stock may be converted. Each share of Series A and Series B entitles the holder
to receive dividends in cash at an annual rate of $0.043 and $0.1472 per share,
respectively (as adjusted for any stock splits, stock dividends,
recapitalizations, or the like). Dividends are payable quarterly when and if
declared by the board of directors and are not cumulative.
RECEIVABLES FROM STOCKHOLDERS
Receivables from stockholders, totaling $30,000 and $147,000 at March 31,
1998 and December 31, 1998, respectively, represent interest bearing notes from
certain stockholders issued to finance the purchase of 6,605,001 and 50,000
shares of the Company's Common and Series B, respectively. The notes bear
interest rates between 6.0% and 8.0% per year with interest due upon
F-13
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
payment of the notes. The notes are payable on different dates ranging from
December 1, 1999 to July 27, 2002, or upon termination of employment or transfer
of any of the purchased shares.
DEFERRED COMPENSATION
The Company recorded deferred compensation of $55,000, $0 and $31,626,000
for the year ended March 31, 1998, and the nine months ended December 31, 1997
and 1998, respectively. The amounts recorded represent the difference between
the grant price and the deemed fair value of the Company's Common Stock for
shares subject to options granted. The amortization of deferred compensation
will be charged to operations over the vesting period of the options, which is
typically four years. Total amortization recognized was $2,000, $0 and
$1,621,000 for the year ended March 31, 1998 and the nine months ended December
31, 1997 and 1998, respectively.
6. STOCK OPTION PLANS
The Company adopted the 1997 Stock Plan, as amended June 1998, (the Plan)
which provides for the granting of options for purchases up to 17,400,000 shares
of the Company's Common Stock. Under the terms of the Plan, options may be
granted to employees, nonemployees, directors or consultants at prices not less
than the fair value at the date of grant. Options granted to nonemployees are
recorded at the value of negotiated services received. Options vest over four
years, 25% for the first year and ratably over the remaining three years and
generally expire ten years from the date of grant.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
NUMBER OF PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------- ------------------- ------------------
<S> <C> <C> <C>
Outstanding at March 31, 1997.......... --
Granted.............................. 4,407,000 $ 0.005 to $0.033 $ 0.010
Exercised............................ (150,000) 0.005 to 0.005 0.005
Canceled............................. -- --
-------------
Outstanding at March 31, 1998.......... 4,257,000 0.005 to 0.033 0.010
Granted.............................. 10,746,600 0.033 to 1.667 0.399
Exercised............................ (978,561) 0.005 to 0.140 0.039
Canceled............................. (1,307,439) 0.005 to 0.140 0.015
-------------
Outstanding at December 31, 1998....... 12,717,600 0.033 to 1.667 0.331
-------------
-------------
</TABLE>
Options granted during the year ended March 31, 1998 and the nine months
ended December 31, 1998 resulted in a total compensation amount of $55,000 and
$31,626,000, respectively, and were recorded as deferred compensation in
stockholders equity. The deferred compensation amount will be recognized as
compensation expense over the vesting period. During the year ended March 31,
1998 and the nine months ended December 31, 1998, such compensation expense
amounted to $2,000 and $1,621,000, respectively. Options outstanding at March
31, 1998 and December 31, 1998 were exercisable for 321,000 and 906,726 shares
of Common Stock, respectively. Common Stock available for future grants at March
31, 1998 and December 31, 1998 were 4,165,500 and 3,508,839 shares,
respectively.
F-14
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
Additional information with respect to the outstanding options as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE -------------------------------
WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE SHARES PRICE
------------- ------------------ --------------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
RANGE OF EXERCISE PRICES
$0.005 to $0.033....... 3,847,500 $ 0.016 8.91 838,625 $ 0.008
$0.140 to $0.140....... 726,600 0.140 9.53 9,600 0.140
$0.143 to $1.667....... 8,143,500 0.495 9.85 58,500 1.510
------------- -----------
$0.005 to $1.667....... 12,717,600 906,725
------------- -----------
------------- -----------
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of the grant using the minimum value option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, 1998 DECEMBER 31, 1998
------------------- ---------------------
<S> <C> <C>
Risk-free interest rates............................... 6.0% 5.14%
Expected lives (in years).............................. 5 4
Dividend yield......................................... 0% 0%
Expected volatility.................................... 0% 0%
</TABLE>
The compensation cost associated with the stock-based compensation plans did
not result in a material difference from the reported net loss for the year
ended March 31, 1998 or the nine months ended December 31, 1998.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office and warehouse facilities under long-term
noncancelable operating leases. For the year ended March 31, 1998 and the nine
months ended December 31, 1997 and 1998, total rent expense incurred related to
these leases amounted to $52,000, $26,000 and $405,000, respectively.
F-15
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1998, future lease commitments under these agreements were
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- ---------
<S> <C> <C>
1999............................................................... $ 699,000 $ 27,000
2000............................................................... 718,000 27,000
2001............................................................... 739,000 10,000
2002............................................................... 759,000 --
2003............................................................... 462,000 --
------------- ---------
3,377,000 64,000
Less amounts representing interest................................. -- (5,000)
------------- ---------
$ 3,377,000 $ 59,000
------------- ---------
------------- ---------
</TABLE>
EQUIPMENT FINANCING ARRANGEMENT
During December 1998, the Company entered into a line of credit arrangement
with a leasing institution that provides for sale and leaseback transactions of
capital equipment up to a maximum of $2,000,000. Under this agreement,
$2,000,000 was available for future financing transactions at December 31, 1998.
In addition, the agreement provides the leasing institution warrants, with value
equal to approximately $80,000 with the number of shares to be determined
pursuant to a formula, as defined, at the time of issuance. Such warrants were
issued on January 31, 1999.
ADVERTISING COMMITMENTS
During 1998, the Company entered into a number of commitments for online,
print and broadcast advertising. At December 31, 1998, the advertising
commitments amounted to:
<TABLE>
<CAPTION>
TOTAL
YEARS ENDING DECEMBER 31, COMMITMENTS
- ------------------------------------------------------------------------------ --------------
<S> <C>
1999.......................................................................... $ 8,291,000
2000.......................................................................... 171,000
--------------
$ 8,462,000
--------------
--------------
</TABLE>
PURCHASE COMMITMENTS
At December 31, 1998, the Company had approximately $8.7 million in
outstanding orders with certain suppliers for the purchase of inventory. Such
purchase commitments are expected to be fulfilled from April to September 1999.
8. SUBSEQUENT EVENTS
In February 1999, the Board of Directors adopted the 1999 Stock Plan, the
1999 Directors' Stock Option Plan and the 1999 Employee Stock Purchase Plan. In
March 1999 the stockholders approved these plans. The 1999 Stock Plan provides
for 21,600,000 shares of Common Stock to be granted under terms similar to the
1997 Stock Plan. The 1999 Directors' Stock Option Plan reserves a total of
600,000 shares of Common Stock for grants of options to nonemployee directors.
The 1999 Employee Stock Purchase Plan reserves a total of 900,000 shares of
Common Stock for limited purchases by employees through payroll deductions, with
a purchase price equal to 85% of the fair market value of the Common Stock.
F-16
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
In March 1999, the Company issued Series C Redeemable Convertible Preferred
Stock (Series C) which resulted in proceeds of approximately $20,000,000,
representing 666,666 shares issued and outstanding at $30 per share. Each share
of Series C is convertible, at the stockholder's option, into such number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
$30 by the Conversion Price, as defined. In the event of a public offering of
the Company's equity securities all outstanding shares of Series C will
automatically be converted into Common Stock.
In February 1999, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its Common Stock to the public. Upon
completion of the Company's initial public offering, the Series A, Series B and
Series C Redeemable Convertible Preferred Stock will convert into 56,759,154
shares of Common Stock. Unaudited pro forma stockholders' equity reflects the
assumed conversion of the Redeemable Convertible Preferred Stock as of December
31, 1998.
In March 1999, the Company's Board of Directors declared a stock split of 3
shares for every 1 share of Common Stock then outstanding. The stock split will
become effective at the date the Company's public offering of Common Stock is
declared effective. 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.
F-17
<PAGE>
UNDERWRITING
eToys and the Underwriters named below (the "underwriters") have entered
into an underwriting agreement with respect to the shares being offered. Subject
to certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co.,
BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- --------------------------------------------------------------- -----------
<S> <C>
Goldman, Sachs & Co............................................
BancBoston Robertson Stephens Inc..............................
Donaldson, Lufkin & Jenrette Securities Corporation............
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
-----------
Total......................................................
-----------
-----------
</TABLE>
------------------------
The underwriters are committed to take and pay for all of the shares
indicated in the table above, if any are taken.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,230,000 shares from eToys to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by eToys. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 1,230,000 additional shares.
Paid by eToys
<TABLE>
<CAPTION>
No Exercise Full Exercise
------------- ---------------
<S> <C> <C>
Per Share....................................... $ $
Total........................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
eToys and its directors, officers, employees and other securityholders have
agreed with the underwriters not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of the representatives. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock has been
negotiated among eToys and the representatives of
U-1
<PAGE>
the underwriters. Among the factors considered in determining the initial public
offering price of the shares, in addition to prevailing market conditions, were
eToys' historical performance, estimates of eToys' business potential and
earnings prospects, an assessment of eToys' management and the consideration of
the above factors in relation to market valuation of companies in related
businesses.
eToys has applied to have the common stock listed on the Nasdaq National
Market under the symbol "ETYS".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short-sale covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
The underwriters have reserved for sale, at the initial public offering
price, up to 10% of the common stock offered hereby for certain individuals
designated by eToys who have expressed an interest in purchasing such shares of
common stock in the offering. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same basis as other shares offered hereby.
eToys estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1,200,000.
eToys has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
U-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 7
Use of Proceeds...................... 18
Dividend Policy...................... 18
Capitalization....................... 19
Dilution............................. 20
Selected Financial Data.............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 33
Management........................... 45
Certain Transactions................. 55
Principal Stockholders............... 58
Description of Capital Stock......... 60
Shares Eligible for Future Sale...... 63
Legal Matters........................ 64
Experts.............................. 64
Additional Information............... 65
Index to Financial Statements........ F-1
Underwriting......................... U-1
</TABLE>
------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
8,200,000 Shares
ETOYS INC.
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by eToys in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................................... $ 31,970
NASD filing fee................................................................ 12,000
Nasdaq National Market listing fee............................................. 95,000
Printing and engraving expenses................................................ 350,000
Legal fees and expenses........................................................ 350,000
Accounting fees and expenses................................................... 270,000
Blue Sky qualification fees and expenses....................................... 5,000
Transfer Agent and Registrar fees.............................................. 5,000
Miscellaneous fees and expenses................................................ 81,030
----------
Total...................................................................... $1,200,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article VII of our current
Certificate of Incorporation (Exhibit 3.1 hereto) and Article VI of our current
Bylaws (Exhibit 3.3 hereto) provide for indemnification of our directors,
officers, employees and other agents to the maximum extent permitted by Delaware
law. In addition, we have entered into Indemnification Agreements (Exhibit 10.14
hereto) with our officers and directors. The Underwriting Agreement (Exhibit
1.1) also provides for cross-indemnification among eToys and the Underwriters
with respect to certain matters, including matters arising under the Securities
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our incorporation in November 1996, we have sold and issued the
following securities:
1. On June 27, 1997 we issued 11,680,002 shares of common stock to five
founders for an aggregate consideration of $58,400.01. On June 27, 1997 we also
issued 19,400,001 shares of common stock and a Note in the principal amount of
$100,000 to one investor for an aggregate consideration of $197,000.01.
2. On September 29, 1997, we issued one investor a warrant to purchase
150,000 shares of common stock in connection with the transfer of certain
intellectual property.
3. On August 15, 1997 and September 26, 1997, we issued Notes in the
principal amount of $895,000 and warrants to purchase 2,165,271 shares of Series
A preferred stock to 40 investors for an aggregate consideration of $895,000.
The Notes converted into 4,404,054 shares of Series A preferred stock.
II-1
<PAGE>
4. On December 23, 1997, we issued 18,954,051 shares of Series A preferred
stock to fifty accredited investors for an aggregate consideration of
$3,917,170.54.
5. On March 11, 1998, we issued 2,340,000 shares of common stock to one
accredited investor in exchange for substantially all of the assets of a
business owned by the investor (less $270,000 cash).
6. On May 6, 1998, we issued Notes in the aggregate principal amount of
$2,530,679.61 to four accredited investors. The Notes converted into 3,609,756
shares of Series B preferred stock.
7. On June 4, 1998, we issued 31,424,510 shares of Series B preferred stock
to twelve accredited investors for am aggregate consideration of $22,030,677.17.
8. On June 17, 1998, we issued 4,235,436 shares of Series B preferred stock
to sixteen accredited investors for an aggregate consideration of $2,969,322.97.
9. On January 31, 1999 we issued a warrant to purchase 11,412 shares of
common stock to a lessor in connection with an equipment financing.
10. On March 24, 1999 we issued an aggregate of 1,999,998 shares of Series C
preferred stock to two large institutional accredited investors for aggregate
consideration of $19,999,980.
11. Since inception we have issued an aggregate of 18,522,900 options to
purchase common stock of eToys to a number of our employees, directors and
consultants.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances described in Item 9 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement dated April , 1999.
3.1* Amended and Restated Certificate of Incorporation of eToys (superseded by Exhibit
3.5).
3.2* Amended and Restated Certificate of Incorporation of eToys (proposed) (superseded
by Exhibit 3.6).
3.3* Amended and Restated Bylaws of eToys.
3.4* Amended and Restated Bylaws of eToys (proposed).
3.5 Amended and Restated Certificate of Incorporation of eToys.
3.6 Amended and Restated Certificate of Incorporation of eToys (proposed).
4.1* Specimen Stock Certificate.
5.1 Opinion of Venture Law Group regarding the legality of the Common Stock being
registered.
10.1* Stock Purchase Agreement dated June 27, 1997 between eToys and Edward C. Lenk.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.2* Restricted Stock Purchase Agreement dated June 27, 1997 between eToys and Edward
C. Lenk.
10.3* Stock Purchase Agreement dated June 27, 1997 between eToys and Frank C. Han.
10.4* Restricted Stock Purchase Agreement dated June 27, 1997 between eToys and Frank C.
Han.
10.5* Note and Stock Purchase Agreement dated June 27, 1997 between eToys and idealab!.
10.6*+ Interactive Marketing Agreement dated October 1, 1997 between eToys and America
Online, Inc. (amended January 1, 1998).
10.7* Series A Preferred Stock Purchase Agreement dated December 23, 1997 among eToys
and certain investors.
10.8* Series B Preferred Stock Purchase Agreement dated June 4, 1998 among eToys and
certain investors.
10.9* Amended and Restated Investors' Rights Agreement dated June 4, 1998, among eToys
and certain investors (superseded by Exhibit 10.24).
10.10* Amended and Restated Voting Agreement dated June 4, 1998, among eToys and certain
investors (superseded by Exhibit 10.25).
10.11* Amended and Restated Right of First Refusal and Co-Sale Agreement dated June 4,
1998, among eToys, Edward C. Lenk, Frank C. Han and certain investors
(superseded by Exhibit 10.26).
10.12* Lease dated January 22, 1999 between eToys and Spieker Properties, L.P.
10.13* Standard Industrial Lease Agreement dated June 26, 1998 between eToys and Newcrow
(amended October 15, 1998).
10.14* Form of Indemnification Agreement between eToys and each of its officers and
directors.
10.15 1997 Stock Plan.
10.16 1999 Stock Plan.
10.17 1999 Employee Stock Purchase Plan.
10.18 1999 Directors' Stock Option Plan.
10.19* Offer Letter dated December 5, 1998 between eToys and John R. Hnanicek.
10.20* Offer Letter dated December 28, 1998 between eToys and Louis V. Zambello III.
10.21* Offer Letter dated January 12, 1999 between eToys and Steven J. Schoch.
10.22* Equipment Lease Line dated December 24, 1998 between eToys and Comdisco, Inc.
10.23 Series C Preferred Stock Purchase Agreement dated March 24, 1999 among eToys and
certain investors.
10.24 Amended and Restated Investors' Rights Agreement dated March 24, 1999 among eToys
and certain investors.
10.25 Amended and Restated Voting Agreement dated March 24, 1999 among eToys and certain
investors.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.26 Amended and Restated Right of First Refusal and Co-Sale Agreement dated March 24,
1999 among eToys and certain investors.
23.1 Consent of Accountants.
23.2 Consent of Attorneys (see Exhibit 5.1).
24.1* Power of Attorney.
</TABLE>
- ------------------------
* Previously filed by the registrant with the Commission.
+ Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Santa
Monica, State of California on April 5, 1999.
<TABLE>
<S> <C> <C>
ETOYS INC.
By: /s/ EDWARD C. LENK
-----------------------------------------
Edward C. Lenk
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
UNCLE OF THE BOARD
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ EDWARD C. LENK President, Chief Executive
- ------------------------------ Officer and Uncle of the April 5, 1999
Edward C. Lenk Board
/s/ STEVEN J. SCHOCH
- ------------------------------ Chief Financial Officer April 5, 1999
Steven J. Schoch
PETER C.M. HART*
- ------------------------------ Director April 5, 1999
Peter C.M. Hart
TONY HUNG*
- ------------------------------ Director April 5, 1999
Tony Hung
MICHAEL MORITZ*
- ------------------------------ Director April 5, 1999
Michael Moritz
DANIEL NOVA*
- ------------------------------ Director April 5, 1999
Daniel Nova
</TABLE>
*Power of Attorney
<TABLE>
<S> <C> <C> <C>
By: /s/ STEVEN J. SCHOCH
-------------------------
Steven J. Schoch
ATTORNEY IN FACT
</TABLE>
<PAGE>
eTOYS INC.
COMMON STOCK, PAR VALUE $0.0001
---------------
UNDERWRITING AGREEMENT
April ____, 1999
Goldman, Sachs & Co.,
BancBoston Robertson Stephens Inc.,
Donaldson Lufkin & Jenrette Securities Corporation and
Merrill Lynch, Pierce, Fenner & Smith Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
eToys Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
________ shares (the "Firm Shares") and, at the election of the Underwriters,
up to _______ additional shares (the "Optional Shares") of Common Stock, par
value $0.0001 ("Stock") of the Company (the Firm Shares and the Optional
Shares that the Underwriters elect to purchase pursuant to Section 2 hereof
being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-_____) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant
1
<PAGE>
to Rule 424(a) of the rules and regulations of the Commission under the Act
is hereinafter called a "Preliminary Prospectus"; the various parts of the
Initial Registration Statement and the Rule 462(b) Registration Statement, if
any, including all exhibits thereto and including the information contained
in the form of final prospectus filed with the Commission pursuant to Rule
424(b) under the Act in accordance with Section 5(a) hereof and deemed by
virtue of Rule 430A under the Act to be part of the Initial Registration
Statement at the time it was declared effective, each as amended at the time
such part of the Initial Registration Statement became effective or such part
of the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus");
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects
to the requirements of the Act and the rules and regulations of the
Commission thereunder, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; PROVIDED, HOWEVER, that this
representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing
to the Company by an Underwriter through Goldman, Sachs & Co. expressly for
use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the Registration
Statement and any amendment thereto, and as of the applicable filing date as
to the Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
PROVIDED, HOWEVER, that this representation and warranty shall not apply to
any statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(d) The Company has not sustained since the date of the latest
audited financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
has not been any change in the capital stock (except pursuant to the exercise
of previously granted options and warrants) or long-term debt of the Company
or any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company, otherwise than as set forth or contemplated in the Prospectus;
(e) The Company does not own any real property; the Company has good
and marketable title to all personal property owned by it, free and clear of
all liens, encumbrances
2
<PAGE>
and defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company; and any
real property and buildings held under lease by the Company are held by it
under valid, subsisting and enforceable leases with such exceptions as are
not material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company;
(f) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the state of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such qualification, or
is subject to no material liability or disability by reason of the failure to
be so qualified in any such jurisdiction;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description of the Stock contained in the
Prospectus;
(h) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party or
by which the Company is bound or to which any of the property or assets of
the Company is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or Bylaws of the Company or
any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its properties;
and no consent, approval, authorization, order, registration or qualification
of or with any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration under
the Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares
by the Underwriters;
(j) The Company is not in violation of its Certificate of
Incorporation or Bylaws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
material indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any of its
properties may be bound;
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(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and documents
referred to therein, are accurate and complete;
(l) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of which
any property of the Company is the subject which, if determined adversely to
the Company, would individually or in the aggregate have a material adverse
effect on the current or future financial position, stockholders' equity or
results of operations of the Company; and, to the Company's knowledge, no
such proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(m) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company", as such term is
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act");
(n) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba within
the meaning of Section 517.075, Florida Statutes;
(o) The Company owns or possesses adequate rights to use all patents,
patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names, copyrights and other intellectual property rights that
are necessary to conduct its business as described in the Prospectus; the
expiration of any patents, patent rights, trade secrets, trademarks, service
marks, trade names, copyrights or other intellectual property rights would
not have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company; and the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others
with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names, copyrights or other
intellectual property rights that, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a material adverse
effect upon the Company's business, financial condition or results of
operations;
(p) The Company carries, or is covered by, insurance as is customary
for companies similarly situated and engaged in similar businesses in similar
industries;
(q) There are no contracts or other documents which are required to
be described in the Prospectus or to be filed as exhibits to the Initial
Registration Statement by the Act which are not so filed;
(r) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent which will have a material
adverse effect on the business, financial condition, results of operations or
prospects of the Company;
(s) The Company does not own, directly or indirectly, any interest in
any corporation, partnership, business trust or other entity, which would be
required to be set forth in Exhibit 21 to the Registration Statement;
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(t) The Company does not have any debt securities or preferred stock
which is rated by any "nationally recognized statistical rating
organization", as that term is defined by the Commission for purposes of Rule
426(g)(2) under the Act;
(u) To the Company's knowledge, Ernst & Young, LLP, who have
certified certain financial statements of the Company are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder; and
(v) The Company has reviewed its operations and any third parties
with which the Company has a material relationship to evaluate the extent to
which the business or operations of the Company will be affected by the Year
2000 Problem. As a result of such review, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem will have a
material adverse effect on the general affairs, management, the current or
future financial position, business prospects, stockholders' equity or
results of operations of the Company or result in any material loss or
interference with the Company's business or operations. The "Year 2000
Problem" as used herein means any significant risk that computer hardware or
software used in the receipt, transmission, processing, manipulation,
storage, retrieval, retransmission or other utilization of data or in the
operation of mechanical or electrical systems of any kind will not, in the
case of dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring prior
to January 1, 2000.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $____________, the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto and (b)
in the event and to the extent that the Underwriters shall exercise the
election to purchase Optional Shares as provided below, the Company agrees to
issue and sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at the
purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction, the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to
purchase hereunder.
The Company hereby grants to the Underwriters the right to
purchase at their election up to __________ Optional Shares, at the purchase
price per share set forth in the paragraph above, for the sole purpose of
covering overallotments in the sale of the Firm Shares. Any such election to
purchase Optional Shares may be exercised only by written notice from you to
the Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree
in writing, earlier than two or later than ten business days after the date
of such notice.
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3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours'
prior notice to the Company shall be delivered by or on behalf of the Company
to Goldman, Sachs & Co. through these facilities of the Depository Trust
Company ("DTC"), for the account of such Underwriter, against payment by or
on behalf of such Underwriter of the purchase price therefor by wire transfer
of Federal (same-day) funds, to the account specified by the Company to
Goldman, Sachs & Co. at least forty-eight hours in advance. The time and
date of such delivery and payment shall be, with respect to the Firm Shares,
9:30 a.m., New York City time, on _____________, 1999 or such other time and
date as Goldman, Sachs & Co. and the Company may agree upon in writing, and,
with respect to the Optional Shares, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by Goldman,
Sachs & Co. of the Underwriters' election to purchase such Optional Shares,
or such other time and date as Goldman, Sachs & Co. and the Company may agree
upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for delivery
of the Optional Shares, if not the First Time of Delivery, is herein called
the "Second Time of Delivery", and each such time and date for delivery is
herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the
offices of Venture Law Group ("VLG"), 2800 Sand Hill Road, Menlo Park,
California (the "Closing Location"), and the Shares will be delivered at the
Designated Office, all at such Time of Delivery. A meeting will be held at
the Closing Location at ___p.m., New York City time, on the New York
Business Day next preceding such Time of Delivery, at which meeting the final
drafts of the documents to be delivered pursuant to the preceding sentence
will be available for review by the parties hereto. For the purposes of this
Section 4, "New York Business Day" shall mean each Monday, Tuesday,
Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to
advise you, promptly after it receives notice thereof, of the time when any
amendment to the Registration Statement has been filed or becomes effective
or any supplement to the Prospectus or any amended Prospectus has been filed
and to furnish you with copies thereof; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any stop order
or of any order preventing or
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suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering or
sale of the Shares and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would include
an untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary during such
period to amend or supplement the Prospectus in order to comply with the Act,
to notify you and upon your request to prepare and furnish without charge to
each Underwriter and to any dealer in securities as many copies as you may
from time to time reasonably request of an amended Prospectus or a supplement
to the Prospectus which will correct such statement or omission or effect
such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine
months or more after the time of issue of the Prospectus, upon your request
but at the expense of such Underwriter, to prepare and deliver to such
Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company (which need not be audited)
complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder any securities of the Company that are substantially similar to the
Shares, including but not limited to any securities that are convertible into
or exchangeable for, or that represent the right to receive, Stock or any
such substantially similar securities (other than (i) pursuant to employee
stock option plans existing on, or upon the conversion or exchange of
convertible or exchangeable securities outstanding as of, the date of
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this Agreement, or (ii) as consideration in connection with mergers,
acquisitions of assets, reclassifications and other transactions not
primarily for equity financing purposes, provided that the number of shares
or other securities issued in connection with such mergers, acquisitions of
assets, reclassifications and other transactions shall not exceed ten percent
(10%) of the number of shares of Common Stock of the Company outstanding on
the date of issuance and, provided further, that all persons that are issued
such shares or other securities shall enter a lock-up agreement for a period
expiring on the date 180 days after the date of the Prospectus in the form
substantially to the effect set forth in this Subsection 5(e) in form and
substance satisfactory to you), without your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company
certified by independent public accountants) and, as soon as practicable
after the end of each of the first three quarters of each fiscal year
(beginning with the fiscal quarter ending after the effective date of the
Registration Statement), to make available to its stockholders summary
financial information of the Company for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver
to you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is
listed; and (ii) such additional information concerning the business and
financial condition of the Company as you may from time to time reasonably
request;
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ"); and
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
6. The Company covenants and agrees with the several Underwriters
that the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and
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supplements thereto and the mailing and delivering of copies thereof to the
Underwriters and dealers; (ii) the cost of printing or producing any
Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other
documents in connection with the offering, purchase, sale and delivery of the
Shares; (iii) all expenses in connection with the qualification of the Shares
for offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters
in connection with such qualification and in connection with the Blue Sky
survey; (iv) all fees and expenses in connection with listing the Shares on
the NASDAQ; (v) the filing fees incident to, and the fees and disbursements
of counsel for the Underwriters in connection with, securing any required
review by the National Association of Securities Dealers, Inc. of the terms
of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; and (viii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section.
It is understood, however, that, except as provided in this Section, and
Sections 8 and 11 hereof, the Underwriters will pay all of their own costs
and expenses, including the fees of their counsel, stock transfer taxes on
resale of any of the Shares by them, and any advertising expenses connected
with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares
to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and
other statements of the Company herein are, at and as of such Time of
Delivery, true and correct, the condition that the Company shall have
performed all of its obligations hereunder theretofore to be performed, and
the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been complied
with to your reasonable satisfaction;
(b) Gunderson Dettmer, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of Delivery, with
respect to the matters covered in paragraphs (i), (ii), (v), (ix) and (xi) of
subsection (c) below as well as such other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) VLG, counsel for the Company, shall have furnished to you their
written opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with power and authority
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(corporate and other) to own its properties and conduct its business as
described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of Delivery) have
been duly and validly authorized and issued and are fully paid and
non-assessable; and the Shares conform in all material respects to the
description of the Stock contained in the Prospectus;
(iii) To such counsel's knowledge, the Company has been duly
qualified as a foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company (such counsel being entitled to rely
in respect of the opinion in this clause upon opinions of local counsel and
in respect of matters of fact upon certificates of officers of the Company,
provided that such counsel shall state that they believe that both you and
they are justified in relying upon such opinions and certificates);
(iv) To such counsel's knowledge and other than as set forth
in the Prospectus, there are no legal or governmental proceedings pending to
which the Company is a party or of which any property of the Company is the
subject which, if determined adversely to the Company, would individually or
in the aggregate have a material adverse effect on the current or future
financial position, stockholders' equity or results of operations of the
Company; and, to such counsel's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by others;
(v) This Agreement has been duly authorized, executed and
delivered by the Company;
(vi) The issue and sale of the Shares being delivered at such
Time of Delivery by the Company and the compliance by the Company with all of
the provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under, any
material indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company is a party
or by which the Company is bound or to which any of the property or assets of
the Company is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or Bylaws of the Company or
any statute or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the Company or
any of its properties;
(vii) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which such counsel need
not express an opinion);
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(viii) The Company is not in violation of its Certificate of
Incorporation or Bylaws or, to such counsel's knowledge, in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any material indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or
by which it or any of its properties may be bound;
(ix) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to constitute
a summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and documents
referred to therein, are accurate and complete in all material respects;
(x) The Company is not an "investment company", as such term
is defined in the Investment Company Act; and
(xi) Such counsel shall also state that (i) they believe that
the Registration Statement and the Prospectus and any further amendments and
supplements thereto made by the Company prior to such Time of Delivery (other
than the financial statements and related schedules therein, as to which such
counsel need express no opinion) comply as to form in all material respects
with the requirements of the Act and the rules and regulations thereunder,
although they do not assume any responsibility for, and have not
independently verified, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus, except
for those referred to in the opinion in subsection (ix) of this Section 7(c);
(ii) they have no reason to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made by the Company
prior to such Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date, the Prospectus or
any further amendment or supplement thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained an
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading or that, as of such Time of
Delivery, either the Registration Statement or the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules therein,
as to which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; and (iii) they do not know of any amendment
to the Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus which are not filed or described as required;
(d) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Ernst & Young, LLP,
shall have furnished to you a letter or letters, dated the respective
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dates of delivery thereof, in form and substance satisfactory to you, to the
effect set forth in Annex I hereto (the executed copy of the letter delivered
prior to the execution of this Agreement is attached as Annex I(a) hereto and
a draft of the form of letter to be delivered on the effective date of any
post-effective amendment to the Registration Statement and as of each Time of
Delivery is attached as Annex I(b) hereto);
(e) (i) The Company shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of
which information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company (except pursuant
to the exercise of previously granted options and warrants) or any change, or
any development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in Clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(f) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term is
defined by the Commission for purposes of Rule 436(g)(2) under the Act, and
(ii) no such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its rating of
any of the Company's debt securities;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities declared
by either Federal or New York or California State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the
effect of any such event specified in this Clause (iv) in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time of
Delivery on the terms and in the manner contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been
duly listed for quotation on NASDAQ; and
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from all stockholders of the Company (except
for those stockholders agreed to by you), substantially to the effect set
forth in Subsection 5(e) hereof in form and substance satisfactory to you;
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(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company satisfactory
to you as to the accuracy of the representations and warranties of the
Company herein at and as of such Time of Delivery, as to the performance by
the Company of all of its obligations hereunder to be performed at or prior
to such Time of Delivery, as to the matters set forth in subsections (a) and
(e) of this Section and as to such other matters as you may reasonably
request.
8. (a) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman,
Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company for any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such action or
claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the
13
<PAGE>
indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory
to such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and, after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party under such subsection for any legal expenses of other
counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified party is
an actual or potential party to such action or claim) unless such settlement,
compromise or judgment (i) includes an unconditional release of the
indemnified party from all liability arising out of such action or claim and
(ii) does not include a statement as to or an admission of fault, clpability
or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this subsection (d) were determined by PRO RATA
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred
14
<PAGE>
to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities
(or actions in respect thereof) referred to above in this subsection (d)
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section 8 shall be in addition to any
liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of
the Company and to each person, if any, who controls the Company within the
meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or
other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter you do not
arrange for the purchase of such Shares, then the Company shall be entitled
to a further period of thirty-six hours within which to procure another party
or other parties satisfactory to you to purchase such Shares on such terms.
In the event that, within the respective prescribed periods, you notify the
Company that you have so arranged for the purchase of such Shares, or the
Company notifies you that it has so arranged for the purchase of such Shares,
you or the Company shall have the right to postpone such Time of Delivery for
a period of not more than seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or
in any other documents or arrangements, and the Company agrees to file
promptly any amendments to the Registration Statement or the Prospectus which
in your opinion may thereby be made necessary. The term "Underwriter" as used
in this Agreement shall include any person substituted under this Section
with like effect as if such person had originally been a party to this
Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of
15
<PAGE>
the Shares of such defaulting Underwriter or Underwriters for which such
arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Shares
which remains unpurchased exceeds one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, or if the Company shall
not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company
to sell the Optional Shares) shall thereupon terminate, without liability on
the part of any non-defaulting Underwriter or the Company, except for the
expenses to be borne by the Company and the Underwriters as provided in
Section 6 hereof and the indemnity and contribution agreements in Section 8
hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters,
as set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless
of any investigation (or any statement as to the results thereof) made by or
on behalf of any Underwriter or any controlling person of any Underwriter, or
the Company, or any officer or director or controlling person of the Company,
and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason,
any Shares are not delivered by or on behalf of the Company as provided
herein, the Company will reimburse the Underwriters through you for all
out-of-pocket expenses approved in writing by you, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company shall then be under no further liability to any
Underwriter except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall
be in writing, and if to the Underwriters shall be delivered or sent by mail,
telex or facsimile transmission to you as the representatives in care of
Goldman, Sachs & Co., 32 Old Slip, 21st Floor, New York, New York 10005,
Attention: Registration Department; and if to the Company shall be delivered
or sent by mail to the address of the Company set forth in the Registration
Statement, Attention: Secretary; provided, however, that any notice to an
Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire,
16
<PAGE>
which address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a
successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the
same instrument.
17
<PAGE>
If the foregoing is in accordance with your understanding, please
sign and return to us seven (7) counterparts hereof, and upon the acceptance
hereof by you, on behalf of each of the Underwriters, this letter and such
acceptance hereof shall constitute a binding agreement between each of the
Underwriters and the Company. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company for examination upon request, but without warranty
on your part as to the authority of the signers thereof.
Very truly yours,
ETOYS INC.
By:
--------------------------------
Name:
--------------------------
Title:
--------------------------
Accepted as of the date hereof:
Goldman, Sachs & Co.
BancBoston Robertson Stephens Inc.
Donaldson Lufkin & Jenrette Securities Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By:
----------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
18
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- --------------
<S> <C> <C>
Goldman, Sachs & Co.........................
BancBoston Robertson Stephens Inc...........
Donaldson Lufkin & Jenrette Securities
Corporation ................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................
[NAMES OF OTHER UNDERWRITERS]...............
------------- ---------------
Total
------------- ---------------
------------- ---------------
</TABLE>
S-1
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company within the meaning of the Act and the applicable published rules
and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial forecasts
and/or pro forma financial information) examined by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations thereunder; and, if applicable, they
have made a review in accordance with standards established by the American
Institute of Certified Public Accountants of the unaudited interim financial
statements, selected financial data, pro forma financial information,
financial forecasts and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have been
separately furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed statements of income, balance sheets and statements of cash flows
included in the Prospectus as indicated in their reports thereon copies of
which have been separately furnished to the Representatives and on the basis
of specified procedures including inquiries of officials of the Company who
have responsibility for financial and accounting matters regarding whether
the unaudited condensed financial statements referred to in paragraph
(vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published rules
and regulations, nothing came to their attention that cause them to believe
that the unaudited condensed financial statements do not comply as to form in
all material respects with the applicable accounting requirements of the Act
and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to the
results of operations and financial position of the Company for the five most
recent fiscal years included in the Prospectus agrees with the corresponding
amounts (after restatements where applicable) in the audited financial
statements for such five fiscal years which were included or incorporated by
reference in the Company's Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the basis
of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to believe
that this information does not conform in all material respects with the
disclosure requirements of Items 301, 302, 402 and 503(d), respectively, of
Regulation S-K;
(vi) On the basis of limited procedures, not constituting an examination
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial
A-1
<PAGE>
statements and other information referred to below, a reading of the latest
available interim financial statements of the Company, inspection of the
minute books of the Company since the date of the latest audited financial
statements included in the Prospectus, inquiries of officials of the Company
responsible for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited statements of income, balance sheets and
statements of cash flows included in the Prospectus do not comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed statements of income,
balance sheets and statements of cash flows included in the Prospectus for
them to be in conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding items in
the unaudited financial statements from which such data and items were
derived, and any such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding amounts in the
audited financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included in
the Prospectus but from which were derived any unaudited condensed financial
statements referred to in Clause (A) and any unaudited income statement data
and balance sheet items included in the Prospectus and referred to in Clause
(B) were not determined on a basis substantially consistent with the basis
for the audited financial statements included in the Prospectus;
(D) any unaudited pro forma condensed financial statements included
in the Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the capital stock (other
than issuances of capital stock upon exercise of options and stock
appreciation rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the Prospectus) or
any increase in the long-term debt of the Company, or any decreases in net
current assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in the latest
balance sheet included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(F) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause (E)
there were any decreases in net revenues or operating profit or the total or
per share amounts of net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives,
A-2
<PAGE>
in each case as compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which the
Prospectus discloses have occurred or may occur or which are described in
such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration Statement
specified by the Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of the
Company and have found them to be in agreement.
A-3
<PAGE>
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
eTOYS INC.
The undersigned, Edward C. Lenk and Glen R. Van Ligten hereby certify that:
1. They are the duly elected and acting President and Assistant
Secretary, respectively, of eToys Inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on November 8, 1996 under the
name of TOYS.COM INC.
3. The Certificate of Incorporation of this corporation shall be
amended and restated to read in full as follows:
ARTICLE I
"The name of this corporation is eToys Inc. (the "CORPORATION").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 15 East North Street, Dover, County of Kent, Delaware 19901. The
name of its registered agent at such address is Incorporating Services, Ltd.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
ARTICLE IV
(A) CLASSES OF STOCK. The Corporation is authorized to issue two
classes of stock to be designated, respectively, "COMMON STOCK" and
"PREFERRED STOCK." The total number of shares which the Corporation is
authorized to issue is Sixty-Nine Million Five Hundred Ninety-Three Thousand
Eighty-Nine (69,593,089) shares, each with a par value of $0.0001 per share.
Fifty Million (50,000,000) shares shall be Common Stock and Nineteen Million
Five Hundred Ninety-Three Thousand Eighty-Nine (19,593,089) shares shall be
Preferred Stock.
(B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by this Third Amended and Restated Certificate of
Incorporation may be issued from time to time in one or more series. The
first series of Preferred Stock shall be designated "SERIES A PREFERRED
STOCK" and shall consist of Seven Million Thirty-Nine Thousand Seven
<PAGE>
Hundred Seventy-Four (7,039,774) shares. The second series of Preferred
Stock shall be designated "Series B Preferred Stock" and shall consist of
Eleven Million Eight Hundred Eighty Six Thousand Six Hundred Forty Nine
(11,886,649) shares. The third series of Preferred Stock shall be designated
"Series C Preferred Stock" and shall consist of Six Hundred Sixty-Six
Thousand Six Hundred Sixty-Six (666,666) shares. The rights, preferences,
privileges, and restrictions granted to and imposed on the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock are as set forth
below in this Article IV(B).
1. DIVIDEND PROVISIONS.
(a) Subject to the rights of series of Preferred Stock which
may from time to time come into existence, the holders of shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall
be entitled to receive dividends, out of any assets legally available
therefor, prior and in preference to any declaration or payment of any
dividend (payable other than in Common Stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock of the Corporation) on the
Common Stock of the Corporation, at the rate of (a) $0.043 per share per
annum on each outstanding share of Series A Preferred Stock (as adjusted for
any stock splits, stock dividends, recapitalizations or the like), (b) $0.1472
per share per annum on each outstanding share of Series B Preferred Stock (as
adjusted for any stock splits, stock dividends, recapitalizations or the like)
and (c) $2.40 per share per annum on each outstanding share of Series C
Preferred Stock (as adjusted for any stock splits, stock dividends,
recapitalizations or the like) or, if greater (as determined on a per annum
basis and on an as converted basis for the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock) an amount equal to that paid on
any other outstanding shares of this Corporation, payable quarterly when, as
and if declared by the Board of Directors. Such dividends shall not be
cumulative.
(b) After payment of such dividends, any additional dividends
shall be distributed among all holders of Common Stock and all holders of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock in proportion to the number of shares of Common Stock which would be
held by each such holder if all shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock were converted to Common Stock
at the then effective conversion rate.
2. LIQUIDATION.
(a) PREFERENCE. In the event of any liquidation, dissolution
or winding up of the Corporation, either voluntary or involuntary, subject to
the rights of series of Preferred Stock that may from time to time come into
existence, the holders of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of the Corporation to the
holders of Common Stock by reason of their ownership thereof, an amount per
share equal to (i) $0.62 per share (as adjusted for any stock splits, stock
dividends, recapitalizations or the like) for each share of Series A Preferred
Stock then held by them, (ii) $2.1032 per share (as adjusted for any stock
splits, stock dividends, recapitalizations or the like) for each share of
Series B Preferred
-2-
<PAGE>
Stock then held by them (as adjusted for any stock splits, recapitalizations
or the like), (iii) $30.00 per share (as adjusted for any stock splits, stock
dividends, recapitalizations or the like) for each share of Series C Preferred
Stock then held by them, plus an amount equal to all declared but unpaid
dividends on the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock, respectively. If, upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, subject to the rights of series of Preferred
Stock that may from time to time come into existence, the entire assets and
funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock in proportion to the preferential
amount each such holder would otherwise have been entitled to receive if the
preferential amounts payable in respect to the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock had been paid in full.
(b) REMAINING ASSETS. Upon the completion of the distribution
required by Section 2(a) above and any other distribution that may be required
with respect to series of Preferred Stock that may from time to time come
into existence, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among the holders of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock and the Common Stock pro rata based on the number of shares of Common
Stock held by each (assuming conversion of all such Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock) until (i) with respect
to the holders of Series A Preferred Stock, such holders shall have received
an aggregate of $1.86 per share of Series A Preferred Stock (as adjusted for
any stock splits, stock dividends, recapitalizations or the like) (including
amounts paid pursuant to Section 2(a) above) and (ii) with respect to the
holders of Series B Preferred Stock, such holders shall have received an
aggregate of $6.31 per share of Series B Preferred Stock (as adjusted for any
stock splits, stock dividends, recapitalizations or the like) (including
amounts paid pursuant to Section 2(a) above) and (iii) with respect to the
holders of Series C Preferred Stock, such holders shall have received an
aggregate of $90.00 per share of Series C Preferred Stock (as adjusted for
any stock splits, stock dividends, recapitalizations or the like) (including
amounts paid pursuant to Section 2(a) above); thereafter, subject to the
rights of series of Preferred Stock that may from time to time come into
existence, if assets remain in the Corporation, the holders of the Common
Stock of the Corporation shall receive all of the remaining assets of the
Corporation pro rata based on the number of shares of Common Stock held by
each.
(c) CERTAIN ACQUISITIONS.
(i) DEEMED LIQUIDATION. For purposes of this Section 2,
a liquidation, dissolution or winding up of the Corporation shall be deemed
to be occasioned by, or to include, (A) the acquisition of the Corporation by
another entity by means of any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation,
but excluding any merger effected exclusively for the purpose of changing the
domicile of the Corporation); (B) a sale of all or substantially all of the
assets of the Corporation,
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UNLESS the Corporation's stockholders of record as constituted immediately
prior to such acquisition or sale will, immediately after such acquisition or
sale (by virtue of securities issued as consideration for the Corporation's
acquisition or sale or otherwise) hold at least 50% of the voting power of the
surviving or acquiring entity in approximately the same relative percentages
after such acquisition or sale as before such acquisition or sale; or (C) any
other transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of the Corporation is disposed of.
(ii) VALUATION OF CONSIDERATION. In the event of a deemed
liquidation as described in Section 2(c)(i) above, if the consideration
received by the Corporation is other than cash, its value will be deemed its
fair market value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability:
(1) If traded on a securities exchange or The
Nasdaq Stock Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending three (3) days
prior to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as determined in good faith by
the Board of Directors of the Corporation.
(B) The method of valuation of securities subject
to investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an
affiliate or former affiliate) shall be to make an appropriate discount from
the market value determined as above in Section 2(c)(ii)(A) to reflect the
approximate fair market value thereof, as determined in good faith by the
Board of Directors of the Corporation.
(iii) NOTICE OF TRANSACTION. The Corporation shall give
each holder of record of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock written notice of such impending transaction not
later than twenty (20) days prior to the stockholders' meeting called to
approve such transaction, or twenty (20) days prior to the closing of such
transaction, whichever is earlier, and shall also notify such holders in
writing of the final approval of such transaction. The first of such notices
shall describe the material terms and conditions of the impending transaction
and the provisions of this Section 2, and the Corporation shall thereafter
give such holders prompt notice of any material changes. The transaction
shall in no event take place sooner than twenty (20) days after the
Corporation has given the first notice provided for herein or sooner than
twenty (20) days after the Corporation has given notice of any material
changes provided for herein; provided, however, that such periods may be
shortened
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upon the written consent of the holders of Preferred Stock that are entitled
to such notice rights or similar notice rights and that represent at least a
majority of the voting power of all then outstanding shares of such Preferred
Stock.
(iv) EFFECT OF NONCOMPLIANCE. In the event the
requirements of this Section 2(c) are not complied with, the Corporation
shall forthwith either cause the closing of the transaction to be postponed
until such requirements have been complied with, or cancel such transaction,
in which event the rights, preferences and privileges of the holders of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock shall revert to and be the same as such rights, preferences and
privileges existing immediately prior to the date of the first notice
referred to in Section 2(c)(iii) hereof.
3. REDEMPTION.
(a) Subject to the rights of series of any Preferred Stock
which may from time to time come into existence, on or at any time after the
date November 26, 2002, this Corporation shall, upon receipt by this
Corporation from the holders of 66 2/3% of the then outstanding shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock of their written consent to redemption hereunder of their respective
shares (the "REDEMPTION NOTICE"), at such time and to the extent that it may
lawfully do so, redeem in whole or in part the (i) Series A Preferred Stock
by paying in cash therefor a sum equal to $0.62 per share (as adjusted for
any stock dividends, combinations or splits with respect to such share) plus
all declared but unpaid dividends on such share (the "SERIES A REDEMPTION
PRICE"), (ii) Series B Preferred Stock by paying in cash therefor a sum equal
to $2.1032 per share (as adjusted for any stock dividends, combinations or
splits with respect to such share) plus all declared but unpaid dividends on
such share (the "SERIES B REDEMPTION PRICE") and (iii) Series C Preferred
Stock by paying in cash therefor a sum equal to $30.00 per share (as adjusted
for any stock dividends, combinations or splits with respect to such share)
plus all declared but unpaid dividends on such share (the "SERIES C REDEMPTION
PRICE"). Any such redemption shall occur on the date forty-five (45) days
after the receipt of the Redemption Notice or as soon thereafter as the
Company may lawfully conduct such redemption under the terms of this Section 3.
(b) As used herein and in subsection (3)(c) below, the term
"REDEMPTION DATE" shall refer to November 26, 2002, and the term "REDEMPTION
PRICE" shall refer to each of the Series A Redemption Price, Series B
Redemption Price and Series C Redemption Price. Subject to the rights of
series of Preferred Stock which may from time to time come into existence, at
least fifteen (15) but no more than thirty (30) days prior to the Redemption
Date, if the holders of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock exercise their right of redemption pursuant to
subsection 3(a) above, written notice shall be mailed, first class postage
prepaid, to each holder of record (at the close of business on the business
day next preceding the day on which notice is given) of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock to be redeemed,
at the address last shown on the records of this Corporation for such holder,
notifying such holder of the redemption to be effected, specifying the number
of shares to be redeemed from such holder, the Redemption Date, the Redemption
Price, the place at which payment may be obtained and
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calling upon such holder to surrender to this Corporation, in the manner and
at the place designated, his, her or its certificate or certificates
representing the shares to be redeemed (the "REDEMPTION NOTICE"). Except as
provided in subsection (3)(c) on or after the Redemption Date, each holder of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock to be redeemed shall surrender to this Corporation the certificate or
certificates representing such shares, in the manner and at the place
designated in the Redemption Notice, and thereupon the Redemption Price of
such shares shall be payable to the order of the person whose name appears on
such certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled. In the event less than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(c) From and after the Redemption Date, unless there shall
have been a default in payment of the Redemption Price, all rights of the
holders of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock designated for redemption in the Redemption Notice
as holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock (except the right to receive the Redemption Price without
interest upon surrender of their certificate or certificates) shall cease
with respect to such shares, and such shares shall not thereafter be
transferred on the books of this Corporation or be deemed to be outstanding
for any purpose whatsoever. Subject to the rights of series of Preferred
Stock which may from time to time come into existence, if the funds of this
Corporation legally available for redemption of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock on the Redemption
Date are insufficient to redeem the total number of shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock to be
redeemed on such date, those funds which are legally available will be used
to redeem the maximum possible number of such shares ratably among the
holders of such shares to be redeemed in proportion to the amounts which the
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock would otherwise had been entitled to receive if all amounts payable on
or with respect to such Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock in such redemption had been paid in full. The
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, at any time
thereafter when additional funds of this Corporation are legally available
for the redemption of shares of Serie A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, such funds will immediately be used to
redeem the balance of the shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock which this Corporation has not
redeemed.
(d) Three (3) days prior to the Redemption Date, this
Corporation shall deposit the Redemption Price of all outstanding shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock designated for redemption in the Redemption Notice, and not yet
redeemed or converted, with a bank or trust company having aggregate capital
and surplus in excess of $50,000,000 as a trust fund for the benefit of the
respective holders of the shares designated for redemption and not yet
redeemed, Simultaneously, this Corporation shall deposit irrevocable
instruction and authority to such bank or trust company to publish the notice
of redemption thereof (or to complete such publication if theretofore
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commenced) and to pay, on and after the date fixed for redemption or prior
thereto, the Redemption Price of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock to the holders thereof upon
surrender of their certificates. Any monies deposited by this Corporation
pursuant to this subsection 3(d) for the redemption of shares which are
thereafter converted into shares of Common Stock pursuant to Section 4 hereof
no later than the close of business on the Redemption Date shall be returned
to this Corporation forthwith upon such conversion. The balance of any monies
deposited by this Corporation pursuant to this subsection 3(d) remaining
unclaimed at the expiration of two (2) years following the Redemption Date
shall thereafter be returned to this Corporation, provided that the stockholder
to which such money would be payable hereunder shall be entitled, upon proof
of its ownership of the Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock and payment of any bond requested by the Company,
to receive such monies but without interest from the Redemption Date.
4. CONVERSION. The holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall have conversion
rights as follows (the "CONVERSION RIGHTS"):
(a) RIGHT TO CONVERT. Subject to Section 4(c), each share of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share and on or prior to the close of
business on the day prior to the Redemption Date, if any, as may be specified
in the Redemption Notice with respect to the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, at the office of the Corporation
or any transfer agent for such stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing (i) $0.62
in the case of Series A Preferred Stock, (ii) $2.1032 in the case of Series B
Preferred Stock by the Conversion Price applicable to such share, determined
as hereafter provided, in effect on the date the certificate is surrendered
for conversion and (iii) $30.00 in the case of Series C Preferred Stock by the
Conversion Price applicable to such share, determined as hereafter provided,
in effect on the date the certificate is surrendered for conversion. The
initial Conversion Price per share shall be $0.62 for shares of Series A
Preferred Stock, $2.1032 for shares of Series B Preferred Stock and $30.00
for shares of Series C Preferred Stock. Such initial Conversion Price shall
be subject to adjustment as set forth in Section 4(d) below.
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock shall automatically
be converted into shares of Common Stock at the Conversion Price at the time
in effect for such share immediately upon, except as provided below in
Section 4(c), the Corporation's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), which results in
aggregate gross cash proceeds to the Corporation of at least $20,000,000 (an
"IPO").
(c) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall
be entitled to convert the same into shares of Common Stock, he shall
surrender the certificate or certificates therefor,
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duly endorsed, at the office of the Corporation or of any transfer agent for
such series of Preferred Stock, and shall give written notice to the
Corporation at its principal corporate office, of the election to convert the
same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Preferred Stock, or to the nominee or nominees of such holder,
a certificate or certificates for the number of shares of Common Stock to
which such holder shall be entitled as aforesaid. Such conversion shall be
deemed to have been made immediately prior to the close of business on the
date of such surrender of the shares of such series of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date. If
the conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act the conversion may, at the option
of any holder tendering such Preferred Stock for conversion, be conditioned
upon the closing with the underwriters of the sale of securities pursuant to
such offering, in which event the person(s) entitled to receive Common Stock
upon conversion of such Preferred Stock shall not be deemed to have converted
such Preferred Stock until immediately prior to the closing of such sale of
securities.
(d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN
DILUTIVE ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock shall be subject to adjustment from time to time as follows:
(i) (A) ISSUANCE OF ADDITIONAL STOCK BELOW PURCHASE
PRICE. If the Corporation shall issue, after the date upon which any shares
of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock were first issued (the "PURCHASE DATE"), any Additional Stock (as
defined below) without consideration or for a consideration per share less
than the Conversion Price for the Series A Preferred Stock or the Series B
Preferred Stock or Series C Preferred Stock in effect immediately prior to
the issuance of such Additional Stock, the Conversion Price for the Series A
Preferred Stock or the Series B Preferred Stock or the Series C Preferred
Stock in effect immediately prior to each such issuance shall automatically
(except as otherwise provided in this clause (i)) be adjusted to a price
determined by multiplying such Conversion Price by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such issuance, plus the number of shares of Common Stock that the
aggregate consideration received by the Corporation for such issuance would
purchase at such Conversion Price; and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
issuance, plus the number of shares of such Additional Stock.
(B) NO FRACTIONAL ADJUSTMENTS. No adjustment of the
Conversion Price for the Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock shall be made in an amount less than one cent per
share, provided that any adjustments which are not required to be made by
reason of this sentence shall be carried forward and shall be either taken
into account in any subsequent adjustment made prior to three (3) years from
the
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date of the event giving rise to the adjustment being carried forward, or
shall be made at the end of three (3) years from the date of the event giving
rise to the adjustment being carried forward. Except to the limited extent
provided for in Sections 4(d)(i)(E)(3) and 4(d)(i)(E)(4), no adjustment of
such Conversion Price pursuant to this Section 4(d)(i) shall have the effect
of increasing the Conversion Price above the Conversion Price in effect
immediately prior to such adjustment.
(C) DETERMINATION OF CONSIDERATION. In the case of
the issuance of Common Stock for cash, the consideration shall be deemed to
be the amount of cash paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by the Corporation for
any underwriting or otherwise in connection with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair value thereof as determined in
good faith by the Board of Directors irrespective of any accounting treatment.
(E) DEEMED ISSUANCES OF COMMON STOCK. In the case
of the issuance (whether before, on or after the applicable Purchase Date) of
options to purchase or rights to subscribe for Common Stock, securities by
their terms convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or exchangeable
securities, the following provisions shall apply for all purposes of this
Section 4(d)(i) and Section 4(d)(ii):
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of
time, but without taking into account potential antidilution adjustments) of
such options to purchase or rights to subscribe for Common Stock shall be
deemed to have been issued at the time such options or rights were issued and
for a consideration equal to the consideration (determined in the manner
provided in Sections 4(d)(i)(C) and 4(d)(i)(D)), if any, received by the
Corporation upon the issuance of such options or rights plus the minimum
exercise price provided in such options or rights (without taking into
account potential antidilution adjustments) for the Common Stock covered
thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the
minimum additional consideration, if
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any, to be received by the Corporation (without taking into
account potential antidilution adjustments) upon the conversion or exchange of
such securities or the exercise of any related options or rights (the
consideration in each case to be determined in the manner provided in Sections
4(d)(i)(C) and 4(d)(i)(D)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to the
Corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of the Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock, to the extent in any way affected by or computed using
such options, rights or securities, shall be recomputed to reflect such change,
but no further adjustment shall be made for the actual issuance of Common Stock
or any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, to the extent in any way affected
by or computed using such options, rights or securities or options or rights
related to such securities, shall be recomputed to reflect the issuance of only
the number of shares of Common Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the exercise
of the options or rights related to such securities.
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to Sections
4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either Section 4(d)(i)(E)(3)
or (4).
(ii) "ADDITIONAL STOCK" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to Section 4(d)(i)(E)) by
the Corporation after the Purchase Date) other than:
(A) Common Stock issued pursuant to a transaction
described in Section 4(d)(iii) hereof,
(B) Up to 5,800,000 shares of Common Stock issuable or
issued to employees, consultants or directors of the Corporation directly or
pursuant to a stock option plan or restricted stock plan approved by the Board
of Directors of the Corporation,
(C) Capital stock, or options or warrants to purchase
capital stock, issued to financial institutions or lessors in connection with
commercial credit arrangements, equipment financings or similar transactions,
which issuances are primarily for other than equity financing purposes, and
provided that the aggregate of such issuance and similar issuances in the
preceding twelve months period do not exceed 1% of the then
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outstanding Common Stock of the Company (assuming full conversion and
exercise of all outstanding convertible and exercisable securities),
(D) Shares of Common Stock or Preferred Stock issuable
upon exercise of warrants outstanding as of the date of this Amended and
Restated Certificate of Incorporation,
(E) Capital stock or warrants or options to purchase
capital stock issued in connection with bona fide acquisitions, mergers or
similar transactions, the terms of which are approved by the Board of Directors
of the Corporation,
(F) Shares of Common Stock issued or issuable upon
conversion of the Preferred Stock,
(G) Shares of Common Stock issued or issuable in a
public offering, and
(H) Warrants exercisable for up to 721,757 shares of
Series A Preferred Stock.
(iii) In the event the Corporation should at any time or
from time to time after the Purchase Date fix a record date for the effectuation
of a split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be appropriately decreased so that the number of shares of
Common Stock issuable on conversion of each share of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall be increased in
proportion to such increase of the aggregate of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents
with the number of shares issuable with respect to Common Stock Equivalents
determined from time to time in the manner provided for deemed issuances in
Section 4(d)(i)(E).
(iv) If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be appropriately increased so
that the number of shares of Common Stock issuable on conversion of each share
of such series shall be decreased in proportion to such decrease in outstanding
shares.
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(e) OTHER DISTRIBUTIONS. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4(d)(iii), then, in
each such case for the purpose of this Section 4(e), the holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
entitled to a proportionate share of any such distribution as though they were
the holders of the number of shares of Common Stock of the Corporation into
which their shares of Preferred Stock are convertible as of the record date
fixed for the determination of the holders of Common Stock of the Corporation
entitled to receive such distribution.
(f) RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
shall thereafter be entitled to receive upon conversion of such Preferred Stock
the number of shares of stock or other securities or property of the Corporation
or otherwise, to which a holder of Common Stock deliverable upon conversion
would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4 with respect to the rights of the holders of such Preferred Stock
after the recapitalization to the end that the provisions of this Section 4
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of such Preferred Stock) shall be applicable
after that event and be as nearly equivalent as practicable.
(g) NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of Preferred Stock against impairment.
(h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be determined on the
basis of the total number of shares of Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock pursuant to this Section 4, the Corporation, at its
expense, shall promptly compute such
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adjustment or readjustment in accordance with the terms hereof and prepare
and furnish to each holder of such Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for such series of Preferred Stock
at the time in effect, and (C) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon
the conversion of a share of such series of Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock, at least twenty (20) days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or right, and the amount
and character of such dividend, distribution or right.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of such series of Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of such series of
Preferred Stock, in addition to such other remedies as shall be available to the
holder of such Preferred Stock, the Corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes, including, without limitation, engaging in best
efforts to obtain the requisite stockholder approval of any necessary amendment
to this Certificate of Incorporation.
(k) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of the Corporation.
5. VOTING RIGHTS. Except as provided below with respect to the
election of directors, the holder of each share of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock shall have the right to one
vote for each share of Common Stock into which such Preferred Stock could then
be converted, and with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the holders of
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<PAGE>
Common Stock, and shall be entitled, notwithstanding any provision hereof,
to notice of any stockholders' meeting in accordance with the bylaws of the
Corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have
the right to vote. In addition, as long as twenty-five percent (25%) of the
number of shares of Series A Preferred Stock issued by the Corporation on the
date the Series A Preferred Stock was originally issued remain outstanding,
the holders of the Series A Preferred Stock shall be entitled, voting
together as a separate class, to elect one (1) director of this Corporation
at each annual election of directors. As long as twenty-five percent (25%)
of the number of shares of Series B Preferred Stock issued by the Corporation
on the date the Series B Preferred Stock was originally issued remain
outstanding, the holders of the Series B Preferred Stock shall be entitled,
voting together as a separate class, to elect two (2) directors of this
Corporation at each annual election of directors. The holders of Common
Stock shall be entitled, voting together as a separate class, to elect two
(2) directors of this Corporation at each annual meeting of directors. The
holders of Preferred Stock and Common Stock voting together as a single class
shall have the right to elect any remaining directors.
6. PROTECTIVE PROVISIONS. So long as any shares of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock are
outstanding (as adjusted for stock splits, stock dividends or recapitalizations
or the like), the Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least 66-2/3%
of the then outstanding shares of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, voting together as a class:
(a) liquidate, dissolve, sell, convey, or otherwise dispose of
or encumber all or substantially all of its property or business or merge into
or consolidate with any other corporation (other than a wholly-owned subsidiary
corporation) or effect any other transaction or series of related transactions
in which more than fifty percent (50%) of the voting power of the Corporation is
disposed of, PROVIDED that this Section 6(a) shall not apply to a merger
effected exclusively for the purpose of changing the domicile of the
Corporation;
(b) alter or change the rights, preferences or privileges of the
shares of the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock so as to affect adversely the shares of such series;
(c) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock;
(d) authorize or issue, or obligate itself to issue, any other
equity security, including any other security convertible into or exercisable
for any equity security, having a preference over, or being on a parity with,
the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock with respect to voting, redemption, conversion, dividends or upon
liquidation;
(e) redeem, purchase or otherwise acquire (or pay into or set
funds aside for a sinking fund for such purpose) any share or shares of
Preferred Stock or Common
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<PAGE>
Stock; PROVIDED, HOWEVER, that this restriction shall not apply to the
repurchase of shares of Common Stock from employees, officers, directors,
consultants or other persons performing services for the Corporation or any
subsidiary pursuant to agreements under which the Corporation has the option
to repurchase such shares at cost or at cost upon the occurrence of certain
events, such as the termination of employment;
(f) increase the authorized number of directors of the
Corporation; or
(g) pay any dividend on the Common Stock other than dividends on
the Common Stock solely in the form of additional shares of Common Stock.
7. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares
of Preferred Stock shall be redeemed or converted pursuant to Section 3 or
Section 4 hereof, the shares so converted shall be cancelled and shall not be
issuable by the Corporation. The Certificate of Incorporation of the
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock.
(C) COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Division (B) of this Article IV.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal Bylaws of the Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
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<PAGE>
ARTICLE VII
(A) To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
(C) Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect of this Article VII
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision."
ARTICLE VIII
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of this Corporation (and any other persons to which Delaware law permits this
Corporation to provide indemnification) through bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors otherwise, in excess of the indemnification and advancement otherwise
permitted by Section 145 of the Delaware General Corporation Law, subject only
to limits created by applicable Delaware law (statutory or non-statutory), with
respect to actions for breach of duty to this Corporation, its stockholders, and
others.
* * *
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<PAGE>
The foregoing Third Amended and Restated Certificate of Incorporation has
been duly adopted by this corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Santa Monica, California, on the 19th day of March, 1999.
/s/ Edward C. Lenk
------------------------------------
Edward C. Lenk, President
<PAGE>
The foregoing Third Amended and Restated Certificate of Incorporation has
been duly adopted by this corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Santa Monica, California, on the 19th day of March, 1999.
/s/ Glen R. Van Ligten
----------------------------------------
Glen R. Van Ligten, Assistant Secretary
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ETOYS INC.
The undersigned, Edward C. Lenk and Steven J. Schoch, hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of eToys Inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on November 8, 1996 under the
name of TOYS.COM INC.
3. The Certificate of Incorporation of this corporation shall be
amended and restated to read in full as follows:
"ARTICLE I
The name of this corporation is eToys Inc. (the "CORPORATION").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 15 East North Street, Dover, County of Kent, Delaware 19901. The
name of its registered agent at such address is Incorporating Services, Ltd.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
Upon the effective date of the filing of this Certificate of
Incorporation, each share of the corporation's outstanding capital stock
shall be converted and reconstituted into three shares of capital stock (the
"STOCK SPLIT"). No further adjustment of any preference or price set forth
in this Article IV shall be made as a result of the Stock Split, as all share
amounts, amounts per share and per share numbers set forth in this Certificate
of Incorporation have been appropriately adjusted to reflect the Stock Split.
(A) CLASSES OF STOCK. The Corporation is authorized to issue two classes
of stock to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK."
The total number of shares which the Corporation is authorized to issue is
Six Hundred Ten Million (610,000,000) shares, each with a par value of
$0.0001 per share. Six Hundred Million (600,000,000) shares shall be Common
Stock and Ten Million (10,000,000) shares shall be Preferred Stock.
<PAGE>
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations
and restrictions stated in this Certificate of Incorporation, to determine or
alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and the number of
shares constituting any such series and the designation thereof, or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares
of such series then outstanding. In case the number of shares of any series
shall be so decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors.
ARTICLE VI
This Article VI shall become effective only when the Corporation qualifies
for an exemption from Section 2115 of the California Corporations Code (the
"Effective Time").
On or prior to the date on which the Corporation first provides notice
of an annual meeting of the stockholders following the Effective Time, the
Board of Directors of the Corporation shall divide the directors into three
classes, as nearly equal in number as reasonably possible, designated Class I,
Class II and Class III, respectively. Directors shall be assigned to each
class in accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders or any special meeting
in lieu thereof following the Effective Time, the terms of the Class I
directors shall expire and Class I directors shall be elected for a full term
of three years. At the second annual meeting of stockholders or any special
meeting in lieu thereof following the Effective Time, the terms of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three years. At the third annual meeting of stockholders or any special
meeting in lieu thereof following the Effective Time, the terms of the
Class III directors shall expire and Class III directors shall be elected for
a full term of three years. At each succeeding annual meeting of stockholders
or special meeting in lieu thereof, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire
at such annual meeting.
Notwithstanding the foregoing provisions of this Article VI, each director
shall serve until his or her successor is duly elected and qualified or until
his or her death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other causes shall be filled by either (i) the
affirmative vote of the
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<PAGE>
holders of a majority of the voting power of the then-outstanding shares of
voting stock of the corporation entitled to vote generally in the election of
directors (the "VOTING STOCK") voting together as a single class; or (ii) by
the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum of the Board of Directors. Newly created
directorships resulting from any increase in the number of directors shall,
unless the Board of Directors determines by resolution that any such newly
created directorship shall be filled by the stockholders, be filled only by
the affirmative vote of the directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term
of the class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been elected
and qualified. Any director, or the entire Board of Directors, may be
removed from office, with or without cause, by the holders of a majority of
the Voting Stock.
ARTICLE VII
In the election of directors, each holder of shares of any class or series of
capital stock of the Corporation shall be entitled to one vote for each share
held. No stockholder will be permitted to cumulate votes at any election of
directors.
ARTICLE VIII
No action shall be taken by the stockholders of the Corporation other
than at an annual or special meeting of the stockholders, upon due notice and
in accordance with the provisions of the Corporation's bylaws.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
ARTICLE X
The Board of Directors of the Corporation is expressly authorized to
make, alter or repeal bylaws of the Corporation.
ARTICLE XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be
kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the bylaws of the Corporation.
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<PAGE>
ARTICLE XII
The Corporation shall have perpetual existence.
ARTICLE XIII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
If the General Corporation Law of Delaware is hereafter amended to authorize,
with the approval of a corporation's stockholders, further reductions in the
liability of a corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this
Article XIII shall not adversely affect any right or protection of a director
of the Corporation with respect to any acts or omissions of such director
occurring prior to such repeal or modification.
ARTICLE XIV
(A) To the fullest extent permitted by applicable law, the Corporation
is also authorized to provide indemnification of (and advancement of expenses
to) such agents (and any other persons to which Delaware law permits the
Corporation to provide indemnification) through bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise permitted by Section 145 of the General Corporation Law of Delaware,
subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to actions for breach of duty to a corporation,
its stockholders, and others.
(B) Any repeal or modification of any of the foregoing provisions of
this Article XIV shall not adversely affect any right or protection of a
director, officer, agent or other person existing at the time of, or increase
the liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal
or modification."
* * *
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<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Santa Monica, California, on the ____ day of ___________, 1999.
____________________________________
Edward C. Lenk, President
____________________________________
Steven J. Schoch, Secretary
<PAGE>
EXHIBIT 5.1
April 5, 1999
eToys Inc.
2850 Ocean Park Blvd., Suite 225
Santa Monica, CA 90405
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-72469)
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-72469), as amended by Amendment No. 1 to Form S-1 (the "REGISTRATION
STATEMENT") to be filed by you with the Securities and Exchange Commission on
April 5, 1999, in connection with the registration under the Securities Act of
1933 of shares of you Common Stock (the "SHARES"). As your legal counsel in
connection with this transaction, we have examined the proceedings taken and
we are familiar with the proceedings proposed to be taken by you in connection
with the sale and issuance of the Shares.
It is our opinion that upon completion of the proceedings being taken
in order to permit such transactions to be carried out in accordance with
the securities laws of the various states where required, the Shares, when
issued and sold in the manner described in the Registration Statement, will
be legally and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever it appears in
the Registration Statement and in any amendment to it.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
/s/ VENTURE LAW GROUP
<PAGE>
ETOYS INC.
1997 STOCK PLAN
(AMENDED JUNE 1998 AND FEBRUARY 1999)
1. PURPOSES OF THE PLAN. The purposes of this 1997 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options (as
defined under Section 422 of the Code) or Nonstatutory Stock Options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the legal requirements relating to the
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any Stock Exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) and (b) of the Plan.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means eToys Inc., a Delaware corporation.
(h) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(i) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
<PAGE>
such leave is for a period of not more than 90 days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or
(iv) in the case of transfers between locations of the Company or between the
Company, its Subsidiaries or their respective successors. For purposes of this
Plan, a change in status from an Employee to a Consultant or from a Consultant
to an Employee will not constitute an interruption of Continuous Status as an
Employee or Consultant.
(j) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment determined based upon such minimum number of hours or
periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment by the Company of a
director's fee to a director shall not be sufficient to constitute "employment"
of such director by the Company.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means, as of any date, the fair market value
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in THE WALL STREET JOURNAL or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in THE WALL
STREET JOURNAL or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written Option Agreement.
(n) "LISTED SECURITY" means any security of the Company that is
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
<PAGE>
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
Option Agreement.
(p) "OPTION" means a stock option granted pursuant to the Plan.
(q) "OPTION AGREEMENT" means a written agreement between an Optionee
and the Company reflecting the terms of an Option granted under the Plan and
includes any documents attached to such Option Agreement, including, but not
limited to, a notice of stock option grant and a form of exercise notice.
(r) "OPTIONED STOCK" means the Common Stock subject to an Option or a
Stock Purchase Right.
(s) "OPTIONEE" means an Employee or Consultant who receives an Option
or a Stock Purchase Right.
(t) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code, or any successor provision.
(u) "PLAN" means this 1997 Stock Plan.
(v) "REPORTING PERSON" means an officer, director, or greater than
10% stockholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(w) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 10 below.
(x) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written agreement
between a holder of a Stock Purchase Right and the Company reflecting the terms
of a Stock Purchase Right granted under the Plan and includes any documents
attached to such agreement.
(y) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
as the same may be amended from time to time, or any successor provision.
(z) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(aa) "STOCK EXCHANGE" means any stock exchange or consolidated stock
price reporting system on which prices for the Common Stock are quoted at any
given time.
(bb) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock
pursuant to Section 10 below.
(cc) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
<PAGE>
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 5,800,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should
expire or become unexercisable for any reason without having been exercised in
full, the unpurchased Shares that were subject thereto shall, unless the Plan
shall have been terminated, become available for future grant under the Plan.
In addition, any Shares of Common Stock which are retained by the Company upon
exercise of an Option or Stock Purchase Right in order to satisfy the exercise
or purchase price for such Option or Stock Purchase Right or any withholding
taxes due with respect to such exercise shall be treated as not issued and shall
continue to be available under the Plan. Shares repurchased by the Company
pursuant to any repurchase right which the Company may have shall not be
available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any, upon which
the Company becomes subject to the Exchange Act, the Plan shall be administered
by the Board or a Committee appointed by the Board.
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY, UPON WHICH THE COMPANY
BECOMES SUBJECT TO THE EXCHANGE ACT.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3, grants under the Plan may be made by different bodies with respect to
directors, non-director officers and Employees or Consultants who are not
Reporting Persons.
(ii) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS. With
respect to grants of Options or Stock Purchase Rights to Employees who are
Reporting Persons, such grants shall be made by (A) the Board if the Board may
make grants to Reporting Persons under the Plan in compliance with Rule 16b-3,
or (B) a Committee designated by the Board to make grants to Reporting Persons
under the Plan, which Committee shall be constituted in such a manner as to
permit grants under the Plan to comply with Rule 16b-3. Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
make grants to Reporting Persons under the Plan, all to the extent permitted by
Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options or Stock Purchase Rights to
Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board,
which Committee shall be constituted in such a manner as to satisfy the
Applicable Laws. Once appointed, such Committee shall continue to serve in
its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove
<PAGE>
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights or any combination thereof may from time to time be
granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights; and
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
<PAGE>
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees. An Employee or Consultant who has
been granted an Option or Stock Purchase Right may, if he or she is otherwise
eligible, be granted additional Options or Stock Purchase Rights.
(b) TYPE OF OPTION. Each Option shall be designated in the Option
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon the holder of any Option or Stock
Purchase Right any right with respect to continuation of employment or
consulting relationship with the Company, nor shall it interfere in any way with
such holder's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten years unless sooner terminated under
Section 15 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than
ten years from the date of grant thereof or such shorter term as may be provided
in the Option Agreement and provided further that, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than 10% of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five years from the date of grant thereof or such shorter term
as may be provided in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board and
set forth in the applicable agreement, but shall be subject to the following:
<PAGE>
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to a person who, at the time of the grant of
such Option, owns stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of grant if required by the Applicable Laws and, if not so
required, shall be such price as is determined by the Administrator.
(B) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security, to any other person, the per Share exercise
price shall be no less than 85% of the Fair Market Value per Share on the date
of grant if required by Applicable Law and, if not so required, shall be such
price as is determined by the Administrator.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash,
(2) check, (3) promissory note (subject to the provisions of Section 153 of the
Delaware General Corporation Law), (4) other Shares that (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six months on the date of surrender or such other period as may be
required to avoid a charge to the Company's earnings, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which such Option shall be exercised, (5) authorization for the
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (6) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price and
any applicable income or employment taxes, (7) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under the Applicable Laws. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
<PAGE>
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator and reflected in the Option Agreement, which
may include vesting requirements and/or performance criteria with respect to the
Company and/or the Optionee; provided however that, if required by the
Applicable Laws, any Option granted prior to the date, if any, upon which the
Common Stock becomes a Listed Security shall become exercisable at a rate of at
least 20% per year over five years from the date the Option is granted. In the
event that any of the Shares issued upon exercise of an Option (which exercise
occurs prior to the date, if any, upon which the Common Stock becomes a Listed
Security) should be subject to a right of repurchase in the Company's favor,
such repurchase right shall, if required by the Applicable Laws, lapse at the
rate of at least 20% per year over five years from the date the Option is
granted. Notwithstanding the above, in the case of an Option granted to an
officer, director or Consultant of the Company or any Parent or Subsidiary of
the Company, the Option may become fully exercisable, and a repurchase right, if
any, in favor of the Company shall lapse, at any time or during any period
established by the Administrator.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. Subject to
Section 9(c) below, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant with the Company, such Optionee may, but
only within three months (or such other period of time not less than 30 days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was entitled to exercise it at the date of
<PAGE>
such termination. To the extent that the Optionee was not entitled to
exercise the Option at the date of such termination, or if the Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate. No termination shall be deemed to occur
and this Section 9(b) shall not apply if (i) the Optionee is a Consultant who
becomes an Employee, or (ii) the Optionee is an Employee who becomes a
Consultant.
(c) DISABILITY OF OPTIONEE.
(i) Notwithstanding Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), such Optionee may, but only within twelve months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination, or if the Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), such Optionee may, but only within six months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of
Section 422 of the Code) within three months of the date of such termination,
the Option will not qualify for ISO treatment under the Code. To the extent
that the Optionee was not entitled to exercise the Option at the date of
termination, or if the Optionee does not exercise such Option to the extent so
entitled within six months from the date of termination, the Option shall
terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within 30 days following termination of the
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six months following the date of death (but in no
event later than the expiration date of the term of such Option as set forth in
the Option Agreement), by such Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of the Optionee's Continuous Status as an Employee or
Consultant. To the extent that the Optionee was not entitled to exercise the
Option at the date of death or termination, as the case may be, or if the
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
<PAGE>
(e) RULE 16b-3. Options granted to Reporting Persons shall comply
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
10. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed 30 days from the date upon
which the Administrator made the determination to grant the Stock Purchase
Right. In the case of a Stock Purchase Right granted prior to the date, if any,
on which the Common Stock becomes a Listed Security and if required by the
Applicable Laws at such time, the purchase price of Shares subject to such Stock
Purchase Rights shall not be less than 85% of the Fair Market Value of the
Shares as of the date of the offer, or, in the case of a person owning stock
representing more than 10% of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary, the price shall not be less
than 100% of the Fair Market Value of the Shares as of the date of the offer.
If the Applicable Laws do not impose the requirements set forth in the preceding
sentence and with respect to any Stock Purchase Rights granted after the date,
if any, on which the Common Stock becomes a Listed Security, the purchase price
of Shares subject to Stock Purchase Rights shall be as determined by the
Administrator. The offer shall be accepted by execution of a Restricted Stock
Purchase Agreement in the form determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided however that with respect to a Stock
Purchase Right granted prior to the date, if any, on which the Common Stock
becomes a Listed Security to a purchaser who is not an officer, director or
Consultant of the Company or of any Parent or Subsidiary of the Company, it
shall lapse at a minimum rate of 20% per year if required by the Applicable
Laws.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder
<PAGE>
when his or her purchase is entered upon the records of the duly authorized
transfer agent of the Company. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Stock Purchase
Right is exercised, except as provided in Section 12 of the Plan.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash or check payment, or (b) out
of the Optionee's current compensation, (c) if permitted by the Administrator,
in its discretion, by surrendering to the Company Shares that (i) in the case of
Shares previously acquired from the Company, have been owned by the Optionee for
more than six months on the date of surrender, and (ii) have a fair market value
on the date of surrender equal to or less than the Optionee's marginal tax rate
times the ordinary income recognized, or (d) by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option, or the Shares
to be issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "TAX DATE").
Any surrender by a Reporting Person of previously owned Shares to satisfy
tax withholding obligations arising upon exercise of this Option must comply
with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Stock Purchase Right as to which the election is made;
and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
<PAGE>
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN OTHER
TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least 15 days prior to such proposed action. To the extent it has not been
previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR SALE OF ASSETS. In the event of a proposed sale of all
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's stockholders, each outstanding Option or Stock Purchase Right
shall be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the Option or Stock
Purchase Right or to substitute an equivalent option or right, in which case
such Option or Stock Purchase Right shall terminate upon the consummation of the
merger or sale of assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without
receipt of consideration by the Company, the Administrator may, in its
discretion, appropriately adjust the price per share of Common Stock covered
by each outstanding Option or Stock Purchase Right to reflect the effect of
such distribution.
13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be
<PAGE>
exercised or purchased during the lifetime of the Optionee or Stock Purchase
Rights Holder only by the Optionee or Stock Purchase Rights Holder.
14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided,
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AUTHORITY TO AMEND OR TERMINATE. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any Stock Exchange), the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a degree
as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
<PAGE>
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by
written Option Agreements and Restricted Stock Purchase Agreements,
respectively, in such form(s) as the Administrator shall approve from time to
time.
19. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve months before or after
the date the Plan is adopted. Such stockholder approval shall be obtained in
the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange upon which the Common Stock is listed. All Options
and Stock Purchase Rights issued under the Plan shall become void in the event
such approval is not obtained.
20. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. Prior to the
date, if any, upon which the Common Stock becomes a Listed Security and if
required by the Applicable Laws, the Company shall provide financial statements
at least annually to each Optionee and to each individual who acquired Shares
Pursuant to the Plan, during the period such Optionee or purchaser has one or
more Options or Stock Purchase Rights outstanding, and in the case of an
individual who acquired Shares pursuant to the Plan, during the period such
individual owns such Shares. The Company shall not be required to provide such
information if the issuance of Options or Stock Purchase Rights under the Plan
is limited to key employees whose duties in connection with the Company assure
their access to equivalent information. In addition, at the time of issuance of
any securities under the Plan, the Company shall provide to the Optionee or the
Purchaser a copy of the Plan and any agreement(s) pursuant to which securities
granted under the Plan are issued.
<PAGE>
ETOYS INC.
1997 STOCK PLAN
NOTICE OF STOCK OPTION GRANT
< < Optionee > >
_______________
_______________
You have been granted an option to purchase Common Stock "COMMON STOCK" of
eToys Inc. (the "COMPANY") as follows:
Board Approval Date: < < BoardApprovalDate > >
Date of Grant (Later of Board
Approval Date or Commence-
ment of Employment/Consulting): < < GrantDate > >
Vesting Commencement Date: < < VestingCommenceDate > >
Exercise Price per Share: $< < ExercisePrice > >
Total Number of Shares Granted: < < NoofShares > >
Total Exercise Price: $< < TotalExercisePrice > >
Type of Option: < < NoSharesISO Incentive
Stock Options > >
< < NoSharesNSO > > Nonstatutory Stock
Options > >
Term/Expiration Date: < < ExpirDate > >
Vesting Schedule: This Option may be exercised, in whole
or in part, in accordance with the
following schedule: 1/4th of the Shares
subject to the Option shall vest on the
first anniversary of the Vesting
Commencement Date and 1/48th of the
total number of Shares subject to the
Option shall vest each month thereafter.
Termination Period: Option may be exercised for 30 days
after termination of employment or
consulting relationship except as set
out in Sections 6 and 7 of the Stock
Option Agreement (but in no event later
than the Expiration Date).
<PAGE>
By your signature and the signature of the Company's representative
below, you and the Company agree that this option is granted under and governed
by the terms and conditions of the 1997 Stock Plan and the Stock Option
Agreement, both of which are attached and made a part of this document.
< < OPTIONEE: > > ETOYS INC.
By:
- ----------------------------------- ----------------------------------
Signature
- ----------------------------------- ----------------------------------
Print Name Print Name and Title
-2-
<PAGE>
ETOYS INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT
1. GRANT OF OPTION. eToys Inc., a Delaware corporation (the
"COMPANY"), hereby grants to < < Optionee > > ("OPTIONEE"), an option (the
"OPTION") to purchase a total number of shares of Common Stock (the "SHARES")
set forth in the Notice of Stock Option Grant, at the exercise price per
share set forth in the Notice of Stock Option Grant (the "EXERCISE PRICE")
subject to the terms, definitions and provisions of the eToys Inc. 1997 Stock
Plan (the "PLAN") adopted by the Company, which is incorporated herein by
reference. Unless otherwise defined herein, the terms defined in the Plan
shall have the same defined meanings in this Option.
If designated an Incentive Stock Option, this Option is intended to qualify as
an Incentive Stock Option as defined in Section 422 of the Code.
2. EXERCISE OF OPTION. This Option shall be exercisable during its
Term in accordance with the Vesting Schedule set out in the Notice of Stock
Option Grant and with the provisions of Section 9 of the Plan as follows:
(a) RIGHT TO EXERCISE.
(i) This Option may not be exercised for a fraction of
a share.
(ii) In the event of Optionee's death, disability or
other termination of employment, the exercisability of the Option is governed by
Sections 5, 6 and 7 below, subject to the limitation contained in
Section 2(a)(i).
(iii) In no event may this Option be exercised after the
date of expiration of the Term of this Option as set forth in the Notice of
Stock Option Grant.
(b) METHOD OF EXERCISE. This Option shall be exercisable by
execution and delivery of the Exercise Notice and Restricted Stock Purchase
Agreement attached hereto as EXHIBIT A (the "EXERCISE AGREEMENT") or of any
other form of written notice approved for such purpose by the Company which
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by Optionee and shall be delivered in
person or by certified mail to the Secretary of the Company. The written notice
shall be accompanied by payment of the Exercise Price. This Option shall be
deemed to be exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
<PAGE>
No Shares will be issued pursuant to the exercise of an Option
unless such issuance and such exercise shall comply with all relevant provisions
of applicable law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes
the Shares shall be considered transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any
of the following, or a combination thereof, at the election of Optionee:
(a) cash;
(b) check;
(c) surrender of other shares of Common Stock of the Company
which (i) in the case of Shares acquired pursuant to the exercise of a Company
option, have been owned by Optionee for more than six months on the date of
surrender, and (ii) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(d) if there is a public market for the Shares and they are
registered under the Securities Act of 1933, as amended, delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds required to
pay the Exercise Price.
4. RESTRICTIONS ON EXERCISE. This Option may not be exercised until
such time as the Plan has been approved by the stockholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations as promulgated by the
Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
5. TERMINATION OF RELATIONSHIP. In the event of termination of
Optionee's Continuous Status as an Employee or Consultant, Optionee may, to the
extent otherwise so entitled at the date of such termination (the "TERMINATION
DATE"), exercise this Option during the Termination Period set forth in the
Notice of Stock Option Grant. To the extent that Optionee was not entitled to
exercise this Option at such Termination Date, or if Optionee does not exercise
this Option within the Termination Period, the Option shall terminate.
6. DISABILITY OF OPTIONEE.
(a) Notwithstanding the provisions of Section 5 above, in the
event of termination of Optionee's Continuous Status as an Employee or
Consultant as a result of Optionee's total and permanent disability (as defined
in Section 22(e)(3) of the Code), Optionee may, but only within twelve months
from the Termination Date (but in no event later than the Expiration Date set
forth in the Notice of Stock Option Grant), exercise this
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Option to the extent Optionee was entitled to exercise it as of such Termination
Date. To the extent that Optionee was not entitled to exercise the Option as of
the Termination Date, or if Optionee does not exercise such Option (to the
extent so entitled) within the time specified in this Section 6(a), the Option
shall terminate.
(b) Notwithstanding the provisions of Section 5 above, in the
event of termination of Optionee's consulting relationship or Continuous Status
as an Employee as a result of disability not constituting a total and permanent
disability (as set forth in Section 22(e)(3) of the Code), Optionee may, but
only within six months from the Termination Date (but in no event later than the
Expiration Date set forth in the Notice of Stock Option Grant), exercise the
Option to the extent Optionee was entitled to exercise it as of such Termination
Date; provided, however, that if this is an Incentive Stock Option and Optionee
fails to exercise this Incentive Stock Option within three months from the
Termination Date, this Option will cease to qualify as an Incentive Stock Option
(as defined in Section 422 of the Code) and Optionee will be treated for federal
income tax purposes as having received ordinary income at the time of such
exercise in an amount generally measured by the difference between the Exercise
Price for the Shares and the Fair Market Value of the Shares on the date of
exercise. To the extent that Optionee was not entitled to exercise the Option
at the Termination Date, or if Optionee does not exercise such Option to the
extent so entitled within the time specified in this Section 6(b), the Option
shall terminate.
7. DEATH OF OPTIONEE. In the event of the death of Optionee (a)
during the Term of this Option and while an Employee or Consultant of the
Company and having been in Continuous Status as an Employee or Consultant since
the date of grant of the Option, or (b) within 30 days after Optionee's
Termination Date, the Option may be exercised at any time within six months
following the date of death (but in no event later than the Expiration Date set
forth in the Notice of Stock Option Grant), by Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent of the right to exercise that had accrued at the Termination
Date.
8. NON-TRANSFERABILITY OF OPTION. This Option may not be
transferred in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by him or
her. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of Optionee.
9. TERM OF OPTION. This Option may be exercised only within the
Term set forth in the Notice of Stock Option Grant, subject to the limitations
set forth in Section 7 of the Plan.
10. TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Option of certain of the federal and California tax consequences of
exercise of this Option and disposition of the Shares under the laws in effect
as of the Date of Grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
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(a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option
qualifies as an Incentive Stock Option, there will be no regular federal or
California income tax liability upon the exercise of the Option, although the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price will be treated as an adjustment to the alternative
minimum tax for federal tax purposes and may subject Optionee to the alternative
minimum tax in the year of exercise.
(b) EXERCISE OF NONSTATUTORY STOCK OPTION. If this Option
does not qualify as an Incentive Stock Option, there may be a regular federal
income tax liability and a California income tax liability upon the exercise of
the Option. Optionee will be treated as having received compensation income
(taxable at ordinary income tax rates) equal to the excess, if any, of the Fair
Market Value of the Shares on the date of exercise over the Exercise Price. If
Optionee is an employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.
(c) DISPOSITION OF SHARES. In the case of a Nonstatutory
Stock Option, if Shares are held for at least one year, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
and California income tax purposes. In the case of an Incentive Stock Option,
if Shares transferred pursuant to the Option are held for at least one year
after exercise and are disposed of at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal and California income tax purposes. In either case,
the long-term capital gain will be taxed for federal income tax and alternative
minimum tax purposes at a maximum rate of 28% if the Shares are held more than
one year but less than 18 months after exercise and at 20% if the Shares are
held more than 18 months after exercise. If Shares purchased under an Incentive
Stock Option are disposed of within one year after exercise or within two years
after the Date of Grant, any gain realized on such disposition will be treated
as compensation income (taxable at ordinary income rates) to the extent of the
difference between the Exercise Price and the lesser of (i) the fair market
value of the Shares on the date of exercise, or (ii) the sale price of the
Shares.
(d) NOTICE OF DISQUALIFYING DISPOSITION OF INCENTIVE STOCK
OPTION SHARES. If the Option granted to Optionee herein is an Incentive Stock
Option, and if Optionee sells or otherwise disposes of any of the Shares
acquired pursuant to the Incentive Stock Option on or before the later of
(i) the date two years after the Date of Grant, or (ii) the date one year after
the date of exercise, Optionee shall immediately notify the Company in writing
of such disposition. Optionee acknowledges and agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized by Optionee from the early disposition by payment in cash or out of
the current earnings paid to Optionee.
11. WITHHOLDING TAX OBLIGATIONS. Optionee understands that, upon
exercising a Nonstatutory Stock Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then Fair Market Value of the
Shares over the Exercise Price.
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However, the timing of this income recognition may be deferred for up to six
months if Optionee is subject to Section 16 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"). If Optionee is an employee, the Company
will be required to withhold from Optionee's compensation, or collect from
Optionee and pay to the applicable taxing authorities an amount equal to a
percentage of this compensation income. Additionally, Optionee may at some
point be required to satisfy tax withholding obligations with respect to the
disqualifying disposition of an Incentive Stock Option. Optionee shall satisfy
his or her tax withholding obligation arising upon the exercise of this Option
by one or some combination of the following methods: (a) by cash payment,
(b) out of Optionee's current compensation, (c) if permitted by the
Administrator, in its discretion, by surrendering to the Company Shares which
(i) in the case of Shares previously acquired from the Company, have been owned
by Optionee for more than six months on the date of surrender, and (ii) have a
Fair Market Value on the date of surrender equal to or greater than Optionee's
marginal tax rate times the ordinary income recognized, or (d) by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option that number of Shares having a Fair Market Value equal to the amount
required to be withheld. For this purpose, the Fair Market Value of the Shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined (the "TAX DATE").
If Optionee is subject to Section 16 of the Exchange Act (an "INSIDER"),
any surrender of previously owned Shares to satisfy tax withholding obligations
arising upon exercise of this Option must comply with the applicable provisions
of Rule 16b-3 promulgated under the Exchange Act ("RULE 16b-3").
All elections by Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable
Tax Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or
disapproval of the Administrator.
12. MARKET STANDOFF AGREEMENT. In connection with the initial public
offering of the Company's securities and upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities,
Optionee hereby agrees not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Shares (other than those
included in the registration) without the prior written consent of the Company
or such underwriters, as the case may be, for such period of time (not to exceed
180 days) from the effective date of such registration as may be requested by
the Company or such managing underwriters and to execute an agreement reflecting
the foregoing as may be requested by the underwriters at the time of the public
offering.
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[SIGNATURE PAGE FOLLOWS]
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<PAGE>
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
document.
ETOYS INC.
By:
----------------------------------
----------------------------------
(Print name and title)
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT OR CONSULTANCY AT THE
WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that
he or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Dated:
------------------------ ------------------------------
< < Optionee > >
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EXHIBIT A
ETOYS INC.
1997 STOCK PLAN
EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT
This Agreement ("AGREEMENT") is made as of ______________, by and
between eToys Inc., a Delaware corporation (the "COMPANY"), and < < Optionee > >
("PURCHASER"). To the extent any capitalized terms used in this Agreement are
not defined, they shall have the meaning ascribed to them in the 1997 Stock
Plan.
1. EXERCISE OF OPTION. Subject to the terms and conditions hereof,
Purchaser hereby elects to exercise his or her option to purchase __________
shares of the Common Stock (the "SHARES") of the Company under and pursuant to
the Company's 1997 Stock Plan (the "PLAN") and the Stock Option Agreement dated
______________, (the "OPTION AGREEMENT"). The purchase price for the Shares
shall be $< < ExercisePrice > > per Share for a total purchase price of
$_______________. The term "SHARES" refers to the purchased Shares and all
securities received in replacement of the Shares or as stock dividends or
splits, all securities received in replacement of the Shares in a
recapitalization, merger, reorganization, exchange or the like, and all new,
substituted or additional securities or other properties to which Purchaser is
entitled by reason of Purchaser's ownership of the Shares.
2. TIME AND PLACE OF EXERCISE. The purchase and sale of the Shares
under this Agreement shall occur at the principal office of the Company
simultaneously with the execution and delivery of this Agreement in accordance
with the provisions of Section 2(b) of the Option Agreement. On such date, the
Company will deliver to Purchaser a certificate representing the Shares to be
purchased by Purchaser (which shall be issued in Purchaser's name) against
payment of the exercise price therefor by Purchaser by (a) check made payable to
the Company, (b) cancellation of indebtedness of the Company to Purchaser, (c)
delivery of shares of the Common Stock of the Company in accordance with Section
3 of the Option Agreement, or (d) by a combination of the foregoing.
3. LIMITATIONS ON TRANSFER. In addition to any other limitation on
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares except in compliance with the
provisions below and applicable securities laws.
(a) RIGHT OF FIRST REFUSAL. Before any Shares held by
Purchaser or any transferee of Purchaser (either being sometimes referred to
herein as the "HOLDER") may be sold or otherwise transferred (including transfer
by gift or operation of law), the Company or its assignee(s) shall have a right
of first refusal to purchase the Shares on the terms and conditions set forth in
this Section 3(a) (the "RIGHT OF FIRST REFUSAL").
(i) NOTICE OF PROPOSED TRANSFER. The Holder of the
Shares shall deliver to the Company a written notice (the "NOTICE") stating:
(i) the Holder's bona fide
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intention to sell or otherwise transfer such Shares; (ii) the name of each
proposed purchaser or other transferee ("PROPOSED TRANSFEREE"); (iii) the number
of Shares to be transferred to each Proposed Transferee; and (iv) the terms and
conditions of each proposed sale or transfer. The Holder shall offer the Shares
at the same price (the "OFFERED PRICE") and upon the same terms (or terms as
similar as reasonably possible) to the Company or its assignee(s).
(ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time
within 30 days after receipt of the Notice, the Company and/or its assignee(s)
may, by giving written notice to the Holder, elect to purchase all, but not less
than all, of the Shares proposed to be transferred to any one or more of the
Proposed Transferees, at the purchase price determined in accordance with
subsection (iii) below.
(iii) PURCHASE PRICE. The purchase price ("PURCHASE
PRICE") for the Shares purchased by the Company or its assignee(s) under this
Section 3(a) shall be the Offered Price. If the Offered Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined by the Board of Directors of the Company in
good faith.
(iv) PAYMENT. Payment of the Purchase Price shall be
made, at the option of the Company or its assignee(s), in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company (or, in the case of repurchase by an assignee, to the assignee),
or by any combination thereof within 30 days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this
Section 3(a), then the Holder may sell or otherwise transfer such Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within 60 days after the date of the
Notice and provided further that any such sale or other transfer is effected in
accordance with any applicable securities laws and the Proposed Transferee
agrees in writing that the provisions of this Section 3 shall continue to apply
to the Shares in the hands of such Proposed Transferee. If the Shares described
in the Notice are not transferred to the Proposed Transferee within such period,
or if the Holder proposes to change the price or other terms to make them more
favorable to the Proposed Transferee, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything
to the contrary contained in this Section 3(a) notwithstanding, the transfer of
any or all of the Shares during Purchaser's lifetime or on Purchaser's death by
will or intestacy to Purchaser's Immediate Family or a trust for the benefit of
Purchaser's Immediate Family shall be exempt from the provisions of this Section
3(a). "IMMEDIATE FAMILY" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section,
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and there shall be no further transfer of such Shares except in accordance
with the terms of this Section 3.
(b) INVOLUNTARY TRANSFER.
(i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY
TRANSFER. In the event, at any time after the date of this Agreement, of any
transfer by operation of law or other involuntary transfer (including death or
divorce, but excluding a transfer to Immediate Family as set forth in Section
3(a)(vi) above) of all or a portion of the Shares by the record holder thereof,
the Company shall have an option to purchase all of the Shares transferred at
the greater of the purchase price paid by Purchaser pursuant to this Agreement
or the Fair Market Value of the Shares on the date of transfer. Upon such a
transfer, the person acquiring the Shares shall promptly notify the Secretary of
the Company of such transfer. The right to purchase such Shares shall be
provided to the Company for a period of 30 days following receipt by the Company
of written notice by the person acquiring the Shares.
(ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to
any stock to be transferred pursuant to Section 3(b)(i), the price per Share
shall be a price set by the Board of Directors of the Company that will reflect
the current value of the stock in terms of present earnings and future prospects
of the Company. The Company shall notify Purchaser or his or her executor of
the price so determined within 30 days after receipt by it of written notice of
the transfer or proposed transfer of Shares. However, if the Purchaser does not
agree with the valuation as determined by the Board of Directors of the Company,
the Purchaser shall be entitled to have the valuation determined by an
independent appraiser to be mutually agreed upon by the Company and the
Purchaser and whose fees shall be borne equally by the Company and the
Purchaser.
(c) ASSIGNMENT. The right of the Company to purchase any
part of the Shares may be assigned in whole or in part to any stockholder or
stockholders of the Company or other persons or organizations; provided,
however, that an assignee, other than a corporation that is the parent or a 100%
owned subsidiary of the Company, must pay the Company, upon assignment of such
right, cash equal to the difference between the original purchase price and Fair
Market Value, if the original purchase price is less than the fair market value
of the Shares subject to the assignment.
(d) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of
Shares or any interest therein will receive and hold such Shares or interest
subject to the provisions of this Agreement. Any sale or transfer of the
Company's Shares shall be void unless the provisions of this Agreement are
satisfied.
(e) TERMINATION OF RIGHTS. The Right of First Refusal
granted the Company by Section 3(a) above and the option to repurchase the
Shares in the event of an involuntary transfer granted the Company by Section
3(b) above shall terminate upon the first sale of Common Stock of the Company to
the general public pursuant to a registration statement filed with and declared
effective by the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "SECURITIES ACT").. Upon termination of the Right of
First Refusal
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described in Section 3(a) above, a new certificate or certificates
representing the Shares not repurchased shall be issued, on request, without
the legend referred to in Section 6(a)(ii) herein and delivered to Purchaser.
4. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the securities.
Purchaser is purchasing these securities for investment for his or her own
account only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act.
(b) Purchaser understands that the securities have not been
registered under the Securities Act by reason of a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of
Purchaser's investment intent as expressed herein.
(c) Purchaser understands that the Shares are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, Purchaser must hold the Shares indefinitely unless they
are registered with the Securities and Exchange Commission and qualified by
state authorities, or an exemption from such registration and qualification
requirements is available. Purchaser acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
(d) Purchaser understands that Purchaser may suffer adverse
tax consequences as a result of Purchaser's purchase or disposition of the
Shares. Purchaser represents that Purchaser has consulted any tax consultants
Purchaser deems advisable in connection with the purchase or disposition of the
Shares and that Purchaser is not relying on the Company for any tax advice.
5. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. The certificate or certificates representing
the Shares shall bear the following legends (as well as any legends required by
applicable state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND
NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR
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DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL IN A FORM SATISFACTORY TO FOR
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF
AN AGREEMENT BETWEEN THE COMPANY AND THE
STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order
to ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required
(i) to transfer on its books any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Agreement or (ii) to
treat as owner of such Shares or to accord the right to vote or pay dividends to
any purchaser or other transferee to whom such Shares shall have been so
transferred.
6. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in
any manner whatsoever the right or power of the Company, or a parent or
subsidiary of the Company, to terminate Purchaser's employment, for any reason,
with or without cause.
7. MARKET STAND-OFF AGREEMENT. In connection with the initial
public offering of the Company's securities and upon request of the Company or
the underwriters managing any underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any Shares (other than those included
in the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting the
foregoing as may be requested by the underwriters at the time of the public
offering.
8. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement and all acts and
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of California, without giving effect to principles of conflicts of
law.
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(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement
sets forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) SEVERABILITY. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, the parties agree
to renegotiate such provision in good faith. In the event that the parties
cannot reach a mutually agreeable and enforceable replacement for such
provision, then (i) such provision shall be excluded from this Agreement,
(ii) the balance of the Agreement shall be interpreted as if such provision were
so excluded and (iii) the balance of the Agreement shall be enforceable in
accordance with its terms.
(d) CONSTRUCTION. This Agreement is the result of
negotiations between and has been reviewed by each of the parties hereto and
their respective counsel, if any; accordingly, this Agreement shall be deemed to
be the product of all of the parties hereto, and no ambiguity shall be construed
in favor of or against any one of the parties hereto.
(e) NOTICES. Any notice required or permitted by this
Agreement shall be in writing and shall be deemed sufficient when delivered
personally or sent by telegram or fax or 48 hours after being deposited in the
U.S. mail, as certified or registered mail, with postage prepaid, and addressed
to the party to be notified at such party's address as set forth below or as
subsequently modified by written notice.
(f) COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) SUCCESSORS AND ASSIGNS. The rights and benefits of this
Agreement shall inure to the benefit of, and be enforceable by the Company's
successors and assigns. The rights and obligations of Purchaser under this
Agreement may only be assigned with the prior written consent of the Company.
(h) CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
-6-
<PAGE>
[SIGNATURE PAGE FOLLOWS]
-7-
<PAGE>
The parties have executed this Exercise Notice and Restricted Stock
Purchase Agreement as of the date first set forth above.
COMPANY:
ETOYS INC.
By:
-----------------------------------
Name:
---------------------------------
(print)
Title:
--------------------------------
2850 Ocean Park Boulevard
Santa Monica, California 90405
PURCHASER:
< < OPTIONEE > >
--------------------------------------
(Signature)
--------------------------------------
(Print Name)
Address:
---------------------
---------------------
I, ______________________, spouse of < < Optionee > >, have read and hereby
approve the foregoing Agreement. In consideration of the Company's granting
my spouse the right to purchase the Shares as set forth in the Agreement, I
hereby agree to be bound irrevocably by the Agreement and further agree that
any community property or similar interest that I may have in the Shares
shall hereby by similarly bound by the Agreement. I hereby appoint my spouse
as my attorney-in-fact with respect to any amendment or exercise of any
rights under the Agreement.
---------------------------------------
Spouse of < < Optionee > >
-8-
<PAGE>
RECEIPT
The undersigned hereby acknowledges receipt of Certificate No. _____ for
__________ shares of Common Stock of eToys Inc. (the "COMPANY").
Dated:
----------------- ---------------------------------------
< < Optionee > >
<PAGE>
RECEIPT
eToys Inc. (the "COMPANY") hereby acknowledges receipt of a check in the amount
of $_____________ given by < < Optionee > > as consideration for Certificate
No. _________ for ____________ shares of Common Stock of eToys Inc.
Dated:
------------------
ETOYS INC.
By:
-----------------------------------
Name:
----------------------------------
(print)
Title:
---------------------------------
<PAGE>
eTOYS INC.
1999 STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and
Consultants of the Company and to promote the success of the Company's
business. Options granted under the Plan may be either Incentive Stock
Options (as defined under Section 422 of the Code) or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant of an Option
and subject to the applicable provisions of Section 422 of the Code and the
regulations promulgated thereunder. Stock Purchase Rights may also be granted
under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or its Committee appointed
pursuant to Section 4 of the Plan.
(b) "AFFILIATE" means an entity other than a Subsidiary (as
defined below) in which the Company owns an equity interest or which,
together with the Company, is under common control of a third person or
entity.
(c) "APPLICABLE LAWS" means the legal requirements relating to the
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any Stock Exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations
and requirements shall be in place from time to time.
(d) "BOARD" means the Board of Directors of the Company.
(e) "CAUSE" for termination of a Participant's Continuous Service
Status will exist if the Participant is terminated for any of the following
reasons: (i) Participant's willful failure substantially to perform his or
her duties and responsibilities to the Company or any Subsidiary, Parent,
Affiliate or successor thereto, as appropriate; (ii) Participant's repeated
unexplained or unjustified absence from the Company or any Subsidiary,
Parent, Affiliate or successor thereto, as appropriate; (iii) Participant's
commission of any act of fraud, embezzlement, dishonesty or any other willful
and serious misconduct that has caused or is reasonably expected to result in
material injury to the Company or to any Subsidiary, Parent, Affiliate or
successor thereto; (iv) unauthorized use or disclosure by Participant of any
proprietary information or trade secrets of the Company or any other party to
whom the Participant owes an obligation of nondisclosure as a result of his
or her relationship with the Company or a Subsidiary, Parent, Affiliate or
successor thereto; or (iv) Participant's willful breach of any of his or her
obligations under any written agreement or covenant with the Company or with
any Subsidiary, Parent, Affiliate or successor to the Company. The
<PAGE>
determination as to whether a Participant is being terminated for Cause shall
be made in good faith by the Company or a Subsidiary, Parent, Affiliate or
successor thereto, as appropriate, and shall be final and binding on the
Participant. The foregoing definition does not in any way limit the ability
of the Company or a Subsidiary, Parent, Affiliate or successor thereto to
terminate a Participant's employment or consulting relationship at any time
as provided in Section 5(c) below.
(f) "CHANGE OF CONTROL" means a sale of all or substantially all
of the Company's assets, or any merger or consolidation of the Company with
or into another corporation other than a merger or consolidation in which the
holders of more than 50% of the shares of capital stock of the Company
outstanding immediately prior to such transaction continue to hold (either by
the voting securities remaining outstanding or by their being converted into
voting securities of the surviving entity) more than 50% of the total voting
power represented by the voting securities of the Company, or such surviving
entity, outstanding immediately after such transaction.
(g) "CODE" means the Internal Revenue Code of 1986, as amended.
(h) "COMMITTEE" means one or more committees or subcommittees of
the Board appointed by the Board to administer the Plan in accordance with
Section 4 below.
(i) "COMMON STOCK" means the Common Stock of the Company.
(j) "COMPANY" means eToys Inc., a Delaware corporation.
(k) "CONSULTANT" means any person, including an advisor, who
renders services to the Company or any Parent, Subsidiary or Affiliate and is
compensated for such services, and any Director of the Company whether
compensated for such services or not.
(l) "CONTINUOUS SERVICE STATUS" means the absence of any
interruption or termination of service as an Employee or Consultant to the
Company or a Parent, Subsidiary or Affiliate. Continuous Service Status shall
not be considered interrupted in the case of (i) sick leave; (ii) military
leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the
Company or between the Company, its Parent(s), Subsidiaries, Affiliates or
their respective successors. Unless otherwise determined by the Administrator
or the Company, a change in status from an Employee to a Consultant or from a
Consultant to an Employee will not constitute a termination of Continuous
Service Status.
(m) "CORPORATE TRANSACTION" means a sale of all or substantially
all of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(n) "DIRECTOR" means a member of the Board.
<PAGE>
(o) "EMPLOYEE" means any person (including, if appropriate, any
Named Executive, Officer or Director) employed by the Company or any Parent,
Subsidiary or Affiliate of the Company. The payment by the Company of a
director's fee to a Director shall not be sufficient to constitute
"employment" of such Director by the Company.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(q) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange on the date of determination
(or if no trading or bids occurred on the date of determination, on the last
trading day prior to the date of determination), as reported in THE WALL
STREET JOURNAL or such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common
Stock for the date of determination (or if no bids occurred on the date of
determination, on the last trading day prior to the date of determination); or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(r) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code,
as designated in the applicable Option Agreement.
(s) "INVOLUNTARY TERMINATION" means termination of a Participant's
Continuous Service Status under the following circumstances: (i) termination
without Cause by the Company or a Subsidiary, Parent, Affiliate or successor
thereto, as appropriate; or (ii) voluntary termination by the Participant
following (A) a material reduction in the Participant's job responsibilities,
provided that neither a mere change in title alone nor reassignment following
a Change of Control to a position that is substantially similar to the
position held prior to the Change of Control shall constitute a material
reduction in job responsibilities; (B) without Participant's prior written
approval, the Company or a Subsidiary, Parent, Affiliate or successor
thereto, as appropriate, requires Participant to relocate to a facility or
location more than 50 miles from the Company's location at the time of the
Change of Control, provided that required travel on corporate business to an
extent consistent with Participant's job responsibilities does not constitute
such a forced relocation; or (C) a reduction in Participant's then-current
base salary, provided that an across-the-board reduction in the salary level
of all other employees or consultants in positions similar to the
Participant's by the same percentage amount as part of a general salary level
reduction shall not constitute such a salary reduction.
<PAGE>
(t) "LISTED SECURITY" means any security of the Company that is
listed or approved for listing on a national securities exchange or
designated or approved for designation as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc.
(u) "NAMED EXECUTIVE" means any individual who, on the last day of
the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four most highly compensated
officers of the Company (other than the chief executive officer). Such
officer status shall be determined pursuant to the executive compensation
disclosure rules under the Exchange Act.
(v) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable Option
Agreement.
(w) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16(a) of the Exchange Act and the rules and
regulations promulgated thereunder.
(x) "OPTION" means a stock option granted pursuant to the Plan.
(y) "OPTION AGREEMENT" means a written document, the form(s) of
which shall be approved from time to time by the Administrator, reflecting
the terms of an Option granted under the Plan and includes any documents
attached to or incorporated into such Option Agreement, including, but not
limited to, a notice of stock option grant and a form of exercise notice.
(z) "OPTION EXCHANGE PROGRAM" means a program approved by the
Administrator whereby outstanding Options are exchanged for Options with a
lower exercise price.
(aa) "OPTIONED STOCK" means the Common Stock subject to an Option.
(bb) "OPTIONEE" means an Employee or Consultant who receives an
Option.
(cc) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(c) of the Code.
(dd) "PARTICIPANT" means any holder of one or more Options or Stock
Purchase Rights, or the Shares issuable or issued upon exercise of such
awards, under the Plan.
(ee) "PLAN" means this 1999 Stock Plan.
(ff) "REPORTING PERSON" means an Officer, Director or greater than
10% stockholder of the Company within the meaning of Rule 16a-2 of the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 of the
Exchange Act.
<PAGE>
(gg) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(hh) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written
document, the form(s) of which shall be approved from time to time by the
Administrator, reflecting the terms of a Stock Purchase Right granted under
the Plan and includes any documents attached to such agreement.
(ii) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange
Act, as amended from time to time, or any successor provision.
(jj) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 14 of the Plan.
(kk) "STOCK EXCHANGE" means any stock exchange or consolidated
stock price reporting system on which prices for the Common Stock are quoted
at any given time.
(ll) "STOCK PURCHASE RIGHT" means the right to purchase Common
Stock pursuant to Section 11 below.
(mm) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(nn) "TEN PERCENT HOLDER" means a person who owns stock
representing more than ten percent (10%) of the voting power of all classes
of stock of the Company or any Parent or Subsidiary.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14
of the Plan, the maximum aggregate number of shares that may be sold under
the Plan is 7,200,000 Shares of Common Stock, plus an annual increase on the
first day of each of the Company's fiscal years beginning in 2000, 2001,
2002, 2003 and 2004 equal to the lesser of (i) 1,500,000 Shares, (ii) three
percent (3%) of the Shares outstanding on the last day of the immediately
preceding fiscal year, or (iii) such lesser number of Shares as the Board
shall determine. The Shares may be authorized, but unissued, or reacquired
Common Stock.
If an Option expires or becomes unexercisable for any reason without
having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares that were subject thereto shall,
unless the Plan has been terminated, become available for future grant under
the Plan. In addition, any Shares of Common Stock that are retained by the
Company upon exercise of an Option or Stock Purchase Right in order to
satisfy the exercise or purchase price for such Option or Stock Purchase
Right or any withholding taxes due with respect to such exercise or purchase
shall be treated as not issued and shall continue to be available under the
Plan. Shares issued under the Plan and later repurchased by the Company
pursuant to any repurchase right that the Company may have shall not be
available for future grant under the Plan.
<PAGE>
4. ADMINISTRATION OF THE PLAN.
(a) GENERAL. The Plan shall be administered by the Board or a
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different administrative bodies with respect to different
classes of Participants and, if permitted by the Applicable Laws, the Board
may authorize one or more officers (who may (but need not) be Officers) to
grant Options or Stock Purchase Rights to Employees and Consultants.
(b) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS. With respect
to Options granted to Reporting Persons and Named Executives, the Plan may
(but need not) be administered so as to permit such Options to qualify for
the exemption set forth in Rule 16b-3 and to qualify as performance-based
compensation under Section 162(m) of the Code.
(c) COMMITTEE COMPOSITION. If a Committee has been appointed
pursuant to this Section 4, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. From time to time
the Board may increase the size of any Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new
members in substitution therefor, fill vacancies (however caused) and remove
all members of a Committee and thereafter directly administer the Plan, all
to the extent permitted by the Applicable Laws and, in the case of a
Committee administering the Plan pursuant to Section 4(b) above, to the
extent permitted or required by Rule 16b-3 and Section 162(m) of the Code.
(d) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(q) of the Plan;
(ii) to select the Employees and Consultants to whom Options
and Stock Purchase Rights or any combination thereof may from time to time be
granted;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof are granted;
(iv) to determine the number of Shares of Common Stock to be
covered by each such award granted;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder, which terms and
conditions include but are not limited to the exercise or purchase price, the
time or times when Options or Stock Purchase Rights may be exercised (which
may be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any
Option,
<PAGE>
Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case
on such factors as the Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 10(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted and to make any other amendments or adjustments to any Option that
the Administrator determines, in its discretion and under the authority
granted to it under the Plan, to be necessary or advisable, provided however
that no amendment or adjustment to an Option that would materially and
adversely affect the rights of any Optionee shall be made without the prior
written consent of the Optionee;
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights;
(x) to initiate an Option Exchange Program;
(xi) to construe and interpret the terms of the Plan and
awards granted under the Plan; and
(xii) in order to fulfill the purposes of the Plan and
without amending the Plan, to modify grants of Options or Stock Purchase
Rights to Participants who are foreign nationals or employed outside of the
United States in order to recognize differences in local law, tax policies or
customs.
(e) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Participants.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees, provided however that Employees of
Affiliates shall not be eligible to receive Incentive Stock Options. An
Employee or Consultant who has been granted an Option or Stock Option Right
may, if he or she is otherwise eligible, be granted additional Options or
Stock Purchase Rights.
(b) TYPE OF OPTION. Each Option shall be designated in the Option
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options are exercisable for
the first time by an Optionee during any calendar year (under all plans of
the Company or any Parent or Subsidiary) exceeds $100,000, such excess
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the
order in which they were granted,
<PAGE>
and the Fair Market Value of the Shares shall be determined as of the date of
grant of such Option.
(c) NO EMPLOYMENT RIGHTS. The Plan shall not confer upon any
Participant any right with respect to continuation of employment or
consulting relationship with the Company, nor shall it interfere in any way
with his or her right or the Company's right to terminate his or her
employment or consulting relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 16 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided however that the term shall be no more than
ten (10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Incentive Stock Option granted to a person who at the time of such grant is a
Ten Percent Holder, the term of such Incentive Stock Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided
in the Option Agreement.
8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as
provided in Section 13 below, the maximum number of Shares which may be
subject to Options and Stock Purchase Rights granted to any one Employee
under this Plan for any fiscal year of the Company shall be 3,000,000.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per Share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be such price as is
determined by the Administrator and set forth in the Option Agreement, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who at the time of grant
is a Ten Percent Holder, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant; or
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted prior to the date, if any, on which the
Common Stock becomes a Listed Security to a person who is at the time of
grant is a Ten Percent Holder, the per Share exercise price shall be no less
than 110% of the Fair Market Value per Share on the date of grant if required
by the Applicable Laws and, if not so required, shall be such price as is
determined by the Administrator;
<PAGE>
(B) granted to a person who, at the time of the
grant of such Option, is a Named Executive of the Company, the per share
Exercise Price shall be no less than 100% of the Fair Market Value on the
date of grant if such Option is intended to qualify as performance-based
compensation under Section 162(m) of the Code; or
(C) granted prior to the date, if any, on which the
Common Stock becomes a Listed Security to any person other than a Named
Executive or a Ten Percent Holder, the per Share exercise price shall be no
less than 85% of the Fair Market Value per Share on the date of grant if
required by Applicable Law and, if not so required, shall be such price as is
determined by the Administrator.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price other than as required above pursuant to a
merger or other corporate transaction.
(b) PERMISSIBLE CONSIDERATION. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administration (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of (1) cash; (2) check; (3) delivery of Optionee's
promissory note with such recourse, interest, security and redemption
provisions as the Administrator determines to be appropriate (subject to the
provisions of Section 153 of the Delaware General Corporation Law); (4)
cancellation of indebtedness; (5) other Shares that (x) in the case of Shares
acquired upon exercise of an Option either have been owned by the Optionee
for more than six months on the date of surrender (or such other period as
may be required to avoid a charge to the Company's earnings) or were not
acquired, directly or indirectly, from the Company, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price
of the Shares as to which the Option is exercised; (6) authorization from the
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to
which the Option is exercised; (7) delivery of a properly executed exercise
notice together with such other documentation as the Administration and the
broker, if applicable, shall require to effect exercise of the Option and
prompt delivery to the Company of the sale or loan proceeds required to pay
the exercise price and any applicable withholding taxes; (8) any combination
of the foregoing methods of payment; or (9) such other consideration and
method of payment for the issuance of Shares to the extent permitted under
the Applicable Laws. In making its determination as to the type of
consideration to accept, the Administrator shall consider if acceptance of
such consideration may be reasonably expected to benefit the Company and the
Administrator may refuse to accept a particular form of consideration at the
time of any Option exercise if, in its sole discretion, acceptance of such
form of consideration is not in the best interests of the Company at such
time.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the
<PAGE>
Administrator, consistent with the terms of the Plan, and reflected in the
Option Agreement, including vesting requirements and/or performance criteria
with respect to the Company and/or the Optionee; provided however that, if
required by the Applicable Laws, any Option granted prior to the date, if
any, upon which the Common Stock becomes a Listed Security shall become
exercisable at a rate of at least 20% per year over five years from the date
the Option is granted. In the event that any of the Shares issued upon
exercise of an Option (which exercise occurs prior to the date, if any, upon
which the Common Stock becomes a Listed Security) should be subject to a
right of repurchase in the Company's favor, such repurchase right shall, if
required by the Applicable Laws, lapse at the rate of at least 20% per year
over five years from the date the Option is granted. Notwithstanding the
above, in the case of an Option granted to an officer (including but not
limited to Officers), Director or Consultant, the Option may become
exercisable, or a repurchase right, if any, in favor of the Company shall
lapse, at any time or during any period established by the Administrator. The
Administrator shall have the discretion to determine whether and to what
extent the vesting of Options shall be tolled during any unpaid leave of
absence; provided however that in the absence of such determination, vesting
of Options shall be tolled during any such leave.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares. Full payment may, as authorized by the
Administrator, consist of any consideration and method of payment allowable
under Section 9(b) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no
right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Option. No adjustment will be made
for a dividend or other right for which the record date is prior to the date
the stock certificate is issued, except as provided in Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares that thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the
event of termination of an Optionee's Continuous Service Status, such
Optionee may, but only within the (3) months (or such other period of time,
not less than thirty (30) days, as is determined by the Administrator, with
such determination in the case of an Incentive Stock Option being made at the
time of grant of the Option) after the date of such termination (but in no
event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), exercise his or her Option to the extent that
he or she was entitled to exercise it at the date of such termination. To the
extent that the Optionee was not entitled to exercise the Option at the date
of such termination, or if the Optionee does not exercise the Option to the
extent so entitled within
<PAGE>
the time specified above, the Option shall terminate and the Optioned Stock
underlying the unexercised portion of the Option shall revert to the Plan.
Unless otherwise determined by the Administrator or the Company, no
termination shall be deemed to occur and this Section 10(b) shall not apply
if (i) the Optionee is a Consultant who becomes an Employee, or (ii) the
Optionee is an Employee who becomes a Consultant.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 10(b) above,
in the event of termination of an Optionee's Continuous Service Status as a
result of his or her total and permanent disability (as defined in Section
22(e)(3) of the Code), such Optionee may, but only within twelve (12) months
(or such other period of time as is determined by the Administrator, with
such determination in the case of an Incentive Stock Option made at the time
of grant of the Option) from the date of such termination (but in no event
later than the date of expiration of the term of such Option as set forth in
the Option Agreement), exercise the Option to the extent he or she was
entitled to exercise it at the date of such termination. To the extent that
the Optionee was not entitled to exercise the Option at the date of
termination, or if the Optionee does not exercise the Option to the extent so
entitled within the time specified above, the Option shall terminate and the
Option Stock underlying the unexercised portion of the Option shall revert to
the Plan.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the period of Continuous Service Status since the date of grant of the
Option, or within 30 days following termination of the Optionee's Continuous
Service Status, the Option may be exercised at any time within twelve (12)
months following the date of death (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement) by such
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise
that had accrued at the date of death or, if earlier, the date of termination
of the Optionee's Continuous Service Status. To the extent that the Optionee
was not entitled to exercise the Option at the date of death or termination,
as the case may be, or if the Optionee does not exercise such Option to the
extent so entitled within the time specified above, the Option shall
terminate and the Optioned Stock underlying the unexercised portion of the
Option shall revert to the Plan.
(e) EXTENSION OF EXERCISE PERIOD. The Administrator shall have
full power and authority to extend the period of time for which an Option is
to remain exercisable following termination of an Optionee's Continuous
Service Status from the periods set forth in Sections 10(b), 10(c) and 10(d)
above or in the Option Agreement to such greater time as the Administrator
shall deem appropriate, provided that in no event shall such Option be
exercisable later than the date of expiration of the term of such Option as
set forth in the Option Agreement.
(f) BUY-OUT PROVISIONS. The Administrator may at any time offer
to buy out for a payment in cash or Shares an Option previously granted under
the Plan based on such terms and conditions as the Administrator shall
establish and communicate to the Optionee at the time such offer is made.
<PAGE>
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under
the Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall
be entitled to purchase, the price to be paid, and the time within which such
person must accept such offer, which shall in no event exceed 30 days from
the date upon which the Administrator made the determination to grant the
Stock Purchase Right. In the case of a Stock Purchase Right granted prior to
the date, if any, on which the Common Stock becomes a Listed Security and if
required by the Applicable Laws at such time, the purchase price of Shares
subject to such Stock Purchase Rights shall not be less than 85% of the Fair
Market Value of the Shares as of the date of the offer, or, in the case of a
person owning stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
price shall not be less than 100% of the Fair Market Value of the Shares as
of the date of the offer. If the Applicable Laws do not impose the
requirements set forth in the preceding sentence and with respect to any
Stock Purchase Rights granted after the date, if any, on which the Common
Stock becomes a Listed Security, the purchase price of Shares subject to
Stock Purchase Rights shall be as determined by the Administrator. The offer
to purchase Shares subject to Stock Purchase Rights shall be accepted by
execution of a Restricted Stock Purchase Agreement in the form determined by
the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's employment with the Company for any reason (including
death or disability). The purchase price for Shares repurchased pursuant to
the Restricted Stock Purchase Agreement shall be the original purchase price
paid by the purchaser and may be paid by cancellation of any indebtedness of
the purchaser to the Company. The repurchase option shall lapse at such rate
as the Administrator may determine; provided however that with respect to a
Stock Purchase Right granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to a purchaser who is not an officer
(including an Officer), Director or Consultant of the Company or of any Parent
or Subsidiary of the Company, it shall lapse at a minimum rate of 20% per
year if required by the Applicable Laws.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion. In addition, the provisions of Restricted Stock Purchase
Agreements need not be the same with respect to each purchaser.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is
<PAGE>
prior to the date the Stock Purchase Right is exercised, except as provided
in Section 14 of the Plan.
12. TAXES.
(a) As a condition of the exercise of an Option or Stock Purchase
Right granted under the Plan, the Participant (or in the case of the
Participant's death, the person exercising the Option or Stock Purchase
Right) shall make such arrangements as the Administrator may require for the
satisfaction of any applicable federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise of Option or
Stock Purchase Right and the issuance of Shares. The Company shall not be
required to issue any Shares under the Plan until such obligations are
satisfied.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to
satisfy such tax obligations from the next payroll payment otherwise payable
after the date of an exercise of the Option or Stock Purchase Right.
(c) This Section 12(c) shall apply only after the date, if any,
upon which the Common Stock becomes a Listed Security. In the case of
Participant other than an Employee (or in the case of an Employee where the
next payroll payment is not sufficient to satisfy such tax obligations, with
respect to any remaining tax obligations), in the absence of any other
arrangement and to the extent permitted under the Applicable Laws, the
Participant shall be deemed to have elected to have the Company withhold from
the Shares to be issued upon exercise of the Option or Stock Purchase Right
that number of Shares having a Fair Market Value determined as of the
applicable Tax Date (as defined below) equal to the amount required to be
withheld. For purposes of this Section 12, the Fair Market Value of the Shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined under the Applicable Laws (the "TAX DATE").
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right by surrendering to the Company Shares that
(i) in the case of Shares previously acquired from the Company, have been
owned by the Participant for more than six (6) months on the date of
surrender, and (ii) have a Fair Market Value determined as of the applicable
Tax Date equal to the amount required to be withheld.
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 12(c) or (d)
above shall be irrevocable as to the particular Shares as to which the
election is made and shall be subject to the consent or disapproval of the
Administrator. Any election by a Participant under Section 12(d) above must be
made on or prior to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because
no election is filed under Section 83(b) of the Code, the Participant shall
receive the full number of Shares with respect to
<PAGE>
which the Option or Stock Purchase Right is exercised but such Participant
shall be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.
13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent or distribution; provided that, after the date, if any, upon which
the Common Stock becomes a Listed Security, the Administrator may in its
discretion grant transferable Nonstatutory Stock Options pursuant to Option
Agreements specifying (i) the manner in which such Nonstatutory Stock Options
are transferable and (ii) that any such transfer shall be subject to the
Applicable Laws. The designation of a beneficiary by an Optionee will not
constitute a transfer. An Option or Stock Purchase Right may be exercised,
during the lifetime of the holder of Option or Stock Purchase Right, only by
such holder or a transferee permitted by this Section 13.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, CORPORATE TRANSACTIONS
AND CERTAIN OTHER TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the stockholders of the Company, the number of shares of Common Stock covered
by each outstanding Option or Stock Purchase Right, the number of Shares set
forth in Sections 3(a)(i) and 8 above, and the number of shares of Common
Stock that have been authorized for issuance under the Plan but as to which no
Options or Stock Purchase Rights have yet been granted or that have been
returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per Share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued Shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock
(including any change in the number of Shares of Common Stock effected in
connection with a change of domicile of the Company), or any other increase or
decrease in the number of issued Shares of Common Stock effected without
receipt of consideration by the Company; provided however that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Administrator, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of Shares of Common
Stock subject to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the dissolution or
liquidation of the Company, each outstanding Option or Stock Purchase Right
shall terminate immediately prior to the consummation of the transaction,
unless otherwise provided by the Administrator.
(c) CORPORATE TRANSACTIONS; CHANGE OF CONTROL. In the event of a
Corporate Transaction, each outstanding Option and Stock Purchase Right shall
be assumed or
<PAGE>
an equivalent option or right shall be substituted by the successor
corporation or a Parent or Subsidiary of such successor corporation (such
entity, the "SUCCESSOR CORPORATION"), unless the Successor Corporation does
not agree to such assumption or substitution, in which case such Options and
Stock Purchase Rights shall terminate upon consummation of the transaction.
Notwithstanding the preceding sentence, in the event of a Change of Control,
each outstanding Option and Stock Purchase Right shall be assumed or an
equivalent option or right shall be substituted by the Successor Corporation,
unless the Successor Corporation does not agree to such assumption or
substitution, in which case the vesting of each Option shall accelerate and
the Options shall become exercisable in full (including with respect to
Shares as to which an Option would not otherwise be vested and exercisable),
and any repurchase right in favor of the Company with respect to any Shares
purchased upon exercise of an Option or Stock Purchase right shall lapse in
full, prior to consummation of the transaction at such time and on such
conditions as the Administrator shall determine. To the extent an Option is
not exercised prior to consummation of a Change of Control in which the
vesting of Options is being accelerated, such Option shall terminate upon
such consummation and the Administrator shall notify the Optionee of such
fact at least five (5) days prior to the date on which the Option terminates.
In the event Plan awards are assumed or substituted in connection
with a Change of Control and a Participant holding such an assumed or
substituted award experiences an Involuntary Termination within twenty-four
(24) months following the Change of Control, any assumed or substituted
Option held by the terminated Participant at the time of termination shall
accelerate and become exercisable in full (including with respect to any
shares of stock then underlying the Option as to which the Option would not
otherwise be vested and exercisable), and any repurchase right in favor of
the Company or the Successor Corporation with respect to any Shares (or any
shares of stock issued in exchange for such Shares) purchased upon exercise
of an Option or Stock Purchase Right shall lapse in full, immediately prior
to the effective date of the Involuntary Termination.
For purposes of this Section 14(c), an Option or a Stock Purchase
Right shall be considered assumed, without limitation, if, at the time of
issuance of the stock or other consideration upon a Corporate Transaction or
a Change of Control, as the case may be, each holder of an Option or Stock
Purchase Right would be entitled to receive upon exercise of the Option or
Stock Purchase Right the same number and kind of shares of stock or the same
amount of property, cash or securities as such holder would have been
entitled to receive upon the occurrence of the transaction if the holder had
been, immediately prior to such transaction, the holder of the number of
Shares of Common Stock covered by the Option or the Stock Purchase Right at
such time (after giving effect to any adjustments in the number of Shares
covered by the Option or Stock Purchase Right as provided for in this
Section 14); provided however that if the consideration received in the
transaction is not solely common stock of the Successor Corporation, the
Administrator may, with the consent of the Successor Corporation, provide for
the consideration to be received upon exercise of the Option or Stock
Purchase Right to be solely common stock of the Successor Corporation equal
to the Fair Market Value of the per Share consideration received by holders
of Common Stock in the transaction.
(d) ACCOUNTING AND TAX TREATMENT.
<PAGE>
(i) POOLING ISSUES. Notwithstanding Section 14(c) above, no
vesting acceleration or lapse of a repurchase right pursuant to such section
shall occur if such acceleration or lapse would cause a contemplated Change
of Control transaction that was intended to be accounted for as a "pooling of
interests" transaction to be ineligible for such treatment under generally
accepted accounting principles, as determined by the Company's independent
accountants prior to the Change of Control.
(ii) LIMITATION ON PAYMENTS. In the event that the vesting
acceleration or lapse of a repurchase right provided for in Section 14(c)
above (x) constitutes "parachute payments" within the meaning of Section 280G
of the Code, and (y) but for this Section 14(d)(ii) would be subject to the
excise tax imposed by Section 4999 of the Code (or any corresponding
provisions of state income tax law), then such vesting acceleration or lapse
of a repurchase right shall be either
(A) delivered in full, or
(B) delivered as to such lesser extent which would
result in no portion of such severance benefits subject to excise tax under
Code Section 4999,
whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Code
Section 4999, results in the receipt by the Participant on an after-tax basis
of the greater amount of acceleration or lapse of repurchase rights benefits,
notwithstanding that all or some portion of such benefits may be taxable
under Code Section 4999. Any determination required under this Section 14(d)
shall be made in writing by the Company's independent accountants, whose
determination shall be conclusive and binding for all purposes on the Company
and any affected Participant. In the event that (ii)(A) above applies, then
the Participant shall be responsible for any excise taxes imposed with
respect to such benefits. In the event that (ii)(B) above applies, then each
benefit provided hereunder shall be proportionately reduced to the extent
necessary to avoid imposition of such excise taxes.
(e) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without
receipt of consideration by the Company, the Administrator may, in its
discretion, appropriately adjust the price per Share of Common Stock covered
by each outstanding Option or Stock Purchase Right to reflect the effect of
such distribution.
15. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. To date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the
date on which the Administrator makes the determination granting such Option
or Stock Purchase Right, or such other date as is determined by the
Administrator; provided however that in the case of an Incentive Stock Option,
the grant date shall be the later of the date on which the Administrator makes
the determination granting such Incentive Stock Option or the date of
commencement of the Optionee's employment relationship with the Company.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
<PAGE>
16. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend, discontinue or terminate the Plan, but no amendment,
alteration, suspension, discontinuance or termination (other than an
adjustment made pursuant to Section 14 above) shall be made that would
materially and adversely affect the rights of any Optionee or holder of Stock
Purchase Rights under any outstanding grant, without his or her consent. In
addition, to the extent necessary and desirable to comply with the Applicable
Laws, the Company shall obtain stockholder approval of any Plan amendment in
such a manner and to such as degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or
termination of the Plan shall materially and adversely affect Options or
Stock Purchase Rights already granted, unless mutually agreed otherwise
between the Optionee or holder of the Stock Purchase Rights and the
Administrator, which agreement must be in writing and signed by such Optionee
or holder and the Company.
17. CONDITIONS UPON ISSUANCE OF SHARES. Notwithstanding any other
provision of the Plan or any agreement entered into by the Company pursuant
to the Plan, the Company shall not be obligated, and shall have no liability
for failure, to issue or deliver any Shares under the Plan unless such
issuance or delivery would comply with the Applicable Laws, with such
compliance determined by the Company in consultation with its legal counsel.
As a condition to the exercise of an Option or Stock Purchase Right, the
Company may require the person exercising such Option or Stock Purchase Right
to represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without any present intention to sell
or distribute such Shares if, in the opinion of counsel for the Company, such
a representation is required by law.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
19. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced
by Option Agreements and Restricted Stock Purchase Agreements, respectively,
in such form(s) as the Administrator shall from time to time approve.
20. STOCKHOLDER APPROVAL. If required by the Applicable Laws,
continuance of the Plan shall be subject to approval by the stockholders of
the Company within twelve (12) months before or after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to
the degree required under the Applicable Laws.
21. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. Prior to
the date, if any, upon which the Common Stock becomes a Listed Security and
if required by the Applicable Laws, the Company shall provide financial
statements at least annually to each Optionee and to each individual who
acquired Shares pursuant to the Plan, during the period such Optionee or
<PAGE>
purchaser has one or more Options or Stock Purchase Rights outstanding, and
in the case of an individual who acquired Shares pursuant to the Plan, during
the period such individual owns such Shares. The Company shall not be
required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information.
<PAGE>
eTOYS INC.
1999 STOCK PLAN
NOTICE OF STOCK OPTION GRANT
Optionee
You have been granted an option to purchase Common Stock of eToys Inc.
(the "COMPANY") as follows:
Board Approval Date: ((GrantDate))
Date of Grant (Later of Board
Approval Date or Commencement of
Employment/Consulting): ((GrantDate))
Exercise Price Per Share: ((PricePerShare))
Total Number of Shares Granted: ((NumberofShares))
Total Price of Shares Granted: ((TotalExercisePrice))
Type of Option: ((NoSharesISO)) Incentive Stock Option
((NoSharesNSO)) Nonstatutory Stock
Option
Term/Expiration Date: ((Expiration))
Vesting Commencement Date: ((VestingCommencement))
Vesting Schedule: ((VestingSchedule))
Termination Period: Option may be exercised for a period of
______ after termination of employment
or consulting relationship except as set
out in Sections 7 and 8 of the Stock
Option Agreement (but in no event later
than the Expiration Date).
By your signature and the signature of the Company's representative
below, you and the Company agree that this option is granted under and
governed by the terms and conditions of the eToys Inc. 1999 Stock Plan and
the Stock Option Agreement, all of which are attached and made a part of this
document.
OPTIONEE eTOYS INC.
By:
- --------------------------------- ----------------------------------
Signature
Address: Title:
------------------------- -------------------------------
- ---------------------------------
-1-
<PAGE>
ETOYS INC.
STOCK OPTION AGREEMENT
1. GRANT OF OPTION.
(a) GENERAL TERMS. eToys Inc., a Delaware corporation (the
"COMPANY"), hereby grants to the Optionee named in the Notice of Stock Option
Grant attached to this Agreement ("OPTIONEE"), an option (the "OPTION") to
purchase the total number of shares of Common Stock (the "SHARES") set forth
in the Notice of Stock Option Grant, at the exercise price per share set
forth in the Notice of Stock Option Grant (the "EXERCISE PRICE") subject to
the terms, definitions and provisions of the 1999 Stock Plan (the "PLAN")
adopted by the Company, which is incorporated in this Agreement by reference.
In the event of a conflict between the terms of the Plan and the terms of
this Agreement, the terms of the Plan shall govern. Unless otherwise defined
in this Agreement, the terms used in this Agreement shall have the meanings
defined in the Plan.
(b) TAX STATUS OF OPTION. Unless and to the extent designated a
Nonstatutory Stock Option in the Notice of Stock Option Grant, this Option is
intended to be an Incentive Stock Option as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "CODE"), to the maximum extent
permitted under applicable tax law. If any portion of this Option is
designated as an Incentive Stock Option it shall qualify as such only to the
extent that the aggregate fair market value of the Shares (generally, the
Option's exercise price) subject to this Option (and all other Incentive
Stock Options granted to Optionee by the Company or any Parent or Subsidiary)
that first become exercisable in any calendar year does not exceed $100,000.
To the extent that the aggregate fair market value of such Shares exceeds
$100,000, the Shares in excess of such limit shall be treated as subject to a
Nonstatutory Stock Option, in accordance with Section 5 of the Plan.
2. EXERCISE OF OPTION. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Stock
Option Grant and with the provisions of Sections 9 and 10 of the Plan as
follows:
(a) RIGHT TO EXERCISE.
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
this Section 2 and by Sections 6, 7 and 8 below.
(iii) In no event may this Option be exercised after the
Expiration Date of the Option as set forth in the Notice of Stock Option
Grant.
(b) METHOD OF EXERCISE.
(i) This Option shall be exercisable by delivering to the
Company a written notice of exercise (in the form attached as EXHIBIT A)
which shall state the election to exercise the Option, the number of Shares
in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with
respect to such Shares of Common Stock as may be required by the Company
pursuant to the provisions of the Plan. Such written notice shall be signed
by Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The
-1-
<PAGE>
written notice shall be accompanied by payment of the Exercise Price. This
Option shall be deemed to be exercised upon receipt by the Company of such
written notice accompanied by the Exercise Price.
(ii) As a condition to the exercise of this Option, Optionee
agrees to make adequate provision for federal, state or other tax withholding
obligations, if any, which arise upon the exercise of the Option or
disposition of Shares, whether by withholding, direct payment to the Company,
or otherwise.
(iii) No Shares will be issued pursuant to the exercise of an
Option unless such issuance and such exercise shall comply with all relevant
provisions of law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes
the Shares shall be considered transferred to Optionee on the date on which
the Option is exercised with respect to such Shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), at the time this
Option is exercised, Optionee shall, if required by the Company, concurrently
with the exercise of all or any portion of this Option, deliver to the
Company an investment representation statement in customary form, a copy of
which is available for Optionee's review from the Company upon request.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any
of the following, or a combination of the following, at the election of
Optionee: (a) cash; (b) check; (c) surrender of other Shares of Common Stock
of the Company that (i) either have been owned by Optionee for more than six
(6) months on the date of surrender or were not acquired, directly or
indirectly, from the Company, and (ii) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
the Option shall be exercised; (d) authorization from the Company to retain
from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market value on the date of exercise equal to
the exercise price for the total number of Shares as to which the Option is
exercised; or (e) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly
to the Company the amount of sale or loan proceeds required to pay the
exercise price.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised until
such time as the Plan has been approved by the stockholders of the Company,
or if the issuance of such Shares upon such exercise or the method of payment
of consideration for such shares would constitute a violation of any
applicable federal or state securities or other law or regulation, including
any rule under Part 207 of Title 12 of the Code of Federal Regulations
("REGULATION G") as promulgated by the Federal Reserve Board. As a condition
to the exercise of this Option, the Company may require Optionee to make any
representation and warranty to the Company as may be required by any
applicable law or regulation.
6. TERMINATION OF RELATIONSHIP. In the event of termination of
Optionee's Continuous Service Status, Optionee may, to the extent otherwise
so entitled at the date of such termination (the "TERMINATION DATE"),
exercise this Option during the Termination Period set out in the Notice of
Stock Option Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified in the Notice of Stock Option Grant,
the Option shall terminate.
-2-
<PAGE>
7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section
6 above, in the event of termination of Optionee's Continuous Service Status
as a result of total and permanent disability (as defined in Section 22(e)(3)
of the Code), Optionee may, but only within twelve (12) months from the date
of termination of employment (but in no event later than the Expiration Date
of the Option as set forth in the Notice of Stock Option Grant), exercise the
Option to the extent otherwise so entitled at the date of such termination.
To the extent that Optionee was not entitled to exercise the Option at the
date of termination, or if Optionee does not exercise such Option (to the
extent otherwise so entitled) within the time specified in this Agreement,
the Option shall terminate.
8. DEATH OF OPTIONEE. In the event of the death of Optionee (a)
during the term of this Option and while an Employee or Consultant of the
Company and having been in Continuous Service Status since the date of grant
of the Option, or (b) within thirty (30) days after the termination of
Optionee's Continuous Service Status, the Option may be exercised, at any
time within twelve (12) months following the date of death (but in no event
later than the Expiration Date of the Option as set forth in the Notice of
Stock Option Grant), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise that had accrued at the date of death or
termination, as applicable. To the extent that Optionee was not entitled to
exercise this Option at the date of death or termination, as applicable, or
if Optionee's estate or the person who acquired the right to exercise the
Option as a result of Optionee's death does not exercise this Option within
the time specified in the Notice of Stock Option Grant, the Option shall
terminate
9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or
distribution. The designation of a beneficiary does not constitute a
transfer. An Option may be exercised during the lifetime of Optionee only by
Optionee or a transferee permitted by this section. The terms of this Option
shall be binding upon the executors, administrators, heirs, successors and
assigns of Optionee.
10. TERM OF OPTION. This Option may be exercised only within the term
set out in the Notice of Stock Option Grant, and may be exercised during such
term only in accordance with the Plan and the terms of this Option.
11. NO ADDITIONAL EMPLOYMENT RIGHTS. Optionee understands and agrees
that the vesting of Shares pursuant to the Vesting Schedule is earned only by
continuing as an Employee or Consultant at the will of the Company (not
through the act of being hired, being granted this Option or acquiring Shares
under this Agreement). Optionee further acknowledges and agrees that nothing
in this Agreement or the Plan shall confer upon Optionee any right with
respect to continuation as an Employee or Consultant with the Company, nor
shall it interfere in any way with his or her right or the Company's right to
terminate his or her employment or consulting relationship at any time, with
or without cause.
12. TAX CONSEQUENCES. Optionee acknowledges that he or she has read
the brief summary set forth below of certain federal tax consequences of
exercise of this Option and disposition of the Shares under the law in effect
as of the date of grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS
NECESSARILY INCOMPLETE AND DOES NOT ADDRESS STATE, LOCAL OR FOREIGN ISSUES,
AND THAT THE TAX LAWS AND REGULATIONS SUMMARIZED ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS
OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option is an
Incentive Stock Option, there will be no regular federal income tax liability
upon the exercise of the Option, although the
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excess, if any, of the fair market value of the Shares on the date of
exercise over the Exercise Price will be treated as an item of alternative
minimum taxable income for federal tax purposes and may subject Optionee to
the alternative minimum tax in the year of exercise.
(b) EXERCISE OF NONSTATUTORY STOCK OPTION. If this Option does
not qualify as an Incentive Stock Option, Optionee may incur regular federal
income tax liability upon the exercise of the Option. Optionee will be
treated as having received compensation income (taxable at ordinary income
tax rates) equal to the excess, if any, of the fair market value of the
Shares on the date of exercise over the Exercise Price. In addition, if
Optionee is an employee of the Company, the Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(c) DISPOSITION OF SHARES. If this Option is an Incentive Stock
Option and if Shares transferred pursuant to the Option are held for more
than one year after exercise and more than two years after the Date of Grant,
any gain realized on disposition of the Shares will be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an
Incentive Stock Option are disposed of before the end of either of such two
holding periods, then any gain realized on such disposition will be treated
as compensation income (taxable at ordinary income rates) to the extent of
the excess, if any, of the lesser of (i) the fair market value of the Shares
on the date of exercise, or (ii) the sales proceeds, over the Exercise Price.
If this Option is a Nonstatutory Stock Option, then gain realized on the
disposition of Shares will be treated as long-term or short-term capital gain
depending on whether or not the disposition occurs more than one year after
the exercise date. In the case of either an Incentive Stock Option or a
Nonstatutory Stock Option, the long-term capital gain will be taxed for
federal income tax and alternative minimum tax purposes as a maximum rate of
20% if the Shares are held more than one year after exercise.
(d) NOTICE OF DISQUALIFYING DISPOSITION. If the Option granted to
Optionee in this Agreement is an Incentive Stock Option, and if Optionee
sells or otherwise disposes of any of the Shares acquired pursuant to the
Incentive Stock Option on or before the later of (i) the date two years after
the Date of Grant, or (ii) the date one year after transfer of such Shares to
Optionee upon exercise of the Incentive Stock Option, Optionee shall notify
the Company in writing within thirty (30) days after the date of any such
disposition. Optionee agrees that Optionee may be subject to income tax
withholding by the Company on the compensation income recognized by Optionee
from the early disposition by payment in cash or out of the current earnings
paid to Optionee.
13. SIGNATURE. This Stock Option Agreement shall be deemed executed by
the Company and Optionee upon execution by such parties of the Notice of
Stock Option Grant attached to this Stock Option Agreement.
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EXHIBIT A
NOTICE OF EXERCISE
To: eToys Inc.
Attn: Stock Option Administrator
Subject: NOTICE OF INTENTION TO EXERCISE STOCK OPTION
This is official notice that the undersigned ("OPTIONEE") intends to
exercise Optionee's option to purchase __________ shares of eToys Inc. Common
Stock, under and pursuant to the Company's 1999 Stock Plan and the Stock
Option Agreement dated ___________, as follows:
Grant Number:
--------------------------------
Date of Purchase:
--------------------------------
Number of Shares:
--------------------------------
Purchase Price:
--------------------------------
Method of Payment
of Purchase Price:
--------------------------------
Social Security No.:
--------------------------------
The shares should be issued as follows:
Name:
-------------------------
Address:
-------------------------
Signed:
-------------------------
Date:
-------------------------
<PAGE>
eTOYS INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1999 Employee Stock
Purchase Plan of eToys Inc.
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase
Common Stock of the Company. It is the intention of the Company to have the
Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the
Code. The provisions of the Plan shall, accordingly, be construed so as to
extend and limit participation in a manner consistent with the requirements
of that section of the Code.
2. DEFINITIONS.
(a) "BOARD" means the Board of Directors of the Company.
(b) "CODE" means the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" means the Common Stock of the Company.
(d) "COMPANY" means eToys Inc., a Delaware corporation.
(e) "COMPENSATION" means all regular straight time gross earnings
and shall not include commissions or payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any
interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of (i) sick leave;
(ii) military leave; (iii) any other leave of absence approved by the
Administrator, provided that such leave is for a period of not more than
90 days, unless reemployment upon the expiration of such leave is guaranteed
by contract or statute, or unless provided otherwise pursuant to Company
policy adopted from time to time; or (iv) in the case of transfers between
locations of the Company or between the Company and its Designated Subsidiaries.
(g) "CONTRIBUTIONS" means all amounts credited to the account of a
participant pursuant to the Plan.
(h) "CORPORATE TRANSACTION" means a sale of all or substantially
all of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(i) "DESIGNATED SUBSIDIARIES" means the Subsidiaries which have
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan; provided however that the Board shall
only have the discretion to designate Subsidiaries if
<PAGE>
the issuance of options to such Subsidiary's Employees pursuant to the Plan
would not cause the Company to incur adverse accounting charges.
(j) "EMPLOYEE" means any person, including an Officer, who is
customarily employed for at least twenty (20) hours per week and more than
five (5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "OFFERING DATE" means the first business day of each Offering
Period of the Plan.
(m) "OFFERING PERIOD" means a period of twenty-four (24) months
commencing on May 1 and November 1 of each year, except for the first Offering
Period as set forth in Section 4(a).
(n) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(o) "PLAN" means this Employee Stock Purchase Plan.
(p) "PURCHASE DATE" means the last day of each Purchase Period of
the Plan.
(q) "PURCHASE PERIOD" means a period of six (6) months within an
Offering Period, except for the first Purchase Period as set forth in
Section 4(b).
(r) "PURCHASE PRICE" means with respect to a Purchase Period an
amount equal to 85% of the Fair Market Value (as defined in Section 7(b)
below) of a Share of Common Stock on the Offering Date or on the Purchase
Date, whichever is lower; provided, however, that in the event (i) of any
increase in the number of Shares available for issuance under the Plan
(including without limitation an automatic increase pursuant to Section 13(a)
below or as a result of a stockholder-approved amendment to the Plan), and
(ii) all or a portion of such additional Shares are to be issued with respect
to one or more Offering Periods that are underway at the time of such increase
("ADDITIONAL SHARES"), and (iii) the Fair Market Value of a Share of Common
Stock on the date of such increase (the "APPROVAL DATE FAIR MARKET VALUE") is
higher than the Fair Market Value on the Offering Date for any such Offering
Period, then in such instance the Purchase Price with respect to Additional
Shares shall be 85% of the Approval Date Fair Market Value or the Fair Market
Value of a Share of Common Stock on the Purchase Date, whichever is lower.
(s) "SHARE" means a share of Common Stock, as adjusted in accordance
with Section 19 of the Plan.
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(t) "SUBSIDIARY" means a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
3. ELIGIBILITY.
(a) Any person who is an Employee as of the Offering Date of a
given Offering Period shall be eligible to participate in such Offering
Period under the Plan, subject to the requirements of Section 5(a) and the
limitations imposed by Section 423(b) of the Code; provided however that
eligible Employees may not participate in more than one Offering Period at a
time.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after
the grant, such Employee (or any other person whose stock would be attributed
to such Employee pursuant to Section 424(d) of the Code) would own capital
stock of the Company and/or hold outstanding options to purchase stock
possessing five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or of any subsidiary of the
Company, or (ii) if such option would permit his or her rights to purchase
stock under all employee stock purchase plans (described in Section 423 of
the Code) of the Company and its Subsidiaries to accrue at a rate which
exceeds Twenty-Five Thousand Dollars ($25,000) of the Fair Market Value (as
defined in Section 7(b) below) of such stock (determined at the time such
option is granted) for each calendar year in which such option is outstanding
at any time.
4. OFFERING PERIODS AND PURCHASE PERIODS.
(a) OFFERING PERIODS. The Plan shall be implemented by a series
of Offering Periods of twenty-four (24) months' duration, with new Offering
Periods commencing on or about May 1 and November 1 of each year (or at such
other time or times as may be determined by the Board of Directors). The
first Offering Period shall commence on the beginning of the effective date
of the Registration Statement on Form S-1 for the initial public offering of
the Company's Common Stock (the "IPO DATE") and continue until April 20, 2001.
The Plan shall continue until terminated in accordance with Section 19 hereof.
The Board of Directors of the Company shall have the power to change the
duration and/or the frequency of Offering Periods with respect to future
offerings without stockholder approval if such change is announced at least
five (5) days prior to the scheduled beginning of the first Offering Period
to be affected.
(b) PURCHASE PERIODS. Each Offering Period shall consist of four
(4) consecutive purchase periods of six (6) months' duration. The last day
of each Purchase Period shall be the "PURCHASE DATE" for such Purchase Period.
A Purchase Period commencing on May 1 shall end on the next October 31. A
Purchase Period commencing on November 1 shall end on the next April 30. The
first Purchase Period shall commence on the IPO Date and shall end on
October 31, 1999. The Board of Directors of the Company shall have the power
to change the duration and/or frequency of Purchase Periods with respect to
future purchases without stockholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Purchase
Period to be affected.
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<PAGE>
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given Offering Period. The
subscription agreement shall set forth the percentage of the participant's
Compensation (subject to Section 6(a) below) to be paid as Contributions
pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the
last Purchase Period of the Offering Period to which the subscription
agreement is applicable, unless sooner terminated by the participant as
provided in Section 10.
6. METHOD OF PAYMENT OF CONTRIBUTIONS.
(a) A participant shall elect to have payroll deductions made on
each payday during the Offering Period in an amount not less than one percent
(1%) and not more than fifteen percent (15%) (or such greater percentage as
the Board may establish from time to time before an Offering Date, which
percentage shall not exceed twenty percent (20%)) of such participant's
Compensation on each payday during the Offering Period. All payroll deductions
made by a participant shall be credited to his or her account under the Plan.
A participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the
Plan as provided in Section 10, or, on one occasion only during the Offering
Period may increase and on one occasion only during the Offering Period may
decrease the rate of his or her Contributions with respect to the Offering
Period by completing and filing with the Company a new subscription agreement
authorizing a change in the payroll deduction rate. The change in rate shall
be effective as of the beginning of the next calendar month following the
date of filing of the new subscription agreement, if the agreement is filed
at least ten (10) business days prior to such date and, if not, as of the
beginning of the next succeeding calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased during any Offering Period scheduled to
end during the current calendar year to 0% at such time that the aggregate of
all payroll deductions accumulated with respect to such Offering Period and
any other Offering Period ending within the same calendar year equal $21,250.
Payroll deductions shall re-commence at the rate provided in such participant's
subscription agreement at the beginning of the first Offering Period which is
scheduled to end in the following calendar year, unless terminated by the
participant as provided in Section 10.
7. GRANT OF OPTION.
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase
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<PAGE>
Date a number of Shares of the Company's Common Stock determined by dividing
such Employee's Contributions accumulated prior to such Purchase Date and
retained in the participant's account as of the Purchase Date by the applicable
Purchase Price; provided however that the maximum number of Shares an
Employee may purchase during each Purchase Period shall be 3,000 Shares
(subject to any adjustment pursuant to Section 19 below), and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 13.
(b) The fair market value of the Company's Common Stock on a given
date (the "FAIR MARKET VALUE") shall be determined by the Board in its
discretion based on the closing sales price of the Common Stock for such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported by the National Association
of Securities Dealers Automated Quotation (Nasdaq) National Market or, if
such price is not reported, the mean of the bid and asked prices per share of
the Common Stock as reported by Nasdaq or, in the event the Common Stock is
listed on a stock exchange, the Fair Market Value per share shall be the
closing sales price on such exchange on such date (or, in the event that the
Common Stock is not traded on such date, on the immediately preceding trading
date), as reported in THE WALL STREET JOURNAL. For purposes of the Offering
Date under the first Offering Period under the Plan, the Fair Market Value of
a share of the Common Stock of the Company shall be the Price to Public as
set forth in the final prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424 under the Securities Act of 1933, as amended.
8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan
as provided in Section 10, his or her option for the purchase of Shares will
be exercised automatically on each Purchase Date of an Offering Period, and
the maximum number of full Shares subject to the option will be purchased at
the applicable Purchase Price with the accumulated Contributions in his or
her account. No fractional Shares shall be issued. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.
9. DELIVERY. As promptly as practicable after each Purchase Date of
each Offering Period, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the Shares
purchased upon exercise of his or her option. Any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full Share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 below. Any other amounts left over in
a participant's account after a Purchase Date shall be returned to the
participant.
10. VOLUNTARY WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior
to each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to
him or her promptly after receipt of his or her notice of withdrawal and
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<PAGE>
his or her option for the current period will be automatically terminated,
and no further Contributions for the purchase of Shares will be made during
the Offering Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her
account will be returned to him or her or, in the case of his or her death,
to the person or persons entitled thereto under Section 14, and his or her
option will be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status
as an Employee of the Company for at least twenty (20) hours per week during
the Offering Period in which the employee is a participant, he or she will be
deemed to have elected to withdraw from the Plan and the Contributions credited
to his or her account will be returned to him or her and his or her option
terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or
in any similar plan which may hereafter be adopted by the Company.
11. AUTOMATIC WITHDRAWAL. If the Fair Market Value of the Shares on
any Purchase Date of an Offering Period is less than the Fair Market Value of
the Shares on the Offering Date for such Offering Period, then every
participant shall automatically (i) be withdrawn from such Offering Period at
the close of such Purchase Date and after the acquisition of Shares for such
Purchase Period, and (ii) be enrolled in the Offering Period commencing on
the first business day subsequent to such Purchase Period. Participants
shall automatically be withdrawn as of April 30, 1999 from the Offering
Period beginning on the IPO Date and re-enrolled in the Offering Period
beginning on May 1, 1999 if the Fair Market Value of the Shares on the IPO
Date is greater than the Fair Market Value of the Shares on April 30, 1999,
unless a participant notifies the Administrator prior to April 30, 1999 that
he or she does not wish to be withdrawn and re-enrolled.
12. INTEREST. No interest shall accrue on the Contributions of a
participant in the Plan.
13. STOCK.
(a) Subject to adjustment as provided in Section 19, the maximum
number of Shares which shall be made available for sale under the Plan shall
be 300,000 Shares, plus an annual increase on the first day of each of the
Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to
the lesser of (i) 180,000 Shares, (ii) one-half of one percent (0.5%) of the
Shares outstanding on the last day of the immediately preceding fiscal year,
or (iii) such lesser number of Shares as is determined by the Board. If the
Board determines that, on a given Purchase Date, the number of shares with
respect to which options are to be exercised may exceed (i) the number of
shares of Common Stock that were available for sale under the Plan on the
Offering Date of the applicable Offering Period, or (ii) the number of shares
available for sale under the Plan on such Purchase Date, the Board may in its
sole discretion provide (x) that the
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<PAGE>
Company shall make a pro rata allocation of the Shares of Common Stock
available for purchase on such Offering Date or Purchase Date, as applicable,
in as uniform a manner as shall be practicable and as it shall determine in
its sole discretion to be equitable among all participants exercising options
to purchase Common Stock on such Purchase Date, and continue all Offering
Periods then in effect, or (y) that the Company shall make a pro rata
allocation of the shares available for purchase on such Offering Date or
Purchase Date, as applicable, in as uniform a manner as shall be practicable
and as it shall determine in its sole discretion to be equitable among all
participants exercising options to purchase Common Stock on such Purchase
Date, and terminate any or all Offering Periods then in effect pursuant to
Section 20 below. The Company may make pro rata allocation of the Shares
available on the Offering Date of any applicable Offering Period pursuant to
the preceding sentence, notwithstanding any authorization of additional
Shares for issuance under the Plan by the Company's stockholders subsequent
to such Offering Date.
(b) The participant shall have no interest or voting right in
Shares covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant
and his or her spouse.
14. ADMINISTRATION. The Board, or a committee named by the Board,
shall supervise and administer the Plan and shall have full power to adopt,
amend and rescind any rules deemed desirable and appropriate for the
administration of the Plan and not inconsistent with the Plan, to construe
and interpret the Plan, and to make all other determinations necessary or
advisable for the administration of the Plan.
15. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary
who is to receive any Shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to the end
of a Purchase Period but prior to delivery to him or her of such Shares and
cash. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to the Purchase Date
of an Offering Period. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant (and his or her spouse, if any) at any time by written notice.
In the event of the death of a participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such Shares and/or cash to the
executor or administrator of the estate of the participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such Shares and/or cash to the
spouse or to any one or more dependents or relatives of the participant, or
if no spouse, dependent or relative is known to the Company, then to such
other person as the Company may designate.
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<PAGE>
16. TRANSFERABILITY. Neither Contributions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 15) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 10.
17. USE OF FUNDS. All Contributions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such Contributions.
18. REPORTS. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to
participating Employees at least annually, which statements will set forth
the amounts of Contributions, the per Share Purchase Price, the number of
Shares purchased and the remaining cash balance, if any.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the
stockholders of the Company, the number of Shares covered by each option
under the Plan which has not yet been exercised and the number of Shares
which have been authorized for issuance under the Plan but have not yet been
placed under option (collectively, the "RESERVES"), as well as the maximum
number of shares of Common Stock which may be purchased by a participant in a
Purchase Period, the number of shares of Common Stock set forth in Section
13(a)(i) above, and the price per Share of Common Stock covered by each
option under the Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock (including any such
change in the number of Shares of Common Stock effected in connection with a
change in domicile of the Company), or any other increase or decrease in the
number of Shares effected without receipt of consideration by the Company;
provided however that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number or
price of Shares subject to an option.
(b) CORPORATE TRANSACTIONS. In the event of a dissolution or
liquidation of the Company, any Purchase Period and Offering Period then in
progress will terminate immediately prior to the consummation of such action,
unless otherwise provided by the Board. In the event of a Corporate Transaction,
each option outstanding under the Plan shall be assumed or an equivalent option
shall be substituted by the successor corporation or a parent or Subsidiary of
such successor corporation. In the event that the successor corporation refuses
to assume or substitute for outstanding options, each Purchase Period and
Offering Period then in progress shall be shortened and a new Purchase Date
shall be set (the "NEW PURCHASE DATE"), as of which
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<PAGE>
date any Purchase Period and Offering Period then in progress will terminate.
The New Purchase Date shall be on or before the date of consummation of the
transaction and the Board shall notify each participant in writing, at least
ten (10) days prior to the New Purchase Date, that the Purchase Date for his
or her option has been changed to the New Purchase Date and that his or her
option will be exercised automatically on the New Purchase Date, unless prior
to such date he or she has withdrawn from the Offering Period as provided in
Section 10. For purposes of this Section 19, an option granted under the
Plan shall be deemed to be assumed, without limitation, if, at the time of
issuance of the stock or other consideration upon a Corporate Transaction,
each holder of an option under the Plan would be entitled to receive upon
exercise of the option the same number and kind of shares of stock or the
same amount of property, cash or securities as such holder would have been
entitled to receive upon the occurrence of the transaction if the holder had
been, immediately prior to the transaction, the holder of the number of
Shares of Common Stock covered by the option at such time (after giving
effect to any adjustments in the number of Shares covered by the option as
provided for in this Section 19); provided however that if the consideration
received in the transaction is not solely common stock of the successor
corporation or its parent (as defined in Section 424(e) of the Code), the
Board may, with the consent of the successor corporation, provide for the
consideration to be received upon exercise of the option to be solely common
stock of the successor corporation or its parent equal in Fair Market Value
to the per Share consideration received by holders of Common Stock in the
transaction.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the
price per Share of Common Stock covered by each outstanding option, in the
event that the Company effects one or more reorganizations,
recapitalizations, rights offerings or other increases or reductions of
Shares of its outstanding Common Stock, and in the event of the Company's
being consolidated with or merged into any other corporation.
20. AMENDMENT OR TERMINATION.
(a) The Board may at any time and for any reason terminate or
amend the Plan. Except as provided in Section 19, no such termination of the
Plan may affect options previously granted, provided that the Plan or an
Offering Period may be terminated by the Board on a Purchase Date or by the
Board's setting a new Purchase Date with respect to an Offering Period and
Purchase Period then in progress if the Board determines that termination of
the Plan and/or the Offering Period is in the best interests of the Company
and the stockholders or if continuation of the Plan and/or the Offering
Period would cause the Company to incur adverse accounting charges as a
result of a change after the effective date of the Plan in the generally
accepted accounting rules applicable to the Plan. Except as provided in
Section 19 and in this Section 20, no amendment to the Plan shall make any
change in any option previously granted which adversely affects the rights of
any participant. In addition, to the extent necessary to comply with Rule
16b-3 under the Exchange Act, or under Section 423 of the Code (or any
successor rule or provision or any applicable law or regulation), the Company
shall obtain stockholder approval in such a manner and to such a degree as so
required.
-9-
<PAGE>
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the
Board (or its committee) shall be entitled to change the Offering Periods and
Purchase Periods, limit the frequency and/or number of changes in the amount
withheld during an Offering Period, establish the exchange ratio applicable
to amounts withheld in a currency other than U.S. dollars, permit payroll
withholding in excess of the amount designated by a participant in order to
adjust for delays or mistakes in the Company's processing of properly
completed withholding elections, establish reasonable waiting and adjustment
periods and/or accounting and crediting procedures to ensure that amounts
applied toward the purchase of Common Stock for each participant properly
correspond with amounts withheld from the participant's Compensation, and
establish such other limitations or procedures as the Board (or its
committee) determines in its sole discretion advisable which are consistent
with the Plan.
21. NOTICES. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the
location, or by the person, designated by the Company for the receipt thereof.
22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and
regulations promulgated thereunder, applicable state securities laws and the
requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
of the aforementioned applicable provisions of law.
23. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon
the IPO Date. It shall continue in effect for a term of twenty (20) years
unless sooner terminated under Section 20.
24. ADDITIONAL RESTRICTIONS OF RULE 16b-3. The terms and conditions of
options granted hereunder to, and the purchase of Shares by, persons subject
to Section 16 of the Exchange Act shall comply with the applicable provisions
of Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the Shares issued upon exercise thereof shall be subject to,
such additional conditions and restrictions as may be required by Rule 16b-3
to qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
-10-
<PAGE>
eTOYS INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the
eToys Inc. 1999 Employee Stock Purchase Plan (the "PLAN") for the Offering
Period ______________, ____ to _______________, ____, and subscribe to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this
purchase. I understand that this amount must not be less than 1% and not more
than 15% of my Compensation during the Offering Period. (Please note that no
fractional percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement.
I understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into
such account. I understand that all payments made by me shall be accumulated
for the purchase of shares of Common Stock at the applicable purchase price
determined in accordance with the Plan. I further understand that, except as
otherwise set forth in the Plan, shares will be purchased for me
automatically on the Purchase Date of each Offering Period unless I otherwise
withdraw from the Plan by giving written notice to the Company for such
purpose.
4. I understand that I may discontinue at any time prior to the
Purchase Date my participation in the Plan as provided in Section 10 of the
Plan. I also understand that I can increase or decrease the rate of my
Contributions on one occasion only with respect to any increase and one
occasion only with respect to any decrease during any Offering Period by
completing and filing a new Subscription Agreement with such increase or
decrease taking effect as of the beginning of the calendar month following
the date of filing of the new Subscription Agreement, if filed at least ten
(10) business days prior to the beginning of such month. Further, I may
change the rate of deductions for future Offering Periods by filing a new
Subscription Agreement, and any such change will be effective as of the
beginning of the next Offering Period. In addition, I acknowledge that,
unless I discontinue my participation in the Plan as provided in Section 10
of the Plan, my election will continue to be effective for each successive
Offering Period.
<PAGE>
5. I have received a copy of the Company's most recent description of
the Plan and a copy of the complete "eToys Inc. 1999 Employee Stock Purchase
Plan." I understand that my participation in the Plan is in all respects
subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the
name(s) of (name of employee or employee and spouse only):
--------------------------------------
--------------------------------------
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) --------------------------------------
(First) (Middle) (Last)
- -------------------------------- --------------------------------------
(Relationship) (Address)
--------------------------------------
8. I understand that if I dispose of any shares received by me
pursuant to the Plan within 2 years after the Offering Date (the first day of
the Offering Period during which I purchased such shares) or within 1 year
after the Purchase Date, I will be treated for federal income tax purposes as
having received ordinary compensation income at the time of such disposition
in an amount equal to the excess of the fair market value of the shares on
the Purchase Date over the price which I paid for the shares, regardless of
whether I disposed of the shares at a price less than their fair market value
at the Purchase Date. The remainder of the gain or loss, if any, recognized
on such disposition will be treated as capital gain or loss.
I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER THE
DATE OF ANY SUCH DISPOSITION, AND I WILL MAKE ADEQUATE PROVISION FOR FEDERAL,
STATE OR OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON THE
DISPOSITION OF THE COMMON STOCK. The Company may, but will not be obligated
to, withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available
to the Company any tax deductions or benefits attributable to the sale or
early disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the
-2-
<PAGE>
shares on the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I UNDERSTAND THAT THIS TAX SUMMARY IS ONLY A SUMMARY AND IS SUBJECT TO
CHANGE. I further understand that I should consult a tax advisor concerning
the tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Subscription Agreement is dependent upon my eligibility
to participate in the Plan.
SIGNATURE:
------------------------------
SOCIAL SECURITY #:
----------------------
DATE:
-----------------------------------
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
- ----------------------------------------
(Signature)
- ----------------------------------------
(Print name)
-3-
<PAGE>
eTOYS INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, __________________________, hereby elect to withdraw my participation in
the eToys Inc. 1999 Employee Stock Purchase Plan (the "PLAN") for the Offering
Period that began on _________ ___, _____. This withdrawal covers all
Contributions credited to my account and is effective on the date designated
below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:
----------------------------- -----------------------------------
Signature of Employee
-----------------------------------
Social Security Number
<PAGE>
eTOYS INC.
1999 DIRECTORS' STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Directors' Stock Option Plan
are to attract and retain the best available personnel for service as Directors
of the Company, to provide additional incentive to the Outside Directors of the
Company to serve as Directors, and to encourage their continued service on the
Board.
All options granted hereunder shall be nonstatutory stock options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" means the Board of Directors of the Company.
(b) "CHANGE OF CONTROL" means a sale of all or substantially all
of the Company's assets, or any merger or consolidation of the Company with
or into another corporation other than a merger or consolidation in which the
holders of more than 50% of the shares of capital stock of the Company
outstanding immediately prior to such transaction continue to hold (either by
the voting securities remaining outstanding or by their being converted into
voting securities of the surviving entity) more than 50% of the total voting
power represented by the voting securities of the Company, or such surviving
entity, outstanding immediately after such transaction.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMON STOCK" means the Common Stock of the Company.
(e) "COMPANY" means eToys Inc., a Delaware corporation.
(f) "CONTINUOUS STATUS AS A DIRECTOR" means the absence of any
interruption or termination of service as a Director.
(g) "CORPORATE TRANSACTION" means a dissolution or liquidation of the
Company, a sale of all or substantially all of the Company's assets, or a
merger, consolidation or other capital reorganization of the Company with or
into another corporation.
(h) "DIRECTOR" means a member of the Board.
(i) "EMPLOYEE" means any person, including any officer or Director,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
<PAGE>
(k) "OPTION" means a stock option granted pursuant to the Plan. All
options shall be nonstatutory stock options (i.e., options that are not intended
to qualify as incentive stock options under Section 422 of the Code).
(l) "OPTIONED STOCK" means the Common Stock subject to an Option.
(m) "OPTIONEE" means an Outside Director who receives an Option.
(n) "OUTSIDE DIRECTOR" means a Director who is not an Employee.
(o) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(p) "PLAN" means this 1999 Directors' Stock Option Plan.
(q) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(r) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 200,000 Shares of Common Stock (the "POOL"). The Shares may
be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan has been terminated, become available for future grant
under the Plan. In addition, any Shares of Common Stock that are retained by
the Company upon exercise of an Option in order to satisfy the exercise price
for such Option, or any withholding taxes due with respect to such exercise,
shall be treated as not issued and shall continue to be available under the
Plan. If Shares that were acquired upon exercise of an Option are subsequently
repurchased by the Company, such Shares shall not in any event be returned to
the Plan and shall not become available for future grant under the Plan.
4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN.
(a) ADMINISTRATOR. Except as otherwise required herein, the Plan
shall be administered by the Board.
(b) PROCEDURE FOR GRANTS. All grants of Options hereunder shall be
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
<PAGE>
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director who becomes an Outside Director
after the effective date of this Plan shall be automatically granted an
Option to purchase 20,000 Shares (the "FIRST OPTION") on the date on which
such person first becomes an Outside Director, whether through election by
the stockholders of the Company or appointment by the Board to fill a vacancy.
(iii) Each Outside Director shall thereafter be automatically
granted an Option to purchase 5,000 Shares (a "SUBSEQUENT OPTION") on the
date of each Annual Meeting of the Company's stockholders immediately
following which such Outside Director is serving on the Board, provided that,
on such date, he or she shall have served on the Board for at least six (6)
months prior to the date of such Annual Meeting.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, in the event that a grant would cause the number of Shares
subject to outstanding Options plus the number of Shares previously purchased
upon exercise of Options to exceed the Pool, then each such automatic grant
shall be for that number of Shares determined by dividing the total number of
Shares remaining available for grant by the number of Outside Directors
receiving an Option on the automatic grant date. Any further grants shall
then be deferred until such time, if any, as additional Shares become
available for grant under the Plan through action of the stockholders to
increase the number of Shares which may be issued under the Plan or through
cancellation or expiration of Options previously granted hereunder.
(v) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any grant of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 17 hereof shall
be conditioned upon obtaining such stockholder approval of the Plan in
accordance with Section 17 hereof.
(vi) The terms of each First Option granted hereunder shall be as
follows:
(1) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 below;
(2) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the First Option, determined in
accordance with Section 8 hereof; and
(3) the First Option shall be fully vested and exercisable
in its entirety immediately upon grant.
(vii) The terms of each Subsequent Option granted hereunder
shall be as follows:
<PAGE>
(1) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Section 9 below;
(2) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the Subsequent Option, determined
in accordance with Section 8 hereof; and
(3) the Subsequent Option shall be fully vested and
exercisable in its entirety immediately upon grant.
(c) POWERS OF THE BOARD. Subject to the provisions and
restrictions of the Plan, the Board shall have the authority, in its
discretion: (i) to determine, upon review of relevant information and in
accordance with Section 8(b) of the Plan, the fair market value of the Common
Stock; (ii) to determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with Section
8 of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and
rescind rules and regulations relating to the Plan; (v) to authorize any
person to execute on behalf of the Company any instrument required to
effectuate the grant of an Option previously granted hereunder; and (vi) to
make all other determinations deemed necessary or advisable for the
administration of the Plan.
(d) EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) SUSPENSION OR TERMINATION OF OPTION. If the Chief Executive
Officer or his or her designee reasonably believes that an Optionee has
committed an act of misconduct, such officer may suspend the Optionee's right
to exercise any option pending a determination by the Board (excluding the
Outside Director accused of such misconduct). If the Board (excluding the
Outside Director accused of such misconduct) determines an Optionee has
committed an act of embezzlement, fraud, dishonesty, nonpayment of an
obligation owed to the Company, breach of fiduciary duty or deliberate
disregard of the Company rules resulting in loss, damage or injury to the
Company, or if an Optionee makes an unauthorized disclosure of any Company
trade secret or confidential information, engages in any conduct constituting
unfair competition, induces any Company customer to breach a contract with
the Company or induces any principal for whom the Company acts as agent to
terminate such agency relationship, neither the Optionee nor his or her
estate shall be entitled to exercise any Option whatsoever. In making such
determination, the Board of Directors (excluding the Outside Director accused
of such misconduct) shall act fairly and shall give the Optionee an
opportunity to appear and present evidence on Optionee's behalf at a hearing
before the Board or a committee of the Board.
5. ELIGIBILITY. Options may be granted only to Outside Directors.
All Options shall be automatically granted in accordance with the terms set
forth in Section 4(b) above. An Outside Director who has been granted an
Option may, if he or she is otherwise eligible, be granted an additional
Option or Options in accordance with such provisions.
<PAGE>
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective on the
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating to the Company's initial public offering of securities. It
shall continue in effect for a term of ten (10) years unless sooner terminated
under Section 13 of the Plan.
7. TERM OF OPTIONS. The term of each Option shall be ten (10) years from
the date of grant thereof unless an Option terminates sooner pursuant to
Section 9 below.
8. EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per Share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option.
(b) FAIR MARKET VALUE. The fair market value shall be determined by
the Board; provided however that in the event the Common Stock is traded on the
Nasdaq National Market or listed on a stock exchange, the fair market value per
Share shall be the closing sales price on such system or exchange on the date of
grant of the Option (or, in the event that the Common Stock is not traded on
such date, on the immediately preceding trading date), as reported in THE WALL
STREET JOURNAL, or if there is a public market for the Common Stock but the
Common Stock is not traded on the Nasdaq National Market or listed on a stock
exchange, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the over-the-counter market on the date of grant,
as reported in THE WALL STREET JOURNAL (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") System).
(c) FORM OF CONSIDERATION. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which the
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times as are set forth in
Section 4(b) above; provided however that no Options shall be exercisable prior
to stockholder approval of the Plan in accordance with Section 17 below has been
obtained.
<PAGE>
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms
of the Option by the person entitled to exercise the Option and full payment
for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may consist of any consideration and
method of payment allowable under Section 8(c) of the Plan. Until the
issuance (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. A share certificate for
the number of Shares so acquired shall be issued to the Optionee as soon as
practicable after exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes
of the Plan and for sale under the Option, by the number of Shares as to
which the Option is exercised.
(b) TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. If an Outside
Director ceases to serve as a Director, he or she may, but only within ninety
(90) days after the date he or she ceases to be a Director of the Company,
exercise his or her Option to the extent that he or she was entitled to
exercise it at the date of such termination. Notwithstanding the foregoing,
in no event may the Option be exercised after its term set forth in Section 7
has expired. To the extent that such Outside Director was not entitled to
exercise an Option at the date of such termination, or does not exercise such
Option (to the extent he or she was entitled to exercise) within the time
specified above, the Option shall terminate and the Shares underlying the
unexercised portion of the Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 9(b) above,
in the event a Director is unable to continue his or her service as a
Director with the Company as a result of his or her total and permanent
disability (as defined in Section 22(e)(3) of the Code), he or she may, but
only within twelve (12) months from the date of such termination, exercise
his or her Option to the extent he or she was entitled to exercise it at the
date of such termination. Notwithstanding the foregoing, in no event may the
Option be exercised after its term set forth in Section 7 has expired. To
the extent that he or she was not entitled to exercise the Option at the date
of termination, or if he or she does not exercise such Option (to the extent
he or she was entitled to exercise) within the time specified above, the
Option shall terminate and the Shares underlying the unexercised portion of
the Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
(i) (A) During the term of the Option who is, at the time of
his or her death, a Director of the Company and who shall have been in
Continuous Status as a Director since the date of grant of the Option, or (B)
three (3) months after the termination of Continuous Status as a Director,
the Option may be exercised, at any time within twelve (12) months
<PAGE>
following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only
to the extent of the right to exercise that had accrued at the date of death
or the date of termination, as applicable. Notwithstanding the foregoing, in
no event may the Option be exercised after its term set forth in Section 7
has expired. To the extent that an Optionee was not entitled to exercise the
Option at the date of death or termination or if he or she does not exercise
such Option (to the extent he or she was entitled to exercise) within the
time specified above, the Option shall terminate and the Shares underlying
the unexercised portion of the Option shall revert to the Plan.
10. NONTRANSFERABILITY OF OPTIONS. The Option may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent or distribution or pursuant to a
qualified domestic relations order (as defined by the Code or the rules
thereunder). The designation of a beneficiary by an Optionee does not
constitute a transfer. An Option may be exercised during the lifetime of an
Optionee only by the Optionee or a transferee permitted by this Section.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, the number of Shares of Common Stock set forth in
Sections 4(b)(ii) and (iii) above, and the number of Shares of Common Stock
which have been authorized for issuance under the Plan but as to which no
Options have yet been granted or which have been returned to the Plan upon
cancellation or expiration of an Option, as well as the price per Share of
Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock
(including any such change in the number of Shares of Common Stock effected
in connection with a change in domicile of the Company) or any other increase
or decrease in the number of issued Shares of Common Stock effected without
receipt of consideration by the Company; provided however that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock
subject to an Option.
(b) CORPORATE TRANSACTIONS; CHANGE OF CONTROL. In the event of a
Corporate Transaction, each outstanding Option shall be assumed or an
equivalent option shall be substituted by the successor corporation or a
Parent or Subsidiary of such successor corporation, unless the successor
corporation does not agree to assume the outstanding Options or to substitute
equivalent options, in which case the Options shall terminate upon the
consummation of the transaction.
<PAGE>
For purposes of this Section 11(b), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or
other consideration upon such Corporate Transaction or Change of Control,
each Optionee would be entitled to receive upon exercise of an Option the
same number and kind of shares of stock or the same amount of property, cash
or securities as the Optionee would have been entitled to receive upon the
occurrence of such transaction if the Optionee had been, immediately prior to
such transaction, the holder of the number of Shares of Common Stock covered
by the Option at such time (after giving effect to any adjustments in the
number of Shares covered by the Option as provided for in this Section 11);
provided however that if such consideration received in the transaction was
not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon exercise of the Option to be solely
common stock of the successor corporation or its Parent equal to the Fair
Market Value of the per Share consideration received by holders of Common
Stock in the transaction.
(c) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without
receipt of consideration by the Company, the Administrator may, in its
discretion, appropriately adjust the price per Share of Common Stock covered
by each outstanding Option to reflect the effect of such distribution.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date determined in accordance with Section 4(b)
hereof. Notice of the determination shall be given to each Outside Director
to whom an Option is so granted within a reasonable time after the date of
such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule
16b-3 under the Exchange Act (or any other applicable law or regulation), the
Company shall obtain approval of the stockholders of the Company to Plan
amendments to the extent and in the manner required by such law or regulation.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan that would impair the rights of any Optionee shall
not affect Options already granted to such Optionee and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the
Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Notwithstanding any other
provision of the Plan or any agreement entered into by the Company pursuant
to the Plan, the Company shall not be obligated, and shall have no liability
for failure, to issue or deliver any Shares under the Plan unless such
issuance or delivery would comply with the legal requirements relating to the
<PAGE>
administration of stock option plans under applicable U.S. state corporate
laws, U.S. federal and applicable state securities laws, the Code, any stock
exchange or Nasdaq rules or regulations to which the Company may be subject
and the applicable laws of any other country or jurisdiction where Options
are granted under the Plan, as such laws, rules, regulations and requirements
shall be in place from time to time (the "APPLICABLE LAWS"). Such compliance
shall be determined by the Company in consultation with its legal counsel.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required by law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
16. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. STOCKHOLDER APPROVAL. If required by the Applicable Laws,
continuance of the Plan shall be subject to approval by the stockholders of
the Company. Such stockholder approval shall be obtained in the manner and to
the degree required under the Applicable Laws.
<PAGE>
ETOYS INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
MARCH 24, 1999
<PAGE>
ETOYS INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
This Series C Preferred Stock Purchase Agreement (the "AGREEMENT") is
made as of the 24th day of March, 1999, by and between eToys Inc., a Delaware
corporation (the "COMPANY") and the investors listed on EXHIBIT A attached
hereto (each a "PURCHASER" and together the "PURCHASERS").
The parties hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED STOCK.
1.1 SALE AND ISSUANCE OF SERIES C PREFERRED STOCK.
(a) The Company shall adopt and file with the Secretary of
State of the State of Delaware on or before the Closing (as defined below)
the Third Amended and Restated Certificate of Incorporation in the form
attached hereto as EXHIBIT B (the "RESTATED CERTIFICATE").
(b) Subject to the terms and conditions of this Agreement,
each Purchaser agrees to purchase at the Closing and the Company agrees to
sell and issue to each Purchaser at the Closing that number of shares of
Series C Preferred Stock set forth opposite each such Purchaser's name on
EXHIBIT A attached hereto at a purchase price of $30.00 per share. The
shares of Series C Preferred Stock issued to the Purchaser pursuant to this
Agreement shall be hereinafter referred to as the "STOCK."
1.2 CLOSING; DELIVERY.
(a) The purchase and sale of the Stock shall take place at
the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park,
California, at 12:00 p.m., on March 24 1999, or at such other time and place
as the Company and the Purchasers purchasing a majority of the shares of
Stock mutually agree upon, orally or in writing (which time and place are
designated as the "CLOSING").
(b) At the Closing, the Company shall deliver to each
Purchaser a certificate representing the Stock being purchased thereby
against payment of the purchase price therefor by check payable to the
Company, wire transfer to the Company's bank account, or any combination
thereof. In the event that payment by a Purchaser is made, in whole or in
part, by cancellation of indebtedness, then such Investor shall surrender to
the Company for cancellation at the Closing or shall executed an instrument
of cancellation in form and substance acceptable to the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Purchaser that, except as set forth on a
Schedule of Exceptions delivered separately to the Purchasers, which
exceptions shall be deemed to be representations and warranties as if made
hereunder:
<PAGE>
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure so to qualify would have a material adverse effect on its business or
properties.
2.2 CAPITALIZATION. The authorized capital of the Company
consists, or will consist, immediately prior to the Closing, of:
(a) Nineteen Million Five Hundred Ninety-Three Thousand
Eighty-Nine (19,593,089) shares of Preferred Stock, Seven Million Thirty-Nine
Thousand Seven Hundred Seventy-Four (7,039,774) shares of which have been
designated Series A Preferred Stock, of which Seven Million Seven Thousand
Four Hundred Ninety-Five (7,007,495) shares are issued and outstanding;
Eleven Million Eight Hundred Eighty-Six Thousand Six Hundred Forty-Nine
(11,886,649) shares of Series B Preferred Stock, all of which are issued and
outstanding immediately prior to the Closing; and Six Hundred Sixty-Six
Thousand Six Hundred Sixty-Six (666,666) shares of Series C Preferred Stock,
none of which are issued and outstanding immediately prior to the Closing.
The rights, privileges and preferences of the Preferred Stock are as stated
in the Restated Certificate.
(b) Fifty Million (50,000,000) shares of Common Stock, Eleven
Million Five Hundred Eighty-Two Thousand Nine Hundred Seventy-Seven
(11,582,977) shares of which are issued and outstanding as of February 28,
1999. All of the outstanding shares of Common Stock have been duly
authorized, fully paid and are nonassessable and issued in compliance with
all applicable federal and state securities laws. The Company has reserved
Six Hundred Sixty-Six Thousand Six Hundred Sixty-Six (666,666) shares of
Common Stock for issuance upon conversion of the Series C Preferred Stock.
(c) The Company has reserved Five Million Eight Hundred
Thousand (5,800,000) shares of Common Stock for issuance to officers,
directors, employees and consultants of the Company pursuant to its 1997
Stock Option Plan duly adopted by the Board of Directors and approved by the
Company stockholders (the "STOCK PLAN").
(d) Except for currently outstanding options issued pursuant
to the Stock Plan, warrants to purchase 32,279 shares of Series A Preferred
Stock, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal or similar
rights) or agreements, orally or in writing, for the purchase or acquisition
from the Company of any shares of its capital stock. The Company is not a
party or subject to any agreement or understanding, and, to the best of the
Company's knowledge, there is no agreement or understanding between any
persons and/or entities, which effects or relates to the voting or giving of
written consents with respect to any security or by a director of the Company.
2.3 SUBSIDIARIES. The Company does not currently own or control,
directly or indirectly, any interest in any other corporation, association,
or other business entity. The Company is not a participant in any joint
venture, partnership or similar arrangement.
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<PAGE>
2.4 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the Second Amended
and Restated Investors' Rights Agreement, in the form attached hereto as
EXHIBIT C (the "INVESTORS' RIGHTS AGREEMENT"), the Second Amended and
Restated Right of First Refusal and Co-Sale Agreement in the form attached
hereto as EXHIBIT D (the "CO-SALE AGREEMENT"), and the Second Amended and
Restated Voting Agreement in the form attached hereto as EXHIBIT E (the
"VOTING AGREEMENT") and collectively with this Agreement, the Investors'
Rights Agreement and the Co-Sale Agreement (the "AGREEMENTS"), the
performance of all obligations of the Company hereunder and thereunder and
the authorization, issuance and delivery of the Stock and the Common Stock
issuable upon conversion of the Stock (together, the "SECURITIES") has been
taken or will be taken prior to the Closing, and the Agreements, when
executed and delivered by the Company, shall constitute valid and legally
binding obligations of the Company, enforceable against the Company in
accordance with their terms except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, and other laws
of general application affecting enforcement of creditors' rights generally,
as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, or (ii) to the extent the
indemnification provisions contained in the Investors' Rights Agreement may
be limited by applicable federal or state securities laws.
2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued
to the Purchasers hereunder, when issued, sold and delivered in accordance
with the terms hereof for the consideration expressed herein, will be duly
and validly issued, fully paid and nonassessable and free of restrictions on
transfer other than restrictions on transfer under this Agreement, the
Investors' Rights Agreement and applicable state and federal securities laws.
Based in part upon the representations of the Purchasers in this Agreement
and subject to the provisions of Section 2.7 below, the Stock will be issued
in compliance with all applicable federal and state securities laws. The
Common Stock issuable upon conversion of the Stock has been duly and validly
reserved for issuance, and upon issuance in accordance with the terms of the
Restated Certificate, shall be duly and validly issued, fully paid and
nonassessable and free of restrictions on transfer other than restrictions on
transfer under this Agreement, the Investors' Rights Agreement and applicable
federal and state securities laws and will be issued in compliance with all
applicable federal and state securities laws.
2.6 OFFERING. Subject in part to the truth and accuracy of each
Purchaser's representations set forth in Section 3 of the Agreement, the
offer, sale and issuance of the Series C Preferred Stock as contemplated by
this Agreement are exempt from the registration requirements of any
applicable stock and federal securities laws, and neither the Company nor any
authorized agent acting on its behalf will take any action hereafter that
would cause the loss of such exemption.
2.7 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part
of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for filings pursuant to
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<PAGE>
Section 25102(f) of the California Corporate Securities Law of 1968, as
amended, and the rules thereunder, other applicable state securities laws and
Regulation D of the Securities Act of 1933, as amended (the "SECURITIES ACT").
2.8 LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the Company's knowledge, currently threatened
against the Company or any of its subsidiaries that questions the validity of
the Agreements or the right of the Company to enter into them, or to
consummate the transactions contemplated hereby or thereby, or that might
result, either individually or in the aggregate, in any material adverse
changes in the assets, condition or affairs of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor
is the Company aware that there is any basis for the foregoing. Neither the
Company nor any of its subsidiaries is a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company or any of its subsidiaries currently pending or
which the Company or any of its subsidiaries intends to initiate.
2.9 PATENTS AND TRADEMARKS. To its knowledge, the Company owns or
possesses sufficient legal rights to all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, licenses, information and proprietary
rights and processes and, to its knowledge, all patent rights necessary for
its business without any conflict with, or infringement of, the rights of
others. There are no outstanding options, licenses or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to the patents,
trademarks, servicemarks, tradenames, copyrights, trade secrets, licenses,
information, proprietary rights and processes of any other person or entity.
The Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed to be conducted in the
Business Plan (as defined in Section 2.12), would violate any of the patents,
trademarks, service marks, tradenames, copyrights, trade secrets or other
proprietary rights or processes of any other person or entity. The Company
is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such employee's
best efforts to promote the interest of the Company or that would conflict
with the Company's business as proposed to be conducted in the Business Plan.
Neither the execution or delivery of this Agreement or the agreements, nor
the carrying on of the Company's business by the employees of the Company,
nor the conduct of the Company's business as proposed in the Business Plan,
will, to the Company's knowledge, conflict with or result in a breach of the
terms, conditions, or provisions of, or constitute a default under, any
contract, covenant or instrument under which any such employee is now
obligated. The Company does not believe it is or will be necessary to
utilize any inventions of (i) idealab! and (ii) any of the Company's
employees or people it currently intends to hire made prior to or outside the
scope of their employment by the Company. No employee of idealab! has
developed any technology which constitutes a material portion of any of the
Company's products, and, to the best of the Company's knowledge, no current
or former stockholder, employee, officer, director or consultant of the
Company has (directly or indirectly) any right, title or interest in any
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<PAGE>
intellectual property necessary for the operation of the business of the
Company as presently conducted or as proposed to be conducted in the Business
Plan.
2.10 COMPLIANCE WITH OTHER INSTRUMENTS. As of the date of the
Closing, the Company is not in violation or default of any provisions of its
Restated Certificate or Bylaws or of any instrument, judgment, order, writ,
decree or contract to which it is a party or by which it is bound or, to its
knowledge, of any provision of federal or state statute, rule or regulation
applicable to the Company. The execution, delivery and performance of the
Agreements and the consummation of the transactions contemplated hereby or
thereby will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either
a default under any such provision, instrument, judgment, order, writ, decree
or contract or an event which results in the creation of any lien, charge or
encumbrance upon any assets of the Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any material permit, license,
authorization applicable to the Company, its business or operations or any of
its assets or properties, which suspension, revocation, impairment,
forfeiture or nonrenewal will have a material adverse effect on the Company's
financial condition, operating results, business or operations.
2.11 AGREEMENTS; ACTION.
(a) There are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors,
affiliates, or any affiliate thereof.
(b) Except for agreements explicitly contemplated by the
Agreements, there are no agreements, understandings, instruments, contracts
or proposed transactions to which the Company or any of its subsidiaries is a
party or by which it is bound that involve (i) obligations (contingent or
otherwise) of, or payments to, the Company or any of its subsidiaries in
excess of, $10,000, (ii) the license of any patent, copyright, trade secret
or other proprietary right to or from the Company or any of its subsidiaries,
(iii) the grant of rights to manufacture, produce, assemble, license, market,
or sell its products to any other person or affect the Company's exclusive
right to develop, manufacture, assemble, distribute, market or sell its
products, or (iv) indemnification by the Company with respect to
infringements of proprietary rights.
(c) Neither the Company nor any of its subsidiaries has (i)
declared or paid any dividends, or authorized or made any distribution upon
or with respect to any class or series of its capital stock, (ii) incurred
any indebtedness for money borrowed or incurred any other liabilities
individually in excess of $10,000 or in excess of $25,000 in the aggregate,
(iii) made any loans or advances to any person, other than ordinary advances
for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of
its assets or rights, other than the sale of its inventory in the ordinary
course of business.
(d) For the purposes of subsections (b) and (c) above, the
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity shall be
aggregated for the purpose of meeting the individual minimum dollar amounts
with such subsections.
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<PAGE>
(e) The Company is not a party to and is not bound by any
contract, agreement or instrument, or, at the time of Closing, subject to any
restriction under its Restated Certificate or Bylaws, that adversely affects
its business, its properties or its financial condition.
2.12 DISCLOSURE. The Company has fully provided the Purchasers
with all the information that the Purchasers have requested for deciding
whether to acquire the Stock and all information that the Company believes is
reasonably necessary to enable the Purchasers to make such a decision,
including certain of the Company's projections describing its proposed
business (collectively, the "BUSINESS PLAN"). To the Company's knowledge, no
representation or warranty of the Company contained in this Agreement and the
exhibits attached hereto, any certificate furnished or to be furnished to
Purchasers at the Closing, or the Business Plan (when read together) contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made. The
Business Plan and the financial and other projections contained in the
Business Plan concerning the Company were prepared in good faith; however,
the Company does not warrant that it will achieve such projections.
2.13 NO CONFLICT OF INTEREST. The Company is not indebted,
directly or indirectly, to any (i) of its officers or directors or to their
respective spouses or children, in any amount whatsoever other than in
connection with expenses or advances of expenses incurred in the ordinary
course of business or relocation expenses of employees and (ii) affiliate of
the Company. To the Company's knowledge, none of the Company's officers or
directors, or any members of their immediate families, or any affiliate of
the Company, are, directly or indirectly, indebted to the Company (other than
in connection with purchases of the Company's stock) or have any direct or
indirect ownership interest in any firm or corporation with which the Company
is affiliated or with which the Company has a business relationship, or any
firm or corporation which competes with the Company except that officers,
directors and/or stockholders of the Company may own stock in (but not
exceeding two percent of the outstanding capital stock of) any publicly
traded companies that may compete with the Company. To the Company's
knowledge, none of the Company's officers or directors or any members of
their immediate families, or any affiliate of the Company, are, directly or
indirectly, interested in any material contract with the Company. The
Company is not a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
2.14 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as
contemplated in the Investors' Rights Agreement, the Company has not granted
or agreed to grant any registration rights, including piggyback rights, to
any person or entity. To the Company's knowledge, except as contemplated in
the Voting Agreement, no stockholder of the Company has entered into any
agreements with respect to the voting of capital shares of the Company.
2.15 PRIVATE PLACEMENT. Subject in part to the truth and accuracy
of the Purchasers' representations set forth in this Agreement, the offer,
sale and issuance of the Securities as contemplated by this Agreement is
exempt from the registration requirements of the Securities Act.
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<PAGE>
2.16 TITLE TO PROPERTY AND ASSETS. The Company owns its property
and assets free and clear of all mortgages, liens, loans and encumbrances,
except such encumbrances and liens which arise in the ordinary course of
business and do not materially impair the Company's ownership or use of such
property or assets. With respect to the property and assets it leases, the
Company is in compliance with such leases and, to its knowledge, holds a
valid leasehold interest free of any liens, claims or encumbrances.
2.17 FINANCIAL STATEMENTS. The Company has made available to each
Purchaser its unaudited financial statements (including balance sheet and
profit and loss statement) as of and for the twelve-month period ended
December 31, 1998 (collectively, the "FINANCIAL STATEMENTS"). The Financial
Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated, except that the unaudited Financial Statements may not contain all
footnotes required by generally accepted accounting principles. The
Financial Statements fairly present the financial condition and operating
results of the Company as of the dates, and for the periods, indicated
therein, subject, in the case of the unaudited Financial Statements, to
normal year-end audit adjustments, which individually or in the aggregate
will not be material to the financial condition or operating results of the
Company. Except as set forth in the Financial Statements, the Company has no
material liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to December 31, 1998
and (ii) obligations under contracts and commitments incurred in the ordinary
course of business and not required under generally accepted accounting
principles to be reflected in the Financial Statements, which, in both cases,
individually or in the aggregate are not material to the financial condition
or operating results of the Company. Except as disclosed in the Financial
Statements, the Company is not a guarantor or indemnity of any indebtedness
of any other person, firm or corporation. The Company maintains and will
continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
2.18 CHANGES. Since December 31, 1998, there has not been:
(a) any change in the assets, liabilities, financial
condition or operating results of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business that
have not been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company (as such business is
presently conducted and as it is proposed to be conducted in the Business
Plan);
(c) any waiver or compromise by the Company of a valuable
right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by the Company, except in the
ordinary course of business and that is not material to the business,
properties, prospects or financial condition of the Company (as such business
is presently conducted and as it is proposed to be conducted);
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<PAGE>
(e) any material change to a material contract or agreement
by which the Company or any of its assets is bound or subject;
(f) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(g) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any
officer or key employee of the Company; and the Company does not know of any
impending resignation or termination of employment of any such officer or key
employee;
(i) receipt of notice that there has been a loss of, or
material order cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in,
or lien, created by the Company, with respect to any of its material
properties or assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(l) any declaration, setting aside or payment or other
distribution in respect to any of the Company's capital stock, or any direct
or indirect redemption, purchase, or other acquisition of any of such stock
by the Company;
(m) to the best of the Company's knowledge, any other event
or condition of any character that might materially and adversely affect the
business, properties, prospects or financial condition of the Company (as
such business is presently conducted and as it is proposed to be conducted in
the Business Plan); or
(n) any arrangement or commitment by the Company to do any of
the things described in this Section 2.18.
2.19 EMPLOYEE BENEFIT PLANS. The Company does not have any
Employee Benefit Plan as defined in the Employee Retirement Income Security
Act of 1974.
2.20 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed
all tax returns and reports (including information returns and reports) as
required by law. These returns and reports are true and correct in all
material respects. The Company has paid all taxes and other assessments due,
except those contested by it in good faith that are listed in the Schedule of
Exceptions. The provision for taxes of the Company as shown in the Financial
Statements is adequate for taxes due or accrued as of the date thereof. The
Company has not elected pursuant to the Internal Revenue Code of 1986, as
amended (the "CODE"), to be treated as a Subchapter
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<PAGE>
S corporation or a collapsible corporation pursuant to Section 1362(a) or
Section 341(f) of the Code, nor has it made any other elections pursuant to
the Code (other than elections that relate solely to methods of accounting,
depreciation or amortization) that would have a material effect on the
Company, its financial condition, its business as presently conducted or
proposed to be conducted or any of its properties or material assets. The
Company has never had any tax deficiency proposed or assessed against it and
has not executed any waiver of any statute of limitations on the assessment
or collection of any tax or governmental charge. None of the Company's
federal income tax returns and none of its state income or franchise tax or
sales or use tax returns have ever been audited by governmental authorities.
Since the date of the Financial Statements, the Company has not incurred any
taxes, assessments or governmental charges other than in the ordinary course
of business and the Company has made adequate provisions on its books or
accounts for all taxes, assessments and governmental charges with respect to
its business, properties and operations for such period. The Company has
withheld or collected from each payment made to each of its employees, the
amount of all taxes (including, but not limited to, federal income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act
taxes) required to be withheld or collected therefrom, and has paid the same
to the proper tax receiving officers or authorized depositories.
2.21 INSURANCE. The Company has in full force and effect fire and
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed; and the Company has insurance
against other hazards, risks and liabilities to persons and property to the
extent and in the manner customary for companies in similar businesses
similarly situated.
2.22 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to)
any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and no labor union has requested or, to the knowledge
of the Company, has sought to represent any of the employees, representatives
or agents of the Company. There is no strike or other labor dispute
involving the Company pending, or to the knowledge of the Company threatened,
which could have a material adverse effect on the assets, properties,
financial condition, operating results, or business of the Company, nor is
the Company aware of any labor organization activity involving its employees.
The Company is not aware that any officer or key employee, or that any group
of key employees, intends to terminate their employment with the Company, nor
does the Company have any present intention to terminate the employment of
any of the foregoing. The employment of each officer and employee of the
Company is terminable at the will of the Company, without the obligation to
pay any severance or other compensation. To its knowledge, the Company has
complied in all material respects with all applicable state and federal equal
employment opportunity laws and with other laws related to employment. The
Company is not a party to or bound to any currently effective employment
contract, deferred compensation agreement, bonus plan, incentive plan, profit
sharing plan, retirement agreement or other employee compensation agreement.
2.23 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENTS.
Each former and current employee, consultant and officer of the Company has
executed an
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agreement with the Company regarding confidentiality and proprietary
information substantially in the form or forms delivered to the counsel for
the Purchasers. The Company is not aware that any of its former and current
employees or consultants is in violation thereof, and the Company will use
its best efforts to prevent any such violation. All consultants to or
vendors of the Company with access to confidential information of the Company
are parties to a written agreement substantially in the form or forms
provided to counsel for the Purchasers under which, among other things, each
such consultant or vendor is obligated to maintain the confidentiality of
confidential information of the Company. The Company is not aware that any
of its consultants or vendors are in violation thereof, and the Company will
use its best efforts to prevent any such violation.
2.24 PERMITS. The Company and each of its subsidiaries has all
franchises, permits, licenses and any similar authority necessary for the
conduct of its business, the lack of which could materially and adversely
affect the business, properties, prospects, or financial condition of the
Company. The Company is not in default in any material respect under any of
such franchises, permits, licenses or other similar authority.
2.25 CORPORATE DOCUMENTS. The Restated Certificate and Bylaws of
the Company are in the form provided to counsel for the Purchasers. The copy
of the minute books of the Company provided to the Purchasers' counsel
contains minutes of all meetings of directors and stockholders and all
actions by written consent without a meeting by the directors and
stockholders since the date of incorporation and reflects all actions by the
directors (and any committee of directors) and stockholders with respect to
all transactions referred to in such minutes accurately in all material
respects.
2.26 SECTION 83(b) ELECTIONS. To the best of the Company's
knowledge, all individuals who have purchased unvested shares of the
Company's Common Stock have timely filed elections under Section 83(b) of the
Code.
2.27 SIGNIFICANT CUSTOMERS AND SUPPLIERS. No major customer or
supplier as of the date the Financial Statements has materially reduced or
threatened to terminate or materially reduce its purchases from or provision
of products or services to the Company, as the case may be.
2.28 REAL PROPERTY HOLDING COMPANY. The Company is not a real
property holding company within the meaning of Section 897 of the Code.
2.29 MANUFACTURING AND MARKETING RIGHTS. The Company has not
granted rights to manufacture, produce, assemble, lease, market or sell its
products to any other person and is not bound by any agreement that affects
the Company's exclusive right to develop, manufacture, assemble, distribute
market or sell its products.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
hereby represents and warrants to the Company that:
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<PAGE>
3.1 AUTHORIZATION. The Agreements, when executed and delivered by
the Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms, except (a) as limited
by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and any other laws of general application affecting enforcement
of creditors' rights generally, and as limited by laws relating to the
availability of a specific performance, injunctive relief, or other equitable
remedies, or (b) to the extent the indemnification provisions contained in
the Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made
with the Purchaser in reliance upon the Purchaser's representation to the
Company, which by the Purchaser's execution of this Agreement, the Purchaser
hereby confirms, that the Securities to be acquired by the Purchaser will be
acquired for investment for the Purchaser's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that the Purchaser has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this
Agreement, the Purchaser further represents that the Purchaser does not
presently have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Securities. The Purchaser
represents that it has full power and authority to enter into this Agreement.
The Purchaser has not been formed for the specific purpose of acquiring the
Securities.
3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an
opportunity to discuss the Company's business, management, financial affairs
and the terms and conditions of the offering of the Stock with the Company's
management and has had an opportunity to review the Company's facilities.
The foregoing, however, does not limit or modify the representations and
warranties of the Company in Section 2 of this Agreement or the right of the
Purchasers to rely thereon.
3.4 RESTRICTED SECURITIES. The Purchaser understands that the
Securities have not been registered under the Securities Act, by reason of a
specific exemption from the registration provisions of the Securities Act
which depends upon, among other things, the bona fide nature of the
investment intent and the accuracy of the Purchaser's representations as
expressed herein. The Purchaser understands that the Securities are
"restricted securities" under applicable U.S. federal and state securities
laws and that, pursuant to these laws, the Purchaser must hold the Securities
indefinitely unless they are registered with the Securities and Exchange
Commission and qualified by state authorities, or an exemption from such
registration and qualification requirements is available. The Purchaser
acknowledges that the Company has no obligation to register or qualify the
Securities for resale except as set forth in the Investors' Rights Agreement.
The Purchaser further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding
period for the Securities, and on requirements relating to the Company which
are outside of the Purchaser's control, and which the Company is under no
obligation and may not be able to satisfy.
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<PAGE>
3.5 NO PUBLIC MARKET. The Purchaser understands that no public
market now exists for any of the securities issued by the Company, and that
the Company has made no assurances that a public market will ever exist for
the Securities.
3.6 LEGENDS. The Purchaser understands that the Securities and
any securities issued in respect of or exchange for the Securities, may bear
one or all of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any state to
the extent such laws are applicable to the shares represented by the
certificate so legended.
3.7 ACCREDITED INVESTOR. The Purchaser is an accredited investor
as defined in Rule 501(a) of Regulation D promulgated under the Act.
3.8 FOREIGN INVESTORS. If the Purchaser is not a United States
person (as defined by Section 7701(a)(30) of the Internal Revenue Code of
1986, as amended), such Purchaser hereby represents that it has satisfied
itself as to the full observance of the laws of its jurisdiction in
connection with any invitation to subscribe for the Stock or any use of this
Agreement, including (i) the legal requirements within its jurisdiction for
the purchase of the Stock, (ii) any foreign exchange restrictions applicable
to such purchase, (iii) any governmental or other consents that may need to
be obtained, and (iv) the income tax and other tax consequences, if any, that
may be relevant to the purchase, holding, redemption, sale, or transfer of
the Stock. Such Purchaser's subscription and payment for and continued
beneficial ownership of the Stock, will not violate any applicable securities
or other laws of the Purchaser's jurisdiction.
4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The
obligations of each Purchaser to the Company under this Agreement are subject
to the fulfillment, on or before the Closing, of each of the following
conditions, unless otherwise waived:
4.1 RESTATED CERTIFICATE. The Company shall have filed the
Restated Certificate with the Secretary of State of Delaware on or prior to
the Closing Date, which shall continue to be in full force and effect as of
the Closing Date.
-12-
<PAGE>
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations
of the Company to each Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 RESTATED CERTIFICATE. The Company shall have filed the Restated
Certificate with the Secretary of State of Delaware on or prior to the Closing
Date, which shall continue to be in full force and effect as of the Closing
Date.
6. MISCELLANEOUS.
6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this
Agreement, the warranties, representations and covenants of the Company and
the Purchasers contained in or made pursuant to this Agreement shall survive
the execution and delivery of this Agreement and the Closing and shall in no
way be affected by any investigation of the subject matter thereof made by or
on behalf of the Purchasers or the Company.
6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the
parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
6.3 GOVERNING LAW. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State
of California, without giving effect to principles of conflicts of law.
6.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
6.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 NOTICES. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient upon delivery, when
delivered personally or by overnight courier or sent by telegram or fax, or
forty-eight (48) hours after being deposited in the U.S. mail, as certified
or registered mail, with postage prepaid, addressed to the party to be
notified at such party's address as set forth below or on EXHIBIT A hereto,
or as subsequently modified by written notice, and (a) if to the Company,
with a copy to Venture Law Group, A Professional Corporation, 2800 Sand Hill
Road, Menlo Park, California 94025, Attention: Glen R. Van Ligten or (b) if
to Highland Capital Partners, with a copy to Testa, Hurwitz & Thibeault, LLP,
High Street Tower, 125 High Street, Boston, Massachusetts 02110, Attention:
William J. Schnoor, Jr.
-13-
<PAGE>
6.7 FINDER'S FEE. Each party represents that it neither is nor
will be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature
of a finder's fee (and the costs and expenses of defending against such
liability or asserted liability) for which each Purchaser or any of its
officers, employees, or representatives is responsible. The Company agrees
to indemnify and hold harmless each Purchaser from any liability for any
commission or compensation in the nature of a finder's fee (and the costs and
expenses of defending against such liability or asserted liability) for which
the Company or any of its officers, employees or representatives is
responsible.
6.8 FEES AND EXPENSES. The Company shall pay at Closing the
reasonable fees and expenses of Testa, Hurwitz & Thibeault, LLP, the counsel
for entities affiliated with Highland Capital, incurred with respect to this
Agreement, the documents referred to herein and the transactions contemplated
hereby and thereby, provided such fees and expenses do not exceed $15,000.
6.9 ATTORNEY'S FEES. If any action at law or in equity (including
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to
which such party may be entitled.
6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended with the written consent of the Company and the holders of at least
66 2/3% of the Common Stock issued or issuable upon conversion of the Stock.
Any amendment or waiver effected in accordance with this Section 6.10 shall
be binding upon the Purchasers and each transferee of the Stock (or the
Common Stock issuable upon conversion thereof), each future holder of all
such securities, and the Company.
6.11 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties
cannot reach a mutually agreeable and enforceable replacement for such
provision, then (a) such provision shall be excluded from this Agreement, (b)
the balance of the Agreement shall be interpreted as if such provision were
so excluded and (c) the balance of the Agreement shall be enforceable in
accordance with its terms.
6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any
right, power or remedy accruing to any party under this Agreement, upon any
breach or default of any other party under this Agreement, shall impair any
such right, power or remedy of such non-breaching or non-defaulting party nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring.
Any waiver, permit, consent or approval of any kind or character on the part
of any party of any breach or default under this Agreement, or any waiver on
the part of any party of any provisions or conditions of this Agreement, must
be in writing and shall be effective only to the extent specifically set
forth in such writing. All remedies, either
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<PAGE>
under this Agreement or by law or otherwise afforded to any party, shall be
cumulative and not alternative.
6.13 ENTIRE AGREEMENT. This Agreement, the documents referred to
herein and certain side letter agreements between the Company and Intel
Corporation and the Company and the DynaFund entities concerning Board
visitation rights constitute the entire agreement between the parties hereto
pertaining to the subject matter hereof, and any and all other written or
oral agreements relating to the subject matter hereof existing between the
parties hereto are expressly canceled.
6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF
SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105
OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED
UNLESS THE SALE IS SO EXEMPT.
6.15 CONFIDENTIALITY. Each party hereto agrees that, except with
the prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has
been or shall become privy by reason of this Agreement, discussions or
negotiations relating to this Agreement, the performance of its obligations
hereunder or the ownership of Stock purchased hereunder. Without granting
any right or license, each party agrees that the foregoing clauses shall not
apply with respect to any information after five (5) years following the
disclosure thereof or any information that the other party can document (i)
is or becomes (through no improper action or inaction by such party or any
affiliate, agent, consultant or employee) generally available to the public,
(ii) was in its possession known by it prior to receipt from the other party,
or (iii) was rightfully disclosed to it by a third party without restriction.
The provisions of this Section 6.15 shall be in addition to, and not in
substitution for, the provisions of any separate nondisclosure agreement
executed by the parties hereto with respect to the transactions contemplated
hereby, including, without limitation, the Intel Letter Agreement.
6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges
that it is not relying upon any person, firm or corporation, other than the
Company and its officers and directors, in making its investment or decision
to invest in the Company. Each Purchaser agrees that no Purchaser nor the
respective controlling persons, officers, directors, partners, agents, or
employees of any Purchaser shall be liable to any other Purchaser for any
action heretofore or hereafter taken or omitted to be taken by any of them in
connection with the purchase of the Securities.
-15-
<PAGE>
6.17 WAIVER OF CONFLICTS. Each party to this Agreement
acknowledges that Venture Law Group, counsel for the Company, has in the past
performed and may continue to perform legal services for certain of the
Purchasers in matters unrelated to the transactions described in this
Agreement, including the representation of such Purchasers in venture capital
financings and other matters. Accordingly, each party to this Agreement
hereby (a) acknowledges that they have had an opportunity to ask for
information relevant to this disclosure; and (b) gives its informed consent
to Venture Law Group's representation of certain of the Purchasers in such
unrelated matters and to Venture Law Group's representation of the Company in
connection with this Agreement and the transactions contemplated hereby.
[Signature Pages Follow]
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<PAGE>
The parties have executed this Series C Preferred Stock Purchase
Agreement as of the date first written above.
COMPANY:
eTOYS INC.
By: /s/ Edward C. Lenk
---------------------------------
Edward C. Lenk
President and Chief Executive officer
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
SIGNATURE PAGE TO eTOYS INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
HIGHLAND CAPITAL PARTNERS IV LIMITED
PARTNERSHIP
By:
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
PURCHASERS:
HIGHLAND ENTREPRENEURS' FUND IV
LIMITED PARTNERSHIP
By:
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
SIGNATURE PAGE TO eTOYS INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASER:
SEQUOIA CAPITAL FRANCHISE FUND
By: /s/ Michael Moritz
-----------------------------------
Name: Michael Moritz
---------------------------------
(print)
Title:
--------------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
SIGNATURE PAGE TO eTOYS INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A - Schedule of Purchasers
Exhibit B - Form of Third Amended and Restated Certificate of
Incorporation
Exhibit C - Form of Second Amended and Restated Investors' Rights
Agreement
Exhibit D - Form of Second Amended and Restated Right of First Refusal
and Co-Sale Agreement
Exhibit E - Form of Second Amended and Restated Voting Agreement
</TABLE>
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PURCHASE PRICE
NAME SERIES C PREFERRED (CASH/WIRE TRANSFER)
-------------------------- ------------------ --------------------
<S> <C> <C>
Highland Capital Partners 320,000 $9,600,000
IV Limited Partnership
Highland Entrepreneurs' 13,333 $399,990
Fund IV Limited Partnership
Sequoia Capital Franchise 333,333 $9,999,990
Fund
</TABLE>
<PAGE>
EXHIBIT B
FORM OF THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
(SEE EXHIBIT 3.5)
<PAGE>
EXHIBIT C
FORM OF SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
(SEE EXHIBIT 10.24)
<PAGE>
EXHIBIT D
FORM OF SECOND AMENDED AND RESTATED RIGHT OF FIRST REFUSAL
AND CO-SALE AGREEMENT
(SEE EXHIBIT 10.26)
<PAGE>
EXHIBIT E
FORM OF SECOND AMENDED AND RESTATED VOTING AGREEMENT
(SEE EXHIBIT 10.25)
<PAGE>
ETOYS INC.
SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
MARCH 24, 1999
<PAGE>
ETOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Second Amended and Restated Investors' Rights Agreement (the
"AGREEMENT") is made as of the 24th day of March, 1999, by and among eToys
Inc., a Delaware corporation (the "COMPANY"), Edward C. Lenk and Frank C.
Han, each of whom is herein referred to as a "FOUNDER", the prior investors
listed on EXHIBIT A hereto (the "PRIOR INVESTORS") and the new investors
listed on EXHIBIT B hereto (the "NEW INVESTORS"). The Prior Investors and
the New Investors are referred to herein collectively as the "INVESTORS" and
each individually as an "INVESTOR".
RECITALS
The Company, the Founders and the Prior Investors entered into an
Amended and Restated Investors' Rights Agreement on June 4, 1998 (the
"EXISTING AGREEMENT").
The Company and the New Investors have entered into a Series C Preferred
Stock Purchase Agreement (the "PURCHASE AGREEMENT") of even date herewith
pursuant to which the Company desires to sell to the New Investors and the
New Investors desire to purchase from the Company shares of the Company's
Series C Preferred Stock. A condition to the New Investors' obligations
under the Purchase Agreement is that the Company, the Founders and the Prior
Investors enter into this Agreement in order to provide the New Investors
with (i) certain rights to register shares of the Company's Common Stock
issuable upon conversion of the Series C Preferred Stock held by the New
Investors, (ii) certain rights to receive or inspect information pertaining
to the Company, and (iii) a right of first offer with respect to certain
issuances by the Company of its securities. The Company, the Prior Investors
and the Founders each desire to induce the New Investors to purchase shares
of Series C Preferred Stock pursuant to the Purchase Agreement by agreeing to
amend and restate the terms and conditions of the Existing Agreement as set
forth herein.
AGREEMENT
The parties hereby agree as follows:
1. REGISTRATION RIGHTS. The Company and the Investors covenant and
agree as follows:
1.1 DEFINITIONS. For purposes of this Section 1:
(a) The terms "REGISTER," "REGISTERED," and "REGISTRATION"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933,
as amended (the "SECURITIES ACT"), and the declaration or ordering of
effectiveness of such registration statement or document;
<PAGE>
(b) The term "REGISTRABLE SECURITIES" means (i) the shares of
Common Stock issuable or issued upon conversion of the Series A Preferred
Stock, (ii) the shares of Common Stock issuable or issued upon conversion of
the Series B Preferred Stock, (iii) the shares of Common Stock issuable or
issued upon conversion of the Series C Preferred Stock and (iv) the shares of
Common Stock issued to the Founders (the "FOUNDERS' STOCK"), PROVIDED,
HOWEVER, that for the purposes of Section 1.2, 1.4 or 1.13 the Founders'
Stock shall not be deemed Registrable Securities and the Founders shall not
be deemed Holders, and (iii) any other shares of Common Stock of the Company
issued as (or issuable upon the conversion or exercise of any warrant, right
or other security which is issued as) a dividend or other distribution with
respect to, or in exchange for or in replacement of, the shares listed in (i)
and (ii); PROVIDED, HOWEVER, that the foregoing definition shall exclude in
all cases any Registrable Securities sold by a person in a transaction in
which his or her rights under this Agreement are not assigned.
Notwithstanding the foregoing, Common Stock or other securities shall only be
treated as Registrable Securities if and so long as they have not been (A)
sold to or through a broker or dealer or underwriter in a public distribution
or a public securities transaction, or (B) sold in a transaction exempt from
the registration and prospectus delivery requirements of the Securities Act
under Section 4(1) thereof so that all transfer restrictions, and restrictive
legends with respect thereto, if any, are removed upon the consummation of
such sale;
(c) The number of shares of "REGISTRABLE SECURITIES THEN
OUTSTANDING" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "HOLDER" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.12 hereof;
(e) The term "FORM S-3" means such form under the Securities
Act as in effect on the date hereof or any successor form under the
Securities Act; and
(f) The term "SEC" means the Securities and Exchange
Commission.
1.2 REQUEST FOR REGISTRATION.
(a) If the Company shall receive at any time after the
earlier of (i) November 26, 2002, or (ii) one hundred eighty (180) days after
the effective date of the first registration statement for a public offering
of securities of the Company (other than a registration statement relating
either to the sale of securities to employees of the Company pursuant to a
stock option, stock purchase or similar plan or an SEC Rule 145 transaction),
a written request from the Holders of twenty-five percent (25%) or more of
the Registrable Securities then outstanding that the Company file a
registration statement under the Securities Act covering the registration of
at least twenty-five percent (25%) of the Registrable Securities then
outstanding (or a lesser percent if the anticipated aggregate offering price,
net of underwriting discounts and commissions, would exceed $5,000,000), then
the Company shall, within ten (10) days of the receipt thereof, give written
notice of such request to all Holders and shall, subject to the limitations
of subsection 1.2(b), use its best efforts to effect as soon as practicable,
and in any
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<PAGE>
event within 60 days of the receipt of such request, the registration under
the Securities Act of all Registrable Securities which the Holders request to
be registered within twenty (20) days of the mailing of such notice by the
Company in accordance with Section 3.5.
(b) If the Holders initiating the registration request
hereunder ("INITIATING HOLDERS") intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall
so advise the Company as a part of their request made pursuant to this
Section 1.2 and the Company shall include such information in the written
notice referred to in subsection 1.2(a). The underwriter will be selected by
a majority in interest of the Initiating Holders and shall be reasonably
acceptable to the Company. In such event, the right of any Holder to include
his Registrable Securities in such registration shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise
mutually agreed by a majority in interest of the Initiating Holders and such
Holder) to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company
as provided in subsection 1.5(e)) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders.
Notwithstanding any other provision of this Section 1.2, if the underwriter
advises the Initiating Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Company shall
so advise all Holders of Registrable Securities which would otherwise be
underwritten pursuant hereto, and the number of shares of Registrable
Securities that may be included in the underwriting shall be allocated among
all Holders thereof, including the Initiating Holders, in proportion (as
nearly as practicable) to the amount of Registrable Securities of the Company
owned by each Holder; PROVIDED, HOWEVER, that the number of shares of
Registrable Securities to be included in such underwriting shall not be
reduced unless all other securities are first entirely excluded from the
underwriting.
(c) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this
Section 1.2, a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
registration statement to be filed and it is therefore essential to defer the
filing of such registration statement, the Company shall have the right to
defer such filing for a period of not more than 90 days after receipt of the
request of the Initiating Holders; PROVIDED, HOWEVER, that the Company may
not utilize this right more than once in any twelve-month period.
(d) In addition, the Company shall not be obligated to
effect, or to take any action to effect, any registration pursuant to this
Section 1.2:
(i) After the Company has effected two (2)
registrations pursuant to this Section 1.2 and such registrations have been
declared or ordered effective;
(ii) During the period starting with the date sixty
(60) days prior to the Company's good faith estimate of the date of filing
of, and ending on a date one hundred eighty (180) days after the effective
date of, a registration subject to Section 1.3 hereof;
-3-
<PAGE>
provided that the Company is actively employing in good faith all reasonable
efforts to cause such registration statement to become effective; or
(iii) If the Initiating Holders propose to dispose of
shares of Registrable Securities that may be immediately registered on Form
S-3 pursuant to a request made pursuant to Section 1.4 below.
1.3 COMPANY REGISTRATION. If (but without any obligation to do
so) the Company proposes to register (including for this purpose a
registration effected by the Company for stockholders other than the Holders)
any of its stock under the Securities Act in connection with the public
offering of such securities solely for cash (other than a registration
relating solely to the sale of securities to participants in a Company stock
plan or a transaction covered by Rule 145 under the Securities Act, a
registration in which the only stock being registered is Common Stock
issuable upon conversion of debt securities which are also being registered,
or any registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon
the written request of each Holder given within twenty (20) days after
mailing of such notice by the Company in accordance with Section 3.5, the
Company shall, subject to the provisions of Section 1.8, cause to be
registered under the Securities Act all of the Registrable Securities that
each such Holder has requested to be registered.
1.4 FORM S-3 REGISTRATION. In case the Company shall receive from
any Holder or Holders of not less than twenty-five percent (25%) of the
Registrable Securities then outstanding, or a lesser percentage if the
aggregate offering price of the Registrable Securities to be included in the
registration is at least $5,000,000, a written request or requests that the
Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned
by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other
Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written
request given within 15 days after receipt of such written notice from the
Company; PROVIDED, HOWEVER, that the Company shall not be obligated to effect
any such registration, qualification or compliance, pursuant to this Section
1.4: (i) if Form S-3 is not available for such offering by the Holders; (ii)
if the Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell
Registrable Securities and such other securities (if any) at an aggregate
price to the public (net of any underwriters' discounts or commissions) of
less than $2,000,000; (iii) if the Company shall furnish to the Holders a
certificate signed by the
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President of the Company stating that in the good faith judgment of the Board
of Directors of the Company, it would be seriously detrimental to the Company
and its stockholders for such Form S-3 Registration to be effected at such
time, in which event the Company shall have the right to defer the filing of
the Form S-3 registration statement for a period of not more than 90 days
after receipt of the request of the Holder or Holders under this Section 1.4;
PROVIDED, HOWEVER, that the Company shall not utilize this right more than
once in any twelve month period; (iv) if the Company has already effected
three registrations on Form S-3 for the Holders pursuant to this Section 1.4;
or (v) in any particular jurisdiction in which the Company would be required
to qualify to do business or to execute a general consent to service of
process in effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt
of the request or requests of the Holders. Registrations effected pursuant
to this Section 1.4 shall not be counted as demands for registration or
registrations effected pursuant to Sections 1.2 or 1.3, respectively.
1.5 OBLIGATIONS OF THE COMPANY. Whenever required under this
Section 1 to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of at least twenty-five percent (25%) majority of the Registrable
Securities registered thereunder, keep such registration statement effective
for up to one hundred twenty (120) days. The Company shall not be required
to file, cause to become effective or maintain the effectiveness of any
registration statement that contemplates a distribution of securities on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement for up to one hundred
twenty (120) days.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or Blue Sky laws of such jurisdictions as shall be reasonably requested by
the Holders, PROVIDED that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions.
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(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each
Holder participating in such underwriting shall also enter into and perform
its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the
circumstances then existing, such obligation to continue for one hundred
twenty (120) days.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereunder and a CUSIP number for
all such Registrable Securities, in each case not later than the effective
date of such registration.
(i) Use its best efforts to furnish, at the request of any
Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Section 1, if such securities are being sold through underwriters, or, if
such securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i)
an opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given
to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Holders requesting registration of
Registrable Securities and (ii) a letter dated such date, from the
independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants
to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Holders requesting registration of
Registrable Securities.
1.6 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such
Holder's Registrable Securities. The Company shall have no obligation with
respect to any registration requested pursuant to Section 1.2 or Section 1.4
of this Agreement if, as a result of the application of the preceding
sentence, the number of shares or the anticipated aggregate offering price of
the Registrable Securities to be included in the registration does not equal
or exceed the number of shares or the anticipated aggregate offering price
required to originally trigger the Company's
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obligation to initiate such registration as specified in subsection 1.2(a) or
subsection 1.4(b)(2), whichever is applicable.
1.7 EXPENSES OF REGISTRATION.
(a) DEMAND REGISTRATION. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the
Company, and the reasonable fees and disbursements of one counsel for the
selling Holders selected by them with the approval of the Company, which
approval shall not be unreasonably withheld, shall be borne by the Company;
PROVIDED, HOWEVER, that the Company shall not be required to pay for any
expenses of any registration proceeding begun pursuant to Section 1.2 if the
registration request is subsequently withdrawn at the request of the Holders
of a majority of the Registrable Securities to be registered (in which case
all participating Holders shall bear such expenses), unless the Holders of a
majority of the Registrable Securities agree to forfeit their right to one
demand registration pursuant to Section 1.2; provided further, however, that
if at the time of such withdrawal, the Holders have learned of a material
adverse change in the condition, business, or prospects of the Company from
that known to the Holders at the time of their request and have withdrawn the
request with reasonable promptness following disclosure by the Company of
such material adverse change, then the Holders shall not be required to pay
any of such expenses and shall retain their rights pursuant to Section 1.2.
(b) COMPANY REGISTRATION. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications of Registrable Securities pursuant
to Section 1.3 for each Holder (which right may be assigned as provided in
Section 1.12), including (without limitation) all registration, filing, and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company and the reasonable fees and disbursements of one
counsel for the selling Holder or Holders selected by them with the approval
of the Company, which approval shall not be unreasonably withheld, shall be
borne by the Company.
(c) REGISTRATION ON FORM S-3. All expenses incurred in
connection with a registration requested pursuant to Section 1.4, including
(without limitation) all registration, filing, qualification, printers' and
accounting fees and the reasonable fees and disbursements of one counsel for
the selling Holder or Holders selected by them with the approval of the
Company, which approval shall not be unreasonably withheld, and counsel for
the Company, and any underwriters' discounts or commissions associated with
Registrable Securities, shall be borne by the Company.
1.8 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under Section 1.3 to include any of the
Holders' securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected
by it (or by other persons entitled to select the underwriters), and then
only in such
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quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount
of securities, including Registrable Securities, requested by stockholders to
be included in such offering exceeds the amount of securities sold other than
by the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be
required to include in the offering only that number of such securities,
including Registrable Securities, which the underwriters determine in their
sole discretion will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling
stockholders according to the total amount of securities entitled to be
included therein owned by each selling stockholder or in such other
proportions as shall mutually be agreed to by such selling stockholders) but
in no event shall: (i) the amount of securities of the selling Holders
included in the offering be reduced below thirty percent (30%) of the total
amount of securities included in such offering, unless such offering is the
initial public offering of the Company's securities in which case the selling
stockholders may be excluded if the underwriters make the determination
described above and no other stockholder's securities are included; or (ii)
notwithstanding (i) above, any shares being sold by a stockholder exercising
a demand registration right similar to that granted in Section 1.2 be
excluded from such offering; or (iii) any securities held by a Founder be
included if any securities held by any selling Holder are excluded. For
purposes of the preceding parenthetical concerning apportionment, for any
selling stockholder which is a holder of Registrable Securities and which is
a partnership, limited liability company or corporation, the partners,
retired partners, members and stockholders of such holder, or the estates and
family members of any such partners, retired partners and members and any
trusts for the benefit of any of the foregoing persons shall be deemed to be
a single "SELLING STOCKHOLDER," and any pro-rata reduction with respect to
such "selling stockholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included
in such "selling stockholder," as defined in this sentence.
1.9 DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect
to the interpretation or implementation of this Section 1.
1.10 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder and the partners, officers, directors
and stockholders of each Holder, and any underwriter (as defined in the
Securities Act) for such Holder and each person, if any, who controls such
Holder or underwriter within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a "VIOLATION"):
(i) any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any
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preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law; and the Company will pay
to each such Holder, underwriter or controlling person, as incurred, any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or
action; PROVIDED, HOWEVER, that the indemnity agreement contained in this
subsection 1.10(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such
loss, claim, damage, liability, or action to the extent that it arises out of
or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any
underwriter, any other Holder selling securities in such registration
statement and any controlling person of any such underwriter or other Holder,
against any losses, claims, damages, or liabilities (joint or several) to
which any of the foregoing persons may become subject, under the Securities
Act, the Exchange Act or other federal or state law, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereto) arise out of
or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will pay, as incurred, any legal
or other expenses reasonably incurred by any person intended to be
indemnified pursuant to this subsection 1.10(b), in connection with
investigating or defending any such loss, claim, damage, liability, or
action; PROVIDED, HOWEVER, that the indemnity agreement contained in this
subsection 1.10(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; PROVIDED, that in no event shall any indemnity under this
subsection 1.10(b) exceed the net proceeds from the offering received by such
Holder, except in the case of willful fraud by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.10,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an
indemnified party (together with all other indemnified parties which may be
represented without conflict by one counsel) shall have the right to retain
one separate counsel,
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with the reasonable fees and expenses to be paid by the indemnifying party,
if representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.10, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
1.10.
(d) If the indemnification provided for in this Section 1.10
is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or
expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party hereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the statements or
omissions that resulted in such loss, liability, claim, damage, or expense as
well as any other relevant equitable considerations; PROVIDED, that in no
event shall any contribution by a Holder under this Subsection 1.10(d) exceed
the net proceeds from the offering received by such Holder, except in the
case of willful fraud by such Holder. The relative fault of the indemnifying
party and of the indemnified party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied
by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information, and opportunity to correct
or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering
are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control. The Company acknowledges that an
agreement by a Holder to indemnify and hold harmless the indemnitees and
their affiliates and controlling persons which is broader than the
indemnification contained in this Section 1.10 shall not be considered a
conflict between the terms of this Section 1.10 and the indemnification and
contribution provisions contained in the underwriting agreement.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under
the Securities Act and any other rule or regulation of the SEC that may at
any time permit a Holder to sell securities of the Company to the public
without registration or pursuant to a registration on Form S-3, the Company
agrees to:
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(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after ninety
(90) days after the effective date of the first registration statement filed
by the Company for the offering of its securities to the general public so
long as the Company remains subject to the periodic reporting requirements
under Sections 13 or 15(d) of the Exchange Act;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the Exchange Act, as is necessary to
enable the Holders to utilize Form S-3 for the sale of their Registrable
Securities, such action to be taken as soon as practicable after the end of
the fiscal year in which the first registration statement filed by the
Company for the offering of its securities to the general public is declared
effective;
(c) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy
of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing any Holder of any rule
or regulation of the SEC which permits the selling of any such securities
without registration or pursuant to such form.
1.12 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee
or assignee of at least 500,000 shares of such securities (subject to stock
splits, combinations and the like) or all of such Holder's shares, if less,
PROVIDED the Company is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights
are being assigned; and PROVIDED, FURTHER, that such assignment shall be
effective only if immediately following such transfer the further disposition
of such securities by the transferee or assignee is restricted under the
Securities Act. For the purposes of determining the number of shares of
Registrable Securities held by a transferee or assignee, the holdings of
transferees and assignees of a partnership or limited liability company who
are partners or retired partners of such partnership or members of such
limited liability company (including spouses and ancestors, lineal
descendants and siblings of such partners or members or spouses who acquire
Registrable Securities by gift, will or intestate succession) shall be
aggregated together and with the partnership or limited liability company, as
the case may be; provided that all assignees and transferees who would not
qualify individually for assignment of registration rights shall have a
single attorney-in-fact for the purpose of exercising any rights, receiving
notices or taking any action under Section 1.
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1.13 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder (a) to include such securities in any registration filed under Section
1.2 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only
to the extent that the inclusion of his securities will not reduce the amount
of the Registrable Securities of the Holders which is included or (b) to make
a demand registration which could result in such registration statement being
declared effective prior to the earlier of either of the dates set forth in
subsection 1.2(a) or within one hundred eighty (180) days of the effective
date of any registration effected pursuant to Section 1.2.
1.14 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that,
during the period of duration (up to, but not exceeding, 180 days) specified
by the Company and an underwriter of Common Stock or other securities of the
Company, following the effective date of a registration statement of the
Company filed under the Securities Act, it shall not, to the extent requested
by the Company and such underwriter, directly or indirectly sell, offer to
sell, contract to sell (including, without limitation, any short sale), grant
any option to purchase or otherwise transfer or dispose of (other than to
donees who agree to be similarly bound) any securities of the Company held by
it at any time during such period except Common Stock included in such
registration; PROVIDED, HOWEVER, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten
offering; and
(b) all officers and directors of the Company, all
one-percent securityholders, and all other persons with registration rights
(whether or not pursuant to this Agreement) enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period, and each Holder agrees
that, if so requested, such Holder will execute an agreement in the form
provided by the underwriter containing terms which are essentially consistent
with the provisions of this Section 1.14.
Notwithstanding the foregoing, the obligations described in this
Section 1.14 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms which may be
promulgated in the future, or a registration relating solely to an SEC Rule
145 transaction on Form S-4 or similar forms which may be promulgated in the
future.
1.15 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be
entitled to exercise any right provided for in this Section 1 after the
earlier of (i) five (5) years following the consummation of the sale of
securities pursuant to a registration statement filed by the Company under
the Securities Act in connection with the initial firm commitment
underwritten offering of
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its securities to the general public, or (ii) such time as Rule 144 or
another similar exemption under the Securities Act is available for the sale
of all of such Holder's shares during a three (3)-month period without
registration.
2. COVENANTS OF THE COMPANY.
2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver
to each Investor holding, and to transferees of, at least 500,000 shares of
Registrable Securities (subject to stock splits, combinations and the like):
(a) as soon as practicable, but in any event within ninety
(90) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement
of stockholder's equity as of the end of such year, and a statement of cash
flows for such year, such year-end financial reports to be in reasonable
detail, prepared in accordance with generally accepted accounting principles
("GAAP"), and audited and certified by an independent public accounting firm
of nationally recognized standing selected by the Company;
(b) as soon as practicable, but in any event within thirty
(30) days after the end of each of the first three (3) quarters of each
fiscal year of the Company, an unaudited profit or loss statement, a
statement of cash flows for such fiscal quarter and an unaudited balance
sheet as of the end of such fiscal quarter;
(c) within thirty (30) days of the end of each month, an
unaudited income statement and a statement of cash flows and balance sheet
for and as of the end of such month, in reasonable detail;
(d) as soon as practicable, but in any event thirty (30) days
prior to the end of each fiscal year, a budget and business plan for the next
fiscal year, prepared on a monthly basis, including balance sheets and
sources and applications of funds statements for such months and, as soon as
prepared, any other budgets or revised budgets prepared by the Company;
(e) with respect to the financial statements called for in
subsections (b) and (c) of this Section 2.1, an instrument executed by the
Chief Financial Officer or President of the Company and certifying that such
financials were prepared in accordance with GAAP consistently applied with
prior practice for earlier periods (with the exception of footnotes that may
be required by GAAP) and fairly present the financial condition of the
Company and its results of operation for the period specified, subject to
year-end audit adjustment, provided that the foregoing shall not restrict the
right of the Company to change its accounting principles consistent with
GAAP, if the Board of Directors determines that it is in the best interest of
the Company to do so; and
(f) such other information relating to the financial
condition, business, prospects or corporate affairs of the Company as the
Investor or any assignee of the Investor may from time to time reasonably
request; PROVIDED, HOWEVER, that the Company shall not be
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obligated under this subsection (f) or any other subsection of Section 2.1 to
provide information which it deems in good faith to be a trade secret or
similar confidential information.
2.2 INSPECTION. The Company shall permit each Investor who holds
not less than 500,000 shares of Registrable Securities (subject to stock
splits, combinations and the like), at such Investor's expense, to visit and
inspect the Company's properties, to examine its books of account and records
and to discuss the Company's affairs, finances and accounts with its
officers, all at such reasonable times as may be requested by the Investor;
PROVIDED, HOWEVER, that the Company shall not be obligated pursuant to this
Section 2.2 to provide access to any information which it reasonably
considers to be a trade secret or similar confidential information.
2.3 RIGHT OF FIRST OFFER. Subject to the terms and conditions
specified in this Section 2.3, the Company hereby grants to each Major
Investor (as hereinafter defined) a right of first offer with respect to
future sales by the Company of its Shares (as hereinafter defined). For
purposes of this Section 2.3, a "MAJOR INVESTOR" shall mean any person who
holds at least 500,000 shares of Series A and/or B Preferred Stock (or the
Common Stock issued upon conversion thereof) (as adjusted for stock splits,
stock dividends, recapitalizations (subject to stock splits, combinations and
the like), issued pursuant to the Purchase Agreement or the Series A
Preferred Stock Purchase Agreement dated as of December 23, 1997. For
purposes of this Section 2.3, Major Investor includes any partners and other
affiliates of a Major Investor. A Major Investor who chooses to exercise the
right of first offer may designate as purchasers under such right itself or
its partners or affiliates in such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class of
its capital stock ("SHARES"), the Company shall first make an offering of
such Shares to each Major Investor in accordance with the following
provisions:
(a) The Company shall deliver a notice by certified mail
("NOTICE") to the Major Investors stating (i) its bona fide intention to
offer such Shares, (ii) the number of such Shares to be offered, and (iii)
the price and terms, if any, upon which it proposes to offer such Shares.
(b) Within 20 calendar days after delivery of the Notice, the
Major Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all outstanding convertible or
exercisable securities then held, by such Major Investor bears to the total
number of shares of Common Stock then outstanding (assuming full conversion
and exercise of all convertible or exercisable securities). The Company
shall promptly, in writing, inform each Major Investor that purchases all the
shares available to it (each, a "FULLY-EXERCISING INVESTOR") of any other
Major Investor's failure to do likewise. During the ten (10)-day period
commencing after receipt of such information, each Fully-Exercising Investor
shall be entitled to obtain that portion of the Shares for which Major
Investors were entitled to subscribe but which were not subscribed for by the
Major Investors that is equal to the proportion that the number of shares of
Common Stock
-14-
<PAGE>
issued and held, or issuable upon conversion and exercise of all outstanding
convertible or exercisable securities then held, by such Fully-Exercising
Investor bears to the total number of shares of Common Stock then outstanding
(assuming full conversion and exercise of all convertible or exercisable
securities).
(c) The Company may, during the 45-day period following the
expiration of the period provided in subsection 2.3(b) hereof, offer the
remaining unsubscribed portion of the Shares to any person or persons at a
price not less than, and upon terms no more favorable to the offeree than
those specified in the Notice. If the Company does not enter into an
agreement for the sale of the Shares within such period, or if such agreement
is not consummated within 60 days of the execution thereof, the right
provided hereunder shall be deemed to be revived and such Shares shall not be
offered unless first reoffered to the Major Investors in accordance herewith.
(d) The right of first offer in this paragraph 2.3 shall not
be applicable (i) to the issuance or sale of options or stock purchase rights
to employees, consultants and directors pursuant to plans or agreements
approved by the Board of Directors, (ii) to or after consummation of a public
offering of shares of Common Stock, (iii) to the issuance of securities
pursuant to the conversion or exercise of convertible or exercisable
securities which were originally excluded from this Section 2.3, (iv) to the
issuance of securities in connection with a bona fide business acquisition by
the Company, whether by merger, consolidation, sale of assets, sale or
exchange of stock or otherwise, (v) to the issuance of securities to
financial institutions or lessors in connection with commercial credit
arrangements, equipment financings, or similar transactions, which issuances
are primarily for other than equity financing purposes and provided that the
aggregate of such issuance and similar issuances in the preceding twelve
month period do not exceed 1% of the then outstanding Common Stock of the
Company (assuming full conversion and exercise of all outstanding convertible
and exercisable securities), (vi) to the issuance or sale of the Series C
Preferred Stock, or (vii) the issuance of securities pursuant to a stock
split, stock dividend, recapitalization or other combination.
2.4 TERMINATION OF COVENANTS. The covenants set forth in
Sections 2.1 through Section 2.3 shall terminate as to each Investor and be
of no further force or effect (i) immediately prior to the consummation of
the Company's initial public offering of shares of its Common Stock
registered under the Securities Act, or (ii) when the Company shall sell,
convey, or otherwise dispose of or encumber all or substantially all of its
property or business or merge into or consolidate with any other corporation
(other than a wholly-owned subsidiary corporation) or effect any other
transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of the Company is disposed of, provided
that this subsection (ii) shall not apply to (x) a merger effected
exclusively for the purpose of changing the domicile of the Company, or (y) a
merger or consolidation in which the holders of the Company's voting
securities immediately prior to such transaction continue to own more than
fifty percent (50%) of the voting power of the surviving or resulting entity.
The covenants set forth in Sections 2.1 and 2.2 shall terminate as to each
Investor and be of no further force or effect when the Company first becomes
subject to the periodic reporting requirements of
-15-
<PAGE>
Sections 13 or 15(d) of the Exchange Act, if this occurs earlier than the
events described in (i) or (ii) above.
3. MISCELLANEOUS.
3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any of the Series A and/or B Preferred Stock or any Common Stock
issued upon conversion thereof). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
3.2 GOVERNING LAW. This Agreement and all acts and transactions
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of California, without giving effect to principles of
conflicts of laws.
3.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.5 NOTICES. Unless otherwise provided, any notice required or
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier or sent by
telegram or fax, or forty-eight (48) hours after being deposited in the U.S.
mail, as certified or registered mail, with postage prepaid, and addressed to
the party to be notified at such party's address or fax number as set forth
below or on EXHIBIT A hereto or as subsequently modified by written notice.
3.6 EXPENSES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least 66 2/3% of the Registrable Securities then outstanding, not including
the Founders' Stock; provided that if such amendment has the effect of affecting
the Founders' Stock (i) in a manner different than securities issued to the
Investors and (ii) in a manner adverse to the interests of the holders of the
Founders' Stock, then such amendment shall require the consent of the holder or
holders of a majority of the Founders' Stock. Any amendment or waiver effected
in accordance with this paragraph shall be binding upon each
-16-
<PAGE>
holder of any Registrable Securities then outstanding, each future holder of
all such Registrable Securities, and the Company.
3.8 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
3.9 AGGREGATION OF STOCK. All shares of the Preferred Stock held or
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
3.10 TERMINATION OF EXISTING AGREEMENT. This Agreement contains the entire
understanding of the parties, and there are no further or other agreements or
understandings, written or oral, in effect between the parties relating to the
subject matter hereof except for the Intel Letter Agreement of even date
herewith, the terms of which are expressly incorporated herein by reference.
The signatories to this Agreement (other than the Company), as the holders of
more than sixty six and two thirds (66 2/3%) in interest of the Registrable
Securities (as defined in the Existing Agreement), hereby agree that the
Existing Agreement is hereby Second Amended and Restated in its entirety by this
Agreement, and the Existing Agreement shall be of no further force or effect.
[Signature Page Follows]
-17-
<PAGE>
The parties have executed this Second Amended and Restated Investors'
Rights Agreement as of the date first above written.
COMPANY:
eTOYS INC.
By: /s/ Edward C. Lenk
----------------------------------
Edward C. Lenk
President and Chief Executive officer
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
Fax: (310) 664-8202
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
DYNAFUND LP
By: /s/ Danny R.S. Ko
--------------------------------------
Name: Danny R.S. Ko
------------------------------------
(print)
Title: General Partner
-----------------------------------
Address: 21311 Hawthorne Blvd., Suite 300
--------------------------------
Torrance, CA 90503
--------------------------------
Fax: (310) 543-8733
--------------------------------
DYNAFUND INTERNATIONAL LP
By: /s/ Danny R.S. Ko
--------------------------------------
Name: Danny R.S. Ko
------------------------------------
(print)
Title: General Partner
-----------------------------------
Address: 21311 Hawthorne Blvd., Suite 300
--------------------------------
Torrence, CA 90503
--------------------------------
Fax: (310) 543-8733
--------------------------------
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTOR:
INTEL CORPORATION
By: /s/ Arvind Sodhani
-----------------------------------
Name: Arvind Sodhani
---------------------------------
(print)
Title: V.P. and Treasurer
--------------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: Treasurer
Fax: (408) 765-6038
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
MOORE GLOBAL INVESTMENTS, LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ Savvas Savvinidis
-----------------------------------
Name: Savvas Savvinidis
---------------------------------
(print)
Title: Director of Operations
--------------------------------
Address: c/o Citco Fund Services
(Bahamas), Ltd.
Bahamas Financial Center
Charlotte & Shirley Street
P.O. Box CB 13136
Nassau, Bahamas
Fax:
-----------------------------
REMINGTON INVESTMENTS STRATEGIES, L.P.
By: Moore Capital Advisors, L.L.C.
Its: General Partner
By: /s/ Savvas Savvinidis
-----------------------------------
Name: Savvas Savvinidis
---------------------------------
(print)
Title: Director of Operations
--------------------------------
Address: 1251 Avenue of the Americas
New York, New York 10020
Fax:
-----------------------------
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
MULTI-STRATEGIES FUND, L.P.
By: Moore Capital Advisors, L.L.C.
Its: General Partner
By: /s/ Savvas Savvinidis
-----------------------------------
Name: Savvas Savvinidis
---------------------------------
(print)
Title: Director of Operations
--------------------------------
Address: 1251 Avenue of the Americas
New York, New York 10020
Fax:
-----------------------------
MULTI-STRATEGIES FUND LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ Savvas Savvinidis
-----------------------------------
Name: Savvas Savvinidis
---------------------------------
(print)
Title: Director of Operations
--------------------------------
Address: c/o Citco Fund Services
(Bahamas), Ltd.
Bahamas Financial Center
Charlotte & Shirley Street
P.O. Box CB 13136
Nassau, Bahamas
Fax:
-----------------------------
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
HIGHLAND CAPITAL PARTNERS III LIMITED
PARTNERSHIP
By: Highland Management Partners III
Limited Partnership, its General
Partner
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
HIGHLAND ENTREPRENEURS' FUND III
LIMITED PARTNERSHIP
By: HEF III, LLC, its General Partner
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
HIGHLAND CAPITAL PARTNERS IV LIMITED
PARTNERSHIP
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
HIGHLAND ENTREPRENEURS' FUND IV
LIMITED PARTNERSHIP
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
idealab! CAPITAL PARTNERS I-A, LP
By its General Partner,
idealab! Capital Management I, LLC
By: /s/ William Elkus
-----------------------------------
William Elkus
Managing Member
Address: c/o idealab! Capital Partners
130 West Union Street
Pasadena, CA 91103
Fax: (626) 535-2881
idealab! CAPITAL PARTNERS I-B, LP
By its General Partner,
idealab! Capital Management I, LLC
By: /s/ William Elkus
-----------------------------------
William Elkus
Managing Member
Address: c/o idealab! Capital Partners
130 West Union Street
Pasadena, CA 91103
Fax: (626) 535-2881
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
BESSEMER VENTURE PARTNERS IV L.P.
By: Deer IV & Co. LLC, General Partner
By: /s/ Robert H. Buescher
-----------------------------------
Name: Robert H. Buescher
Title: Manager
Address: 1400 Old Country Road,
Suite 407
Westbury, NY 11590
Fax: (516) 997-2371
BESSEMER VENTURE INVESTORS L.P.
By: Deer IV & Co. LLC, General Partner
By: /s/ Robert H. Buescher
-----------------------------------
Name: Robert H. Buescher
Title: Manager
Address: 1400 Old Country Road,
Suite 407
Westbury, NY 11590
Fax: (516) 997-2371
BESSEC VENTURES IV L.P.
By: Deer IV & Co. LLC, General Partner
By: /s/ Robert H. Buescher
-----------------------------------
Name: Robert H. Buescher
Title: Manager
Address: 1400 Old Country Road,
Suite 407
Westbury, NY 11590
Fax: (516) 997-2371
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
SEQUOIA CAPITAL VIII
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS VIII
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS VIII (Q)
CMS PARTNERS LLC
SEQUOIA 1997
By: /s/ Michael Moritz
-----------------------------------
Name: Michael Moritz
---------------------------------
(print)
Title:
--------------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Fax: (650) 854-2977
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
FOUNDERS:
/s/ Edward C. Lenk
-------------------------------
Edward C. Lenk
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
Fax: (310) 664-8202
/s/ Frank C. Han
-------------------------------
Frank C. Han
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
Fax: (310) 664-8101
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
EXHIBIT A
PRIOR INVESTORS
DynaFund International LP
DynaFund LP
Intel Corporation
idealab! Capital Partners I-A, LP
Highland Capital Partners III Limited Partnership
Highland Entrepreneurs' Fund III Limited Partnership
idealab! Capital Partners I-A, LP
idealab! Capital Partners I-B, LP
Bessemer Venture Partners IV L.P.
Bessemer Venture Investors L.P.
Bessec Ventures IV L.P.
DynaFund International LP
DynaFund LP
Moore Global Investments, Ltd.
Remington Investment Strategies, L.P.
Multi Strategies Fund, L.P.
Multi-Strategies Fund Ltd.
Sequoia Capital VIII
Sequoia International Technology Partners VIII
Sequoia International Technology Partners VIII Q
CMS
Sequoia 1997
James L. Brock
Glen R. Van Ligten
VLG Investments 1998
<PAGE>
EXHIBIT B
NEW INVESTORS
Highland Capital Partners IV Limited Partnership
Highland Entrepreneurs' Fund IV Limited Partnership
Sequoia Capital Franchise Fund
<PAGE>
eTOYS INC.
SECOND AMENDED AND RESTATED VOTING AGREEMENT
This Second Amended and Restated Voting Agreement (the "AGREEMENT") is
made as of the 24th day of March, 1999, by and among eToys Inc., a Delaware
corporation (the "COMPANY"), idealab!, a Delaware corporation, Edward C.
Lenk, Frank C. Han (collectively, the "COMMON STOCKHOLDERS"), the prior
investors listed on EXHIBIT A hereto (the "PRIOR INVESTORS") and the new
investors listed on EXHIBIT B hereto (the "NEW INVESTORS"). The Prior
Investors and the New Investors are referred to herein collectively as the
"INVESTORS" and each individually as an "INVESTOR".
RECITALS
The Company and the Prior Investors entered into that certain Amended
and Restated Voting Agreement on June 4, 1998, as amended on June 18, 1998
(the "PURCHASE AGREEMENT").
The Company and the New Investors have entered into a Series C Preferred
Stock Purchase Agreement of even date herewith pursuant to which the Company
desires to sell to the New Investors and the Investors desire to purchase
from the Company shares of the Company's Series C Preferred Stock. A
condition to the New Investors' obligations under the Purchase Agreement is
that the Company and the Prior Investors amend and restate the Existing
Agreement in the manner set forth herein, for the purpose of setting forth
the terms and conditions pursuant to which the Investors shall vote their
shares of the Company's voting stock in favor of certain designees to the
Company's Board of Directors.
The Company's Third Amended and Restated Certificate of Incorporation
provides as follows: the holder of each share of Preferred Stock shall have
the right to one vote for each share of Common Stock into which such
Preferred Stock could then be converted, and with respect to such vote, such
holder shall have full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock, and shall be entitled to notice of
any stockholders' meeting in accordance with the bylaws of the Company, and
shall be entitled to vote, together with holders of Common Stock, with
respect to any question upon which holders of Common Stock have the right to
vote. In addition, (i) as long as twenty-five percent (25%) of the number of
shares of Series B Preferred Stock issued by the Company on the date the
Series B Preferred Stock was originally issued remain outstanding, the
holders of the Series B Preferred Stock shall be entitled, voting together as
a separate class, to elect two (2) directors (the "SERIES B DIRECTORS") of
this corporation at each annual election of directors and (ii) as long as
twenty-five percent (25%) of the number of shares of Series A Preferred Stock
issued by the Company on the date the Series A Preferred Stock was originally
issued remain outstanding, the holders of the Series A Preferred Stock shall
be entitled, voting together as a separate class, to elect one (1) director
(the "SERIES A DIRECTOR") of the Company at each annual election of
directors. The holders of Common Stock shall be entitled, voting together as
a separate class, to elect one (1) director (the "COMMON DIRECTOR") of the
Company at each annual meeting of directors. The
<PAGE>
holders of Preferred Stock and Common Stock voting together as a single class
shall have the right to elect any remaining directors (the "INDEPENDENT
DIRECTORS").
The Company and the Investors each desire to facilitate the voting
arrangements set forth in this Agreement, and the sale and purchase of shares
of Series B Preferred Stock pursuant to the Purchase Agreement, by agreeing
to the terms and conditions set forth herein.
AGREEMENT
The parties hereby agree as follows:
1. BOARD REPRESENTATION. Until the earlier of (i) the date the number
of shares of Common Stock held in the aggregate by funds affiliated with
Highland Capital Partners (the "HIGHLAND ENTITIES") (assuming conversion of
the Series B Preferred Stock held by such entities) falls below five percent
(5%) of the Company's then outstanding capital stock or (ii) the date that
the Highland Entities in the aggregate hold less than twenty-five percent
(25%) of the number of shares of Common Stock (assuming conversion of the
Series B Preferred Stock held by the Highland Entities) that the Highland
Entities in the aggregate purchased pursuant to the Purchase Agreement, the
Investors agree to vote or act with respect to their shares so as to elect as
the Series B Director an individual designated by Highland Capital Partners
III Limited Partnership, the initial designee of which shall be Dan Nova.
Until the earlier of (i) the date the number of shares of Common Stock held
in the aggregate by funds affiliated with Sequoia Capital (the "SEQUOIA
ENTITIES") (assuming conversion of the Series B Preferred Stock held by such
entities) falls below five percent (5%) of the Company's then outstanding
capital stock or (ii) the date that the Sequoia Entities in the aggregate
hold less than twenty-five percent (25%) of the number of shares of Common
Stock (assuming conversion of the Series B Preferred Stock held by the
Sequoia Entities) that the Sequoia Entities in the aggregate purchased
pursuant to the Purchase Agreement, the Investors agree to vote or act with
respect to their shares so as to elect as the Series B Director an individual
designated by the Sequoia Entities, the initial designee of which shall be
Michael Moritz. Until the earlier of (i) the date the number of shares of
Common Stock held in the aggregate by DynaFund LP and DynaFund International
LP (the "DYNAFUND ENTITIES") (assuming conversion of the Series A Preferred
Stock held by such entities) falls below five percent (5%) of the Company's
then outstanding capital stock or (ii) the date that the DynaFund Entities in
the aggregate hold less than twenty-five percent (25%) of the number of
shares of Common Stock (assuming conversion of the Series A Preferred Stock
held by the DynaFund Entities) that the DynaFund Entities in the aggregate
purchased pursuant to the Series A Preferred Stock Purchase Agreement dated
as of December 23, 1997, the Investors agree to vote or act with respect to
their shares so as to elect as the Series A Director an individual designated
by DynaFund LP, the initial designee of which shall be Tony Hung. During the
term of this Agreement, the Common Stockholders agree to vote or act with
respect to their shares so as to elect the Company's then-current Chief
Executive Officer as the Common Director. During the term of this
Agreement, the parties to this Agreement agree to vote or act with respect to
their shares so as to elect as one of the Independent Directors an individual
with relevant experience in the Company's industry, which person shall be
designated
-2-
<PAGE>
by the holders of a majority of the outstanding Preferred Stock and Common
Stock voting together as a single class, and which designee shall initially
be Peter Hart.
2. REMOVAL. In the event of any termination, removal or resignation
of any director, the Investors shall take all actions necessary and
appropriate to cause such vacancy to be filled in the manner by which such
director was elected pursuant to the terms of this Agreement.
3. CHANGE IN NUMBER OF DIRECTORS. The Investors will not vote for any
amendment or change to the Bylaws providing for the election of more than six
(6) directors, or any other amendment or change to the Bylaws inconsistent
with the terms of this Agreement.
4. LEGENDS. Each certificate representing Investors' Shares shall be
endorsed by the Company with a legend reading as follows:
"THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT BY AND AMONG
THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY (A COPY OF WHICH MAY BE
OBTAINED FROM THE COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES
THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL
BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT."
5. TERMINATION. This Agreement shall terminate upon the earlier of
(a) the consummation of the Company's initial public offering on a firm
underwriting basis of any of its securities reflecting in proceeds of at
least $20,000,000, or (b) ten (10) years from the date hereof.
6. AMENDMENTS; WAIVERS. Any term hereof may be amended or waived only
with the written consent of the Company and holders of at least 66-2/3% of
the Series A, Series B and Series C Preferred Stock voting together as a
single class; PROVIDED, HOWEVER, that, subject to the limitation set forth in
Section 1 hereto, in no event shall an amendment or waiver hereto which
limits the rights of Highland Capital Partners III Limited Partnership, the
Sequoia Entities or DynaFund L.P., respectively, to designate a director
under Section 1 be effective without the written consent of the Highland
Capital Partners III Limited Partnership, the Sequoia Entities or DynaFund
L.P., respectively. In addition, in no event shall an amendment or waiver
hereto which alters the obligations of the parties hereto under Section 1 to
agree to vote or act with respect to their shares so as to elect as one of
the Independent Directors an individual with relevant experience in the
Company's industry that is designated by the holders of the outstanding
Preferred Stock and Common Stock voting together as a single class be
effective without the written consent of the Common Stockholders. Any
amendment or waiver effected in accordance with this Section 6 shall be
binding upon the Company, the holders of the Preferred Stock and each of
their respective successors and assigns.
7. NOTICES. Any notice required or permitted by this Agreement shall
be in writing and shall be deemed sufficient on the date of delivery, when
delivered personally or by overnight courier or sent by telegram or FAX, or
forty-eight (48) hours after being deposited in the U.S.
-3-
<PAGE>
mail, as certified or registered mail, with postage prepaid, and addressed to
the party to be notified at such party's address or fax number as set forth
below or on EXHIBIT A hereto, or as subsequently modified by written notice.
8. SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a)
such provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c)
the balance of the Agreement shall be enforceable in accordance with its
terms.
9. ENFORCEABILITY/SEVERABILITY. The parties hereto agree that each
provision of this Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law. If any provision of this Agreement
shall nonetheless be held to be prohibited by or invalid under applicable
law, (a) such provision shall be effective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement, and (b) the parties
shall, to the extent permissible by applicable law, amend this Agreement, or
enter into a voting trust agreement under which shares of the DynaFund
Entities the ("DYNAFUND SHARES"), the shares held by the Highland Entities
("HIGHLAND SHARES"), the shares of the Sequoia Entities (the "SEQUOIA
SHARES") and shares of the Investors ("INVESTOR SHARES) and the Shares of the
Common Stockholders (the "COMMON STOCKHOLDER SHARES") (collectively, the
"TRUST SHARES") shall be transferred to the voting trust created thereby, so
as to make effective and enforceable the intent of this Agreement.
10. GOVERNING LAW. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State
of California, without giving effect to principles of conflicts of law.
11. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
12. SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors
and assigns of the parties. Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly
provided in this Agreement.
13. REMEDIES. Each party hereto will be entitled to enforce its rights
under this Agreement specifically, to recover damages by reason of any breach
of any provision hereof, and to exercise all other rights existing in its
favor. Each party hereto agrees and acknowledges that money damages may not
be an adequate remedy for any breach of the provisions of this Agreement and
that each holder may, in its sole discretion, apply for specific performance
and injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
-4-
<PAGE>
14. EXPENSES. The Company shall pay the reasonable expenses of
directors in attending Board meetings.
15. ENTIRE AGREEMENT. This Agreement, and the documents referred to
herein, constitute the entire agreement between the parties hereto pertaining
to the subject matter hereof, and any and all other written or oral
agreements existing between the parties hereto are expressly canceled.
[Signature Pages Follow]
-5-
<PAGE>
The parties hereto have executed this Amended and Restated Voting
Agreement as of the date first written above.
COMPANY:
eTOYS INC.
By: /s/ Edward C. Lenk
--------------------------------
Edward C. Lenk
President and Chief Executive officer
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
Fax: (310) 664-8202
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
DYNAFUND LP
By: /s/ Danny R.S. Ko
--------------------------------------
Name: Danny R.S. Ko
------------------------------------
(print)
Title: General Partner
-----------------------------------
Address: 21311 Hawthorne Blvd., Suite 300
---------------------------------
Torrance, CA 90503
---------------------------------
Fax: (310) 543-8733
---------------------------------
DYNAFUND INTERNATIONAL LP
By: /s/ Danny R.S. Ko
--------------------------------------
Name: Danny R.S. Ko
------------------------------------
(print)
Title: General Partner
-----------------------------------
Address: 21311 Hawthorne Blvd., Suite 300
---------------------------------
Torrance, CA 90503
---------------------------------
Fax: (310) 543-8733
---------------------------------
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTOR:
INTEL CORPORATION
By: /s/ Arvind Sodhani
------------------------------------
Name: Arvind Sodhani
----------------------------------
(print)
Title: V.P. and Treasurer
---------------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: Treasurer
Fax: (408) 765-6038
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
MOORE GLOBAL INVESTMENTS, LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ Savvas Savvinidis
---------------------------------
Name: Savvas Savvinidis
---------------------------------
(print)
Title: Director of Operations
-------------------------------
Address: c/o Citco Fund Services
(Bahamas), Ltd.
Bahamas Financial Center
Charlotte & Shirley Street
P.O. Box CB 13136
Nassau, Bahamas
Fax:
---------------------------------
REMINGTON INVESTMENTS STRATEGIES, L.P.
By: Moore Capital Advisors, L.L.C.
Its: General Partner
By: /s/ Savvas Savvinidis
---------------------------------
Name: Savvas Savvinidis
-------------------------------
(print)
Title: Director of Operations
------------------------------
Address: 1251 Avenue of the Americas
New York, New York 10020
Fax:
----------------------------
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
MULTI-STRATEGIES FUND, L.P.
By: Moore Capital Advisors, L.L.C.
Its: General Partner
By: /s/ Savvas Savvinidis
-----------------------------------
Name: Savvas Savvinidis
---------------------------------
(print)
Title: Director of Operations
--------------------------------
Address: 1251 Avenue of the Americas
New York, New York 10020
Fax:
-----------------------------
MULTI-STRATEGIES FUND LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ Savvas Savvinidis
-----------------------------------
Name: Savvas Savvinidis
---------------------------------
(print)
Title: Director of Operations
--------------------------------
Address: c/o Citco Fund Services
(Bahamas), Ltd.
Bahamas Financial Center
Charlotte & Shirley Street
P.O. Box CB 13136
Nassau, Bahamas
Fax:
-----------------------------
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
COMMON STOCKHOLDERS:
/s/ Edward C. Lenk
---------------------------------
Edward C. Lenk
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
Fax: (310) 664-8202
/s/ Frank C. Han
---------------------------------
Frank C. Han
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
Fax: (310) 664-8101
Bill Gross'
idealab!, a Delaware corporation
By: /s/ William Gross
-----------------------------------
Name: William Gross
---------------------------------
(print)
Title:
--------------------------------
Address: 130 West Union Street
Pasadena, CA 91103
Fax: (626) 535-2701
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
HIGHLAND CAPITAL PARTNERS III LIMITED
PARTNERSHIP
By: Highland Management Partners III
Limited Partnership, its General
Partner
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
HIGHLAND ENTREPRENEURS' FUND III
LIMITED PARTNERSHIP
By: HEF III, LLC, its General Partner
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
SIGNATURE PAGE TO ETOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
HIGHLAND CAPITAL PARTNERS IV LIMITED
PARTNERSHIP
By:
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
HIGHLAND ENTREPRENEURS' FUND IV
LIMITED PARTNERSHIP
By:
By: /s/ Daniel J. Nova
-----------------------------------
Name: Daniel J. Nova
---------------------------------
(print)
Title: Member
--------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
idealab! CAPITAL PARTNERS I-A, LP
By its General Partner,
idealab! Capital Management I, LLC
By: /s/ William Elkus
--------------------------------
William Elkus
Managing Member
Address: c/o idealab! Capital Partners
130 West Union Street
Pasadena, CA 91103
Fax: (626) 535-2881
idealab! CAPITAL PARTNERS I-B, LP
By its General Partner,
idealab! Capital Management I, LLC
By: /s/ William Elkus
--------------------------------
William Elkus
Managing Member
Address: c/o idealab! Capital Partners
130 West Union Street
Pasadena, CA 91103
Fax: (626) 535-2881
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
BESSEMER VENTURE PARTNERS IV L.P.
By: Deer IV & Co. LLC, General Partner
By: /s/ Robert H. Buescher
--------------------------------
Name: Robert H. Buescher
Title: Manager
Address: 1400 Old Country Road,
Suite 407
Westbury, NY 11590
Fax: (516) 997-2371
BESSEMER VENTURE INVESTORS L.P.
By: Deer IV & Co. LLC, General Partner
By: /s/ Robert H. Buescher
--------------------------------
Name: Robert H. Buescher
Title: Manager
Address: 1400 Old Country Road,
Suite 407
Westbury, NY 11590
Fax: (516) 997-2371
BESSEC VENTURES IV L.P.
By: Deer IV & Co. LLC, General Partner
By: /s/ Robert H. Buescher
--------------------------------
Name: Robert H. Buescher
Title: Manager
Address: 1400 Old Country Road,
Suite 407
Westbury, NY 11590
Fax: (516) 997-2371
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
SEQUOIA CAPITAL VIII
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS VIII
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS VIII (Q)
CMS PARTNERS LLC
SEQUOIA 1997
SEQUOIA CAPITAL FRANCHISE FUND
By: /s/ Michael Moritz
-----------------------------------
Name: Michael Moritz
---------------------------------
(print)
Title:
--------------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Fax: (650) 854-2977
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
EXHIBIT A
PRIOR INVESTORS
DynaFund International LP
DynaFund LP
Intel Corporation
idealab! Capital Partners I-A, LP
Highland Capital Partners III Limited Partnership
Highland Entrepreneurs' Fund III Limited Partnership
idealab! Capital Partners I-A, LP
idealab! Capital Partners I-B, LP
Bessemer Venture Partners IV L.P.
Bessemer Venture Investors L.P.
Bessec Ventures IV L.P.
DynaFund International LP
DynaFund LP
Intel Corporation
Moore Global Investments, Ltd.
Remington Investment Strategies, L.P.
Multi Strategies Fund, L.P.
Multi Strategies Fund Ltd.
Glen R. Van Ligten
James L. Brock
VLG Investments 1998
Multi Strategies Fund, L.P.
Multi-Strategies Fund Ltd.
Sequoia Capital VIII
Sequoia International Technology Partners VIII
Sequoia International Technology Partners VIII Q
CMS
Sequoia 1997
<PAGE>
EXHIBIT B
NEW INVESTORS
Highland Capital Partners IV Limited Partnership
Highland Entrepreneurs' Fund IV Limited Partnership
Sequoia Capital Franchise Fund
<PAGE>
ETOYS INC.
SECOND AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
This Second Amended and Restated Right of First Refusal and Co-Sale
Agreement (the "AGREEMENT") is made and entered into as of the 24th day of
March, 1999, by and among idealab!, a Delaware corporation ("IDEALAB!"),
Edward C. Lenk ("LENK") and Frank C. Han ("HAN") (idealab!, Lenk and Han
collectively the "FOUNDERS" and individually , the "FOUNDER"), eToys Inc., a
Delaware corporation (the "COMPANY"), the prior investors listed on EXHIBIT A
hereto (the "PRIOR INVESTORS") and the new investors listed on EXHIBIT B
hereto (the "NEW INVESTORS"). The Prior Investors and the New Investors are
referred to herein collectively as the "INVESTORS" and each individually as
an "INVESTOR".
RECITALS
The Company, the Founders and the Existing Investors entered into an
Amended and Restated Right of First Refusal and Co-Sale Agreement on June 4,
1998, as amended on June 17, 1998 (the "EXISTING AGREEMENT.")
The Company and the New Investors have entered into a Series C Preferred
Stock Purchase Agreement (the "PURCHASE AGREEMENT") of even date herewith,
pursuant to which the Company desires to sell to the New Investors and the
New Investors desire to purchase from the Company shares of the Company's
Series C Preferred Stock. A condition to the New Investors' obligations
under the Purchase Agreement is that the Company, the Founders and the Prior
Investors amend and restate the Existing Agreement in the manner set forth in
this Agreement in order to provide the New Investors with the opportunity to
purchase and/or participate, upon the terms and conditions set forth in this
Agreement, in subsequent sales by any Founder's of shares of the Company's
capital stock. The Company, the Prior Investors and the Founders each desire
to induce the New Investors to purchase shares of Series C Preferred Stock
pursuant to the Purchase Agreement by agreeing to the terms and conditions
set forth herein.
AGREEMENT
The Company, the Prior Investors, the New Investors and the Founders hereby
agree as follows:
1. SALES BY FOUNDERS.
(a) NOTICE OF SALES; ASSIGNMENT OF COMPANY RIGHT OF FIRST REFUSAL.
(i) Should any Founder propose to accept one or more bona
fide offers (collectively, a "PURCHASE OFFER") from any persons to purchase
shares of the Company's capital stock (or securities exercisable into the
Company's capital stock) now or hereafter owned (the "SHARES") by such
Founder (other than as set forth in Section 1(e) below), such Founder shall
<PAGE>
promptly deliver a notice (the "NOTICE") to the Company and each Investor
stating the terms and conditions of such Purchase Offer including, without
limitation, the number of Shares, the nature of such sale or transfer, the
consideration to be paid, and the name and address of each prospective
purchaser or transferee.
(ii) The Company agrees that in the event that the Company
declines to exercise in full the Right of First Refusal set forth in Section
3 of the Restricted Stock Purchase Agreement (or Section 5 of the Stock and
Note Purchase Agreement in the case of idealab!) between such Founder and the
Company (the "RIGHT OF FIRST REFUSAL"), the Company will provide each
Investor with notice of such determination at least thirty (30) days prior to
the end of the period in which the Right of First Refusal expires under such
Restricted Stock Purchase Agreement or Stock and Note Purchase Agreement.
Each Investor shall then have the right, exercisable by notice prior to the
end of such period, to exercise such Right of First Refusal as the Company's
assignee on a pro rata basis (based upon the number of Conversion Shares (as
defined below) held by such Investor relative to the aggregate number of
Conversion Shares held by all Investors); provided that if fewer than all
Investors elect to participate, the Shares that would otherwise be allocated
to non-participating Investors shall be allocated to each participating
Investor so that each participating Investor is entitled to purchase at least
such Investor's pro rata portion of such unallocated Shares (based upon the
number of Conversion Shares held by all participating Investors) or such
different number of shares as the participating Investors shall mutually
agree. In the event the Purchase Offer provides for consideration other than
cash, in lieu of such consideration, the Company and the Investors, may make
payment in cash in an amount equal to the full market value of such
consideration. Upon expiration or exercise of the Right of First Refusal,
the Company will provide notice to all Investors as to whether or not the
Right of First Refusal has been exercised by the Company or the Investors.
(b) CO-SALE RIGHT. To the extent that the Right of First Refusal
is not exercised by the Company or the Investors, each Investor shall have
the right (the "CO-SALE RIGHT"), exercisable upon written notice to the
Company within fifteen (15) business days after the expiration of the Right
of First Refusal to participate in such Founder's sale of Shares pursuant to
the specified terms and conditions of such Purchase Offer. To the extent an
Investor exercises such Co-Sale Right in accordance with the terms and
conditions set forth below, the number of Shares which such Founder may sell
pursuant to such Purchase Offer shall be correspondingly reduced. The
Co-Sale Right of each Investor shall be subject to the following terms and
conditions:
(i) CALCULATION OF SHARES. Each Investor may sell all or any
part of that number of shares of Common Stock of the Company issued or
issuable upon conversion of Series A, Series B and/or Series C Preferred
Stock or Common Stock received in connection with any stock dividend, stock
split or other reclassification thereof (the "CONVERSION SHARES") equal to
the product obtained by multiplying (A) the aggregate number of shares of
Common Stock covered by the Purchase Offer by (B) a fraction, the numerator
of which is the number of Conversion Shares at the time owned by such
Investor and the denominator of which is the combined number of Conversion
Shares at the time owned by all Investors and all Founders participating in
such sale. The provisions of this Agreement do not confer any Co-Sale rights
-2-
<PAGE>
with respect to any shares of Common Stock or other securities held by an
Investor that are not Conversion Shares. An Investor who chooses to exercise
the Co-Sale Right hereunder may designate as sellers under such right itself
or its partners or affiliates, in such proportions as it deems appropriate.
(ii) DELIVERY OF CERTIFICATES. Each Investor may effect its
participation in the sale by delivering to the selling Founder for transfer
to the purchase offeror one or more certificates, properly endorsed for
transfer, which represent the Conversion Shares, which such Investor elects
to sell.
(c) TRANSFER. The stock certificate or certificates which the
Investor delivers to the selling Founder pursuant to Section 1(b) shall be
delivered by such Founder to the purchase offeror in consummation of the sale
pursuant to the terms and conditions specified in the Notice, and such
Founder shall promptly thereafter remit to such Investor that portion of the
sale proceeds to which such Investor is entitled by reason of its
participation in such sale. To the extent that any prospective purchaser or
purchasers prohibits such assignment or otherwise refuses to purchase
Conversion Shares from an Investor exercising its Co-Sale Right hereunder,
the selling Founder or Founders shall not sell to such prospective purchaser
or purchasers any Shares unless and until, simultaneously with such sale, the
selling Founder or Founders shall purchase such Conversion Shares from such
Investor for the same consideration and on the same terms and conditions as
the proposed transfer described in the Notice (which terms and conditions
shall be no less favorable than those governing the sale to the purchaser by
the Founder or Founders).
(d) NO ADVERSE EFFECT. The exercise or non-exercise of the rights
of the Investors hereunder to participate in one or more sales of Shares made
by a Founder shall not adversely affect their rights to participate in
subsequent sales of Shares by a Founder.
(e) PERMITTED TRANSACTIONS. The provisions of Section 1 of this
Agreement shall not pertain or apply to:
(i) Any pledge of the Company's Common Stock made by a
Founder pursuant to a bona fide loan transaction which creates a mere
security interest;
(ii) Any repurchase of Common Stock by the Company;
(iii) Any transfer to a Founder's ancestors, descendants
or spouse or to a trust for their benefit by gift or inheritance;
(iv) any sale or transfer (including any bona fide gift) by a
Founder of up to 5% of the total number of shares of Common Stock held by such
Founder on the date of this Agreement.
PROVIDED, that (A) the Founder(s) shall inform the Company of such pledge,
transfer or gift prior to effecting it, and (B) the pledgee, transferee or
donee (collectively, the "PERMITTED
-3-
<PAGE>
TRANSFEREES") shall furnish the Company with a written agreement to be bound
by and comply with all provisions of this Agreement applicable to the
Founders.
2. PROHIBITED TRANSFERS. Any attempt by a Founder to transfer Shares in
violation of Section 1 of this Agreement shall be void and the Company agrees it
will not effect such a transfer nor will it treat any alleged transferee as the
holder of such shares without the written consent of the holders of 66-2/3% of
the Conversion Shares.
3. LEGENDED CERTIFICATES. Each certificate representing shares of the
Common Stock of the Company now or hereafter owned by the Founders or issued
to any Permitted Transferee pursuant to Section 1(e) shall be endorsed with
the following legend:
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS
OF A CERTAIN RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT BY AND
BETWEEN THE STOCKHOLDER, THE CORPORATION AND CERTAIN HOLDERS OF COMMON
AND PREFERRED STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY
BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION."
The foregoing legend shall be removed upon termination of this Agreement in
accordance with the provisions of Section 4(a).
4. MISCELLANEOUS PROVISIONS.
(a) TERMINATION. This Agreement shall terminate upon the earliest
to occur of any one of the following events (and shall not apply to any
transfer by a Founder in connection with any such event):
(i) The liquidation, dissolution or indefinite cessation of
the business operations of the Company;
(ii) The execution by the Company of a general assignment for
the benefit of creditors or the appointment of a receiver or trustee to take
possession of the property and assets of the Company;
(iii) The closing of the Company's initial public offering
of securities; PROVIDED that all shares of the Company's Series A, Series B
and/or Series C Preferred Stock are converted into shares of Common Stock
prior to or in connection with such offering; or
(iv) The closing of any acquisition, merger, reorganization or
other transaction which results in the stockholders of the Company
immediately prior to such transaction owning less than 50% of the Company's
voting stock immediately after such transaction.
-4-
<PAGE>
(b) NOTICES. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient on the date of delivery,
when delivered personally or by overnight courier or sent by telegram or fax,
or forty-eight (48) hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the
party to be notified at such party's address or fax number as set forth below
or on EXHIBIT A hereto, or as subsequently modified by written notice.
(c) SUCCESSORS AND ASSIGNS. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.
The rights of the Investors hereunder shall be assignable only (i) by each of
such Investors to any other Investor or (ii) an assignee or transferee who
acquires not less than 500,000 shares of the Company's Common Stock (as
adjusted for stock splits, stock dividends and the like, and assuming
conversion of all Series A, Series B and/or Series C Preferred Stock held by
such Investor) or all of such Investor's shares, if less; PROVIDED that such
limitation shall not apply to transfers by an Investor to constituent
stockholders, constituent partners or retired constituent partners or members
(including any constituent of a constituent) of the Investor (including
spouses and ancestors, lineal descendants and siblings of such partners or
members or spouses who acquire the Series A, Series B and/or Series C
Preferred Stock or Common Stock issued upon conversion thereof) if all such
transferees or assignees irrevocably agree in writing to appoint a single
representative as their attorney in fact for the purpose of receiving any
notices and exercising their rights under this Agreement.
(d) SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties
cannot reach a mutually agreeable and enforceable replacement for such
provision, then (i) such provision shall be excluded from this Agreement,
(ii) the balance of the Agreement shall be interpreted as if such provision
were so excluded and (iii) the balance of the Agreement shall be enforceable
in accordance with its terms.
(e) MODIFICATIONS AND AMENDMENTS. Any term hereof may be amended
or waived with the written consent of the Company, Investors holding at
least 66-2/3% the Series A, Series B and Series C Preferred Stock and holders
of 66-2/3% of the Founders' shares (or their respective successors and
assigns) voting together as a class. Any amendment or waiver effected in
accordance with this Section 4(e) shall be binding upon the Company, the
holders of Series A, Series B and Series C Preferred Stock and any holder of
Founders' Shares, and each of their respective successors and assigns.
(f) ATTORNEY'S FEES. If any action at law or in equity (including
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to
which such party may be entitled.
(g) GOVERNING LAW. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and
-5-
<PAGE>
interpreted in accordance with the laws of the State of California, without
giving effect to principles of conflicts of law.
(h) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(i) ENTIRE AGREEMENT. This Agreement, and the documents referred
to herein constitute the entire agreement between the parties hereto
pertaining to the subject matter hereof, and any and all other written or
oral agreements existing between the parties hereto are expressly canceled.
[Signature Page Follows]
-6-
<PAGE>
The parties have executed this Agreement as of the date first written
above.
COMPANY:
eTOYS INC.
By: /s/ Edward C. Lenk
-------------------------------------
Edward C. Lenk
President and Chief Executive officer
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
Fax: (310) 664-8202
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
INVESTORS:
DYNAFUND LP
By: /s/ Danny R.S. Ko
--------------------------------------
Name: Danny R.S. Ko
-------------------------------------
(print)
Title: General Partner
------------------------------------
Address: 21311 Hawthorne Blvd., Suite 300
---------------------------------
Torrance, CA. 90503
---------------------------------
Fax: (310) 543-8733
---------------------------------
DYNAFUND INTERNATIONAL LP
By:/s/ Danny R.S. Ko
--------------------------------------
Name: Danny R.S. Ko
-------------------------------------
(print)
Title: General Partner
------------------------------------
Address: 21311 Hawthorne Blvd., Suite 300
---------------------------------
Torrance, CA. 90503
---------------------------------
Fax: (310) 543-8733
---------------------------------
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
INVESTOR:
INTEL CORPORATION
By: /s/ Arvind Sodhani
-----------------------------------
Name: Arvind Sodhani
----------------------------------
(print)
Title: V.P. and Treasurer
---------------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: Treasurer
Fax: (408) 765-6038
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
INVESTORS:
MOORE GLOBAL INVESTMENTS, LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ Savvas Savvinidis
--------------------------------------------
Name: Savvas Savvinidis
------------------------------------------
(print)
Title: Director of Operations
------------------------------------------
Address: c/o Citco Fund Services (Bahamas), Ltd.
Bahamas Financial Center
Charlotte & Shirley Street
P.O. Box CB 13136
Nassau, Bahamas
Fax:
----------------------------------------
By: /s/ Savvas Savvinidis
--------------------------------------------
Name: Savvas Savvinidis
------------------------------------------
(print)
Title: Director of Operations
------------------------------------------
REMINGTON INVESTMENTS STRATEGIES, L.P.
By: Moore Capital Advisors, L.L.C.
Its: General Partner
Address: 1251 Avenue of the Americas
New York, New York 10020
Fax:
------------------------------------------
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
INVESTORS:
MULTI-STRATEGIES FUND, L.P.
By: Moore Capital Advisors, L.L.C.
Its: General Partner
By: /s/ Savvas Savvinidis
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Name: Savvas Savvinidis
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(print)
Title: Director of Operations
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Address: 1251 Avenue of the Americas
New York, New York 10020
Fax:
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MULTI-STRATEGIES FUND LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ Savvas Savvinidis
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Name: Savvas Savvinidis
------------------------------------------
(print)
Title: Director of Operations
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Address: c/o Citco Fund Services (Bahamas), Ltd.
Bahamas Financial Center
Charlotte & Shirley Street
P.O. Box CB 13136
Nassau, Bahamas
Fax:
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SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
INVESTORS:
HIGHLAND CAPITAL PARTNERS III LIMITED PARTNERSHIP
By: Highland Management Partners III
Limited Partnership, its General Partner
By: /s/ Daniel J. Nova
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Name: Daniel J. Nova
------------------------------------------
(print)
Title: Member
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Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
HIGHLAND ENTREPRENEURS' FUND III LIMITED
PARTNERSHIP
By: HEF III, LLC, its General Partner
By: /s/ Daniel J. Nova
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Name: Daniel J. Nova
------------------------------------------
(print)
Title: Member
------------------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
INVESTORS:
HIGHLAND CAPITAL PARTNERS IV LIMITED PARTNERSHIP
By:
By: /s/ Daniel J. Nova
--------------------------------------------
Name: Daniel J. Nova
------------------------------------------
(print)
Title: Member
------------------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
HIGHLAND ENTREPRENEURS' FUND IV LIMITED
PARTNERSHIP
By:
By: /s/ Daniel J. Nova
--------------------------------------------
Name: Daniel J. Nova
------------------------------------------
(print)
Title: Member
------------------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
Fax: (617) 531-1550
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
INVESTORS:
idealab! CAPITAL PARTNERS I-A, LP
By its General Partner,
idealab! Capital Management I, LLC
By: /s/ William Elkus
---------------------------------------
William Elkus
Managing Member
Address: c/o idealab! Capital Partners
130 West Union Street
Pasadena, CA 91103
Fax: (626) 535-2881
idealab! CAPITAL PARTNERS I-B, LP
By its General Partner,
idealab! Capital Management I, LLC
By: /s/ William Elkus
---------------------------------------
William Elkus
Managing Member
Address: c/o idealab! Capital Partners
130 West Union Street
Pasadena, CA 91103
Fax: (626) 535-2881
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
INVESTORS:
BESSEMER VENTURE PARTNERS IV L.P.
By: Deer IV & Co. LLC, General Partner
By: /s/ Robert H. Buescher
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Name: Robert H. Buescher
Title: Manager
Address: 1400 Old Country Road, Suite 407
Westbury, NY 11590
Fax: (516) 997-2371
BESSEMER VENTURE INVESTORS L.P.
By: Deer IV & Co. LLC, General Partner
By: /s/ Robert H. Buescher
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Name: Robert H. Buescher
Title: Manager
Address: 1400 Old Country Road, Suite 407
Westbury, NY 11590
Fax: (516) 997-2371
BESSEC VENTURES IV L.P.
By: Deer IV & Co. LLC, General Partner
By: /s/ Robert H. Buescher
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Name: Robert H. Buescher
Title: Manager
Address: 1400 Old Country Road, Suite 407
Westbury, NY 11590
Fax: (516) 997-2371
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
INVESTORS:
SEQUOIA CAPITAL VIII
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS VIII
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS VIII (Q)
CMS PARTNERS LLC
SEQUOIA 1997
SEQUOIA FRANCHISE CAPITAL FUND
By: /s/ Michael Moritz
---------------------------------------
Name: Michael Moritz
--------------------------------------
(print)
Title:
------------------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Fax: (650) 854-2977
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
FOUNDERS:
Bill Gross'
idealab!, a Delaware corporation
By: /s/ William Gross
------------------------------------
Name: William Gross
-----------------------------------
(print)
Title:
---------------------------------
Address: 130 West Union Street
Pasadena, CA 91103
Fax: (626) 535-2701
/s/ Edward C. Lenk
----------------------------------------
Edward C. Lenk
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
Fax: (310) 664-8202
/s/ Frank C. Han
----------------------------------------
Frank C. Han
Address: 2850 Ocean Park Boulevard
Suite 225
Santa Monica, CA 90405
Fax: (310) 664-8101
SIGNATURE PAGE TO eTOYS INC. SECOND
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
<PAGE>
EXHIBIT A
PRIOR INVESTORS
DynaFund International LP
DynaFund LP
Intel Corporation
idealab! Capital Partners I-A, L.P.
James L. Brock
Highland Capital Partners III Limited Partnership
Highland Entrepreneurs' Fund III Limited Partnership
idealab! Capital Partners I-A, LP
idealab! Capital Partners I-B, LP
Bessemer Venture Partners IV L.P.
Bessemer Venture Investors L.P.
Bessec Ventures IV L.P.
DynaFund International LP
DynaFund LP
Moore Global Investments, Ltd.
Remington Investment Strategies, L.P.
Multi Strategies Fund, L.P.
Multi-Strategies Fund Ltd.
Sequoia Capital VIII
Sequoia International Technology Partners VIII
Sequoia International Technology Partners VIII (Q)
CMS
Sequoia 1997
VLG Investments 1998
Glen R. Van Ligten
<PAGE>
EXHIBIT B
NEW INVESTORS
Highland Capital Partners IV Limited Partnership
Highland Entrepreneurs' Fund IV Limited Partnership
Sequoia Capital Franchise Fund
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 15, 1999 (except Note 8, as to which the
date is March 25, 1999), in Amendment No. 1 to the Registration Statement (Form
S-1 No. 333-72469) and related Prospectus of eToys Inc. for the registration of
8,200,000 shares of its common stock.
Ernst & Young LLP
Los Angeles, California
The foregoing consent is in the form that will be signed upon the completion
of the stock split described in Note 8 to the financial statements.
/s/ Ernst & Young LLP
Los Angeles, California
April 1, 1999
