<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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
<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.
------------------------------
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 , 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 or sale is not
permitted.
<PAGE>
Shares
[LOGO]
ETOYS INC.
Common Stock
------------------
This is an initial public offering of shares of Common Stock of eToys Inc.
All of the 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 $ and $ . eToys intends to list the Common
Stock on the Nasdaq National Market under the symbol "ETYS".
SEE "RISK FACTORS" BEGINNING ON PAGE TO READ ABOUT CERTAIN 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 certain circumstances, purchase up to an
additional shares from eToys at the initial public offering price, less
the underwriting discount.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
------------------------
Prospectus dated , 1999.
<PAGE>
[INSIDE FRONT COVER]
[COLOR ARTWORK]
[DESCRIPTION TO BE FILED BY AMENDMENT]
------------------------
eToys-Registered Trademark- is a registered trademark of eToys.
Toysearch-TM- and "We bring the toy store to you"-TM- are trademarks of eToys.
All other brand names or trademarks appearing in this prospectus are the
property of their respective holders.
<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 (I)
ASSUMES THE AUTOMATIC CONVERSION OF OUR OUTSTANDING REDEEMABLE CONVERTIBLE
PREFERRED STOCK INTO COMMON STOCK UPON CLOSING OF THE OFFERING AND (II) 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 the 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 8,500 SKUs representing
more than 700 brands. Our Web site features detailed product information,
value-added services and innovative merchandising through an intuitive and
easy-to-use interface. 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.
Since launching our Web site in October 1997, we have sold children's
products to over 320,000 customers. 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 traditional store-based retailers face a number of
challenges in providing a satisfying shopping experience for consumers of
children's products. As a result, 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 compelling 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 are the only retailer to
provide a comprehensive selection of both traditional, well-known brands
(e.g., Mattel, Hasbro and LEGO) and specialty brands (e.g., BRIO, PLAYMOBIL
and Learning Curve).
- - VALUE-ADDED SERVICES. To assist our customers, who are generally adults
purchasing for children, we offer product reviews, recommendations, gift
suggestions and personalized 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 and 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 are:
- - FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS. We intend to become the
ultimate 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 value-added services, pursuing
international opportunities and acquiring complementary businesses, products
or technologies.
- - PROMOTE REPEAT PURCHASES. We intend to maximize the lifetime value of our
customer relationships by targeting existing customers through direct
marketing techniques, building superior personalization features 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,
and plan to increase the automation and efficiency of our supply chain and
fulfillment activities.
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 executive 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. See
"Underwriting".
<TABLE>
<S> <C>
Shares offered by eToys...................... shares
Shares to be outstanding after the shares(1)
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>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL ENDED
YEAR ENDED DECEMBER 31,
MARCH 31, --------------------------
1998 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 4,228
------------ ------------ ------------
Operating loss................................................. (2,270) (1,112) (15,696)
Net loss....................................................... $ (2,268) $ (1,127) $ (15,258)
Pro forma basic net loss per share(3).......................... $ (0.23) $ (0.14) $ (0.58)
Shares used to compute pro forma basic net loss per share(3)... 10,077,634 7,959,833 26,429,153
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------
ACTUAL AS ADJUSTED(4)
--------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 18,545 $
Working capital..................................................................... 10,117
Total assets........................................................................ 27,199
Long-term capital lease obligations, less current portion........................... 35
Total stockholders' equity (deficit)................................................ (15,528)
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of December 31, 1998. Includes an aggregate
of 723,371 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. Excludes shares issuable upon
exercise of a warrant we are obligated to issue to an equipment lessor prior
to this offering. Also excludes 13,123,813 shares of Common Stock reserved
for issuance under our stock option and stock purchase plans, of which
4,254,200 shares were subject to outstanding options as of December 31, 1998
with a weighted average exercise price of $0.996 per share. See
"Management--Stock Plans" and Notes 6 and 8 of Notes to Financial
Statements.
(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.
(4) "As adjusted" reflects the application of the net proceeds from the sale of
shares of Common Stock offered by us at an assumed initial
public offering price of $ per share, after deducting the underwriting
discount and estimated offering expenses. It also reflects conversion of all
outstanding shares of Redeemable Convertible Preferred Stock into Common
Stock upon the closing of this offering. See "Use of Proceeds" and
"Capitalization".
5
<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.
THIS PROSPECTUS ALSO CONTAINS CERTAIN 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, THOSE DISCUSSED BELOW AND
ELSEWHERE IN THIS PROSPECTUS.
WE HAVE A LIMITED OPERATING HISTORY
We were incorporated in November 1996. We began selling products on our Web
site in October 1997. Accordingly, we have a limited operating history. An
investor in our Common Stock must consider the risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets. These
risks include our:
- - evolving business model;
- - competition;
- - need for increased customer acceptance of the online purchase of children's
products;
- - ability to maintain and expand our customer base;
- - ability to manage inventory levels and product return risks;
- - need to manage growth and changing operations, including our recent
implementation of a new accounting and financial reporting system;
- - need to continue to develop and upgrade our Web site, transaction-processing
systems and network infrastructure;
- - ability to scale our systems and fulfillment capabilities to accommodate the
growth of our business;
- - ability to access additional capital when required;
- - ability to develop and renew strategic relationships;
- - dependence upon key personnel; and
- - dependence on the reliability and growing use of the Internet for commerce and
communication and on general economic conditions.
We cannot be certain that our business strategy will be successful or that
we will successfully address these risks.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH
FLOW
Since inception, we have incurred significant losses, and as of December 31,
1998, we had an accumulated deficit of $17.5 million. We incurred net losses of
$2.3 million for the fiscal year ended March 31, 1998 and $15.3 million for the
nine months ended December 31, 1998.
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 order fulfillment
infrastructure;
- - the continued development of our Web site, transaction-processing systems and
network infrastructure;
6
<PAGE>
- - the expansion of our product offerings and Web site content; and
- - strategic relationship development.
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 FUTURE OPERATING RESULTS ARE UNPREDICTABLE
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 for any unexpected revenue shortfall. We may also be unable
to increase our spending and expand our operations in a timely manner to
adequately meet customer demand to the extent it exceeds our expectations.
Our annual and quarterly operating results may be affected 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 fulfillment operations;
- - our inability to adequately maintain, upgrade and develop our Web site,
transaction-processing systems or network infrastructure;
- - 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;
- - increases in the cost of online or offline advertising;
- - our inability to attract new personnel in a timely and effective manner or
retain existing personnel;
- - 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
7
<PAGE>
distribution of toys, video games, software, videos and music;
- - general economic conditions 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 materially and
adversely affect our gross margins and operating results in future periods.
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.
OUR MARKET IS HIGHLY SEASONAL
The market for children's toys, video games, software, videos and music is
highly seasonal. According to industry sources, approximately 52% of retail
sales in this market occurred in the fourth calendar quarter of each of 1997 and
1998. Accordingly, we have historically experienced and expect to continue to
experience seasonal fluctuations in our net sales. 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.
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 fulfillment activities and may
cause a shortfall in net sales as compared to expenses in a given period.
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. If for any
reason our sales were below seasonal norms during this quarter, our annual
operating results would be adversely affected. Historically, net sales during
the first three calendar quarters of the year are lower than in the fourth
calendar quarter, and we expect this trend to continue. These seasonal patterns
will cause quarterly fluctuations in our operating results and could adversely
affect our financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
CONSUMER TRENDS CHANGE AND WE FACE SIGNIFICANT INVENTORY RISK
The market for children's toys, video games, software, videos and music is
subject to rapidly changing trends in consumer tastes. It is critical to our
success that we accurately predict these trends and stock sufficient amounts of
popular toys and other products on a timely basis and not overstock unpopular
products. Since 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 adversely affect our
operating results for the entire fiscal year.
We carry a significant level of inventory. As a result, the changing trends
in the market for children's toys, video games, software, videos and music
subject us to significant inventory risks. The demand for certain products can
change between the time the products are ordered and the date of receipt. 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
8
<PAGE>
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 subject us to additional inventory risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business".
WE RELY ON KEY TOY VENDORS AND KEY DISTRIBUTORS
Our success depends on our ability to purchase products in sufficient
quantities at competitive prices, particularly for the holiday shopping season.
Additionally, vendors from time to time offer exclusive allocations of product
to certain retailers for limited periods of time. If we are not able to offer
our customers sufficient quantities of toys or offer products in a timely
manner, our business will be adversely affected.
According to industry sources, sales of Mattel and Hasbro products
represented approximately 31% of traditional domestic toy sales during 1997. As
a result, 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. 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 certain supply of toys or other products. From time to
time, we have experienced difficulty in obtaining sufficient product allocation
from certain key vendors. If we were unable to obtain sufficient quantities of
products from Mattel, Hasbro or our video game distributor, our business would
be adversely affected.
In addition, such vendors have, and may continue to expand, their own online
retailing efforts, which may impact our ability to get sufficient product
allocations from such vendors.
WE NEED TO MANAGE GROWTH IN OPERATIONS
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We continue to increase the scope of our operations and have
grown our headcount substantially. Excluding part-time employees that we hire
during the fourth calendar quarter of each year, at December 31, 1997, we had a
total of 13 employees and at December 31, 1998, we had a total of 235 employees.
This growth has placed, and our anticipated future operations will continue to
place, a significant strain on our management, information systems and
resources. Furthermore, our current fulfillment operations are not adequate to
accommodate significant increases in customer demand that may occur during the
fourth calendar quarter of 1999. As a result, during 1999, we intend to open a
second fulfillment facility that will be located outside of the greater Los
Angeles area. We are not experienced in coordinating and managing fulfillment
operations in geographically distant locations. This task will place a further
strain on our management, information systems and resources.
We expect that we will need to continue to improve our financial and
managerial controls and reporting systems and procedures. We recently installed
a new accounting and financial reporting system and we are currently in the
process of integrating such system with certain of our other information
systems. A failure to successfully implement and integrate these systems would
adversely affect our business. In addition, we will need to continue to expand,
train and manage our workforce. Furthermore, we expect that we will be required
to manage multiple relationships with various vendors and other third parties.
WE FACE RISKS ASSOCIATED WITH OUR ACCOUNTING AND FINANCIAL REPORTING SYSTEMS
We have recently implemented new accounting and financial reporting
software. In connection with the implementation, we have encountered
difficulties integrating this new
9
<PAGE>
software with certain of our other information systems. Additionally, we are in
the process of upgrading certain of 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. If we fail to successfully implement and integrate these new
financial reporting and information systems or we are not able to scale these
systems with our growth, we may not have adequate, accurate and timely financial
information. Failure to have adequate, accurate and/or timely financial
information would harm our business and could lead to volatility in our stock
price.
OUR MARKETS ARE HIGHLY COMPETITIVE
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. Barriers to entry
are minimal, and current and new competitors can launch new Web sites at a
relatively low cost. In particular, 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 certain of
their products directly online, such as Mattel and Hasbro;
- - other online retailers that include certain 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 of our current and potential 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 current and potential competitors can
devote substantially more resources to Web site and systems development than we
can. In addition, larger, well-established and well-financed entities may
acquire, invest in or form joint ventures 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.
Certain of 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 that select specific titles from a variety of Web sites and
may direct customers to other online toy, video game, software, video and music
retailers, may increase competition.
If we face increased competition, our operating results may be adversely
affected.
10
<PAGE>
WE MAY ENTER NEW BUSINESS CATEGORIES
We may choose to expand our operations by developing new departments or
product categories, promoting new or complementary products or sales formats,
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. We may not
be successful in our efforts to expand our operations, and potential customers
may not react favorably to these efforts. Furthermore, any new department or
product category that is launched by us but not favorably received by consumers
could damage our brand or reputation. An expansion of our business in this
manner would also require significant additional expenses, expose us to
additional inventory risk and development, operations and editorial resources
and would strain our management, financial and operational resources and subject
us to increased inventory risk.
WE FACE FULFILLMENT OPERATIONS RISKS
Our success depends on our ability to rapidly scale our fulfillment
operations in order to accommodate a significant increase in customer orders.
Our current fulfillment operations are not adequate to accommodate significant
increases in customer demand that may occur during the fourth calendar quarter
of 1999. We must also be able to rapidly scale our fulfillment operations and
information systems to accommodate significant increases in demand, which may
require us to automate tasks that are currently performed manually. If we do not
successfully scale our fulfillment operations to accommodate demand generally
and, in particular, increased demand during the fourth calendar quarter of each
year, due to the seasonal nature of our business, our business will be adversely
affected.
During 1999, we intend to open a second fulfillment facility that will be
located outside of the greater Los Angeles area. We are not experienced in
coordinating and managing fulfillment operations in geographically distant
locations. This planned expansion may cause disruptions that adversely affect
our business. Further, we rely upon third-party carriers for product shipments,
including shipments to and from our fulfillment 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 adversely affect our reputation and brand. We also depend
upon temporary employees to adequately staff our fulfillment facility,
particularly during the holiday shopping season. If we do not have sufficient
sources of temporary employees, our business will be adversely affected.
WE HAVE CAPACITY CONSTRAINT AND SYSTEM DEVELOPMENT RISKS
Our success, in particular our ability to successfully receive and fulfill
orders and provide high quality customer service, largely depends on the
efficient and uninterrupted operation of our computer and communications
systems. Our success also depends on our ability to rapidly expand our Web site,
transaction-processing systems and network infrastructure without any systems
interruptions in order to accommodate significant increases in visitors to our
Web site and significant increases in customer orders. Many of our software
systems are custom-developed and we rely on our employees and certain
third-party contractors to develop and maintain these systems. If certain of
these employees or contractors become unavailable to us, we may experience
difficulty in improving and maintaining such systems. Although we are
continually enhancing and expanding our Web site, transaction-processing systems
and network infrastructure, we have experienced periodic systems interruptions,
which we believe will continue to occur. Due to the seasonal nature of our
business, it is particularly important that we are able to expand our Web site,
transaction-processing systems and network infrastructure as necessary in
preparation for the fourth
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<PAGE>
calendar quarter and that we operate during that quarter without systems
interruptions. Our failure to achieve or maintain high capacity data
transmission without system downtime, particularly during the fourth calendar
quarter, would adversely affect our business.
WE FACE THE RISKS OF SYSTEM FAILURES
Substantially all of our product development and information management
systems, as well as inventory, are in facilities we lease in Southern
California. Substantially all of our computer and communications hardware
systems are located at a third-party facility in Sunnyvale, California. Our
systems and operations, including our fulfillment 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. The occurrence of a natural disaster or unanticipated
problems at our leased facilities in Southern California or at the third-party
facility in Sunnyvale, California could cause interruptions or delays in our
business, loss of data or render us unable to accept and fulfill customer
orders. In additional, 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 adversely affect our
reputation and brand and business.
WE ARE EXPOSED TO RISKS ASSOCIATED
WITH ONLINE COMMERCE SECURITY AND
CREDIT CARD FRAUD
Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To securely transmit confidential information, such as customer
credit card numbers, we rely on encryption and authentication technology that we
license from third parties. We cannot predict whether events or developments
will result in a compromise or breach of the algorithms we use to protect
customer transaction data. 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. Our
business may be adversely affected if our security measures do not prevent
security breaches and we cannot assure that we can prevent all security
breaches.
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, a merchant
is liable for fraudulent credit card transactions where, as is the case with the
transactions we process, that merchant does not obtain a cardholder's signature.
A failure to adequately control fraudulent credit card transactions would
adversely affect our business.
WE WILL NEED ADDITIONAL CAPITAL
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 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. 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.
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<PAGE>
OUR COMMON STOCK PRICE MAY BE VOLATILE
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:
- - 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.
The market prices of the securities of Internet-related and online commerce
companies have been especially volatile. Broad market and industry factors may
adversely affect the market price of our Common Stock, regardless of our actual
operating performance. 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 adversely affect our stock price.
WE DEPEND ON THE INTERNET AND THE
DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our success will depend in large part on continued growth in, and the use
of, the Internet, particularly for commerce. There are critical issues
concerning the commercial use of the Internet which remain unresolved. The
issues concerning the commercial use of the Internet which we expect to affect
the development of the market for our services include:
- - security;
- - reliability;
- - cost;
- - ease of access;
- - quality of service; and
- - increases in bandwidth availability.
If the Internet develops more slowly than we expect, as a commercial or
business medium, it will adversely affect our business. In addition, companies
that control access to Internet transactions through network access or Web
browsers could promote our competitors or charge us a substantial fee for
inclusion in their product or service offerings. Either of these developments
could adversely affect our business.
RAPID TECHNOLOGICAL CHANGE MAY ADVERSELY AFFECT US
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. Our future success will depend on our ability to do the
following:
- - both license and internally develop leading technologies useful in our
business;
- - enhance our existing services;
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<PAGE>
- - develop new services and technologies that address the increasingly
sophisticated and varied needs of our prospective customers; and
- - respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
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, transaction-processing systems and network
infrastructure to customer requirements or emerging industry standards. 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.
INTELLECTUAL PROPERTY CLAIMS AGAINST US
CAN BE COSTLY AND RESULT IN THE LOSS
OF SIGNIFICANT RIGHTS
Other parties may assert infringement or unfair competition claims against
us. In the past, other parties have sent us notice of claims of infringement of
proprietary rights, and we expect to receive other notices 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 adversely
affect 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
adversely affect our business.
PROTECTION OF OUR TRADEMARKS AND
PROPRIETARY RIGHTS IS UNCERTAIN
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 and/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 sell our products and services online.
Therefore, the steps we take to protect our proprietary rights may be
inadequate.
PROTECTION OF DOMAIN NAME IS UNCERTAIN
We currently hold various Web domain names relating to our brand, 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. As a result, we
may be unable to acquire or maintain relevant domain names in all countries in
which we conduct business. Furthermore, the relationship between regulations
governing domain names and laws
14
<PAGE>
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.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The United States Congress recently
enacted Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The European Union recently enacted
its own privacy regulations. The law of the Internet, however, remains largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. In
addition, the growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the Internet could adversely affect our business.
WE MAY BE LIABLE FOR INTERNET CONTENT
We believe that our future success will depend in part upon our ability to
deliver original and compelling descriptive content about the children's toys,
video games, software, videos and music that we sell on the Internet. 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. In the
past, plaintiffs have brought such 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. 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.
WE MAY BE SUBJECT TO SALES AND OTHER TAXES
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. 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, it
could adversely affect our business.
WE DEPEND ON KEY PERSONNEL
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 two 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.
WE FACE YEAR 2000 RISKS
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
15
<PAGE>
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 have reviewed the year 2000 compliance of our internally developed
proprietary software. 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 fulfillment functions, as well as
firewall, security, 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 and of our vendors.
Based upon the results of this assessment, we will develop and implement, if
necessary, a remediation plan with respect to third-party suppliers, third-party
vendors and computer technology and services that may fail to be year 2000
compliant. At this time, the expenses associated with this assessment and
potential remediation plan 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. 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.
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.
WE HAVE DISCRETION AS TO USE OF PROCEEDS
Our management can spend the proceeds from this offering in ways with which
the stockholders may not agree. We cannot predict that the proceeds will be
invested to yield a favorable return. See "Use of Proceeds".
CONTROL BY OFFICERS AND DIRECTORS
Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately % of our outstanding Common
Stock following the completion of this offering. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors
16
<PAGE>
and the approval of mergers or other business combination transactions. See
"Principal Stockholders".
ANTITAKEOVER PROVISIONS
Provisions of our Amended and Restated Certificate of Incorporation, 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".
SHARES ELIGIBLE FOR FUTURE SALE
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
shares of Common Stock (based upon 29,512,331 shares outstanding as of
December 31, 1998), assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants after December 31,
1998. Of these shares, the shares sold in this offering are freely tradable.
This leaves 29,512,331 remaining shares, all of which will be eligible for sale
in the public market beginning 180 days after the date of this prospectus. See
"Management--Stock Plans", "Shares Eligible for Future Sale" and "Underwriting".
WE DO NOT INTEND TO PAY DIVIDENDS
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy".
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<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares being offered hereby at
an assumed public offering price of $ per share are estimated to be $
million, after deducting the underwriting discount and estimated offering
expenses payable by us, ($ million if the underwriters' over-allotment
option is exercised in full). We expect to use the net proceeds of this offering
for the payment of marketing and sales expenses, including payments associated
with advertising, capital expenditures associated with technology and systems
upgrades, the expansion of our fulfillment operations and executive offices and
general corporate purposes including working capital. In addition, we may 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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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
(i) on an actual basis, (ii) on a pro forma basis to reflect the automatic
conversion of all outstanding shares of Redeemable Convertible Preferred Stock
into shares of Common Stock upon the closing of this offering and (iii) on an as
adjusted basis as to give effect to the receipt of the estimated net proceeds
from the sale by us of shares of Common Stock at an assumed initial
public offering price of $ per share.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------
AS
ACTUAL PRO FORMA ADJUSTED
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term capital lease obligations, less current
portion............................................... $ 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, pro forma and as adjusted, none issued
and outstanding..................................... 3,947 --
Series B Preferred Stock; $.0001 par value; 11,886,649
shares issued and outstanding, actual; no shares
authorized, pro forma and as adjusted, none issued
and outstanding..................................... 24,952 --
Stockholders' equity (deficit):
Preferred Stock: $0.0001 par value, 5,000,000 shares
authorized, none issued or outstanding actual, pro
forma and as adjusted............................... -- --
Common Stock: $0.0001 par value, 50,000,000 shares
authorized, 11,259,279 shares issued and outstanding
actual; 200,000,000 shares authorized, 29,512,331
issued and outstanding, pro forma; shares
issued and outstanding as adjusted(1)............... 1 3
Additional paid-in capital.............................. 32,202 61,099
Receivables from stockholders........................... (147) (147)
Deferred compensation(2)................................ (30,058) (30,058)
Accumulated deficit..................................... (17,526) (17,526)
--------- ---------- ----------
Total stockholders' equity (deficit)................ (15,528) 13,371
--------- ---------- ----------
Total capitalization............................ $ 13,406 $ 13,406 $
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes an aggregate of 723,371 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. Excludes
shares issuable upon exercise of a warrant we are obligated to issue to an
equipment lessor prior to this offering. Also excludes 13,123,813 shares
reserved for issuance under our stock option and stock purchase plans, of
which 4,254,200 were subject to outstanding options as of December 31, 1998.
See "Management-- Stock Plans" and Notes 6 and 8 of Notes to Financial
Statements.
(2) We recorded deferred compensation of $31.6 million for the nine months ended
December 31, 1998. See Note 5 of Notes to Financial Statements.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1998 was
approximately $ million or $ 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
Redeemable Convertible 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 shares of Common Stock offered by
us at an assumed initial public offering price of $ 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 $ million or $ per share of Common Stock. This
represents an immediate increase in net tangible book value of $ per
share to existing stockholders and an immediate dilution of $ 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....................... $
Pro forma net tangible book value per share before the offering..... $
Increase per share attributable to new investors....................
---------
Pro forma net tangible book value per share after the offering (as
adjusted)...........................................................
---------
Dilution per share to new investors................................... $
---------
---------
</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............................... % $ % $
New investors.......................................
--------- --------- -------------- ---------
Totals.............................................. 100.0% $ 100.0%
--------- --------- -------------- ---------
--------- --------- -------------- ---------
</TABLE>
The preceding tables include an aggregate of 723,371 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 also exclude 13,123,813 shares of Common
Stock reserved for issuance under our stock option and stock purchase plans, of
which 4,254,200 were subject to outstanding options as of December 31, 1998 at a
weighted average exercise price of $0.996 per share, and shares of Common Stock
issuable upon exercise of a warrant we are obligated to issue to an equipment
lessor prior to this offering.
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<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 the Company considers 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 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(1).................................. 678 366 4,228
------------------ ------------ -------------
Total operating expenses................................. 2,389 1,204 20,588
------------------ ------------ -------------
Operating loss................................................... (2,270) (1,112) (15,696)
Interest income (expense), net................................... 3 (15) 439
------------------ ------------ -------------
Loss before income taxes......................................... (2,267) (1,127) (15,257)
Provision for income taxes....................................... 1 -- 1
------------------ ------------ -------------
Net loss......................................................... $ (2,268) $ (1,127) $ (15,258)
------------------ ------------ -------------
------------------ ------------ -------------
Pro forma basic net loss per share(2)............................ $ (0.23) $ (0.14) $ (0.58)
------------------ ------------ -------------
------------------ ------------ -------------
Shares used to compute pro forma basic net loss per share(2)..... 10,077,634 7,959,833 26,429,153
------------------ ------------ -------------
------------------ ------------ -------------
</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.......................................................................... 2,459 27,199
Long-term capital lease obligations, less current portion............................. -- 35
Total stockholders' equity (deficit).................................................. (1,813) (15,528)
</TABLE>
- --------------------------
(1) 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.
(2) 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 the 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 8,500 stock keeping units ("SKUs") representing more than 700
brands. Since launching our Web site in October 1997, we have sold children's
products to over 320,000 customers.
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 fulfillment 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 transaction-processing systems.
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 $17.5 million. We expect operating losses
and negative cash flow to continue for the foreseeable future. We anticipate our
losses
22
<PAGE>
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 order
fulfillment infrastructure; the continued development of our Web site,
transaction-processing systems and network infrastructure; the expansion of our
product offerings and Web site content; and strategic relationship development.
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 transaction-processing systems,
improve our Web site, provide superior customer service and order fulfillment,
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, certain
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 17.7
------ ----------- -----------
Total operating expenses............................................. 347.7 227.2 86.2
------ ----------- -----------
Operating loss............................................................. (330.4) (209.8) (65.7)
Interest income (expense), net............................................. 0.4 (2.8) 1.8
Provision for income taxes................................................. 0.1 -- --
------ ----------- -----------
Net loss................................................................... (330.1)% (212.6)% (63.9)%
------ ----------- -----------
------ ----------- -----------
</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 and the
addition of new departments to our online store during the fall of 1998. 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.
OPERATING EXPENSES
MARKETING AND SALES. Marketing and sales expenses consist primarily of
advertising and promotional expenditures, fulfillment facility expenses,
including equipment and supplies, and payroll and related expenses for personnel
engaged in marketing, customer service and fulfillment 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 fulfillment 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 fulfillment 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 transaction-processing systems. 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
24
<PAGE>
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 $3.1
million for the quarter ended December 31, 1998 from $0.2 million for the
quarter ended December 31, 1997. This $2.9 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
13.7% 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 certain 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 certain 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 Series A 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. Certain 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 certain 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.
25
<PAGE>
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 fulfillment 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
transaction-processing systems. 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 $4.2 million for the nine months ended December 31, 1998 from $0.4 million
for the nine months ended December 31, 1997. This $3.8 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 17.7% for the nine months ended December 31, 1998 from 69.1% 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.
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 certain non-employees during this period. Such amount is
amortized to expense over the vesting periods of the applicable options,
26
<PAGE>
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 certain 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 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. Certain 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 certain 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)...................... 234 312 423 664 3,141
----------- ------------ ----------- ----------- -----------
Total operating expenses....................... 823 1,185 2,197 3,733 14,657
----------- ------------ ----------- ----------- -----------
Operating loss....................................... (731) (1,158) (2,127) (3,621) (9,948)
Interest income (expense), net....................... (15) 18 (5) 277 166
Provision for income taxes........................... -- 1 -- -- 1
----------- ------------ ----------- ----------- -----------
Net loss............................................. $ (746) $ (1,141) $ (2,132) $ (3,344) $ (9,783)
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
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)...................... 44.2 198.7 111.0 109.2 13.7
----------- ------------ ----------- ----------- -----------
Total operating expenses......................... 155.3 754.8 576.6 614.0 64.0
----------- ------------ ----------- ----------- -----------
Operating loss....................................... (137.9) (737.6) (558.3) (595.6) (43.4)
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)% (559.6)% (550.0)% (42.7)%
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
</TABLE>
- ------------------------------
(1) Included in general and administrative expenses are $2,000, $52,000, $74,000
and $1.49 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.
28
<PAGE>
Our quarterly operating results may be affected 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 fulfillment operations; our
inability to adequately maintain, upgrade and develop our Web site,
transaction-processing systems or network infrastructure; 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; increases in the cost of
online or offline advertising; our inability to attract new personnel in a
timely and effective manner or retain existing personnel; 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 general economic conditions 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of Redeemable Convertible 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
29
<PAGE>
from the issuance of Redeemable Convertible 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 fulfillment 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 preferred
AOL provider of children's toy products through an eToys content area on the AOL
Network and AOL's Web site, aol.com, (the "AOL Online Area"). In addition, AOL
agreed to promote and advertise eToys on a preferred basis in certain online
areas controlled by AOL and to deliver a specified number of annual page views
to the online areas promoting eToys. 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
deliver content through the AOL Online Area, provide children's toy products
that are competitive in price and performance and 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 certain similar 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 at least the next 12 months. We
may need to raise additional funds prior to the expiration of such period. 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 have reviewed the year 2000 compliance of our internally developed
proprietary software. 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
30
<PAGE>
fulfillment functions, as well as firewall, security, 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 and of our vendors.
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. At this time, the expenses associated with this assessment and
potential remediation plan 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. 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.
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BUSINESS
ETOYS
We are the 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 8,500 SKUs representing
more than 700 brands. Our Web site features detailed product information,
value-added services and innovative merchandising through an intuitive and
easy-to-use interface. 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.
Since launching our Web site in October 1997, we have sold children's
products to over 320,000 customers. 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, shopping interfaces and pricing, providing
significant merchandising flexibility. The minimal cost to publish on the Web,
the ability to reach and serve a large and global group of customers
electronically from a central location, and the potential for personalized
low-cost customer interaction provide additional economic benefits for online
retailers. 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
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Us, Wal-Mart, Kmart and Target, as well as specialty chains such as Zany Brainy
and Noodle Kidoodle. 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 but 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 (e.g., games, plush
toys or dolls) or packaging and can not 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, thereby limiting 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 the leading Web-based retailer focused exclusively on children's
products. Our online store is designed to provide consumers with a compelling
and enjoyable shopping experience offering all of the benefits of a Web-based
retail environment. Our exclusive focus on children's products and commitment to
value-added services and 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
intuitive, easy-to-use shopping interface that 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, including 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.
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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 and are the only retailer to
provide a comprehensive selection of both traditional, well-known brands (e.g.,
Mattel, Hasbro and LEGO) and specialty toy brands (e.g., 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
and 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.
VALUE-ADDED SERVICES. Through our online store, we offer value-added
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 to our
merchant recommendations, 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, where
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 including helpful hints in searching for,
shopping for, ordering and returning our products.
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BUSINESS STRATEGY
Our objective is to be one of the world's leading retailers of children's
products. Key elements of our strategy are:
FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS. We intend to become the
ultimate 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 not currently
available at any single traditional retailer. 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 fulfillment
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 and Internet service providers, including Yahoo!, Excite,
Infoseek, Microsoft Network 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 value-added 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 lifetime value of our customer
relationships. To accomplish this strategy, we intend to effectively use direct
marketing techniques targeted at existing customers, build superior
personalization
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features 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 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 personalization features and programs, to
enhance our user interface and continuously increase the automation and
efficiency of our supply chain and fulfillment activities.
THE ETOYS ONLINE RETAIL STORE
We designed our online retail store to be the ultimate 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. Our user interface is simple,
the look-and-feel is playful and entertaining, and navigation is consistent
throughout the site. 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. Set forth below is a graphic illustration of our homepage:
[GRAPHICAL PICTURE OF THE HOMEPAGE OF ETOYS]
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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 (e.g., Mattel and Hasbro), category (e.g., games, plush toys
and dolls) and our recommendations (e.g., 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, and we believe we are the only retailer of
children's products to provide a comprehensive selection of both traditional,
well-known brands (e.g., Mattel, Hasbro and LEGO) and specialty toy brands
(e.g., 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 and 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 as well as 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 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, including enhanced selection, convenience,
ease-of-use, depth of content and information, personalization and competitive
pricing. The following highlights some of the key features of our online store:
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
or 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 certain key
national and specialty brands. Customers can also hot-link to pages featuring
certain 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
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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 fulfillment center. Our Web site uses an encryption
technology that works with the most common Internet browsers and makes it
virtually impossible for unauthorized parties to read information sent by our
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 value-added services,
enable us to pursue a unique merchandising strategy. We provide an extensive
selection of children's products, including traditional mass market toys,
specialty toys and a broad selection of related
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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 intuitive, easy-to-use interface 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
certain 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
certain of 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 value-added 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;
- - 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 certain of the sites of these providers, with the right to place
banner advertisements and integrated links to our store on certain
children-related or other specified pages or through keyword searches. In
addition, we advertise on the sites of major online portal and Internet service
providers, including Yahoo!, Excite, Infoseek, Microsoft Network 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 through an eToys content area on the AOL
Network and AOL's Web site, aol.com, (the "AOL Online Area"). In addition, AOL
agreed to promote and advertise eToys on a preferred basis in certain online
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areas controlled by AOL and to deliver a specified number of annual page views
to the online areas promoting eToys. 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
deliver content through the AOL Online Area, 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 certain similar 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 pursuant to which we pay one of our registered affiliates a referral fee
for any sale generated via their link to our Web site.
FULFILLMENT 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 conduct our fulfillment 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 fulfillment center over a secure frame relay connection and a
proprietary warehouse management system ("WMS") optimizes the pick, pack and
ship process. Our proprietary WMS 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 WMS 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 fulfillment 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.
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OPERATIONS AND TECHNOLOGY
We have implemented a broad array of scaleable site management, search,
customer interaction, transaction-processing and fulfillment services and
systems. These services and systems use a combination of our own proprietary
technologies and commercially available, licensed technologies. Our
transaction-processing systems 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 rapidly
changing technology, evolving industry standards, frequent new service and
product announcements, introductions and enhancements and changing customer
demands. Accordingly, our future success will depend on our ability to adapt to
rapidly changing technologies, to adapt our services to evolving industry
standards and to 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 which 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,
and laws or regulations applicable to access to or commerce on the Internet,
other than regulations applicable to businesses generally. However, due to the
increasing popularity and use of the Internet and other online services, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
The nature of such legislation and the manner in which it may be interpreted and
enforced cannot be fully determined and, therefore, such legislation could
subject us and/or our customers to potential liability, which in turn could have
an adverse effect on our business, results of operations and financial
condition. The adoption of any such laws or regulations might also decrease the
rate of growth of Internet use, which in turn could decrease the demand for our
service or increase the cost of doing business or in some other manner have a
material adverse effect on
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our business, results of operations and financial condition. In addition,
applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain. The vast majority of such laws were
adopted prior to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the Internet and
related technologies.
Several states have also proposed legislation that would 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.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for our services or increase the cost
of doing business as a result of litigation costs or increased service delivery
costs, or could in some other manner have a material adverse effect on our
business, results of operations and financial condition. In addition, because
our services are accessible throughout the United States, other jurisdictions
may claim that we are required to qualify to do business as a foreign
corporation in a particular state. We are qualified to do business in
California, and our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or regulation,
or 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. Barriers to entry
are minimal, and current and new competitors can launch new Web sites at a
relatively low cost. In particular, 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 certain of their products
directly online, such as Mattel and Hasbro;
- - other online retailers that include certain 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;
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- - customer service;
- - quality of site content; and
- - reliability and speed of fulfillment.
Many of our current and potential 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 current and potential competitors can
devote substantially more resources to Web site and systems development than we
can. In addition, larger, well-established and well-financed entities may
acquire, invest in or form joint ventures 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.
Certain of 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 that select specific titles from a variety of Web sites and
may direct customers to other online toy, video game, software, video and music
retailers, may increase competition.
If we face increased competition, our operating results may be adversely
affected.
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 regard the protection of our copyrights, service marks, trademarks, trade
dress and trade secrets as critical to our future success and relies on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with our suppliers and strategic partners in order to limit access to
and disclosure of our proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by us to protect our
intellectual property will prove sufficient to prevent misappropriation of our
technology or to deter independent third-party development of similar
technologies. We pursue the registration of our trademarks and service marks in
the U.S. and internationally. Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services are made available online. We have licensed in the past, and expect
that we may license in the future, certain of our proprietary rights, such as
trademarks or copyrighted material, to third parties. While we attempt to ensure
that the quality of the eToys brand is maintained by such licensees, there can
be no assurance that such licensees will not take actions that might materially
adversely affect the value of our proprietary rights or reputation, which could
have a material adverse effect on our business, results of operations and
financial condition. We also rely on certain technologies that we license from
third parties, including the suppliers of the operating systems and financial
and reporting system for our business. There can be no assurance that these
third-party technology licenses will
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continue to be available to us on commercially reasonable terms. The loss of
such technology could require us to obtain substitute technology of lower
quality or performance standards 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. There can be no assurance that third
parties will not claim infringement by us with respect to past, 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, whether meritorious
or not, 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 could have a material adverse effect upon
our business, results of operations and financial condition.
EMPLOYEES
As of December 31, 1998, we had 235 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 executive 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 fulfillment operations under a lease that expires in August 2003.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers
and directors as of January 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(1).......... 48 Director
Tony A. Hung(1)............. 31 Director
Michael Moritz(2)........... 44 Director
Daniel J. Nova(2)........... 37 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
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 Director 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 Vice President 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
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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.
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.
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.
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.
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.
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.
BOARD COMMITTEES
Our Board of Directors established the Compensation Committee in December
1998 and the Audit Committee in February 1999.
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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 certain 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 100,000 shares of Common Stock
at $0.015 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 21,000 shares of Common Stock at $0.10
per share. This option, which vested at the rate of 1/6th per month commencing
upon February 1, 1998, is fully vested.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services
rendered to eToys during the fiscal year ended March 31, 1998 by Edward C. Lenk,
the Chief Executive Officer. No other executive officer earned more than
$100,000 during the fiscal year ended March 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------------
----------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- --------------------------------- ----------- --------------- ----------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Edward C. Lenk(2) ............... $ 80,000 -- -- -- --
President and Chief Executive
Officer
</TABLE>
- --------------------------
(1) Mr. Lenk will be compensated at an annual base salary of $105,000 during the
fiscal year ended March 31, 1999. John R. Hnanicek, who became Chief
Information Officer in December 1998, will be compensated at an annual base
salary of $150,000 during the fiscal year ended March 31, 1999 and was paid
a bonus of $60,000 in December 1998, which bonus vests monthly over his
first year of employment. Louis V. Zambello III, who became Senior Vice
President of Operations in December 1998, will be compensated at an annual
base salary of $200,000 during the fiscal year ended March 31, 1999 and has
the right to receive a signing bonus of $115,000 before January 31, 2000.
(2) Mr. Lenk commenced employment with us in December 1996.
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OPTION GRANTS
No stock options were granted to the Chief Executive Officer during the
fiscal year ended March 31, 1998.
OPTION EXERCISES AND HOLDINGS
No options were held or exercised in the fiscal year ended March 31, 1998 by
the Chief Executive Officer or any executive officer. We did not pay 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 to the Chief Executive Officer or any executive
officer. We do not have any defined benefit or actuarial plan with respect to
the Chief Executive Officer or any executive officer under which benefits are
determined primarily by final compensation and years of service.
STOCK PLANS
1999 STOCK PLAN. The Board of Directors adopted our 1999 Stock Plan in
February 1999 and it is expected to be approved by the stockholders in March
1999. We have reserved a total of 7,200,000 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 1,500,000 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 the date of this offering, no options have
been granted under this plan.
The purposes of the 1999 Stock Plan are to attract and retain the best
available personnel, to provide additional incentives to our employees and
consultants and to promote the success of our business. 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 and
consultants, including 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 one or more 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 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 3,000,000 shares. The exercise price of all incentive stock options
granted under the 1999 Stock Plan must be at least equal to the fair market
value of our Common Stock on the date of grant. The exercise price of any
incentive stock option granted to an optionee who owns stock representing more
than 10% of the total combined voting power of all classes of our outstanding
capital stock or any parent or subsidiary corporation (a "10% Stockholder") must
equal at least 110% of the fair market value of the Common Stock on the date of
grant. After the effective date of this offering, the exercise price of
nonstatutory stock options and the purchase price of stock purchase rights
granted under the 1999 Stock Plan shall be such price as is determined by the
Administrator. However, the exercise price of any nonstatutory stock option and
the purchase price of stock purchase rights granted to our Chief Executive
Officer or our four other most highly compensated officers will generally equal
at least 100% of the fair
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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.
The Administrator determines the term of options, which may not exceed 10
years. The term is five years in the case of an incentive stock option granted
to a 10% Stockholder. An optionee cannot transfer any option other than by will
or the laws of descent or distribution. However, the Administrator may grant
nonstatutory stock options with limited transferability rights in certain
circumstances. Generally, each option may be exercised during the lifetime of
the optionee only by such optionee. The Administrator determines when options
vest and become exercisable. Stock issued pursuant to stock purchase rights
granted under the 1999 Stock Plan will generally be subject to a repurchase
right exercisable upon the voluntary or involuntary termination of the holder's
employment or consulting relationship with us for any reason (including death or
disability). We expect that options and stock purchase rights granted under the
1999 Stock Plan generally will vest, or any repurchase right will generally
lapse, 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 subject to the options each month thereafter.
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
5,800,000 shares of Common Stock for issuance under the 1997 Stock Plan. As of
December 31, 1998, options to purchase 376,187 shares of Common Stock with a
weighted average exercise price of $0.107 had been exercised and options to
purchase a total of 4,254,200 shares at a weighted average exercise price of
$0.996 per share were outstanding. As of December 31, 1998, 1,169,613 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 shall
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. In
addition, nonstatutory stock options or stock purchase rights granted under the
1997 Stock Plan are nontransferable in all cases and must 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, unless granted to a 10% Stockholder,
in which case the exercise price of options must be at least 110%, and the
purchase price of stock purchase rights must be at least 100%, of the fair
market value on the date of grant.
1999 DIRECTORS' STOCK OPTION PLAN. The Board of Directors adopted our 1999
Directors' Stock Option Plan in February 1999 and it is expected to be approved
by the stockholders in March 1999. We have reserved a total of 200,000 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. 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
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Option Plan provides for the grant of
nonstatutory stock options to nonemployee directors. 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 they arise, we expect that conflicts of interest will
be addressed by abstention of any interested director from both deliberations
and voting regarding matters in which such director has a personal interest.
Unless terminated earlier, the 1999 Directors' Stock Option Plan will terminate
in February 2009.
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 20,000 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, we will grant to each nonemployee
director an additional option to purchase 5,000 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.
The 1999 Directors' Stock Option Plan sets neither a maximum nor a minimum
number of shares for which options may be granted to any one nonemployee
director, but does specify the number of shares that may be included in any
grant and the method of making a grant. The optionee cannot transfer any option
granted under the 1999 Directors' Stock Option Plan other than by will or the
laws of descent or distribution or pursuant to a qualified domestic relations
order. Each option is exercisable, during the lifetime of the optionee, only by
such optionee. If a nonemployee director ceases to serve as a director for any
reason other than death or disability, he or she 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, such option shall 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 any option granted under the 1999 Directors' Stock Option Plan for 12
months following such termination date. Options granted under the 1999
Directors' Stock Option Plan have a term of ten years.
The Board of Directors may amend or terminate the 1999 Directors' Stock
Option Plan at any time. However, no such action may adversely affect any
outstanding option. Stockholder approval for any amendments to the 1999
Directors' Stock Option Plan shall be obtained to the extent required by
applicable law.
1999 EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors adopted our 1999
Employee Stock Purchase Plan in February 1999 and it is expected to be approved
by the stockholders in March 1999. We have reserved a total of 300,000 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 180,000 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. Unless terminated earlier by the Board of Directors, the 1999
Employee Stock Purchase Plan shall terminate in February 2019.
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The 1999 Employee Stock Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code. This plan will be implemented by a series of
overlapping offering periods of 24 months' duration, with new offering periods
(other than the first offering period) commencing on May 1 and November 1 of
each year. Each offering period will consist of four consecutive purchase
periods of six months' duration, at the end of which an automatic purchase will
be made for participants. The initial offering period is expected to commence on
the date of this offering and end on April 30, 2001; 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. Our employees, including
officers and employee directors, or employees of any majority-owned subsidiary
designated by the Board of Directors, are eligible to participate in the 1999
Employee Stock Purchase Plan if they are employed by us or any such subsidiary
for at least 20 hours per week and more than five months per year. 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 certain circumstances, the purchase price may be
adjusted during an offering period to avoid our incurring adverse accounting
charges. The Board of Directors shall have the discretion to increase, before
the beginning of an offering period, the percentage of participants'
compensation that may be withheld through the 1999 Employee Stock Purchase Plan,
but such percentage may not exceed 20%. Employees may end their participation in
the 1999 Employee Stock Purchase Plan at any time during an offering period, and
participation ends automatically on termination of employment.
An employee cannot be granted an option under the 1999 Employee Stock
Purchase Plan if immediately after the grant such employee would own stock
and/or hold outstanding options to purchase stock equaling 5% or more of the
total voting power or value of all classes of our stock or stock of our
subsidiaries. An employee cannot be granted an option to purchase stock under
all of our or our subsidiaries' employee stock purchase plans that accrues at a
rate that exceeds $25,000 of fair market value of such stock for each calendar
year in which the option is outstanding. In addition, no employee may purchase
more than 3,000 shares of Common Stock under the 1999 Employee Stock Purchase
Plan in any one purchase period. 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.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 1999
Employee Stock Purchase Plan will be assumed or an equivalent right substituted
by the successor corporation. However, the Board of Directors may shorten any
ongoing offering period so that employees' rights to purchase stock under the
1999 Employee Stock Purchase Plan are exercised before the transaction. 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.
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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 (i) any breach of
their duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) 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 certain expenses (including attorneys' fees), judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding, including any action by or in the right of eToys, arising out of
such person's services as a director or executive officer of eToys, any
subsidiary of eToys or any other company or enterprise 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.
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<PAGE>
CERTAIN TRANSACTIONS
In June 1997, we sold 2,500,000 shares of Common Stock to Edward C. Lenk at
$0.015 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 1,250,000
of Mr. Lenk's shares. 1,250,000 of Mr. Lenk's shares are subject to a repurchase
option in favor of us 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.
In October 1998, we issued Mr. Lenk an option to purchase 1,000,000 shares
of Common Stock at $0.43 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 833,334 shares of Common Stock to Frank C. Han at
$0.015 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 416,667 of
Mr. Han's shares. 466,667 of Mr. Han's shares are subject to a repurchase option
in favor of us 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.
In October 1998, we issued Mr. Han an option to purchase 275,000 shares of
Common Stock at $0.43 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 September 1997 we issued Peter C.M. Hart a stock option to purchase
100,000 shares of Common Stock at $0.015 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. Mr. Hart was appointed a Director in
October 1997. In December 1997, we sold Mr. Hart 32,939 shares of Series A
Preferred Stock at $0.62 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 21,000 shares of
Common Stock at $0.10 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 200,000 shares of Common Stock at $5.00 per share. The option
is immediately exercisable and the shares subject to the option 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.
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 275,000 shares of Common Stock at $5.00 per share. The option is
immediately exercisable
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<PAGE>
and the shares subject to the option 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 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 two years following his commencement of employment, a total of 137,500 of
such shares shall immediately vest.
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 250,000 shares of
Common Stock at $10.00 per share. The option is immediately exercisable and the
shares subject to the option 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 93,750 of
such shares shall immediately vest.
In June 1997, we sold 6,466,667 shares of Common Stock at $0.015 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 6,106,666 shares of Common Stock. Pursuant to a second Letter
Agreement dated November 5, 1997, idealab! forgave our indebtedness in the
amount of $100,000 in consideration for idealab!'s right to purchase additional
shares of Preferred Stock in a subsequent round of financing.
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain 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".
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<PAGE>
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 Redeemable
Convertible Preferred Stock automatically converts into one share of Common
Stock upon the closing of this offering. The shares of Common Stock were sold at
$0.015 per share, the shares of Series A Preferred Stock were sold at $0.62 per
share and the shares of Series B Preferred Stock were sold at $2.1032 per share.
See "Principal Stockholders".
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B
ENTITIES AFFILIATED WITH DIRECTORS STOCK PREFERRED PREFERRED
- ------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Entities affiliated with Highland Capital Partners (Daniel Nova)(1)...... -- -- 3,803,728
Entities affiliated with DynaFund Ventures (Tony Hung)(2)................ -- 1,612,903 950,932
Entities affiliated with Sequoia Capital (Michael Moritz)(3)............. -- -- 2,377,330
Peter C.M. Hart.......................................................... -- 32,939 --
OTHER 5% STOCKHOLDERS
- -------------------------------------------------------------------------
Entities affiliated with idealab!(4)..................................... 6,466,667 1,612,903 713,198
Intel Corporation........................................................ -- 1,612,903 950,931
</TABLE>
- ------------------------
(1) Includes shares held by Highland Capital Partners III Limited Partnership
and Highland Entrepreneurs' Fund III.
(2) Includes shares held by DynaFund L.P. and DynaFund International L.P.
(3) Includes shares held by Sequoia Capital VII, Sequoia International
Technology Partners VIII (Q), CMS Partners LLC, Sequoia International
Technology Partners VIII and Sequoia 1997.
(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 6,106,666 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our Common Stock as of December 31, 1998, as adjusted to
reflect the sale of the Common Stock offered hereby under this prospectus and
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock, by (i) each stockholder known by us to own beneficially more than 5% of
the Common Stock, (ii) each director, (iii) the Chief Executive Officer and
named executive officers and (iv) 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) ...... 8,432,767 28.57% 8,432,767 %
130 West Union Street
Pasadena, CA 91103
Entities affiliated with Highland Capital
Partners(4) ............................. 3,803,728 12.89 3,803,728
Two International Place
Boston, MA 02110
Entities affiliated with DynaFund
Ventures(5) ............................. 2,563,835 8.68 2,563,835
21311 Hawthorne Blvd., Suite 300
Torrance, CA 90503
Intel Corporation ......................... 2,563,834 8.68 2,563,834
2200 Mission Blvd.
Santa Clara, CA 95052
Entities affiliated with Sequoia Capital
Partners(6) ............................. 2,377,330 8.06 2,377,330
3000 Sand Hill Road, Bldg. 4, Suite 280
Menlo Park, CA 94025
Daniel J. Nova(7) ......................... 3,803,728 12.89 3,803,728
Tony Hung(8) .............................. 2,563,835 8.68 2,563,835
Edward C. Lenk ............................ 2,500,000 8.47 2,500,000
Michael Moritz(9) ......................... 2,377,330 8.06 2,377,330
Peter C.M. Hart(10) ....................... 111,734 * 111,734 *
Louis V. Zambello III(11) ................. 275,000 * 275,000 *
John R. Hnanicek(12) ...................... 200,000 * 200,000 *
All directors and executive officers as a
group (9 persons)(13) ................... 12,914,961 42.60% 12,914,961
</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
56
<PAGE>
within 60 days after December 31, 1998 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 6,106,666 shares held by idealab!, 2,187,453 shares held by
idealab! Capital Partners I-A, LP and 138,648 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 3,651,579 shares held by Highland Capital Partners III Limited
Partnership and 152,149 shares held by Highland Entrepreneurs' Fund III
Limited Partnership.
(5) Includes 1,385,298 shares held by DynaFund International L.P. and 1,178,537
shares held by DynaFund L.P.
(6) Includes 2,154,579 shares held by Sequoia Capital VII, 142,640 shares held
by Sequoia International Technology Partners VIII (Q), 47,547 shares held
by CMS Partners LLC, 27,339 shares held by Sequoia International Technology
Partners VIII and 5,230 shares held by Sequoia 1997.
(7) Includes 3,651,579 shares held by Highland Capital Partners III Limited
Partnership and 152,149 shares held by Highland Entrepreneurs' Fund III
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 1,385,298 shares held by DynaFund International L.P. and 1,178,537
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.
(9) Includes 2,154,574 shares held by Sequoia Capital VII, 142,640 shares held
by Sequoia International Technology Partners VIII (Q), 47,547 shares held
by CMS Partners LLC, 27,339 shares held by Sequoia International Technology
Partners VIII and 5,230 shares held by Sequoia 1997. 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.
(10) Includes 16,129 shares issuable upon exercise of a warrant that will
expire upon this offering and 62,666 shares issuable upon exercise of
options which will be vested within 60 days of December 31, 1998.
(11) Includes 275,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of December 31, 1998, but which are subject to
a right of repurchase in our favor at cost in the event Mr. Zambello
ceases employment with us.
(12) Includes 200,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of December 31, 1998, but which are subject to
a right of repurchase in our favor at cost in the event Mr. Hnanicek
ceases employment with us.
(13) Includes the shares described in Notes 7 through 12, 833,334 shares held
by an executive officer not named in this table, and 250,000 shares
issuable upon exercise of an option held by an executive officer not named
in this table which will be exercisable within 60 days of December 31,
1998, but which are subject to a right of repurchase in our favor at cost
in the event such officer ceases employment with us.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
200,000,000 shares of Common Stock, $0.0001 par value, and 5,000,000 shares of
undesignated Preferred Stock, $0.0001 par value. All currently outstanding
shares of Preferred Stock will be converted into Common Stock upon the closing
of this offering. 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 December 31, 1998 there were 29,512,331 shares of Common Stock
outstanding (as adjusted to reflect the conversion of all outstanding shares of
Series A Preferred Stock and Series B Preferred Stock into Common Stock), held
of record by 82 stockholders. In addition, as of December 31, 1998, there were
options to purchase an aggregate of 4,254,200 shares of Common Stock and
warrants to purchase an aggregate of 50,000 shares of Common Stock outstanding.
After giving effect to the sale of the shares offered by us in this offering,
there will be shares of Common Stock outstanding (assuming no exercise
of the underwriter's overallotment option or exercise of outstanding options
under our stock option plans and warrants after December 31, 1998).
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding Preferred Stock, holders
of Common Stock are entitled to receive ratably such dividends, if any, 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, subject to the prior distribution
rights of any outstanding Preferred Stock. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. The outstanding shares
of Common Stock are, 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 Redeemable
Convertible Preferred Stock will be converted into 18,926,423 shares of Common
Stock (assuming full exercise of warrants to purchase 673,371 shares of Series A
Preferred Stock outstanding as of December 31, 1998) and automatically retired.
Thereafter, the Board of Directors will have the authority, without further
action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock
in one or more series and to designate the rights, preferences, privileges and
restrictions of each such series, any or all of which may be greater than the
rights of the Common Stock. It is not possible to state the actual effect of the
issuance of any share of Preferred Stock upon the rights of the holders of the
Common Stock until the Board of Directors determines the specific rights of the
holders of such Preferred Stock. However, the effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, impairing the liquidation rights of the Common Stock and
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.
WARRANTS
As of December 31, 1998 there were warrants outstanding to purchase a total
of 50,000 shares of Common Stock at a price of $0.01 per share and 673,371
shares of Series A Preferred Stock at a price of $0.62
58
<PAGE>
per share. All such warrants not exercised will expire upon the closing of this
offering. In addition, we are obligated to issue a warrant to purchase shares of
Common Stock to an equipment lessor prior to this offering.
REGISTRATION RIGHTS
The holders of 21,586,386 shares of Common Stock, options to purchase
1,275,000 shares of Common Stock and warrants to purchase 673,371 shares of
Common Stock (the "registrable securities") or their permitted transferees are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. These rights are provided under the terms of an agreement
between eToys and the holders of the registrable securities. Subject to certain
limitations in the agreement, 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. We are obligated to register these
shares if the shares to be registered constitute at least 25% of the then
outstanding registrable securities or have an anticipated public offering price
of at least $5,000,000 (net of underwriting discounts and commissions). 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. Subject to certain limitations, the
holders of at least 25% of the then outstanding registrable securities (or a
lesser percentage if the aggregate offering price is at least $5,000,000) may
also 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, among other limitations, that the proposed aggregate selling price
(net of any underwriters' discounts or commissions) is at least $2,000,000.
Subject to certain limitations, we will bear all registration expenses other
than underwriting discounts and commissions. All registration rights will
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.
EFFECT OF CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain provisions of Delaware law and our Certificate of Incorporation and
Bylaws could make more difficult our acquisition by means of a tender offer, a
proxy contest or otherwise and the removal of our incumbent officers and
directors. These provisions, summarized below, are expected to discourage
certain types of 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 potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure us outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. 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 (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected
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<PAGE>
to have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging attempts that might
result in a premium over the market price for the shares of Common Stock held by
stockholders.
Our Certificate of Incorporation eliminates the right of stockholders to act
by written consent without a meeting. The Certificate of Incorporation and
Bylaws of eToys do not provide for cumulative voting in the election of
directors. The authorization of undesignated Preferred Stock makes it possible
for the Board of Directors to issue Preferred Stock with voting or other rights
or preferences that could impede the success of any attempt to change our
control. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in our control or management. The amendment of any
of these provisions would require approval by holders of at least 66 2/3% of the
outstanding Common Stock.
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.
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<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. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale (as described below),
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
eToys' ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding shares of
Common Stock. Of these shares, the 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
(generally, officers, directors or 10% stockholders).
The remaining 29,512,331 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act ("Restricted Shares").
Restricted Shares 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 Shares 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 the representatives of the
underwriters. As a result of these contractual restrictions, 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 the designated underwriters' representative.
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 3,659,521 shares
will be eligible for sale pursuant to Rule 701, approximately 1,995,079
additional shares will be eligible for sale pursuant to Rule 144(k), and
approximately 23,857,731 additional shares will be eligible for sale pursuant
to Rule 144. All but 8,968,398 of such shares are held by affiliates.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements (180 days after the date of this
prospectus) of a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares 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: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after the
offering); or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about us. Under
61
<PAGE>
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 resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the holding
period requirement, of Rule 144. Any of our employees, officers, directors or
consultants who purchased shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 144. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirement of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply 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 such registration statement will also be freely tradable in the public
market, except that 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 December 31, 1998
there were outstanding options for the purchase of 4,254,200 shares, of which
options to purchase 239,240 shares were exercisable. See "Risk Factors--Shares
Eligible for Future Sale", "Management--Stock Plans" and "Description of Capital
Stock--Registration Rights".
62
<PAGE>
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 certain director of Venture
Law Group and an investment partnership affiliated with Venture Law Group own an
aggregate of 13,924 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.
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, reference is made to the registration statement
and to the attached exhibits and schedules. Statements made in this prospectus
concerning the contents of any document referred to herein are not necessarily
complete. With respect to each such document filed as an exhibit to the
registration statement, reference is made to the exhibit for a more complete
description of the matter involved. The registration statement and the attached
exhibits and schedules may be inspected 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. Copies of all or any part of the registration statement
may be obtained from the Securities and Exchange Commission upon payment of
prescribed fees. Reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission may also be
inspected without charge at a Web site maintained by the Securities and Exchange
Commission at http://www.sec.gov.
63
<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
February 15, 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 $122,000 at
December 31, 1998)............................................ 488,000 366,000
Other assets.................................................... -- 1,022,000
------------- ---------------
Total assets.................................................... $ 2,459,000 $ 27,199,000
------------- ---------------
------------- ---------------
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 --
Commitments and contingencies................................... -- --
Stockholders' equity:
Common Stock, $.0001 par value, 50,000,000 shares authorized;
10,933,092 and 11,259,279 shares issued and outstanding at
March 31, 1998 and December 31, 1998, respectively.......... 1,000 1,000 3,000
Additional paid-in capital.................................... 537,000 32,202,000 61,099,000
Receivables from stockholders................................. (30,000) (147,000) (147,000)
Deferred compensation......................................... (53,000) (30,058,000) (30,058,000)
Accumulated deficit........................................... (2,268,000) (17,526,000) (17,526,000)
------------- --------------- ---------------
Total stockholders' equity (deficit)............................ (1,813,000) (15,528,000) $ 13,371,000
------------- --------------- ---------------
---------------
Total liabilities and stockholders' equity (deficit)............ $ 2,459,000 $ 27,199,000
------------- ---------------
------------- ---------------
</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 4,228,000
--------------- -------------- ----------------
2,389,000 1,204,000 20,588,000
--------------- -------------- ----------------
Operating loss................................................. (2,270,000) (1,112,000) (15,696,000)
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) (15,257,000)
Provision for income taxes..................................... 1,000 -- 1,000
--------------- -------------- ----------------
Net loss....................................................... $ (2,268,000) $ (1,127,000) $ (15,258,000)
--------------- -------------- ----------------
--------------- -------------- ----------------
Basic net loss per equivalent share............................ $ (0.27) $ (0.14) $ (1.38)
--------------- -------------- ----------------
--------------- -------------- ----------------
Pro forma basic net loss per equivalent share.................. $ (0.23) $ (0.14) $ (0.58)
--------------- -------------- ----------------
--------------- -------------- ----------------
Shares used to compute basic net
loss per equivalent share.................................... 8,376,629 7,775,365 11,052,345
--------------- -------------- ----------------
--------------- -------------- ----------------
Shares used to compute pro forma basic net loss per equivalent
share........................................................ 10,077,634 7,959,833 26,429,153
--------------- -------------- ----------------
--------------- -------------- ----------------
</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...... 8,856,425 1,000 451,000 -- -- -- 452,000
Restricted stock issued....... 2,026,667 -- 30,000 (30,000) -- -- --
Exercise of stock options..... 50,000 -- 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....... 10,933,092 1,000 537,000 (30,000) (53,000) (2,268,000) (1,813,000)
Restricted stock issued....... 175,000 -- 35,000 (117,000) (82,000)
Exercise of stock options..... 151,187 -- 4,000 4,000
Deferred compensation......... 31,626,000 (31,626,000) --
Amortization of deferred
compensation................ 1,621,000 1,621,000
Net loss...................... (15,258,000) (15,258,000)
---------- ----------- ----------- ------------- -------------- ------------- -------------
Balance at December 31, 1998.... 11,259,279 $ 1,000 $32,202,000 $ (147,000) $(30,058,000) $(17,526,000) $ (15,528,000)
---------- ----------- ----------- ------------- -------------- ------------- -------------
---------- ----------- ----------- ------------- -------------- ------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ETOYS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------
1998 1998
------------ 1997 --------------
------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................. $ (2,268,000) $ (1,127,000) $ (15,258,000)
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....................................................... -- -- 122,000
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. 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 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.
F-7
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
-------------- -------------- ---------------
<S> <C> <C> <C>
Numerator:
Net loss....................................................... $ (2,268,000) $ (1,127,000) $ (15,258,000)
Denominator:
Weighted average shares........................................ 8,376,629 7,775,365 11,052,345
-------------- -------------- ---------------
Denominator for basic calculation.............................. 8,376,629 7,775,365 11,052,345
Weighted average effect of pro forma securities:
Series A Redeemable Convertible Preferred Stock.............. 1,701,005 184,468 6,333,587
Series B Redeemable Convertible Preferred Stock.............. -- -- 9,043,222
-------------- -------------- ---------------
Denominator for pro forma calculation.......................... 10,077,634 7,959,833 26,429,153
-------------- -------------- ---------------
-------------- -------------- ---------------
Net loss per share:
Basic.......................................................... $ (0.27) $ (0.14) $ (1.38)
-------------- -------------- ---------------
-------------- -------------- ---------------
Pro forma...................................................... $ (0.23) $ (0.14) $ (0.58)
-------------- -------------- ---------------
-------------- -------------- ---------------
</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, which to date have not been significant, based on 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).
SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended March 31, 1998:
F-9
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 780,000 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 780,000 shares of Common Stock. Goodwill resulting from the
acquisition was $488,000. Subsequent to the acquisition, Toys.com ceased
operations as a separate entity.
3. INCOME TAXES
As a result of the net operating losses, the provision for income taxes
consists solely of minimum state taxes. The 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>
F-10
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
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.
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 50,000,000 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
F-11
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
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>
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 11,259,279
Series A Redeemable Convertible Preferred Stock 6,366,403
Series B Redeemable Convertible Preferred Stock 11,886,649
Employee Incentive Stock Option Plan 5,800,000
Preferred and Common Stock warrants 723,371
--------------
Common Stock issued or reserved 36,035,702
--------------
Common Stock available 13,964,298
--------------
--------------
</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.
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.
F-12
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
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 2,201,667 and 50,000
shares of the Company's Common and Series B, respectively. The notes bear
interest rates between 6.0% and 8.0% per year with interest due upon payment of
the notes. The notes are payable on different dates ranging from December 1,
1999 to July 27, 2002, or upon termination of employment or transfer of any of
the purchased shares.
DEFERRED COMPENSATION
The Company recorded deferred compensation of $55,000, $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 5,800,000 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.
F-13
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
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................................ 1,469,000 $ 0.015 to $0.100 $ 0.029
Exercised.............................. (50,000) 0.015 to 0.015 0.015
Canceled............................... -- --
-----------
Outstanding at March 31, 1998............ 1,419,000 0.015 to 0.100 0.029
Granted................................ 3,582,200 0.100 to 5.000 1.196
Exercised.............................. (326,187) 0.015 to 0.420 0.121
Canceled............................... (420,813) 0.015 to 0.420 0.079
-----------
Outstanding at December 31, 1998......... 4,254,200 0.100 to 5.000 0.996
-----------
-----------
</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 107,000 and 302,242 shares
of Common Stock, respectively. Common Stock available for future grants at March
31, 1998 and December 31, 1998 were 1,388,500 and 1,169,613 shares,
respectively.
Additional information with respect to the outstanding options as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE -------------------------------
NUMBER OF WEIGHTED AVERAGE REMAINING NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE
------------ ------------------ --------------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
RANGE OF EXERCISE PRICES
$0.015 to $0.100........ 1,147,500 $ 0.048 8.91 279,542 $ 0.024
0.200 to 0.420........ 442,200 0.420 9.53 3,200 0.420
0.430 to 5.000........ 2,664,500 1.506 9.85 19,500 4.531
------------ -----------
0.015 to 5.000........ 4,254,200 302,242
------------ -----------
------------ -----------
</TABLE>
F-14
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
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 income for the nine
months ended December 31, 1998 or the year ended March 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.
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.
F-15
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 Company adopted the 1999 Stock Plan, the 1999
Directors' Stock Option Plan and the 1999 Employee Stock Purchase Plan.
Collectively under these plans 7,700,000 shares of Common Stock have been
reserved for future issuance.
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 Redeemable Convertible
Preferred Stock will convert into 18,253,052 shares of Common Stock. Unaudited
pro forma stockholders' equity reflects the assumed conversion of the Redeemable
Convertible Preferred Stock as of December 31, 1998.
F-16
<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
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 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 shares
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 the underwriters. Among the
factors considered in determining the initial public offering price of the
shares, in addition to prevailing market conditions, were eToys'
U-1
<PAGE>
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 % 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 $ .
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......................... 6
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............................. 32
Management........................... 45
Certain Transactions................. 53
Principal Stockholders............... 56
Description of Capital Stock......... 58
Shares Eligible for Future Sale...... 61
Legal Matters........................ 63
Experts.............................. 63
Additional Information............... 63
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.
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................................................. *
Legal fees and expenses......................................................... *
Accounting fees and expenses.................................................... *
Blue Sky qualification fees and expenses........................................ *
Transfer Agent and Registrar fees............................................... *
Miscellaneous fees and expenses................................................. *
-----------
Total....................................................................... *
-----------
-----------
</TABLE>
* To be completed by amendment.
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 3,893,334 shares of Common Stock to five
founders for an aggregate consideration of $58,400.01. On June 27, 1997 we also
issued 6,466,667 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
50,000 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 721,757 shares of Series A
Preferred Stock to 40 investors for
II-1
<PAGE>
an aggregate consideration of $895,000. The Notes converted into 1,468,018
shares of Series A
Preferred Stock.
4. On December 23, 1997, we issued 6,318,017 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 780,000 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 1,203,252
shares of Series B Preferred Stock.
7. On June 4, 1998, we issued 10,474,837 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 1,411,812 shares of Series B Preferred Stock
to sixteen accredited investors for an aggregate consideration of $2,969,322.97.
9. Since inception we have issued an aggregate of 5,051,200 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 , 1999.
3.1 Amended and Restated Certificate of Incorporation of eToys.
3.2 Amended and Restated Certificate of Incorporation of eToys (proposed).
3.3 Amended and Restated Bylaws of eToys.
3.4 Amended and Restated Bylaws 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.
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!.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
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.
10.10 Amended and Restated Voting Agreement dated June 4, 1998, among eToys and certain
investors.
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.
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.
23.1 Consent of Accountants.
23.2 Consent of Attorneys (see Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
</TABLE>
- ------------------------
* To be filed by amendment.
+ 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
II-3
<PAGE>
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 registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Monica, State of
California on February 17, 1999.
<TABLE>
<S> <C> <C>
ETOYS INC.
By: /s/ EDWARD C. LENK
-----------------------------------------
Edward C. Lenk
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
UNCLE OF THE BOARD OF DIRECTORS
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Edward C. Lenk and
Steven J. Schoch, and each of them, as his attorney-in-fact, with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this registration statement (including post-effective amendments), and any
and all registration statements filed pursuant to Rule 462 under the Securities
Act of 1933, as amended, in connection with or related to the offering
contemplated by this registration statement and its amendments, if any, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said registration statement.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
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 February 17, 1999
Edward C. Lenk Board of Directors
/s/ STEVEN J. SCHOCH
- ------------------------------ Chief Financial Officer February 17, 1999
Steven J. Schoch
/s/ PETER C.M. HART
- ------------------------------ Director February 17, 1999
Peter C.M. Hart
/s/ TONY HUNG
- ------------------------------ Director February 17, 1999
Tony Hung
/s/ MICHAEL MORITZ
- ------------------------------ Director February 17, 1999
Michael Moritz
/s/ DANIEL NOVA
- ------------------------------ Director February 17, 1999
Daniel Nova
</TABLE>
II-5
<PAGE>
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ETOYS INC.
The undersigned, Edward C. Lenk and Frank C. Han 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 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-Eight Million Nine Hundred Twenty-Six Thousand Four Hundred Twenty-Three
(68,926,423) shares, each with a par value of $0.0001 per share. Fifty Million
(50,000,000) shares shall be Common Stock and Eighteen Million Nine Hundred
Twenty-Six Thousand Four Hundred Twenty-Three (18,926,423) shares shall be
Preferred Stock.
(B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by this Second 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
<PAGE>
"SERIES A PREFERRED STOCK" and shall consist of Seven Million Thirty-Nine
Thousand Seven 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 rights, preferences, privileges, and restrictions
granted to and imposed on the Series A and Series B 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 or
Series B 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) and (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)
or, if greater (as determined on a per annum basis and on an as converted basis
for the Series A Preferred Stock and Series B 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 and Series B 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 and Series B 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 and Series B 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 and (ii) $2.1032 per share
(as adjusted for any stock splits, stock dividends, recapitalizations or the
like) for each share of Series B Preferred Stock then held by them (as adjusted
for any stock splits, recapitalizations or the like), plus an amount equal to
all declared but unpaid dividends on the Series A Preferred Stock and Series B
Preferred Stock, respectively. If, upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series A and Series B
Preferred Stock shall be insufficient to permit the payment to such
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<PAGE>
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 and Series B
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 and Series B 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 and Series B
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 and Series B
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); 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, 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:
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<PAGE>
(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 or Series B 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 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 and
Series B 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.
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<PAGE>
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 and Series B
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")
and (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"). 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" and "SERIES B
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 and
Series B 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 and Series B
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 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 and Series B 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 and Series B Preferred Stock designated for redemption in the
Redemption Notice as holders of Series A and Series B 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,
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<PAGE>
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 and Series B Preferred Stock on the Redemption Date are
insufficient to redeem the total number of shares of Series A and Series B
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 and Series B Preferred Stock would
otherwise had been entitled to receive if all amounts payable on or with respect
to such Series A and Series B Preferred Stock in such redemption had been paid
in full. The shares of Series A and Series B 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 Series A
and Series B Preferred Stock, such funds will immediately be used to redeem the
balance of the shares of Series A and Series B 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 and Series B 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
commenced) and to pay, on and after the date fixed for redemption or prior
thereto, the Redemption Price of the Series A and Series B 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 and Series B 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 and Series B 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 and Series B 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 and
Series B Preferred Stock, at the office of the Corporation or any transfer agent
for
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<PAGE>
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 and (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. The initial Conversion
Price per share shall be $0.62 for shares of Series A Preferred Stock and
$2.1032 for shares of Series B 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 or Series B
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 or
Series B Preferred Stock shall be entitled to convert the same into shares of
Common Stock, he shall surrender the certificate or certificates therefor, 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 and Series B 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
or Series B 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
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<PAGE>
Series A Preferred Stock or the Series B 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 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 or Series B 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 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
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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 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 or Series B 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 or Series B 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).
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<PAGE>
(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 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
-10-
<PAGE>
the Series A and Series B Preferred Stock shall be appropriately decreased so
that the number of shares of Common Stock issuable on conversion of each share
of Series A and Series B 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 and Series B 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.
(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 and
Series B 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 and Series B 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.
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<PAGE>
(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 and Series B 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 or Series B Preferred Stock pursuant to this
Section 4, the Corporation, at its expense, shall promptly compute such
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 or Series B 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 or Series B 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 and Series B 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.
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<PAGE>
(k) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A or Series B 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 or Series B
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,
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 or
Series B 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 and
Series B 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 or Series B 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 or Series B
Preferred Stock;
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<PAGE>
(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 or Series B 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 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.
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<PAGE>
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.
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 Second 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 2nd day of June, 1998.
/s/ Edward C. Lenk
---------------------------------
Edward C. Lenk, President
/s/ Frank C. Han
---------------------------------
Frank C. Han, Secretary
SIGNATURE PAGE TO eTOYS INC.
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ETOYS INC.
The undersigned, Edward C. Lenk and Frank C. Han, 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 _____ 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 Two
Hundred Five Million (205,000,000) shares, each with a par value of $0.0001 per
share. Two Hundred Million (200,000,000) shares shall be Common Stock and Five
Million (5,000,000) 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
In the event of a vacancy in the Board of Directors, the remaining
directors, except as otherwise provided by law, may exercise the powers of
the full Board of Directors until the vacancy is filled. Vacancies in the
Board of Directors and newly created directorships resulting from any
increase in the authorized number of directors shall be filled by a vote of
the majority of the directors then in office, though less than a quorum, or
by a sole remaining director. Any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors.
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.
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<PAGE>
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.
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
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<PAGE>
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
----------------------------------------
Frank C. Han, Secretary
<PAGE>
BYLAWS
OF
ETOYS INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE. . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - MEETINGS OF SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 NOTICE OF SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . 2
2.6 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.7 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . 3
2.8 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 3
2.9 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.10 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.12 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS. . . 4
2.13 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.14 LIST OF SHAREHOLDERS ENTITLED TO VOTE. . . . . . . . . . . . . . 5
2.15 ADVANCE NOTICE OF SHAREHOLDERS NOMINEES AND SHAREHOLDER
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. . . . . 7
3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . 8
3.7 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . 9
3.8 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . 9
3.9 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.11 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . .10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . .10
3.13 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . .10
3.14 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . . . . .10
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<S> <C>
3.15 REMOVAL OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . .11
4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . .11
4.2 COMMITTEE MINUTES. . . . . . . . . . . . . . . . . . . . . . . .12
4.3 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . .12
ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.2 APPOINTMENT OF OFFICERS. . . . . . . . . . . . . . . . . . . . .12
5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . .13
5.4 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . .13
5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . .13
5.6 UNCLE OF THE BOARD. . . .. . . . . . . . . . . . . . . . . . . .13
5.7 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.8 VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . . .14
5.9 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . .14
5.10 CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . . . . .14
5.11 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . . . . .15
5.12 ASSISTANT TREASURER. . . . . . . . . . . . . . . . . . . . . . .15
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . .15
5.14 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . .15
ARTICLE VI - INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . .15
6.1 THIRD PARTY ACTIONS. . . . . . . . . . . . . . . . . . . . . . .16
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. . . . . . . . . .16
6.3 SUCCESSFUL DEFENSE . . . . . . . . . . . . . . . . . . . . . . .16
6.4 DETERMINATION OF CONDUCT . . . . . . . . . . . . . . . . . . . .17
6.5 PAYMENT OF EXPENSES IN ADVANCE . . . . . . . . . . . . . . . . .17
6.6 INDEMNITY NOT EXCLUSIVE. . . . . . . . . . . . . . . . . . . . .17
6.7 INSURANCE INDEMNIFICATION. . . . . . . . . . . . . . . . . . . .17
6.8 THE CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . .18
6.9 EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . .18
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. . .18
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<S> <C>
ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . .18
7.1 MAINTENANCE AND INSPECTION OF RECORDS. . . . . . . . . . . . . .18
7.2 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . .19
7.3 ANNUAL STATEMENT TO SHAREHOLDERS . . . . . . . . . . . . . . . .19
ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . .20
8.1 CHECKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS . . . . . . . .20
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES . . . . . . . . . . . . .20
8.4 SPECIAL DESIGNATION ON CERTIFICATES. . . . . . . . . . . . . . .21
8.5 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . .21
8.6 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . .21
8.7 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
8.8 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . .22
8.9 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
8.10 TRANSFER OF STOCK. . . . . . . . . . . . . . . . . . . . . . . .22
8.11 STOCK TRANSFER AGREEMENTS. . . . . . . . . . . . . . . . . . . .22
8.12 REGISTERED SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . .22
ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .23
</TABLE>
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<PAGE>
BYLAWS
OF
ETOYS INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of Dover,
County of Kent, State of Delaware. The name of the registered agent of the
corporation at such location is Incorporating Services, Ltd.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of Shareholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, Shareholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
The annual meeting of Shareholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation the annual meeting of Shareholders shall be held on the third
Tuesday of April of each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding business day. At the meeting, directors shall be elected and any
other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the Shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more Shareholders holding shares in the aggregate entitled to cast not
less than ten percent of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or
by telegraphic or other facsimile transmission to the chairman of the board,
the president or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice.
The officer receiving the request shall cause notice to be promptly given to
the Shareholders entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the
time requested by the person or persons calling the meeting, not less than
ten (10) nor more than sixty (60) days after the receipt of the request.
Nothing contained in this paragraph of this Section 2.3 shall be construed as
limiting, fixing, or affecting the time when a meeting of Shareholders called
by action of the board of directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings with Shareholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.5 of these bylaws not
less than ten (10) nor more than sixty (60) days before the date of the
meeting to each Shareholder entitled to vote at such meeting. The notice
shall specify the place, date, and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of Shareholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
Shareholder at such Shareholder's address as it appears on the records of the
corporation. An affidavit of the Secretary or an Assistant Secretary or of
the transfer agent of the corporation that the notice has been given shall,
in the absence of fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the Shareholders for the transaction
of business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the Shareholders, then either (i) the Chairman of the meeting or
(ii) the Shareholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
is present or
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represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting
if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact
any business that might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each Shareholder of record entitled to vote at the
meeting.
2.8 CONDUCT OF BUSINESS
The chairman of any meeting of Shareholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.9 VOTING
The Shareholders entitled to vote at any meeting of Shareholders shall
be determined in accordance with the provisions of Section 2.12 of these
bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries,
pledgors and joint owners of stock and to voting trusts and other voting
agreements).
Except as may be otherwise provided in the certificate of incorporation
or as may be otherwise required by applicable law, each Shareholder shall be
entitled to one vote for each share of capital stock held by such Shareholder.
Except as may be otherwise provided in the certificate of incorporation
or these bylaws, or as may be otherwise required by applicable law:
(i) in all matters other than the election of directors, the
affirmative vote of the majority of shares present in person or represented by
proxy at the meeting and entitled to vote on the subject matter shall be the act
of the Shareholders;
(ii) directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors; and
(iii) where a separate vote by a class or classes or series is
required, the affirmative vote of the majority of shares of such class or
classes or series present in person or represented by proxy at the meeting shall
be the act of such class or classes or series.
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2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Shareholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
Shareholders of a corporation, or any action that may be taken at any annual or
special meeting of such Shareholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those Shareholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by Shareholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
Shareholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.12 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the Shareholders entitled to
notice of or to vote at any meeting of Shareholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining Shareholders entitled to
notice of or to vote at a meeting of Shareholders shall be at the close of
business on the day next preceding the day on which
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<PAGE>
notice is given, or if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held.
(ii) The record date for determining Shareholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which the
first written consent is expressed.
(iii) The record date for determining Shareholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of Shareholders of record entitled to notice of or to vote
at a meeting of Shareholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
Each Shareholder entitled to vote at a meeting of Shareholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for the Shareholder by a written
proxy, signed by the Shareholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the Shareholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
Shareholder or the Shareholder's attorney-in-fact. The revocability of a
proxy that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.14 LIST OF SHAREHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of
Shareholders, a complete list of the Shareholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
Shareholder and the number of shares registered in the name of each
Shareholder. Such list shall be open to the examination of any Shareholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any Shareholder who is present. Such list shall presumptively
determine the identity of the Shareholders entitled to vote at the meeting
and the number of shares held by each of them.
2.15 ADVANCE NOTICE OF SHAREHOLDERS NOMINEES AND SHAREHOLDER BUSINESS
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<PAGE>
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the board of directors, (b) otherwise properly brought
before the meeting by or at the direction of the board of directors, or (c)
otherwise properly brought before the meeting by a Shareholder. For such
nominations or other business to be considered properly brought before the
meeting by a Shareholder, such Shareholder must have given timely notice and
in proper form of his intent to bring such business before such meeting. To
be timely, such Shareholder's notice must be delivered to or mailed and
received by the secretary of the corporation not less than 90 days prior to
the meeting; provided, however, that in the event that less than 100 days
notice or prior public disclosure of the date of the meeting is given or made
to Shareholders, notice by the Shareholder to be timely must be so received
not later than the close of business on the tenth day following the day on
which such notice of the date of the meeting was mailed or such public
disclosure was made. To be in proper form, a Shareholder's notice to the
secretary shall set forth:
(i) the name and address of the Shareholder who intends to make
the nominations, propose the business, and, as the case may be, the name and
address of the person or persons to be nominated or the nature of the business
to be proposed;
(ii) a representation that the Shareholder is a holder of record
of stock of the corporation entitled to vote at such meeting and, if applicable,
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice or introduce the business specified in the
notice;
(iii) if applicable, a description of all arrangements or
understandings between the Shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the Shareholder;
(iv) such other information regarding each nominee or each matter
of business to be proposed by such Shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, or the matter been proposed, or intended to be proposed by the
board of directors; and
(v) if applicable, the consent of each nominee to serve as
director of the corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the foregoing
procedure.
ARTICLE III
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<PAGE>
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating
to action required to be approved by the Shareholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be five (5). The exact
number of directors shall be five (5) until changed, within the limits
specified above, by a bylaw amending this Section 3.2, duly adopted by the
board of directors or by the stockholders.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of Shareholders to hold office until the next
annual meeting. Directors need not be Shareholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his or her successor is elected and qualified
or until the director's earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the attention of
the Secretary of the corporation. When one or more directors so resigns and the
resignation is effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
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<PAGE>
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
Shareholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
Shareholder or an executor, administrator, trustee or guardian of a
Shareholder, or other fiduciary entrusted with like responsibility for the
person or estate of a Shareholder, may call a special meeting of Shareholders
in accordance with the provisions of the certificate of incorporation or
these bylaws, or may apply to the Court of Chancery for a decree summarily
ordering an election as provided in Section 211 of the General Corporation
Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any Shareholder or
Shareholders holding at least ten (10) percent of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors
then in office as aforesaid, which election shall be governed by the
provisions of Section 211 of the General Corporation Law of Delaware as far
as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
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<PAGE>
The first meeting of each newly elected board of directors shall be
held at such time and place as shall be fixed by the vote of the Shareholders
at the annual meeting and no notice of such meeting shall be necessary to the
newly elected directors in order legally to constitute the meeting, provided
a quorum shall be present. In the event of the failure of the Shareholders to
fix the time or place of such first meeting of the newly elected board of
directors, or in the event such meeting is not held at the time and place so
fixed by the Shareholders, the meeting may be held at such time and place as
shall be specified in a notice given as hereinafter provided for special
meetings of the board of directors, or as shall be specified in a written
waiver signed by all of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any
vice president, the secretary or a majority of the directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4)
days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone or by telegram, it shall be delivered
personally or by telephone or to the telegraph company at least forty-eight
(48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director
or to a person at the office of the director who the person giving the notice
has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the
meeting is to be held at the principal executive office of the corporation.
3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which
there is a quorum shall be the act of the board of directors, except as may
be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum is present.
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A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.10 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors,
then the directors present thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
3.11 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the
board of directors, or of any committee thereof, may be taken without a
meeting if all members of the board or committee, as the case may be, consent
thereto in writing and the writing or writings are filed with the minutes of
proceedings of the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors,
such loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares
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of stock of the corporation. Nothing in this section contained shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
3.15 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority
of the shares then entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist
of one or more of the directors of the corporation. The board may designate
one or more directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting of the committee. In the
absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or
not such member or members constitute a quorum, may unanimously appoint
another member of the board of directors to act at the meeting in the place
of any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the board of directors or in the bylaws of the
corporation, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to
all papers that may require it; but no such committee shall have the power or
authority to (i) amend the certificate of incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of
directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the corporation or fix the
number of shares of any series of stock or authorize the increase or decrease
of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the Shareholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the Shareholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the
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bylaws of the corporation: and, unless the board resolution establishing the
committee, the bylaws or the certificate of incorporation expressly so
provide, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock, or to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law
of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws.
Section 3.5 (place of meetings and meetings by telephone), Section 3.7
(regular meetings), Section 3.8 (special meetings and notice), Section 3.9
(quorum), Section 3.11 (waiver of notice), and Section 3.12 (action without a
meeting), with such changes in the context of those bylaws as are necessary
to substitute the committee and its members for the board of directors and
its members; provided however, that the time of regular meetings of
committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may
also be called by resolution of the board of directors and that notice of
special meetings of committees shall also be given to all alternate members,
who shall have the right to attend all meetings of the committee. The board
of directors may adopt rules for the government of any committee not
inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, an uncle of the board, one or more vice presidents,
one or more assistant vice secretaries, one or more assistant treasurers, and
any such other officers as may be appointed in accordance with the provisions
of Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
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5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may
require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws or as the board of
directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by
the board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall
not be necessary to make it effective. Any resignation is without prejudice
to the rights, if any, of the corporation under any contract to which the
officer is a party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled
by the board of directors.
5.6 UNCLE OF THE BOARD
The uncle of the board, if such an officer be elected, shall, if
present, preside at meetings of the bond of directors and exercise and
perform such other powers and duties as may from time to time be assigned to
him or her by the board of directors or as may be prescribed by these bylaws.
If there is no chief executive officer and no president, then the uncle of
the board shall also be the chief executive officer of the corporation and
shall have the powers and duties prescribed in Section 5.7 of these bylaws.
5.7 PRESIDENT
The president shall preside at all meetings of the Shareholders and, in
the absence or nonexistence of an uncle of the board and a chief executive
officer, at all meetings of the board of directors. The president shall have
the general powers and duties of management usually vested in the office of
president of a corporation and shall have such other powers and duties as may
be prescribed by the board of directors or these bylaws. If there is no chief
executive officer, then the president shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
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5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform
all the duties of the president and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of
directors, these bylaws, the president or the uncle of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors,
committees of directors, and Shareholders. The minutes shall show the time
and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented
at Shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names
of all Shareholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the Shareholders and of the board of directors required to be given by law
or by these bylaws. The secretary shall keep the seal, of the corporation, if
one be adopted, in safe custody and shall have such other powers and perform
such other duties as may be prescribed by the board of directors or by these
bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables
in the name and to the credit of the corporation with such depositories as
may be designated by the board of directors. The chief financial officer
shall disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president and directors, whenever they request
it, an account of all his or her transactions as chief financial officer and
of the financial condition of the corporation, and shall
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have other powers and perform such other duties as may be prescribed by the
board of directors or these bylaws.
The chief financial officer shall be the treasurer of the corporation.
5.11 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the Shareholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her
inability or refusal to act, perform the duties and exercise the powers of
the secretary and shall perform such other duties and have such other powers
as may be prescribed by the board of directors or these bylaws.
5.12 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the Shareholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the chief financial officer or in the event of his
or her inability or refusal to act, perform the duties and exercise the
powers of the chief financial officer and shall perform such other duties and
have such other powers as may be prescribed by the board of directors or
these bylaws.
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The uncle of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation,
or any other person authorized by the board of directors or the president or
a vice president, is authorized to vote, represent, and exercise on behalf of
this corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation. The
authority granted herein may be exercised either by such person directly or
by any other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
5.14 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from
time to time by the board of directors or the Shareholders.
ARTICLE VI
INDEMNITY
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6.1 THIRD PARTY ACTIONS
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement (if such
settlement is approved in advance by the corporation, which approval shall
not be unreasonably withheld) actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith and
in a manner which such person reasonably believed to be in or not opposed to
the best interest of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct was
unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person is or was a director, officer,
employee or agent of corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) and amounts paid in settlement (if such
settlement is approved in advance by the corporation, which approval shall
not be unreasonably withheld) actually and reasonably incurred by such person
in connection with the defense or settlement of such action or suit if the
person acted in good faith and in manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Delaware Court of Chancery or such
other court shall deem proper. Notwithstanding any other provision of this
Article VI, no person shall be indemnified hereunder for any expenses or
amounts paid in settlement with respect to any action to recover short-swing
profits under Section 16(b) of the Securities Exchange Act of 1934, as
amended.
6.3 SUCCESSFUL DEFENSE
To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sec-
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tions 6.1 and 6.2, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by the person in connection therewith.
6.4 DETERMINATION OF CONDUCT
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a
court) shall be made by the corporation only as authorized in the specific
case upon a determination that the indemnification of the director, officer,
employee or agent is proper in the circumstances because the person has met
the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such
determination shall be made (1) by a majority vote of the directors who are
not parties to such action, suit or proceeding, even though less than a
quorum, or (2) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (3) by the
Shareholders. Notwithstanding the foregoing, a director, officer, employee or
agent of the Corporation shall be entitled to contest any determination that
the director, officer, employee or agent has not met the applicable standard
of conduct set forth in Sections 6.1 and 6.2 by petitioning a court of
competent jurisdiction.
6.5 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending a civil or criminal action, suit or
proceeding, by an individual who may be entitled to indemnification pursuant
to Section 6.1 or 6.2, shall be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director, officer, employee or agent to
repay such amount if it shall ultimately be determined that the individual is
not entitled to be indemnified by the corporation as authorized in this
Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
The indemnification and advancement of expenses provided by or granted
pursuant to the other sections of this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
Shareholders or disinterested directors or otherwise, both as to action in
their official capacity and as to action in another capacity while holding
such office.
6.7 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against the person and incurred by the person in any such capacity or arising
out of the person's status as such, whether or not the corporation would have
the power to indemnify such person against such liability under the
provisions of this Article VI.
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6.8 THE CORPORATION
For purposes of this Article VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under and subject to the
provisions of this Article VI (including, without limitation the provisions
of Section 6.4) with respect to the resulting or surviving corporation as the
person would have with respect to such constituent corporation if its
separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan;
and references to "serving at the request of the corporation" shall include
any service as a director, officer, employee or agent of the corporation
which imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to
in this Article VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive officer or at
such place or places as designated by the board of directors, keep a record
of its Shareholders listing their names and
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addresses and the number and class of shares held by each Shareholder, a copy
of these bylaws as amended to date, accounting books, and other records.
Any Shareholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose
the corporation's stock ledger, a list of its Shareholders, and its other
books and records and to make copies or extracts therefrom. A proper purpose
shall mean a purpose reasonably related to such person's interest as a
Shareholder. In every instance where an attorney or other agent is the person
who seeks the right to inspection, the demand under oath shall be accompanied
by a power of attorney or such other writing that authorizes the attorney or
other agent so to act on behalf of the Shareholder. The demand under oath
shall be directed to the corporation at its registered office in Delaware or
at its principal place of business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of
Shareholders, a complete list of the Shareholders entitled to vote at the
meeting, arranged in alphabetical order, showing the address of each
Shareholder and the number of shares registered in the name of each
Shareholder. Such list shall be open to the examination of any Shareholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any Shareholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its Shareholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine
whether a director is entitled to the inspection sought. The Court may
summarily order the corporation to permit the director to inspect any and all
books and records, the stock ledger, and the stock list and to make copies or
extracts therefrom. The Court may, in its discretion, prescribe any
limitations or conditions with reference to the inspection, or award such
other and further relief as the Court may deem just and proper.
7.3 ANNUAL STATEMENT TO SHAREHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the Shareholders when called for by vote of the
Shareholders, a full and clear statement of the business and condition of the
corporation.
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ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders
for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the
agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered
to the corporation. Notwithstanding the adoption of such a resolution by the
board of directors, every holder of stock represented by certificates and
upon request every holder of uncertificated shares shall be entitled to have
a certificate signed by, or in the name of the corporation by the chairman or
vice-chairman of the board of directors, or the president or vice-president,
and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of such corporation representing the
number of shares registered in certificate form. Any or all of the signatures
on the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if the person were such officer, transfer agent or registrar at the
date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend
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on fully paid shares, the corporation shall declare a dividend upon partly
paid shares of the same class, but only upon the basis of the percentage of
the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set
forth in full or summarized on the face or back of the certificate that the
corporation shall issue to represent such class or series of stock; provided,
however, that, except as otherwise provided in Section 202 of the General
Corporation Law of Delaware, in lieu of the foregoing requirements there may
be set forth on the face or back of the certificate that the corporation
shall issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each Shareholder who so requests
the powers, the designations, the preferences, and the relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications limitations or restrictions of such
preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter
is surrendered to the corporation and cancelled at the same time. The
corporation may issue a new certificate of stock or uncertificated shares in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or the owner's legal representative,
to give the corporation a bond sufficient to indemnify it against any claim
that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate
or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision. the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and
a natural person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained
in (i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
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The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any
proper purpose and may abolish any such reserve. Such purposes shall include
but not be limited to equalizing dividends, repairing or maintaining any
property of the corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
The corporation may adopt a corporate seal, which shall be adopted and
which may be altered by the board of directors, and may use the same by
causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall
be the duty of the corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate, and record the transaction in
its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of Shareholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such Shareholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED SHAREHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends
and to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest
in such share or shares on the part of another person, whether or not it
shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
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ARTICLE IX
AMENDMENTS
The bylaws of the corporation may be adopted, amended or repealed by the
Shareholders entitled to vote; provided, however, that the corporation may,
in its certificate of incorporation, confer the power to adopt, amend or
repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the Shareholders of the power,
nor limit their power to adopt, amend or repeal bylaws.
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BYLAWS
OF
ETOYS INC.
(AS AMENDED AND RESTATED ON ____________, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Registered Office . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II - MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . .1
2.1 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . .1
2.2 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.3 Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.4 Notice of Stockholder's Meeting; Affidavit of Notice. . . . . . . .3
2.5 Advance Notice of Stockholder Nominees. . . . . . . . . . . . . . .3
2.6 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.7 Adjourned Meeting; Notice . . . . . . . . . . . . . . . . . . . . .4
2.8 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . .4
2.9 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.10 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . .5
2.11 Record Date for Stockholder Notice; Voting . . . . . . . . . . . .5
2.12 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.1 Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.2 Number of Directors . . . . . . . . . . . . . . . . . . . . . . . .6
3.3 Election, Qualification and Term of Office of Directors . . . . . .6
3.4 Resignation and Vacancies . . . . . . . . . . . . . . . . . . . . .7
3.5 Place of Meetings; Meetings by Telephone. . . . . . . . . . . . . .7
3.6 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . . .8
3.7 Special Meetings; Notice. . . . . . . . . . . . . . . . . . . . . .8
3.8 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.9 Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . . . . .9
3.10 Board Action by Written Consent without a Meeting. . . . . . . . .9
3.11 Fees and Compensation of Directors . . . . . . . . . . . . . . . .9
3.12 Approval of Loans to Officers. . . . . . . . . . . . . . . . . . .9
3.13 Removal of Directors . . . . . . . . . . . . . . . . . . . . . . .9
3.14 Uncle of the Board of Directors . .. . . . . . . . . . . . . . . 10
ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.1 Committees of Directors . . . . . . . . . . . . . . . . . . . . . 10
4.2 Committee Minutes . . . . . . . . . . . . . . . . . . . . . . . . 12
4.3 Meetings and Action of Committees . . . . . . . . . . . . . . . . 12
ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 Appointment of Officers . . . . . . . . . . . . . . . . . . . . . 12
5.3 Subordinate Officers. . . . . . . . . . . . . . . . . . . . . . . 12
5.4 Removal and Resignation of Officers . . . . . . . . . . . . . . . 13
5.5 Vacancies in Offices. . . . . . . . . . . . . . . . . . . . . . . 13
5.6 Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
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<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<S> <C>
5.7 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.8 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.9 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.10 Chief Financial Officer. . . . . . . . . . . . . . . . . . . . . 14
5.11 Representation of Shares of Other Corporations . . . . . . . . . 15
5.12 Authority and Duties of Officers . . . . . . . . . . . . . . . . 15
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND
OTHER AGENTS. . . . . . . . . . . . . . . . . . . . . . . . . 15
6.1 Indemnification of Directors and Officers . . . . . . . . . . . . 15
6.2 Indemnification of Others . . . . . . . . . . . . . . . . . . . . 15
6.3 Payment of Expenses in Advance. . . . . . . . . . . . . . . . . . 16
6.4 Indemnity Not Exclusive . . . . . . . . . . . . . . . . . . . . . 16
6.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.6 Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . 17
7.1 Maintenance and Inspection of Records . . . . . . . . . . . . . . 17
7.2 Inspection by Directors . . . . . . . . . . . . . . . . . . . . . 17
7.3 Annual Statement to Stockholders. . . . . . . . . . . . . . . . . 17
ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . 18
8.1 Checks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.2 Execution of Corporate Contracts and Instruments. . . . . . . . . 18
8.3 Stock Certificates; Partly Paid Shares. . . . . . . . . . . . . . 18
8.4 Special Designation on Certificates . . . . . . . . . . . . . . . 19
8.5 Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . 19
8.6 Construction; Definitions . . . . . . . . . . . . . . . . . . . . 19
8.7 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.8 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.9 Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.10 Transfer of Stock. . . . . . . . . . . . . . . . . . . . . . . . 20
8.11 Stock Transfer Agreements. . . . . . . . . . . . . . . . . . . . 20
8.12 Registered Stockholders. . . . . . . . . . . . . . . . . . . . . 20
ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
-ii-
<PAGE>
BYLAWS
OF
ETOYS INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE.
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.
1.2 OTHER OFFICES.
The Board of Directors may at any time establish other offices at any
place or places where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS.
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the Corporation.
2.2 ANNUAL MEETING.
(a) The annual meeting of stockholders shall be held each year on a date
and at a time designated by the Board of Directors. At the meeting, directors
shall be elected and any other proper business may be transacted.
(b) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be transacted by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
Corporation's notice with respect to such meeting, (ii) by or at the direction
of the Board of Directors or (iii) by any stockholder of the Corporation who was
a stockholder of record at the time of giving of the notice provided for in this
Section 2.2, who is entitled to vote at the meeting and who has complied with
the notice procedures set forth in this Section 2.2.
<PAGE>
(c) In addition to the requirements of Section 2.5, for nominations or
other business to be properly brought before an annual meeting by a
stockholder pursuant to clause (iii) of paragraph (b) of this Section 2.2,
the stockholder must have given timely notice thereof in writing to the
secretary of the Corporation and such business must be a proper matter for
stockholder action under the General Corporation Law of Delaware. To be
timely, a stockholder's notice shall be delivered to the secretary at the
principal executive offices of the Corporation not less than 20 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
meeting of stockholders; provided, however, that in the event that the date
of the annual meeting is more than 30 days prior to or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be
so delivered not earlier than the 90th day prior to such annual meeting and
not later than the close of business on the later of the 20th day prior to
such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (i) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected);
(ii) as to any other business that the stockholder proposes to bring before
the meeting, a brief description of such business, the reasons for conducting
such business at the meeting and any material interest in such business of
such stockholder and the beneficial owner, if any, on whose behalf the
proposal is made; and (iii) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made
(A) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (B) the class and
number of shares of the Corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
(d) Only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.2. The chairman of the meeting
shall determine whether a nomination or any business proposed to be
transacted by the stockholders has been properly brought before the meeting
and, if any proposed nomination or business has not been properly brought
before the meeting, the chairman shall declare that such proposed business or
nomination shall not be presented for stockholder action at the meeting.
(e) For purposes of this Section 2.2, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service.
(f) Nothing in this Section 2.2 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
<PAGE>
2.3 SPECIAL MEETING.
(a) A special meeting of the stockholders may be called at any
time by the Board of Directors, or by the chairman of the board, or by the
president.
(b) Nominations of persons for election to the Board of Directors
may be made at a special meeting of stockholders at which directors are to be
elected pursuant to such notice of meeting (i) by or at the direction of the
Board of Directors or (ii) by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in Section
2.5, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in Section 2.5.
2.4 NOTICE OF STOCKHOLDER'S MEETINGS; AFFIDAVIT OF NOTICE.
All notices of meetings of stockholders shall be in writing and
shall be sent or otherwise given in accordance with this Section 2.4 of these
Bylaws not less than 10 nor more than 60 days before the date of the meeting
to each stockholder entitled to vote at such meeting (or such longer or
shorter time as is required by Section 2.5 of these Bylaws, if applicable).
The notice shall specify the place, date, and hour of the meeting, and, in
the case of a special meeting, the purpose or purposes for which the meeting
is called.
Written notice of any meeting of stockholders, if mailed, is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation.
An affidavit of the secretary or an assistant secretary or of the transfer
agent of the Corporation that the notice has been given shall, in the absence
of fraud, be prima facie evidence of the facts stated therein.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES.
Only persons who are nominated in accordance with the procedures
set forth in this Section 2.5 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders by or at the direction
of the Board of Directors or by any stockholder of the Corporation entitled
to vote for the election of directors at the meeting who complies with the
notice procedures set forth in this Section 2.5. Such nominations, other
than those made by or at the direction of the Board of Directors, shall be
made pursuant to timely notice in writing to the secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 60 days nor more than 90 days prior to the meeting; provided,
however, that in the event that less than 60 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was made. Such
stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director,
(i) the name, age, business address and residence address of such person,
(ii) the principal occupation or employment of such person, (iii) the class
and number of shares of the Corporation which are beneficially owned by
<PAGE>
such person and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Exchange Act (including, without limitation, such person's written
consent to being named in the proxy statement as a nominee and to serving as
a director if elected); and (b) as to the stockholder giving the notice (i)
the name and address, as they appear on the Corporation's books, of such
stockholder and (ii) the class and number of shares of the Corporation which
are beneficially owned by such stockholder. At the request of the Board of
Directors any person nominated by the Board of Directors for election as a
director shall furnish to the secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which
pertains to the nominee. No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the
procedures set forth in this Section 2.5. The chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that a nomination
was not made in accordance with the procedures prescribed by the Bylaws, and
if he or she should so determine, he or she shall so declare to the meeting
and the defective nomination shall be disregarded.
2.6 QUORUM.
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction
of business except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (a) the chairman of the meeting or
(b) the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
is present or represented. At such adjourned meeting at which a quorum is
present or represented, any business may be transacted that might have been
transacted at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE.
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting
if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the Corporation may transact
any business that might have been transacted at the original meeting. If the
adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2.8 CONDUCT OF BUSINESS.
The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including the manner of
voting and the conduct of business.
<PAGE>
2.9 VOTING.
(a) The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of
the General Corporation Law of Delaware (relating to voting rights of
fiduciaries, pledgors and joint owners of stock and to voting trusts and
other voting agreements).
(b) Except as may be otherwise provided in the Certificate of
Incorporation, each stockholder shall be entitled to one vote for each share
of capital stock held by such stockholder.
2.10 WAIVER OF NOTICE.
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the Certificate of Incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any
written waiver of notice unless so required by the Certificate of
Incorporation or these Bylaws.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING.
In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion or exchange of stock or for the purpose
of any other lawful action, the Board of Directors may fix, in advance, a
record date, which shall not be more than 60 nor less than 10 days before the
date of such meeting, nor more than 60 days prior to any other action. If the
Board of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day
on which the meeting is held.
(b) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
<PAGE>
2.12 PROXIES.
Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
Corporation, but no such proxy shall be voted or acted upon after three years
from its date, unless the proxy provides for a longer period. A proxy shall
be deemed signed if the stockholder's name is placed on the proxy (whether by
manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a
proxy that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
3.1 POWERS.
Subject to the provisions of the General Corporation Law of
Delaware and any limitations in the Certificate of Incorporation or these
Bylaws relating to action required to be approved by the stockholders or by
the outstanding shares, the business and affairs of the Corporation shall be
managed and all corporate powers shall be exercised by or under the direction
of the Board of Directors.
3.2 NUMBER OF DIRECTORS.
The number of directors constituting the entire Board of Directors
shall be five.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.
Except as provided in Section 3.4 of these Bylaws, directors shall
be elected at each annual meeting of stockholders to hold office until the
next annual meeting. Directors need not be stockholders unless so required
by the Certificate of Incorporation or these Bylaws, wherein other
qualifications for directors may be prescribed. Each director, including a
director elected to fill a vacancy, shall hold office until his or her
successor is elected and qualified or until his or her earlier resignation or
removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES.
Any director may resign at any time upon written notice to the
attention of the secretary of the Corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have
power to fill such vacancy or vacancies, the vote thereon to take effect when
such resignation or resignations shall become effective, and each director so
chosen shall hold office as provided in this section in the filling of other
vacancies. A vacancy created by the
<PAGE>
removal of a director by the vote of the stockholders or by court order may
be filled only by the affirmative vote of a majority of the shares
represented and voting at a duly held meeting at which a quorum is present
(which shares voting affirmatively also constitute a majority of the quorum.
Each director so elected shall hold office until the next annual meeting of
the stockholders and until a successor has been elected and qualified.
Unless otherwise provided in the Certificate of Incorporation or
these Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by
a sole remaining director.
(b) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions
of the Certificate of Incorporation, vacancies and newly created
directorships of such class or classes or series may be filled by a majority
of the directors elected by such class or classes or series thereof then in
office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause,
the Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders
in accordance with the provisions of the Certificate of Incorporation or
these Bylaws, or may apply to the Court of Chancery for a decree summarily
ordering an election as provided in Section 211 of the General Corporation
Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole Board of Directors (as constituted immediately prior to any such
increase), then the Court of Chancery may, upon application of any
stockholder or stockholders holding at least 10% of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors
then in office as aforesaid, which election shall be governed by the
provisions of Section 211 of the General Corporation Law of Delaware as far
as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
The Board of Directors of the Corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, members of the Board of Directors, or any committee designated
by the Board of Directors, may participate in a meeting of the Board of
Directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in
<PAGE>
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.6 REGULAR MEETINGS.
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be
determined by the Board of Directors.
3.7 SPECIAL MEETINGS; NOTICE.
Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the chairman of the board, the
president, any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the Corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or by telegram, it shall be delivered personally
or by telephone or to the telegraph company at least 48 hours before the time
of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify
the purpose or the place of the meeting, if the meeting is to be held at the
principal executive office of the Corporation.
3.8 QUORUM.
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction
of business and the act of a majority of the directors present at any meeting
at which there is a quorum shall be the act of the Board of Directors, except
as may be otherwise specifically provided by statute or by the Certificate of
Incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE.
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the Certificate of Incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall
<PAGE>
constitute a waiver of notice of such meeting, except when the person attends
a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor
the purpose of, any regular or special meeting of the directors, or members
of a committee of directors, need be specified in any written waiver of
notice unless so required by the Certificate of Incorporation or these Bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of
the Board of Directors, or of any committee thereof, may be taken without a
meeting if all members of the Board of Directors or committee, as the case
may be, consent thereto in writing and the writing or writings are filed with
the minutes of proceedings of the Board of Directors or committee. Written
consents representing actions taken by the board or committee may be executed
by telex, telecopy or other facsimile transmission, and such facsimile shall
be valid and binding to the same extent as if it were an original.
3.11 FEES AND COMPENSATION OF DIRECTORS.
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
3.12 APPROVAL OF LOANS TO OFFICERS.
The Corporation may lend money to, or guarantee any obligation of,
or otherwise assist any officer or other employee of the Corporation or of
its subsidiary, including any officer or employee who is a director of the
Corporation or its subsidiary, whenever, in the judgment of the directors,
such loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Section 3.2 contained shall be
deemed to deny, limit or restrict the powers of guaranty or warranty of the
Corporation at common law or under any statute.
3.13 REMOVAL OF DIRECTORS.
Unless otherwise restricted by statute, by the Certificate of
Incorporation or by these Bylaws, any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority
of the shares then entitled to vote at an election of directors; provided,
however, that if the stockholders of the Corporation are entitled to
cumulative voting, if less than the entire Board of Directors is to be
removed, no director may be removed without cause if the votes cast against
his removal would be sufficient to elect him if then cumulatively voted at an
election of the entire Board of Directors.
<PAGE>
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's
term of office.
3.14 UNCLE OF THE BOARD OF DIRECTORS.
The Corporation may also have, at the discretion of the Board of
Directors, an uncle of the Board of Directors who shall not be considered
an officer of the Corporation.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS.
The Board of Directors may, by resolution passed by a majority of
the whole Board of Directors, designate one or more committees, with each
committee to consist of one or more of the directors of the Corporation. The
Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board of
Directors or in the Bylaws of the Corporation, shall have and may exercise
all the powers and authority of the Board of Directors in the management of
the business and affairs of the Corporation, and may authorize the seal of
the Corporation to be affixed to all papers that may require it; but no such
committee shall have the power or authority to (a) amend the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock
adopted by the Board of Directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or
classes or any other series of the same or any other class or classes of
stock of the Corporation or fix the number of shares of any series of stock
or authorize the increase or decrease of the shares of any series), (b) adopt
an agreement of merger or consolidation under Sections 251 or 252 of the
General Corporation Law of Delaware, (c) recommend to the stockholders the
sale, lease or exchange of all or substantially all of the Corporation's
property and assets, (d) recommend to the stockholders a dissolution of the
Corporation or a revocation of a dissolution, or (e) amend the Bylaws of the
Corporation; and, unless the board resolution establishing the committee, the
Bylaws or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
<PAGE>
4.2 COMMITTEE MINUTES.
Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES.
Meetings and actions of committees shall be governed by, and held
and taken in accordance with, the provisions of Section 3.5 (place of
meetings and meetings by telephone), Section 3.6 (regular meetings), Section
3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver
of notice), and Section 3.10 (action without a meeting) of these Bylaws, with
such changes in the context of such provisions as are necessary to substitute
the committee and its members for the Board of Directors and its members;
provided, however, that the time of regular meetings of committees may be
determined either by resolution of the Board of Directors or by resolution of
the committee, that special meetings of committees may also be called by
resolution of the Board of Directors and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The Board of Directors may
adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS.
The officers of the Corporation shall be a chief executive officer,
a president, a secretary, and a chief financial officer. The Corporation may
also have, at the discretion of the Board of Directors, one or more vice
presidents, one or more assistant secretaries, one or more assistant
treasurers, and any such other officers as may be appointed in accordance
with the provisions of Section 5.3 of these Bylaws. Any number of offices
may be held by the same person.
5.2 APPOINTMENT OF OFFICERS.
The officers of the Corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights,
if any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS.
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the Corporation may require, each of whom shall hold office for
such period, have such authority, and perform such duties as are provided in
these Bylaws or as the Board of Directors may from time to time determine.
<PAGE>
5.4 REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the Board of Directors or, except in the case of an
officer chosen by the Board of Directors, by any officer upon whom such power
of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the secretary of the Corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time
specified in that notice; and, unless otherwise specified in that notice, the
acceptance of the resignation shall not be necessary to make it effective.
Any resignation is without prejudice to the rights, if any, of the
Corporation under any contract to which the officer is a party.
5.5 VACANCIES IN OFFICES.
Any vacancy occurring in any office of the Corporation shall be
filled by the Board of Directors.
5.6 CHIEF EXECUTIVE OFFICER.
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the uncle of the board, if any, the chief executive
officer of the Corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business
and the officers of the Corporation. He or she shall preside at all meetings
of the stockholders and, in the absence or nonexistence of an uncle of the
board, at all meetings of the Board of Directors and shall have the general
powers and duties of management usually vested in the office of chief
executive officer of a corporation and shall have such other powers and
duties as may be prescribed by the Board of Directors or these Bylaws.
5.7 PRESIDENT.
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the uncle of the board (if any) or the chief
executive officer, the president shall have general supervision, direction,
and control of the business and other officers of the Corporation. He or she
shall have the general powers and duties of management usually vested in the
office of president of a corporation and such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws.
5.8 VICE PRESIDENTS.
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by
the Board of Directors or, if not ranked, a vice president designated by the
Board of Directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the
<PAGE>
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by
the Board of Directors, these Bylaws, the president or the chairman of the
board.
5.9 SECRETARY.
The secretary shall keep or cause to be kept, at the principal
executive office of the Corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented
at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the Corporation or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names
of all stockholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors required to be
given by law or by these Bylaws. He or she shall keep the seal of the
Corporation, if one be adopted, in safe custody and shall have such other
powers and perform such other duties as may be prescribed by the Board of
Directors or by these Bylaws.
5.10 CHIEF FINANCIAL OFFICER.
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the Corporation, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital retained earnings, and shares. The books of account shall at all
reasonable times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the Corporation, and
shall have other powers and perform such other duties as may be prescribed by
the Board of Directors or the Bylaws.
5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
The uncle of the board, the chief executive officer, the
president, any vice president, the chief financial officer, the secretary or
assistant secretary of this Corporation, or
<PAGE>
any other person authorized by the Board of Directors or the chief executive
officer or the president or a vice president, is authorized to vote,
represent, and exercise on behalf of this Corporation all rights incident to
any and all shares of any other corporation or corporations standing in the
name of this Corporation. The authority granted herein may be exercised
either by such person directly or by any other person authorized to do so by
proxy or power of attorney duly executed by the person having such authority.
5.12 AUTHORITY AND DUTIES OF OFFICERS.
In addition to the foregoing authority and duties, all officers of
the Corporation shall respectively have such authority and perform such
duties in the management of the business of the Corporation as may be
designated from time to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees),
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with any proceeding, arising by reason of the fact
that such person is or was an agent of the Corporation. For purposes of this
Section 6.1, a "director" or "officer" of the Corporation includes any person
(a) who is or was a director or officer of the Corporation, (b) who is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, or (c)
who was a director or officer of a Corporation which was a predecessor
corporation of the Corporation or of another enterprise at the request of
such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS.
The Corporation shall have the power, to the maximum extent and in
the manner permitted by the General Corporation Law of Delaware, to indemnify
each of its employees and agents (other than directors and officers) against
expenses (including attorneys' fees), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding,
arising by reason of the fact that such person is or was an agent of the
Corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the Corporation (other than a director or officer) includes any person (a)
who is or was an employee or agent of the Corporation, (b) who is or was
serving at the request of the Corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or (c)
who was an employee or agent of a corporation which was a predecessor
corporation of the Corporation or of another enterprise at the request of
such predecessor corporation.
<PAGE>
6.3 PAYMENT OF EXPENSES IN ADVANCE.
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the Corporation in advance
of the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if
it shall ultimately be determined that the indemnified party is not entitled
to be indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE.
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any Bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Certificate of
Incorporation
6.5 INSURANCE.
The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Corporation
would have the power to indemnify him or her against such liability under the
provisions of the General Corporation Law of Delaware.
6.6 CONFLICTS.
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the
Certificate of Incorporation, these Bylaws, a resolution of the stockholders
or an agreement in effect at the time of the accrual of the alleged cause of
the action asserted in the proceeding in which the expenses were incurred or
other amounts were paid, which prohibits or otherwise limits indemnification;
or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
<PAGE>
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS.
The Corporation shall, either at its principal executive offices or
at such place or places as designated by the Board of Directors, keep a
record of its stockholders listing their names and addresses and the number
and class of shares held by each stockholder, a copy of these Bylaws as
amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose
the Corporation's stock ledger, a list of its stockholders, and its other
books and records and to make copies or extracts therefrom. A proper purpose
shall mean a purpose reasonably related to such person's interest as a
stockholder. In every instance where an attorney or other agent is the
person who seeks the right to inspection, the demand under oath shall be
accompanied by a power of attorney or such other writing that authorizes the
attorney or other agent to so act on behalf of the stockholder. The demand
under oath shall be directed to the Corporation at its registered office in
Delaware or at its principal place of business.
7.2 INSPECTION BY DIRECTORS.
Any director shall have the right to examine the Corporation's
stock ledger, a list of its stockholders, and its other books and records for
a purpose reasonably related to his or her position as a director. The Court
of Chancery is hereby vested with the exclusive jurisdiction to determine
whether a director is entitled to the inspection sought. The Court may
summarily order the Corporation to permit the director to inspect any and all
books and records, the stock ledger, and the stock list and to make copies or
extracts therefrom. The Court may, in its discretion, prescribe any
limitations or conditions with reference to the inspection, or award such
other and further relief as the Court may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
Corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS.
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts,
other orders for payment of money,
<PAGE>
notes or other evidences of indebtedness that are issued in the name of or
payable to the Corporation, and only the persons so authorized shall sign or
endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.
The Board of Directors, except as otherwise provided in these
Bylaws, may authorize any officer or officers, or agent or agents, to enter
into any contract or execute any instrument in the name of and on behalf of
the Corporation; such authority may be general or confined to specific
instances. Unless so authorized or ratified by the Board of Directors or
within the agency power of an officer, no officer, agent or employee shall
have any power or authority to bind the Corporation by any contract or
engagement or to pledge its credit or to render it liable for any purpose or
for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.
The shares of the Corporation shall be represented by certificates,
provided that the Board of Directors of the Corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not
apply to shares represented by a certificate until such certificate is
surrendered to the Corporation. Notwithstanding the adoption of such a
resolution by the Board of Directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the Corporation
by the chairman or vice-chairman of the Board of Directors, or the chief
executive officer or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of the Corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate has ceased to
be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
The Corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
Corporation in the case of uncertificated partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated. Upon the declaration of any dividend on fully paid shares,
the Corporation shall declare a dividend upon partly paid shares of the same
class, but only upon the basis of the percentage of the consideration
actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES.
If the Corporation is authorized to issue more than one class of
stock or more than one series of any class, then the powers, the
designations, the preferences, and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full
<PAGE>
or summarized on the face or back of the certificate that the Corporation
shall issue to represent such class or series of stock; provided, however,
that, except as otherwise provided in Section 202 of the General Corporation
Law of Delaware, in lieu of the foregoing requirements there may be set forth
on the face or back of the certificate that the Corporation shall issue to
represent such class or series of stock a statement that the Corporation will
furnish without charge to each stockholder who so requests the powers, the
designations, the preferences, and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES.
Except as provided in this Section 8.5, no new certificates for
shares shall be issued to replace a previously issued certificate unless the
latter is surrendered to the Corporation and canceled at the same time. The
Corporation may issue a new certificate of stock or uncertificated shares in
the place of any certificate previously issued by it, alleged to have been
lost, stolen or destroyed, and the Corporation may require the owner of the
lost, stolen or destroyed certificate, or the owner's legal representative,
to give the Corporation a bond sufficient to indemnify it against any claim
that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate
or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS.
Unless the context requires otherwise, the general provisions,
rules of construction, and definitions in the Delaware General Corporation
Law shall govern the construction of these Bylaws. Without limiting the
generality of this provision, the singular number includes the plural, the
plural number includes the singular, and the term "person" includes both a
corporation and a natural person.
8.7 DIVIDENDS.
The directors of the Corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the
Certificate of Incorporation, may declare and pay dividends upon the shares
of its capital stock. Dividends may be paid in cash, in property, or in
shares of the Corporation's capital stock.
The directors of the Corporation may set apart out of any of the
funds of the Corporation available for dividends a reserve or reserves for
any proper purpose and may abolish any such reserve. Such purposes shall
include but not be limited to equalizing dividends, repairing or maintaining
any property of the Corporation, and meeting contingencies.
8.8 FISCAL YEAR.
The fiscal year of the Corporation shall be fixed by resolution of
the Board of Directors and may be changed by the Board of Directors.
<PAGE>
8.9 SEAL.
The Corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK.
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall
be the duty of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate, and record the transaction in
its books.
8.11 STOCK TRANSFER AGREEMENTS.
The Corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock
of the Corporation to restrict the transfer of shares of stock of the
Corporation of any one or more classes owned by such stockholders in any
manner not prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS.
The Corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive
dividends and to vote as such owner, shall be entitled to hold liable for
calls and assessments the person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of another person, whether or
not it shall have express or other notice thereof, except as otherwise
provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
The Bylaws of the Corporation may be adopted, amended or repealed
by the stockholders entitled to vote; provided, however, that the Corporation
may, in its Certificate of Incorporation, confer the power to adopt, amend or
repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power,
nor limit their power to adopt, amend or repeal Bylaws.
<PAGE>
Exhibit 4.1
NUMBER CS-"CERTIFICATENUMBER" *"NUMBEROFSHARES"*SHARES
ETOYS INC.
A DELAWARE CORPORATION
THIS CERTIFIES THAT "StockholderName" is the record holder of
"SharesWrittenOut" ("NumberOfShares") shares of Common Stock of eToys Inc., a
Delaware corporation, transferable only on the share register of said
corporation by the holder, in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed or assigned.
This certificate and the shares represented hereby are issued and shall
be held subject to all the provisions of the Certificate of Incorporation and
the Bylaws of said corporation and any amendments thereto, to all of which
the holder of this certificate, by acceptance hereof, assents.
A statement of all of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights may be obtained by any stockholder upon
request and without charge, at the principal office of the corporation, and
the corporation will furnish any stockholder, upon request and without
charge, a copy of such statement.
WITNESS the Seal of the corporation and the signatures of its duly
authorized officers this "Day" day of "Month", "Year".
- ------------------------------ ------------------------------------
, Secretary , President
- ---------- --------------------
<PAGE>
FOR VALUE RECEIVED _____________________________________ HEREBY SELL, ASSIGN
AND TRANSFER
UNTO__________________________________________________________________________
SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY
CONSTITUTE AND APPOINT ____________________________________ ATTORNEY TO
TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED ____________, ______
IN PRESENCE OF _______________________________________________________________
______________________________________________________________________________
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
-----------------------------
(Stockholder)
<PAGE>
EXHIBIT 5.1
February 17, 1999
eToys Inc.
2850 Ocean Park Blvd., Suite 225
Santa Monica, CA 90405
REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (the "REGISTRATION
STATEMENT") to be filed by you with the Securities and Exchange Commission on
February 17, 1999, in connection with the registration under the Securities
Act of 1933 of shares of your 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.
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made as of the 27th day
of June, 1997 by and between eToys Inc., a Delaware corporation (the "Company"),
and Edward C. Lenk (the "Purchaser").
In consideration of the mutual covenants and representations herein set
forth, the Company and Purchaser agree as follows:
1. PURCHASE. Subject to the terms and conditions of this Agreement,
the Company hereby agrees to issue to Purchaser and Purchaser agrees to
acquire from the Company on the Closing Date (as defined below), 1,250,000
shares of the Company's Common Stock (the "Stock") at a price of $0.015 per
share, for the aggregate purchase price of $18,750 (the "Purchase Price").
The Purchase Price for the Stock shall be paid by check or wire transfer.
2. CLOSING. The purchase and sale of the Stock shall occur at a
Closing to be held at such time and place (the "Closing Date"), as designated
by the Company no less than two business days prior to the Closing Date. The
Closing will take place at the principal office of the Company or at such
other place as shall be designated by the Company. At the Closing, Purchaser
shall deliver to the Company the consideration to be paid for the Stock, and
the Company will issue the Stock registered in the name of Purchaser.
3. COMPANY'S REPRESENTATIONS AND WARRANTIES. Except as set forth on
Exhibit A attached hereto, the Company represents and warrants to Purchaser
as follows:
(a) The Company is a Corporation duly organized and validly
existing under, and by virtue of, the laws of the State of Delaware and is in
good standing under such laws. The Company has requisite corporate power and
authority to own and operate its properties and assets, and to carry on its
business as presently conducted and as proposed to be conducted. The Company
is not presently qualified to do business as a foreign corporation in any
jurisdiction, and the failure to be so qualified will not have a material
adverse affect on the Company's business as now conducted or as now proposed
to be conducted.
(b) The Company will have at the Closing all requisite legal and
corporate power and authority to execute and deliver this Agreement, to sell
and issue the Stock hereunder and to carry out and perform its obligations
under the terms of this Agreement.
(c) The authorized capital stock of the Company consists or will,
upon the filing of the Certificate, consist of 50,000,000 shares of Common
Stock and 25,000,000 shares of
<PAGE>
undesignated Preferred Stock. Immediately prior to the Closing, no shares of
common or capital stock will be outstanding. The Stock, when issued pursuant
to the terms of this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable.
(d) All corporate action on the part of the Company, its officers,
directors and stockholders necessary for the authorization, execution,
delivery and performance of the Agreement by the Company, the authorization,
sale, issuance and delivery of the Stock and the performance of all of the
Company's obligations under this Agreement has been taken or will be taken
prior to the Closing. This Agreement, when executed and delivered by the
Company, shall constitute a valid and binding obligation of the Company,
enforceable in accordance with its terms.
(e) The Company is not in violation or default of any term of its
Certificate or Bylaws, or in any material respect of any term or provision of
any material mortgage, indebtedness, indenture, contract, agreement,
instrument, judgment, order or decree, and to its knowledge is not in
violation of any statute, rule or regulation applicable to the Company where
such violation would materially and adversely affect the Company.
(f) The Company has not incurred, and will not incur, directly or
indirectly, as a result of any action taken by the Company, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement.
4. PURCHASER'S REPRESENTATIONS AND WARRANTIES. In connection with the
purchase of the Stock, Purchaser hereby represents and warrants to the
Company:
(a) Purchaser has substantial experience in investing in
newly-formed technology companies or in evaluating and investing in private
placement transactions, so Purchaser is capable of evaluating the merits and
risks of Purchaser's investment in the Company. Purchaser, by reason of
Purchaser's business or financial experience or the business or financial
experience of Purchaser's professional advisors who are unaffiliated with the
Company or any affiliate or selling agent of the Company, directly or
indirectly, has the capacity to protect Purchaser's own interests in
connection with the purchase of the Stock.
(b) Purchaser is acquiring or will be acquiring the Stock for
investment for Purchaser's own account, not as a nominee or agent and not
with the view to, or for resale in connection with, any distribution thereof
Purchaser understands that the Stock have not been, and will not be,
registered under the Securities Act of 1933 (the "Securities Act") by reason
of a specific exemption from the registration provisions of the Securities
Act that depends upon, among other things, the bona fide nature of the
investment intent and the accuracy of such Purchaser's representations as
expressed herein. Purchaser has not been formed for the specific purpose of
acquiring the Stock. Purchaser further understands that the Company shall
have no obligation to register the Stock under the Securities Act on behalf
of Purchaser.
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<PAGE>
(c) Purchaser acknowledges that the Stock must be held
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available. Purchaser is aware of the
provisions of Rule 144 promulgated under the Securities Act, which permit
limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including (except as limited by Rule
144(k)), among other things, the existence of a public market for the shares,
the availability of certain current public information about the Company, the
resale occurring not less than one year after a party has purchased and paid
for the security to be sold, the sale being effected through a "broker's
transaction" or in transactions directly with a "market maker" (as provided
by Rule 144(f)) and the number of shares being sold during any three-month
period not exceeding specified limitations.
(d) Purchaser understands that no public market now exists for any
of the securities issued by the Company, that the Company has made no
assurances that a public market will ever exist for the Stock and that, even
if such a public market exists at some future time, the Company may not then
be satisfying the current public information requirements of Rule 144.
(e) Purchaser and Purchaser's representatives have had the
opportunity to ask questions of, and receive answers from, representatives of
the Company concerning the Company and the terms and conditions of this
transaction as well as to obtain any information requested by Purchaser. Any
questions raised by Purchaser or Purchaser's representatives concerning the
transaction have been answered to the satisfaction of Purchaser and
Purchaser's representatives. Purchaser's decision to enter into the
transactions contemplated hereby is based in part on the answers to such
questions as Purchaser and Purchaser's representatives have raised concerning
the transaction and on Purchaser's own evaluation of the risks and merits of
the purchase and the Company's proposed business activities.
(f) All corporate or partnership action, if applicable, on the
part of Purchaser, its directors, partners and its stockholders necessary for
the authorization, execution, delivery and performance of this Agreement by
Purchaser has been taken. This Agreement, when executed and delivered by
Purchaser, will constitute a valid and legally binding obligation of
Purchaser, enforceable in accordance with its terms.
(g) Purchaser has not incurred, and will not incur, directly or
indirectly, as a result of any action taken by such Purchaser, any liability
for brokerage or finders' fees or agents' commissions or any similar charges
in connection with this Agreement.
(h) Purchaser has reviewed with its own tax advisors the federal,
state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on
such advisors and not on any statements or representations of the Company or
any of its agents and understands that Purchaser (and not the Company) shall
be responsible for Purchaser's own tax liability that may arise as a result
of this investment or the transactions contemplated by this Agreement.
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<PAGE>
5. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL
(a) Before any shares of Stock registered in the name of Purchaser
may be sold or transferred (including transfer by operation of law), such
shares shall first be offered to the Company.
(i) Purchaser shall deliver a notice ("Notice") to the
Company stating (A) Purchaser's bona fide intention to sell or transfer such
shares, (B) the number of such shares to be sold or transferred, (C) the
price for which he proposes to sell or transfer such shares, and (D) the name
of the proposed purchaser or transferee.
(ii) Within 30 days after receipt of the Notice, the
Company or its assignee may elect to purchase all (but not less than all)
shares to which the Notice refers, at the price per share specified in the
Notice. Full payment for all the shares to which the Notice refers shall be
made by the Company or its assignee to Purchaser by cash.
(iii) If the shares to which the Notice refers are not
elected to be purchased, as provided in subparagraph 5(a)(ii), Purchaser may
sell the shares to any person named/in the Notice at the price specified in
the Notice or at a higher price, provided that such sale or transfer is
consummated within 60 days of the date of said Notice to the Company, and
provided, further, that any such sale is in accordance with all the terms and
conditions hereof. Any sale or transfer after such 60 day period or on terms
more favorable to the proposed purchaser or transferee then described in the
Notice shall be subject again to this subparagraph 5(a).
(iv) The provisions of this subparagraph 5(a) shall
terminate on the earlier of (A) the effective date of a registration
statement filed by the Company under the Securities Act, with respect to an
underwritten public offering of Common Stock of the Company (an "Initial
Public Offering") or (B) the closing date of a sale of assets or merger of
the Company pursuant to which stockholders of this Company receive securities
of a buyer whose shares are publicly traded. The provisions of this
subparagraph 5(a) shall not apply to a transfer of any shares of Stock by
Purchaser, either during its lifetime or on death by will or intestacy to its
other ancestors, descendants or spouse, or any custodian or trustee for the
account of Purchaser or Purchaser's ancestors, descendants or spouse;
provided, in each such case a transferee shall receive and hold such shares
subject to the provisions of this paragraph 5 and there shall be no further
transfer of such shares except in accordance herewith.
(b) Purchaser agrees in connection with the Company's Initial
Public Offering, not to sell, make any short sale of, loan, grant any option
for the purchase of or otherwise dispose of any shares of Stock without the
prior written consent of Company or its underwriters, 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 underwriters; provided, that the officers
and directors of the Company who own stock of the Company also agree to such
restrictions.
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<PAGE>
(c) The Company shall not be required (i) to transfer on its books
any shares of Stock which shall have been sold or transferred in violation of
any of the provisions set forth in this Agreement. or (ii) to treat as owner
of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares shall have been so
transferred.
6. LEGENDS. All certificates representing any of the shares of Stock
subject to the provisions of this Agreement shall have endorsed thereon
legends substantially in the following form:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS CERTIFICATE MUST BE
SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO
THE SALE, PLEDGE OR OTHER TRANSFER OF ANY INTEREST IN ANY OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE."
(b) "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN STOCK
PURCHASE AGREEMENT CONTAINING A RIGHT OF FIRST REFUSAL, COPIES OF WHICH MAY
BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO THE SECRETARY OF THE
COMPANY."
(c) Any legend required to be placed thereon by the California
Commissioner of Corporations, or required by applicable blue sky laws of any
state.
7. MISCELLANEOUS.
(a) The parties agree to execute such further instruments and to
take such further action as may reasonably be necessary to carry out the
intent of this Agreement.
(b) Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by regular or certified mail with
postage and fees prepaid, addressed to Purchaser at its address shown on the
Company's records and to the Company at the address of its principal
corporate offices (attention: President) or at such other address as such
party may designate by ten days' advance written notice to the other party
hereto.
(c) The Company may assign its rights and delegate its duties
under this Agreement. If any such assignment or delegation requires consent
of the California Commissioner
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<PAGE>
of Corporations, the parties agree to cooperate in requesting such consent.
This Agreement shall inure to the benefit of the successors and assigns of
the Company and, subject to the restrictions on transfer herein set forth, be
binding upon Purchaser, its heirs, executors, administrators, successors and
assigns.
(d) Purchaser hereby authorizes and directs the Secretary or
Transfer Agent of the Company to transfer the Stock as to which the right of
first refusal has been exercised from Purchaser to the Company.
(e) This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California.
8. ARBITRATION. At the option of either party, any and all disputes
or controversies whether of law or fact and of any nature whatsoever arising
from or respecting this Agreement shall be decided by arbitration by the
American Arbitration Association in accordance with the commercial rules and
regulations of that Association.
The arbitrators shall be selected as follows: In the event the
Company and Purchaser agree on one arbitrator, the arbitration shall be
conducted by such arbitrator. In the event the Company and Purchaser do not
so agree, the Company and Purchaser shall each select one independent,
qualified arbitrator and the two arbitrators so selected shall select the
third arbitrator. The Company reserves the right to object to any individual
arbitrator who shall be employed by or affiliated with a competing
organization.
Arbitration shall take place in Pasadena, California, or any other
location mutually agreeable to the parties. At the request of either party,
arbitration proceedings will be conducted in the utmost secrecy; in such case
all documents, testimony and records shall be received, heard and maintained
by the arbitrators in secrecy under seal, available for the inspection only
of the Company or Purchaser and their respective attorneys and their
respective experts who shall agree in advance and in writing to receive all
such information confidentially and to maintain such information in secrecy
until such information shall become generally known. The arbitrator, who
shall act by majority vote, shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a temporary and/or a permanent injunction, and shall also
be able to award damages, with or without an accounting and costs. The decree
or judgment of an award rendered by the arbitrators may be entered in any
court having jurisdiction thereof.
Reasonable notice of the time and place of arbitration shall be given to
all persons, other than the parties, as shall be required by law, in which
case such persons or those authorized representatives shall have the right to
attend and/or participate in all the arbitration hearings in such manner as
the law shall require.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Agreement as of the day and year first above written.
PURCHASER COMPANY
Edward C. Lenk eToys Inc.,
a Delaware corporation
/s/ Edward C. Lenk By: /s/ Edward C. Lenk
- ------------------------- -----------------------
Address: Name: Edward C. Lenk
--------------------
1325 Grant Avenue Title: President
Santa Monica, CA 90405 --------------------
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<PAGE>
EXHIBIT A
SCHEDULE OF EXCEPTIONS TO THE COMPANY'S REPRESENTATIONS AND WARRANTIES
On June 27, 1997, the Company intends to sell and issue: (i) 6,466,667 shares of
Common Stock being issued under a Stock and Note Purchase Agreement; (ii)
1,866,667 shares of Common Stock to certain founders and employees of the
Company pursuant to Stock Purchase Agreements; and (iii) 2,026,667 shares of
Common Stock to certain founders and employees of the Company pursuant to
Restricted Stock Purchase Agreements.
<PAGE>
ETOYS INC.
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made this 27th day of June 1997 between eToys Inc., a
Delaware corporation (the "Company"), and Edward C. Lenk (the "Purchaser").
In consideration of the mutual covenants and representations herein set
forth, the Company and the Purchaser agree as follows:
1. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and
the Purchaser hereby agrees to purchase an aggregate of 1,250,000 shares of the
Company's Common Stock (the "Shares"), at the price of $0.015 per Share for an
aggregate purchase price of $18,750.
2. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares shall be
paid by delivery to the Company at the time of execution of this Agreement of
(a) a check in the amount of the purchase price or (b) a promissory note and
pledge agreement in the form attached hereto as EXHIBIT A.
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 while the Shares are subject
to the Company's repurchase option and right of first refusal except in
compliance with the provisions of this Section 3.
(a) REPURCHASE OPTION. In the event of the voluntary or involuntary
termination of employment of Purchaser with the Company for any reason, with or
without cause (including death or disability) (a "Termination"), the Company
shall, upon the date of such termination, have an irrevocable, exclusive option
(the "Repurchase Option") for a period of 180 days from such date to repurchase
from Purchaser, at the original purchase price per Share (the "Repurchase
Price"), all or any portion of the Shares held by Purchaser as of such date, to
the extent such Shares have not yet been released from the Company's Repurchase
Option. The Repurchase Option shall be exercised by the Company by written
notice to Purchaser or his executor and, at the Company's option, (i) by
delivery to the Purchaser or his executor, with such Notice, of a check in the
amount of the purchase price for the Shares being repurchased, or (ii) in the
event the Purchaser is indebted to the Company, by cancellation by the Company
of an amount of such indebtedness equal to the Repurchase Price for the Shares
being repurchased, or (iii) by a combination of (i) and (ii) so that the
combined payment and cancellation of indebtedness equals such Repurchase Price.
Upon delivery of such notice and payment of the Repurchase Price in any of the
ways described above, the Company shall become the legal and beneficial owner of
the Shares being repurchased and all rights and interest therein or related
thereto, and the Company shall have the right to transfer to its own name the
number of Shares being repurchased by the Company, without further action by
Purchaser.
<PAGE>
If a Termination occurs at any time after the date hereof and
prior to the last day of the twelfth full calendar month December 1, 1996 (the
"Initial Period"), the Repurchase Option shall apply to 100% of the Shares. On
the last day of the Initial Period, 12/48ths of the Shares shall be released
from the Repurchase Option and 1/48th of the Shares shall be released from the
Repurchase Option on the last day of each calendar month thereafter, provided in
each case the Purchaser is an employee of the Company on the date of each said
release. Fractional shares shall be rounded to the nearest whole share.
Notwithstanding the foregoing, all Shares shall be released from the
Company's Repurchase Option under Section 3 immediately upon a merger or
consolidation of the Company with or into any other corporation or other entity,
or a sale of all or substantially all of the assets of the Company, unless the
stockholders of the Company immediately prior to such transaction hold at least
50% of the outstanding equity securities of the equity surviving such merger or
consolidation or the entity purchasing such assets, or the sale or transfer of
more than 50% of the Company's Common Stock to a person or persons acting as a
group, who is or are not controlled directly or indirectly by the Company, in a
single transaction or series of related transactions.
(b) RIGHT OF FIRST REFUSAL. Before any Shares may be sold or
transferred (including transfer by operation of law), such Shares shall first be
offered to the Company (the "Right of First Refusal").
(i) In the event the Purchaser wishes to sell the Shares,
Purchaser shall deliver a notice ("Notice") to the Company stating (A) his bona
fide intention to sell or transfer such Shares, (B) the number of such Shares to
be sold or transferred, (C) the price for which he proposes to sell or transfer
such Shares, and (D) the name of the proposed purchaser or transferee.
(ii) Within thirty (30) days after receipt of the Notice, the
Company or its assignee may elect to purchase all or none of the Shares to which
the Notice refers, at the price per Share specified in the Notice. The purchase
of the Shares in either such event shall occur at a closing held at the
Company's principal office at a mutually agreed upon time which in no event
shall be more than thirty (30) days following the end of the time period in
which the Company had to elect to purchase such Shares.
(iii) If all of the Shares to which the Notice refers are not
elected to be purchased, as provided in Section 3(b) hereof, Purchaser may
sell the Shares to any person named in the Notice at the price specified in
the Notice or at a higher price, provided that such sale or transfer is
consummated within sixty (60) days of the date of said Notice to the Company,
and provided, further, that any such sale is in accordance with all the terms
and conditions hereof.
(c) TERMINATION OF RESTRICTIONS. Notwithstanding the provisions of
Section 3(b) above, the Company's Right of First Refusal shall terminate
immediately as to all Shares upon the occurrence of the first to occur of the
following events:
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<PAGE>
(i) the acquisition of the Company by another entity by means of
the merger or consolidation of the Company with or into another corporation in
which the stockholders of the Company own less that 50% of the voting securities
of the surviving entity,
(ii) the sale of all or substantially all of the assets of the
Company, or
(iii) the date upon which a public market exists for the
Company's capital stock (or any other stock issued to purchasers in exchange
for the Shares purchased under this Agreement). For the purpose of this
Agreement, a "Public Market" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the
Securities Exchange Act of 1934) or (ii) such stock is traded on the
over-the-counter market and prices are published daily on business days in a
recognized financial journal.
(d) ASSIGNMENT. Whenever the Company shall have the right to purchase
Shares under this Section 3, the Company may designate and assign one or more
employees, officers, directors or stockholders of the Company or other persons
or organizations to exercise all of the Company's purchase rights under this
Agreement and purchase all of such Shares; provided that if the fair market
value of the Shares to be purchased on the date of such designation or
assignment (the "Repurchase FMV") exceeds the purchase price of the Shares
(determined as described hereinabove) to be purchased, then each such designee
or assignee shall pay the Company cash equal to the difference between the
Repurchase FMV and the purchase price of the Shares which such designee or
assignee shall have the right to purchase.
(e) EXEMPT TRANSFERS. The provisions of this Section 3 shall not
apply to a transfer of any Shares by Purchaser, either during his lifetime or on
death by will or intestacy to his ancestors, descendants or spouse, or any
custodian or trustee for the account of Purchaser or Purchaser's ancestors,
descendants or spouse; provided, in each such case that the transferee shall
receive and hold such Shares subject to all of the provisions of this Section 3
and there shall be no further transfer of such Shares except in accordance
herewith.
4. STANDOFF AGREEMENT. Purchaser agrees, in connection with the Company's
initial public offering of its equity securities, 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, if any) without the prior
written consent of the Company or such underwriters, as the case may be, for
such period of time (not to exceed one hundred eighty (180) days) from the
effective date of such registration as may be requested by the Company or such
underwriters; provided, that the officers and directors of the Company who own
stock of the Company also agree to such restrictions.
5. NO TRANSFER EXCEPT IN COMPLIANCE WITH THE RESTRICTIONS HEREIN. The
Company shall not be required (i) to transfer on its books any Shares which
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement, or (ii) to treat as owner of such Shares or to accord
the right to vote as such owner or to pay dividends to any transferee to whom
such Shares shall have been so transferred. Purchaser shall not sell, transfer,
pledge, hypothecate or
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<PAGE>
otherwise dispose of any shares which remain subject to the restrictions on
transfer set forth in Section 3 hereof.
6. LEGENDS. All certificates representing any of the Shares subject to
the provisions of this Agreement shall have endorsed thereon the following
legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS UPON TRANSFER, RIGHTS OF FIRST REFUSAL AND RIGHTS OF
REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
CORPORATION."
(b) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
(c) Any legend required to be placed thereon by the applicable blue
sky laws of any state.
7. ESCROW.
(a) The Shares issued under this Agreement shall be held by an escrow
holder designated by the Company (the "Escrow Holder"), along with a stock
assignment executed by the Purchaser in blank, until the expiration of the
Company's options and right of first refusal with respect to such Shares as set
forth above.
(b) The Escrow Holder is hereby directed to permit transfer of the
Shares only in accordance with this Agreement or instructions signed by both
parties. In the event further instructions are desired by the Escrow Holder, he
shall be entitled to rely upon directions executed by a majority of the
authorized number of the Company's Board of Directors. The Escrow Holder shall
have no liability for any act or omission hereunder while acting in good faith
in the exercise of his own judgment.
(c) If the Company or any assignee exercises its Repurchase Option or
Right of First Refusal hereunder, the Escrow Holder, upon receipt of written
notice of such exercise from the proposed transferee, shall take all steps
necessary to accomplish such transfer.
(d) When the Repurchase Option or Right of First Refusal have been
exercised or expire unexercised or a portion of the Shares has been released
from the provisions of Section 3 hereof, upon Purchaser's request the Escrow
Holder shall promptly cause a new certificate to be issued for such released
Shares and shall deliver such certificate to the Purchaser.
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<PAGE>
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a stockholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the provisions of Section 3, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of his ownership of the Shares shall be immediately subject to this
escrow, deposited with the Escrow Holder and included thereafter as "Shares" for
purposes of this Agreement and the Company's Repurchase Option or Right of First
Refusal.
8. INVESTMENT REPRESENTATIONS. In connection with the purchase of the
Shares, the Purchaser shall, concurrently with the purchase of the Shares,
deliver to the Company his Investment Representation Statement attached hereto
as Exhibit B.
9. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
10. TAX CONSEQUENCES. The Purchaser has reviewed with the Purchaser's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement (including any
tax consequences that may result under recently enacted tax legislation). The
Purchaser is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents. The Purchaser understands
that the Purchaser (and not the Company) shall be responsible for the
Purchaser's own tax liability that may arise as a result of this investment or
the transactions contemplated by this Agreement. The Purchaser understands that
Section 83 of the Internal Revenue Code, as amended (the "Code"), taxes as
ordinary income both (i) the difference between the fair market value of the
Shares when the Company granted the Purchaser the right to purchase the Shares
and the fair market value of the Shares on the date of this Agreement and (ii)
the difference between the amount paid for the Shares and the fair market value
of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" includes the right of the Company to buy back the Shares
pursuant to certain of its rights under Section 3.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF
THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
THE PURCHASER'S BEHALF.
11. TERMINATION OF EMPLOYMENT. Purchaser understands and acknowledges that
Purchaser's employment relationship with the Company is at the will of either
party and that nothing in this Agreement, shall confer any right upon Purchaser
with respect to continuation of employment by the Company, nor shall it
interfere in any way with his right or the Company's right to terminate
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<PAGE>
his employment at any time, with or without cause. This Agreement does not
constitute an express or implied promise of continued employment for any period.
12. GENERAL PROVISIONS.
(a) GOVERNING LAW. This Agreement shall be governed by the laws of
the State of California. This Agreement represents the entire agreement between
the parties with respect to the purchase of Common Stock by the Purchaser and
may only be modified or amended in writing signed by both parties.
(b) NOTICES. Any notice, demand or request required or permitted to
be given by either the Company or the Purchaser pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally or deposited in the U.S. mail, First Class with postage prepaid, and
addressed to the parties at the addresses of the parties set forth at the end of
this Agreement or such other address as a party may request by notifying the
other in writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
(c) ASSIGNMENT. The rights and benefits of the Company under this
Agreement shall be transferable to any one or more persons or entities, and all
covenants and agreements hereunder shall inure to the benefit of, and be
enforceable by the Company's successors and assigns. The rights and obligations
of the Purchaser under this Agreement may only be assigned with the prior
written consent of the Company.
(d) WAIVER. Either party's failure to enforce any provision or
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions, nor prevent that party thereafter from
enforcing each and every other provision of this Agreement. The rights granted
both parties herein are cumulative and shall not constitute a waiver of either
party's right to assert all other legal remedies available to it under the
circumstances.
(e) ADDITIONAL ACTIONS. The Purchaser agrees upon request to execute
any further documents or instruments necessary or desirable to carry out the
purposes or intent of this Agreement.
(f) ARBITRATION. At the option of either party, any and all
disputes or controversies, whether of law or in equity, and of any nature
whatsoever arising from or respecting this Agreement, unless otherwise expressly
provided herein, shall be decided by arbitration by the American Arbitration
Association in accordance with the rules and regulations of that Association.
(i) The arbitrators shall be selected as follows: In the event
the Company and Purchaser agree on one arbitrator, the arbitration shall be
conducted by such arbitrator. In the event the Company and Purchaser do not so
agree, the Company and Purchaser shall each select one independent, qualified
arbitrator and these two arbitrators shall select a third arbitrator. The
-6-
<PAGE>
Company reserves the right to reject any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(ii) Arbitration shall take place in Pasadena, California, or any
other location mutually agreeable to the parties. At the request of either
party, arbitration proceedings will be conducted in secrecy. In such case all
documents, testimony, and records shall be received, heard, and maintained by
the arbitrators in secrecy under seal, available for inspection only by the
Company and the Purchaser and their respective attorneys and their respective
experts who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known. The arbitrators, who shall act by
majority vote, shall be able to decree any and all relief of an equitable
nature, including but not limited to such relief as a temporary restraining
order, a temporary or a permanent injunction, or both, and shall also be able to
award damages (with or without an accounting), costs, and reasonable attorneys'
fees. The decree or judgment of an award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
(iii) Reasonable notice of the time and place of arbitration
shall be given to all persons, other than the parties, as shall be required by
law, in which case such persons or their authorized representatives shall have
the right to attend and participate in all the arbitration hearings to the
extent and in such manner as the law shall require.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first set forth above.
ETOYS INC. PURCHASER:
a Delaware corporation
By: /s/ Edward C. Lenk /s/ Edward C. Lenk
---------------------- --------------------------
Title: President Edward C. Lenk
----------------------
-7-
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, Edward C. Lenk, hereby sell, assign and transfer
unto_____________________(__________________) shares of the Common Stock of
eToys Inc. standing in my name of the books of said corporation represented by
Certificate No. __________ herewith and do hereby irrevocably constitute and
appoint ________________________, attorney, to transfer the said stock on the
books of the within named corporation with full power of substitution in the
premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between eToys Inc. and the undersigned dated June 27,
1997.
Dated: Signature: /s/ Edward C. Lenk
-------------------------- -----------------------------
Name: Edward C. Lenk
-----------------------------
<PAGE>
EXHIBIT A
PLEDGE AGREEMENT
This Agreement is entered into as of June 27, 1997, by and between ETOYS
INC., a Delaware corporation (the "Company") and Edward C. Lenk ("Pledgor").
WHEREAS, in exchange for Pledgor's Full Recourse Promissory Note dated of
even date herewith (the "Note"), the Company has issued and sold to Pledgor
1,250,000 shares of its Common Stock evidenced by the Company's Common Stock
Certificate No. 6 (the "Shares") pursuant to the terms and conditions of that
certain Common Stock Purchase Agreement ("Stock Purchase Agreement") entered
into by the Company and Pledgor of even date herewith;
WHEREAS, Pledgor has agreed that repayment of the Note will be secured by
the pledge of the Shares;
NOW, THEREFORE, the parties agree as follows:
1. CREATION OF SECURITY INTEREST. Pursuant to the provisions of the
California Commercial Code, Pledgor hereby grants to the Company, and the
Company hereby accepts, a present security interest in the Shares as collateral
to secure the payment of Pledgor's obligation to the Company under the Note.
Pledgor herewith delivers to the Company Common Stock Certificate No. 6,
representing a total of 1,250,000 shares of the Company's Common Stock, together
with one stock power for each certificate in the form attached as an Exhibit to
the Stock Purchase Agreement, duly executed (with the date and number of shares
left blank) by Pledgor and Pledgor's spouse, if any. For purposes of this
Agreement, the Shares pledged hereby shall hereinafter be collectively referred
to as the "Collateral".
2. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants
to the Company that Pledgor has good title (both of record and beneficially) to
the Collateral, free and clear of all claims, pledges and liens or encumbrances
of every nature whatsoever, and that Pledgor has the right to pledge the
Collateral as provided herein. Pledgor further agrees not to grant or create,
nor attempt to grant or create, any security interest, claim, lien, pledge or
other encumbrance with respect to the Collateral until the entire principal sum
and accrued interest due under the Note has been paid in full.
3. RIGHTS ON DEFAULT. In the event of default by Pledgor under the Note,
the Company and its assigns shall have full power to sell, assign and deliver
the whole or any part of the Collateral at any broker's exchange or elsewhere,
at public or private sale, at the option of the Company or its assigns, in order
to satisfy any part of the obligations of Pledgor now existing or hereinafter
arising under the Note should payment of such obligations be in default. On any
such public sale, the Company and its assigns may purchase all or any part of
the Collateral. In addition, at its sole
<PAGE>
option, the Company may elect to retain the Collateral in satisfaction of
Pledgor's obligation under the Note, in accordance with the provisions and
procedures set forth in the California Commercial Code.
4. ADDITIONAL REMEDIES. The rights and remedies granted to the Company
herein upon default shall be in addition to all the rights, powers and remedies
of the Company under the California Commercial Code and applicable law and such
rights, powers and remedies shall be exercisable by the Company with respect to
all of the Collateral. The Company's reasonable expenses of holding the
Collateral, preparing it for resale or other disposition, and selling or
otherwise disposing of the Collateral, including attorneys' fees and other legal
expenses, will be deducted from the proceeds of any sale or other disposition
and will be included in the amounts Pledgor must tender to redeem the
Collateral. All rights, powers and remedies of the Company shall be cumulative
and not alternative. Any forbearance or failure or delay by the Company in
exercising any right, power or remedy hereunder shall not be deemed to be a
waiver of any such right, power or remedy and any single or partial exercise of
any such right, power or remedy hereunder shall not preclude the further
exercise thereof.
5. DIVIDENDS; VOTING. All dividends hereinafter declared on or payable
with respect to the Collateral during the term of this pledge (excluding only
ordinary cash dividends, which shall be payable to Pledgor so long as Pledgor
is not in default under this Note) shall be immediately delivered to the Company
to be held in pledge hereunder. Pledgor shall be entitled to receive cash
dividends so long as Pledgor is not in default under the Note. Notwithstanding
anything to the contrary contained in this Agreement, Pledgor shall be entitled
to vote any shares comprising the Collateral, subject to any proxies granted by
Pledgor.
6. ADJUSTMENTS. In the event that during the term of this pledge, any
stock dividend, reclassification, readjustment, stock split or other change is
declared or made with respect to the Collateral, or if warrants or any other
rights or options are issued in connection with the Collateral, all new,
substituted and/or additional shares or other securities issued by reason of
such change or by reason of the exercise of such warrants, rights or options,
shall be immediately pledged to the Company to be held under the terms of this
Agreement in the same manner as the Collateral is held hereunder.
7. RULE 144 HOLDING PERIOD. PLEDGOR UNDERSTANDS THAT THE HOLDING PERIOD
SPECIFIED UNDER RULE 144(d) WILL NOT BEGIN TO RUN WITH RESPECT TO THE PURCHASED
SHARES UNTIL EITHER (A) THE NOTE IS PAID IN FULL OR (B) THE NOTE IS SECURED BY
COLLATERAL, OTHER THAN THE PURCHASED SHARES, HAVING A FAIR MARKET VALUE AT LEAST
EQUAL TO THE AMOUNT OF PLEDGOR'S THEN OUTSTANDING OBLIGATION UNDER THE NOTE
(INCLUDING ACCRUED INTEREST).
8. REDELIVERY OF COLLATERAL. Upon payment in full of the entire principal
sum and accrued interest due under the Note, and subject to the terms and
conditions of the Stock Purchase Agreement, the Company shall immediately
redeliver the Collateral pledged hereunder to Pledgor, duly
<PAGE>
endorsed, and this Agreement shall terminate; provided, however, that all rights
of the Company to retain possession of the Shares pursuant to the Stock Purchase
Agreement shall survive termination of this Agreement.
9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
the respective heirs, personal representatives, successors and assigns of the
parties hereto.
10. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by the
construed in accordance with the laws of the State of California, excluding that
body of law relating to conflicts of law. Should one or more of the provisions
of this Agreement be determined by a court of law to be illegal or
unenforceable, the other provisions nevertheless shall remain effective and
shall be enforceable.
11. MODIFICATION. This Agreement shall not be amended without the written
consent of both parties hereto.
12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings related to such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
ETOYS INC. PLEDGOR
By: /s/ Edward C. Lenk /s/ Edward C. Lenk
-------------------------- ---------------------------
Title: President (signature)
-----------------------
Edward C. Lenk
---------------------------
(print or type name)
<PAGE>
FULL RECOURSE PROMISSORY NOTE
Pasadena, California
$18,750.00 June 27, 1997
1. OBLIGATION. In exchange for 1,250,000 shares (the "Shares") of the
Common Stock of ETOYS INC., a Delaware corporation (the "Company"), represented
by Common Stock Certificate No. 6, receipt of which is hereby acknowledged, the
undersigned hereby promises to pay to the order of the Company on or before June
27, 2002, or upon termination of employment for any reason, whichever occurs
earlier, at the Company's office at 790 E. Colorado Blvd., Suite 200, Pasadena,
CA 91101, or at such other place as the Company may direct, the principal sum
of Eighteen Thousand Seven Hundred Fifty Dollars ($18,750.00) together with
interest on unpaid principal at the rate of 6.80% per annum from the date hereof
until paid.
2. ACCELERATION OF OBLIGATION. The principal sum of this Note, together
with all interest accrued thereon, shall immediately become due and payable in
full upon any transfer of any of the Shares.
3. REMEDIES ON DEFAULT. Payment of this Note is secured by shares of the
Company's Common Stock pursuant to a Pledge Agreement dated as of even date
herewith between the Company and the undersigned. Upon any default of the
undersigned under this Note, the Company shall have, in addition to its rights
and remedies under the Pledge Agreement, full recourse against any real,
personal, tangible or intangible assets of the undersigned, and may pursue any
legal or equitable remedies that are available to it.
4. GOVERNING LAW; WAIVER. The validity, construction and performance of
this Note shall be governed by the laws of the State of California, excluding
that body of law pertaining to conflicts of law. The undersigned waives
presentment, notice of nonpayment, notice of dishonor, protest, demand and
diligence.
5. ATTORNEYS' FEES. If suit is brought for collection of this Note, the
undersigned agrees to pay all reasonable expenses, including attorneys' fees,
incurred by the holder in connection therewith whether or not such suit is
prosecuted to judgment.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as
of the date and year first above written.
/s/ Edward C. Lenk
-----------------------
Edward C. Lenk
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER: EDWARD C. LENK
COMPANY : ETOYS INC.
SECURITY : COMMON STOCK
AMOUNT : 1,250,000 SHARES
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company the following:
(a) I am sufficiently aware of the Company's business affairs and
financial condition to reach an informed and knowledgeable decision to acquire
the Securities. I am purchasing these Securities for my own account for
investment purposes only and not with a view to, or for the resale in connection
with, any "distribution" thereof for purposes of the Securities Act of 1933, as
amended (the "Securities Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission (the "SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available (such as Rule 144 or the resale
provisions of Rule 701 under the Securities Act). Moreover, I understand that
the Company is under no obligation to register the Securities. In addition, I
understand that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am familiar with the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired,
<PAGE>
directly or indirectly, from the issuer thereof (or from an affiliate of such
issuer), in a non-public offering subject to the satisfaction of certain
conditions, including, among other things: (1) the availability of certain
public information about the Company; (2) the resale occurring not less than one
year after the party has purchased, and made full payment for, within the
meaning of Rule 144, the securities to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than two
years, (3) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker, as said term is
defined under the Securities Exchange Act of 1934 (the "Exchange Act") and the
amount of securities being sold during any three month period not exceeding the
specified limitations stated therein, if applicable. The Purchaser further
understands that the resale provisions of Rule 701 will not apply until 90 days
after the Company becomes subject to the reporting obligations under the
Exchange Act (typically upon the effective date of a company's initial public
offerings). There can be no assurances that the requirements of Rule 144 or Rule
701 will be met, or that the Securities will ever be saleable.
(e) I further understand that at the time I wish to sell the Securities
there may be no public market upon which to make such a sale, and that, even if
such a public market then exists, the Company may not be satisfying the current
public information requirements of Rule 144, and that, in such event, I would be
precluded from selling the Securities under Rule 144 even if the one-year
minimum holding period had been satisfied.
(f) I further understand that in the event all of the applicable
requirements of Rule 144 are not satisfied, or that the resale provisions of
Rule 701 are not available, registration under the Securities Act, compliance
with Regulation A, compliance with some other registration exemption or the
notification to the Company of the proposed disposition by me and the furnishing
to the Company of (i) detailed information regarding the disposition, and (ii)
and opinion of my counsel to the effect that such disposition will not require
registration (I understand such counsel's opinion shall concur with the opinion
by counsel for the Company and I shall have been informed of such compliance)
will be required and that, notwithstanding the fact that Rule 144 is not
exclusive, the Staff of the SEC has expressed its opinion that persons proposing
to sell private placement securities other than in a registered offering and
otherwise than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Signature of Purchaser:
/s/ Edward C. Lenk
------------------------------
Edward C. Lenk
Date: June 27, 1997
<PAGE>
ETOYS INC.
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made as of the 27th
day of June, 1997 by and between eToys Inc., a Delaware corporation (the
"Company"), and Frank C. Han (the "Purchaser").
In consideration of the mutual covenants and representations herein set
forth, the Company and Purchaser agree as follows:
1. PURCHASE. Subject to the terms and conditions of this Agreement,
the Company hereby agrees to issue to Purchaser and Purchaser agrees to
acquire from the Company on the Closing Date (as defined below), 416,667
shares of the Company's Common Stock (the "Stock") at a price of $0.015 per
share, for the aggregate purchase price of $6,250 (the "Purchase Price"). The
Purchase Price for the Stock shall be paid by check or wire transfer.
2. CLOSING. The purchase and sale of the Stock shall occur at a
Closing to be held at such time and place (the "Closing Date"), as designated
by the Company no less than two business days prior to the Closing Date. The
Closing will take place at the principal office of the Company or at such
other place as shall be designated by the Company. At the Closing, Purchaser
shall deliver to the Company the consideration to be paid for the Stock, and
the Company will issue the Stock registered in the name of Purchaser.
3. COMPANY'S REPRESENTATIONS AND WARRANTIES. Except as set forth on
Exhibit A attached hereto, the Company represents and warrants to Purchaser
as follows:
(a) The Company is a Corporation duly organized and validly
existing under, and by virtue of, the laws of the State of Delaware and is in
good standing under such laws. The Company has requisite corporate power and
authority to own and operate its properties and assets, and to carry on its
business as presently conducted and as proposed to be conducted. The Company
is not presently qualified to do business as a foreign corporation in any
jurisdiction, and the failure to be so qualified will not have a material
adverse affect on the Company's business as now conducted or as now proposed
to be conducted.
(b) The Company will have at the Closing all requisite legal and
corporate power and authority to execute and deliver this Agreement, to sell
and issue the Stock hereunder and to carry out and perform its obligations
under the terms of this Agreement.
(c) The authorized capital stock of the Company consists or will,
upon the filing of the Certificate, consist of 50,000,000 shares of Common
Stock and 25,000,000 shares of
<PAGE>
undesignated Preferred Stock. Immediately prior to the Closing, no shares of
common or capital stock will be outstanding. The Stock, when issued pursuant
to the terms of this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable.
(d) All corporate action on the part of the Company, its officers,
directors and stockholders necessary for the authorization, execution,
delivery and performance of the Agreement by the Company, the authorization,
sale, issuance and delivery of the Stock and the performance of all of the
Company's obligations under this Agreement has been taken or will be taken
prior to the Closing. This Agreement, when executed and delivered by the
Company, shall constitute a valid and binding obligation of the Company,
enforceable in accordance with its terms.
(e) The Company is not in violation or default of any term of its
Certificate or Bylaws, or in any material respect of any term or provision of
any material mortgage, indebtedness, indenture, contract, agreement,
instrument, judgment, order or decree, and to its knowledge is not in
violation of any statute, rule or regulation applicable to the Company where
such violation would materially and adversely affect the Company.
(f) The Company has not incurred, and will not incur, directly or
indirectly, as a result of any action taken by the Company, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement.
4. PURCHASER'S REPRESENTATIONS AND WARRANTIES. In connection with the
purchase of the Stock, Purchaser hereby represents and warrants to the
Company:
(a) Purchaser has substantial experience in investing in
newly-formed technology companies or in evaluating and investing in private
placement transactions, so Purchaser is capable of evaluating the merits and
risks of Purchaser's investment in the Company. Purchaser, by reason of
Purchaser's business or financial experience or the business or financial
experience of Purchaser's professional advisors who are unaffiliated with the
Company or any affiliate or selling agent of the Company, directly or
indirectly, has the capacity to protect Purchaser's own interests in
connection with the purchase of the Stock.
(b) Purchaser is acquiring or will be acquiring the Stock for
investment for Purchaser's own account, not as a nominee or agent and not
with the view to, or for resale in connection with, any distribution thereof
Purchaser understands that the Stock have not been, and will not be,
registered under the Securities Act of 1933 (the "Securities Act") by reason
of a specific exemption from the registration provisions of the Securities
Act that depends upon, among other things, the bona fide nature of the
investment intent and the accuracy of such Purchaser's representations as
expressed herein. Purchaser has not been formed for the specific purpose of
acquiring the Stock. Purchaser further understands that the Company shall
have no obligation to register the Stock under the Securities Act on behalf
of Purchaser.
-2-
<PAGE>
(c) Purchaser acknowledges that the Stock must be held
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available. Purchaser is aware of the
provisions of Rule 144 promulgated under the Securities Act, which permit
limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including (except as limited by Rule
144(k)), among other things, the existence of a public market for the shares,
the availability of certain current public information about the Company, the
resale occurring not less than one year after a party has purchased and paid
for the security to be sold, the sale being effected through a "broker's
transaction" or in transactions directly with a "market maker" (as provided
by Rule 144(f)) and the number of shares being sold during any three-month
period not exceeding specified limitations.
(d) Purchaser understands that no public market now exists for any
of the securities issued by the Company, that the Company has made no
assurances that a public market will ever exist for the Stock and that, even
if such a public market exists at some future time, the Company may not then
be satisfying the current public information requirements of Rule 144.
(e) Purchaser and Purchaser's representatives have had the
opportunity to ask questions of, and receive answers from, representatives of
the Company concerning the Company and the terms and conditions of this
transaction as well as to obtain any information requested by Purchaser. Any
questions raised by Purchaser or Purchaser's representatives concerning the
transaction have been answered to the satisfaction of Purchaser and
Purchaser's representatives. Purchaser's decision to enter into the
transactions contemplated hereby is based in part on the answers to such
questions as Purchaser and Purchaser's representatives have raised concerning
the transaction and on Purchaser's own evaluation of the risks and merits of
the purchase and the Company's proposed business activities.
(f) All corporate or partnership action, if applicable, on the
part of Purchaser, its directors, partners and its stockholders necessary for
the authorization, execution, delivery and performance of this Agreement by
Purchaser has been taken. This Agreement, when executed and delivered by
Purchaser, will constitute a valid and legally binding obligation of
Purchaser, enforceable in accordance with its terms.
(g) Purchaser has not incurred, and will not incur, directly or
indirectly, as a result of any action taken by such Purchaser, any liability
for brokerage or finders' fees or agents' commissions or any similar charges
in connection with this Agreement.
(h) Purchaser has reviewed with its own tax advisors the federal,
state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on
such advisors and not on any statements or representations of the Company or
any of its agents and understands that Purchaser (and not the Company) shall
be responsible for Purchaser's own tax liability that may arise as a result
of this investment or the transactions contemplated by this Agreement.
-3-
<PAGE>
5. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL
(a) Before any shares of Stock registered in the name of Purchaser
may be sold or transferred (including transfer by operation of law), such
shares shall first be offered to the Company.
(i) Purchaser shall deliver a notice ("Notice") to the
Company stating (A) Purchaser's bona fide intention to sell or transfer such
shares, (B) the number of such shares to be sold or transferred, (C) the
price for which he proposes to sell or transfer such shares, and (D) the name
of the proposed purchaser or transferee.
(ii) Within 30 days after receipt of the Notice, the Company
or its assignee may elect to purchase all (but not less than all) shares to
which the Notice refers, at the price per share specified in the Notice. Full
payment for all the shares to which the Notice refers shall be made by the
Company or its assignee to Purchaser by cash.
(iii) If the shares to which the Notice refers are not
elected to be purchased, as provided in subparagraph 5(a)(ii), Purchaser may
sell the shares to any person named/in the Notice at the price specified in
the Notice or at a higher price, provided that such sale or transfer is
consummated within 60 days of the date of said Notice to the Company, and
provided, further, that any such sale is in accordance with all the terms and
conditions hereof. Any sale or transfer after such 60 day period or on terms
more favorable to the proposed purchaser or transferee then described in the
Notice shall be subject again to this subparagraph 5(a).
(iv) The provisions of this subparagraph 5(a) shall
terminate on the earlier of (A) the effective date of a registration
statement filed by the Company under the Securities Act, with respect to an
underwritten public offering of Common Stock of the Company (an "Initial
Public Offering") or (B) the closing date of a sale of assets or merger of
the Company pursuant to which stockholders of this Company receive securities
of a buyer whose shares are publicly traded. The provisions of this
subparagraph 5(a) shall not apply to a transfer of any shares of Stock by
Purchaser, either during its lifetime or on death by will or intestacy to its
other ancestors, descendants or spouse, or any custodian or trustee for the
account of Purchaser or Purchaser's ancestors, descendants or spouse;
provided, in each such case a transferee shall receive and hold such shares
subject to the provisions of this paragraph 5 and there shall be no further
transfer of such shares except in accordance herewith.
(b) Purchaser agrees in connection with the Company's Initial
Public Offering, not to sell, make any short sale of, loan, grant any option
for the purchase of or otherwise dispose of any shares of Stock without the
prior written consent of Company or its underwriters, 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 underwriters; provided, that the officers
and directors of the Company who own stock of the Company also agree to such
restrictions.
-4-
<PAGE>
(c) The Company shall not be required (i) to transfer on its books
any shares of Stock which shall have been sold or transferred in violation of
any of the provisions set forth in this Agreement, or (ii) to treat as owner
of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares shall have been so
transferred.
6. LEGENDS. All certificates representing any of the shares of Stock
subject to the provisions of this Agreement shall have endorsed thereon
legends substantially in the following form:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS CERTIFICATE MUST BE
SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO
THE SALE, PLEDGE OR OTHER TRANSFER OF ANY INTEREST IN ANY OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE."
(b) "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN STOCK
PURCHASE AGREEMENT CONTAINING A RIGHT OF FIRST REFUSAL, COPIES OF WHICH MAY
BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO THE SECRETARY OF THE
COMPANY."
(c) Any legend required to be placed thereon by the California
Commissioner of Corporations, or required by applicable blue sky laws of any
state.
7. MISCELLANEOUS.
(a) The parties agree to execute such further instruments and to
take such further action as may reasonably be necessary to carry out the
intent of this Agreement.
(b) Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by regular or certified mail with
postage and fees prepaid, addressed to Purchaser at its address shown on the
Company's records and to the Company at the address of its principal
corporate offices (attention: President) or at such other address as such
party may designate by ten days' advance written notice to the other party
hereto.
(c) The Company may assign its rights and delegate its duties
under this Agreement. If any such assignment or delegation requires consent
of the California Commissioner
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<PAGE>
of Corporations, the parties agree to cooperate in requesting such consent.
This Agreement shall inure to the benefit of the successors and assigns of
the Company and, subject to the restrictions on transfer herein set forth, be
binding upon Purchaser, its heirs, executors, administrators, successors and
assigns.
(d) Purchaser hereby authorizes and directs the Secretary or
Transfer Agent of the Company to transfer the Stock as to which the right of
first refusal has been exercised from Purchaser to the Company.
(e) This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California.
8. ARBITRATION. At the option of either party, any and all disputes or
controversies whether of law or fact and of any nature whatsoever arising
from or respecting this Agreement shall be decided by arbitration by the
American Arbitration Association in accordance with the commercial rules and
regulations of that Association.
The arbitrators shall be selected as follows: In the event the
Company and Purchaser agree on one arbitrator, the arbitration shall be
conducted by such arbitrator. In the event the Company and Purchaser do not
so agree, the Company and Purchaser shall each select one independent,
qualified arbitrator and the two arbitrators so selected shall select the
third arbitrator. The Company reserves the right to object to any individual
arbitrator who shall be employed by or affiliated with a competing
organization.
Arbitration shall take place in Pasadena, California, or any other
location mutually agreeable to the parties. At the request of either party,
arbitration proceedings will be conducted in the utmost secrecy; in such case
all documents, testimony and records shall be received, heard and maintained
by the arbitrators in secrecy under seal, available for the inspection only
of the Company or Purchaser and their respective attorneys and their
respective experts who shall agree in advance and in writing to receive all
such information confidentially and to maintain such information in secrecy
until such information shall become generally known. The arbitrator, who
shall act by majority vote, shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a temporary and/or a permanent injunction, and shall also
be able to award damages, with or without an accounting and costs. The decree
or judgment of an award rendered by the arbitrators may be entered in any
court having jurisdiction thereof.
Reasonable notice of the time and place of arbitration shall be
given to all persons, other than the parties, as shall be required by law, in
which case such persons or those authorized representatives shall have the
right to attend and/or participate in all the arbitration hearings in such
manner as the law shall require.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase
Agreement as of the day and year first above written.
PURCHASER COMPANY
Frank C. Han eToys Inc.,
a Delaware corporation
/s/ Frank C. Han By: /s/ Edward C. Lenk
- --------------------- ----------------------
Name: Edward C. Lenk
--------------------
Title: President
Address: -------------------
1015 Diamond Avenue
S. Pasadena, CA 91030
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<PAGE>
EXHIBIT A
SCHEDULE OF EXCEPTIONS TO THE COMPANY'S REPRESENTATIONS AND WARRANTIES
On June 27, 1997, the Company intends to sell and issue: (i) 6,466,667 shares of
Common Stock being issued under a Stock and Note Purchase Agreement; (ii)
1,866,667 shares of Common Stock to certain founders and employees of the
Company pursuant to Stock Purchase Agreements; and (iii) 2,026,667 shares of
Common Stock to certain founders and employees of the Company pursuant to
Restricted Stock Purchase Agreements.
<PAGE>
ETOYS INC.
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made this 27th day of June 1997 between eToys Inc., a
Delaware corporation (the "Company"), and Frank C. Han (the "Purchaser").
In consideration of the mutual covenants and representations herein set
forth, the Company and the Purchaser agree as follows:
1. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and
the Purchaser hereby agrees to purchase an aggregate of 416,667 shares of the
Company's Common Stock (the "Shares"), at the price of $0.015 per Share for an
aggregate purchase price of $6,250.
2. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares shall be
paid by delivery to the Company at the time of execution of this Agreement of
(a) a check in the amount of the purchase price or (b) a promissory note and
pledge agreement in the form attached hereto as EXHIBIT A.
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 while the Shares are subject
to the Company's repurchase option and right of first refusal except in
compliance with the provisions of this Section 3.
(a) REPURCHASE OPTION. In the event of the voluntary or involuntary
termination of employment of Purchaser with the Company for any reason, with or
without cause (including death or disability) (a "Termination"), the Company
shall, upon the date of such termination, have an irrevocable, exclusive option
(the "Repurchase Option") for a period of 180 days from such date to repurchase
from Purchaser, at the original purchase price per Share (the "Repurchase
Price"), all or any portion of the Shares held by Purchaser as of such date, to
the extent such Shares have not yet been released from the Company's Repurchase
Option. The Repurchase Option shall be exercised by the Company by written
notice to Purchaser or his executor and, at the Company's option, (i) by
delivery to the Purchaser or his executor, with such Notice, of a check in the
amount of the purchase price for the Shares being repurchased, or (ii) in the
event the Purchaser is indebted to the Company, by cancellation by the Company
of an amount of such indebtedness equal to the Repurchase Price for the Shares
being repurchased, or (iii) by a combination of (i) and (ii) so that the
combined payment and cancellation of indebtedness equals such Repurchase Price.
Upon delivery of such notice and payment of the Repurchase Price in any of the
ways described above, the Company shall become the legal and beneficial owner of
the Shares being repurchased and all rights and interest therein or related
thereto, and the Company shall have the right to transfer to its own name the
number of Shares being repurchased by the Company, without further action by
Purchaser.
<PAGE>
If a Termination occurs at any time after the date hereof and
prior to the last day of the twelfth full calendar month February 1, 1997 (the
"Initial Period"), the Repurchase Option shall apply to 100% of the Shares. On
the last day of the Initial Period, 12/48ths of the Shares shall be released
from the Repurchase Option and 1/48th of the Shares shall be released from the
Repurchase Option on the last day of each calendar month thereafter, provided in
each case the Purchaser is an employee of the Company on the date of each said
release. Fractional shares shall be rounded to the nearest whole share.
Notwithstanding the foregoing, all Shares shall be released from the
Company's Repurchase Option under Section 3 immediately upon a merger or
consolidation of the Company with or into any other corporation or other entity,
or a sale of all or substantially all of the assets of the Company, unless the
stockholders of the Company immediately prior to such transaction hold at least
50% of the outstanding equity securities of the equity surviving such merger or
consolidation or the entity purchasing such assets, or the sale or transfer of
more than 50% of the Company's Common Stock to a person or persons acting as a
group, who is or are not controlled directly or indirectly by the Company, in a
single transaction or series of related transactions.
(b) RIGHT OF FIRST REFUSAL. Before any Shares may be sold or
transferred (including transfer by operation of law), such Shares shall first
be offered to the Company (the "Right of First Refusal").
(i) In the event the Purchaser wishes to sell the Shares,
Purchaser shall deliver a notice ("Notice") to the Company stating (A) his bona
fide intention to sell or transfer such Shares, (B) the number of such Shares to
be sold or transferred, (c) the price for which he proposes to sell or transfer
such Shares, and (D) the name of the proposed purchaser or transferee.
(ii) Within thirty (30) days after receipt of the Notice, the
Company or its assignee may elect to purchase all or none of the Shares to which
the Notice refers, at the price per Share specified in the Notice. The purchase
of the Shares in either such event shall occur at a closing held at the
Company's principal office at a mutually agreed upon time which in no event
shall be more than thirty (30) days following the end of the time period in
which the Company had to elect to purchase such Shares.
(iii) If all of the Shares to which the Notice refers are not
elected to be purchased, as provided in Section 3(b) hereof, Purchaser may sell
the Shares to any person named in the Notice at the price specified in the
Notice or at a higher price, provided that such sale or transfer is consummated
within sixty (60) days of the date of said Notice to the Company, and provided,
further, that any such sale is in accordance with all the terms and conditions
hereof.
(c) TERMINATION OF RESTRICTIONS. Notwithstanding the provisions of
Section 3(b) above, the Company's Right of First Refusal shall terminate
immediately as to all Shares upon the occurrence of the first to occur of the
following events:
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<PAGE>
(i) the acquisition of the Company by another entity by means of
the merger or consolidation of the Company with or into another corporation in
which the stockholders of the Company own less that 50% of the voting securities
of the surviving entity,
(ii) the sale of all or substantially all of the assets of the
Company, or
(iii) the date upon which a public market exists for the
Company's capital stock (or any other stock issued to purchasers in exchange for
the Shares purchased under this Agreement). For the purpose of this Agreement, a
"Public Market" shall be deemed to exist if (i) such stock is listed on a
national securities exchange (as that term is used in the Securities Exchange
Act of 1934) or (ii) such stock is traded on the over-the-counter market and
prices are published daily on business days in a recognized financial journal.
(d) ASSIGNMENT. Whenever the Company shall have the right to purchase
Shares under this Section 3, the Company may designate and assign one or more
employees, officers, directors or stockholders of the Company or other persons
or organizations to exercise all of the Company's purchase rights under this
Agreement and purchase all of such Shares; provided that if the fair market
value of the Shares to be purchased on the date of such designation or
assignment (the "Repurchase FMV") exceeds the purchase price of the Shares
(determined as described hereinabove) to be purchased, then each such designee
or assignee shall pay the Company cash equal to the difference between the
Repurchase FMV and the purchase price of the Shares which such designee or
assignee shall have the right to purchase.
(e) EXEMPT TRANSFERS. The provisions of this Section 3 shall not
apply to a transfer of any Shares by Purchaser, either during his lifetime or on
death by will or intestacy to his ancestors, descendants or spouse, or any
custodian or trustee for the account of Purchaser or Purchaser's ancestors,
descendants or spouse; provided, in each such case that the transferee shall
receive and hold such Shares subject to all of the provisions of this Section 3
and there shall be no further transfer of such Shares except in accordance
herewith.
4. STANDOFF AGREEMENT. Purchaser agrees, in connection with the
Company's initial public offering of its equity securities, 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, if any)
without the prior written consent of the Company or such underwriters, as the
case may be, for such period of time (not to exceed one hundred eighty (180)
days) from the effective date of such registration as may be requested by the
Company or such underwriters; provided, that the officers and directors of
the Company who own stock of the Company also agree to such restrictions.
5. NO TRANSFER EXCEPT IN COMPLIANCE WITH THE RESTRICTIONS HEREIN. The
Company shall not be required (i) to transfer on its books any Shares which
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement, or (ii) to treat as owner of such Shares or to accord
the right to vote as such owner or to pay dividends to any transferee to whom
such Shares shall have been so transferred. Purchaser shall not sell, transfer,
pledge, hypothecate or
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<PAGE>
otherwise dispose of any shares which remain subject to the restrictions on
transfer set forth in Section 3 hereof.
6. LEGENDS. All certificates representing any of the Shares subject to
the provisions of this Agreement shall have endorsed thereon the following
legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS UPON TRANSFER, RIGHTS OF FIRST REFUSAL AND RIGHTS OF
REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
CORPORATION."
(b) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
(c) Any legend required to be placed thereon by the applicable blue
sky laws of any state.
7. ESCROW.
(a) The Shares issued under this Agreement shall be held by an escrow
holder designated by the Company (the "Escrow Holder"), along with a stock
assignment executed by the Purchaser in blank, until the expiration of the
Company's options and right of first refusal with respect to such Shares as set
forth above.
(b) The Escrow Holder is hereby directed to permit transfer of the
Shares only in accordance with this Agreement or instructions signed by both
parties. In the event further instructions are desired by the Escrow Holder, he
shall be entitled to rely upon directions executed by a majority of the
authorized number of the Company's Board of Directors. The Escrow Holder shall
have no liability for any act or omission hereunder while acting in good faith
in the exercise of his own judgment.
(c) If the Company or any assignee exercises its Repurchase Option or
Right of First Refusal hereunder, the Escrow Holder, upon receipt of written
notice of such exercise from the proposed transferee, shall take all steps
necessary to accomplish such transfer.
(d) When the Repurchase Option or Right of First Refusal have been
exercised or expire unexercised or a portion of the Shares has been released
from the provisions of Section 3 hereof, upon Purchaser's request the Escrow
Holder shall promptly cause a new certificate to be issued for such released
Shares and shall deliver such certificate to the Purchaser.
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<PAGE>
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a stockholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the provisions of Section 3, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of his ownership of the Shares shall be immediately subject to this
escrow, deposited with the Escrow Holder and included thereafter as "Shares" for
purposes of this Agreement and the Company's Repurchase Option or Right of First
Refusal.
8. INVESTMENT REPRESENTATIONS. In connection with the purchase of the
Shares, the Purchaser shall, concurrently with the purchase of the Shares,
deliver to the Company his Investment Representation Statement attached hereto
as Exhibit B.
9. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares and
the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
10. TAX CONSEQUENCES. The Purchaser has reviewed with the Purchaser's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement (including any
tax consequences that may result under recently enacted tax legislation). The
Purchaser is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents. The Purchaser understands
that the Purchaser (and not the Company) shall be responsible for the
Purchaser's own tax liability that may arise as a result of this investment or
the transactions contemplated by this Agreement. The Purchaser understands that
Section 83 of the Internal Revenue Code, as amended (the "Code"), taxes as
ordinary income both (i) the difference between the fair market value of the
Shares when the Company granted the Purchaser the right to purchase the Shares
and the fair market value of the Shares on the date of this Agreement and (ii)
the difference between the amount paid for the Shares and the fair market value
of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" includes the right of the Company to buy back the Shares
pursuant to certain of its rights under Section 3.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF
THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
THE PURCHASER'S BEHALF.
11. TERMINATION OF EMPLOYMENT. Purchaser understands and acknowledges that
Purchaser's employment relationship with the Company is at the will of either
party and that nothing in this Agreement, shall confer any right upon Purchaser
with respect to continuation of employment by the Company, nor shall it
interfere in any way with his right or the Company's right to terminate
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<PAGE>
his employment at any time, with or without cause. This Agreement does not
constitute an express or implied promise of continued employment for any period.
12. GENERAL PROVISIONS.
(a) GOVERNING LAW. This Agreement shall be governed by the laws of
the State of California. This Agreement represents the entire agreement between
the parties with respect to the purchase of Common Stock by the Purchaser and
may only be modified or amended in writing signed by both parties.
(b) NOTICES. Any notice, demand or request required or permitted to
be given by either the Company or the Purchaser pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally or deposited in the U.S. mail, First Class with postage prepaid, and
addressed to the parties at the addresses of the parties set forth at the end of
this Agreement or such other address as a party may request by notifying the
other in writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
(c) ASSIGNMENT. The rights and benefits of the Company under this
Agreement shall be transferable to any one or more persons or entities, and all
covenants and agreements hereunder shall inure to the benefit of, and be
enforceable by the Company's successors and assigns. The rights and obligations
of the Purchaser under this Agreement may only be assigned with the prior
written consent of the Company.
(d) WAIVER. Either party's failure to enforce any provision or
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions, nor prevent that party thereafter from
enforcing each and every other provision of this Agreement. The rights granted
both parties herein are cumulative and shall not constitute a waiver of either
party's right to assert all other legal remedies available to it under the
circumstances.
(e) ADDITIONAL ACTIONS. The Purchaser agrees upon request to execute
any further documents or instruments necessary or desirable to carry out the
purposes or intent of this Agreement.
(f) ARBITRATION. At the option of either party, any and all disputes
or controversies, whether of law or in equity, and of any nature whatsoever
arising from or respecting this Agreement, unless otherwise expressly provided
herein, shall be decided by arbitration by the American Arbitration Association
in accordance with the rules and regulations of that Association.
(i) The arbitrators shall be selected as follows: In the
event the Company and Purchaser agree on one arbitrator, the arbitration
shall be conducted by such arbitrator. In the event the Company and Purchaser
do not so agree, the Company and Purchaser shall each select one independent,
qualified arbitrator and these two arbitrators shall select a third
arbitrator. The
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<PAGE>
Company reserves the right to reject any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(ii) Arbitration shall take place in Pasadena, California, or any
other location mutually agreeable to the parties. At the request of either
party, arbitration proceedings will be conducted in secrecy. In such case all
documents, testimony, and records shall be received, heard, and maintained by
the arbitrators in secrecy under seal, available for inspection only by the
Company and the Purchaser and their respective attorneys and their respective
experts who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known. The arbitrators, who shall act by
majority vote, shall be able to decree any and all relief of an equitable
nature, including but not limited to such relief as a temporary restraining
order, a temporary or a permanent injunction, or both, and shall also be able to
award damages (with or without an accounting), costs, and reasonable attorneys'
fees. The decree or judgment of an award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
(iii) Reasonable notice of the time and place of arbitration
shall be given to all persons, other than the parties, as shall be required by
law, in which case such persons or their authorized representatives shall have
the right to attend and participate in all the arbitration hearings to the
extent and in such manner as the law shall require.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first set forth above.
ETOYS INC. PURCHASER:
a Delaware corporation
By: /s/ Edward C. Lenk /s/ Frank C. Han
------------------------------- -------------------------------
Title: President Frank C. Han
----------------------------
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<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, Frank C. Han, hereby sell, assign and transfer unto
__________________________(___________) shares of the Common Stock of eToys Inc.
standing in my name of the books of said corporation represented by Certificate
No. __________ herewith and do hereby irrevocably constitute and appoint
____________________, attorney, to transfer the said stock on the books of the
within named corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between eToys Inc. and the undersigned dated June 27,
1997.
Dated: Signature: /s/ Frank C. Han
------------------------ --------------------------
Name: Frank C. Han
-------------------------------
<PAGE>
EXHIBIT A
PLEDGE AGREEMENT
This Agreement is entered into as of June 27, 1997, by and between ETOYS
INC., a Delaware corporation (the "Company") and Frank C. Han ("Pledgor").
WHEREAS, in exchange for Pledgor's Full Recourse Promissory Note dated of
even date herewith (the "Note"), the Company has issued and sold to Pledgor
416,667 shares of its Common Stock evidenced by the Company's Common Stock
Certificate No. 7 (the "Shares") pursuant to the terms and conditions of that
certain Common Stock Purchase Agreement ("Stock Purchase Agreement") entered
into by the Company and Pledgor of even date herewith;
WHEREAS, Pledgor has agreed that repayment of the Note will be secured by
the pledge of the Shares;
NOW, THEREFORE, the parties agree as follows:
1. CREATION OF SECURITY INTEREST. Pursuant to the provisions of the
California Commercial Code, Pledgor hereby grants to the Company, and the
Company hereby accepts, a present security interest in the Shares as collateral
to secure the payment of Pledgor's obligation to the Company under the Note.
Pledgor herewith delivers to the Company Common Stock Certificate No. 6,
representing a total of 416,667 shares of the Company's Common Stock, together
with one stock power for each certificate in the form attached as an Exhibit to
the Stock Purchase Agreement, duly executed (with the date and number of shares
left blank) by Pledgor and Pledgor's spouse, if any. For purposes of this
Agreement, the Shares pledged hereby shall hereinafter be collectively referred
to as the "Collateral".
2. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants
to the Company that Pledgor has good title (both of record and beneficially) to
the Collateral, free and clear of all claims, pledges and liens or encumbrances
of every nature whatsoever, and that Pledgor has the right to pledge the
Collateral as provided herein. Pledgor further agrees not to grant or create,
nor attempt to grant or create, any security interest, claim, lien, pledge or
other encumbrance with respect to the Collateral until the entire principal sum
and accrued interest due under the Note has been paid in full.
3. RIGHTS ON DEFAULT. In the event of default by Pledgor under the Note,
the Company and its assigns shall have full power to sell, assign and deliver
the whole or any part of the Collateral at any broker's exchange or elsewhere,
at public or private sale, at the option of the Company or its assigns, in order
to satisfy any part of the obligations of Pledgor now existing or hereinafter
arising under the Note should payment of such obligations be in default. On any
such public sale, the Company and its assigns may purchase all or any part of
the Collateral. In addition, at its sole
<PAGE>
option, the Company may elect to retain the Collateral in satisfaction of
Pledgor's obligation under the Note, in accordance with the provisions and
procedures set forth in the California Commercial Code.
4. ADDITIONAL REMEDIES. The rights and remedies granted to the Company
herein upon default shall be in addition to all the rights, powers and remedies
of the Company under the California Commercial Code and applicable law and such
rights, powers and remedies shall be exercisable by the Company with respect to
all of the Collateral. The Company's reasonable expenses of holding the
Collateral, preparing it for resale or other disposition, and selling or
otherwise disposing of the Collateral, including attorneys' fees and other legal
expenses, will be deducted from the proceeds of any sale or other disposition
and will be included in the amounts Pledgor must tender to redeem the
Collateral. All rights, powers and remedies of the Company shall be cumulative
and not alternative. Any forbearance or failure or delay by the Company in
exercising any right, power or remedy hereunder shall not be deemed to be a
waiver of any such right, power or remedy and any single or partial exercise of
any such right, power or remedy hereunder shall not preclude the further
exercise thereof.
5. DIVIDENDS; VOTING. All dividends hereinafter declared on or payable
with respect to the Collateral during the term of this pledge (excluding only
ordinary cash dividends, which shall be payable to Pledgor so long as Pledgor is
not in default under this Note) shall be immediately delivered to the Company to
be held in pledge hereunder. Pledgor shall be entitled to receive cash dividends
so long as Pledgor is not in default under the Note. Notwithstanding anything to
the contrary contained in this Agreement, Pledgor shall be entitled to vote any
shares comprising the Collateral, subject to any proxies granted by Pledgor.
6. ADJUSTMENTS. In the event that during the term of this pledge, any
stock dividend, reclassification, readjustment, stock split or other change is
declared or made with respect to the Collateral, or if warrants or any other
rights or options are issued in connection with the Collateral, all new,
substituted and/or additional shares or other securities issued by reason of
such change or by reason of the exercise of such warrants, rights or options,
shall be immediately pledged to the Company to be held under the terms of this
Agreement in the same manner as the Collateral is held hereunder.
7. RULE 144 HOLDING PERIOD. PLEDGOR UNDERSTANDS THAT THE HOLDING PERIOD
SPECIFIED UNDER RULE 144(d) WILL NOT BEGIN TO RUN WITH RESPECT TO THE PURCHASED
SHARES UNTIL EITHER (A) THE NOTE IS PAID IN FULL OR (B) THE NOTE IS SECURED BY
COLLATERAL, OTHER THAN THE PURCHASED SHARES, HAVING A FAIR MARKET VALUE AT LEAST
EQUAL TO THE AMOUNT OF PLEDGOR'S THEN OUTSTANDING OBLIGATION UNDER THE NOTE
(INCLUDING ACCRUED INTEREST).
8. REDELIVERY OF COLLATERAL. Upon payment in full of the entire principal
sum and accrued interest due under the Note, and subject to the terms and
conditions of the Stock Purchase Agreement, the Company shall immediately
redeliver the Collateral pledged hereunder to Pledgor, duly
<PAGE>
endorsed, and this Agreement shall terminate; provided, however, that all rights
of the Company to retain possession of the Shares pursuant to the Stock Purchase
Agreement shall survive termination of this Agreement.
9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
the respective heirs, personal representatives, successors and assigns of the
parties hereto.
10. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by the
construed in accordance with the laws of the State of California, excluding that
body of law relating to conflicts of law. Should one or more of the provisions
of this Agreement be determined by a court of law to be illegal or
unenforceable, the other provisions nevertheless shall remain effective and
shall be enforceable.
11. MODIFICATION. This Agreement shall not be amended without the written
consent of both parties hereto.
12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings related to such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
ETOYS INC. PLEDGOR
By: /s/ Edward C. Lenk /s/ Frank C. Han
---------------------------- -----------------------------
(signature)
Title: President
--------------------
Frank C. Han
-----------------------------
(print or type name)
<PAGE>
FULL RECOURSE PROMISSORY NOTE
Pasadena, California
$6,250.00 June 27, 1997
1. OBLIGATION. In exchange for 416,667 shares (the "Shares") of the
Common Stock of ETOYS INC., a Delaware corporation (the "Company"), represented
by Common Stock Certificate No. 7, receipt of which is hereby acknowledged, the
undersigned hereby promises to pay to the order of the Company on or before June
27, 2002, or upon termination of employment for any reason, whichever occurs
earlier, at the Company's office at 790 E. Colorado Blvd., Suite 200, Pasadena,
CA 91101, or at such other place as the Company may direct, the principal sum of
Six Thousand Two Hundred Fifty Dollars ($6,250.00) together with interest on
unpaid principal at the rate of 6.80% per annum from the date hereof until paid.
2. ACCELERATION OF OBLIGATION. The principal sum of this Note, together
with all interest accrued thereon, shall immediately become due and payable in
full upon any transfer of any of the Shares.
3. REMEDIES ON DEFAULT. Payment of this Note is secured by shares of the
Company's Common Stock pursuant to a Pledge Agreement dated as of even date
herewith between the Company and the undersigned. Upon any default of the
undersigned under this Note, the Company shall have, in addition to its rights
and remedies under the Pledge Agreement, full recourse against any real,
personal, tangible or intangible assets of the undersigned, and may pursue any
legal or equitable remedies that are available to it.
4. GOVERNING LAW; WAIVER. The validity, construction and performance of
this Note shall be governed by the laws of the State of California, excluding
that body of law pertaining to conflicts of law. The undersigned waives
presentment, notice of nonpayment, notice of dishonor, protest, demand and
diligence.
5. ATTORNEYS' FEES. If suit is brought for collection of this Note, the
undersigned agrees to pay all reasonable expenses, including attorneys' fees,
incurred by the holder in connection therewith whether or not such suit is
prosecuted to judgment.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as
of the date and year first above written.
/s/ Frank C. Han
----------------------
Frank C. Han
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER: FRANK C. HAN
COMPANY: ETOYS INC.
SECURITY: COMMON STOCK
AMOUNT: 416,667 SHARES
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company the following:
(a) I am sufficiently aware of the Company's business affairs
and financial condition to reach an informed and knowledgeable decision to
acquire the Securities. I am purchasing these Securities for my own account for
investment purposes only and not with a view to, or for the resale in connection
with, any "distribution" thereof for purposes of the Securities Act of 1933, as
amended (the "Securities Act").
(b) I understand that the Securities have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein. In this connection, I understand that, in
the view of the Securities and Exchange Commission (the "SEC"), the statutory
basis for such exemption may be unavailable if my representation was predicated
solely upon a present intention to hold these Securities for the minimum capital
gains period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available (such as Rule 144 or the
resale provisions of Rule 701 under the Securities Act). Moreover, I understand
that the Company is under no obligation to register the Securities. In addition,
I understand that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am familiar with the provisions of Rule 144, promulgated
under the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired,
<PAGE>
directly or indirectly, from the issuer thereof (or from an affiliate of such
issuer), in a non-public offering subject to the satisfaction of certain
conditions, including, among other things: (1) the availability of certain
public information about the Company; (2) the resale occurring not less than one
year after the party has purchased, and made full payment for, within the
meaning of Rule 144, the securities to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than two
years, (3) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker, as said term is
defined under the Securities Exchange Act of 1934 (the "Exchange Act") and the
amount of securities being sold during any three month period not exceeding the
specified limitations stated therein, if applicable. The Purchaser further
understands that the resale provisions of Rule 701 will not apply until 90 days
after the Company becomes subject to the reporting obligations under the
Exchange Act (typically upon the effective date of a company's initial public
offerings). There can be no assurances that the requirements of Rule 144 or Rule
701 will be met, or that the Securities will ever be saleable.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale, and
that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and that, in
such event, I would be precluded from selling the Securities under Rule 144 even
if the one-year minimum holding period had been satisfied.
(f) I further understand that in the event all of the applicable
requirements of Rule 144 are not satisfied, or that the resale provisions of
Rule 701 are not available, registration under the Securities Act, compliance
with Regulation A, compliance with some other registration exemption or the
notification to the Company of the proposed disposition by me and the furnishing
to the Company of (i) detailed information regarding the disposition, and (ii)
and opinion of my counsel to the effect that such disposition will not require
registration (I understand such counsel's opinion shall concur with the opinion
by counsel for the Company and I shall have been informed of such compliance)
will be required and that, notwithstanding the fact that Rule 144 is not
exclusive, the Staff of the SEC has expressed its opinion that persons proposing
to sell private placement securities other than in a registered offering and
otherwise than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Signature of Purchaser:
/s/ Frank C. Han
----------------------------------
Frank C. Han
Date: June 27,1997
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<PAGE>
EXHIBIT 10.5
ETOYS INC.
STOCK AND NOTE PURCHASE AGREEMENT
This Stock and Note Purchase Agreement (the "Agreement") is made as of
the 27th day of June, 1997 by and between eToys Inc., a Delaware
corporation (the "Company"), and idealab!, a Delaware corporation (the
"Purchaser").
In consideration of the mutual covenants and representations herein set
forth, the Company and Purchaser agree as follows:
1. PURCHASE. Subject to the terms and conditions of this Agreement,
the Company hereby agrees to issue to Purchaser and Purchaser agrees to
acquire from the Company on the Closing Date (as defined below), (i)
6,467,000 shares of the Company's Common Stock (the "Stock") at a price of
$0.015 per share, for the aggregate purchase price of $97,015 (the "Purchase
Price") and (ii) Convertible Promissory Notes in substantially the form
attached hereto as Exhibit A (the "Note" or collectively the "Notes") which
may be issued in one or more Notes for up to an aggregate principal amount of
$100,000. The Purchase Price for the Stock and the principal amounts of the
Notes shall be paid by check or wire transfer or the cancellation of existing
indebtedness or a combination thereof.
2. CLOSING. The purchase and sale of the Stock and Notes shall occur
at a Closing or Closings to be held at such times and places (the "Closing
Dates"), as designated by the Company no less than two business days prior to
such Closing Date. The Closings will take place at the principal office of
the Company or at such other place as shall be designated by the Company. At
the Closing on June 27, 1997 (the "Initial Closing"), the Company will issue
the Stock registered in the name of Purchaser and the Company acknowledges
receipt of $97,000 in payment of the Purchase Price for the Stock prior to
the date of this Agreement. At subsequent Closings at times to be determined
by the Company and the Purchaser, Purchaser shall deliver to the Company the
consideration to be paid for the Note or Notes and the Company will deliver
to Purchaser a Note or Notes in the principal amounts(s) equal to the
consideration paid by Purchaser for such Note or Notes.
3. COMPANY'S REPRESENTATIONS AND WARRANTIES. Except as set forth on
Exhibit B attached hereto, the Company represents and warrants to Purchaser
as follows:
(a) The Company is a Corporation duly organized and validly
existing under, and by virtue of, the laws of the State of Delaware and is in
good standing under such laws. The Company has requisite corporate power and
authority to own and operate its properties and assets, and to carry on its
business as presently conducted and as proposed to be conducted. The Company
is not presently qualified to do business as a foreign corporation in any
jurisdiction, and the failure
<PAGE>
to be so qualified will not have a material adverse affect on the Company's
business as now conducted or as now proposed to be conducted.
(b) The Company will have at the Closing all requisite legal and
corporate power and authority to execute and deliver this Agreement, to sell
and issue the Stock and the Note hereunder and to carry out and perform its
obligations under the terms of this Agreement.
(c) The authorized capital stock of the Company consists or will,
upon the filing of the Certificate, consist of 50,000,000 shares of Common
Stock and 25,000,000 shares of undesignated Preferred Stock. Immediately
prior to the Closing, no shares of common or capital stock will be
outstanding. The Stock, when issued pursuant to the terms of this Agreement,
will be duly authorized, validly issued, fully paid and nonassessable.
(d) All corporate action on the part of the Company, its officers,
directors and stockholders necessary for the authorization, execution,
delivery and performance of the Agreement by the Company, the authorization,
sale, issuance and delivery of the Stock and the Note and the performance of
all of the Company's obligations under this Agreement has been taken or will
be taken prior to the Closing. This Agreement, when executed and delivered by
the Company, shall constitute a valid and binding obligation of the Company,
enforceable in accordance with its terms.
(e) The Company is not in violation or default of any term of its
Certificate or Bylaws, or in any material respect of any term or provision of
any material mortgage, indebtedness, indenture, contract, agreement,
instrument, judgement, order or decree, and to its knowledge is not in
violation of any statute, rule or regulation applicable to the Company where
such violation would materially and adversely affect the Company.
(f) The Company has not incurred, and will not incur, directly or
indirectly, as a result of any action taken by the Company, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement.
4. PURCHASER'S REPRESENTATIONS AND WARRANTIES. In connection with the
purchase of the Stock and the Note, Purchaser hereby represents and warrants
to the Company:
(a) Purchaser has substantial experience in investing in
newly-formed technology companies or in evaluating and investing in private
placement transactions, so Purchaser is capable of evaluating the merits and
risks of Purchaser's investment in the Company. Purchaser, by reason of
Purchaser's business or financial experience or the business or financial
experience of Purchaser's professional advisors who are unaffiliated with the
Company or any affiliate or selling agent of the Company, directly or
indirectly, has the capacity to protect Purchaser's own interests in
connection with the purchase of the Stock, the Note and the common stock
issuable upon conversion of the Note (the "Securities").
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<PAGE>
(b) Purchaser is acquiring or will be acquiring the Stock and the
Note for investment for Purchaser's own account, not as a nominee or agent
and not with the view to, or for resale in connection with, any distribution
thereof Purchaser understands that the Stock and the Note have not been, and
will not be, registered under the Securities Act of 1933 (the "Securities
Act") by reason of a specific exemption from the registration provisions of
the Securities Act that depends upon, among other things, the bona fide
nature of the investment intent and the accuracy of such Purchaser's
representations as expressed herein. Purchaser has not been formed for the
specific purpose of acquiring the Stock and the Note. Purchaser further
understands that the Company shall have no obligation to register the Stock
or the Securities issuable upon conversion of the Note under the Securities
Act on behalf of Purchaser.
(c) Purchaser acknowledges that the Stock and the Securities
issuable upon conversion of the Note must be held indefinitely unless
subsequently registered under the Securities Act or an exemption from such
registration is available. Purchaser is aware of the provisions of Rule 144
promulgated under the Securities Act, which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions, including (except as limited by Rule 144(k)), among other things,
the existence of a public market for the shares, the availability of certain
current public information about the Company, the resale occurring not less
than one year after a party has purchased and paid for the security to be
sold, the sale being effected through a "broker's transaction" or in
transactions directly with a "market maker" (as provided by Rule 144(f)) and
the number of shares being sold during any three-month period not exceeding
specified limitations.
(d) Purchaser understands that no public market now exists for any
of the securities issued by the Company, that the Company has made no
assurances that a public market will ever exist for the Stock or the
Securities issuable upon conversion of the Note and that, even if such a
public market exists at some future time, the Company may not then be
satisfying the current public information requirements of Rule 144.
(e) Purchaser and Purchaser's representatives have had the
opportunity to ask questions of, and receive answers from, representatives of
the Company concerning the Company and the terms and conditions of this
transaction as well as to obtain any information requested by Purchaser. Any
questions raised by Purchaser or Purchaser's representatives concerning the
transaction have been answered to the satisfaction of Purchaser and
Purchaser's representatives. Purchaser's decision to enter into the
transactions contemplated hereby is based in part on the answers to such
questions as Purchaser and Purchaser's representatives have raised concerning
the transaction and on Purchaser's own evaluation of the risks and merits of
the purchase and the Company's proposed business activities.
(f) All corporate or partnership action, if applicable, on the part
of Purchaser, its directors, partners and its stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by
Purchaser has been taken. This Agreement, when executed and
-3-
<PAGE>
delivered by Purchaser, will constitute a valid and legally binding obligation
of Purchaser, enforceable in accordance with its terms.
(g) Purchaser has not incurred, and will not incur, directly or
indirectly, as a result of any action taken by such Purchaser, any liability
for brokerage or finders' fees or agents' commissions or any similar charges
in connection with this Agreement.
(h) Purchaser has reviewed with its own tax advisors the federal,
state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on
such advisors and not on any statements or representations of the Company or
any of its agents and understands that Purchaser (and not the Company) shall
be responsible for Purchaser's own tax liability that may arise as a result
of this investment or the transactions contemplated by this Agreement.
5. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL
(a) Before any shares of Stock registered in the name of Purchaser
may be sold or transferred (including transfer by operation of law), such
shares shall first be offered to the Company.
(i) Purchaser shall deliver a notice ("Notice") to the
Company stating (A) Purchaser's bona fide intention to sell or transfer such
shares, (B) the number of such shares to be sold or transferred, (C) the
price for which he proposes to sell or transfer such shares, and (D) the name
of the proposed purchaser or transferee.
(ii) Within 30 days after receipt of the Notice, the Company
or its assignee may elect to purchase all (but not less than all) shares to
which the Notice refers, at the price per share specified in the Notice. Full
payment for all the shares to which the Notice refers shall be made by the
Company or its assignee to Purchaser by cash.
(iii) If the shares to which the Notice refers are not
elected to be purchased, as provided in subparagraph 5(a)(ii), Purchaser may
sell the shares to any person named/in the Notice at the price specified in
the Notice or at a higher price, provided that such sale or transfer is
consummated within 60 days of the date of said Notice to the Company, and
provided, further, that any such sale is in accordance with all the terms and
conditions hereof. Any sale or transfer after such 60 day period or on terms
more favorable to the proposed purchaser or transferee then described in the
Notice shall be subject again to this subparagraph 5(a).
(iv) The provisions of this subparagraph 5(a) shall terminate
on the earlier of (A) the effective date of a registration statement filed by
the Company under the Securities Act, with respect to an underwritten public
offering of Common Stock of the Company (an "Initial Public Offering") or (B)
the closing date of a sale of assets or merger of the Company pursuant to
which
-4-
<PAGE>
stockholders of this Company received securities of a buyer whose shares are
publicly traded. The provisions of this subparagraph 5(a) shall not apply to
a transfer of any shares of Stock by Purchaser, either during its lifetime or
on death by will or intestacy to its other ancestors, descendents or spouse,
or any custodian or trustee for the account of Purchaser or Purchaser's
ancestors, descendents or spouse; provided, in each such case a transferee
shall receive and hold such shares subject to the provisions of this
paragraph 5 and there shall be no further transfer of such shares except in
accordance herewith.
(b) Purchaser agrees in connection with the Company's Initial
Public Offering, not to sell, make any short sale of, loan, grant any option
for the purchase of or otherwise dispose of any shares of Stock without the
prior written consent of Company or its underwriters, 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 underwriters; provided, that the
officers and directors of the Company who own stock of the Company also
agree to such restrictions.
(c) The Company shall not be required (i) to transfer on its
books any shares of Stock which shall have been sold or transferred in
violation of any of the provisions set forth in this Agreement, or (ii) to
treat as owner of such shares or to accord the right to vote as such owner
or to pay dividends to any transferee to which such shares shall have been so
transferred.
6. LEGENDS. All certificates representing any of the shares of Stock
subject to the provisions of this Agreement shall have endorsed thereon
legends substantially in the following form:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS CERTIFICATE MUST BE
SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO
THE SALE, PLEDGE OR OTHER TRANSFER OF ANY INTEREST IN ANY OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE."
(b) "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN STOCK
PURCHASE AGREEMENT CONTAINING A RIGHT OF FIRST REFUSAL, COPIES OF WHICH MAY
BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO THE SECRETARY OF THE
COMPANY."
(c) Any legend required to be placed thereon by the California
Commissioner of Corporations, or required by applicable blue sky laws of any
state.
-5-
<PAGE>
7. MISCELLANEOUS
(a) The parties agree to execute such further instruments and
to take such further action as may reasonably be necessary to carry out the
intent of this Agreement.
(b) Any notice required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon personal delivery or
upon deposit in the United States Post Office, by regular or certified mail
with postage and fees prepaid, addressed to Purchaser at its address shown on
the Company's records and to the Company at the address of its principal
corporate offices (attention: President) or at such other address as such
party may designate by ten days' advance written notice to the other party
hereto.
(c) The Company may assign its rights and delegate its duties
under this Agreement. If any such assignment or delegation requires consent
of the California Commissioner of Corporations, the parties agree to cooperate
in requesting such consent. This Agreement shall inure to the benefit of the
successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon Purchaser, its heirs, executors,
administrators, successors and assigns.
(d) Purchaser hereby authorizes and directs the Secretary or
Transfer Agent of the Company to transfer the Stock as to which the right of
first refusal has been exercised from Purchaser to the Company.
(e) This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California.
8. ARBITRATION. At the option of either party, any and all
disputes or controversies whether of law or fact and of any nature whatsoever
arising from or respecting this Agreement shall be decided by arbitration by
the American Arbitration Association in accordance with the commercial rules
and regulations of that Association.
The arbitrators shall be selected as follows: In the event the
Company and Purchaser agree on one arbitrator, the arbitration shall be
conducted by such arbitrator. In the event the Company and Purchaser do not
so agree, the Company and Purchaser shall each select one independent,
qualified arbitrator and the two arbitrators so selected shall select the
third arbitrator. The Company reserves the right to object to any individual
arbitrator who shall be employed by or affiliated with a competing
organization.
Arbitration shall take place in Pasadena, California, or any
other location mutually agreeable to the parties. At the request of either
party, arbitration proceedings will be conducted in the utmost secrecy; in
such case all documents, testimony and records shall be received, heard and
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<PAGE>
maintained by the arbitrators in secrecy under seal, available for the
inspection only of the Company or Purchaser and their respective attorneys
and their respective experts who shall agree in advance and in writing to
receive all such information confidentially and to maintain such information
in secrecy until such information shall become generally known. The
arbitrator, who shall act by majority vote, shall be able to decree any and
all relief of an equitable nature, including but not limited to such relief
as a temporary restraining order, a temporary and/or a permanent injunction,
and shall also be able to award damages, with or without an accounting and
costs. The decree or judgment of an award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
Reasonable notice of the time and place of arbitration shall be
given to all persons, other than the parties, as shall be required by law, in
which case such persons or those authorized representatives shall have the
right to attend and/or participate in all the arbitration hearings in such
manner as the law shall require.
IN WITNESS THEREOF, the parties hereto have executed this Stock
Purchase Agreement as of the day and year first above written.
PURCHASER COMPANY
Bill Gross' idealab! eToys Inc.,
a California corporation a Delaware corporation
By: /s/ Bill Gross By: /s/ Edward C. Lenk
---------------------- ---------------------------
Name: Bill Gross Name: Edward C. Lenk
-------------------- -------------------------
Title: Chairman Title: President
------------------- ------------------------
Address: 790 E. Colorado Blvd
---------------------
Pasadena, CA 91101
---------------------
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<PAGE>
EXHIBIT A
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
INTEREST BEARING
CONVERTIBLE PROMISSORY NOTE
$________ _________, 1997
Pasadena, California
FOR VALUE RECEIVED, eToys, Inc., a Delaware corporation (the "Company"),
hereby promises to pay to idealab! ("Lender") the principal sum of
____________________________ dollars ($___________) on _________________,1998
(the "Maturity Date") at the offices of the Company, or at such other address
as Lender may specify in writing.
1. Interest shall accrue on the unpaid principal amount of this
Note at a rate of eight percent (8%) per annum, computed on the basis of the
actual number of days elapsed and a year of 365 days.
2. In the event that the Company, at any time after the date of this
Note and prior to the Maturity Date, shall issue and sell shares of its
Common Stock or Series A Preferred Stock to any investors (the "Investors")
for aggregate proceeds to the Company of at least One Million Dollars
($1,000,000), excluding the principal and accrued interest of this Note and
any similar notes which the holders have elected to convert into the
Securities, (the "Financing"), then the entire unpaid principal amount of
this Note (the "Unpaid Principal") and, at the option of Lender, the accrued
and unpaid interest on this Note, if any (the "Accrued Interest"), shall at
the closing of such Financing and at the option of Lender be either (i)
repaid in full in cash or (ii) converted into shares of the Company's Common
Stock (the "Securities"); PROVIDED, HOWEVER, that if the price per share of
the securities sold in the Financing is $0.25 or greater, then this Note
shall be repaid in full in cash upon the closing of such Financing and Lender
shall not have the option to convert this Notes into Securities.
3. The number of shares of Securities issuable to Lender upon
conversion of the Unpaid Principal, and Accrued Interest, if any, shall equal
that number of shares as is obtained by dividing the amount of Unpaid
Principal and Accrued Interest, if any, to be converted by the price per
share of $0.20.
4. The Unpaid Principal amount of this Note, together with Accrued
Interest to date, shall become immediately due and payable upon _________,
1998.
5. Any conversion by Lender of the Note into the Securities shall be
pursuant to a stock purchase agreement (the "Stock Agreement") which shall
contain customary terms and conditions. Lender shall provide the Company
with written notice of its election to exercise its conversion right
hereunder and the Company shall immediately thereafter undertake all
necessary action to enable such conversion to occur, but the Note shall
remain outstanding until such time as the Securities are actually issued to
Lender.
6. Acceptance by Lender of any partial payment shall not be deemed to
constitute a waiver by Lender to require prompt payment of the Note upon
demand.
7. In the event of any action to enforce payment of this Note, in
addition to all other relief, the prevailing party in such action shall be
entitled to reasonable attorneys' fees and expenses.
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<PAGE>
8. The Company hereby waives presentment, protest and demand, notice of
protest, demand, nonpayment or dishonor.
9. This Note is to be governed by and construed in accordance with the
laws of the State of California.
eToys Inc.
By:__________________________________
Title:_______________________________
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<PAGE>
EXHIBIT B
SCHEDULE OF EXCEPTIONS TO THE COMPANIES REPRESENTATIONS AND WARRANTIES
In addition to the 6,466,667 shares of Common Stock being issued under this
Stock and Note Purchase Agreement, the Company has agreed to issue 1,866,667
shares of Common Stock to certain founders and employees of the Company
pursuant to Stock Purchase Agreements and 2,026,667 shares of Common Stock to
certain founders and employees of the Company pursuant to Restricted Stock
Purchase Agreements and such shares shall be issued as of the same date of
this Stock and Note Purchase Agreement. Forms of such Stock Purchase
Agreements and Restricted Stock Purchase Agreements have been previously
provided to counsel for idealab!
<PAGE>
EXHIBIT 10.6
CONFIDENTIAL
INTERACTIVE MARKETING AGREEMENT
This Interactive Marketing Agreement (the "Agreement"), dated as of
October 1, 1997 (the "Effective Date"), is between America Online, Inc.
("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles,
Virginia 20166, and eToys Inc. ("eToys"), a private corporation, with offices
at 1640 5th Street, Suite 124, Santa Monica, CA 90401. AOL and eToys may be
referred to individually as a "Party" and collectively as "Parties."
INTRODUCTION
AOL and eToys each desires to enter into an interactive marketing
relationship whereby AOL will promote an interactive site referred to (and
further defined) herein as the Affiliated eToys Site. This relationship is
further described below and is subject to the terms and conditions set forth
in this Agreement. Defined terms used but not defined in the body of the
Agreement will be as defined on Exhibit B attached hereto.
TERMS
1. PROMOTION, DISTRIBUTION AND MARKETING.
1.1. AOL PROMOTION OF AFFILIATED eTOYS SITE.
AOL will provide eToys with the promotions for the Affiliated eToys
Site described on Exhibit A (the "Promotions"). Screen shots
indicating the current design for the applicable screens within the
shopping channels on each of the AOL Service and AOL.com are
attached hereto. Subject to eToys's reasonable approval, AOL will
have the right to fulfill its promotional commitments with respect
to any of the foregoing by providing eToys comparable promotional
placements in alternative areas of the AOL Network. AOL reserves
the right to redesign or modify the organization, structure, "look
and feel," navigation and other elements of the AOL services at any
time. In the event such modifications materially and adversely
affect any specific Promotion, AOL will work with eToys to provide
eToys, as its sole remedy, a comparable promotional placement. In
the event that modifications materially and adversely affect the
aggregate promotional value to be received hereunder by eToys
(including, without limitation, the promotional value of the
placements reflected through the attached screen shots) and AOL and
eToys cannot reach agreement regarding substitute promotional
placements reasonably satisfactory to eToys (notwithstanding both
Parties' good faith efforts to reach agreement for a period of
thirty days), then eToys will be entitled to terminate this
Agreement with fifteen days prior written notice to AOL. In the
event of such an early termination, eToys will be responsible for
the pro-rata portion of the payments provided for herein. This
pro-rata portion will represent the average of the percentages of
value delivered with respect to each component of Promotions
described on Exhibit A. For the impressions-based Promotions, the
percentage of value will be determined with reference to the
percentage of impressions which were delivered prior to the
effectiveness of the termination. For the other Promotions, the
percentage of value will be determined with reference to the
percentage of days of the term of the agreement which precede the
effectiveness of such termination.
With respect to the impressions targets specified on Exhibit A,
AOL will not be obligated to provide in excess of any of such
target amounts in any year. Any shortfall in impressions at the end
of a year will not be deemed a breach of the Agreement by AOL. In
the event there is a shortfall in impressions as of the end of
either year during the Initial Term (a "Shortfall"), AOL will
provide eToys with advertising placements in mutually
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agreed upon areas of the AOL Network which have a total value,
based on rates comparable to those set forth in Exhibit A, equal to
the value of the Shortfall (determined by multiplying the
percentage of impressions that were not delivered by the total
guaranteed payment provided for below) and which will be delivered
during the first four months following the end of the year in
question. [*]
1.2. CONTENT OF PROMOTIONS. The specific eToys Content (e.g., eToys's
logo) to be contained within the Promotions will be determined by
eToys, subject to AOL technical limitations and AOL's
then-applicable policies relating to advertising and promotions.
Except to the extent described herein, the specific form,
placement, duration and nature of the Promotions will be as
determined by AOL in its reasonable editorial discretion
(consistent with the editorial composition of the applicable
screens).
1.3. eTOYS PROMOTION OF AFFILIATED eTOYS SITE AND AOL. As set forth in
fuller detail in Exhibit C, eToys will promote the availability of
the Affiliated eToys Site through the AOL Network.
2. AFFILIATED eTOYS SITE.
2.1. CONTENT. eToys will make available through the Affiliated eToys
Site [*]. eToys will ensure that the Affiliated eToys Site does not in
any respect promote, advertise, market or distribute the products,
services or content of any Interactive Service through the linked
pages of the Affiliated eToys Site. The linked pages of the
Affiliated eToys Site will not contain advertisements, promotions,
links, sponsorships or other Content (i) [*] or (ii) otherwise in
conflict with AOL's standard advertising policies (except as
expressly approved by writing by AOL).
2.2. PRODUCTION WORK. eToys will be responsible for all production work
associated with the Affiliated eToys Site, including all related
costs and expenses.
2.3. TECHNOLOGY. eToys shall take reasonable steps necessary to conform
its promotion and sale of Products through the Affiliated eToys
Site to the then-existing technologies identified by AOL which are
optimized for the AOL Service. AOL reserves the right to review and
test the Affiliated eToys Site from time to time to determine whether
the site is compatible with AOL's then-available client and host
software and the AOL Network.
2.4. PRODUCT OFFERING. eToys will ensure that the Affiliated eToys Site
includes all of the Products and other Content (including, without
limitation, any features, offers, contests, functionality or
technology) that are then made available by or on behalf of eToys
through
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the "General eToys Site" (i.e., the publicly available site at
www.etoys.com to which an unregistered user would have access);
provided, however, that (a) such inclusion will not be required
where it is commercially or technically impractical to either Party
(i.e., inclusion would cause either Party to incur substantial
incremental costs); and (b) eToys will notify AOL of the material,
specific changes in scope, nature and/or offerings required by such
inclusion.
2.5. PRICING AND TERMS. [*]
2.6. SPECIAL OFFERS. [*]
2.7. OPERATING STANDARDS. eToys will ensure that the Affiliated eToys
Site complies with the operating standards set forth in Exhibit D.
2.8. TRAFFIC FLOW. eToys will take reasonable efforts to ensure that AOL
traffic is either kept within the Affiliated eToys Site or
channeled back into the AOL Network (with the exception of
advertising links sold and implemented pursuant to the Agreement).
The Parties will work together on mutually acceptable links back to
the AOL Service.
3. AOL EXCLUSIVITY OBLIGATIONS. [*] Notwithstanding anything to contrary in
this Section 3, no provision of this Agreement will limit AOL's ability
(on or off the AOL Network) to undertake activities or perform duties
pursuant to existing arrangements with third parties.
4. PAYMENTS.
4.1. PAYMENTS. eToys will pay AOL an amount of Three Million Dollars
(US$3,000,000), to be paid in: [*]
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As indicated elsewhere herein, this Agreement supersedes eToys
prior agreements with AOL related to advertising and placement in
the AOL shopping channel (the "Prior Agreements"). In that regard,
(i) eToys has no further payment obligations under the Prior
Agreements (except to invoices which have been received by eToys as
of its execution of this Agreement) and (ii) any impressions
delivered to eToys beginning as of the Effective Date will count
towards the impressions commitments contained herein.
4.2. WIRED PAYMENTS; LATE PAYMENTS. All payments required under this
Section 4 will be paid in immediately available, non-refundable
funds either by way of check or as wired to AOL's account. All
amounts owed hereunder not paid when due and payable will bear
interest from the date such amounts are due and payable at the rate
of 10% per year.
5. TERM; RENEWAL; TERMINATION.
5.1 TERM. Unless earlier terminated as set forth herein, the initial
term of this Agreement will be from the Effective Date through
December 31, 1999 (the "Initial Term").
5.2. TERMINATION FOR BREACH. Except as expressly provided elsewhere in
this Agreement, either Party may terminate this Agreement at any
time in the event of a material breach of the Agreement by the
other Party which remains uncured after thirty (30) days written
notice thereof to the other Party (or such shorter period as may be
specified elsewhere in this Agreement). Notwithstanding the
foregoing, in the event of a material breach of a provision that
expressly requires action to be completed within an express period
shorter than 30 days, either Party may terminate this Agreement if
the breach remains uncured after written notice thereof to the
other Party.
5.3 TERMINATION FOR BANKRUPTCY/INSOLVENCY. Either Party may terminate
this Agreement immediately following written notice to the other
Party if the other Party (i) ceases to do business in the normal
course, (ii) becomes or is declared insolvent or bankrupt, (iii) is
the subject of any proceeding related to its liquidation or
insolvency (whether voluntary or involuntary) which is not
dismissed within ninety (90) calendar days or (iv) makes an
assignment for the benefit of creditors.
6. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set forth
on Exhibit E attached hereto and Standard Legal Terms & Conditions set
forth on Exhibit F attached hereto are each hereby made a part of this
Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
AMERICA ONLINE, INC. ETOYS INC.
By: /s/ David M. [ILLEGIBLE] By: /s/ Toby Lenk
------------------------------ -------------------------------
Print Name: David M. [ILLEGIBLE] Print Name: /s/ Toby Lenk
---------------------- ----------------------
Title: Sr. V.P. Title: CEO
--------------------------- ----------------------------
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EXHIBIT A
PLACEMENT/PROMOTION PLAN
AOL SERVICE SHOPPING CHANNEL [*]
AOL.COM SHOPPING CHANNEL [*]
ADDITIONAL ADVERTISING [*]
Should eToys wish to increase or decrease its impression levels within any of
the impressions-based, additional advertising categories described above (the
"Impressions-based Ads"), AOL will work in good faith with eToys to
accommodate any such requests, subject to availability and provided that
eToys will continue to be required to pay AOL the full amounts specified
under this Agreement and eToys will not,
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through any adjustment, be entitled to value in excess of that allocable to
the Impressions-based Ads (taking into account the relative values of the
impressions involved in any such adjustments).
In delivering the impressions called for under the Impressions-based Ads, AOL
will use all commercially reasonable efforts to deliver [*] of the annual
impressions for the following categories during the fourth calendar quarter:
[*]; provided that, in the event AOL believes that it will
not be able to deliver the requisite impressions in any specific category,
eToys will cooperate in good faith with AOL to designate comparable,
substitute inventory for delivery of such impressions during such period. The
Parties will use commercially reasonable efforts to spread the remaining
impressions on a relatively even basis during the remaining three quarters of
each year (or on such other basis as the Parties may reasonably agree);
provided that, in the event that the impressions are not spread on that basis
due to eToys role in the process, then AOL shall not be responsible for any
penalties or timing restrictions with respect to shortfalls of impressions
which may otherwise be called for hereunder.
* For purposes of these promotions, the first year shall be deemed to end
December 31, 1998
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EXHIBIT B
DEFINITIONS
The following definitions will apply to this Agreement:
ADDITIONAL eTOYS CHANNEL. Any third-party distribution channel (e.g., an
Interactive Service) through which the Affiliated eToys Site is made
available.
AFFILIATED eTOYS SITE. The specific area to be promoted and distributed by
AOL hereunder in which eToys can market and complete transactions regarding
its Products.
AOL.COM. AOL's primary Internet-based Interactive Site marketed under the
"AOL.COM" brand, specifically excluding (a) the AOL Service, (b) any
international versions of AOL.com, (c) "Driveway," "AOL Instant Messenger"
or any similar product or service offered by or through such site or any
other AOL Interactive Site, (d) "Digital Cities," "WorldPlay," "Entertainment
Asylum," the "Hub," or any similar "sub-service" offered by or through such
site or any other AOL Interactive Site and (e) any programming or content area
offered by or through such site or any other AOL Interactive Site which is
provided and operationally controlled by a third-party content provider and
not by AOL (or any successor to or substitute for any of the foregoing
properties in clauses (a) through (e)).
AOL LOOK AND FEEL. The elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally
associated with Interactive Sites within the AOL Service or AOL.com.
AOL MEMBER. Any authorized user of the AOL Network, including any
sub-accounts using the AOL Network under an authorized master account.
AOL NETWORK. (i) The AOL Service and (ii) any other product or service owned,
operated, distributed or authorized to be distributed by or through AOL or
its Affiliates worldwide through which such party elects to offer the
Licensed Content.
AOL SERVICE. The U.S. version of the America Online-Registered TradeMark-
brand service, specifically excluding (a) AOL.com or any other AOL
Interactive Site, (b) the international versions of the AOL Service (e.g.,
AOL Japan), (c) "Driveway," "NetFind," AOL Instant Messenger" or any similar
product or service offered by or through the U.S. version of the America
Online-Registered TradeMark- brand service, (d) "Digital Cities,"
"WorldPlay," "Entertainment Asylum," the "Hub," or any similar "sub-service"
offered by or through the U.S. version of the America Online-Regestered
Trademark- brand service and (e) any programming or content area offered by
or through the U.S. version of the America Online-Registered TradeMark- brand
service which is provided and operationally controlled by a third-party
content provider and not by AOL (or any successor to or substitute for any of
the foregoing properties in clauses (a) through (e)).
CONFIDENTIAL INFORMATION. Any information relating to or disclosed in the
course of the Agreement, which is or should be reasonably understood to be
confidential or proprietary to the disclosing Party, including, but not
limited to, the material terms of this Agreement, information about AOL
Members and eToys customers, technical processes and formulas, source codes,
product designs, sales, cost and other unpublished financial information,
product and business plans, projections, and marketing data. "Confidential
Information" will not include information (a) already lawfully known to or
independently developed by the receiving Party, (b) disclosed in published
materials, (c) generally known to the public, or (d) lawfully obtained from
any third party.
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CONTENT. Information, materials, features, Products, advertisements,
promotions, links, pointers and software, including any modifications,
upgrades, updates, enhancements and related documentation.
eTOYS COMPETITORS. [*]
IMPRESSION. Any access by a user to the file representing the page containing
the applicable Promotion.
INTERACTIVE SERVICE. Any entity that offers online or Internet connectivity
(or any successor form of connectivity), aggregates and/or distributes a
broad selection of third-party interactive Content, or provides interactive
navigational services (including, without limitation, any online service
providers, Internet service providers, @Home or other broadband providers,
search or directory providers, "push" product providers such as the Pointcast
Network or providers of interactive environments such as Microsoft's "Active
Desktop").
INTERACTIVE SITE. Any interactive site or area (other than the Affiliated
eToys Site) which is managed. maintained or owned by eToys or its agents,
including, by way of example and without limitation, (i) an eToys site on the
World Wide Web portion of the internet or (ii) a channel or area delivered
through a "push" product such as the Pointcast Network or interactive
environment such as Microsoft's proposed "Active Desktop."
LICENSED CONTENT. All Content offered through the Affiliated eToys Site
pursuant to this Agreement, including any modifications, upgrades, updates,
enhancements, and related documentation.
PRODUCT. Any product, good or service which eToys offers, sells or licenses
to AOL Members through (i) the Affiliated eToys Site (including through any
Interactive Site linked thereto) or (ii) an "offline" means (e.g., toll-free
number) for receiving orders related to specific offers within the
Affiliated eToys Site requiring purchasers to reference a specific
promotional identifier or tracking code, including, without limitation,
products sold through surcharged downloads (to the extent expressly
permitted hereunder).
TOYS. Childrens toy products.
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EXHIBIT C
eTOYS CROSS-PROMOTION
ONLINE
In each eToys Interactive Site, eToys will include:
- -
- - [*]
OFFLINE
In eToys' television, radio and print advertisements and in any publications,
programs, features or other forms of media over which eToys exercises at
least partial editorial control, eToys will make reasonable efforts to
include on a periodic basis:
- - [*]
Subject to the requirements of Section 1 of Exhibit F, eToys will be entitled
to issue a press release regarding this Agreement.
- ---------------------------
[*]
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EXHIBIT D
OPERATING STANDARDS
GENERAL. [*]
HOSTING; CAPACITY. eToys will provide all computer servers, routers,
switches and associated hardware in an amount reasonably necessary to meet
anticipated traffic demands, adequate power supply (including generator
back-up) and HVAC, adequate insurance, adequate service contracts and all
necessary equipment racks, floor space, network cabling, and power
distribution to support the Affiliated eToys Site (collectively, "Hosting
Infrastructure"). In the event eToys fails to satisfy this requirement AOL
will have the right (in addition to any other remedies available to AOL
hereunder) to regulate the promotions it provides to eToys hereunder to the
extent necessary to minimize user delays until such time as eToys corrects
its infrastructure deficiencies.
SPEED; ACCESSIBILITY. eToys will ensure that the performance and
availability of the Affiliated eToys Site (a) is monitored on a continuous,
24/7 basis and (b) remains competitive in all material respects with the
performance and availability of other similar sites based on similar form
technology. eToys will use commercially reasonable efforts to ensure that:
(a) the functionality and features within the Affiliated eToys Site are
optimized for the AOL client software then in use by AOL Members; and (b) the
Affiliated eToys Site is designed and populated in a manner that minimizes
delays when AOL Members and AOL Users attempt to access such site.
USER INTERFACE. eToys will maintain a graphical user interface within the
Affiliated eToys Site that is competitive in all material respects with
interfaces of other similar sites based on similar form technology. AOL
reserves the right to conduct focus group testing to assess eToys'
competitiveness in this regard.
MONITORING. AOL Network Operations Center (NOC) will work with a
eToys-designated technical contact in the event of any performance
malfunction or other emergency related to the Affiliated eToys Site and will
either assist or work in parallel with eToys' contact using eToys tools and
procedures, as applicable. The Parties will develop a process to monitor
performance and member behavior with respect to access, capacity, security
and related issues both during normal operations and during special
promotions/events.
TELECOMMUNICATIONS. The Parties agree to explore encryption methodology to
secure data communications between the Parties' data centers. The network
between the Parties will be configured such that no single component failure
will significantly impact AOL Users. The network will be sized such that no
single line runs at more than 70% average utilization for a five minute peak
in a daily period.
SECURITY REVIEW. eToys and AOL will work together to perform an initial
security review of, and to perform tests of, the eToys system, network, and
service security in order to evaluate the security risks and provide
recommendations to eToys, including periodic follow-up reviews as reasonably
required by eToys or AOL.
TECHNICAL PERFORMANCE. eToys will perform the following technical
obligations (and any reasonable updates thereto from time to time by AOL):
1. eToys will design the Affiliated eToys Site to support the Windows
version of the Microsoft Internet Explorer 4.0 browser, and make commercially
reasonable effects to support all other AOL browsers listed at:
http://webmaster.info.aol.com/BrowTable.html.
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2. eToys will configure the server from which it serves the site to
examine the HTTP User-Agent field in order to identify the AOL Member-Agents
listed at: http://webmaster.info.aol.com/Brow2Text.html (the "AOL
Member-Agents").
3. eToys will design its site to support HTTP 1.0 or later protocol as
defined in RFC 1945 (available at http://ds.internic.net/rfc/rfc1945.text)
and to adhere to AOL's parameters for refreshing cached information listed at
http://webmaster.info.aol.com/CacheText.html.
eToys will provide continuous navigational ability for AOL Users to return to
an agreed-upon point on the AOL Network (for which AOL will supply the proper
address) from the Affiliated eToys Site.
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EXHIBIT E
STANDARD ONLINE COMMERCE TERMS & CONDITIONS
1. AOL NETWORK DISTRIBUTION. eToys will not authorize or permit any third
party to distribute or promote the Affiliated eToys Site through the AOL
Network absent AOL's prior written approval. AOL shall be entitled to require
reasonable changes to the Content (including, without limitations features
and functionality) within any linked pages of the Affiliated eToys Site to
the extent AOL reasonably believes that such Content will adversely affect
AOL's operation of the AOL Network.
2. PROVISION OF OTHER CONTENT. In the event that AOL notifies eToys that
(i) as reasonably determined by AOL, any Content within the Affiliated eToys
Site violates AOL's then-standard Terms of Service (as set forth on the
America Online-Registered Trademark- brand service), the terms of this
Agreement or any other standard, written AOL policy or (ii) AOL reasonably
objects to the inclusion of any Content within the Affiliated eToys Site
(other than any specific items of Content which may be expressly identified
in this Agreement), then eToys shall take commercially reasonable steps to
block access by AOL Members to such Content using eToys's then-available
technology. In the event that eToys cannot, through its commercially
reasonable efforts, block access by AOL Members to the Content in question,
then eToys shall provide AOL prompt written notice of such fact. AOL may
then, at its option, restrict access from the AOL Network to the Content in
question using technology available to AOL. eToys will cooperate with AOL's
reasonable requests to the extent AOL elects to implement any such access
restrictions.
3. CONTESTS. eToys will take all steps necessary to ensure that any
contest, sweepstakes or similar promotion conducted or promoted through the
Affiliated eToys Site (a "Contest") complies with all applicable federal,
state and local laws and requisitions.
4. DISCLAIMERS. Upon AOL's request, eToys agrees to include within the
Rainman Screens a product disclaimer (the specific form and substance to be
mutually agreed upon by the Parties) indicating that transactions are solely
between eToys and AOL Users purchasing products from eToys.
5. OWNERSHIP. eToys acknowledges and agrees that AOL will own all right,
title and interest in and to the elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) (collectively the "Look and
Feel") which are generally associated with online areas contained within the
AOL Network (the AOL Look and Feel, as previously defined), subject to eToys'
ownership rights in any eToys trademarks or copyrighted material within the
Affiliated eToys Site. AOL acknowledges and agrees that eToys will own all
right, title and interest in and to the Look and Feel which is generally
associated with the Affiliated eToys Site, subject to AOL's ownership rights
in any AOL trademarks or copyrighted material and the AOL Look and Feel.
6.
7. MANAGEMENT OF THE AFFILIATED eTOYS SITE. eToys will manage, review,
delete, edit, create, update and otherwise manage all Products available on
or through the Affiliated eToys Site, in a timely and professional manner and
in accordance with the terms of this Agreement. eToys will ensure that each
Affiliated eToys Site is current, accurate and well-organized at all times.
eToys warrants that the Affiliated eToys Site, including all Products and
Contents available therein: (i) will not infringe on or violate any
copyright, trademark, U.S. patent or any other third party right, including
without limitation, any music performance or other music-related rights; and
(ii) will not contain any Product which violates any applicable law or
regulation, including those relating to contests, sweepstakes or similar
promotions. AOL will have no obligations with respect to the Products
available on or through the Affiliated eToys Site, including, but not limited
to, any duty to review or monitor any such Products.
8. DUTY TO INFORM. eToys will promptly inform AOL of any information
related to the eToys Service or Affiliated eToys Site which could reasonably
lead to a claim, demand, or liability of or against AOL and/or its affiliates
by any third party.
9. CUSTOMER SERVICE. It is the sole responsibility of eToys to provide
customer service to persons or entities purchasing Products through the AOL
Network ("Customers"). eToys will bear full responsibility for all customer
service, including without limitation, order processing, billing,
fulfillment, shipment, collection and other customer service associated with
any Products offered, sold or licensed through the Affiliated eToys Site, and
AOL will have no obligations whatsoever with respect thereto. eToys will
receive all emails from Customers via a computer available to eToys' customer
service staff and generally respond to such emails within one business day of
receipt. eToys will receive all orders electronically and generally process
all orders within one business day of receipt, provided Products ordered are
not advance order
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items. eToys will ensure that all orders of Products are received, processed,
fulfilled and delivered on a timely and professional basis. eToys will offer
AOL Users who purchase Products through such Affiliated eToys Site a money
back satisfaction guarantee. eToys will bear all responsibility for compliance
with federal, state and local laws in the event that Products are out of
stock or are no longer available at the time an order is received. eToys will
also comply with the requirements of any federal, state or local consumer
protection or disclosure law. Payment for Products will be collected by eToys
directly from customers. eToys' order fulfillment operation will be subject
to AOL's reasonable review.
10. PRODUCTION WORK. In the event that eToys requests AOL's production
assistance in connection with any matter, eToys will work with AOL to develop
a detailed production plan for the requested production assistance (the
"Production Plan"). Following receipt of the final Production Plan, AOL will
notify eToys of (i) AOL's availability to perform the requested production
work, (ii) the proposed fee or fee structure for the requested production and
maintenance work and (iii) the estimated development schedule for such work.
To the extent the Parties reach agreement regarding implementation of
agreed-upon Production Plan, such agreement will be reflected in a separate
work order signed by the Parties. To the extent eToys elects to retain a
third party provider to perform any such production work, work produced by
such third party provider must generally conform to AOL's production
Standards & Practices (a copy of which will be supplied by AOL to eToys upon
request). The specific production resources which AOL allocates to any
production work to be performed on behalf of eToys will be as determined by
AOL in its sole discretion.
11. MERCHANT CERTIFICATION PROGRAM. eToys will participate in any generally
applicable "Certified Merchant" program operated by AOL or its authorized
agents or contractors. Such program may require merchant participants on an
ongoing basis to meet certain reasonable standards relating to provision of
electronic commerce through the AOL Network and may also require the payment
of certain reasonable certification fees to the applicable entity operating
the program.
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EXHIBIT F
STANDARD LEGAL TERMS & CONDITIONS
1. PROMOTIONAL MATERIALS/PRESS RELEASES. Each Party will submit to the other
Party, for its prior written approval, which will not be unreasonably
withheld or delayed, any marketing, advertising, press releases, and all
other promotional materials related to the Affiliated eToys Site and/or
referencing the other Party and/or its trade names, trademarks, and service
marks (the "Materials"); provided, however, that either Party's use of screen
shots of the Affiliated eToys Site for promotional purposes will not require
the approval of the other Party so long as the AOL Network is clearly
identified as the source of such screen shots. Each Party will solicit and
reasonably consider the views of the other Party in designing and
implementing such Materials. Once approved, the Materials may be used by a
Party and its affiliates for the purpose of promoting the Affiliated eToys
Site and the content contained therein and reused for such purpose until such
approval is withdrawn with reasonable prior notice. In the event such
approval is withdrawn, existing inventories of Materials may be depleted.
Notwithstanding the foregoing, either Party may issue press releases and
other disclosures as required by law or as reasonably advised by legal
counsel without the consent of the other Party and in such event, prompt
notice thereof will be provided to the other Party.
2. LICENSE. eToys hereby grants AOL a non-exclusive worldwide license to
market, license, distribute, reproduce, display, perform, transmit and
promote the Affiliated eToys Site and the Products contained therein (or any
portion thereof) through such areas or features of the AOL Network as AOL
deems appropriate. AOL Users will have the right to access and use the
Affiliate eToys Site.
3. TRADEMARK LICENSE. In designing and implementing the Materials and
subject to the other provisions contained herein, eToys will be entitled to
use the following trade names, trademarks, and service marks of AOL: the
"America Online-Registered Trademark-" brand service, "AOL" service/software
and AOL's triangle logo; and AOL and its Affiliates will be entitled to use
the trade names, trademarks, and service marks of eToys (collectively,
together with the AOL marks listed above, the "Marks"); provided that each
Party: (i) does not create a unitary composite mark involving a Mark of the
other Party without the prior written approval of such other Party; and (ii)
displays symbols and notices clearly and sufficiently indicating the
trademark status and ownership of the other Party's Marks in accordance with
applicable trademark law and practice.
4. OWNERSHIP OF TRADEMARKS. Each Party acknowledges the ownership of the
other Party in the Marks of the other Party and agrees that all use of the
other Party's Marks will inure to the benefit, and be on behalf, of the other
Party. Each Party acknowledges that its utilization of the other Party's
Marks will not create in it, nor will it represent it has, any right, title,
or interest in or to such Marks other than the licenses expressly granted
herein. Each Party agrees not to do anything contesting or impairing the
trademark rights of the other Party.
5. QUALITY STANDARDS. Each Party agrees that the nature and quality of its
products and services supplied in connection with the other Party's Marks
will conform to quality standards set by the other Party. Each Party agrees
to supply the other Party, upon request, with a reasonable number of samples
of any Materials publicly disseminated by such Party which utilize the other
Party's Marks. Each Party will comply with all applicable laws, regulations,
and customs and obtain any required government approvals pertaining to use of
the other Party's marks.
6. INFRINGEMENT PROCEEDINGS. Each Party agrees to promptly notify the other
Party of any unauthorized use of the other Party's Marks of which it has
actual knowledge. Each Party will have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
infringement proceedings.
7. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants to
the other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of it
hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it
is otherwise bound; (iii) when executed and delivered by such Party, this
Agreement will constitute the legal, valid and binding obligation of such
Party, enforceable against such Party in accordance with its terms; and (iv)
such Party acknowledges that the other Party makes no representations,
warranties or agreements related to the subject matter hereof that are not
expressly provided for in this Agreement.
8. CONFIDENTIALITY. Each Party acknowledges that Confidential Information
may be disclosed to the other Party during the course of this Agreement.
Each Party agrees that it will take reasonable steps, at least substantially
equivalent to the steps it takes to protect its own proprietary information,
during the term of this Agreement, and for a
14
<PAGE>
CONFIDENTIAL
period of three years following expiration or termination of this Agreement,
to prevent the duplication or disclosure of Confidential Information of the
other Party, other than by or to its employees or agents who must have access
to such Confidential Information to perform such Party's obligations
hereunder, who will each agree to comply with this section. Notwithstanding
the foregoing, either Party may issue a press release or other disclosure
containing Confidential Information without the consent of the other Party,
to the extent such disclosure is required by law, rule, regulation or
government or court order. In such event, the disclosing Party will provide
at least five (5) business days prior written notice of such proposed
disclosure to the other Party. Further, in the event such disclosure is
required of either Party under the laws, rules or regulations of the
Securities and Exchange Commission or any other applicable governing body,
such Party will (i) redact mutually agreed-upon portions of this Agreement to
the fullest extent permitted under applicable laws, rules and regulations and
(ii) submit a request to such governing body that such portions and other
provisions of this Agreement receive confidential treatment under the laws,
rules and regulations of the Securities and Exchange Commission or otherwise
be held in the strictest confidence to the fullest extent permitted under the
laws, rules or regulations of any other applicable governing body.
9. LIMITATION OF LIABILITY; DISCLAIMER INDEMNIFICATION.
9.1. LIABILITY. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE
OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY
DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES), ARISING FROM BREACH OF THE AGREEMENT, THE SALE OF PRODUCTS, THE USE
OR INABILITY TO USE THE AOL NETWORK, THE AOL SERVICE, AOL.COM OR THE
AFFILIATED eToys SITE, OR ARISING FROM ANY OTHER PROVISION OF THIS AGREEMENT,
SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST
BUSINESS (COLLECTIVELY, "DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY WILL
REMAIN LIABLE TO THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES ARE
CLAIMED BY A THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT TO
SECTION 9.3 OF THIS EXHIBIT F. EXCEPT AS PROVIDED IN SECTION 9.3 OF THIS
EXHIBIT F, NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR MORE THAN
$1,000,000; PROVIDED THAT EACH PARTY WILL REMAIN LIABLE FOR THE AGGREGATE
AMOUNT OF ANY PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY PURSUANT TO SECTION
4 OF THE AGREEMENT.
9.2. NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY
DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING
THE AOL NETWORK, THE AOL SERVICE, AOL.COM OR THE AFFILIATED eToys SITE,
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF
PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AOL
SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING THE PROFITABILITY OF THE
AFFILIATED ETOYS SITE.
9.3. INDEMNITY. Either Party will defend, indemnify, save and hold harmless
the other Party and the officers, directors, agents, affiliates,
distributors, franchisees and employees of the other Party from any and all
third party claims, demands, liabilities, costs or expenses, including
reasonable attorneys' fees ("Liabilities"), resulting from the indemnifying
Party's material breach of any duty, representation, or warranty of this
Agreement, except where Liabilities result from the gross negligence or
knowing and willful misconduct of the other Party.
9.4. CLAIMS. Each Party agrees to (i) promptly notify the other Party in
writing of any indemnifiable claim and give the other Party the opportunity
to defend or negotiate a settlement of any such claim at such other Party's
expense, and (ii) cooperate fully with the other Party, at that other Party's
expense, in defending or settling such claim. AOL reserves the right, at its
own expense, to assume the exclusive defense and control of any matter
otherwise subject to indemnification by eToys hereunder, and in such event,
eToys will have no further obligation to provide indemnification for such
matter hereunder.
9.5. ACKNOWLEDGMENT. AOL and eToys each acknowledges that the provisions of
this Agreement were negotiated to reflect an informed, voluntary allocation
between them of all risks (both known and unknown) associated with the
transactions contemplated hereunder. The limitations and disclaimers related
to warranties and liability contained in this Agreement are intended to limit
the circumstances and extent of liability. The provisions of this Section 6
will be enforceable independent of and severable from any other enforceable
or unenforceable provision of this Agreement.
10. SOLICITATION OF AOL USERS. During the term of this Agreement, and for
the two-year period following the expiration or termination of this
Agreement, neither eToys nor its agents will use the AOL Network to (i)
solicit, or
15
<PAGE>
CONFIDENTIAL
participate in the solicitation of AOL Users when that solicitation is for the
benefit of any entity (including eToys) which could reasonably be construed
to be or become in competition with AOL or (ii) promote any services which
could reasonably be construed to be in competition with AOL, including, but
not limited to, services available through the Internet. In addition, eToys
may not send AOL Users e-mail communications promoting eToys' Products
through the AOL Network without a "Prior Business Relationship." For purposes
of this Agreement, a "Prior Business Relationship" will mean that the AOL
User has either (i) engaged in a transaction with eToys through the AOL
Network or (ii) voluntarily provided information to eToys through a contest,
registration, or other communication, which included notice to the AOL User
that the information provided by the AOL User could result in an e-mail being
sent to that AOL User by eToys or its agents. A Prior Business Relationship
does not exist by virtue of an AOL User's visit to an Affiliated eToys Site
(absent the elements above). More generally, eToys will be subject to any
standard policies regarding e-mail distribution through the AOL Network which
AOL may implement.
11. COLLECTION OF USER INFORMATION. eToys is prohibited from collecting AOL
Member screennames from public or private areas of the AOL Network, except as
specifically provided below. eToys will ensure that any survey, questionnaire
or other means of collecting AOL Member screennames or AOL User email
addresses, names, addresses or other identifying information ("User
Information"), including, without limitation, requests directed to specific
AOL Member screennames and automated methods of collecting screennames (an
"Information Request") complies with (i) all applicable laws and regulations
and (ii) any privacy policies which have been issued by AOL in writing during
the Term (the "AOL Privacy Policies"). Each Information Request will clearly
and conspicuously specify to the AOL Users at issue the purpose for which
User Information collected through the Information Request will be used (the
"Specified Purpose").
12. USE OF USER INFORMATION. eToys will restrict use of the User Information
collected through an Information Request to the Specified Purpose. In no
event will eToys (i) provide User Information to any third party (except to
the extent specifically (a) permitted under the AOL Privacy Policies or (b)
authorized by the members in question), (ii) rent, sell or barter User
Information, (iii) identify, promote or otherwise disclose such User
Information in a manner that identifies AOL Users as end-users of the AOL
Service, AOL.com or the AOL Network or (iv) otherwise use any User
Information in contravention of Section 10 above. Notwithstanding the
foregoing, in the case of AOL Users who purchase Products from eToys, eToys
will be entitled to use User Information from such AOL Users as part of
eToy's aggregate list of Customers; provided that eToys's use does not in any
way identify, promote or otherwise disclose such User Information in a manner
that identifies AOL Users as end-users of the AOL Service. AOL.com or the AOL
Network. In addition, eToys will not use any User Information for any purpose
(including any Specified Purpose) not directly related to the business purpose
of the Affiliated eToys Site.
13. EXCUSE. Neither Party will be liable for, or be considered in breach of
or default under this Agreement on account of, any delay or failure to
perform as required by this Agreement as a result of any causes or
conditions which are beyond such Party's reasonable control and which such
Party is unable to overcome by the exercise of reasonable diligence.
14. INDEPENDENT CONTRACTORS. The Parties to this Agreement are independent
contractors. Neither Party is an agent, representative or partner of the
other Party. Neither Party will have any right, power or authority to enter
into any agreement for or on behalf of, or incur any obligation or
liability of, or to otherwise bind, the other Party. This Agreement will not
be interpreted or construed to create an association, agency, joint venture
or partnership between the Parties or to impose any liability attributable
to such a relationship upon either Party.
15. NOTICE. Any notice, approval, request, authorization, direction or other
communication under this Agreement will be given in writing and will be
deemed to have been delivered and given for all purposes on the delivery date
if delivered by electronic mail on the AOL Network or (i) on the delivery
date if delivered personally to the Party to whom the same is directed; (ii)
one business day after deposit with a commercial overnight carrier, with
written verification of receipt, or (iii) five business days after the
mailing date, whether or not actually received, if sent by U.S. mail, return
receipt requested, postage and charges prepaid, or any other means of rapid
mail delivery for which a receipt is available, to the person(s) specified
below at the address of the Party set forth in the first paragraph of this
Agreement.
16. NO WAIVER. The failure of either Party to insist upon or enforce strict
performance by the other Party of any provision of this Agreement or to
exercise any right under this Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will
be and remain in full force and effect.
17. RETURN OF INFORMATION. Upon the expiration or termination of this
Agreement, each Party will, upon the written request of the other Party,
return or destroy (at the option of the Party receiving the request) all
confidential information, documents, manuals and other materials specified
the other Party.
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CONFIDENTIAL
18. SURVIVAL. Sections 9 through 12 of this Exhibit F, will survive the
completion, expiration, termination or cancellation of this Agreement.
19. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth herein. Neither Party will be bound by, and each Party
specifically objects to, any term, condition or other provision which is
different from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered by the
other Party in any correspondence or other document, unless the Party to be
bound thereby specifically agrees to such provision in writing.
20. AMENDMENT. No change, amendment or modification of any provision of this
Agreement will be valid unless set forth in a written instrument signed by
the Party subject to enforcement of such amendment, and in the case of AOL,
by an executive of at least the same standing to the executive who signed the
Agreement.
21. FURTHER ASSURANCES. Each Party will take such action (including, but not
limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party of the implementation or
continuing performance of this Agreement.
22. ASSIGNMENT. eToys will not assign this Agreement or any right, interest
or benefit under this Agreement without the prior written consent of AOL.
Subject to the foregoing, this Agreement will be fully binding upon, inure to
the benefit of and be enforceable by the Parties hereto and their respective
successors and assigns.
23. CONSTRUCTION; SEVERABILITY. In the event that any provision of this
Agreement conflicts with the law under which this Agreement is to be
construed or if any such provision is held invalid by a court with
jurisdiction over the Parties to this Agreement, (i) such provision will be
deemed to be restated to reflect as nearly as possible the original
intentions of the Parties in accordance with applicable law, and (ii) the
remaining terms, provisions, covenants and restrictions of this Agreement
will remain in full force and effect.
24. REMEDIES. Except where otherwise specified, the rights and remedies
granted to a Party under this Agreement are cumulative and in addition to,
and not in lieu of, any other rights or remedies which the Party may possess
at law or in equity; provided that, in connection with any dispute hereunder,
eToys will be not entitled to offset any amounts that it claims to be due and
payable from AOL against amounts otherwise payable by eToys to AOL.
25. APPLICABLE LAW; JURISDICTION. This Agreement will be interpreted,
construed and enforced in all respects in accordance with the laws of the
Commonwealth of Virginia except for its conflicts of laws principles. Each
Party irrevocably consents to the exclusive jurisdiction of the courts of the
Commonwealth of Virginia and the federal courts situated in the Commonwealth
of Virginia. In connection with any action to enforce the provisions of this
Agreement, to recover damages or other relief for breach or default under
this Agreement, or otherwise arising under or by reason of this Agreement.
26. EXPORT CONTROLS. Both Parties will adhere to all applicable laws,
regulations and rules relating to the export of technical data and will not
export or re-export any technical data, any products received from the other
Party or the direct product of such technical data to any proscribed country
listed in such applicable laws, regulations and rules unless properly
authorized.
27. HEADINGS. The captions and headings used in this Agreement are inserted
for convenience only and will not affect the meaning or interpretation of
this Agreement.
28. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed an original and all of which together will constitute
one and the same document.
17
<PAGE>
ADDENDUM TO INTERACTIVE MARKETING AGREEMENT
This Addendum, dated January 1, 1998 (the "Revised Effective Date"), is
to that certain Interactive Marketing Agreement dated October 1, 1997 by and
between America Online, Inc. ("AOL"), and eToys Inc. ("eToys") (the
"Agreement"). Defined terms that are used but not defined herein shall be as
defined in the Agreement.
The parties wish to amend the Agreement as follows:
1. PARAGRAPH 4.1, PAYMENTS. This clause shall be deleted in its entirety,
and replaced with the following:
"PAYMENTS. eToys will pay AOL an amount of Three Million One Hundred
Thousand Dollars (US$3,100,000), to be paid as follows: [*] As indicated
elsewhere herein, this Agreement supersedes eToys prior agreements with
AOL related to advertising and placement in the AOL shopping channel
(the "Prior Agreements"). In that regard, (i) eToys has no further
payment obligations under the Prior Agreements (except with respect to
invoices which have been received by eToys as of its execution of this
Agreement) and (ii) any impressions delivered to eToys beginning as of
the Effective Date will count towards the impressions commitments
contained herein."
2. EXHIBIT A, PLACEMENT/PROMOTION PLAN. The paragraph titled: 'AOL Service
Shopping Channel' shall be deleted in its entirety and replaced with the
following:
"AOL SERVICE SHOPPING CHANNEL [*]
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
- *
-
3. ORDER OF PRECEDENCE; STANDARD TERMS. This Addendum is supplementary to
and modifies the Agreement. This Addendum supersedes provisions in the
Agreement only to the extent that the terms of this Addendum expressly
conflict with the provisions of the Agreement or such provisions are
otherwise expressly invalidated by reference herein.
4. COUNTERPARTS. This Addendum may be executed in counterparts, each of
which shall be deemed an original and all of which together shall
constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of the
date first written above.
AMERICA ONLINE, INC. eTOYS INC.
By: /s/ illegible By: /s/ Philip Polishook 2/16/98
-------------------------------
Name: illegible Name: Philip Polishook
-----------------------------
Title: Title: Vice President Marketing
----------------------------
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
ETOYS INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
DECEMBER 23, 1997
<PAGE>
ETOYS INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
This Series A Preferred Stock Purchase Agreement (the "AGREEMENT") is made
as of the 23rd day of December, 1997, 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 A 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
First 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 A
Preferred Stock set forth opposite each such Purchaser's name on EXHIBIT A
attached hereto at a purchase price of $0.62 per share. The shares of Series A
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 December 23, 1997, 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, cancellation of indebtedness, 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 any evidence of such indebtedness
or shall executed an instrument of cancellation in form and substance acceptable
to the Company.
(c) If the full number of the authorized shares of Series A
Preferred Stock of the Company is not sold at the Closing, the Company shall
have the right, at any time prior to January 15, 1998, to sell the remaining
authorized but unissued shares of Series A Preferred Stock to one or more
additional purchasers as determined by the Company, or to any
<PAGE>
Purchaser hereunder who wishes to acquire additional shares of Series A
Preferred Stock at the price and on the terms set forth herein, provided that
any such additional purchaser shall be required to execute an Addendum Agreement
substantially in the form attached hereto as EXHIBIT H. Any additional
purchaser so acquiring shares of Series A Preferred Stock shall be considered a
"Purchaser" for purposes of this Agreement, and any Series A Preferred Stock so
acquired by such additional purchaser shall be considered "Stock" for purposes
of this Agreement and all other agreements contemplated hereby.
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 attached hereto as EXHIBIT C, which exceptions shall be
deemed to be representations and warranties as if made hereunder:
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) Seven Million Thirty-Six Thousand Three Hundred
(7,036,300) shares of Preferred Stock, all of which have been designated
Series A 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, Ten
Million Fifty Thousand (10,050,000) shares of which are issued and outstanding
immediately prior to the Closing. 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 Seven Million Thirty-Six Thousand Three Hundred (7,036,300) shares
of Common Stock for issuance upon conversion of the Series A Preferred Stock.
(c) The Company has reserved Two Million Nine Hundred Fifty
Thousand (2,950,000) 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"). Of such reserved shares of Common Stock, options to
purchase 1,276,093 shares have been granted and are currently outstanding, and
1,573,907 shares of Common Stock remain available for issuance to officers,
directors, employees and consultants pursuant to the Stock Plan.
(d) Except for currently outstanding options issued pursuant
to the Stock Plan and warrants to purchase 50,000 shares of Common Stock, there
are no outstanding options, warrants, rights (including conversion or preemptive
rights and rights of first refusal or
-2-
<PAGE>
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.
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 Investors' Rights
Agreement, in the form attached hereto as EXHIBIT D (the "INVESTORS' RIGHTS
AGREEMENT"), the Right of First Refusal and Co-Sale Agreement in the form
attached hereto as EXHIBIT E (the "CO-SALE AGREEMENT"), the Voting Agreement in
the form attached hereto as EXHIBIT F (the "VOTING AGREEMENT" and the Letter
Agreement between Intel Corporation and the other parties thereto in the form
attached hereto as EXHIBIT I (the "INTEL LETTER AGREEMENT") and collectively
with this Agreement, the Investors' Rights Agreement, the Co-Sale Agreement and
the Voting 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.
-3-
<PAGE>
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 A 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 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, 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
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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.
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 business and
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,
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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.
(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. To the extent the Business Plan was prepared by
management of the Company, the Business Plan and the financial and other
projections contained in the Business Plan 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
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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.
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 September 30, 1997 (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 to normal year-end audit adjustments. 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 September 30, 1997 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 September 30, 1997, 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);
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(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);
(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.
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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 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. 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
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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 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 QUALIFIED SMALL BUSINESS STOCK. As of the Closing, (i) the
Company will be an eligible corporation as defined in Section 1202(e)(4) of the
Code, (ii) the Company will not have made any purchases of its own stock during
the one-year period proceeding the Closing having an aggregate value exceeding
five percent (5%) of the aggregate value of all its stock as of the beginning of
such period and (iii) the Company's aggregate gross assets, as defined by Code
Section 1202(d)(2), at no time since incorporation and through the Closing have
exceeded
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or will exceed $50 million, taking into account the assets of any corporations
required to be aggregated with the Company in accordance with the Code
Section 1202(d)(3).
2.29 REAL PROPERTY HOLDING COMPANY. The Company is not a real
property holding company within the meaning of Section 897 of the Code.
2.30 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:
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
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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.
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
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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 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
4.2 PERFORMANCE. The Company shall have performed and complied
with all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 COMPLIANCE CERTIFICATE. The President of the Company shall
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating
that there shall have been no adverse change in the business, affairs,
prospects, operations, properties, assets or condition of the Company since the
date of the Financial Statements.
4.4 QUALIFICATIONS. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Purchasers' special counsel, and they shall have received all such
counterpart and certified or other copies of such documents as they may
reasonably request.
4.6 OPINION OF COMPANY COUNSEL. The Purchasers shall have
received from Venture Law Group, A Professional Corporation, counsel for the
Company, an opinion, dated as of the Closing, in substantially the form of
EXHIBIT G.
4.7 BOARD OF DIRECTORS. As of the Closing, the holders of a
majority of the outstanding Series A Preferred Stock will have the right to
designate one (1) board seat, which designee shall initially be a representative
of DynaFund, increasing the current size of the Board to four members which
includes Edward C. Lenk, William Gross, Tony Hung and Peter Hart.
4.8 INVESTORS' RIGHTS AGREEMENT. The Company, each Purchaser and
each Founder shall have executed and delivered the Investors' Rights Agreement
in substantially the form attached as EXHIBIT D.
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4.9 CO-SALE AGREEMENT. The Company, each Purchaser, and each
Founder shall have executed and delivered the Co-Sale Agreement in substantially
the form attached as EXHIBIT E.
4.10 VOTING AGREEMENT. The Company and each Purchaser shall have
executed and delivered the Voting Agreement in substantially the form attached
as EXHIBIT F.
4.11 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.
4.12 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT.
The Company and each of its employees shall have entered into the Company's
standard form Confidential Information and Invention Assignment Agreement, in
substantially the form provided to the Purchasers.
4.13 INTEL LETTER AGREEMENT. The Company, Edward C. Lenk, Frank C.
Han and each Purchaser shall have executed and delivered the Intel Letter
Agreement in substantially the form attached as EXHIBIT I.
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 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the Closing.
5.2 PERFORMANCE. All covenants, agreements and conditions
contained in this Agreement to be performed by the Purchasers on or prior to the
Closing shall have been performed or complied with in all material respects.
5.3 QUALIFICATIONS. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
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.
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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 DynaFund L.P. and
DynaFund International L.P., with a copy to Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park, California 94025,
Attention: Bennett L. Yee.
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 Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, the counsel for DynaFund L.P. and DynaFund International L.P.,
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 $12,500.
-15-
<PAGE>
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 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
-16-
<PAGE>
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.
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]
-17-
<PAGE>
The parties have executed this Series A 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: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
SIGNATURE PAGE TO PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
DYNAFUND LP
By: /s/ Denny R.S. Ko
------------------------------------------
Name: Denny Ko
----------------------------------------
(print)
Title: General Partner
---------------------------------------
Address: 21311 Howtherne Blvd, Suite 30
-------------------------------------
Tarronne, CA 70503
-------------------------------------
DYNAFUND INTERNATIONAL LP
By: /s/ Denny R.S. Ko
------------------------------------------
Name: Denny Ko
----------------------------------------
(print)
Title: General Partner
---------------------------------------
Address: 21311 Howtherne Blvd, Suite 30
-------------------------------------
Tarronne, CA 70503
-------------------------------------
SIGNATURE PAGE TO PURCHASE AGREEMENT
<PAGE>
PURCHASER:
INTEL CORPORATION
By: /s/ illedgible
------------------------------------------
Name:
----------------------------------------
(print)
Title:
---------------------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: Treasurer
Fax: (408) 765-6038
SIGNATURE PAGE TO eTOYS INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
/s/ William S. Elkus
---------------------------------------------
William S. Elkus
Address: 231 Alma Real Drive
Pacific Palisades, CA 90272
MOORE GLOBAL INVESTMENTS, LTD.
A BVI Corporation
By: Moore Capital Management, Inc.
By: /s/ Savvas Savvinidis
------------------------------------------
Name: Savvas Savvinidis
----------------------------------------
(print)
Title: Director of Operations
---------------------------------------
Address: 1251 Avenue of the Americas
-------------------------------------
NY NY 10020
-------------------------------------
REMINGTON INVESTMENT STRATEGIES, L.P.
A Delaware Partnership
By: Moore Capital Advisors L.L.C.
By: /s/ Savvas Savvinidis
------------------------------------------
Name: Savvas Savvinidis
----------------------------------------
(print)
Title: Director of Operations
---------------------------------------
Address: 1251 Avenue of the Americas
-------------------------------------
NY 10020
-------------------------------------
SIGNATURE PAGE TO PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
MULTI STRATEGIES FUND, L.P.
A Delaware Partnership
By: Moore Capital Management, Inc.
By: /s/ Savvas Savvinidis
------------------------------------------
Name: Savvas Savvinidis
----------------------------------------
(print)
Title: Director of Operations
---------------------------------------
Address: 1251 Avenue of the Americas
-------------------------------------
NY NY 10020
-------------------------------------
MULTI STRATEGIES FUND, LTD.
A Bahamian IBC
By: Moore Capital Management, Inc.
By: /s/ Savvas Savvinidis
------------------------------------------
Name: Savvas Savvinidis
----------------------------------------
(print)
Title: Director of Operations
---------------------------------------
Address: 1251 Avenue of the Americas
-------------------------------------
NY NY 10020
-------------------------------------
SIGNATURE PAGE TO PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
/s/ Glen R. Van Ligten
---------------------------------------------
Glen R. Van Ligten
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
/s/ James L. Brock
---------------------------------------------
James L. Brock
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO PURCHASE AGREEMENT
<PAGE>
PURCHASER:
By: /s/ Kenneth M. Deemer
------------------------------------------
Name: Kenneth M. Deemer
----------------------------------------
(print)
Title:
---------------------------------------
Address: 2401 Pine Ave
-------------------------------------
Manhattan Beach, CA 902
-------------------------------------
PURCHASER:
By: /s/ Thomas Elden
------------------------------------------
Name: Thomas Elden
----------------------------------------
(print)
Title:
---------------------------------------
Address: c/o Grosverner Capital Management
-------------------------------------
333 W. Wacker Drive, Suite 1600
-------------------------------------
Chicago, IL 60606
-------------------------------------
PURCHASER:
By: /s/ Brett Fisher
------------------------------------------
Name: Brett Fisher
----------------------------------------
(print)
Title:
---------------------------------------
Address: 1290 Sharon Park Dr #51
-------------------------------------
Menlo Park, CA 94025
-------------------------------------
PURCHASER:
By: /s/ Andrew J. Greenebaum
------------------------------------------
Name: Andrew J. Greenebaum
----------------------------------------
(print)
Title:
---------------------------------------
Address: CD Radio Inc.
-------------------------------------
730 Fifth Avenue, 9th Floor
-------------------------------------
New York, NY 10019
-------------------------------------
PURCHASER:
By: /s/ Peter C.M. Hart
------------------------------------------
Name: Peter C.M. Hart
----------------------------------------
(print)
Title: illeible
---------------------------------------
Address: illeible
-------------------------------------
-------------------------------------
PURCHASER:
By: /s/ David Hodess
------------------------------------------
Name: David Hodess
----------------------------------------
(print)
Title:
---------------------------------------
Address: 9925 Robbin Dr
-------------------------------------
illeible
-------------------------------------
PURCHASER:
By: /s/ Mark Kozin
------------------------------------------
Name: Mark Kozin
----------------------------------------
(print)
Title:
---------------------------------------
Address: illeible
-------------------------------------
-------------------------------------
PURCHASER:
By: /s/ Edward C. Lenk
------------------------------------------
Name: Edward C. Lenk
----------------------------------------
(print)
Title:
---------------------------------------
Address: 15 Saddler Lane
-------------------------------------
illegible
-------------------------------------
PURCHASER:
By: /s/ Richard D. Nanula
------------------------------------------
Name: Richard D. Nanula
----------------------------------------
(print)
Title:
---------------------------------------
Address: 3348 Clerendon Rd
-------------------------------------
Beverly Hills, CA 90210
-------------------------------------
PURCHASER:
By: /s/ Robert Sheriff
------------------------------------------
Name: Robert Sheriff
----------------------------------------
(print)
Title:
---------------------------------------
Address: 211 East 70th Street
-------------------------------------
New York, NY 10021
-------------------------------------
PURCHASER:
By: /s/ Allan R. Sheriff/Karen A. Sheriff
------------------------------------------
Name: Allan R. Sheriff/Karen A. Sheriff
----------------------------------------
(print)
Title:
---------------------------------------
Address: 29 Weatherfield Dr.
-------------------------------------
Newton, CA 18940
-------------------------------------
PURCHASER:
By: /s/ Thomas O. Staggs
------------------------------------------
Name: Thomas O. Staggs
----------------------------------------
(print)
Title:
---------------------------------------
Address:
-------------------------------------
-------------------------------------
PURCHASER:
By: /s/ Arnold Whitman
------------------------------------------
Name: Arnold Whitman
----------------------------------------
(print)
Title: President Chief
---------------------------------------
Address: 2 Ravinia Dr. Suite 1850
-------------------------------------
Atlanta GA. 30396
-------------------------------------
PURCHASER:
By: /s/ Kenneth Wong
------------------------------------------
Name: Kenneth Wong
----------------------------------------
(print)
Title: an individual
---------------------------------------
Address: 1305 Circle Drive
-------------------------------------
San Marino CA 91108
-------------------------------------
PURCHASER:
By: /s/ Richard Bock
------------------------------------------
Name: Richard Bock
----------------------------------------
(print)
Title:
---------------------------------------
Address: 625 21st Place
-------------------------------------
San Monica, CA 90402
-------------------------------------
PURCHASER:
By: /s/ John T. Cahill
------------------------------------------
Name: John T. Cahill
----------------------------------------
(print)
Title:
---------------------------------------
Address: 420 Davis Ave
-------------------------------------
Greenwich, CA 06830
-------------------------------------
PURCHASER:
By: /s/ Jeff Colin
------------------------------------------
Name: Jeff Colin
----------------------------------------
(print)
Title:
---------------------------------------
Address: 18 Cuffalen Park
-------------------------------------
San Rafod, CA 94901
-------------------------------------
Fax: 415 834-7822
-------------------------------------
PURCHASER:
By: /s/ Stephen de Kanter
------------------------------------------
Name: Stephen de Kanter
----------------------------------------
(print)
Title: President Latin America
---------------------------------------
Address: 1 Albambra Plaza
-------------------------------------
Coral Galdes, FL 33134
-------------------------------------
PURCHASER:
By: /s/ Cristina Fernandez-Carol
------------------------------------------
Name: Cristina Fernandez-Carol
----------------------------------------
(print)
Title:
---------------------------------------
Address: 1327 Pacific St.
-------------------------------------
Santa Monica, CA 90805
-------------------------------------
PURCHASER:
By: /s/ Geoffrey P.M. Goodman
------------------------------------------
Name: Geoffrey P.M. Goodman
----------------------------------------
(print)
Title:
---------------------------------------
Address: P.O. Box 675887
-------------------------------------
Rancho Santa Fe, CA 92067
-------------------------------------
PURCHASER:
By: /s/ Wesley Hein
------------------------------------------
Name: Wesley Hein
----------------------------------------
(print)
Title:
---------------------------------------
Address: 779 Latimer Road
-------------------------------------
Santa Monica, CA 90402
-------------------------------------
PURCHASER:
By: /s/ Bruce Hendricks
------------------------------------------
Name: Bruce Hendricks
----------------------------------------
(print)
Title: Principal
---------------------------------------
Address: 11844 Beekman Place
-------------------------------------
Potomac, Maryland, 20854
-------------------------------------
Fax: (301) 951-3240
-------------------------------------
PURCHASER:
By: /s/ James Hertling
------------------------------------------
Name: James Hertling
----------------------------------------
(print)
Title:
---------------------------------------
Address: illegible
-------------------------------------
-------------------------------------
PURCHASER:
By: /s/ Michael Joe
------------------------------------------
Name: Michael Joe
----------------------------------------
(print)
Title:
---------------------------------------
Address: 563 Everett Street
-------------------------------------
Wardwood, MA 02090
-------------------------------------
PURCHASER:
By: /s/ Hydra Global Investments, Inc.
------------------------------------------
Name: Mimi Kwon
----------------------------------------
(print)
Title: Investment Officer
---------------------------------------
Address: Abott Building, 2nd Floor
-------------------------------------
Roadwill, Tortaor, RVL
-------------------------------------
PURCHASER:
By: /s/ Keith Kitani
------------------------------------------
Name: Keith Kitani
----------------------------------------
(print)
Title:
---------------------------------------
Address: 2755 Kesey Lane
-------------------------------------
San Jose, CA 95132
-------------------------------------
PURCHASER:
By: /s/ Marcee Kleinman
------------------------------------------
Name: Marcee Kleinman
----------------------------------------
(print)
Title:
---------------------------------------
Address: 4334 Jubilo Dr
-------------------------------------
Tarzana Ca 91388-6205
-------------------------------------
PURCHASER:
By: /s/ Christopher J. Loh
------------------------------------------
Name: Christopher J. Loh
----------------------------------------
(print)
Title:
---------------------------------------
Address: illegible
-------------------------------------
illegible
-------------------------------------
PURCHASER:
By: /s/ Linda Mac Cannell
------------------------------------------
Name: Linda Mac Cannell
----------------------------------------
(print)
Title:
---------------------------------------
Address: 3016 Conrad Dr. N.W.
-------------------------------------
Calgary Alberta, Canada
-------------------------------------
PURCHASER:
By: /s/ Donald Mapel
------------------------------------------
Name: Donald Mapel
----------------------------------------
(print)
Title:
---------------------------------------
Address: 813 E. 4th Ave
-------------------------------------
Durangh CA 81341
-------------------------------------
PURCHASER:
By: /s/ Franis B. Mapel
------------------------------------------
Name: Franis B. Mapel
----------------------------------------
(print)
Title:
---------------------------------------
Address: 1928 St. Albnas Rd.
-------------------------------------
San. Marinco, CA 91108
-------------------------------------
PURCHASER:
By: /s/ Adam M. Palley
------------------------------------------
Name: Adam M. Palley
----------------------------------------
(print)
Title:
---------------------------------------
Address: 69 Fifth Ave, 16D
-------------------------------------
New York, NY 10003
-------------------------------------
PURCHASER:
/s/ Burt Polishook
By: /s/ Sandy Polishook
------------------------------------------
Name: Sandy Polishook and Burt Polishook
----------------------------------------
(print)
Title:
---------------------------------------
Address: 3931 Bay Shore Rd.
-------------------------------------
Saranota, Fl 34234
-------------------------------------
PURCHASER:
By: /s/ Mark D. Rozells
------------------------------------------
Name: Mark D. Rozells
----------------------------------------
(print)
Title:
---------------------------------------
Address: 2334 Bronson Hill Dr.
-------------------------------------
Los Angeles, CA 90068
-------------------------------------
PURCHASER:
By: /s/ Raymond Sheen
------------------------------------------
Name: Raymond Sheen
----------------------------------------
(print)
Title:
---------------------------------------
Address: 136 Middle River Rd
-------------------------------------
Danbury CT 06811
-------------------------------------
PURCHASER:
By: /s/ Wendy Smith
------------------------------------------
Name: Wendy Smith
----------------------------------------
(print)
Title:
---------------------------------------
Address: 561 Jackson Dr.
-------------------------------------
Palo Alto, CA 94303
-------------------------------------
PURCHASER:
By: /s/ Alan G. Stanford
------------------------------------------
Name: Alan G. Stanford
----------------------------------------
(print)
Title: Trustee
---------------------------------------
Address: P.O. Box 300
-------------------------------------
Deer Harbor, WA 98243
-------------------------------------
PURCHASER:
By: /s/ Larry N. Summers
------------------------------------------
Name: Larry N. Summers
----------------------------------------
(print)
Title:
---------------------------------------
Address:
-------------------------------------
-------------------------------------
PURCHASER:
By: /s/ Michael Toporek
------------------------------------------
Name: Michael Toporek
----------------------------------------
(print)
Title:
---------------------------------------
Address:
-------------------------------------
-------------------------------------
PURCHASER:
By: /s/ Norman Tsang
------------------------------------------
Name: Norman Tsang
----------------------------------------
(print)
Title:
---------------------------------------
Address: 20 Mellen St.
-------------------------------------
Cambridge MA 02638
-------------------------------------
SIGNATURE PAGE TO PURCHASE AGREEMENT
<PAGE>
EXHIBITS
Exhibit A - Schedule of Purchasers
Exhibit B - Form of Amended and Restated Certificate of Incorporation
Exhibit C - Schedule of Exceptions to Representations and Warranties
Exhibit D - Form of Investors' Rights Agreement
Exhibit E - Form of Right of First Refusal and Co-Sale Agreement
Exhibit F - Form of Voting Agreement
Exhibit G - Form of Legal Opinion of Venture Law Group
Exhibit H - Form of Addendum Agreement
Exhibit I - Form of Intel Letter Agreement
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
SERIES A PREFERRED
NAME STOCK PURCHASE PRICE
(SHARES) (CASH/WIRE TRANSFER)
<S> <C> <C>
DynaFund L.P. 691,661 $ 428,829.82
DynaFund International L.P. 921,242 $ 571,170.04
Intel Corporation 1,612,903 $ 999,999.86
William S. Elkus 80,645 $ 49,999.90
Moore Global Investments, Ltd. 824,866 $ 511,416.92
Remington Investment Strategies, L.P. 68,952 $ 42,750.24
Multi Strategies Fund, L.P. 114,919 $ 71,249.78
Multi Strategies Fund Ltd. 523,521 $ 324,583.02
James L. Brock 8,064 $ 4,999.68
Glen R. Van Ligten 3,226 $ 2,000.12
- ------------------ ------------------- --------------------
Subtotal: 4,849,999 $ 3,006,999.38
<CAPTION>
SERIES A PREFERRED
NAME STOCK PURCHASE PRICE
(SHARES) (CANCELLATION OF DEBT)
<S> <C> <C>
Ken Deemer 82,348 $ 51,055.76
Thomas Elden 24,704 $ 15,316.48
Brett Fisher 16,469 $ 10,210.78
Andrew Greenebaum 41,174 $ 25,527.88
Peter Hart 32,939 $ 20,422.18
David Hodess 57,643 $ 35,738.66
Marc Kozin 32,939 $ 20,422.18
Edward Lenk 32,939 $ 20,422.18
Richard Nanula 41,174 $ 25,527.88
Robert Sheriff 41,174 $ 25,527.88
Alan and Karen Sheriff 41,174 $ 25,527.88
Tom Staggs 49,409 $ 30,633.58
Arnold Whitman 41,174 $ 25,527.88
Ken Wong 82,348 $ 51,055.76
Richard Bock and Helene Rosenzweig 40,885 $ 25,348.70
John Cahill 16,354 $ 10,139.48
Jeff Colin 40,885 $ 25,348.70
Stephen De Kanter 40,885 $ 25,348.70
Cristina Fernandez 16,354 $ 10,139.48
Geoff Goodman 40,885 $ 25,348.70
Wesley Hein 40,885 $ 25,348.70
Bruce Hendricks 81,771 $ 50,698.02
James Hertling 24,531 $ 15,209.22
Michael Joe 24,531 $ 15,209.22
Mimi Kim/Hydra Global Investments 40,885 $ 25,348.70
Keith Kitani 16,354 $ 10,139.48
Marcee Kleinman 57,240 $ 35,488.80
Chris Loh 16,354 $ 10,139.48
Linda MacCannell 32,708 $ 20,278.96
Frank Mapel 40,885 $ 25,348.70
Don Mapel 40,885 $ 25,348.70
Adam Palley 24,531 $ 15,209.22
</TABLE>
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
SERIES A PREFERRED
NAME STOCK PURCHASE PRICE
(SHARES) (CANCELLATION OF DEBT)
<S> <C> <C>
Burton and Sandra Polishook 16,354 $ 10,139.48
Mark Rozells 40,885 $ 25,348.70
Ray Sheen 16,354 $ 10,139.48
Wendy Smith 16,354 $ 10,139.48
Alan Stanford 40,885 $ 25,348.70
Larry Summers 40,885 $ 25,348.70
Mike Toporek 24,531 $ 15,209.22
Norman Tsang 16,354 $ 10,139.48
- ------------ ------------------- --------------------
SUBTOTAL: 1,468,018.00 $ 910,171.16
TOTAL: 6,318,017.00 $ 3,917,170.54
------------------- --------------------
------------------- --------------------
</TABLE>
<PAGE>
EXHIBIT B
FORM OF FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
<PAGE>
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ETOYS INC.
The undersigned, Edward C. Lenk and Frank C. Han 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.
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 Fifty-Seven Million Thirty-Six Thousand Three Hundred (57,036,300) shares,
each with a par value of $0.0001 per share. Fifty Million (50,000,000) shares
shall be Common Stock and Seven Million Thirty-Six Thousand Three Hundred
(7,036,300) shares shall be Preferred Stock.
(B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by this First 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-Six Thousand Three
<PAGE>
Hundred (7,036,300) shares. The rights, preferences, privileges, and
restrictions granted to and imposed on the Series A 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 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 $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) or, if greater (as
determined on a per annum basis and on an as converted basis for the Series A
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 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 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 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 $0.62 per share for each share
of Series A Preferred Stock then held by them, plus declared but unpaid
dividends. If, upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series A 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 in proportion to the
preferential amount each such holder is otherwise entitled to receive.
(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 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) until
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such holders of Series A Preferred Stock shall have received an aggregate of
$1.86 per share (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); or (B) a sale of all or substantially
all of the assets of the Corporation, 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.
(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 National 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
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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 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 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 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 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 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 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").
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 each of "SERIES A REDEMPTION DATE" and the term
"REDEMPTION PRICE" shall refer to the "SERIES A 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 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
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preceding the day on which notice is given) of the Series A 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 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 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 designated for redemption in the
Redemption Notice as holders of Series A 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 on the Redemption Date are insufficient to redeem the
total number of shares of Series A 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 based upon their holdings of Series A Preferred Stock. The shares of
Series A 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 Series A Preferred Stock, such funds will
immediately be used to redeem the balance of the shares of Series A 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 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 commenced) and to pay,
on and after the date fixed for redemption or prior thereto, the Redemption
Price of the Series A 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
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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 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 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 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,
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 $0.62 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 of Series A Preferred Stock
shall be $0.62. Such initial Conversion Price shall be subject to adjustment as
set forth in Section 4(d).
(b) AUTOMATIC CONVERSION. Each share of 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 the earlier of
(i) 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 $15,000,000 (an "IPO") or (ii) the date specified by
written consent or agreement of the holders of at least forty percent (40%) of
the then outstanding shares of Series A Preferred Stock.
(c) MECHANICS OF CONVERSION. Before any holder of Preferred
Stock shall be entitled to convert the same into shares of Common Stock, he
shall surrender the certificate or certificates therefor, 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
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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 shall be subject to adjustment from time to time as
follows:
(i) (A) If the Corporation shall issue, after the
date upon which any shares of Series A 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 in effect immediately prior to the issuance of such Additional
Stock, the Conversion Price for the Series A 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 adjustment of the Conversion Price for
the Series A 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 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) 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.
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(E) 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 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, 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,
to the extent in any way affected by or computed using such options,
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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) 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,
(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, and
(G) Shares of Common Stock issued or issuable in
a public offering.
(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
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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 shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of each share of
Series A 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 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.
(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 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
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
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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 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 pursuant to
this Section 4, the Corporation, at its expense, shall promptly compute such
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, furnish or cause
to be furnished to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price for the Series A 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 the Series A 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 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 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
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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 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 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, 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. 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. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, 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 Preferred Stock, voting together as a class:
(a) 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 so as to affect adversely such
shares;
(c) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series A Preferred Stock;
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(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 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 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 Company or
any subsidiary pursuant to agreements under which the Company 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.
-13-
<PAGE>
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.
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.
* * *
-14-
<PAGE>
The foregoing First 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 22nd day of December, 1997.
/s/ Edward C. Lenk
------------------------------
Edward C. Lenk, President
/s/ Frank C. Han
------------------------------
Frank C. Han, Secretary
SIGNATURE PAGE TO eTOYS INC.
FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
<PAGE>
EXHIBIT C
SCHEDULE OF EXCEPTIONS TO
REPRESENTATIONS AND WARRANTIES
<PAGE>
SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES
December 23, 1997
This confidential Schedule of Exceptions (the "SCHEDULE") is delivered
pursuant to Section 2 of the Series A Preferred Stock Purchase Agreement by and
between eToys Inc., a Delaware corporation ("eTOYS" or the "COMPANY") and the
purchasers listed on EXHIBIT A to the Series A Preferred Stock Purchase
Agreement (the "PURCHASERS").
The section numbers in the Schedule correspond to the section numbers in
the Agreement; however, any information reasonably disclosed under any section
number of the Schedule shall be deemed to be disclosed and incorporated into any
other section number under the Agreement to which it pertains, whether or not
the specific section numbers are indicated below. All capitalized terms herein
shall have the meanings given them in the Agreement, unless otherwise indicated
in the Schedule.
Copies of agreements, plans, policies and other documents referred to
herein (the "DOCUMENTS") have been made available to the Purchasers. The
foregoing, however, does not modify or limit the representations and warranties
of the Company in Section 2 of the Agreement or the right of the Purchasers to
rely thereon.
2.2
The Company has issued certain promissory notes that, upon the Closing,
will be automatically convertible into 1,468,018 shares of Series A Preferred
Stock. In connection with the issuance of such promissory notes, the Company
issued certain warrants that, upon the Closing, will be exercisable for an
aggregate of 721,757 shares of Series A Preferred Stock at an exercise price of
$0.62 per share.
2.7
The filing of the Restated Certificate will be necessary to consummate the
transactions contemplated by the Agreement.
2.8
[intentionally omitted]
<PAGE>
2.9
The Company has filed an application for trademark registration with the
United States Patent and Trademark Office for the mark "ETOYS".
Pursuant to a Letter Agreement, dated March 14, 1997, by and between
idealab! and Elliot Portwood Productions, Elliot Portwood Productions agreed to
transfer to idealab! the domain names "eToys.com" and "e-toys.com" for certain
consideration. In December 1997, the Company entered into an agreement with
idealab! pursuant to which the rights to these domain names were transferred and
assigned by idealab! to eToys.
[intentionally omitted]
[intentionally omitted]
2.10
The Company did not timely file notices under the securities laws of the
states of Colorado, Maryland and Washington in connection with the issuance and
sale of promissory notes and warrants. These issuances were made to two
purchasers in the state of Colorado and to one purchaser in the states of
Maryland and Washington, respectively. The Company is currently in the process
of making these notice filings.
-2-
<PAGE>
2.11 (a)
In June 1997, the Company issued and sold 2,500,000 shares of Common Stock
to Toby Lenk pursuant to a Stock Purchase Agreement.
In June 1997, the Company issued and sold an aggregate of 833,334 shares
of Common Stock to Frank Han pursuant to two Stock Purchase Agreements.
In June 1997, the Company issued and sold 6,466,667 shares of Common Stock
to idealab!, an affiliate of the Company. In November 1997, pursuant to a
letter agreement, idealab! returned 360,000 shares of Common Stock of the
Company to the Company in the form of a capital contribution.
Each of the Company's officers and directors have entered into proprietary
information and inventions agreements with the Company.
During 1997, the Company reimbursed Frank Han for approximately $10,000 in
expenses incurred by Mr. Han on behalf of the Company.
During 1997, the Company reimbursed Toby Lenk for approximately $15,000 in
expenses incurred by Mr. Lenk on behalf of the Company.
The Company has entered into an indemnification agreement with each of its
current directors and with Frank Han.
2.11 (b)
The Company is party to the following contracts that that involve
(i) obligations (contingent or otherwise) of, or payments to, the Company in
excess of, $10,000 , (ii) the license of a patent, copyright, trade secret or
other proprietary right to or from the Company, or (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:
Engagement Letter, dated July 9, 1997, by and between the Company and
Alexander Communications, Inc.
Lease, dated July 15, 1997, by and between the Company and E.A. Three,
Ltd. (the "WAREHOUSE LEASE").
[intentionally omitted]
Lease, dated August 21, 1997, by and between the Company and Martin H.
Waldman and Hal Spector (the "OFFICE LEASE").
-3-
<PAGE>
Lease, dated September 29, 1997, by and between the Company and IKON
Office Solutions (copier lease) (the "COPIER LEASE").
Content License Agreement, dated October 1, 1997, by and between the
Company and Dr. Stevanne Auerbach.
Interactive Marketing Agreement, dated as of October 1, 1997, by and
between the Company and America Online, Inc.
Network Advertising Agreement, effective as of November 1, 1997, by and
between the Company and Excite.
Content and Services Agreement, dated as of October 1, 1997, by and
between WebTV Network, Inc. and the Company.
Shopping Development - Merchant Services Agreement, dated as of
November 10, 1997, by and between GTE Media Ventures Incorporated and the
Company.
Market Square Agreement, effective as of October 27, 1997, by and between
AT&T Corp. and the Company.
The Company is a party to an agreement with FoneMart pursuant to which the
Company rents its phone system on a month to month basis (the "PHONE
SYSTEM LEASE").
The Company is a party to an agreement with Worldcom pursuant to which the
Company is provided with long distance telephone service and internet
access on a monthly basis.
Advertising Insertion Orders No. 6964 and 6979, dated as of July 9, 1997
and July 10, 1997, respectively, by and between the Company and Yahoo!
Inc.;
Sponsorship Agreement, dated as of July 17, 1997, by and between the
Company and Netscape Communications Corporation;
Internet Advertising Insertion Orders, dated as of July 17, 1997, by and
between the Company and SOFTBANK Interactive Marketing, Inc.;
Advertiser Agreements, dated as of July 10, 1997, July 16, 1997, and
July 16, 1997, by and between the Company and Infoseek;
Global Center Service Order No. E-Toys 0001.1;
Master Service Agreement, dated as of November 26, 1997, by and between
Global Center, Inc. and the Company; and
-4-
<PAGE>
[intentionally omitted]
The Company enters into purchase orders in the ordinary course of business
pursuant to which it purchases inventory for ultimate resale to customers.
The dollar amounts of such purchase orders exceed $25,000 in the aggregate
and in some cases exceed $10,000 individually.
The Company enters into affiliate license agreements in the ordinary
course of business pursuant to which it supplies the affiliate with
artwork and text that can be placed on the affiliate's site and can act as
a link to the Company's site. The dollar amounts covered by such license
agreements exceed $25,000 in the aggregate and in some cases exceed
$10,000 individually.
2.11 (c)
Since the Company's inception, idealab! has paid for $100,000 in expenses
incurred by the Company. In November 1997, the Company and idealab! entered
into a letter agreement pursuant to which idealab! agreed to forgive the
Company's repayment of such $100,000 amount.
2.12
Concurrent with the Closing, the Company will enter into letter agreements
with both Intel Corporation and the DynaFund entities providing for certain
Board visitation rights.
2.13
Since the Company's inception, idealab! has paid for $100,000 in expenses
incurred by the Company. In November 1997, the Company and idealab! entered
into a letter agreement pursuant to which idealab! agreed to forgive the
Company's repayment of such $100,000 amount.
2.16
The Company leases certain warehouse space under the Warehouse Lease and
office space under the Office Lease. The Company also leases a copier and its
phone system under the Copier Lease and the Phone System Lease.
2.17
The Company's financial statements have not been prepared in accordance
with generally accepted accounting principles.
-5-
<PAGE>
2.18
[intentionally omitted]
2.20
The Company has missed the deadline for filing its federal and state tax
returns for the fiscal year ended March 31, 1997. The Company filed these
returns on December 18, 1997. The Company believes that any penalties resulting
from such late filing will not exceed $2,000.
2.21
The Company does not currently have in effect fire insurance.
2.22
The Company has adopted a stock option plan.
2.24
The Company is currently in the process of applying for a business permit
from the city of Santa Monica.
-6-
<PAGE>
EXHIBIT D
FORM OF INVESTORS' RIGHTS AGREEMENT
(See Exhibit 10.9)
<PAGE>
EXHIBIT E
FORM OF RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
(See Exhibit 10.11)
<PAGE>
EXHIBIT F
FORM OF VOTING AGREEMENT
(See Exhibit 10.10)
<PAGE>
EXHIBIT G
FORM OF LEGAL OPINION
OF
VENTURE LAW GROUP
<PAGE>
December 23, 1997
To the Purchasers of Series A Preferred
Stock of eToys, Inc. Listed
on EXHIBIT A to the Series A Preferred Stock
Purchase Agreement
Ladies and Gentlemen:
We have acted as counsel for eToys Inc., a Delaware corporation (the
"COMPANY"), in connection with the sale by the Company to you of 6,312,372
shares of the Company's Series A Preferred Stock (the "SHARES") pursuant to the
Series A Preferred Stock Purchase Agreement (the "PURCHASE AGREEMENT") dated
December 23, 1997 among the Company and the persons listed on EXHIBIT A attached
thereto (the "PURCHASERS"), and the negotiation, execution and delivery by the
Company of the Investors' Rights Agreement dated December 23, 1997 (the
"INVESTORS' RIGHTS AGREEMENT"), the Co-Sale Agreement dated December 23, 1997
(the "CO-SALE AGREEMENT") and the Voting Agreement dated December 23, 1997.
This opinion is given to you in compliance with Section 4.6 of the Purchase
Agreement. The Purchase Agreement, the Investors' Rights Agreement, the Co-Sale
Agreement and the Voting Agreement are referred to herein collectively as the
"AGREEMENTS." Unless defined herein, capitalized terms have the meaning given
them in the Agreements.
In rendering this opinion, we have made such legal and factual
examinations and inquiries as we have deemed advisable or necessary for the
purpose of rendering this opinion. In addition, we have examined originals or
copies of documents, corporate records and other writings which we consider
relevant for the purposes of this opinion. In such examination, we have assumed
the genuineness of all signatures on original documents, the conformity to
original documents of all copies submitted to us and the due execution and
delivery of all documents where due execution and delivery are a prerequisite to
the effectiveness thereof. In making our examination of documents executed by
entities other than the Company, we have assumed that each other entity had the
power to enter into and perform all its obligations thereunder and we also have
assumed the due authorization by each such other entity of all requisite actions
and the due execution and delivery of such documents by each such other entity.
Whenever our opinion herein with respect to the existence or absence of
facts is indicated to be based on our knowledge or belief, it is intended to
signify that in the course of our representation of the Company in connection
with the transactions referred to in the first paragraph hereof, no information
has come to the attention of James L. Brock, Glen R. Van Ligten or Mitchell S.
Zuklie (the only lawyers at Venture Law Group working on this
<PAGE>
Page 2
transaction) that would give them actual knowledge of the existence or absence
of such facts. We have not undertaken any independent investigation to
determine the existence or absence of such facts, and no inference as to our
knowledge of the existence or absence of such facts should be drawn from the
fact of our representation of the Company.
In rendering the opinion set forth in paragraph (c) below relating to the
fully paid status of all of the issued shares of capital stock of the Company,
we have relied without independent verification on the Management Certificate of
the President of the Company (the "OPINION CERTIFICATE"), to the effect that the
Company has received the consideration approved by the Board of Directors for
all of the issued shares of capital stock of the Company.
In rendering the opinion set forth in paragraph (c) below to the extent
they relate to the status of the capitalization of the Company, we have relied
without further investigation on our review of the stock records of the Company
and statements in the Opinion Certificate relating to the capitalization of the
Company.
In rendering the opinion set forth in paragraph (a) below, (a) in order to
determine in which states qualification is appropriate, we have assumed that
qualification may be required only in those states in which the Company own or
lease real property, maintain offices or have employees, and we have relied on
the Company's listing of those states in the Opinion Certificate, and (b) as to
the qualification and good standing of the Company in the states so identified
in such Opinion Certificate, we have relied exclusively on certificates of
public officials, although we have not obtained tax good standing certificates
(other than a Delaware long-form good standing certificate and a California
franchise tax certificate for the Company) and no opinion is provided with
respect to tax good standing (other than with respect to the Company in
California).
In rendering the opinion in paragraph (e) below, we have reviewed and are
providing an opinion only with respect to those Contractual Obligations (as
defined in the Opinion Certificate), judgments and orders set forth in the
Opinion Certificate, and have assumed that the governing law (exclusive of
California laws relating to conflicts of laws) of each such Contractual
Obligation is California. We have not, however, reviewed the covenants in the
Contractual Obligations that contain financial ratios and other similar
financial restrictions, and no opinion is provided with respect thereto.
In rendering the opinion expressed in paragraph (h) below, we have assumed
and express no opinion with respect to the following: (a) that the
representations and warranties of the Purchasers set forth in the Agreements are
true and complete; and (b) the accuracy and completeness of the information
provided by the Company to the Purchasers in connection with
<PAGE>
Page 3
such offer and sale. We have also assumed the accuracy of, and have relied
upon, the Company's representations to us that the Company has made no offer to
sell the Shares by means of any "GENERAL SOLICITATION," as defined in
Regulation D under the Securities Act or the "PUBLICATION OF ANY ADVERTISEMENT"
(as defined under the California Corporate Securities Law of 1968, as amended,
and the regulations thereunder) and that no offer or sale of the Shares has been
made or will be made in any states other than California, Illinois, Colorado,
Massachusetts, New York, Pennsylvania, Georgia, Connecticut, Florida, Maryland
and Washington.
The opinions hereinafter expressed are subject to the following further
qualifications:
(i) Our opinions are qualified by the effect of bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
relating to or affecting the rights of creditors generally, including, without
limitation, laws relating to fraudulent transfers or conveyances, preferences
and equitable subordination;
(ii) Our opinions are qualified by the limitations imposed by
general principles of equity upon the availability of equitable remedies or the
enforcement of provisions of the Agreements; and the effect of judicial
decisions which have held that certain provisions are unenforceable when their
enforcement would violate the implied covenant of good faith and fair dealing,
or would be commercially unreasonable, or where their breach is not material;
(iii) A requirement that provisions of the Agreements may only be
waived in writing will not be enforced to the extent an oral agreement has been
executed modifying provisions of the Agreements;
(iv) Our opinion is based upon current statutes, rules,
regulations, cases and official interpretive opinions, and it covers certain
items that are not directly or definitively addressed by such authorities;
(v) The effect of judicial decisions which may permit the
introduction of extrinsic evidence to modify the terms or the interpretation of
the Agreements;
(vi) The enforceability of provisions of the Agreements providing
for arbitration of disputes to the extent that arbitration of a particular
dispute would be against public policy;
(vii) The enforceability of provisions of the Agreements which
purport to establish evidentiary standards or to make determinations conclusive;
<PAGE>
Page 4
(viii) The enforceability of provisions of the Agreements which
purport to establish particular courts as the forum for the adjudication of any
controversy relating to the Agreements;
(ix) The enforceability of provisions of the Agreements expressly
or by implication waiving broadly or vaguely stated rights, or waiving rights
granted by law where such waivers are against public policy;
(x) The enforceability of provisions of the Agreements providing
that rights or remedies are not exclusive, that every right or remedy is
cumulative, or that the election of a particular remedy or remedies does not
preclude recourse to one or more other remedies.
(xi) We express no opinion as to compliance with applicable
antifraud statutes, rules or regulations of applicable state and federal laws
concerning the issuance or sale of securities; and
(xii) Provisions in the Investors' Rights Agreement purporting to
provide for indemnification and contribution under certain circumstances may be
unenforceable.
(xiii) We express no opinion as to the enforceability of the Voting
Agreement.
Based upon and subject to the foregoing, and except as set forth in
the Schedule of Exceptions, we are of the opinion that:
(a) The Company is a corporation duly organized and existing under the
laws of the State of Delaware, and is in good standing under such laws. The
Company has the requisite corporate power to own and operate its properties and
assets, and to carry on its business as presently conducted. The Company is
qualified to do business as a foreign corporation in each state in which the
failure to be so qualified would have a material adverse effect on the Company.
(b) The Company has the requisite corporate power and authority to
execute and deliver the Agreements, to sell and issue the Shares thereunder, to
issue the Common Stock issuable upon conversion of the Shares and to carry out
and perform its obligations under the terms of the Agreements.
(c) The authorized capital stock of the Company consists or will, upon
the filing of the First Amended and Restated Certificate of Incorporation (the
"RESTATED CERTIFICATE"), consist of 50,000,000 shares of Common Stock, par value
$0.0001 per share, 10,050,000 of which are issued and outstanding prior to the
Closing Date, and 7,036,300 shares of Preferred Stock, par
<PAGE>
Page 5
value $0.0001 per share, all of which have been designated Series A Preferred
Stock ("SERIES A PREFERRED"), none of which are issued and outstanding prior to
the Closing. All of such issued and outstanding shares are validly issued,
fully paid and nonassessable. The Company has reserved 7,036,300 shares of
Common Stock for issuance upon conversion of Preferred Stock, 1,468,018 shares
of Series A Preferred for issuance upon the automatic conversion of certain
outstanding promissory notes (the "NOTES"), 721,757 shares of Series A Preferred
for issuance upon the exercise of outstanding warrants (the "SERIES A
WARRANTS"), 50,000 shares of Common Stock for issuance upon the exercise of
outstanding warrants, and 7,036,300 shares of Series A Preferred for issuance
under the Purchase Agreement (including the Series A Preferred issuable upon the
automatic conversion of the Notes). There are options outstanding for the
purchase of 1,276,093 shares of Common Stock under the Company's 1997 Stock
Option Plan and 1,573,907 shares of Common Stock are available for issuance
thereunder. To our knowledge, except as described above, there are no
preemptive rights, options or warrants or other conversion privileges or rights
presently outstanding to purchase any of the authorized but unissued stock of
the Company, other than the rights of first refusal set forth in Section 2.3 of
the Investors' Rights Agreement.
(d) All corporate action on the part of the Company, its directors and
shareholders necessary for the authorization, execution, delivery and
performance of the Agreements by the Company, the authorization, sale, issuance
and delivery of the Shares (and the Common Stock issuable upon conversion
thereof) and the performance of all of the Company's obligations under the
Agreements, including, without limitation, the execution and filing with the
Secretary of State of the State of Delaware of the Restated Certificate, has
been taken. The Agreements constitute valid and binding obligations of the
Company enforceable in accordance with their terms. The Shares have been
validly issued, and are fully paid and nonassessable and have the rights,
preferences and privileges described in the Restated Certificate; the shares of
Common Stock issuable upon conversion of the Shares have been duly and validly
reserved and, when issued in compliance with the provisions of the Purchase
Agreement and the Restated Certificate, will be validly issued, fully paid and
nonassessable.
(e) The execution, delivery and performance of and compliance with the
Agreements, and the issuance of the Shares and the Common Stock issuable upon
conversion of the Shares, have not resulted and will not result in any material
violation of, or conflict with, or constitute a material default under (i) the
Restated Certificate or the Company's Bylaws, (ii) any Contractual Obligation to
which the Company is a party or by which it is bound or (ii) any statute, rule
or regulation of Federal or California law or Delaware corporate law, or any
judgment or order set forth in the Opinion Certificate.
<PAGE>
Page 6
(f) To our knowledge, there are no actions, suits, proceedings or
investigations pending or threatened against the Company, or its properties
before any court or governmental agency that, either in any case or in the
aggregate, might result in any materially adverse change in the business or
financial condition of the Company or any of its properties or assets, or in any
material impairment of the right or ability of the Company to carry on its
business as now conducted, or in any material liability on the part of the
Company, and none that questions the validity of the Agreements or any action
taken or to be taken in connection therewith.
(g) No consent, approval or authorization of or designation,
qualification, regulation, declaration or filing with, any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of the Agreements, or the offer, sale or issuance of the
Shares (and the Common Stock issuable upon conversion thereof), or the
consummation of any other transaction contemplated by the Agreements, except the
notice filing required by Section 25102(f) of the California Corporate
Securities Law of 1968, as amended.
(h) The offer, sale and issuance of the Shares to be issued in
conformity with the terms of the Purchase Agreement and the issuance of the
Common Stock, if any, to be issued upon conversion thereof, constitute
transactions exempt from the registration requirements of Section 5 of the
Securities Act and exempt from the qualification requirements of the California
Corporate Securities Law of 1968, as amended.
We express no opinion as to matters governed by any laws other than the
laws of the State of California, the general corporate law of the State of
Delaware and the federal law of the United States of America. We express no
opinion as to whether the laws of any particular jurisdiction apply, and no
opinion to the extent that the laws of any jurisdiction other than those
identified above are applicable to the Agreements or the transactions
contemplated thereby.
<PAGE>
Page 7
This opinion is furnished to you pursuant to Section 4.6 of the Purchase
Agreement and is solely for your benefit and may not be relied on by, nor may
copies be delivered to, any other person without our prior written consent. We
assume no obligation to inform you of any facts, circumstances, events or
changes in the law that may hereafter be brought to our attention that may
alter, affect or modify the opinion expressed herein.
Sincerely,
VENTURE LAW GROUP,
A Professional Corporation
JLB
<PAGE>
EXHIBIT H
FORM OF ADDENDUM AGREEMENT
<PAGE>
ETOYS INC.
ADDENDUM TO SERIES A PREFERRED STOCK
PURCHASE AGREEMENT
This Addendum to Series A Preferred Stock Purchase Agreement (the
"ADDENDUM") is made as of _____________, 199_ by and among eToys Inc., a
Delaware corporation (the "COMPANY"), and the individuals and entities listed in
EXHIBIT A hereto (the "ADDITIONAL PURCHASERS").
RECITALS
On December ___, 1997, the Company entered into a Series A Preferred Stock
Purchase Agreement (the "PURCHASE AGREEMENT") with certain investors set forth
on EXHIBIT A attached thereto. The Purchase Agreement provides in Section 1.2
thereof that additional investors may, under conditions set forth therein,
become parties to the Purchase Agreement at any time on or before January 15,
1998.
AGREEMENT
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto mutually agree as follows:
1. AUTHORIZATION AND SALE OF PREFERRED STOCK.
1.1 SALE OF PREFERRED STOCK. Subject to the terms and conditions
hereof, at the Closing (as defined in Section 2.1 hereof) the Company will issue
and sell to each Additional Purchaser, and each Additional Purchaser severally
agrees to purchase from the Company, that number of Additional Shares specified
opposite such Additional Purchaser's name on EXHIBIT A hereto, at a cash
purchase price of $0.62 per share. Each of the Additional Purchasers, by its
signature hereto, shall hereby (i) become a party to the Purchase Agreement,
(ii) be considered a "PURCHASER" for all purposes under the Purchase Agreement
and (iii) have all the rights and obligations of a Purchaser thereunder. The
Additional Shares acquired by the Additional Purchasers thereunder shall be
considered "STOCK" for all purposes under the Purchase Agreement, as amended.
In addition, each Additional Purchaser, by its signature hereto, shall hereby
(a) become a party to the Investors' Rights Agreement dated December ____, 1997
(the "RIGHTS AGREEMENT"), (b) be considered an "INVESTOR" for all purposes under
the Rights Agreement and (c) have all rights and obligations of an "INVESTOR"
thereunder. Further, each Additional Purchaser, by its signature hereto, shall
hereby (x) become a party to the Voting Agreement dated December ____, 1997 (the
"VOTING AGREEMENT"), (y) be considered an "INVESTOR" for all purposes under the
Voting Agreement and (z) have all rights and obligations under the Voting
Agreement. Further, each Additional Purchaser, by its signature hereto, shall
hereby (q) become a party to the Right of First Refusal and Co-Sale Agreement
dated December ____, 1997 (the "CO-SALE AGREEMENT"), (r) be considered an
"INVESTOR" for all
<PAGE>
purposes under the Co-Sale Agreement and (s) have all rights and obligations of
an "INVESTOR" thereunder. Finally, each Additional Purchaser, by its signature
hereto, shall hereby (h) become a party to the Intel Letter Agreement dated
December __, 1997 (the "INTEL LETTER AGREEMENT"), (i) be considered a "party"
for all purposes under the Intel Letter Agreement and (j) have all rights and
obligations of a party thereunder.
2. CLOSING; DELIVERY.
2.1 CLOSING. The closing of the purchase and sale of the
Additional Shares hereunder (the "CLOSING") shall be held at the offices of
Venture Law Group, Menlo Park, California, at such other time and place as the
Company and the Additional Purchasers purchasing a majority of the Additional
Shares may agree.
2.2 DELIVERY. At the Closing, the Company will deliver to each
Additional Purchaser a certificate representing the number of Additional Shares
set forth opposite such Additional Purchaser's name on EXHIBIT A, against
payment of the purchase price therefor by each Additional Purchaser by wire
transfer to the Company.
3. DISCLOSURE; CAPITALIZATION.
3.1 DISCLOSURE. Each Additional Purchaser hereby acknowledges
receipt of the Purchase Agreement and the exhibits thereto. The Company affirms
to each Additional Purchaser that:
(i) The representations and warranties of the Company set
forth in Section 2 of the Purchase Agreement were true and accurate when made;
(ii) Except as set forth in Section 3.2 hereof, those
representations and warranties, which are incorporated herein by this reference
and made a part hereof, remain true and accurate in all material respects as of
the date hereof, except (A) for changes resulting from the transactions
contemplated in the Purchase Agreement and this Addendum and (B) as set forth in
the Schedule of Exceptions to Representations and Warranties delivered to the
Additional Purchasers prior to the date hereof.
(iii) The conditions to closing set forth in Section 4 of the
Purchase Agreement and in Section 5 hereof have been satisfied, provided that
the conditions set forth in Section 4.1 of the Purchase Agreement shall include
references to changes in the Company's representations and warranties and the
Company's status, respectively, as set forth herein and in the Exhibits attached
hereto, and resulting from the consummation of the transactions contemplated by
the Purchase Agreement and this Addendum.
3.2 CAPITALIZATION. Immediately prior to the Closing, the
authorized capital of the Company shall consist of:
-2-
<PAGE>
(i) 7,036,300 shares of Preferred Stock, all of which have
been designated Series A Preferred Stock, __________ of which are issued and
outstanding. The rights, privileges and preferences of the Preferred Stock are
as stated in the Restated Certificate.
(ii) 50,000,000 shares of Common Stock, __________shares of
which are issued and outstanding. 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 7,036,300 shares of Common Stock for issuance upon conversion of
the Preferred Stock.
(iii) The Company has reserved 2,950,000 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").
__________shares have been granted and are currently outstanding, and
__________shares of Common Stock remain available for issuance to officers,
directors, employees and consultants pursuant to the Stock Plan.
(iv) 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. Except as
otherwise contemplated herein, 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 that affects or relates to
the voting or giving of written consents with respect to any security or the
voting by a director of the Company.
4. REPRESENTATIONS AND WARRANTIES OF ADDITIONAL PURCHASERS. Each
Additional Purchaser acknowledges that such Additional Purchaser has reviewed
the representations and warranties set forth in Section 3 of the Purchase
Agreement and agrees with the Company that such representations and warranties,
which are incorporated herein by this reference and made a part hereof, are true
and correct as of the date hereof as they relate to such Additional Purchaser's
purchase of the Additional Shares hereunder.
5. CONDITIONS TO ADDITIONAL PURCHASERS' OBLIGATIONS AT CLOSING. The
obligation of each Additional Purchaser to purchase the Additional Shares at the
Closing is subject to the fulfillment to such Additional Purchaser's
satisfaction at or prior to the Closing of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES CORRECT; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in Section
3 hereof shall be true and correct when made, and shall be true and correct on
the date of the Closing with the same force and effect as if they had been made
on and as of said date, subject to changes contemplated by this Addendum; and
the Company shall have performed all obligations and conditions herein required
to be performed or observed by it at or prior to the Closing.
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<PAGE>
5.2 CONSENTS AND WAIVERS. The Company shall have obtained any and
all consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Addendum.
5.3 LEGAL OPINION. Upon request, each of the Additional
Purchasers will be entitled to receive from Venture Law Group, legal counsel for
the Company, a legal opinion substantially in the form delivered to the
investors pursuant to Section 4.6 of the Purchase Agreement.
6. CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING. The obligations of
the Company under Sections 1.1 of this Addendum are subject to the fulfillment
at or before the Closing of each of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each Additional Purchaser contained in Section 4 hereof shall be
true at the Closing.
6.2 CONSENTS AND WAIVERS. The Company shall have obtained any and
all consents and waivers necessary or appropriate for the Purchasers to become
parties to the Investors' Rights Agreement and for the consummation of the
transactions contemplated by this Addendum.
7. MISCELLANEOUS.
7.1 INCORPORATION BY REFERENCE. The provisions set forth in
Section 6 of the Purchase Agreement are incorporated herein by this reference
and made a part hereof.
7.2 COUNTERPARTS. This Addendum may be executed in any number of
counterparts, each of which may be executed by less than all of the Additional
Purchasers, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
[Signature Page Follows]
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<PAGE>
The parties hereto have executed this Addendum as of the date first set
forth above.
COMPANY:
eTOYS INC.
By:
--------------------------------------
Edward C. Lenk
President and Chief Executive officer
Address: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
SIGNATURE PAGE TO ADDENDUM TO SERIES A PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
The parties hereto have executed this Addendum as of the date first set
forth above.
ADDITIONAL PURCHASERS:
By:
-----------------------------------------
Name:
---------------------------------------
(Print)
Title:
--------------------------------------
(If applicable)
Address:
--------------------------------
--------------------------------
SIGNATURE PAGE TO ADDENDUM TO SERIES A PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
EXHIBIT A
SCHEDULE OF ADDITIONAL PURCHASERS
(SECOND SERIES A PREFERRED STOCK CLOSING)
AGGREGATE
NAME NUMBER OF SHARES PURCHASE PRICE
---- ---------------- --------------
<PAGE>
EXHIBIT I
FORM OF INTEL LETTER AGREEMENT
<PAGE>
Exhibit I
INTEL CORPORATION
December 19, 1997
To: The Parties Listed Below
Re: SERIES A PREFERRED STOCK FINANCING OF eTOYS INC.
Ladies and Gentlemen:
Reference is made to the Series A Preferred Stock Purchase Agreement,
dated as of December 19, 1997, by and between eToys Inc. (the "Company") and the
investors listed on Exhibit A thereto (the "Purchase Agreement"). Reference is
also made to the Investors' Rights Agreement, dated as of December 19, 1997, by
and among the Company, the investors listed on Exhibit A thereto and Edward C.
Lenk and Frank C. Han (the "Rights Agreement"). This letter and the exhibit
hereto constitutes the Intel Letter Agreement referred to in the Purchase
Agreement and the Rights Agreement.
The parties hereto agree to the terms of Exhibit A attached to this
letter.
All exhibits to this letter are incorporated herein and made a part hereof
by this reference.
<PAGE>
Please indicate your acceptance of this letter as a part of the Purchase
Agreement and the Rights Agreement by countersigning in the space provided
below.
Very truly yours,
INTEL CORPORATION
By: /s/ Illegible
----------------------
ACCEPTED:
eTOYS INC.
By: /s/ Edward C. Lenk
--------------------------
Name: Edward C. Lenk
-----------------------
Title: CEO
------------------------
[Signatures intentionally omitted. See signature pages to Series A Preferred
Stock Purchase Agreement.]
SIGNATURE PAGE TO INTEL LETTER AGREEMENT
eTOYS INC. SERIES A PREFERRED FINANCING
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<PAGE>
EXHIBIT A
1. PROTECTION OF CONFIDENTIAL INFORMATION. Confidential or
proprietary information disclosed by any party under the Series A Preferred
Stock Purchase Agreement, dated as of December 19, 1997, by and between eToys
Inc. (the "Company") and the investors listed on Exhibit A thereto (the
"Purchase Agreement") or the Investors' Rights Agreement, dated as of December
19, 1997, by and among the Company, the investors listed on Exhibit A thereto
and Edward C. Lenk and Frank C. Han (the "Rights Agreement"), as well as the
terms of the Purchase Agreement and the Rights Agreement and the investment of
Intel Corporation ("Intel") in the Company, shall be considered confidential
information (the "Confidential Information") and shall not be disclosed by the
Company or any other party hereto to any third party, subject to Paragraph 2 of
this Exhibit A below. Each party shall immediately notify the other parties of
any information that comes to its attention which might indicate that there has
been a loss of confidentiality with respect to the Confidential Information. In
the event that the Company or any other party becomes legally compelled (by
statute or regulation or by oral questions, interrogatories, request for
information or documents, subpoena, criminal or civil investigative demand or
similar process, including without limitation, in connection with any public or
private offering of the Company's capital stock) to disclose any of the
Confidential Information, such party (the "Disclosing Party") shall provide the
other parties (the "Non-Disclosing Parties") with prompt written notice of that
fact so that the appropriate party may seek (with the cooperation and reasonable
efforts of the other parties) a protective order, confidential treatment or
other appropriate remedy. In such event, the Disclosing Party shall furnish
only that portion of the Confidential Information which is legally required and
shall exercise reasonable efforts to obtain reliable assurance that confidential
treatment will be accorded the Confidential Information to the extent reasonably
requested by the Non-Disclosing Parties. The provisions of this Paragraph 1 of
this Exhibit A shall be in addition to, and not in substitution for, the
provisions of any separate nondisclosure agreement executed by the parties to
the Purchase Agreement or the Rights Agreement with respect to the transaction
contemplated thereby.
2. DISCLOSURE OF TERMS; PRESS RELEASES. Notwithstanding the
provisions of Paragraph 1 of this Exhibit A, from and after the closing of the
transactions contemplated by the Purchase Agreement, the Company and the other
parties hereto may disclose the existence of the Purchase Agreement, the Rights
Agreement and the general terms thereof, as well as Intel's investment in the
Company solely to the Company's or the other parties' respective investors,
investment bankers, lenders, accountants, legal counsel, business partners, and
bona fide prospective investors, employees, lenders and business partners, in
each case only where such persons or entities are under appropriate
nondisclosure obligations. In addition, the Company and the other parties
hereto may disclose the fact that Intel is an investor in the Company to third
parties without the requirement for nondisclosure agreements. Within sixty (60)
days of the Closing, the Company may issue a press release disclosing that Intel
has invested in the Company; provided that the release does not disclose the
amount or other specific terms of the investment and is approved in advance in
writing by Intel. Intel, at its sole discretion, may provide an executive quote
or other material regarding its investment in the Company. No other
announcement regarding Intel's investment in the Company in a press conference,
in any
A-1
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<PAGE>
professional or trade publication, in any marketing materials or otherwise to
the general public may be made without the prior written consent of Intel, which
consent may be withheld at the sole discretion of Intel. Notwithstanding the
foregoing, Intel may disclose its investment in the Company and the terms
thereof to third parties or to the public at its discretion, and the Company and
the other parties hereto shall have the right to disclose to third parties any
such information disclosed by Intel in a press release or other public
announcement. If the Company, Intel or the other parties hereto determine that
any disclosure not otherwise authorized by hereby is required by law or
regulation, then the provisions of Paragraph 1 of this Exhibit A regarding
disclosure of Confidential Information by a Disclosing Party shall govern.
A-2
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<PAGE>
ETOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
INITIAL CLOSING: JUNE 3, 1998
<PAGE>
ETOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
This Series B Preferred Stock Purchase Agreement (the "AGREEMENT") is made
as of the 3rd day of June, 1998, 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 B 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 Second
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 B
Preferred Stock set forth opposite each such Purchaser's name on EXHIBIT A
attached hereto at a purchase price of $2.1032 per share. The shares of
Series B 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 June 3, 1998, 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, cancellation of indebtedness, 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 any evidence of such indebtedness or
shall executed an instrument of cancellation in form and substance acceptable to
the Company.
(c) If the full number of the authorized shares of Series B
Preferred Stock of the Company is not sold at the Closing, the Company shall
have the right, at any time prior to June 17, 1998, to sell the remaining
authorized but unissued shares of Series B Preferred Stock to one or more
additional purchasers as determined by the Company, or to any Purchaser
<PAGE>
hereunder who wishes to acquire additional shares of Series B Preferred Stock at
the price and on the terms set forth herein, provided that any such additional
purchaser shall be required to execute an Addendum Agreement substantially in
the form attached hereto as EXHIBIT H. Any additional purchaser so acquiring
shares of Series B Preferred Stock shall be considered a "Purchaser" for
purposes of this Agreement, and any Series B Preferred Stock so acquired by such
additional purchaser shall be considered "Stock" for purposes of this Agreement
and all other agreements contemplated hereby.
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 attached hereto as EXHIBIT C, which exceptions shall be
deemed to be representations and warranties as if made hereunder:
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) Eighteen Million Nine Hundred Twenty-Six Thousand Four
Hundred Twenty-Three (18,926,423) 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 Six Million Three Hundred
Eighteen Thousand Seventeen (6,318,017) shares are issued and outstanding; and
Eleven Million Eight Hundred Eighty-Six Thousand Six Hundred Forty-Nine
(11,886,649) shares of Series B 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 Seven Thousand Two Hundred Fifty-Nine (11,007,259) shares of which are
issued and outstanding immediately prior to the Closing. 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 Eleven Million Eight Hundred Eighty-
Six Thousand Six Hundred Forty-Nine (11,886,649) shares of Common Stock for
issuance upon conversion of the Series B 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"). Of such reserved shares of Common Stock, options to
purchase One Million Nine Hundred Three Thousand (1,903,000) shares have been
granted and are currently outstanding, options to purchase Seventy-Four Thousand
One Hundred Sixty-Seven (74,167) shares have been exercised, and Three
-2-
<PAGE>
Million Eight Hundred Twenty-Two Thousand Eight Hundred Thirty-Three (3,822,833)
shares of Common Stock remain available for issuance to officers, directors,
employees and consultants pursuant to the Stock Plan.
(d) Except for currently outstanding options issued pursuant to
the Stock Plan, warrants to purchase 721,757 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.
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 Amended and Restated Investors'
Rights Agreement, in the form attached hereto as EXHIBIT D (the "INVESTORS'
RIGHTS AGREEMENT"), the Amended and Restated Right of First Refusal and Co-Sale
Agreement in the form attached hereto as EXHIBIT E (the "CO-SALE AGREEMENT"),
and the Amended and Restated Voting Agreement in the form attached hereto as
EXHIBIT F (the "VOTING AGREEMENT") and the Letter Agreement between Intel
Corporation in the form attached hereto as EXHIBIT I (the "INTEL LETTER
AGREEMENT") and collectively with this Agreement, the Investors' Rights
Agreement, the Co-Sale Agreement and the Voting 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
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<PAGE>
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 B 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 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,
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<PAGE>
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 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
-5-
<PAGE>
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.
(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
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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.
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 March 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
March 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
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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 March 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);
(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;
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(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 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.
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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 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.
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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 QUALIFIED SMALL BUSINESS STOCK. As of the Closing, (i) the
Company will be an eligible corporation as defined in Section 1202(e)(4) of the
Code, (ii) the Company will not have made any purchases of its own stock during
the one-year period proceeding the Closing having an aggregate value exceeding
five percent (5%) of the aggregate value of all its stock as of the beginning of
such period and (iii) the Company's aggregate gross assets, as defined by Code
Section 1202(d)(2), at no time since incorporation and through the Closing have
exceeded or will exceed $50 million, taking into account the assets of any
corporations required to be aggregated with the Company in accordance with the
Code Section 1202(d)(3).
2.29 REAL PROPERTY HOLDING COMPANY. The Company is not a real
property holding company within the meaning of Section 897 of the Code.
2.30 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:
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
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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.
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.
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(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 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
4.2 PERFORMANCE. The Company shall have performed and complied with
all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 COMPLIANCE CERTIFICATE. The President of the Company shall
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating
that there shall have been no adverse change in the business, affairs,
prospects, operations, properties, assets or condition of the Company since the
date of the Financial Statements.
4.4 QUALIFICATIONS. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Purchasers' special counsel, and they
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shall have received all such counterpart and certified or other copies of such
documents as they may reasonably request.
4.6 OPINION OF COMPANY COUNSEL. The Purchasers shall have received
from Venture Law Group, A Professional Corporation, counsel for the Company, an
opinion, dated as of the Closing, in substantially the form of EXHIBIT G.
4.7 BOARD OF DIRECTORS. As of the Closing, the size of the Company's
Board of Directors shall be increased to six (6) members. As of the Closing,
the holders of a majority of the outstanding Series A Preferred Stock will have
the right to designate one (1) board seat, which designee shall initially be a
representative of DynaFund, the holders of a majority of the outstanding
Series B Preferred Stock will have the right to designate two (2) board seats,
one such designee shall initially be a representative of Highland Capital
Partners and the second designee shall initially be a representative of Sequoia
Capital, and the holders of a majority of the outstanding Common Stock will have
the right to designate two (2) board seats, which designees shall initially be
William Gross and Edward C. Lenk. The remaining directors of the Company shall
be designated by the holders of a majority of the outstanding Common and
Preferred Stock, voting together as a single class, and as of the Closing such
designee shall be Peter Hart.
4.8 INVESTORS' RIGHTS AGREEMENT. The Company, each Purchaser and
each Founder shall have executed and delivered the Investors' Rights Agreement
in substantially the form attached as EXHIBIT D.
4.9 CO-SALE AGREEMENT. The Company, each Purchaser, and each Founder
shall have executed and delivered the Co-Sale Agreement in substantially the
form attached as EXHIBIT E.
4.10 VOTING AGREEMENT. The Company and each Purchaser shall have
executed and delivered the Voting Agreement in substantially the form attached
as EXHIBIT F.
4.11 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.
4.12 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. The
Company and each of its employees shall have entered into the Company's standard
form Confidential Information and Invention Assignment Agreement, in
substantially the form provided to the Purchasers.
4.13 HIGHLAND CERTIFICATE. The Company shall have provided to
Highland Capital Partners III Limited Partnership ("HIGHLAND") a certificate of
the direct and indirect holdings of securities of the Company by certain persons
designated by Highland as required by Highland's governing documents.
4.14 INTEL LETTER AGREEMENT. Each Purchaser shall have executed and
delivered the Intel Letter Agreement in substantially the form attached as
EXHIBIT I.
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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 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the Closing.
5.2 PERFORMANCE. All covenants, agreements and conditions contained
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 QUALIFICATIONS. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
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.
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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 Hutchins, Wheeler & Dittmar, A Professional
Corporation, 101 Federal Street, Boston, Massachusetts 02110, Attention: Michael
J. Riccio, Jr.
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 Hutchins, Wheeler & Dittmar, A Professional
Corporation, the counsel for the Purchasers, 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.
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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 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.
-17-
<PAGE>
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.
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]
-18-
<PAGE>
The parties have executed this Series B 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: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
DYNAFUND LP
By: /s/ Denny R. S. Ko
------------------------------------------
Name: Denny R. S. Ko
----------------------------------------
(print)
Title: General Partner
---------------------------------------
Address: Illegible
-------------------------------------
Illegible
-------------------------------------
DYNAFUND INTERNATIONAL LP
By: /s/ Denny R. S. Ko
------------------------------------------
Name: Denny R. S. Ko
----------------------------------------
(print)
Title: General Partner
---------------------------------------
Address: Illegible
-------------------------------------
Illegible
-------------------------------------
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASER:
INTEL CORPORATION
By: /s/ Illegible
------------------------------------------
Name:
----------------------------------------
(print)
Title:
---------------------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: Treasurer
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
/s/ Glen R. Van Ligten
---------------------------------------------
Glen R. Van Ligten
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
---------------------------------------------
James L. Brock
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
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: General Partner
---------------------------------------
Address: c/o Highland Capital Partners
Two International Place
Boston, MA 02110
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
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
idealab! CAPITAL PARTNERS I-A, LP
By its General Partner,
idealab! Capital Management I, LLC
By: /s/ William Elkus
------------------------------------------
Name: William Elkus
----------------------------------------
(print)
Title: Managing Member
---------------------------------------
Address: c/o idealab! Capital Partners
130 West Union Street
Pasadena, CA 91103
idealab! CAPITAL PARTNERS I-B, LP
By its General Partner,
idealab! Capital Management I, LLC
By: /s/ Wiliam Elkus
------------------------------------------
Name: William Elkus
----------------------------------------
(print)
Title: Managing Member
---------------------------------------
Address: c/o idealab! Capital Partners
130 West Union Street
Pasadena, CA 91103
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
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
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
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
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
MOORE GLOBAL INVESTMENTS, LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ Savvas Savvinidis
------------------------------------------
Name: Savvis 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
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
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
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
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
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASER:
SEQUOIA CAPITAL VIII
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS Q
CMS
SEQUOIA 1997
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 B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASERS:
VLG INVESTMENTS 1998
By: /s/ Joshua Pickus
------------------------------------------
Name: Joshua Pickus
----------------------------------------
(print)
Title: Partner
---------------------------------------
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
PURCHASER:
/s/ Glen R. Van Ligten
---------------------------------------------
Glen R. Van Ligten
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASER:
By: /s/ Andrew J. Greenbaum
------------------------------------------
Name: Andrew J. Greenbaum
----------------------------------------
(print)
Title:
---------------------------------------
Address:c/o CD Radio Inc.
-------------------------------------
1180 Avenue of the Americas
-------------------------------------
New York, NY 10036
PURCHASER:
By: /s/ David A. Hoddess
------------------------------------------
Name: David Hoddess
----------------------------------------
(print)
Title:
---------------------------------------
Address: 9925 Robbins
-------------------------------------
90212
-------------------------------------
PURCHASER:
By: /s/ Richard Nanula
------------------------------------------
Name: Richard Nanula
----------------------------------------
(print)
Title:
---------------------------------------
Address:
-------------------------------------
-------------------------------------
PURCHASER:
By: /s/ Robert Sheriff
------------------------------------------
Name: Robert Sheriff
----------------------------------------
(print)
Title:
---------------------------------------
Address: Illegible
-------------------------------------
-------------------------------------
PURCHASER:
By: /s/ Thomas O. Staggs
------------------------------------------
Name: Thomas O. Staggs
----------------------------------------
(print)
Title:
---------------------------------------
Address:
-------------------------------------
-------------------------------------
PURCHASER:
By: /s/ Wesley Hein
------------------------------------------
Name: Wesley Hein
----------------------------------------
(print)
Title:
---------------------------------------
Address: 779 Latimer Road
-------------------------------------
Santa Monica, CA 90402
-------------------------------------
PURCHASER:
By: /s/ Michael J. Riccio, Jr.
------------------------------------------
Name: Michael J. Riccio, Jr.
----------------------------------------
(print)
Title:
---------------------------------------
Address: 101 Federal Street
-------------------------------------
Boston, MA 02110
-------------------------------------
PURCHASER:
By: /s/ Stephen E. Paul
------------------------------------------
Name: Stephen E. Paul
----------------------------------------
(print)
---------------------------------------
Address: 109 Ocean Front Walk
-------------------------------------
Venice, CA 90291
-------------------------------------
PURCHASER:
SLK I PARTNERS
By: /s/ Stephen E. Paul
------------------------------------------
Name: Stephen E. Paul
----------------------------------------
Title: Partner
---------------------------------------
Address: 109 Ocean Front Walk
-------------------------------------
Venice, CA 90291
-------------------------------------
SIGNATURE PAGE TO eTOYS INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
EXHIBITS
Exhibit A - Schedule of Purchasers
Exhibit B - Form of Second Amended and Restated Certificate of Incorporation
Exhibit C - Schedule of Exceptions to Representations and Warranties
Exhibit D - Form of Amended and Restated Investors' Rights Agreement
Exhibit E - Form of Amended and Restated Right of First Refusal and Co-Sale
Agreement
Exhibit F - Form of Amended and Restated Voting Agreement
Exhibit G - Form of Legal Opinion of Venture Law Group
Exhibit H - Form of Addendum Agreement
Exhibit I - Form of Intel Letter Agreement
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
SERIES B PREFERRED
NAME STOCK PURCHASE PRICE
(SHARES) (CASH/WIRE TRANSFER)
<S> <C> <C>
Highland Capital Partners III Limited Partnership 3,651,579 $ 7,680,000.95
Highland Entrepreneurs' Fund III Limited Partnership 152,149 $ 319,999.78
DynaFund L.P. 419,406 $ 882,094.70
DynaFund International L.P. 531,526 $ 1,117,905.48
idealab! Capital Partners I-A, LP 574,550 $ 1,208,393.56
idealab! Capital Partners I-B, LP 138,648 $ 291,604.47
Entities Affiliated with Bessemer Venture Partners 1,426,397 $ 2,999,998.17
Entities Affiliated with Sequoia Capital 2,377,330 $ 5,000,000.46
----------------- ---------------------------
SUBTOTAL: 9,271,585 $ 19,499,997.57
<CAPTION>
SERIES B PREFERRED
NAME STOCK PURCHASE PRICE
(SHARES) (CASH/WIRE TRANSFER)
<S> <C> <C>
Moore Global Investments, Ltd. 760,697 $ 1,599,897.93
Remington Investment Strategies, L.P. 108,292 $ 227,759.73
Multi-Strategies Fund, L.P. 60,162 $ 126,532.72
Multi-Strategies Fund Ltd. 274,101 $ 576,489.22
----------------- ---------------------------
SUBTOTAL: 1,203,252 $ 2,530,679.61
TOTAL: 10,474,837.00 $ 22,030,677.18
----------------- ---------------------------
----------------- ---------------------------
</TABLE>
<PAGE>
EXHIBIT B
FORM OF SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
(See Exhibit 3.1)
<PAGE>
EXHIBIT C
SCHEDULE OF EXCEPTIONS TO
REPRESENTATIONS AND WARRANTIES
<PAGE>
SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES
June 4, 1998
This confidential Schedule of Exceptions (the "SCHEDULE") is delivered
pursuant to Section 2 of the Series B Preferred Stock Purchase Agreement (the
"AGREEMENT") by and between eToys Inc., a Delaware corporation ("eTOYS" or the
"COMPANY") and the purchasers listed on EXHIBIT A to the Agreement (the
"PURCHASERS").
The section numbers in the Schedule correspond to the section numbers in
the Agreement; however, any information reasonably disclosed under any section
number of the Schedule shall be deemed to be disclosed and incorporated into any
other section number under the Agreement to which it pertains, whether or not
the specific section numbers are indicated below. All capitalized terms herein
shall have the meanings given them in the Agreement, unless otherwise indicated
in the Schedule.
Copies of agreements, plans, policies and other documents referred to
herein (the "DOCUMENTS") have been made available to the Purchasers. The
foregoing, however, does not modify or limit the representations and warranties
of the Company in Section 2 of the Agreement or the right of the Purchasers to
rely thereon.
2.2
As of May 6, 1998, the Company issued certain convertible promissory notes
to Moore Global Investments, Ltd., Remington Investments Strategies, L.P.,
Multi-Strategies Fund Ltd. and Multi-Strategies Fund, L.P. (the "SERIES B
CONVERTIBLE NOTES").
The Company has an agreement to issue Stephen Paul an option to acquire
125,000 shares of Common Stock. In addition, the Company has agreed to sell Mr.
Paul 50,000 shares of the Company's Common Stock at 50,000 shares of the
Company's Series B Preferred Stock.
2.7
The filing of the Restated Certificate will be necessary to consummate the
transactions contemplated by the Agreement.
2.8
[intentionally omitted]
<PAGE>
2.9
The Company has filed an application for trademark registration with the
United States Patent and Trademark Office for the mark "ETOYS." The Company is
in the process of preparing an application for trademark registration with the
United States Patent and Trademark Office for the mark "TOYSEARCH."
Pursuant to a Letter Agreement, dated March 14, 1997, by and between
idealab! and Elliot Portwood Productions, Elliot Portwood Productions agreed to
transfer to idealab! the domain names "eToys.com" and "e-toys.com" for certain
consideration. In March 1997, the Company entered into an agreement with
idealab! pursuant to which the rights to these domain names were transferred and
assigned by idealab! to eToys.
[intentionally omitted]
2.10
The Company did not timely file notices under the securities laws of the
states of Colorado, Maryland and Washington in connection with the issuance and
sale of promissory notes and warrants. These issuances were made to two
purchasers in the state of Colorado and to one purchaser in the states of
Maryland and Washington, respectively. The Company is currently in the process
of making these notice filings.
-2-
<PAGE>
2.11 (a)
In June 1997, the Company issued and sold 2,500,000 shares of Common Stock
to Toby Lenk pursuant to a Stock Purchase Agreement.
In June 1997, the Company issued and sold an aggregate of 833,334 shares of
Common Stock to Frank Han pursuant to two Stock Purchase Agreements.
In June 1997, the Company issued and sold 6,466,667 shares of Common Stock
to idealab!, an affiliate of the Company. In November 1997, pursuant to a
letter agreement, idealab! returned 360,000 shares of Common Stock of the
Company to the Company in the form of a capital contribution.
Each of the Company's officers and directors have entered into proprietary
information and inventions agreements with the Company.
During 1997, the Company reimbursed Frank Han for approximately $10,000 in
expenses incurred by Mr. Han on behalf of the Company.
During 1997, the Company reimbursed Toby Lenk for approximately $15,000 in
expenses incurred by Mr. Lenk on behalf of the Company.
The Company has entered into an indemnification agreement with each of its
current directors and with Frank Han.
The Company has an informal policy of reimbursing Peter Hart, a director of
the Company, for travel expenses associated with his attendance at Board of
Director meetings. In addition, the Company has an informal agreement with
Peter Hart pursuant to which Mr. Hart provides consulting services to the
Company in exchange for monthly option grants for 3,500 shares of Common Stock
and cash compensation of $6,500 per month.
2.11 (b)
The Company is party to the following contracts that that involve
(i) obligations (contingent or otherwise) of, or payments to, the Company in
excess of, $10,000 , (ii) the license of a patent, copyright, trade secret or
other proprietary right to or from the Company, or (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:
Engagement Letter, dated July 9, 1997, by and between the Company and
Alexander Communications, Inc., as amended.
-3-
<PAGE>
Lease, dated July 15, 1997, by and between the Company and E.A. Three, Ltd.
(the "WAREHOUSE LEASE").
Client Agreement, dated July 24, 1997, by and between Digital Boardwalk,
Inc. and the Company.
Lease, dated August 21, 1997, by and between the Company and Martin H.
Waldman and Hal Spector (the "OFFICE LEASE").
Lease, dated September 29, 1997, by and between the Company and IKON Office
Solutions (copier lease) (the "COPIER LEASE").
Content License Agreement, dated October 1, 1997, by and between the
Company and Dr. Stevanne Auerbach.
Interactive Marketing Agreement, dated as of October 1, 1997, by and
between the Company and America Online, Inc.
Network Advertising Agreement, effective as of November 1, 1997, by and
between the Company and Excite.
Content and Services Agreement, dated as of October 1, 1997, by and between
WebTV Network, Inc. and the Company.
Shopping Development - Merchant Services Agreement, dated as of
November 10, 1997, by and between GTE Media Ventures Incorporated and the
Company.
Market Square Agreement, effective as of October 27, 1997, by and between
AT&T Corp. and the Company.
The Company is a party to an agreement with FoneMart pursuant to which the
Company rents its phone system on a month to month basis (the "PHONE SYSTEM
LEASE").
The Company is a party to an agreement with Worldcom pursuant to which the
Company is provided with long distance telephone service and internet
access on a monthly basis.
Advertising Insertion Orders No. 6964 and 6979, dated as of July 9, 1997
and July 10, 1997, respectively, by and between the Company and Yahoo! Inc.
Sponsorship Agreement, dated as of July 17, 1997, by and between the
Company and Netscape Communications Corporation.
Internet Advertising Insertion Orders, dated as of July 17, 1997, by and
between the Company and SOFTBANK Interactive Marketing, Inc.
-4-
<PAGE>
Advertiser Agreements, dated as of July 10, 1997, July 16, 1997, and
July 16, 1997, by and between the Company and Infoseek.
Global Center Service Order No. E-Toys 0001.1.
Master Service Agreement, dated as of November 26, 1997, by and between
Global Center, Inc. and the Company.
[intentionally omitted]
Yahoo! Insertion Order #9945 dated as of November 1, 1997.
Netscape Sponsorship Agreement dated as of February 18, 1998.
Be Free Affiliate Provider Agreement dated as of March 10, 1998.
Lycos Advertising Contract dated as of March 25, 1998.
Nix, Hilton & Associates On Target Advertising Agreement dated as of
March 30, 1998.
Letter Agreement with Kalis & Savage Advertising dated as of April 8, 1998.
Offer Letter to Steven Paul dated May 22, 1998.
The Company enters into purchase orders in the ordinary course of business
pursuant to which it purchases inventory for ultimate resale to customers.
The dollar amounts of such purchase orders exceed $25,000 in the aggregate
and in some cases exceed $10,000 individually.
The Company enters into affiliate license agreements in the ordinary course
of business pursuant to which it supplies the affiliate with artwork and
text that can be placed on the affiliate's site and can act as a link to
the Company's site. The dollar amounts covered by such license agreements
exceed $25,000 in the aggregate and in some cases exceed $10,000
individually.
The Company has advanced the salaries of certain employees in an amount of
approximately $10,000 in the aggregate.
2.11 (c)
Since the Company's inception, idealab! has paid for $100,000 in expenses
incurred by the Company. In November 1997, the Company and idealab! entered
into a
-5-
<PAGE>
letter agreement pursuant to which idealab! agreed to forgive the Company's
repayment of such $100,000 amount.
2.12
The Company has entered into letter agreements with both Intel Corporation
and the DynaFund entities providing for certain Board visitation rights. In
connection with the Series B Convertible Note financing, the Company agreed that
if Moore Global Investments, Ltd., Remington Investments Strategies, L.P.,
Multi-Strategies Fund, L.P. and Multi-Strategies Fund Ltd. (collectively, the
"BRIDGE INVESTORS") collectively were to convert at least $4,000,000 of the
outstanding principal amount of the Series B Convertible Notes into shares of
the Company's capital, the Company will permit one representative (the
"OBSERVER") on behalf of the Bridge Investors, collectively, to attend all
meetings of the Company's Board of Directors and all committees thereof (whether
in person, telephonic or other) in a non-voting, observer capacity. The Company
anticipates that it will grant Board visitation rights to certain of the
Purchasers.
2.13
Since the Company's inception, idealab! has paid for $100,000 in expenses
incurred by the Company. In November 1997, the Company and idealab! entered
into a letter agreement pursuant to which idealab! agreed to forgive the
Company's repayment of such $100,000 amount.
2.16
The Company leases certain warehouse space under the Warehouse Lease and
office space under the Office Lease. The Company also leases a copier and its
phone system under the Copier Lease and the Phone System Lease.
2.17
The Company's financial statements have not been prepared in accordance
with generally accepted accounting principles.
2.18 (n)
[intentionally omitted]
The Company has recently hired Steven Paul as the Company's Vice President
of Business Development, commencing June 1, 1998. Pursuant to the terms of Mr.
Paul's offer letter, the Company will loan Mr. Paul the necessary funds to
enable him to purchase up to 175,00 shares of Common Stock and up to 50,000
shares of Series B
-6-
<PAGE>
Preferred Stock, subject to subject to the execution of full recourse promissory
notes in favor of the Company that accrue interest at the minimum applicable
federal rate.
2.21
The Company does not currently have in effect fire insurance and receives
casualty coverage through idealab!
2.22
The Company has adopted a stock option plan.
The restricted stock grants to Edward Lenk, Frank Han and Phil Polishook
each accelerate in full upon a change of control. The restricted stock grant to
Steven Paul accelerates with respect to one year of vesting upon termination
without cause following a change of control.
-7-
<PAGE>
EXHIBIT D
FORM OF AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
(See Exhibit 10.9)
<PAGE>
EXHIBIT E
FORM OF AMENDED AND RESTATED RIGHT OF FIRST REFUSAL
AND CO-SALE AGREEMENT
(see Exhibit 10.11)
<PAGE>
EXHIBIT F
FORM OF AMENDED AND RESTATED VOTING AGREEMENT
(See Exhibit 10.10)
<PAGE>
EXHIBIT G
FORM OF LEGAL OPINION
OF
VENTURE LAW GROUP
<PAGE>
June 17, 1998
To the Purchasers of Series B Preferred
Stock of eToys, Inc. Listed
on EXHIBIT A to the Series B Preferred Stock
Addendum Agreement
Ladies and Gentlemen:
We have acted as counsel for eToys Inc., a Delaware corporation (the
"COMPANY"), in connection with the sale by the Company to you of 1,411,812
shares of the Company's Series B Preferred Stock (the "SHARES") pursuant to the
Series B Preferred Stock Addendum Agreement (the "PURCHASE AGREEMENT") dated
June 17, 1998 among the Company and the persons listed on EXHIBIT A attached
thereto (the "PURCHASERS"), and the negotiation, execution and delivery by the
Company of the Amended and Restated Investors' Rights Agreement dated June 4,
1998 (the "INVESTORS' RIGHTS AGREEMENT"), the Amended and Restated Right of
First Refusal and Co-Sale Agreement dated June 4, 1998 (the "CO-SALE AGREEMENT")
and the Amended and Restated Voting Agreement dated June 4, 1998. This opinion
is given to you in compliance with Section 5.3 of the Purchase Agreement. The
Purchase Agreement, the Investors' Rights Agreement, the Co-Sale Agreement and
the Voting Agreement are referred to herein collectively as the "AGREEMENTS."
Unless defined herein, capitalized terms have the meaning given them in the
Agreements.
In rendering this opinion, we have made such legal and factual examinations
and inquiries as we have deemed advisable or necessary for the purpose of
rendering this opinion. In addition, we have examined originals or copies of
documents, corporate records and other writings which we consider relevant for
the purposes of this opinion. In such examination, we have assumed the
genuineness of all signatures on original documents, the conformity to original
documents of all copies submitted to us and the due execution and delivery of
all documents where due execution and delivery are a prerequisite to the
effectiveness thereof. In making our examination of documents executed by
entities other than the Company, we have assumed that each other entity had the
power to enter into and perform all its obligations thereunder and we also have
assumed the due authorization by each such other entity of all requisite actions
and the due execution and delivery of such documents by each such other entity.
Whenever our opinion herein with respect to the existence or absence of
facts is indicated to be based on our knowledge or belief, it is intended to
signify that in the course of our representation of the Company in connection
with the transactions referred to in the first paragraph hereof, no information
has come to the attention of Glen R. Van Ligten or
<PAGE>
Page 2
Mitchell S. Zuklie (the only lawyers at Venture Law Group working on this
transaction) that would give them actual knowledge of the existence or absence
of such facts. We have not undertaken any independent investigation to
determine the existence or absence of such facts, and no inference as to our
knowledge of the existence or absence of such facts should be drawn from the
fact of our representation of the Company.
In rendering the opinion set forth in paragraph (c) below relating to the
fully paid status of all of the issued shares of capital stock of the Company,
we have relied without independent verification on the Management Certificate of
the President of the Company (the "OPINION CERTIFICATE"), to the effect that the
Company has received the consideration approved by the Board of Directors for
all of the issued shares of capital stock of the Company.
In rendering the opinion set forth in paragraph (c) below to the extent
they relate to the status of the capitalization of the Company, we have relied
without further investigation on our review of the stock records of the Company
and statements in the Opinion Certificate relating to the capitalization of the
Company.
In rendering the opinion set forth in paragraph (a) below, (a) in order to
determine in which states qualification is appropriate, we have assumed that
qualification may be required only in those states in which the Company own or
lease real property, maintain offices or have employees, and we have relied on
the Company's listing of those states in the Opinion Certificate, and (b) as to
the qualification and good standing of the Company in the states so identified
in such Opinion Certificate, we have relied exclusively on certificates of
public officials, although we have not obtained tax good standing certificates
(other than a Delaware long-form good standing certificate and a California
franchise tax certificate for the Company) and no opinion is provided with
respect to tax good standing (other than with respect to the Company in
California).
In rendering the opinion in paragraph (e) below, we have reviewed and are
providing an opinion only with respect to those Contractual Obligations (as
defined in the Opinion Certificate), judgments and orders set forth in the
Opinion Certificate, and have assumed that the governing law (exclusive of
California laws relating to conflicts of laws) of each such Contractual
Obligation is California. We have not, however, reviewed the covenants in the
Contractual Obligations that contain financial ratios and other similar
financial restrictions, and no opinion is provided with respect thereto.
In rendering the opinion expressed in paragraph (h) below, we have assumed
and express no opinion with respect to the following: (a) that the
representations and warranties of the Purchasers set forth in the Agreements are
true and complete; and (b) the accuracy and
<PAGE>
Page 3
completeness of the information provided by the Company to the Purchasers in
connection with such offer and sale. We have also assumed the accuracy of, and
have relied upon, the Company's representations to us that the Company has made
no offer to sell the Shares by means of any "GENERAL SOLICITATION," as defined
in Regulation D under the Securities Act or the "PUBLICATION OF ANY
ADVERTISEMENT" (as defined under the California Corporate Securities Law of
1968, as amended, and the regulations thereunder) and that no offer or sale of
the Shares has been made or will be made in any states other than California and
New York.
The opinions hereinafter expressed are subject to the following further
qualifications:
(i) Our opinions are qualified by the effect of bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
relating to or affecting the rights of creditors generally, including, without
limitation, laws relating to fraudulent transfers or conveyances, preferences
and equitable subordination;
(ii) Our opinions are qualified by the limitations imposed by
general principles of equity upon the availability of equitable remedies or the
enforcement of provisions of the Agreements; and the effect of judicial
decisions which have held that certain provisions are unenforceable when their
enforcement would violate the implied covenant of good faith and fair dealing,
or would be commercially unreasonable, or where their breach is not material;
(iii) A requirement that provisions of the Agreements may only be
waived in writing will not be enforced to the extent an oral agreement has been
executed modifying provisions of the Agreements;
(iv) Our opinion is based upon current statutes, rules,
regulations, cases and official interpretive opinions, and it covers certain
items that are not directly or definitively addressed by such authorities;
(v) The effect of judicial decisions which may permit the
introduction of extrinsic evidence to modify the terms or the interpretation of
the Agreements;
(vi) The enforceability of provisions of the Agreements providing
for arbitration of disputes to the extent that arbitration of a particular
dispute would be against public policy;
(vii) The enforceability of provisions of the Agreements which
purport to establish evidentiary standards or to make determinations conclusive;
<PAGE>
Page 4
(viii) The enforceability of provisions of the Agreements which
purport to establish particular courts as the forum for the adjudication of any
controversy relating to the Agreements;
(ix) The enforceability of provisions of the Agreements expressly
or by implication waiving broadly or vaguely stated rights, or waiving rights
granted by law where such waivers are against public policy;
(x) The enforceability of provisions of the Agreements providing
that rights or remedies are not exclusive, that every right or remedy is
cumulative, or that the election of a particular remedy or remedies does not
preclude recourse to one or more other remedies.
(xi) We express no opinion as to compliance with applicable
antifraud statutes, rules or regulations of applicable state and federal laws
concerning the issuance or sale of securities; and
(xii) Provisions in the Investors' Rights Agreement purporting to
provide for indemnification and contribution under certain circumstances may be
unenforceable.
(xiii) We express no opinion as to the enforceability of the Voting
Agreement.
Based upon and subject to the foregoing, and except as set forth in
the Schedule of Exceptions, we are of the opinion that:
(a) The Company is a corporation duly organized and existing under the
laws of the State of Delaware, and is in good standing under such laws. The
Company has the requisite corporate power to own and operate its properties and
assets, and to carry on its business as presently conducted. The Company is
qualified to do business as a foreign corporation in each state in which the
failure to be so qualified would have a material adverse effect on the Company.
(b) The Company has the requisite corporate power and authority to execute
and deliver the Agreements, to sell and issue the Shares thereunder, to issue
the Common Stock issuable upon conversion of the Shares and to carry out and
perform its obligations under the terms of the Agreements.
(c) The authorized capital stock of the Company consists or will, upon the
filing of the Amended and Restated Certificate of Incorporation (the "RESTATED
CERTIFICATE"), consist of 50,000,000 shares of Common Stock, par value $0.0001
per share, 11,007,259 of which are issued and outstanding prior to the Closing
Date, and 18,926,423 shares of Preferred Stock, par
<PAGE>
Page 5
value $0.0001 per share, 7,039,744 of which have been designated Series A
Preferred Stock (the "SERIES A PREFERRED"), 6,318,017 of which are issued and
outstanding prior to the Closing Date, and 11,886,649 of which have been
designated Series B Preferred Stock ("SERIES B PREFERRED"), 8,097,507 of which
are issued and outstanding prior to the Closing. All of such issued and
outstanding shares are validly issued, fully paid and nonassessable. The
Company has reserved 18,926,423 shares of Common Stock for issuance upon
conversion of Preferred Stock and 721,757 shares of Series A Preferred for
issuance upon the exercise of outstanding warrants (the "SERIES A WARRANTS").
There are options outstanding for the purchase of 1,903,000 shares of Common
Stock under the Company's 1997 Stock Option Plan, 74,167 shares have been
exercised thereunder and 3,822,833 shares of Common Stock are available for
issuance thereunder. To our knowledge, except as described above, there are no
preemptive rights, options or warrants or other conversion privileges or rights
presently outstanding to purchase any of the authorized but unissued stock of
the Company, other than the rights of first refusal set forth in Section 2.3 of
the Investors' Rights Agreement, which rights of first refusal have been waived
with respect to the issuance of the Stock.
(d) All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of the Agreements by the Company, the authorization, sale, issuance
and delivery of the Shares (and the Common Stock issuable upon conversion
thereof) and the performance of all of the Company's obligations under the
Agreements, including, without limitation, the execution and filing with the
Secretary of State of the State of Delaware of the Restated Certificate, has
been taken. The Agreements constitute valid and binding obligations of the
Company enforceable in accordance with their terms. The Shares have been
validly issued, and are fully paid and nonassessable and have the rights,
preferences and privileges described in the Restated Certificate; the shares of
Common Stock issuable upon conversion of the Shares have been duly and validly
reserved and, when issued in compliance with the provisions of the Purchase
Agreement and the Restated Certificate, will be validly issued, fully paid and
nonassessable.
(e) The execution, delivery and performance of and compliance with the
Agreements, and the issuance of the Shares and the Common Stock issuable upon
conversion of the Shares, have not resulted and will not result in any material
violation of, or conflict with, or constitute a material default under (i) the
Restated Certificate or the Company's Bylaws, (ii) any Contractual Obligation to
which the Company is a party or by which it is bound or (iii) any statute, rule
or regulation known to us of Federal or California law or Delaware corporate
law, or any judgment or order set forth in the Opinion Certificate.
(f) To our knowledge, there are no actions, suits, proceedings or
investigations pending or threatened against the Company, or its properties
before any court or governmental
<PAGE>
Page 6
agency that, either in any case or in the aggregate, might result in any
materially adverse change in the business or financial condition of the Company
or any of its properties or assets, or in any material impairment of the right
or ability of the Company to carry on its business as now conducted, or in any
material liability on the part of the Company, and none that questions the
validity of the Agreements or any action taken or to be taken in connection
therewith.
(g) No consent, approval or authorization of or designation,
qualification, regulation, declaration or filing with, any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of the Agreements, or the offer, sale or issuance of the
Shares (and the Common Stock issuable upon conversion thereof), or the
consummation of any other transaction contemplated by the Agreements, except the
notice filing required by Section 25102(f) of the California Corporate
Securities Law of 1968, as amended.
(h) The offer, sale and issuance of the Shares to be issued in conformity
with the terms of the Purchase Agreement and the issuance of the Common Stock,
if any, to be issued upon conversion thereof, constitute transactions exempt
from the registration requirements of Section 5 of the Securities Act and exempt
from the qualification requirements of the California Corporate Securities Law
of 1968, as amended.
We express no opinion as to matters governed by any laws other than the laws of
the State of California, the general corporate law of the State of Delaware and
the federal law of the United States of America. We express no opinion as to
whether the laws of any particular jurisdiction apply, and no opinion to the
extent that the laws of any jurisdiction other than those identified above are
applicable to the Agreements or the transactions contemplated thereby.
<PAGE>
Page 7
This opinion is furnished to you pursuant to Section 5.3 of the Purchase
Agreement and is solely for your benefit and may not be relied on by, nor may
copies be delivered to, any other person without our prior written consent. We
assume no obligation to inform you of any facts, circumstances, events or
changes in the law that may hereafter be brought to our attention that may
alter, affect or modify the opinion expressed herein.
Sincerely,
VENTURE LAW GROUP,
A Professional Corporation
GVL
<PAGE>
EXHIBIT H
FORM OF ADDENDUM AGREEMENT
<PAGE>
eTOYS INC.
ADDENDUM TO SERIES B PREFERRED STOCK
PURCHASE AGREEMENT
This Addendum to Series B Preferred Stock Purchase Agreement (the
"ADDENDUM") is made as of the 17th day of June, 1998 by and among eToys Inc., a
Delaware corporation (the "COMPANY"), and the individuals and entities listed on
the signature page attached hereto (the "ADDITIONAL PURCHASERS").
RECITALS
On June 3, 1998, the Company entered into a Series B Preferred Stock
Purchase Agreement (the "PURCHASE AGREEMENT") with certain investors set forth
on EXHIBIT A attached thereto. The Purchase Agreement provides in
Section 1.2(c) thereof that additional investors may, under conditions set forth
therein, become parties to the Purchase Agreement at any time on or before June
17, 1998.
AGREEMENT
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto mutually agree as follows:
1. AUTHORIZATION AND SALE OF PREFERRED STOCK.
1.1 AUTHORIZATION OF PREFERRED STOCK. The Company will, prior to the
Closing (as defined in Section 2.1 below), authorize the issuance pursuant to
this Addendum of up to 1,411,812 shares of its Series B Preferred Stock (the
"ADDITIONAL SHARES"). The rights, preferences, privileges and restrictions of
the Series B Preferred Stock are as set forth in the Company's First Amended and
Restated Certificate of Incorporation attached as EXHIBIT B to the Purchase
Agreement (the "RESTATED CERTIFICATE").
1.2 SALE OF PREFERRED STOCK. Subject to the terms and conditions
hereof, at the Closing (as defined in Section 2.1 hereof) the Company will issue
and sell to each Additional Purchaser, and each Additional Purchaser severally
agrees to purchase from the Company, that number of Additional Shares specified
opposite such Additional Purchaser's name on EXHIBIT A hereto, at a cash
purchase price of $2.1032 per share. Each of the Additional Purchasers, by
their signatures hereto, shall hereby (i) become parties to the Purchase
Agreement, (ii) be considered a "PURCHASER" for all purposes under the Purchase
Agreement and (iii) have all the rights and obligations of a Purchaser
thereunder. The Additional Shares acquired by the Additional Purchasers
hereunder shall be considered "STOCK" for all purposes under the Purchase
Agreement, as amended.
<PAGE>
2. CLOSING; DELIVERY.
2.1 CLOSING. The closing of the purchase and sale of the Additional
Shares hereunder (the "CLOSING") shall be held at the offices of Venture Law
Group, Menlo Park, California, at 12:00 p.m., on June 17, 1998, or at such other
time and place as the Company and the Additional Purchasers may agree.
2.2 DELIVERY. At the Closing, the Company will deliver to each
Additional Purchaser a certificate representing the number of Additional Shares
set forth opposite such Additional Purchaser's name on EXHIBIT A, against
payment of the purchase price therefor by each Additional Purchaser by wire
transfer to the Company.
3. DISCLOSURE; CAPITALIZATION.
3.1 DISCLOSURE. Each Additional Purchaser hereby acknowledges
receipt of the Purchase Agreement and the exhibits thereto. The Company affirms
to each Additional Purchaser that:
(i) The representations and warranties of the Company set
forth in Section 2 of the Purchase Agreement were true and accurate when made;
(ii) Those representations and warranties, which are
incorporated herein by this reference and made a part hereof, remain true and
accurate in all material respects as of the date hereof, except (A) for changes
resulting from the transactions contemplated in the Purchase Agreement and
(B) as set forth in the Schedule of Exceptions to Representations and Warranties
attached hereto as EXHIBIT B.
(iii) The conditions to closing set forth in Section 4 of the
Purchase Agreement and in Section 5 hereof have been satisfied, provided that
the conditions set forth in Section 4.1 of the Purchase Agreement shall include
references to changes in the Company's representations and warranties and the
Company's status, respectively, as set forth herein and in the Exhibits attached
hereto, and resulting from the consummation of the transactions contemplated by
the Purchase Agreement.
3.2 CAPITALIZATION. Immediately prior to the Closing, the authorized
capital of the Company shall consist of:
(i) 18,926,423 shares of Preferred Stock, of which 7,039,774
shares have been designated Series A Preferred Stock, 6,318,017 shares of which
are issued and outstanding and 11,886,649 shares of Series B Preferred Stock, of
which 8,097,507 shares are issued and outstanding. The rights, privileges and
preferences of the Preferred Stock are as stated in the Restated Certificate.
All of the outstanding shares of Preferred Stock have been duly authorized and
fully paid and are nonassessable and issued in compliance with all applicable
securities laws.
-2-
<PAGE>
(ii) 50,000,000 shares of Common Stock, 11,007,259 shares of
which are issued and outstanding, and all such shares have been duly authorized
and fully paid and are nonassessable and issued in compliance with all
applicable securities laws.
(iii) Based in part upon the representations of each Purchaser
in this Addendum and subject to the provisions of Section 2.6 of the Purchase
Agreement, the Stock (and the Common Stock issuable upon conversion thereof) has
been issued or will be issued in compliance with all applicable federal and
state securities laws.
(iv) Except for (A) conversion privileges of the Preferred
Stock, (B) outstanding options to purchase 1,903,000 shares of Common Stock
granted to certain employees of the Company pursuant to the terms of the
Company's 1997 Stock Plan duly adopted by the Board of Directors (the "STOCK
PLAN") and (C) a warrants to purchase 721,757 shares of Series A Preferred Stock
issued to certain investors, there are no outstanding options, warrants, rights
(including conversion or preemptive rights) or agreements, orally or in writing,
for the purchase or acquisition from the Company of any shares of its capital
stock. The Company has reserved 5,800,000 shares of Common Stock for issuance
upon exercise of options under the Stock Plan. Options to purchase 3,822,833
shares of Common Stock are currently available for grant, at the discretion of
the Board of Directors, to officers, directors, employees and consultants
pursuant to the Stock Plan. Except as otherwise contemplated herein, 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 that affects or relates to the voting or giving of written consents
with respect to any security or the voting by a director of the Company.
4. REPRESENTATIONS AND WARRANTIES OF ADDITIONAL PURCHASERS. Each
Additional Purchaser acknowledges that such Additional Purchaser has reviewed
the representations and warranties set forth in Section 3 of the Purchase
Agreement and agrees with the Company that such representations and warranties,
which are incorporated herein by this reference and made a part hereof, are true
and correct as of the date hereof as they relate to such Additional Purchaser's
purchase of the Additional Shares hereunder.
5. CONDITIONS TO ADDITIONAL PURCHASERS' OBLIGATIONS AT CLOSING. The
obligation of each Additional Purchaser to purchase the Additional Shares at the
Closing is subject to the fulfillment to such Additional Purchaser's
satisfaction at or prior to the Closing of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES CORRECT; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in Section
3 hereof shall be true and correct when made, and shall be true and correct on
the date of the Closing with the same force and effect as if they had been made
on and as of said date, subject to changes contemplated by this Addendum; and
the Company shall have performed all obligations and conditions herein required
to be performed or observed by it at or prior to the Closing.
-3-
<PAGE>
5.2 CONSENTS AND WAIVERS. The Company shall have obtained any and
all consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Addendum.
5.3 LEGAL OPINION. Upon request, each of the Additional Purchasers
will be entitled to receive from Venture Law Group, A Professional Corporation,
legal counsel for the Company, a legal opinion substantially in the form
delivered to the investors pursuant to Section 4.6 of the Purchase Agreement.
6. CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING. The obligations of
the Company under Sections 1.1 and 1.2 of this Addendum are subject to the
fulfillment at or before the Closing of each of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each Additional Purchaser contained in Section 4 hereof shall be
true at the Closing.
6.2 CONSENTS AND WAIVERS. The Company shall have obtained any and
all consents and waivers necessary or appropriate for the Purchasers to become
parties to the Investors' Rights Agreement, the Voting Agreement and the Co-Sale
Agreement and for the consummation of the transactions contemplated by this
Addendum.
7. MISCELLANEOUS.
7.1 INCORPORATION BY REFERENCE. The provisions set forth in Section
6 of the Purchase Agreement (other than Section 6.6) are incorporated herein by
this reference and made a part hereof.
7.2 NOTICES. Any notice required or permitted by this Addendum shall
be in writing and shall be deemed sufficient upon delivery, when delivered
personally or sent by overnight courier telegram or fax, or forty-eight (48)
hours after being deposited in the U.S. mail, as certified or fax number (as set
forth below or in the Purchase Agreement or on Exhibit A hereto or thereto, 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 the
Purchasers, with a copy to Hutchins, Wheeler & Dittmar, A Professional
Corporation, 101 Federal Street, Boston, Massachusetts, 02110, Attention:
Michael J. Riccio, Jr.
7.3 COUNTERPARTS. This Addendum may be executed in any number of
counterparts, each of which may be executed by less than all of the Additional
Purchasers, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
[Signature Page Follows]
-4-
<PAGE>
The parties hereto have executed this Addendum as of the date first set
forth above.
eTOYS, INC.
By:
----------------------------------------
Edward C. Lenk
Title: President and Chief Executive Officer
Address:
Fax Number:
SIGNATURE PAGE TO eTOYS INC.
ADDENDUM TO PURCHASE AGREEMENT
<PAGE>
ADDITIONAL PURCHASERS:
By:
----------------------------------------
Name:
----------------------------------------
(Print)
Title:
---------------------------------------
(If applicable)
Address:
-----------------------------------
-----------------------------------
Fax:
-----------------------------------
SIGNATURE PAGE TO eTOYS INC.
ADDENDUM TO PURCHASE AGREEMENT
<PAGE>
EXHIBIT A
SCHEDULE OF ADDITIONAL PURCHASERS
<TABLE>
<CAPTION>
NAME SHARES PURCHASE PRICE
<S> <C> <C>
Andrew J. Greenebaum 23,773 $ 49,999.37
David A. Hodess 11,886 $ 24,998.64
Richard Nanula 47,546 $ 99,998.75
Robert Sheriff 23,773 $ 49,999.37
Thomas O. Staggs 17,829 $ 37,497.95
Wesley Hein 23,773 $ 49,999.37
Glen R. Van Ligten 1,188 $ 2,498.60
VLG Investments 1998 9,510 $ 20,001.43
Michael J. Riccio, Jr. 4,754 $ 9,998.61
SLK I Partners 118,866 $ 249,998.97
Intel Corporation 950,931 $ 1,999,998.08
Stephen E. Paul 50,000 $ 105,160.00
Moore Global Investments, Ltd. 80,911 $ 170,172.00
Remington Investments Strategies, L.P. 11,518 $ 24,224.65
Multi-Strategies Fund, L.P. 6,399 $ 13,458.38
Multi-Strategies Fund Ltd. 29,155 $ 61,318.80
------ --------------
TOTAL: 1,411,812 $ 2,969,322.97
--------- --------------
--------- --------------
</TABLE>
<PAGE>
EXHIBIT B
SCHEDULE OF EXCEPTIONS
All exceptions listed from the Schedule of Exceptions dated June 4, 1998 are
expressly incorporated herein.
<PAGE>
EXHIBIT I
FORM OF INTEL LETTER AGREEMENT
<PAGE>
INTEL CORPORATION
June __, 1998
To: The Parties Listed Below
Re: SERIES B PREFERRED STOCK FINANCING OF eTOYS INC.
Ladies and Gentlemen:
Reference is made to (i) the Series B Preferred Stock Purchase Agreement,
dated as of June __, 1998, by and among eToys Inc. (the "COMPANY") and certain
investors (the "NEW INVESTORS") listed on EXHIBIT A thereto (the "PURCHASE
AGREEMENT") and (ii) the Amended and Restated Investors' Rights Agreement, dated
as of June __, 1998, by and among the Company, the New Investors, certain prior
investors (the "PRIOR INVESTORS") listed on EXHIBIT B thereto, Edward C. Lenk
and Frank C. Han (THE "RIGHTS AGREEMENT").
On December 19, 1997, the Company and the Prior Investors entered into the
"INTEL LETTER AGREEMENT" in the form attached hereto as EXHIBIT A. The New
Investors hereby agree that by their signature hereto, they shall become parties
to, and obligated by, the Intel Letter Agreement; provided, however, that
nothing in this Agreement shall prevent the New Investors from disclosing any
non-proprietary information learned about the Company to such New Investors'
limited partners or other investors, consistent with such New Investors'
disclosure obligations to such limited partners or other investors.
All exhibits to this letter are incorporated herein and made a part hereof.
<PAGE>
Please indicate your acceptance of this letter as a part of the Purchase
Agreement and the Rights Agreement by countersigning in the space provided
below.
AGREED AND ACCEPTED:
NEW INVESTORS:
[Signatures intentionally omitted. See
signature pages to Series B Preferred
Stock Purchase Agreement.]
SIGNATURE PAGE TO INTEL LETTER AGREEMENT
eTOYS INC. SERIES B PREFERRED FINANCING
<PAGE>
ETOYS INC.
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
JUNE 4, 1998
<PAGE>
ETOYS INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Amended and Restated Investors' Rights Agreement (the "AGREEMENT") is
made as of the 4th day of June, 1998, 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
Investors' Rights Agreement on December 23, 1997 (the "EXISTING AGREEMENT").
The Company and the New Investors have entered into a Series B 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 B
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 B 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 B 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 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 event within 60
days of the receipt of such request, the registration under the Securities Act
of all
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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;
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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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<PAGE>
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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<PAGE>
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 up to 5,800,000 shares Common Stock
(or options therefor) to employees, consultants and directors, pursuant to plans
or agreements approved by the Board of Directors, including options to purchase
1,903,000 shares of Common Stock outstanding on the date hereof, (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 preceeding 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 B 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
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<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
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<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 amended and restated in its entirety by this
Agreement, and the Existing Agreement shall be of no further force or effect.
[Signature Page Follows]
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<PAGE>
The parties have executed this 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: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
DYNAFUND LP
By: /s/ Denny R. S. Ko
------------------------------------------
Name: Denny R. S. Ko
----------------------------------------
(print)
Title: General Partner
---------------------------------------
Address: illegible
-------------------------------------
illegible
-------------------------------------
Fax: 310-543-8733
-------------------------------------
DYNAFUND INTERNATIONAL LP
By: /s/ Denny R. S. Ko
------------------------------------------
Name: Denny R. S. Ko
----------------------------------------
(print)
Title: General Partner
---------------------------------------
Address: Illegible
-------------------------------------
Illegible
-------------------------------------
Fax: 310-543-8733
-------------------------------------
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTOR:
INTEL CORPORATION
By: Illegible
------------------------------------------
Name: Illegible
----------------------------------------
(print)
Title:
---------------------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: Treasurer
Fax: (408) 765-6038
SIGNATURE PAGE TO eTOYS INC.
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: 242-356-0223
-----------------------------------
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: 212-582-9813
-----------------------------------
SIGNATURE PAGE TO eTOYS INC.
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: 212-582-9813
-----------------------------------
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: 242-356-0223
-----------------------------------
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
/s/ Glen R. Van Ligten
---------------------------------------------
Glen R. Van Ligten
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Fax: (650) 854-1121
/s/ James L. Brock
----------------------------------------
James L. Brock
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Fax: (650) 854-1121
SIGNATURE PAGE TO eTOYS INC.
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: General Partner
---------------------------------------
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 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.
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.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
SEQUOIA CAPITAL VIII
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS Q
CMS
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.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
INVESTORS:
VLG INVESTMENTS 1998
By: /s/ Illegible
------------------------------------------
Name:
----------------------------------------
(print)
Title:
---------------------------------------
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
/s/ Glen R. Van Ligten
---------------------------------------------
Glen R. Van Ligten
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
FOUNDERS:
/s/ Edward C. Lenk
------------------------------------------
Edward C. Lenk
Address: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
/s/ Frank C. Han
------------------------------------------
Frank C. Han
Address: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
EXHIBIT A
PRIOR INVESTORS
DynaFund International LP
DynaFund LP
Intel Corporation
idealab! Capital Partners I-A, LP
<PAGE>
EXHIBIT B
NEW INVESTORS
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
Sequoia International Technology Partners Q
CMS
Sequoia 1997
<PAGE>
ETOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
This Amended and Restated Voting Agreement (the "AGREEMENT") is made as of
the 4th day of June, 1998, 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 Voting
Agreement on December 23, 1997 (the "EXISTING AGREEMENT").
The Company and the New Investors have entered into a Series B 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
Investors desire to purchase from the Company shares of the Company's Series B
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 Second 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 two (2) directors (the "COMMON DIRECTORS") 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 Highland Capital Partners III
Limited Partnership and Highland Entrepreneurs' Fund III Limited Partnership
(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 Se 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 one of the Common Directors. 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 and Series B Preferred Stock; 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 5 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: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
DYNAFUND LP
By: /s/ Denny R. S. Ko
------------------------------------------
Name: Denny R. S. Ko
----------------------------------------
(print)
Title: General Partner
---------------------------------------
Address: Illegible
-------------------------------------
Illegible
-------------------------------------
Fax: Illegible
-------------------------------------
DYNAFUND INTERNATIONAL LP
By: /s/ Denny R.S. Ko
------------------------------------------
Name: Denny R. S. Ko
----------------------------------------
(print)
Title: General Partner
---------------------------------------
Address: Illegible
-------------------------------------
Illegible
-------------------------------------
Fax: Illegible
-------------------------------------
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTOR:
INTEL CORPORATION
By: /s/ Illegible
------------------------------------------
Name: Illegible
----------------------------------------
(print)
Title:
---------------------------------------
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: 242-356-0223
-----------------------------------
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: 212-582-9813
-----------------------------------
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 Savvinidi
------------------------------------------
Name: Savvas Savvinidi
----------------------------------------
(print)
Title: Director of Operations
---------------------------------------
Address: 1251 Avenue of the Americas
New York, New York 10020
Fax: 212-582-9813
-----------------------------------
MULTI-STRATEGIES FUND LTD.
By: Moore Capital Management, Inc.
Its: Trading Advisor
By: /s/ Savvas Savvinidi
------------------------------------------
Name: Savvas Savvinidi
----------------------------------------
(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: 242-356-0223
-----------------------------------
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
/s/ Glen R. Van Ligten
---------------------------------------------
Glen R. Van Ligten
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Fax: (650) 854-1121
/s/ James L. Brock
---------------------------------------------
James L. Brock
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Fax: (650) 854-1121
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
COMMON STOCKHOLDERS:
/s/ Edward C. Lenk
---------------------------------------------
Edward C. Lenk
Address: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
/s/ Frank C. Han
---------------------------------------------
Frank C. Han
Address: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
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>
NEW 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: General Partner
---------------------------------------
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:
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
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS Q
CMS
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.
AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
INVESTORS:
VLG INVESTMENTS 1998
By: /s/ Joshua Pickus
------------------------------------------
Name: Joshua Pickus
----------------------------------------
(print)
Title: Partner
---------------------------------------
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
/s/ Glen R. Van Ligten
---------------------------------------------
Glen R. Van Ligten
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
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
<PAGE>
EXHIBIT B
NEW INVESTORS
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
Entities Affiliated with Sequoia Capital
<PAGE>
ETOYS INC.
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE
AGREEMENT
This Amended and Restated Right of First Refusal and Co-Sale Agreement (the
"AGREEMENT") is made and entered into as of the 4th day of June, 1998, 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 a Right
of First Refusal and Co-Sale Agreement on December 23, 1997 (the "EXISTING
AGREEMENT.")
The Company and the New Investors have entered into a Series B 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 B
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 B 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 promptly
deliver a notice (the "NOTICE") to the Company and each Investor stating the
terms and
<PAGE>
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 and/or Series B Series A and/or Series B
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 with respect to
any shares of Common Stock or other securities held by an Investor that are
-2-
<PAGE>
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 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.
-3-
<PAGE>
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 and/or Series B
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.
(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
-4-
<PAGE>
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 and/or Series B 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 and/or Series B 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 and B 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 and Series B
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 interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
-5-
<PAGE>
(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: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE
AGREEMENT
<PAGE>
INVESTORS:
DYNAFUND LP
By: /s/ Denny R.S. Ko
--------------------------------------
Name: Denny R.S. Ko
--------------------------------------
(print)
Title: General Partner
--------------------------------------
Address: illegible
------------------------------
------------------------------
Fax: illegible
------------------------------
DYNAFUND INTERNATIONAL LP
By: /s/ Denny R.S. Ko
--------------------------------------
Name: Denny R.S. Ko
--------------------------------------
(print)
Title: General Partner
--------------------------------------
Address: illegible
------------------------------
------------------------------
Fax: illegible
------------------------------
SIGNATURE PAGE TO eTOYS INC.
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE
AGREEMENT
<PAGE>
INVESTOR:
INTEL CORPORATION
By: /s/ illegible
--------------------------------------
Name: Illegible
--------------------------------------
(print)
Title:
--------------------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: Treasurer
Fax: (408) 765-6038
SIGNATURE PAGE TO eTOYS INC.
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:
-----------------------------------
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 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
--------------------------------------
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 RIGHT OF FIRST REFUSAL AND CO-SALE
AGREEMENT
<PAGE>
INVESTORS:
/s/ Glen R. Van Ligten
---------------------------------------------
Glen R. Van Ligten
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Fax: (650) 854-1121
/s/ James L. Brock
---------------------------------------------
James L. Brock
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Fax: (650) 854-1121
SIGNATURE PAGE TO eTOYS INC.
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
--------------------------------------
Name: Daniel J. Nova
--------------------------------------
(print)
Title: General Partner
--------------------------------------
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 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.
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
-------------------------------------
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 RIGHT OF FIRST REFUSAL AND CO-SALE
AGREEMENT
<PAGE>
INVESTORS:
SEQUOIA CAPITAL VIII
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS
SEQUOIA INTERNATIONAL
TECHNOLOGY PARTNERS Q
CMS
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.
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE
AGREEMENT
<PAGE>
INVESTORS:
VLG INVESTMENTS 1998
By: /s/ Joshua Pickus
------------------------------------------
Name: Joshua Pickus
----------------------------------------
(print)
Title: Partner
---------------------------------------
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
/s/ Glen R. Van Ligten
---------------------------------------------
Glen R. Van Ligten
Address: c/o Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO eTOYS INC.
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: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
/s/ Frank C. Han
------------------------------------------
Frank C. Han
Address: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
Fax: (310) 576-7784
SIGNATURE PAGE TO eTOYS INC.
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.
Glen R. Van Ligten
James L. Brock
<PAGE>
EXHIBIT B
NEW INVESTORS
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.
Glen R. Van Ligten
Entities Associated with Sequoia Capital
<PAGE>
BASIC LEASE INFORMATION
OFFICE GROSS
LEASE DATE:
(same as date in first paragraph of the Lease)
As of January 22, 1999
TENANT: eToys, Inc., a Delaware Corporation
TENANT'S NOTICE ADDRESS: 3100 Ocean Park Blvd., Suite 300
(after Commencement Date)
Santa Monica, CA 90405
TENANT'S BILLING ADDRESS: 3100 Ocean Park Blvd., Suite 300
(after Commencement Date)
Santa Monica, CA 90405
TENANT CONTACT: JORDAN POSELL PHONE NUMBER: (310) 576-6776 ext. 118
FAX NUMBER: (310) 576-7784
LANDLORD: Spieker Properties, L.P., a California
limited partnership
LANDLORD'S NOTICE ADDRESS: 3250 Ocean Park Boulevard, Suite 150
Santa Monica, California 90405
LANDLORD'S REMITTANCE ADDRESS: P.O. Box 60077
Department 12371
Los Angeles, California 90060-0077
PROJECT DESCRIPTION: A project commonly known as Santa
Monica Business Park consisting of
nineteen (19) buildings, as further
shown on Exhibit "B" attached hereto.
BUILDING DESCRIPTIONS: A three (3) story office building
containing approximately 141,961
rentable square feet, located at
2850 Ocean Park Boulevard, Santa
Monica, California, as shown on
Exhibit B attached hereto (the "2850
Building").
A three (3)-story office building
containing approximately 141,833
rentable square feet, located at 3100
Ocean Park Boulevard, Santa Monica,
California, as shown on Exhibit B
attached hereto (the "3100 Building").
The term "Building" as used in this
Lease shall collectively mean and
refer to the 2850 Building and the
3100 Building.
PREMISES: 59,023 rentable square feet of space
commonly known as Suites 225 ("Suite
225"), 230, 240 and 270 of the 2850
Building (collectively, the "2850
Space") and the entire third (3rd)
floor of the 3100 Building (the
"3100 Space"), as shown on Exhibit B
attached hereto. The 2850 Space
collectively contains 16,873 rentable
square feet (broken down
-1-
<PAGE>
as follows -- Suite 225 - 12,364
rentable square feet; Suites 230 and
240 - 2,466 rentable square feet;
and Suite 270 - 2,043 rentable
square feet), and the 3100 Space
contains 42,150 rentable square feet.
The term "Premises" shall collectively
mean the 2850 Space and the 3100 Space.
Landlord and Tenant hereby stipulate
and agree to the foregoing square
footage figures.
PERMITTED USE: General office, non-medical use
OCCUPANCY DENSITY: Six (6) people per 1,000 rentable
square feet of the Premises.
PARKING DENSITY: Subject to the terms of Article 4
below, up to five (5) non-exclusive
parking spaces per 1,000 rentable
square feet of the Premises which
will be in common with other tenants
of the Project. Tenant agrees that
for that portion of the parking
requirements of Tenant at any given
time during the Term (i) which exceed
three (3) non-exclusive parking spaces
per 1,000 rentable square feet of the
Premises, Tenant will utilize
parking on level No. 3 of the
parking structure adjacent to the
Building (which parking structure is
located at 2910 31st Street, Santa
Monica, California, and is
hereinafter referred to as the
"Adjacent Parking Structure"), and
(ii) which exceed 4.5 non-exclusive
parking spaces per 1,000 rentable
square feet of the Premises or occur
during the Seasonal Period (defined
below), Tenant will utilize valet
parking services (provided by
Landlord as an Operating Expense) on
certain levels in the Adjacent
Parking Structure to be designated
by Landlord. The term "Seasonal
Period" shall mean the months of
October, November, December during
each calendar year of the Term and
January of the immediately following
calendar year. In addition to
non-exclusive parking spaces, the
Original Tenant (as defined in
Article 39E below) and any Affiliate
(but not any other assignee or
subtenant of the Original Tenant)
shall have the right to lease five
(5) reserved parking spaces in front
of the 3100 Building (the exact
location of which is delineated on
Exhibit "B" attached hereto).
PARKING AND PARKING CHARGE: Up to 300 non-exclusive parking
spaces and, subject to the preceding
paragraph, five (5) reserved parking
spaces at Landlord's prevailing
market rates plus applicable
governmental taxes. Landlord's
prevailing market rates for parking
are $60.00 per unreserved parking
space per month and $60.00 per
reserved parking space per month plus
applicable governmental taxes, which
rates are subject to change from
time to time (subject to a cap on
increases in parking rates in
accordance with Article 37 below).
-2-
<PAGE>
ESTIMATED TERM COMMENCEMENT DATE: April 1, 1999, subject to the terms
of Article 2 of the Lease.
ESTIMATED LENGTH OF TERM: Fifty-three (53) months.
TERM EXPIRATION DATE: August 31, 2003.
RENT:
<TABLE>
<CAPTION>
2850 SPACE
----------
<S> <C> <C>
COMMENCEMENT DATE -- AUGUST 31, 1999 $33,746.00 PER MONTH
SEPT. 1, 1999 -- AUGUST 31, 2000 $34,758.38 PER MONTH
SEPT. 1, 2000 -- AUGUST 31, 2001 $35,801.14 PER MONTH
SEPT. 1, 2001 -- AUGUST 31, 2002 $36,875.17 PER MONTH
SEPT. 1, 2002 -- AUGUST 31, 2003 $37,981.42 PER MONTH
<CAPTION>
3100 SPACE
----------
<S> <C> <C>
MONTHS 1 -- 3 $42,150.00 PER MONTH ($1.00 PER RENTABLE SQUARE FOOT PER MONTH)
MONTHS 4 -- 12 $82,192.50 PER MONTH ($1.95 PER RENTABLE SQUARE FOOT PER MONTH)
MONTHS 13 -- 24 $85,564.50 PER MONTH ($2.03 PER RENTABLE SQUARE FOOT PER MONTH)
MONTHS 25 -- 36 $88,936.50 PER MONTH ($2.11 PER RENTABLE SQUARE FOOT PER MONTH)
MONTHS 37 -- 48 $92,730.00 PER MONTH ($2.20 PER RENTABLE SQUARE FOOT PER MONTH)
MONTHS 49 -- AUGUST 31, 2003 $96,945.00 PER MONTH ($2.30 PER RENTABLE SQUARE FOOT PER MONTH)
</TABLE>
2850 BUILDING BASE YEAR -- CALENDAR YEAR 1998
3100 BUILDING BASE YEAR -- CALENDAR YEAR 1999
SECURITY DEPOSIT: $37,981.42 PLUS $900,000 (which
amount shall be paid to Landlord by
means of a cash security deposit and/
or letter(s) of credit in accordance
with paragraph 39C below). Landlord
and Tenant acknowledge that (i)
Landlord is currently holding an
amount equal to $583,856.54 as a
security deposit for Tenant's
obligations under the Existing Lease
(as defined in Article 39G below),
(ii) Landlord shall continue to hold
said security deposit as part of the
security deposit which Tenant is
obligated to deliver to Landlord
hereunder, and (iii) Tenant shall be
credited against its obligations to
provide a security deposit to
Landlord under this Lease with the
amount of the security deposit being
held by Landlord under the Existing
Lease.
-3-
<PAGE>
TENANT'S 2850 SPACE PROPORTIONATE SHARE: 11.88%
TENANT'S 3100 SPACE PROPORTIONATE SHARE: 30.90%
The foregoing proportionate shares are hereby stipulated by Landlord and
Tenant to be true and correct.
The foregoing Basic Lease Information is incorporated into and made a
part of this Lease. Each reference in this Lease to any of the Basic Lease
Information shall mean the respective information above and shall be
construed to incorporate all of the terms provided under the particular Lease
paragraph pertaining to such information. In the event of any conflict
between the Basic Lease Information and the Lease, the latter shall control.
LANDLORD TENANT
Spieker Properties, L.P., eToys, Inc.
a California limited partnership a Delaware corporation
By: Spieker Properties, Inc., By: /s/
a Maryland corporation, ------------------------
Its:
------------------------
By: /s/ By: /s/
------------------------ ------------------------
Its: Its:
------------------------ ------------------------
-4-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. PREMISES................................................................ 1
2. POSSESSION AND LEASE COMMENCEMENT....................................... 1
3. TERM.................................................................... 2
4. USE..................................................................... 2
5. RULES AND REGULATIONS................................................... 5
6. RENT.................................................................... 5
7. OPERATING EXPENSES...................................................... 6
8. INSURANCE AND INDEMNIFICATION.......................................... 15
9. WAIVER OF SUBROGATION.................................................. 17
10. LANDLORD'S REPAIRS AND MAINTENANCE.................................... 18
11. TENANT'S REPAIRS AND MAINTENANCE...................................... 19
12. ALTERATIONS........................................................... 20
13. SIGNS................................................................. 21
14. INSPECTION/POSTING NOTICES............................................ 21
15. SERVICES AND UTILITIES................................................ 22
16. SUBORDINATION......................................................... 26
17. FINANCIAL STATEMENTS.................................................. 26
18. ESTOPPEL CERTIFICATE.................................................. 26
19. SECURITY DEPOSIT...................................................... 27
20. LIMITATION OF TENANT'S REMEDIES....................................... 27
21. ASSIGNMENT AND SUBLETTING............................................. 28
22. AUTHORITY............................................................. 30
23. CONDEMNATION.......................................................... 30
24. CASUALTY DAMAGE....................................................... 31
25. HOLDING OVER.......................................................... 33
26. DEFAULT............................................................... 34
27. LIENS................................................................. 36
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
28. SUBSTITUTION.......................................................... 36
29. TRANSFERS BY LANDLORD................................................. 37
30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS....................... 37
31. WAIVER................................................................ 37
32. NOTICES............................................................... 37
33. ATTORNEYS' FEES....................................................... 38
34. SUCCESSORS AND ASSIGNS................................................ 38
35. FORCE MAJEURE......................................................... 38
36. SURRENDER OF PREMISES................................................. 38
37. PARKING............................................................... 39
38. MISCELLANEOUS......................................................... 40
39. ADDITIONAL PROVISIONS................................................. 42
40. STANDARD FOR CONDUCT AND CONSENT...................................... 48
41. JURY TRIAL WAIVER..................................................... 48
</TABLE>
-3-
<PAGE>
LEASE
THIS LEASE is made as of the 22nd day of January, 1999, by and
between Spieker Properties, L.P., a California limited partnership
(hereinafter called "LANDLORD"), and eToys, Inc., a Delaware corporation
(hereinafter called "TENANT").
1. PREMISES
Landlord leases to Tenant and Tenant leases from Landlord, upon the
terms and conditions hereinafter set forth, those premises (the "PREMISES")
outlined in red on EXHIBIT B and described in the Basic Lease Information.
Tenant's rights to the Premises shall include the limited right to
use and access upon reasonable prior notice to Landlord, the janitorial
closet and the electrical and telephone rooms on the floors containing the
Premises as reasonably necessary for Tenant's effective and efficient use of
the Premises. Upon reasonable prior notice to Landlord, Tenant, at its sole
expense, shall also be permitted to enter such areas to service its
equipment. Upon reasonable prior notice to Landlord, Tenant, at its sole
expense, shall have the right to use, or access, any ceilings or space above
the ceilings on the floors or walls containing the Premises to the extent
necessary to service Tenant's equipment in the Premises and to run wires,
cables, and other conduits to the Premises to the extent permitted by
applicable laws. In addition, upon reasonable prior notice to Landlord,
Tenant, at its sole expense, shall be allowed to use such space as
necessary for providing utility services such as the installation of
computer cable conduits. Notwithstanding anything to the contrary set forth
in this Lease, (i) in no event shall Tenant (A) take any action in the
Premises or the Project which may affect the base, shell and core or any of
the Project's systems or equipment, (B) take any action which may interfere
with the use or occupancy by another tenant in the Project of its premises or
the exercise by another tenant in the Project of similar rights, or (C) take
any action which may impair the health or safety of any of the occupants of
the Project or violate any Regulations, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed; and
(ii) Landlord shall have the right to have a representative of Landlord
present to supervise or otherwise coordinate any such action by Tenant.
The Premises shall be all or part of a building (the "BUILDING") and
of a project (the "PROJECT"), which may consist of more than one building and
additional facilities, as described in the Basic Lease Information. The
Building and Project are outlined in blue and green respectively on EXHIBIT
B. Landlord and Tenant acknowledge that physical changes may occur from time
to time in the Premises, Building or Project, and that the number of
buildings and additional facilities which constitute the Project may change
from time to time, which may result in an adjustment in Tenant's
Proportionate Share, as defined in the Basic Lease Information, as provided
in Paragraph 7.A; provided that Tenant's obligations under Paragraph 7 below
shall not be increased as a result of additional buildings or facilities
being added to the Project and such changes shall not materially and adversely
interfere with Tenant's use of or access to the Premises.
2. POSSESSION AND LEASE COMMENCEMENT
A. CONSTRUCTION OF IMPROVEMENTS. The term commencement date
("TERM COMMENCEMENT DATE") shall be the earlier of the date on which: (1)
Tenant takes possession of some or all of the 3100 Space and commences
business therefrom; or (2) the first Monday following the date Tenant
receives a factually correct notice that the improvements to be constructed
or performed in the 3100 Space by Landlord (the "Tenant Improvements") shall
have been substantially completed in accordance with the plans and
specifications described on EXHIBIT C. Landlord shall use its commercially
reasonable efforts to provide Tenant with at least ten (10) business days'
advance notice of Landlord's estimated date of substantial completion of the
3100 Space. The terms "substantially completed" or "substantial completion"
shall mean: (1) all the Building systems and equipment are operational to the
extent necessary to service the 3100 Space; (2) Landlord has completed all
work required to be performed by Landlord in accordance with the Plans as
certified by Landlord's architect, excluding "punch-list" items which do not
adversely and materially affect Tenant's use and occupancy of the 3100 Space
and shall be
-2-
<PAGE>
completed as soon thereafter as reasonably practicable; (3) Landlord has
obtained a certificate of occupancy for the 3100 Space, or its legal
equivalent; and (4) Tenant has been provided the number of parking privileges
and spaces to which it is entitled under the Lease and has been provided
access to the 3100 Space, Building and Project parking facilities in
accordance with the terms of this Lease. In the event the Term Commencement
Date does not occur by July 31, 1999 (the "Outside Commencement Date"), which
date shall be extended by governmental delays (up to but not exceeding 90
days), Force Majeure Delays (defined below) (up to but not exceeding 90 days)
(provided that in no event shall the Outside Commencement Date be extended by
more than 90 days, in the aggregate, for Force Majeure Delays and
governmental delays) and Tenant Delays (defined below), Tenant shall have the
right to terminate this Lease by delivering ten (10) days' prior notice to
Landlord at any time prior to the occurrence of the Term Commencement Date.
Subject to the preceding sentence, if for any reason Landlord cannot deliver
possession of the 3100 Space to Tenant on the scheduled Term Commencement
Date, Landlord shall not be subject to any liability therefor, nor shall
Landlord be in default hereunder nor shall such failure affect the validity
of this Lease, and Tenant agrees to accept possession of the 3100 Space at
such time as such improvements have been substantially completed, which date
shall then be deemed the Term Commencement Date. Tenant shall not be liable
for any Rent for any period prior to the Term Commencement Date (but without
affecting any obligations of Tenant under any improvement agreement appended
to this Lease). Substantial completion shall have occurred notwithstanding
Tenant's submission of a punchlist to Landlord, which Tenant shall submit, if
at all, within thirty (30) days after the Term Commencement Date or otherwise
in accordance with any improvement agreement appended to this Lease. Landlord
shall deliver within sixty (60) days of the Term Commencement Date to Tenant
a "Start-Up Letter" in which Tenant shall agree, among other things, to
acceptance of the 3100 Space (subject to latent defects and Tenant's rights
under any warranties assigned to Tenant pursuant to the Improvement Agreement
attached hereto as Exhibit "C") and to the determination of the Term
Commencement Date, in accordance with the terms of this Lease. Tenant shall
execute and return said Start-Up Letter to Landlord within ten (10) business
days following Tenant's receipt of the same, but Tenant's failure or refusal
to do so shall not negate Tenant's acceptance of the 3100 Space or affect
determination of the Term Commencement Date.
Landlord represents to Tenant that, to the best of Landlord's actual
knowledge (without any independent inquiry or investigation), Landlord has
not received any notice from any governmental authority informing Landlord
that the 2850 Building or the 3100 Building is in violation of the Americans
With Disabilities Act of 1990 (41 U.S.C. 12101 et seq.), as well as the
regulations and accessibility guidelines promulgated thereunder (collectively,
"ADA"), or any laws, ordinances or statutes of the City of Santa Monica or
State of California based upon or similar to ADA (collectively, the "Santa
Monica Disability Codes") for new construction without regard to
grandfathering. In the event any portion of the Project (including the
Premises) does not comply with ADA or Santa Monica Disability Codes, and
Tenant is not responsible for such non-compliance in accordance with the
terms of this Lease, then as Tenant's sole remedy (other than Tenant's right
to recover from Landlord any claims, losses or damages suffered by Tenant as
a result of a third party claim brought against Tenant), Landlord shall be
obligated to promptly, at Landlord's sole cost and expense (and not as an
Operating Expense pass-through item), rectify said violation and cause the
2850 Building and/or 3100 Building and/or Project to be in material
compliance with ADA or the Santa Monica Disability Codes, as applicable.
3. TERM
The term of this Lease (the "TERM") shall commence on the Term
Commencement Date and continue in full force and effect until August 31,
2003, or until this Lease is terminated as otherwise provided herein. If the
Term Commencement Date is a date other than the first day of the calendar
month, the Term shall be the number of months of the Length of Term in
addition to the remainder of the calendar month following the Term
Commencement Date.
4. USE
A. GENERAL. Tenant shall use the Premises for the permitted use
specified in the Basic Lease Information ("PERMITTED USE") and for no other
use or purpose. Tenant shall control Tenant's (and Tenant's assignees' and
subtenants') employees, independent contractors and agents
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(collectively, "TENANT'S PARTIES") in such a manner that Tenant and Tenant's
Parties cumulatively do not exceed the occupant density (the "OCCUPANCY
DENSITY") or the parking density (the "PARKING DENSITY") specified in the
Basic Lease Information at any time. Notwithstanding the definition of
Occupancy Density set forth in the Basic Lease Information, unless otherwise
approved by Landlord, upon an assignment of this Lease or a sublease of all
or a portion of the Premises to other than an Affiliate, the "Occupancy
Density" with respect to the portion of the Premises affected by the
assignment or sublease shall be reduced to 5 people per 1,000 rentable square
feet of office space. If Tenant and Tenant's Parties exceed the Occupancy
Density, Tenant shall be directly responsible for any additional costs
actually incurred by Landlord as a result of such excessive Occupancy
Density, including without limitation, costs for excess use and excess wear
and tear (i.e. additional costs to maintain elevators, elevator
lobbies, . . .). Notwithstanding the definition of Parking Density set forth
in the Basic Lease Information, upon an assignment of this Lease or a sublease
of all or a portion of the Premises to other than an Affiliate, the "Parking
Density" with respect to the portion of the Premises affected by the
assignment or sublease shall be reduced to 4.5 non-exclusive parking spaces
per 1,000 rentable square feet of office space. Tenant shall pay the Parking
Charge specified in the Basic Lease Information for spaces leased by Tenant
as Additional Rent (as hereinafter defined) hereunder. Tenant and Tenant's
Parties and any approved subtenants and/or assignees shall have the
nonexclusive right to use, in common with other parties occupying the
Building or Project, the parking areas, driveways and other common areas of
the Building and Project, subject to the terms of this Lease and such
reasonable, non-discriminatory rules and regulations as Landlord may from
time to time prescribe. Landlord reserves the right, without notice or
liability to Tenant, and without the same constituting an actual or
constructive eviction, to alter or modify the common areas from time to time,
including the location and configuration thereof, and the amenities and
facilities which Landlord may determine to provide from time to time,
provided Landlord agrees to use its commercially reasonable efforts not to
materially and adversely interfere with Tenant's use of or access to the
Premises and parking facilities.
Landlord shall have the right to alter the Common Areas from time to
time so long as any such alteration does not materially and adversely impair
Tenant's use or access to the Premises; provided, however, Landlord shall use
its best efforts to provide Tenant with fifteen (15) business days prior
notice of any of the actions set forth in this Section 4A, above, to be taken
by Landlord if such action will materially and adversely interfere with
Tenant's ability to (i) conduct business in the Premises, (ii) gain access to
and from the Building and the parking facilities and adjacent streets, or
(iii) use the parking facilities. All of Landlord's entries and the
performance of Landlord's work pursuant to this Lease, shall be scheduled and
performed, as applicable, so as to use commercially reasonable efforts to
minimize interference with Tenant's use of and access to the Premises and
parking facilities. Tenant may, subject to Landlord's prior approval,
designate certain areas of the Premises as "Security Areas" should Tenant
require such areas for the purpose of securing certain valuable property or
confidential information. Landlord may only enter such Security Areas upon
two (2) business days' notice to Tenant which notice shall specify the date
and time of such entry by Landlord; provided, however, that Landlord may enter
the Security Areas without notice to Tenant in the event of an emergency, in
which case Landlord shall provide Tenant with notice of such entry promptly
thereafter.
Landlord shall maintain the Building and Project in a manner
consistent with the manner in which the Building and pRoject are being
maintained as of the date of this Lease. Subject to the terms and conditions
of this Lease, Tenant shall have access to the Premises and the parking
facilities serving the Premises twenty-four (24) hours per day, three hundred
sixty-five (365) days per year.
B. LIMITATIONS. Tenant shall not permit unreasonable amounts (as
reasonably determined by Landlord) of any odors, smoke, dust, gas,
substances, noise or vibrations to emanate from the Premises or from any
portion of the common areas as a result of Tenant's or any Tenant's Party's
use thereof, nor take any action which would constitute a nuisance or would
disturb, obstruct or endanger any other tenants or occupants of the Building
or Project or elsewhere, or interfere with their use of their respective
premises or common areas. Storage outside the Premises of materials, vehicles
or any other items is prohibited. Tenant shall not use or allow the Premises
to be used for any immoral, improper or unlawful purpose, nor shall Tenant
cause or maintain or permit any nuisance in, on or about the Premises. Tenant
shall not commit
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or suffer the commission of any waste in, on or about the Premises. Tenant
shall not allow any sale by auction upon the Premises, or place any loads
upon the floors, walls or ceilings which could endanger the structure, or
place any harmful substances in the drainage system of the Building or
Project. No waste, materials or refuse shall be dumped upon or permitted to
remain outside the Premises. Landlord shall not be responsible to Tenant for
the non-compliance by any other tenant or occupant of the Building or Project
with any of the above-referenced rules or any other terms or provisions of
such tenant's or occupant's lease or other contract, provided that Landlord
agrees to use its reasonable efforts to enforce said rules and other terms or
provisions in order to ensure compliance therewith.
C. COMPLIANCE WITH REGULATIONS. By entering the Premises,
Tenant accepts the Premises in its "AS-IS" condition existing as of the date
of such entry, subject to any punchlist items, latent defects, structural
defects and any covenants and/or representations set forth in this Lease and
Tenant's rights under any warranties assigned to Tenant pursuant to the
Improvement Agreement attached hereto as Exhibit "C". Except for items which
are Landlord's responsibility hereunder, Tenant shall at its sole cost and
expense cause its use and occupancy of the Premises and any Alterations
(defined in Paragraph 12 below) performed by or on behalf of Tenant (except
those performed by Landlord) to strictly comply with all existing or future
applicable municipal, state and federal and other governmental statutes,
rules, requirements, regulations, laws and ordinances, including zoning
ordinances and regulations, ADA and the Santa Monica Disability Codes, and
covenants, easements and restrictions of record governing and relating to the
use, occupancy or possession of the Premises, to Tenant's use of the common
areas, or to the use, storage, generation or disposal of Hazardous Materials
caused by Tenant or any employee, agent, representative, contractor, licensee
or invitee of Tenant (hereinafter defined) (collectively "REGULATIONS").
Tenant shall at its sole cost and expense obtain any and all licenses or
permits necessary for Tenant's use of the Premises. Tenant shall at its sole
cost and expense promptly comply with the requirements of any board of fire
underwriters or other similar body now or hereafter constituted. Tenant shall
not do or permit anything to be done in, on, under or about the Project or
bring or keep anything which will in any way increase the rate of any
insurance upon the Premises, Building or Project or upon any contents therein
or cause a cancellation of said insurance. Tenant shall indemnify, defend (by
counsel reasonably acceptable to Landlord), protect and hold Landlord
harmless from and against any loss, cost, expense, damage, attorneys' fees or
liability arising out of the failure of Tenant to comply with any Regulation.
Tenant's obligations pursuant to the foregoing indemnity shall survive the
expiration or earlier termination of this Lease. Notwithstanding the
foregoing, Tenant shall not be responsible for any capital improvements,
costs incurred to comply with ADA or the Santa Monica Disability Codes, for
costs to comply with environmental or fire/life/safety laws or structural
work required to be performed unless such work is required by reason of
Tenant's particular use of the Premises (other than as general office use),
any Alterations performed by or on behalf of Tenant, any Tenant Improvements
which do not constitute normal general office improvements, or as a result of
any act of Tenant or any of Tenant's agents, representatives, employees,
contractors or invitees (in which event Tenant shall be responsible for said
capital improvement costs, compliance costs or structural work, as
applicable).
D. HAZARDOUS MATERIALS. As used in this Lease, "HAZARDOUS MATERIALS"
shall include, but not be limited to, hazardous, toxic and radioactive
materials and those substances defined as "hazardous substances," "hazardous
materials," "hazardous wastes," "toxic substances," or other similar
designations in any Regulation. Tenant shall not cause, or allow any
of Tenant's Parties to cause, any Hazardous Materials to be handled, used,
generated, stored, released or disposed of in, on, under or about
the Premises, the Building or the Project or surrounding land or environment
in violation of any Regulations. Tenant must obtain Landlord's written
consent prior to the introduction of any Hazardous Materials onto the
Project. Notwithstanding the foregoing, Tenant may handle, store, use and
dispose of products containing small quantities of Hazardous Materials for
"general office purposes" (such as toner for copiers) to the extent customary
and necessary for the Permitted Use of the Premises; provided that Tenant
shall always handle, store, use, and dispose of any such Hazardous Materials
in a safe and lawful manner and never allow such Hazardous Materials
to contaminate the Premises, Building, or Project or surrounding land or
environment. Tenant shall immediately notify Landlord in writing of any
Hazardous Materials' contamination of any portion of the Project of which
Tenant becomes aware if caused by Tenant. Landlord shall have the right
at all reasonable times to inspect the
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Premises and to conduct tests and investigations to determine whether Tenant
is in compliance with the foregoing provisions, the costs of all such
inspections, tests and investigations to be borne by Tenant to the extent it
is determined Tenant is not in compliance with said provisions. Tenant shall
indemnify, defend (by counsel reasonably acceptable to Landlord), protect and
hold Landlord and its directors, officers, employees, agents, successors and
assigns harmless from and against any and all claims, liabilities, losses,
costs, loss of rents, liens, damages, injuries or expenses (including
attorneys' and consultants' fees and court costs), demands, causes of action,
or judgments directly or indirectly arising out of or related to the use,
generation, storage, release, or disposal of Hazardous Materials by Tenant or
any of Tenant's Parties in, on, under or about the Premises, the Building or
the Project or surrounding land or environment, which indemnity
shall include, without limitation, damages for personal or bodily injury,
property damage, damage to the environment or natural resources occurring on
or off the Premises, losses attributable to diminution in value or adverse
effects on marketability, the cost of any investigation, monitoring,
government oversight, repair, removal, remediation, restoration, abatement,
and disposal, and the preparation of any closure or other required plans,
whether such action is required or necessary prior to or following the
expiration or earlier termination of this Lease. Neither the consent by
Landlord to the use, generation, storage, release or disposal of Hazardous
Materials nor the strict compliance by Tenant with all laws pertaining to
Hazardous Materials shall excuse Tenant from Tenant's obligation of
indemnification pursuant to this Paragraph 4.D.
E. Landlord represents to Tenant that, to the best of Landlord's actual
knowledge (without any independent inquiry or investigation), the Premises
and the Building are in material compliance with all Regulations as of the
date of this Lease. Landlord shall indemnify, defend, protect and hold
harmless Tenant, its affiliates, their respective directors, officers,
employees, agents and successors and assigns harmless from and against any
and all claims, demands, causes of action, judgments, injuries, damages,
penalties, fines, costs, liabilities or losses and attorneys' fees,
consultant fees and court costs arising out of, directly or indirectly, any
Hazardous Material in, on or about the Project or the Premises which was
created, handled, placed, stored, used, transported or disposed of by
Landlord, excluding, however, any Hazardous Material whose
presence was caused by Tenant or its affiliates or their respective agents.
F. To the extent the representation set forth in the first sentence
of paragraph 4E above is breached or to the extent otherwise required by any
Regulations, Landlord agrees, at its sole cost and expense and not as an
Operating Expense, to (i) commence to remove, restore, remediate and/or
otherwise abate any Hazardous Materials located in the Project not caused by
Tenant or any of Tenant's employees, agents, representatives, contractors,
licensees or invitees, and (ii) diligently pursue such removal, restoration,
remediation or abatement to completion.
G. Notwithstanding anything to the contrary set forth in this Lease,
the provisions of this Section 4 and the obligation or each party hereunder
shall survive the expiration or earlier termination of this Lease.
5. RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the building rules and
regulations attached hereto as EXHIBIT A and any other reasonable,
non-discriminatory rules and regulations and any modifications or additions
thereto which Landlord may from time to time prescribe in writing for the
purpose of maintaining the proper care, cleanliness, safety, traffic flow and
general order of the Premises or the Building or Project. Tenant shall
cause Tenant's Parties to comply with such rules and regulations. Landlord
shall not be responsible to Tenant for the non-compliance by any
other tenant or occupant of the Building or Project with any of such rules
and regulations, any other tenant's or occupant's lease or any Regulations,
provided that Landlord agrees to use its reasonable efforts to enforce
said rules and regulations in a uniform, non-discriminatory manner against
all tenants of the Project.
Notwithstanding anything to the contrary contained in this Lease,
Landlord agrees that the rules and regulations for the Project shall not be
(i) modified or enforced in any way by Landlord so as to unreasonably and
materially interfere with the permitted use set forth in the Lease or
Tenant's access to the Premises, Building or Project parking facility, or
(ii) discriminatorily enforced against Tenant and not against other tenants
of the Project. Landlord agrees that none
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of the rules and regulations for the Project shall be used to prohibit the
conduct of any business from the Premises which Tenant is permitted to
conduct, unless said conduct constitutes a nuisance to other tenants of the
Project or materially injures or impairs the reputation or image of the
Project as a professional office park. In the event any other tenant or
occupant fails to comply with the rules and regulations for the Project, and
such non-compliance unreasonably and materially interferes with Tenant's use
of the Premises, Landlord shall use its reasonable efforts to cause such
other tenants and/or occupants to comply with such rules and regulations.
6. RENT
A. BASE RENT. Tenant shall pay to Landlord and Landlord shall
receive, without notice or demand, except as otherwise provided herein,
throughout the Term, Base Rent as specified in the Basic Lease Information,
payable in monthly installments in advance on or before the first day of each
calendar month, in lawful money of the United States, without deduction or
offset whatsoever, except as otherwise provided herein, at the Remittance
Address specified in the Basic Lease Information or to such other place as
Landlord may from time to time designate in writing. Bass Rent for the first
full month of the Term shall be paid by Tenant upon Tenant's execution of
this Lease. If the obligation for payment of Base Rent commences on a day
other than the first day of a month, then Base Rent shall be prorated and the
prorated installment shall be paid on the first day of the calendar month
next succeeding the Term Commencement Date. As used herein, the term "Base
Rent" shall mean the Base Rent specified in the Basic Lease Information as it
may be so adjusted from time to time.
B. ADDITIONAL RENT. All monies other than Base Rent required to be
paid by Tenant hereunder, including, but not limited to, Tenant's 2850 Space
Proportionate Share of 2850 Building Operating Expenses and Tenant's 3100
Space Proportionate Share of 3100 Building Operating Expenses, as specified
in Paragraph 7 of this Lease, charges to be paid by Tenant under Paragraph
15, the interest and the late charge described in Paragraphs 26.C. and D.,
and any monies spent by Landlord pursuant to Paragraph 30, shall be
considered additional rent ("ADDITIONAL RENT"). "RENT' shall mean Base Rent
and Additional Rent.
7. OPERATING EXPENSES
A. OPERATING EXPENSES. In addition to the Base Rent required to be
paid hereunder, beginning with the expiration of the applicable Base Year
specified in the Basic Lease Information, Tenant shall pay as Additional
Rent, (i) Tenant's 2850 Space Proportionate Share of increases in the 2850
Building Operating Expenses (defined below) over the 2850 Building Operating
Expenses incurred by Landlord during the 2850 Building Base Year ("2850
Building Base Year Operating Expenses"), and (ii) Tenant's 3100 Proportionate
Share of increases in the 3100 Building Operating Expenses (defined below)
over the 3100 Building Operating Expenses incurred by Landlord during the
3100 Building Base Year ("3100 Building Base Year Operating Expenses"), all
as determined in the manner set forth below. Landlord and Tenant acknowledge
that if the number of buildings which constitute the Project increases or
decreases, or if physical changes are made to the Premises, Building or
Project or the configuration of any thereof, Landlord shall, to the extent
appropriate, reasonably adjust Tenant's 2850 Space Proportionate Share and/or
Tenant's 3100 Space Proportionate Share to reflect the change, provided that
Tenant's obligations under this Paragraph 7 shall not be increased as a
result thereof.
"OPERATING EXPENSES" shall mean all expenses and costs of every
kind and nature which Landlord shall pay, because of or in connection with the
ownership, management, maintenance, repair, preservation, replacement and
operation of the 2850 Building or 3100 Building, as applicable, and its
supporting facilities and such additional facilities now and in subsequent
years as may be determined by Landlord to be reasonably necessary or
desirable to the 2850 Building or 3100 Building, as applicable, (as
determined in a reasonable manner in accordance with sound real estate
management principles) other than those expenses and costs which are
specifically attributable to Tenant or which are expressly made the financial
responsibility of Landlord or specific tenants of the 2850 Building or 3100
Building as applicable, pursuant to this Lease or such other tenants' leases.
The "2850 Building Operating Expenses" shall mean those Operating Expenses
which relate to the ownership, management, maintenance, repair, preservation,
replacement and/or operation of the 2850 Building. The "3100 Building
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Operating Expenses" shall mean those Operating Expenses which relate to the
ownership, management, repair, preservation, replacement and/or operation of
the 3100 Building. "Operating Expenses" shall collectively mean and refer to
the 2850 Operating Expenses and the 3100 Operating Expenses. The Operating
Expenses shall include, but are not limited to, the following:
(1) TAXES. All real property taxes and assessments, possessory
interest taxes, sales taxes, personal property taxes, business or
license taxes or fees, gross receipts taxes, service payments in lieu
of such taxes or fees, annual or periodic license or use fees,
excises, mandatory transit charges, and other impositions, general and
special, ordinary and extraordinary, unforeseen as well as foreseen,
of any kind (including fees "in-lieu" of any such tax or assessment)
which are now or hereafter assessed, levied, charged, confirmed, or
imposed by any public authority upon the 2850 Building or 3100
Building, as applicable, its operations or the Rent (or any portion or
component thereof), or any tax, assessment or fee imposed in
substitution, partially or totally, of any of the above. Operating
Expenses shall also include any taxes, assessments, reassessments, or
other fees or impositions with respect to the development, leasing,
management, maintenance, alteration, repair, use or occupancy of the
Premises or 2850 Building or 3100 Building, as applicable, or any
portion thereof, including, without limitation, by or for Tenant, and
all, except as otherwise provided herein, increases therein or
reassessments thereof whether the increases or reassessments result
from increased rate and/or valuation (whether upon a transfer of the
2850 Building or 3100 Building, as applicable, or any portion thereof
or any interest therein or for any other reason). Operating Expenses
shall not include inheritance or estate taxes imposed upon or assessed
against the interest of any person in the 2850 Building or 3100
Building, as applicable, or taxes computed upon the basis of the net
income of any owners of any interest in the 2850 Building or 3100
Building, as applicable. If it shall not be lawful for Tenant to
reimburse Landlord for all or any part of such taxes, the monthly
rental payable to Landlord under this Lease shall be revised to net
Landlord the same net rental after imposition of any such taxes by
Landlord as would have been payable to Landlord prior to the payment
of any such taxes. There shall be included within the definition of
"Taxes" with respect to any calendar year only the amount currently
payable on any bonds or assessments, including interest for such tax
calendar year or the current annual installment for such calendar
year, and such shall be paid in the maximum number of installments
allowable. Tax refunds shall be credited against Taxes and refunded to
Tenant, regardless of when received, based on the year to which the
refund is applicable. For purposes of this Lease, Taxes shall be
calculated as if the tenant improvements in the 2850 Building and 3100
Building were fully constructed and the 2850 Building and 3100
Building, all parking facilities and all tenant improvements in the
2850 Building and 3100 Building were fully assessed for real estate
tax purposes, specifically excluding any Proposition 8 reduction.
Notwithstanding anything to the contrary contained in the Lease, Taxes
shall not include (i) any excess profits taxes, franchise taxes, gift
taxes, capital stock taxes, inheritance and succession taxes, estate
taxes, federal and state income taxes, and other taxes to the extent
applicable to Landlord's general or net income (as opposed to rents or
receipts), (ii) any items for which Tenant or other tenants are liable
pursuant to their lease (other than as Operating Expense pass through
item), or (iii) penalties incurred as a result of Landlord's
negligence, inability or unwillingness to make payments of, and/or to
file any tax or informational returns with respect to, any real
property taxes or assessment, when due, or (iv) taxes on tenant
improvements in any space in either the 2850 Building or the 3100
Building or the Project based upon an assessed level in excess of
$25.00 per rentable square foot. After written request (the "Tax
Notice") by Tenant, at Landlord's option, either (i) Landlord shall
diligently pursue claims for reductions in the Taxes of the Building,
Project or any part thereof, in which event Landlord shall provide
Tenant with detailed information as to how Landlord will pursue such
claims, (ii) Tenant may pursue such claims with Landlord's
concurrence, in the name of Landlord, or (iii) Tenant may pursue such
claims, at Tenant's expense (except as otherwise set forth in this
paragraph), in the name of Landlord without Landlord's concurrence. In
the event that Landlord does not elect either item (i) or (ii), above,
within thirty (30) days of receipt of the Tax Notice, Tenant shall
thereafter have the right to pursue such claims under item (iii),
above. If either Landlord agrees to pursue such claims or concurs in
the decision to pursue such claims but elects to have them
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pursued by Tenant, the cost of such proceedings shall be paid by
Landlord and included in taxes in the fiscal year such expenses are
paid. If Tenant pursues such claims without obtaining Landlord's
concurrence and such contest is successful, then the cost of such
proceedings, but in no event more than the cumulative tax savings
achieved, shall be included in Operating Expenses in the fiscal year
such expenses are paid, and Landlord shall pay or reimburse to Tenant
such cost. Tenant may give a Tax Notice prior to the issuance of the
actual tax bill by the taxing authority or receipt by Tenant of a
billing from Landlord for Tenant's proportionate share thereof. If
Tenant pursues any claims for reductions in Taxes pursuant to the
terms hereof, Tenant shall notify Landlord in writing, on a regular
basis, of the status of such claims and provide Landlord with a copy
of any correspondence or other information delivered to or received by
Tenant in connection therewith.
(a) PROPOSITION 13 PROTECTION. Despite any other provision of
this Lease, if (x) with respect to the 2850 Space, during the
period ending on August 31, 2001, any sale, refinancing, or
change in ownership of the 2850 Building is consummated and, as
a result, all or part of the 2850 Building is reassessed
("Reassessment") for real estate tax purposes by the appropriate
government authority under the terms of Proposition 13 (as
adopted by the voters of the State of California in the June 1978
election), and (y) with respect to the 3100 Space, during the
initial Term there is a reassessment of the 3100 Building, the terms
of this Paragraph 7(A)(1)(a) shall apply.
I. For purposes of this Paragraph 7(A)(1)(a), the term "Tax
Increase" shall mean that portion of the Taxes, as calculated
immediately following the Reassessment, that is attributable
solely to the Reassessment. Accordingly, a Tax Increase shall
not include any portion of the Taxes, as calculated immediately
following the Reassessment, that is:
(1) Attributable to the initial assessment of the value
of the 2850 Building or 3100 Building, as
applicable, the base, shell and core of the
2850 Building, or 3100 Building, as applicable, or
the tenant improvements located in the 2850 Building
or 3100 Building, as applicable;
(2) Attributable to assessments pending immediately
before the Reassessment, but not otherwise
excludable, that were conducted during, and included
in, that Reassessment or that were otherwise
rendered unnecessary following the Reassessment;
(3) Attributable to the annual inflationary increase in
real estate taxes; or
(4) Part of Taxes incurred or considered to be incurred
during the applicable Base Year as determined under
this Lease.
II. With respect to the 2850 Space, during the period
ending on August 31, 2001, Tenant shall not be obligated to pay
any portion of the Tax Increase relating to a Reassessment of
the 2850 Building occurring during the period ending on
August 31, 2001.
III. With respect to the 3100 Space, during the initial
Term, Tenant shall not be obligated to pay any portion of the
Tax Increase relating to a Reassessment of the 3100 Building
occurring during the initial Term.
IV. The amount of Taxes that Tenant is not obligated to
pay or shall not be obligated to pay during the Term in
connection with a particular Reassessment under the terms of
this Paragraph 7(A)(1)(a) shall be referred to as the
Proposition 13 Protection Amount. If a Reassessment is
reasonably
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foreseeable by Landlord and the Proposition 13 Protection
Amount attributable to that Reassessment may be reasonably
quantified or estimated for each Lease Year beginning with
the Lease Year in which the Reassessment will occur, the
terms of this Paragraph 7(A)(1)(a) shall apply to each such
Reassessment. On notice to Tenant, Landlord shall have the
right to purchase the entire Proposition 13 Protection
Amount relating to the applicable Reassessment (Applicable
Reassessment), at any time during the Term, by paying to
Tenant an amount equal to the Proposition 13 Purchase Price,
as defined below, as long as the right of any successor of
Landlord to exercise its right of repurchase under this
Lease shall not apply to any Reassessment that results from
the event under which that successor became Landlord under
this Lease. As used in this Lease, the term "Proposition 13
Purchase Price" shall mean the present value of the
Proposition 13 Protection Amount remaining during the Term,
as of the date of payment of the Proposition 13 Purchase
Price by Landlord. The present value shall be calculated by:
(1) Using the portion of the Proposition 13
Protection Amount attributable to each remaining
Lease Year (as though the portion of that
Proposition 13 Protection Amount benefited Tenant
at the end of each Lease Year) as the amounts to
be discounted; and
(2) Using discount rates for each amount to be
discounted equal to:
(A) The average rates of yield for United States
Treasury Obligations with maturity dates as close
as reasonably possible to the end of each Lease
Year during which the portions of the Proposition 13
Protection Amount would have benefited Tenant,
using the rates in effect as of Landlord's exercise
of its right to purchase, as set forth in this
Paragraph 7(A)(1)(a); plus
(B) two percent (2%) per annum.
On payment of the Proposition 13 Purchase Price,
subparagraphs (II) and/or (III), as applicable, of this
Paragraph 7(A)(1)(a) shall not apply to any Taxes
attributable to the Applicable Reassessment. Because
Landlord is estimating the Proposition 13 Purchase Price
because a Reassessment has not yet occurred, an adjustment
shall be made when a Reassessment occurs. If Landlord has
underestimated the Proposition 13 Purchase Price, Landlord
shall, on notice to Tenant, credit Tenant's Rent next due
with the amount of that underestimation (and Landlord's
successor in interest shall be bound by any such
underestimation). If Landlord has overestimated the
Proposition 13 Purchase Price, Landlord shall, on notice to
Tenant, increase Tenant's Rent next due by the amount of the
overestimation.
(2) INSURANCE. All insurance premiums and costs, including,
but not limited to, any deductible amounts, premiums and other costs of
insurance incurred by Landlord with respect to the 2850 Building or
3100 Building, as applicable, including for the insurance coverage set
forth in Paragraph 8.A. herein.
(3) COMMON AREA MAINTENANCE.
(a) Repairs, replacements, and general maintenance of and
for the 2850 Building or 3100 Building, as applicable, and
public and common areas and facilities of and comprising the
2850 Building or 3100 Building, as applicable, including, but
not limited to, the roof and roof membrane, windows, elevators,
restrooms, conference rooms, health club facilities (if
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any), lobbies, mezzanines, balconies, mechanical rooms, building
exteriors, alarm systems, pest extermination, landscaped areas,
parking and service areas, driveways, sidewalks, loading areas,
fire sprinkler systems, sanitary and storm sewer lines, utility
services, heating/ventilation/air conditioning systems,
electrical, mechanical or other systems, telephone equipment and
wiring servicing, plumbing, lighting, and any other items or
areas which affect the operation or appearance of the 2850
Building or 3100 Building, as applicable, except for: those
items expressly made the financial responsibility of Landlord
pursuant to Paragraph 10 hereof; those items to the extent paid
for by the proceeds of insurance; those items attributable
solely or jointly to specific tenants of the 2850 Building or
3100 Building, as applicable, and those items specifically
excluded from Operating Expenses.
(b) Repairs, replacements, and general maintenance shall
include the cost of any capital improvements made to or capital
assets acquired for the 2850 Building or 3100 Building, as
applicable, that in Landlord's discretion may reduce any other
Operating Expenses (only to the extent of cost savings),
including present or future repair work, are reasonably
necessary for the health and safety of the occupants of the
2850 Building or 3100 Building, as applicable, or are required to
comply with any Regulation enacted after June 25, 1998 (with
respect to the 2850 Building Operating Expenses) and after the
date hereof (with respect to the 3100 Building Operating
Expenses), such costs or allocable portions thereof to be
amortized over their respective useful life, together with
interest on the unamortized balance at the publicly announced
"prime rate" charged by Wells Fargo Bank, N.A. (San Francisco)
or its successor at the time such improvements or capital assets
are constructed or acquired, plus two (2) percentage points, or
in the absence of such prime rate, than at the U.S. Treasury
six-month market note (or bond, if so designated) rate as
published by any national financial publication selected by
Landlord, plus two (2) percentage points, but in no event more
than the maximum rate permitted by law.
(c) Payment under or for any easement, license, permit,
operating agreement, declaration, restrictive covenant or
instrument relating to the 2850 Building or 3100 Building, as
applicable.
(d) All expenses and rental related to services and costs
of supplies, materials and equipment used in operating, managing
and maintaining the Premises and the 2850 Building or 3100
Building, as applicable, the equipment therein and the adjacent
sidewalks, driveways, parking and service areas, including,
without limitation, expenses related to service agreements
regarding security, fire and other alarm systems, janitorial
services, window cleaning, elevator maintenance, 2850 Building
or 3100 Building, as applicable, exterior maintenance
landscaping and expenses related to the administration,
management and operation of the 2850 Building or 3100 Building,
as applicable, including without limitation salaries, wages and
benefits of personnel up to the level of the Project director
(and/or vice president responsible for the Project) and building
engineer and fair market management office rent (based on size
and rent per square foot).
(e) The cost of supplying any services and utilities which
benefit all or a portion of the Premises or 2850 Building or
3100 Building, as applicable, including without limitation
services and utilities provided pursuant to Paragraph 15 hereof.
(f) Reasonable legal expenses and the cost of audits by
certified public accountants (other than in connection with
defending operating
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expense audits performed by other tenants) relating to the
2850 Building or 3100 Building, as applicable; provided,
however, that legal expenses chargeable as Operating Expenses
shall not include the cost of negotiating leases, collecting
rents, evicting tenants nor shall it include costs incurred in
legal proceedings with or against any tenant or to enforce the
provisions of any lease.
(g) The deductible portion of any repair costs for the
2850 Building or 3100 Building, as applicable, covered by
earthquake insurance, provided that said deductible portion
shall be amortized over a fifteen (15) year period.
(h) A management and accounting cost recovery fee equal
to five percent (5%) of the sum of the Project's base rents
and Operating Expenses to the extent not included in such base
rents (other than such management and accounting fee).
If the rentable area of the 2850 Building and/or 3100 Building, as
applicable, is not at least ninety-five percent (95%) occupied during any
fiscal year of the Term (including the applicable Base Year), an adjustment
shall be made in computing the variable components of 2850 Building Operating
Expenses and/or 3100 Building Operating Expenses, as applicable, for such year
so that Tenant pays an equitable portion of all variable items (e.g.,
utilities, janitorial services and other component expenses that are affected
by variations in occupancy levels) of the 2850 Building Operating Expenses and
3100 Building Operating Expenses, as applicable, as reasonably determined by
Landlord; provided, however, that in no event shall Landlord be entitled to
collect in excess of one hundred percent (100%) of the total Operating Expenses
from all of the tenants in the Building or Project, as the case may be.
Operating Expenses shall not include the cost of providing tenant
improvements or other specific costs incurred for the account of, separately
billed to and paid by specific tenants of the Project, the initial construction
cost of the Project, or debt service on any mortgage or deed of trust recorded
with respect to the Project other than pursuant to Paragraph 7.A.(3)(b) above.
Notwithstanding anything herein to the contrary, in any instance wherein Tenant
uses excessive services of the 2850 Building or 3100 Building, as applicable,
or otherwise creates a greater burden on the operation of the 2850 Building or
3100 Building, as applicable, than other tenants, except as specifically
allowed by this Lease (such determination to be adjusted based on relative
square footages of the space leased by Tenant and other tenants), Landlord
shall have the right to reasonably allocate any such additional costs.
Landlord (x) shall not collect or be entitled to collect from Tenant an
amount in excess of Tenant's applicable share of one hundred percent (100%) of
the 2850 Building Operating Expenses and 3100 Building Operating Expenses
actually paid or incurred by Landlord; and (y) shall reduce the amount of the
2850 Building Operating Expenses and 3100 Building Operating Expenses, as
applicable, by any refund or discount received by Landlord in connection with
any expenses previously included in the 2850 Building Operating Expenses and/or
3100 Building Operating Expenses (such reduction to be credited to Tenant in
the year in which the refund or discount is received by Landlord).
Notwithstanding the foregoing, for the purposes of this Lease, the Operating
Expenses shall not, however, include:
I. bad debt expenses and interest, principal, points and fees on debts
(except in connection with the financing of items which may be included in the
Operating Expenses) or amortization on any mortgage or mortgages or any other
debt instrument encumbering the Building or the Project;
II. marketing costs, including leasing commissions, attorneys' fees in
connection with the negotiation and preparation of letters, deal memos, letters
of intent, leases, subleases and/or assignments, space planning costs, and
other costs and expenses
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incurred in connection with lease, sublease and/or assignment negotiations
and transactions with present or prospective tenants or other occupants of the
Project, including attorneys' fees and other costs and expenditures incurred in
connection with disputes with present or prospective tenants or other occupants
of the Project;
III. costs of inspecting and correcting defects in the Project (including
without limitation, defects discovered as a result of earthquake damage) and
costs, including permit, license and inspection costs, incurred with respect to
the installation of other tenants' or occupants' improvements made for tenants
or other occupants in the Project or incurred in renovating or otherwise
improving, decorating, painting or redecorating vacant space for tenants or
other occupants in the Project;
IV. the cost of providing any service directly to an paid directly by
any tenant;
V. any costs expressly excluded from the Operating Expenses elsewhere
in this Lease;
VI. costs of any items (including, but not limited to, costs incurred by
Landlord for the repair or damage to the Project or Building) to the extent
Landlord receives reimbursement from insurance proceeds (such proceeds to be
deducted from the Operating Expenses in the year in which received) or from a
third party (such proceeds to be credited to the Operating Expenses in the year
in which received, except that any deductible amount under any insurance policy
shall be included within the Operating Expenses of the Project);
VII. Costs of a capital nature, including, without limitation, capital
improvements, capital repairs and capital equipment; except for those (i)
acquired to reduce the Operating Expenses (amortized at an annual rate
reasonably calculated to equal the amount of the Operating Expenses to be saved
in each calendar year throughout the Term of the Lease, as reasonably
determined at the time Landlord elected to proceed with the capital improvement
or acquisition of the capital equipment to reduce the Operating Expenses),
together with interest at the actual interest rate incurred by the Landlord, or
(ii) incurred after the Term Commencement Date in order to comply with any
governmental law or regulation that was enacted subsequent to the Term
Commencement Date (but specifically not including any re-enactment or
subsequent codification, local or otherwise, of any laws or regulations
existing as of the Term Commencement Date, including without limitation the
Americans with Disabilities Act or any state or local codifications thereof)
provided that such capital costs shall be amortized over their useful life,
together with interest at the actual interest rate incurred by Landlord; all
other capital expenditures shall be excluded from the Operating Expenses;
VIII. rentals and other related expenses for leasing a HVAC system,
elevators, or other items (except when needed in connection with normal repairs
and maintenance of the Project) which if purchased, rather than rented, would
constitute a capital improvement not included in the Operating Expenses
pursuant to this Lease;
IX. depreciation, amortization and interest payments, except as
specifically included in the Operating Expenses pursuant to the terms of this
Lease and except on material, tools, supplies and vendor-type equipment
purchased by Landlord to enable Landlord to supply services Landlord might
otherwise contract for with a third party, where such depreciation,
amortization and interest payments would otherwise have been included in the
charge for such third party's services, all as determined in accordance with
generally accepted accounting principles, consistently applied, and when
depreciation or amortization is permitted or required, the item shall be
amortized over its reasonably anticipated useful life;
X. costs incurred by Landlord for alterations (including structural
additions), repairs, equipment and tools which are of a capital nature and/or
which are considered capital improvements or replacements under generally
accepted accounting principles,
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consistently applied, except as specifically included in the Operating Expenses
pursuant to the terms of this Lease;
XI. expenses in connection with services or other benefits which are not
offered to Tenant or for which Tenant is charged for directly but which are
provided to another tenant or occupant of the Project, without charge;
XII. costs incurred by Landlord due to the violation by Landlord or any
tenant of the terms and conditions of any lease of space in the Project;
XIII. overhead and profit increment paid to Landlord or to subsidiaries or
affiliates of Landlord for goods and/or services in the Project to the extent
the same exceeds the costs of such by unaffiliated third parties on a
competitive basis;
XIV. Landlord's general corporate overhead and general and administrative
expenses, excluding on-site management to the level of Project director (and/or
vice president responsible for the Project) and Project engineer and on-site
accounting attributable to the Project, but including costs associated with the
operation of the business of the ownership or entity which constitutes
"Landlord," as distinguished from the costs of building operations, including,
but not limited to, partnership accounting and legal matters, costs of
defending any lawsuits with any mortgagee, costs of selling, syndicating,
financing, mortgaging or hypothecating any of Landlord's interest in the
Project, costs of any disputes between Landlord and its employees or with its
Project management;
XV. advertising and promotional expenditures, and costs of signs in or
on the Project identifying the owner of the Project or other tenants' signs,
except for Project directories or Project standard signage;
XVI. electric power costs or other utility costs for which any tenant
directly contracts with the local public service company (but Landlord shall
have the right to "gross up" as if the floor was vacant);
XVII. tax penalties incurred as a result of Landlord's negligence,
inability or unwillingness to make payments or file returns when due;
XVIII.costs arising from Landlord's charitable or political contributions;
XIX. costs of installing, maintaining and operating any specialty service
operated by landlord including without limitation, any luncheon club or
athletic facility, or the repair thereof;
XX. costs necessitated by or resulting from the gross negligence of
Landlord, or any of its agents, employees or independent contractors;
XXI. any ground lease rental;
XXII. costs of capital acquisition of sculptures, paintings or other
objects of art;
XXIII. costs of earthquake insurance (except to the extent maintained in
the applicable Base Year);
XXIV. notwithstanding any contrary provision of this Lease, including
without limitation, any provision relating to capital expenditures, costs
arising from the presence of "hazardous materials," "hazardous substances,"
and/or "toxic substances," as defined in any federal, state, county or local
law, including asbestos, in or about the Building and the Project; and
XXV. Management fees to the extent in excess of that specifically
includable in Operating Expenses.
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The Operating Expenses shall also include the 2850 Building's and the 3100
Building's respective share of Project Operating Costs (defined below), such
share to be based upon the rentable square footage of the 2850 Building and 3100
Building, as applicable, divided by the rentable square footage of all the
office buildings comprising the Project. The term "Project Operating Costs"
shall include all expenses incurred of the type included in the Operating
Expenses but which are directly and separately identifiable to the ownership,
operation and maintenance of areas of the Project which are owned by Landlord
other than the 2850 Building, the 3100 Building or other office buildings
within the Project, such as real property taxes applicable to the Common Areas,
liability insurance with respect to the Common Areas, maintenance service for
all of the buildings within the Project and repair costs with respect to the
entire Project. To the extent that, in Landlord's reasonable judgment, it may
not be equitable to allocate certain Project Operating Costs on a pro rata
basis based upon the rentable areas of the buildings in the Project, then
Landlord may allocate the same on such basis as Landlord, in its reasonable
judgment, determines to be equitable.
The above enumeration of services and facilities shall not be deemed to
impose an obligation on Landlord to make available or provide such services or
facilities except to the extent if any that Landlord has specifically agreed
elsewhere in this Lease to make the same available or provide the same.
Without limiting the generality of the foregoing, Tenant acknowledges and
agrees that it shall be responsible for providing adequate security for its use
of the Premises, the Building and the Project and that Landlord shall have no
obligation or liability with respect thereto, except to the extent of
Landlord's negligence or willful misconduct or to the extent that Landlord has
specifically agreed elsewhere in this Lease to provide the same.
B. PAYMENT OF ESTIMATED OPERATING EXPENSES. "ESTIMATED OPERATING EXPENSES"
for any particular year shall mean Landlord's estimate of the Operating
Expenses for such fiscal year made with respect to such fiscal year as
hereinafter provided. Landlord shall have the right from time to time to
revise its fiscal year and interim accounting periods so long as the periods as
so revised are reconciled with prior periods in a reasonable manner and do not
result in any net increase to Tenant. During the last month of each fiscal
year during the Term, or as soon thereafter as practicable, Landlord shall give
Tenant written notice of the Estimated Operating Expenses for the ensuing
fiscal year on a line item by line item basis. Tenant shall pay Tenant's
applicable share of the difference between Estimated Operating Expenses for the
respective building and the applicable Base Year Operating Expenses for each
building with installments of Base Rent for the fiscal year to which the
Estimated Operating Expenses applies in monthly installments on the first day
of each calendar month during such year, in advance. Such payment shall be
construed to be Additional Rent for all purposes hereunder. If at any time
during the course of the fiscal year, Landlord reasonably determines that
Operating Expenses are projected to vary from the then Estimated Operating
Expenses by more than five percent (5%), Landlord may, by written notice to
Tenant, revise the Estimated Operating Expenses for the balance of such fiscal
year, and Tenant's monthly installments for the remainder of such year shall be
adjusted so that by the end of such fiscal year Tenant has paid to Landlord
Tenant's applicable share of the revised difference between Estimated Operating
Expenses and the applicable Base Year Operating Expenses for each building for
such year, such revised installment amounts to be Additional Rent for all
purposes hereunder.
C. COMPUTATION OF OPERATING EXPENSE ADJUSTMENT. "OPERATING EXPENSE
ADJUSTMENT" shall mean the difference between Estimated Operating Expenses and
actual Operating Expenses for any fiscal year, over the applicable Base Year
Operating Expenses for each building, determined as hereinafter provided.
Within one hundred twenty (120) days after the end of each fiscal year, or as
soon thereafter as practicable (but in no event beyond two (2) years following
such 120th day), Landlord shall deliver to Tenant a reasonably detailed
statement (line item by line item basis) of actual Operating Expenses for the
fiscal year just ended, accompanied by a computation of Operating Expense
Adjustment. If such statement shows that Tenant's payment based
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upon Estimated Operating Expenses is less than Tenant's applicable share of
actual increases in each building's Operating Expenses over the applicable
Base Year Operating Expenses for each building, then Tenant shall pay to
Landlord the difference within thirty (30) days after receipt of such
statement, such payment to constitute Additional Rent for all purposes
hereunder. If such statement shows that Tenant's payments of Estimated
Operating Expenses exceed Tenant's applicable share of actual increases in
each building's Operating Expenses over the applicable Base Year Operating
Expenses for each building, then (provided that Tenant is not in default
under this Lease beyond applicable notice and cure periods) Landlord shall
pay to Tenant the difference within thirty (30) days after delivery of such
statement to Tenant. If this Lease has been terminated or the Term hereof has
expired prior to the date of such statement, then the Operating Expense
Adjustment shall be paid by the appropriate party within thirty (30) days
after the date of delivery of the statement (which Landlord agrees to use its
commercially reasonable efforts to deliver within six (6) months following
the end of the applicable fiscal year). Tenant's obligation to pay increases
in each building's Operating Expenses over the applicable Base Year Operating
Expenses for each building, shall commence on January 1 of the year
succeeding the applicable Base Year. Should this Lease terminate at any time
other than the last day of the fiscal year, Tenant's applicable share of the
Operating Expense Adjustment shall be prorated based on a month of 30 days
and the number of calendar months during such fiscal year that this Lease is
in effect. Tenant shall in no event be entitled to any credit if applicable
Operating Expenses in any year are less than applicable Base Year Operating
Expenses. Notwithstanding anything to the contrary contained in Paragraph 7.A
or 7.B, Landlord's failure to provide any notices or statements within the
time periods specified in those paragraphs shall in no way excuse Tenant from
its obligation to pay Tenant's applicable share of increases in each
building's Operating Expenses (unless Landlord still has not provided any
required statement within two (2) years following the date said statement was
required to be delivered pursuant to the terms hereof).
D. GROSS LEASE. This shall be a gross Lease; however, it is intended
that Base Rent shall be paid to Landlord absolutely net of all costs and
expenses other than Operating Expenses each year equal to Tenant's applicable
share of applicable Base Year Operating Expenses for each building, except as
otherwise specifically provided to the contrary in this Lease. The provisions
for payment of increases in each building's Operating Expenses and the
Operating Expense Adjustment are intended to pass on to Tenant and reimburse
Landlord for all costs and expenses of the nature described in Paragraph 7.A.
incurred in connection with the ownership, management, maintenance, repair,
preservation, replacement and operation of the Building and/or Project and
its supporting facilities and such additional facilities, in excess of the
applicable Base Year Operating Expenses, now and in subsequent years as may
be reasonably determined by Landlord to be necessary or desirable to the
Building and/or Project.
E. TENANT AUDIT. If Tenant shall dispute the amount set forth in any
statement provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant
shall have the right, not later than two hundred seventy (270) days following
receipt of such statement and upon the condition that Tenant shall first
deposit with Landlord the full amount in dispute, without waiving its rights,
to cause Landlord's books and records with respect to applicable Operating
Expenses for such fiscal year to be audited by certified public accountants
selected by Tenant and subject to Landlord's reasonable right of approval.
The Operating Expense Adjustment shall be appropriately adjusted on the basis
of such audit. If such audit discloses a liability for a refund in excess of
five percent (5%) of Tenant's applicable share of the applicable Operating
Expenses previously reported, the cost of such audit shall be borne by
Landlord, otherwise the cost of such audit shall be paid by Tenant. If Tenant
shall not request an audit in accordance with the provisions of this
Paragraph 7.E. within two hundred seventy (270) days after receipt of
Landlord's statement provided pursuant to Paragraph 7.B. or 7.C., such
statement shall be final and binding for all purposes hereof.
8 INSURANCE AND INDEMNIFICATION
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A LANDLORD'S INSURANCE. All insurance maintained by Landlord shall be for
the sole benefit of Landlord and under Landlord's sole control.
(1) PROPERTY INSURANCE. Landlord agrees to maintain All Perils
property insurance insuring the Building at all times against damage or
destruction due to risk including fire, vandalism, and malicious mischief
in an amount not less than the replacement cost thereof, in the form and
with deductibles and endorsements as selected by Landlord (in its
reasonable discretion). At its election, Landlord may (but shall have no
obligation to) obtain earthquake, and/or pollution, in amounts selected by
Landlord (in its reasonable discretion). Landlord represents to Tenant that
as of the date of this Lease, Landlord carries "All-Perils" coverage and
rental income insurance for twelve (12) months.
(2) OPTIONAL INSURANCE. Landlord shall carry insurance against loss
of rent, in an amount equal to the amount of Base Rent and Additional Rent
that Landlord could be required to abate to all Building tenants in the
event of condemnation or casualty damage for a period of twelve (12)
months. Landlord may also (but shall have no obligation to) carry such
other insurance as Landlord may deem prudent or advisable, including,
without limitation, liability insurance in such amounts and on such terms
as Landlord shall determine (in its reasonable discretion), provided such
insurance is reasonably comparable (as determined by Landlord) to that
being carried by other landlords of Comparable Projects (as defined in
paragraph 39E below). Landlord shall not be obligated to insure, and shall
have no responsibility whatsoever for any damage to, any furniture,
machinery, goods, inventory or supplies, or other personal property or
fixtures which Tenant may keep or maintain in the Premises, or any
leasehold improvements, additions or alterations within the Premises,
except as otherwise provided herein.
B TENANT'S INSURANCE.
(1) PROPERTY INSURANCE. Tenant shall procure at Tenant's sole cost
and expense and keep in effect from the date of this Lease and at all times
until the end of the Term, insurance on all personal property and fixtures
of Tenant and all improvements, additions or alterations made by or for
Tenant to the Premises on an "All Perils" basis, insuring such property for
the full replacement value of such property.
(2) LIABILITY INSURANCE. Tenant shall procure at Tenant's sole cost
and expense and keep in effect from the date of this Lease and at all times
until the end of the Term Commercial General Liability insurance covering
bodily injury and property damage liability occurring in or about the
Premises or arising out of the use and occupancy of the Premises and the
Project, and any part of either, and any areas adjacent thereto, and the
business operated by Tenant or by any other occupant of the Premises. Such
insurance shall include contractual liability insurance coverage insuring
all of Tenant's indemnity obligations under this Lease. Such coverage shall
have a minimum combined single limit of liability of at least Two Million
Dollars ($2,000,000.00), and a minimum general aggregate limit of Three
Million Dollars ($3,000,000.00), with an "Additional Insured-Managers or
Lessors of Premises Endorsement." All such policies shall be written to
apply to all bodily injury (including death), property damage or loss,
personal and advertising injury and other covered loss, however occasioned,
occurring during the policy term, shall be endorsed to add Landlord and any
party holding an interest to which this Lease may be subordinated as an
additional insured, and shall provide that such coverage shall be "PRIMARY"
and non-contributing with any insurance maintained by Landlord, which shall
be excess insurance only. Such coverage shall also contain endorsements
including employees as additional insured if not covered by Tenant's
Commercial General Liability Insurance. All such insurance shall provide
for the severability of interests of insured; and shall be written on an
"OCCURRENCE" basis, which shall afford coverage for all claims
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based on acts, omissions, injury and damage, which occurred or arose (or
the onset of which occurred or arose) in whole or in part during the policy
period.
(3) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE. Tenant
shall carry Workers' Compensation Insurance as required by any Regulation,
throughout the Term at Tenant's sole cost and expense. Tenant shall also
carry Employers' Liability Insurance in amounts not less than One Million
Dollars ($1,000,000) each accident for bodily injury by accident; One
Million Dollars ($1,000,000) policy Limit for bodily injury by disease; and
One Million Dollars ($1,000,000) each employee for bodily injury by
disease, throughout the Term at Tenant's sole cost and expense.
(4) GENERAL INSURANCE REQUIREMENTS. All coverages described in this
Paragraph 8.B. shall be endorsed to provide Landlord with thirty (30) days'
notice of cancellation or change in terms. If at any time during the Term
the amount or coverage of insurance which Tenant is required to carry under
this Paragraph 8.B. is, in Landlord's reasonable judgment, materially less
than the amount or type of insurance coverage typically carried by tenants
of properties located in the general area in which the Premises are located
which are similar to and operated for similar purposes as the Premises or
if Tenant's use of the Premises should change with or without Landlord's
consent, Landlord shall have the right to require Tenant to increase the
amount or change the types of insurance coverage required under this
Paragraph 8.B. All insurance policies required to be carried by Tenant
under this Lease shall be written by companies rated A X or better in
"Best's Insurance Guide" and authorized to do business in the State of
California. In any event deductible amounts under all insurance policies
required to be carried by Tenant under this Lease shall not exceed Seven
Thousand Five Hundred Dollars ($15,000.00) per occurrence. Tenant shall
deliver to Landlord on or before the Term Commencement Date, and thereafter
at least thirty (30) days before the expiration dates of the expired
policies, a certificate evidencing the same issued by the insurer
thereunder; and, if Tenant shall fail to procure such insurance, or to
deliver such certificates, Landlord may, at Landlord's option and in
addition to Landlord's other remedies in the event of a default by Tenant
hereunder, after five (5) business days prior notice to Tenant, procure the
same for the account of Tenant, and the cost thereof shall be paid to
Landlord as Additional Rent.
C INDEMNIFICATION. Tenant shall indemnify, defend by counsel reasonably
acceptable to Landlord, protect and hold Landlord harmless from and against any
and all claims, liabilities, losses, costs, loss of rents, liens, damages,
injuries or expenses, including reasonable attorneys' and consultants' fees and
court costs, demands, causes of action, or judgments, directly or indirectly
arising out of or related to or resulting from: (1) claims of injury to or death
of persons or damage to property occurring or resulting directly or indirectly
from the use or occupancy of the Premises by Tenant or Tenant's Parties, or from
activities or failures to act of Tenant or Tenant's Parties within the Premises;
(2) claims arising from work or labor performed, or for materials or supplies
furnished to or at the request or for the account of Tenant in connection with
performance of any work done for the account of Tenant within the Premises or
Project (other than by Landlord); (3) claims arising from any breach or default
on the part of Tenant in the performance of any covenant contained in this
Lease; and (4) claims arising from the negligence or intentional acts or
omissions of Tenant or Tenant's Parties. The foregoing indemnity by Tenant shall
not be applicable to claims to the extent arising from a the gross negligence
or willful misconduct of Landlord. Landlord shall not be liable to Tenant and
Tenant hereby waives all claims against Landlord for any injury or damage to any
person or property in or about the Premises by or from any cause whatsoever
(other than Landlord's gross negligence or willful misconduct) and, without
limiting the generality of the foregoing, whether caused by water leakage of any
character from the roof, walls, basement or other portion of the Premises,
Building or Project, or caused by gas, fire, oil or electricity in, on or about
the Premises, Building or Project. Provisions of this Paragraph shall survive
the expiration or earlier termination of this Lease.
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Landlord shall indemnify, defend, protect and hold harmless Tenant
from any and all loss, cost, liability, damage, claims, injuries or expense,
including reasonable attorneys' and consultants' fees and court costs, demands,
causes of action or judgments, directly or indirectly arising out of or related
to or resulting from (1) the negligence or willful misconduct of Landlord or its
agents, servants, employees, contractors or licensees (collectively, "Landlord's
Parties") within the Project (but outside of the Premises), (2) the activities
or failures to act of Landlord or Landlord's Parties within the Project (but
outside of the Premises), (3) any default by Landlord under the terms of this
Lease, or (4) Tenant's use of the Project in general (other than its occupancy
and use of the Premises) (except for damage to the tenant improvements and
Tenant's personal property, fixtures, furniture and equipment in the Premises to
the extent such damage is covered by insurance Tenant is required to carry
pursuant to Paragraph 8B). The foregoing indemnity by Landlord shall not be
applicable to claims to the extent arising from the gross negligence or wilful
misconduct of Tenant or Tenant's Parties.
9 WAIVER OF SUBROGATION
To the extent permitted by law and without affecting the coverage provided
by insurance to be maintained hereunder or any other rights or remedies,
Landlord and Tenant each waive any right to recover against the other for: (a)
damages for injury to or death of persons; (b) damages to property, including
personal property; (c) damages to the Premises or any part thereof; and (d)
claims arising by reason of the foregoing due to hazards covered by insurance
maintained or required to be maintained pursuant to this Lease to the extent of
proceeds recovered therefrom, or proceeds which would have been recoverable
therefrom in the case of the failure of any party to maintain any insurance
coverage required to be maintained by such party pursuant to this Lease. This
provision is intended to waive fully, any rights and/or claims arising by reason
of the foregoing, but only to the extent that any of the foregoing damages
and/or claims referred to above are covered or would be covered, and only to the
extent of such coverage, by insurance actually carried or required to be
maintained pursuant to this Lease by either Landlord or Tenant. This provision
is also intended to waive fully, and for the benefit of each party, any rights
and/or claims which might give rise to a right of subrogation on any insurance
carrier. Subject to all qualifications of this Paragraph 9, Landlord waives its
rights as specified in this Paragraph 9 with respect to any subtenant that it
has approved pursuant to Paragraph 21 but only in exchange for the written
waiver of such rights to be given by such subtenant to Landlord upon such
subtenant taking possession of the Premises or a portion thereof. Each party
shall cause each insurance policy obtained by it to provide that the insurance
company waives all right of recovery by way of subrogation against either party
in connection with any damage covered by any policy.
10 LANDLORD'S REPAIRS AND MAINTENANCE
Landlord shall at Landlord's expense maintain in good repair, reasonable
wear and tear excepted, the structural soundness of the roof, foundations, and
exterior walls of the Building, Landlord shall furthermore be responsible, at
its sole cost and expense (not as an Operating Expense), for repairing any
latent or patent structural defects in the Building, except to the extent any
such defect is caused, exacerbated or aggravated by any acts of Tenant or any of
Tenant's Parties. Landlord shall also use its commercially reasonable efforts to
keep the Building and Project free from any infestation of insects, rodents,
bugs or other animals. The term "exterior walls" as used herein shall not
include windows, glass or plate glass, doors, special store fronts or office
entries.
Without limiting the generality of the foregoing, Landlord shall diligently
maintain, repair and keep in a clean and sanitary working order and condition
equal to the standards of the Comparable Projects as part of Operating Expenses
to the extent allowable under this Lease: (i) the foundations, roof and all
structural aspects of the Building, the Common Areas, and the parking
facilities; (ii) all nonstructural aspects of the Building which relate to more
than one (1) tenant's premises, or which no tenant of the Building is required
to maintain and repair, including all systems and facilities necessary for the
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operation of the Building and the provision of services and utilities as
required herein, and the electrical, mechanical, plumbing, lighting,
lifesafety, fire sprinkler, HVAC and security systems, fixtures, and
equipment located in the Premises and all other elements thereof; (iii) the
parking facilities; and (iv) the Common Areas, including, but not limited to,
elevators and escalators, electrical, mechanical and plumbing systems,
fixtures and equipment, restrooms, structural components, lighting, heating,
ventilating and air conditioning equipment and systems and security systems
and all other areas or elements thereof. Any damage caused by or repairs
necessitated by any negligence or wilful misconduct of Tenant or Tenant's
Parties may be repaired by Landlord at Landlord's option and Tenant's
expense. Tenant shall immediately give Landlord written notice of any defect
or need of repairs in such components of the Building for which Landlord is
responsible, after which Landlord shall have a reasonable opportunity and the
right to enter the Premises at all reasonable times to repair same (subject
to the immediately succeeding paragraph). Landlord's liability with respect
to any defects, repairs, or maintenance for which Landlord is responsible
under any of the provisions of this Lease shall be limited to the cost of
such repairs or maintenance, and there shall be no abatement of rent and no
liability of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of repairs, alterations or
improvements in or to any portion of the Premises, the Building or the
Project or to fixtures, appurtenances or equipment in the Building, except as
provided in Paragraph 24 or elsewhere in this Lease. By taking possession of
the Premises, Tenant accepts them "as is," as being in good order, condition
and repair and the condition in which Landlord is obligated to deliver them
and suitable for the Permitted Use and Tenant's intended operations in the
Premises, whether or not any notice of acceptance is given, subject to
punchlist items, latent defects, structural defects, any covenants and/or
representations set forth in this Lease, Tenant's rights under any warranties
assigned to Tenant pursuant to the Improvement Agreement attached hereto as
Exhibit "C" and the performance by Landlord of its obligations under this
Paragraph 10.
Except in the case of emergency, Landlord shall use its best efforts to
provide Tenant with at least forty-eight (48) hours prior written notice
(unless such entry is approved by the on-site manager for a lesser time
period or with respect to janitorial or normal periodic minor maintenance and
upkeep) of Landlord's intent to enter the Premises, shall use reasonable
efforts to minimize any interference to Tenant, shall attempt to reasonably
schedule such entry with Tenant and shall attempt to make all such entries
during normal business hours.
If Tenant provides notice to Landlord of an event or circumstance which
requires the action of Landlord with respect to the provision of utilities
and/or services and/or repairs and/or maintenance as set forth in ARTICLES 10
AND 15 of this Lease, and Landlord fails to provide such action as required
by the terms of this Lease, then Tenant may proceed to take the required
action upon delivery of an additional ten (10) business days notice (or less
in the event of an emergency) to Landlord specifying that Tenant is taking
such required action, and if such action was required under the terms of this
Lease to be taken by Landlord, then Tenant shall be entitled to prompt
reimbursement by Landlord of Tenant's reasonable costs and expenses in taking
such action plus interest at the Applicable Interest Rate (defined below). In
the event Tenant takes such action, and such work will affect, in Landlord's
reasonable determination, any of the Building systems and equipment,
structural integrity or exterior appearance of the Building, Tenant shall use
only those contractors used by Landlord in the Project for such work unless
such contractors are unwilling or unable to perform such work within a
reasonable period of time, in which event Tenant may utilize the services of
any other qualified contractor which normally and regularly performs similar
work in comparable projects. Further, if Landlord does not deliver a detailed
written objection to Tenant, within thirty (30) days after receipt of an
invoice by Tenant of its costs of taking action which Tenant claims should
have been taken by Landlord, and if such invoice from Tenant sets forth a
reasonably particularized breakdown of its costs and expenses in connection
with taking such action on behalf of Landlord, then Tenant shall be entitled
to deduct from Rent payable by Tenant under this Lease, the amount set forth
in such invoice together with interest at the Applicable Interest Rate. If,
however, Landlord delivers to Tenant within
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thirty (30) days after receipt of Tenant's invoice, a written objection to
the payment of such invoice, setting forth with reasonable particularity
Landlord's reasons for its claim that such action did not have to be taken by
Landlord pursuant to the terms of this Lease or that the charges are
excessive (in which case Landlord shall pay the amount it contends would not
have been excessive), then Tenant shall not be entitled to such deduction
from Rent, but as Tenant's sole remedy, Tenant may proceed to institute legal
proceedings against Landlord to collect the amount set forth in the subject
invoice. For purposes of the first sentence of this paragraph, Landlord shall
not be deemed to have "failed to provide such action as required by the terms
of this Lease" if Landlord commences any requisite repair work within a
reasonable period of time (in light of the required repair) following
Landlord's receipt of written notice of the need for repairs and Landlord
prosecutes such repair work toward completion with reasonable diligence.
11 TENANT'S REPAIRS AND MAINTENANCE
Tenant shall at all times during the Term at Tenant's expense maintain all
parts of the Premises (including partitions and interior dry walls) (other than
Building systems and equipment and the structural parts of the Premises) and
such portions of the Building as are within the exclusive control of Tenant in
good repair and condition, reasonable wear and tear excepted, clean and secure
condition and promptly make all necessary repairs and replacements with
materials and workmanship of the same character, kind and quality as the
original, except to the extent the necessity for any such repairs or
replacements results from Landlord's negligence or willful misconduct of
Landlord. Notwithstanding anything to the contrary contained herein, but subject
to the terms of the last paragraph of Article 8 above, Tenant shall, at its
expense, promptly repair any damage to the Premises or the Building or Project
resulting from or caused by the negligence or wilful misconduct of Tenant or
Tenant's Parties.
12 ALTERATIONS
A. Tenant shall not make, or allow to be made, any alterations,
physical additions, improvements or partitions, including without limitation
the attachment of any fixtures or equipment, in, about or to the Premises
("ALTERATIONS") without obtaining the prior written consent of Landlord,
which consent shall not be unreasonably withheld with respect to proposed
Alterations (and shall be granted or denied within fifteen (15) business days
following Landlord's receipt of Tenant's request therefor [together with all
relevant information required by Landlord with respect to such Alterations] ,
stating detailed reasons for denial) which: (a) comply with all applicable
Regulations; (b) in Landlord's reasonable opinion, do not adversely affect
the structure of the Building or the Project and its mechanical, plumbing,
electrical, heating/ventilation/air conditioning systems, and will not cause
the Building or Project or such systems to be required to be modified to
comply with any Regulations (including, without limitation, the Americans
With Disabilities Act); and (c) will not interfere with the use and occupancy
of any other portion of the Building or Project by any other tenant or its
invitees. Specifically, but without limiting the generality of the foregoing,
Landlord shall have the right of written consent for all plans and
specifications for the proposed Alterations (to the extent plans and
specifications are reasonably required), construction means and methods, all
appropriate permits and licenses, any contractor or subcontractor to be
employed on the work of Alterations, and the time for performance of such
work, and may impose reasonable, non-discriminatory rules and regulations for
contractors and subcontractors performing such work, all of which shall not
be unreasonably withheld or delayed. Tenant shall also supply to Landlord any
documents and information reasonably requested by Landlord in connection with
Landlord's consideration of a request for approval hereunder. Tenant shall
cause all Alterations to be accomplished in a good and workmanlike manner,
and to comply with all applicable Regulations and Paragraph 27 hereof. Tenant
shall at Tenant's sole expense, perform any additional work required under
applicable Regulations due to the Alterations hereunder. Tenant shall have
the right to use non-union contractors to perform all or a portion of the
Alterations, but only to the extent (i) Tenant provides Landlord with prior
written notice of its request to hire a non-union contractor, and (ii) hiring
non-union contractors does not violate any
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contracts to which Landlord is a party. No review or consent by Landlord of or
to any proposed Alteration or additional work shall constitute a waiver of
Tenant's obligations under this Paragraph 12, nor constitute any warranty or
representation that the same complies with all applicable Regulations, for which
Tenant shall at all times be solely responsible. Tenant shall reimburse Landlord
for all actual, out-of-pocket costs which Landlord may incur in connection with
granting approval to Tenant for any such Alterations, including any costs or
expenses which Landlord may incur in electing to have outside architects and
engineers review said plans and specifications, and shall pay no administration
fee to Landlord. All such Alterations shall remain the property of Tenant until
the expiration or earlier termination of this Lease, at which time they shall be
and become the property of Landlord; provided, however, that Landlord may, at
Landlord's option, at the time of Landlord's consent (or if Landlord's consent
is not required, within ten (10) business days following Tenant's notice to
Landlord of its intention to perform any Alterations) require that Tenant, at
Tenant's expense, remove any or all Alterations made by Tenant (but not the
Tenant Improvements constructed in accordance with the Improvement Agreement
attached hereto as Exhibit "C") and restore the Premises by the expiration or
earlier termination of this Lease, to their condition existing prior to the
construction of any such Alterations. All such removals and restoration shall be
accomplished in a good and workmanlike manner so as not to cause any damage to
the Premises or Project whatsoever. If Tenant fails to remove such Alterations
which Landlord timely required Tenant to remove or Tenant's trade fixtures or
furniture or other personal property at the expiration or earlier termination of
this Lease, Landlord may keep and use them or remove any of them and cause them
to be stored or sold all in accordance with applicable law, at Tenant's sole
expense. In addition to and wholly apart from Tenant's obligation to pay
Tenant's Proportionate Share of Operating Expenses, Tenant shall be responsible
for and shall pay prior to delinquency any taxes or governmental service fees,
possessory interest taxes, fees or charges in lieu of any such taxes, capital
levies, or other charges imposed upon, levied with respect to or assessed
against its fixtures or personal property, on the value of Alterations within
the Premises, and on Tenant's interest pursuant to this Lease, or any increase
in any of the foregoing based on such Alterations. To the extent that any such
taxes are not separately assessed or billed to Tenant, Tenant shall pay the
amount thereof as invoiced to Tenant by Landlord within thirty (30) days.
Notwithstanding anything to the contrary contained herein, Tenant may make
any cosmetic Alterations which do not affect the Building systems and equipment,
exterior appearance of the Building, or structural aspects, by providing
Landlord with notice not less than ten (10) business days prior to the
commencement thereof. Landlord's consent shall not be required with respect to
any such Alterations provided the cost of said Alterations do not exceed $50,000
in any twelve (12) month period. Tenant may not make any Alterations which may
affect the Building systems and equipment, exterior appearance of the Building,
or structural aspects or which require a permit from the applicable governmental
authorities, without first procuring the prior written consent of Landlord to
such Alterations, which consent shall be requested by Tenant not less than
fifteen (15) days prior to commencement thereof, and which consent may be
withheld by Landlord in its reasonable discretion. Any time Tenant proposes to
make Alterations which require the consent of Landlord pursuant to this Section,
Tenant's notice regarding the proposed Alterations shall be provided together
with the plans and specifications for the Alterations, and Landlord shall
approve or disapprove of the same within fifteen (15) business Days after its
receipt of all of the same.
B. In compliance with Paragraph 27 hereof, at least ten (10) business
days before beginning construction of any Alteration, Tenant shall give Landlord
written notice of the expected commencement date of that construction to permit
Landlord to post and record a notice of non-responsibility. Upon substantial
completion of construction, if the law so provides, Tenant shall cause a timely
notice of completion to be recorded in the office of the recorder of the county
in which the Building is located.
13. SIGNS
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Except as otherwise set forth in Paragraph 39D below, Tenant shall not
place, install, affix, paint or maintain any signs, notices, graphics or banners
whatsoever or any window decor which is visible in or from public view or
corridors, the common areas or the exterior of the Premises or the Building, in
or on any exterior window or window fronting upon any common areas or service
area without Landlord's prior written approval which Landlord shall have the
right to withhold in its absolute and sole discretion; provided that Tenant's
name and/or logo shall be included in any Building-standard door and directory
signage in buildings containing the Premises (such directory signage not to
exceed one (1) line per 1,000 rentable square feet of the Premises), if any, in
accordance with Landlord's Building signage program, including without
limitation, payment by Tenant of any Project standard reasonable fee charged by
Landlord for installing and/or maintaining such signage, which fee shall
constitute Additional Rent hereunder. Any installation of signs, notices,
graphics or banners on or about the Premises or Project approved by Landlord
shall be subject to any Regulations and to any other requirements imposed by
Landlord. Tenant shall remove all such signs or graphics (except directories) by
the expiration or any earlier termination of this Lease. Such installations and
removals shall be made in such manner as to avoid injury to or defacement of the
Premises, Building or Project and any other improvements contained therein, and
Tenant shall repair any injury or defacement including without limitation
discoloration caused by such installation or removal.
14. INSPECTION/POSTING NOTICES
After forty-eight (48) hours prior notice (unless approved by Tenant's
on-site manager for lesser time period or with respect to janitorial or
normal periodic minor maintenance and upkeep), except in emergencies where no
such notice shall be required, Landlord and Landlord's agents and
representatives, shall have the right to enter the Premises at all reasonable
times to inspect the same, to clean, to perform such work as may be permitted
or required hereunder, to make repairs, improvements or alterations to the
Premises, Building or Project or to other tenant spaces therein, to deal with
emergencies, to post such notices as may be permitted or required by law to
prevent the perfection of liens against Landlord's interest in the Project or
to exhibit the Premises to prospective tenants (only during the last nine
months of the Term), purchasers, encumbrancers or to others, or for any other
purpose as Landlord may deem reasonably necessary or desirable; provided,
however, that Landlord shall use reasonable efforts not to unreasonably
interfere with Tenant's business operations or access to the Premises and
Landlord shall attempt to reasonably schedule any such entry with Tenant and
make entries during normal business hours. Tenant shall not be entitled to
any abatement of Rent by reason of the exercise of any such right of entry,
except as otherwise provided herein. Tenant waives any claim for damages for
any injury or inconvenience to or interference with Tenant's business, any
loss of occupancy or quiet enjoyment of the Premises, and any other loss
occasioned thereby. Landlord shall at all times have and retain a key with
which to unlock all of the doors in, upon and about the Premises, excluding
Tenant's vaults and safes or special security areas (designated in advance),
and Landlord shall have the right to use any and all means which Landlord may
deem reasonably necessary or proper to open said doors in an emergency, in
order to obtain entry to any portion of the Premises, and any entry to the
Premises or portions thereof obtained by Landlord by any of said means, or
otherwise, shall not be construed to be a forcible or unlawful entry into, or
a detainer of, the Premises, or an eviction, actual or constructive, of
Tenant from the Premises or any portions thereof. At any time within nine (9)
months prior to the expiration of the Term or following any earlier
termination of this Lease or agreement to terminate this Lease, Landlord
shall have the right to erect on the Building and/or Project a suitable sign
indicating that the Premises are available for lease.
15. SERVICES AND UTILITIES
A. Subject to the provisions elsewhere herein contained and to the rules
and regulations of the Building, Landlord shall furnish to the Premises during
ordinary business hours (which business hours, as of the date of this Lease, are
7:00 a.m. to 6:00
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p.m. Monday through Friday, as such hours may change from time to time,
excluding legal holidays generally recognized by most Comparable Projects (as
defined in Paragraph 39E below)), water for kitchen, lavatory and drinking
purposes and electricity, heat and air conditioning as usually furnished or
supplied for use of the Premises for reasonable and normal office use
(consistent with other tenants in the Project). Notwithstanding the
foregoing, and subject to all of the other terms and conditions of this
Lease, water, elevator service, electricity and heat and air conditioning
shall be furnished or supplied for use of the Premises twenty-four (24) hours
per day, three hundred sixty-five (365) days per year. Subject to Landlord's
approval (not to be unreasonably withheld or delayed), Tenant shall have the
right to provide supplemental water systems in order to service the Premises.
B. Landlord shall provide adequate electrical wiring, facilities and
power for normal general office use as reasonably determined by Landlord (but
not including above-standard or continuous cooling for excessive
heat-generating machines, excess lighting or equipment), and elevator
service, which shall mean service either by nonattended automatic elevators
or elevators with attendants, or both, at the option of Landlord. For
purposes of this Paragraph 15B, the term "power for normal general office
use" shall equal five (5) watts connected load per usable square foot of the
Premises on an annual basis. Landlord represents to Tenant that the
electrical capacity for the Premises equals seven (7) watts demand load per
usable square foot of the Premises on an annual basis.
C. Tenant shall have the right to install its own supplemental
air-conditioning units, provided that Landlord approves of the installation
of such units pursuant to Section 12 and the same does not interfere with the
operation systems and equipment, including without limitation, the Building
heating, ventilation and air-conditioning systems (as determined by Landlord
in its reasonable discretion); provided, however, Tenant shall be solely
responsible for all costs relating to the installation and operation of such
units, and shall, upon Landlord's request, remove such units upon the
expiration or earlier termination of the Term and shall cause such units to
be separately metered at Tenant's expense.
D. Landlord shall provide janitorial services in accordance with the
janitorial specifications attached hereto as Exhibit "F".
E. Landlord will maintain reasonable security measures at the Project,
as determined by Landlord in its reasonable discretion given the character
and nature of the Project. Subject Landlord's approval as to the method of
installation and type of security system, Tenant shall have the right to
install its own security system and/or personnel provided (i) Landlord and
its agents, representatives and employees shall be able to reasonably access
the Premises for any purposes for which Landlord is entitled to access the
Premises under this Lease (including, without limitation, for emergency
purposes), (ii) the same does not interfere with the Building systems or
equipment, (iii) Tenant shall indemnify, defend and hold harmless Landlord
from and against any and all claims, loss, damage or expenses suffered by
Landlord resulting from or arising out of the installation of said security
system or maintenance of security personnel, and (iv) upon Landlord's request
(and notwithstanding anything to the contrary set forth in Paragraph 26
below), Tenant shall remove any such system upon the expiration or earlier
termination of this Lease and repair any damage caused by such removal.
F. Notwithstanding anything to the contrary contained in this Article
15, with respect to the 3100 Space, (i) if the two (2) twenty (20) ton
supplemental HVAC units located on the roof of the 3100 Building (the "20-Ton
Units") are not required to provide air conditioning to the 3100 Space for
reasonable and normal office use, then (A) there shall be no additional
charge to Tenant for normal HVAC usage during ordinary business hours of
generally recognized business days, (B) the charge to Tenant for after-hours
HVAC usage shall equal the actual utility costs incurred by Landlord to
provide HVAC usage from the 20-Ton Units (the "20-Ton HVAC Supply Costs"),
and (C) any work necessary to allow for the distribution of air conditioning
from the 20-Ton Units into the 3100 Space (i.e. ducting) shall be part of and
applied against the Tenant Improvement
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Allowance (as defined in the attached Improvement Agreement); and (ii) if the
20-Ton Units are required to provide air conditioning to the 3100 Space for
reasonable and normal office use, then (a) the 20-Ton HVAC Supply Costs
incurred by Landlord during ordinary business hours of generally recognized
business days shall be paid for by Landlord as an Operating Expense, (b) for
any after-hours HVAC usage, Tenant shall be directly responsible for the
20-Ton HVAC Supply Costs and the actual costs incurred by Landlord to operate
the other HVAC units serving the 3100 Space (which actual costs are currently
at a rate of $15.00 per unit and $10.00 per zone, as such rates may be
reasonably adjusted by Landlord based upon Landlord's actual costs [with the
per-zone charge to be reduced to $5.00 per zone for any additional zones
beyond the first two zones] per hour), and (c) Landlord shall, at Landlord's
expense (not to be applied against the Tenant Improvement Allowance), perform
the work necessary to allow for the distribution of air conditioning from the
20-Ton Units into the 3100 Space (with the costs of all other HVAC-related
work to be applied against the Tenant Improvement Allowance -- i.e.,
installation of controls, distribution to ceilings or specified areas within
the 3100 Space and thermostat controls).
With respect to the 2850 Building, Tenant acknowledges that
Landlord currently charges Twenty-five Dollars ($25.00) per hour for
after-hours heat or air-conditioning. Tenant further acknowledges that such
hourly charge shall be applicable to any after-hours heat or air-conditioning
which Tenant requests and obtains from the 2850 Building's heating and
air-conditioning system.
G. Landlord agrees that the charge for after-hours heating or air
conditioning shall not be increased in any calendar year by more than 10%
from that charged for the preceding calendar year (calculated on a cumulative
basis). Tenant agrees to keep and cause to be kept closed all window covering
when necessary because of the sun's position, and Tenant also agrees at all
times to cooperate fully with Landlord and to abide by all of the reasonable,
non-discriminatory regulations and requirements which Landlord may prescribe
for the proper functioning and protection of electrical, heating, ventilating
and air conditioning systems. Wherever heat-generating machines, excess
lighting or equipment are used in the Premises which affect the temperature
otherwise maintained by the air conditioning system (other than standard
office equipment), Landlord reserves the right to install supplementary air
conditioning units in the Premises and the cost thereof, including the cost
of installation and the cost of operation and maintenance thereof, shall be
paid by Tenant to Landlord within thirty (30) days after demand by Landlord.
H. Tenant shall not without written consent of Landlord (which shall
not be unreasonably withheld or delayed) use any apparatus, equipment or
device in the Premises, including without limitation, electronic data
processing machines, and other over-standard machines using electric current
or water, in excess of or which will in any way increase the amount of
electricity or water being furnished or supplied for the use of the Premises
(which, with respect to electricity consumption, is in excess of 5 watts per
usable square foot of the Premises) or which will require additions or
alterations to or interfere with the Building power distribution systems; nor
connect with electric current, except through existing electrical outlets in
the Premises or water pipes, any apparatus, equipment or device for the
purpose of using electrical current, water, or any other resource. If Tenant
shall require water or electric current or any other resource in excess of
that being furnished or supplied for the use of the Premises, Tenant shall
first procure the written consent of Landlord (which shall not be
unreasonably withheld or delayed), and Landlord may cause a special meter to
be installed in the Premises so as to measure the amount of water, electric
current or other resource consumed for any such other use. Tenant shall pay
directly to Landlord as an addition to and separate from payment of Operating
Expenses the cost of all such additional resources, energy, utility service
and meters (and of installation, maintenance and repair thereof and of any
additional circuits or other equipment necessary to furnish such additional
resources, energy, utility or service). Landlord may add to the separate or
metered charge a recovery of additional expense incurred in keeping account
of the excess water, electric current or other resource so consumed. Except
as otherwise provided herein, Landlord
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shall not be liable for any damages directly or indirectly resulting from nor
shall the Rent or any monies owed Landlord under this Lease herein reserved
be abated by reason of: (a) the installation, use or interruption of use of
any equipment used in connection with the furnishing of any such utilities or
services, or any change in the character or means of supplying or providing
any such utilities or services or any supplier thereof; (b) the failure to
furnish or delay in furnishing any such utilities or services when such
failure or delay is caused by acts of God or the elements, labor disturbances
of any character, or any other accidents or other conditions beyond the
reasonable control of Landlord or because of any interruption of service due
to Tenant's use of water, electric current or other resource in excess of
that being supplied or furnished for the use of the Premises; (c) the
inadequacy, limitation, curtailment, rationing or restriction on use of
water, electricity, gas or any other form of energy or any other service or
utility whatsoever serving the Premises or Project, whether by Regulation or
otherwise beyond Landlord's reasonable control; or (d) the partial or total
unavailability of any such utilities or services to the Premises or the
Building, whether by Regulation or otherwise beyond Landlord's reasonable
control; nor shall any such occurrence constitute an actual or constructive
eviction of Tenant. Provided the utility services provided to Tenant are not
materially reduced or impaired, Landlord shall be entitled to cooperate
voluntarily and in a reasonable manner with the efforts of national, state or
local governmental agencies or utility suppliers in reducing energy or other
resource consumption. In addition, Landlord reserves the right to change the
supplier or provider of any such utility or service from time to time, so
long as the cost to provide said utilities or services arc reasonably
competitive with that of other providers or suppliers. Tenant shall have no
right to contract with or otherwise obtain any electrical service for or with
respect to the Premises or Tenant's operations therein from any supplier or
provider of any such service. Tenant shall cooperate, at no expense to
Tenant, with Landlord and any supplier or provider of such services
designated by Landlord from time to time to facilitate the delivery of such
services to Tenant at the Premises and to the Building and Project, including
without limitation allowing Landlord and Landlord's suppliers or providers,
and their respective agents and contractors, reasonable access to the
Premises for the purpose of installing, maintaining, repairing, replacing or
upgrading such service or any equipment or machinery associated therewith.
Landlord agrees to use its best efforts to minimize any interference caused
to Tenant's business operations as a result of such access.
I. In the event that Tenant requires utilities (other than
electricity, water and HVAC) and/or services in excess of what Landlord is
required to provide during Business Hours, Landlord agrees to use its
commercially reasonable efforts to provide such extra utilities and services,
and Tenant agrees to pay to Landlord its then standard charge for any such
extra utilities or services.
J. For all utilities furnished to the Premises and separately billed to
or metered to Tenant in accordance with the terms of this Paragraph 15,
Tenant shall pay the charges therefor within 30 days after written demand
from Landlord. For all other utilities furnished to the Premises, Tenant
shall pay Tenant's applicable share of all charges jointly serving the
Project in accordance with Paragraph 7. All sums payable under this Paragraph
15 shall constitute Additional Rent hereunder.
K. In the event that Tenant is prevented from using, and does not use,
the Premises or any portion thereof, for more than three (3) consecutive
business days or ten (10) business days in any twelve (12) month period
following Landlord's receipt of written notice from Tenant (which notice shall
not be deemed given until the following non-holiday weekday if it is given on a
Saturday, Sunday or holiday) (the "Eligibility Period") as a result of any (i)
repair, maintenance or alteration performed by Landlord, or which Landlord
failed to perform and which was required by this Lease (which is not
necessitated by the negligence of Tenant or its employees, agents, contractors
or invitees) and which substantially interferes with Tenant's use of the
Premises, and (ii) interruption in any of the following building services
required to be provided by Landlord (so long as it is not due to the fault or
neglect of Tenant, its agents, employees, contractors or invitees): heating,
ventilation and air conditioning, fire life safety, electrical services,
janitorial service or water or any other "essential" building service (each such
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circumstance to be known as an "Abatement Event"), then Tenant's rent and
parking charges shall be abated or reduced, as the case may be, after
expiration of the Eligibility Period for such time that Tenant continues to
be so prevented from using, and does not use, the Premises, or a portion
thereof, in the proportion that the rentable area of the portion of the
Premises that Tenant is prevented from using, and does not use, bears to the
total rentable area of the Premises. However, in the event that Tenant is
prevented from conducting, and does not conduct, its business in any portion
of the Premises for a period of time in excess of the Eligibility Period, and
the remaining portion of the Premises is not sufficient to allow Tenant to
effectively conduct its business therein, and if Tenant does not conduct its
business from such remaining portion, then for such time after expiration of
the Eligibility Period during which Tenant is so prevented from effectively
conducting its business therein, the rent for the entire Premises and all of
Tenant's parking charges shall be abated; provided, however, if Tenant
reoccupies and conducts its business from any portion of the Premises during
such period, the rent and parking charges allocable to such reoccupied
portion, based on the proportion that the rentable area of such reoccupied
portion of the Premises bears to the total rentable area of the Premises,
shall be payable by Tenant from the date such business operations commence.
If the Eligibility Period continues for more than six (6) consecutive months,
and the Abatement Event is reasonably capable of being remedied by Landlord
(and is not an event covered by Articles 23 or 24 below), then Tenant shall
have the right to elect to terminate this Lease effective ninety (90) days
thereafter by notifying Landlord in writing of such election within five (5)
business days following the end of such six (6) consecutive month period and
thereafter during the first five (5) business days after each calendar month
following the end of such six (6) consecutive month period until such time as
the Abatement Event is remedied and Tenant is able to conduct its business
from the Premises. The six (6) consecutive month period set forth in this
paragraph shall not be extended by any delays in remedying the Abatement
Event which result from a Force Majeure Delay (as defined in Paragraph 35
below).
Notwithstanding anything to the contrary contained herein, the
terms of Article 23 and 24 shall govern and control Tenant's right to any
rental abatement as a result of any event covered by Article 23 or 24 below.
L. Landlord agrees to maintain and operate the Common Areas in a
manner consistent with the manner in which the Common Areas are being
maintained and operated as of the date of this Lease.
16. SUBORDINATION
Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, the Lease shall be and
is hereby declared to be subject and subordinate at all times to: (a) all
ground leases or underlying leases which may now exist or hereafter be
executed affecting the Premises and/or the land upon which the Premises and
Project are situated, or both; and (b) any mortgage or deed of trust which
may now exist or be placed upon the Building, the Project and/or the land
upon which the Premises or the Project are situated, or said ground leases or
underlying leases, or Landlord's interest or estate in any of said items
which is specified as security. Notwithstanding the foregoing, Landlord shall
have the right to subordinate or cause to be subordinated any such ground
leases or underlying leases or any such liens to this Lease. If any ground
lease or underlying lease terminates for any reason or any mortgage or deed
of trust is foreclosed or a conveyance in lieu of foreclosure is made for any
reason, Tenant shall, notwithstanding any subordination, attorn to and become
the Tenant of the successor in interest to Landlord provided that such
successor agrees that Tenant shall not be disturbed in its possession under
this Lease by such successor in interest so long as Tenant is not in default
under this Lease. Within fifteen (15) business days after request by
Landlord, Tenant shall execute and deliver any additional documents
evidencing Tenant's attornment or the subordination of this Lease with
respect to any such ground leases or underlying leases or any such mortgage
or deed of trust, in a commercially reasonable form requested by Landlord or
by any ground landlord,
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mortgagee, or beneficiary under a deed of trust, subject to such
nondisturbance requirement.
Landlord shall provide Tenant within sixty (60) days from the date of
Tenant's execution of the Lease, a commercially reasonable non-disturbance
agreement in favor of Tenant, from any ground lessors, mortgage holders or
lien holders then in existence. Landlord also agrees to provide Tenant with
commercially reasonable non-disturbance agreement(s) in favor of Tenant from
any ground lessors, mortgage holders or lien holders of Landlord who later
come into existence at any time prior to the expiration of the Term of the
Lease in consideration of, and as a condition precedent to, Tenant's
agreement to be bound by Article 16 of the Lease.
17. FINANCIAL STATEMENTS
At the request of Landlord from time to time and, if Tenant is not a
public company, upon Landlord's signing a commercially reasonable
confidentiality agreement, Tenant shall provide to Landlord Tenant's current
financial statements prepared in the normal course of business, which
Landlord shall use solely for purposes of this Lease and in connection with
the ownership, management, financing and disposition of the Project.
18. ESTOPPEL CERTIFICATE
Tenant agrees from time to time (but no more than two (2) times per
year), within fifteen (15) business days after request of Landlord, to
deliver to Landlord, or Landlord's designee, an estoppel certificate stating
that this Lease is in full force and effect, that this Lease has not been
modified (or stating all modifications, written or oral, to this Lease), the
date to which Rent has been paid, the unexpired portion of this Lease, to
Tenant's actual knowledge, that there are no current defaults by Landlord or
Tenant under this Lease (or specifying any such defaults), that the leasehold
estate granted by this Lease is the sole interest of Tenant in the Premises
and/or the land at which the Premises are situated, and such other matters
pertaining to this Lease as may be reasonably requested by Landlord or any
mortgagee, beneficiary, purchaser or prospective purchaser of the Building or
Project or any interest therein. Failure by Tenant to execute and deliver
such certificate shall constitute an acknowledgment by Tenant that the
statements included are true and correct without exception. Tenant agrees
that if Tenant fails to execute and deliver such certificate within such
fifteen (15) business day period, Landlord may execute and deliver such
certificate on Tenant's behalf and that such certificate shall be binding on
Tenant. Landlord and Tenant intend that any statement delivered pursuant to
this Paragraph may be relied upon by any mortgagee, beneficiary, purchaser or
prospective purchaser of the Building or Project or any interest therein. The
parties agree that Tenant's obligation to furnish such estoppel certificates
in a timely fashion is a material inducement for Landlord's execution of the
Lease, and shall be an event of default (without any cure period that might
be provided under Paragraph 26.A(3) of this Lease) if Tenant fails to fully
comply within two (2) business days after Tenant's receipt of a notice from
Landlord notifying Tenant of its failure to provide said estoppel certificate
within the foregoing fifteen (15) business day period or makes any material
misstatement in any such certificate.
Landlord hereby agrees to provide to Tenant an estoppel certificate
signed by Landlord, containing the same types of information, and within the
same period of time, as set forth above, with such changes as are reasonably
necessary to reflect that the estoppel certificate is being granted and
signed by Landlord to Tenant, rather than from Tenant to Landlord or a
lender.
19. SECURITY DEPOSIT
Tenant agrees to deposit with Landlord upon execution of this Lease, a
security deposit as stated in the Basic Lease Information (the "SECURITY
DEPOSIT"), which sum shall be held by Landlord, as security for the
performance of Tenant's covenants and obligations under this Lease. The
Security Deposit is not an advance rental deposit or
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a measure of damages incurred by Landlord in case of Tenant's default. Upon
the occurrence of any event of default by Tenant, beyond any applicable
notice and cure period, Landlord may from time to time, without prejudice to
any other remedy provided herein or by law, use such fund as a credit to the
extent necessary to credit against any arrears of Rent or other payments due
to Landlord hereunder, and any other damage, injury, expense or liability
caused by such event of default, and Tenant shall pay to Landlord, on demand,
the amount so applied in order to restore the Security Deposit to its
original amount. Any remaining balance of such deposit shall be returned by
Landlord to Tenant within ninety (90) days after termination of this Lease,
reduced by such amounts as may be required by Landlord to remedy defaults on
the part of Tenant in the payment of Rent or other obligations of Tenant
under this Lease, to repair damage to the Premises, Building or Project
caused by Tenant or any Tenant's Parties, to clean the Premises and to
compensate Landlord for Landlord's reasonable estimate of any additional
amounts to be owed by Tenant to Landlord on account of Tenant's proportionate
share of Operating Expenses. Landlord agrees to invest the amount of the cash
portion of the Security Deposit provided by Tenant under this Lease which
exceeds $37,981.42 into a three (3) month certificate of deposit account at a
financial institution selected by Landlord (with such certificate of deposit
to rollover for successive periods of three (3) months each). The interest
earned on such certificate of deposit account shall accrue for the benefit of
Tenant, subject to Landlord's right to apply the Security Deposit (including
said interest) in accordance with the terms hereof against any of Tenant's
obligations under this Lease. To the extent Landlord properly applies any
portion of the Security Deposit against Tenant's obligations under this Lease
and a penalty is incurred in connection with such application due to the
early withdrawal of said funds from the certificate of deposit account, then
Tenant shall be responsible for restoring the Security Deposit to its
original amount immediately prior to said application, subject to the terms
of Paragraph 39C below. Accordingly, the amount received by Landlord from the
certificate of deposit account, together with any penalty amount assessed in
connection with said withdrawal, shall be paid by Tenant to Landlord to
replenish the Security Deposit.
20. LIMITATION OF TENANT'S REMEDIES
The obligations and liability of Landlord to Tenant for any default by
Landlord under the terms of this Lease are not personal obligations of
Landlord or of the individual or other partners of Landlord or its or their
partners, directors, officers, or shareholders, and Tenant agrees to look
solely to Landlord's interest in the Project for the recovery of any amount
from Landlord, including all rental income, insurance, condemnation and net
sale proceeds, and shall not look to other assets of Landlord nor seek
recourse against the assets of the individual or other partners of Landlord
or its or their partners, directors, officers or shareholders. Any lien
obtained to enforce any such judgment and any levy of execution thereon shall
be subject and subordinate to any lien, mortgage or deed of trust on the
Project. Under no circumstances shall Tenant have the right to offset against
or recoup Rent or other payments due and to become due to Landlord hereunder
except as expressly provided in this Lease, including Paragraph 23.B. below,
which Rent and other payments shall be absolutely due and payable hereunder
in accordance with the terms hereof.
21. ASSIGNMENT AND SUBLETTING
A. (1 GENERAL. Tenant shall not assign or pledge this Lease or sublet
the Premises or any part thereof, whether voluntary or by operation of law,
or permit the use or occupancy of the Premises or any part thereof by
anyone other than Tenant, or suffer or permit any such assignment, pledge,
subleasing or occupancy, without Landlord's prior written consent except as
provided herein. If Tenant desires to assign this Lease or sublet any or
all of the Premises, Tenant shall give Landlord written notice (the
"TRANSFER NOTICE") at least twenty (20) days prior to the anticipated
effective date of the proposed assignment or sublease, which shall contain
all of the information reasonably requested by Landlord to address
Landlord's decision criteria specified hereinafter. Within twenty (20) days
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following Landlord's receipt of the Transfer Notice, Landlord shall notify
Tenant in writing that Landlord elects either: (i) to terminate this Lease
as to the space so affected as of the date so requested by Tenant for the
period of time so requested by Tenant (provided that Landlord shall have no
such termination right during the initial Term); or (ii) to consent to the
proposed assignment or sublease, or (iii) deny consent for reasonable
grounds detailed to Tenant. Consent to any assignment or subletting shall
not constitute consent to any subsequent transaction to which this
Paragraph 21 applies.
(2 CONDITIONS OF LANDLORD'S CONSENT. Without limiting the other
instances in which it may be reasonable for Landlord to withhold Landlord's
consent to an assignment or subletting, Landlord and Tenant acknowledge
that it shall be reasonable for Landlord to withhold Landlord's consent in
the following instances: if the proposed assignee does not agree to be
bound by and assume the obligations of Tenant under this Lease in a
commercially reasonable form and substance reasonably satisfactory to
Landlord; the use of the Premises by such proposed assignee or subtenant
would not be a Permitted Use or would violate any exclusivity or other
arrangement which Landlord has with any other tenant or occupant or any
Regulation or would violate the Occupancy Density or Parking Density of the
Building or Project; the proposed assignee or subtenant is not of sound
financial condition in light of its obligations under any such sublease or
assignment; the proposed assignee or subtenant is a governmental agency
with the power of condemnation or high foot traffic or otherwise of a
character which is not consistent (in Landlord's reasonable opinion) with
the professional image of the Building or the character of the other
tenants therein; the proposed assignee or subtenant does not have a good
reputation as a tenant of property or a good business reputation (as
determined by Landlord in its reasonable discretion); the proposed assignee
or subtenant is a person with whom Landlord is actively negotiating to
lease space in the Project (which for purposes of this Lease shall mean
that a written lease proposal/counter-proposals setting forth the material
business terms of a proposal lease transaction have been exchanged within
the immediately proceeding three (3) month period between Landlord and the
proposed transferee) or is a present tenant of the Project; the assignment
or subletting would entail any use of any Hazardous Materials or other
noxious use or use which may disturb other tenants of the Project; or
Tenant is in default of any obligation of Tenant under this Lease, beyond
applicable notice and cure provision. Failure by or refusal of Landlord to
consent to a proposed assignee or subtenant shall not cause a termination
of this Lease. Upon a termination under Paragraph 21.A.(1)(i), Landlord may
lease the Premises to any party, including parties with whom Tenant has
negotiated an assignment or sublease, without incurring any liability to
Tenant. At the option of Landlord, a surrender and termination of this
Lease shall operate as an assignment to Landlord of some or all subleases
or subtenancies. Landlord shall exercise this option by giving notice of
that assignment to such subtenants on or before the effective date of the
surrender and termination. In connection with each request for assignment
or subletting, Tenant shall pay to Landlord Landlord's actual out-of-pocket
costs for approving such requests, as well as all costs incurred by
Landlord or any mortgagee or ground lessor in approving each such request
and effecting any such transfer, including, without limitation, reasonable
attorneys' fees (not to exceed $1,500 in the aggregate).
B. BONUS RENT. Any Rent or other consideration realized by Tenant under
any such sublease or assignment in excess of the Rent payable hereunder,
after deducting any Subleasing Costs (defined below) incurred by Tenant in
connection with said sublease or assignment (which Subleasing Costs shall be
amortized over the term of said sublease or assignment), shall be divided and
paid, fifty percent (50%) to Tenant, fifty percent (50%) to Landlord.
"Subleasing Costs" shall mean reasonable, out-of-pocket expenses for (i) any
changes, alterations and improvements to the Premises in connection with the
transfer, (ii) any brokerage commissions in connection with the transfer,
(iii) any costs to buy-out or takeover the previous lease of a transferee,
(iv) reasonable legal fees incurred in connection with the transfer including
those fees and costs reimbursed to
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Landlord pursuant to this Lease, (v) provided Tenant is marketing the
Premises (or a portion thereof) for sublease or assignment after Tenant is no
longer occupying said space, the amount of Base Rent paid by Landlord during
the period from the date Tenant is no longer occupying all or a portion of
the Premises until the commencement date of such sublease or assignment (with
such Base Rent payments to be appropriately prorated in the event of a
sublease of a portion of the Premises) and (vi) any other "out-of-pocket"
monetary concessions reasonably provided in connection with the transfer
including, but not limited to, tenant improvement or decorating allowances
(collectively, the "Subleasing Costs"). Tenant may recoup all Subleasing
Costs before any profit is paid to Landlord pursuant to the terms hereof.
C. CORPORATION. If Tenant is a corporation, a transfer of corporate
shares by sale, assignment, bequest, inheritance, operation of law or other
disposition (including such a transfer to or by a receiver or trustee in
federal or state bankruptcy, insolvency or other proceedings) resulting in a
change in the present control of such corporation or any of its parent
corporations by the person or persons owning a majority of said corporate
shares, shall constitute an assignment for purposes of this Lease. The terms
of this Paragraph 21B shall not apply if Tenant becomes a publicly traded
company on a nationally or regionally recognized stock exchange or in
connection with Tenant becoming a publicly traded company or in connection
with the investment of money into Tenant (without a change in the present
control of Tenant).
D. UNINCORPORATED ENTITY. If Tenant is a partnership, joint venture,
unincorporated limited liability company or other unincorporated business
form, a transfer of the interest of persons, firms, or entities responsible
for managerial control of Tenant by sale, assignment, bequest, inheritance,
operation of law or other disposition, so as to result in a change in the
present control of said entity and/or of the underlying beneficial interests
of said entity and/or a change in the identity of the persons responsible for
the general credit obligations of said entity shall constitute an assignment
for all purposes of this Lease.
E. LIABILITY. No assignment or subletting by Tenant, permitted or
otherwise, shall relieve Tenant of any obligation under this Lease or alter
the primary liability of the Tenant named herein for the payment of Rent or
for the performance of any other obligations to be performed by Tenant,
including obligations contained in Paragraph 25 with respect to any assignee
or subtenant. From and after the date of any default by Tenant under this
Lease, beyond any applicable notice and cure period, until such default is
cured, Landlord may collect rent or other amounts or any portion thereof from
any assignee, subtenant, or other occupant of the Premises, permitted or
otherwise, and apply the net rent collected to the Rent payable hereunder,
but no such collection shall be deemed to be a waiver of this Paragraph 21,
or the acceptance of the assignee, subtenant or occupant as tenant, or a
release of Tenant from the further performance by Tenant of the obligations
of Tenant under this Lease. Any assignment or subletting which conflicts with
the provisions hereof shall be void to such extent.
F. SUBLEASE AND ASSIGNMENT. Notwithstanding anything to the contrary
contained in this Section, neither (i) an assignment or subletting of all or
a portion of the Premises (A) to an entity which is controlled by, controls
or is under common control with Tenant (or a valid assignee of this Lease),
or (B) to a purchaser of all or substantially all of the assets of Tenant or
of an entity which is controlled by, controls or is under common control with
Tenant (or a valid assignee of this Lease), (ii) a transfer, by operation of
law or otherwise, in connection with the merger, consolidation or other
reorganization of Tenant or of an entity which is controlled by, controls or
is under common control with Tenant (or a valid assignee of this Lease), nor
(iii) the temporary use or occupancy of portions of the Premises (not to
exceed 8,000 rentable square feet, in the aggregate) by a party or parties in
connection with the transaction of business with Tenant or with an entity
which is controlled by, controls or is under common control with Tenant (or
with a valid assignee of this Lease), shall be subject to the Landlord's
consent (collectively, such entities, purchasers, and parties shall be
referred to herein collectively or individually as an "Affiliate"), provided
such assignment
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or sublease is not a subterfuge by Tenant to avoid its obligations under this
Lease. Tenant shall immediately notify Landlord of any such assignment,
purchase, transfer, sublease, action, or use. For purposes of this Lease,
"control" shall mean the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a person or
entity, or majority ownership of any sort, whether through the ownership of
voting securities, by contract or otherwise.
22. AUTHORITY
Landlord represents and warrants that it has full right and authority to
enter into this Lease and to perform all of Landlord's obligations hereunder
and that all persons signing this Lease on its behalf are authorized to do.
Tenant represents and warrants that Tenant has full right and authority to
enter into this Lease, and to perform all of Tenant's obligations hereunder,
and that all persons signing this Lease on its behalf are authorized to do so.
23. CONDEMNATION
A. CONDEMNATION RESULTING IN TERMINATION. If the whole or any
substantial part of the Premises should be taken or condemned for any public
use under any Regulation, or by right of eminent domain, or by private
purchase in lieu thereof, and the taking would prevent or materially
interfere with the Permitted Use of the Premises, either party shall have the
right to terminate this Lease at its option. If any material portion of the
Building or Project is taken or condemned for any public use under any
Regulation, or by right of eminent domain, or by private purchase in lieu
thereof, Landlord may terminate this Lease at its option. In either of such
events, the Rent shall be abated during the unexpired portion of this Lease,
effective when the physical taking of said Premises shall have occurred.
B. CONDEMNATION NOT RESULTING IN TERMINATION. If a portion of the
Project of which the Premises are a part should be taken or condemned for any
public use under any Regulation, or by right of eminent domain, or by private
purchase in lieu thereof, and the taking prevents or materially interferes
with the Permitted Use of the Premises, and this Lease is not terminated as
provided in Paragraph 23.A. above, the Rent payable hereunder during the
unexpired portion of the Lease shall be reduced, beginning on the date when
the physical taking shall have occurred, to such amount as may be fair and
reasonable under all of the circumstances, but only after giving Landlord
credit for all sums received or to be received by Tenant by the condemning
authority. Notwithstanding anything to the contrary contained in this
Paragraph, if the temporary use or occupancy of any part of the Premises
shall be taken or appropriated under power of eminent domain during the Term,
this Lease shall be and remain unaffected by such taking or appropriation and
Tenant shall continue to pay in full all Rent payable hereunder by Tenant
during the Term; in the event of an such temporary appropriation or
taking, Tenant shall be entitled to receive that portion of any award which
represents compensation for the use of or occupancy of the Premises during
the Term, and Landlord shall be entitled to receive that portion of any award
which represents the cost of restoration of the Premises and the use and
occupancy of the Premises beyond the Term.
C. AWARD. Landlord shall be entitled to (and Tenant shall assign to
Landlord) any and all payment, income, rent, award or any interest therein
whatsoever which may be paid or made in connection with such taking or
conveyance and Tenant shall have no claim against Landlord or otherwise for
any sums paid by virtue of such proceedings, whether or not attributable to
the value of any unexpired portion of this Lease, except as expressly
provided in this Lease. Notwithstanding the foregoing, any compensation
awarded Tenant for Tenant's personal property, fixtures and moving costs,
shall be and remain the property of Tenant.
D. WAIVER OF CCP SECTION 1265.130. Each party waives the provisions of
California Civil Code Procedure Section 1265.130 allowing either party to
petition the superior court to terminate this Lease as a result of a partial
taking.
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24. CASUALTY DAMAGE
A. GENERAL. If the Premises or Building should be damaged or destroyed
by fire, tornado, or other casualty (collectively, "CASUALTY") and Tenant has
determined that Landlord is not otherwise aware of such Casualty, Tenant
shall give immediate written notice thereof to Landlord. Within sixty (60)
days after the earlier of Landlord's receipt of such notice or Landlord's
becoming aware of the Casualty, Landlord shall notify Tenant whether in
Landlord's estimation (as reasonably certified by Landlord's contractor)
restoration of the Premises can reasonably be made within two hundred ten
(210) days from the date of such notice ("Landlord's Damage Notice").
Landlord's contractor's reasonable determination shall be binding on Tenant.
B. WITHIN 210 DAYS. If the Premises or Building should be damaged by
Casualty to such extent that restoration can in Landlord's estimation be
reasonably completed within two hundred ten (210) days after the earlier of
the date of such notice, or Landlord's becoming aware of the Casualty, this
Lease shall not terminate. Provided that insurance proceeds are received by
Landlord to fully repair the damage, Landlord shall proceed to rebuild and
repair the Premises to its pre-existing condition, except that Landlord shall
not be required to rebuild, repair or replace any part of the Alterations
which may have been placed on or about the Premises by Tenant. If the
Premises are untenantable in whole or in part following such damage, the Rent
payable hereunder during the period in which they are untenantable shall be
abated proportionately, but only to the extent the Premises are unfit for
occupancy and Tenant does not occupy the same.
C. GREATER THAN 210 DAYS. If the Premises or Building should be
damaged by Casualty to such extent that rebuilding or repairs cannot in
Landlord's estimation be reasonably completed within two hundred ten (210)
days after the earlier of the date of such notice or Landlord's becoming
aware of the Casualty, then Landlord shall have the option of either: (1)
terminating this Lease effective upon the date of the occurrence of such
damage, in which event the Rent shall be abated during the unexpired portion
of this Lease; or (2) electing to rebuild or repair the Premises diligently
and to its pre-existing condition. Landlord shall notify Tenant of its
election within thirty (30) days after the earlier of Landlord's receipt of
notice of the damage or destruction or Landlord's becoming aware of the
Casualty. Landlord may only elect to terminate this Lease hereunder if
Landlord terminates all leases of similarly damaged space in the Building.
Notwithstanding the above, Landlord shall not be required to rebuild, repair
or replace any part of any Alterations which may have been placed, on or
about the Premises by Tenant. If the Premises are untenantable in whole or in
part following such damage, the Rent payable hereunder during the period in
which they are untenantable shall be abated proportionately, but only to the
extent the Premises are unfit for occupancy and Tenant does not occupy the
same.
D. TENANT'S FAULT. Notwithstanding anything herein to the contrary, if
the Premises or any other portion of the Building are damaged by Casualty
resulting from the fault, negligence, or breach of this Lease by Tenant or
any of Tenant's Parties, Base Rent and Additional Rent shall not be
diminished during the repair of such damage (except to the extent of rental
income insurance proceeds actually received by Landlord) and Tenant shall be
liable to Landlord for the cost and expense of the repair and restoration of
the Building caused thereby to the extent such cost and expense is not
covered by insurance proceeds.
E. INSURANCE PROCEEDS. Notwithstanding anything herein to the
contrary, if the Premises or Building are damaged or destroyed and are not
fully covered by the insurance proceeds received by Landlord (other than any
deductible portion and an additional amount up to 5% of the total replacement
cost of the 2850 Building and/or 3100 Building, as applicable) or if the
holder of any indebtedness secured by a mortgage or deed of trust covering
the Premises requires that the insurance proceeds be applied to such
indebtedness, then in either case Landlord shall have the right to terminate
this Lease by delivering written notice of termination to Tenant within
thirty (30) days after the date of notice to Landlord that said damage or
destruction is not fully covered by
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insurance (other than any deductible portion and an additional amount up to
5% of the total replacement cost of the 2850 Building or 3100 Building, as
applicable) or such requirement is made by any such holder, as the case may
be, whereupon this Lease shall terminate.
F. WAIVER. This Paragraph 24 shall be Tenant's sole and exclusive
remedy in the event of damage or destruction to the Premises or the Building.
As a material inducement to Landlord entering into this Lease, Tenant hereby
waives any rights it may have under Sections 1932, 1933(4), 1941 or 1942 of
the Civil Code of California with respect to any destruction of the Premises,
Landlord's obligation for tenantability of the Premises and Tenant's right to
make repairs and deduct the expenses of such repairs, or under any similar
law, statute or ordinance now or hereafter in effect.
G. TENANT'S PERSONAL PROPERTY. In the event of any damage or
destruction of the Premises or the Building, except to the extent resulting
from Landlord's negligence or willful misconduct, under no circumstances
shall Landlord be required to repair any injury or damage to, or make any
repairs to or replacements of, Tenant's personal property.
H. TENANT'S TERMINATION RIGHT. If Landlord does not elect to terminate
this Lease pursuant to Paragraph 24C above and if the estimated date by which
Landlord's repair obligations are expected to be sufficiently completed so
that Tenant can resume normal business operations in the affected portions of
the Premises (the "Estimated Completion Date") is greater than two hundred
ten (210) days after the earlier of the date Landlord receives notice of the
Casualty or Landlord's becoming aware of the Casualty, Tenant may elect, no
later than thirty (30) days after Tenant's receipt of Landlord's Damage
Notice, to terminate this Lease by written notice to Landlord effective as of
the date specified in Tenant's notice, which date shall be not greater than
ninety (90) days after the date of delivery of Tenant's notice. Furthermore,
if neither Landlord nor Tenant have terminated this Lease and the repairs are
not actually completed within two hundred ten (210) days after the date
Landlord receives notice of the Casualty (which two hundred ten (210) day
period shall be extended by Force Majeure Delays [which delays shall not
exceed sixty (60) days] and by any delays resulting from the acts or
omissions of Tenant and/or its agents, employees or contractors), Tenant
shall have the right to terminate this Lease within five (5) business days
after the end of such period and thereafter during the first five (5)
business days after each calendar month following the end of such period
until such time as the repairs are complete, by notice to Landlord (the
"Damage Termination Notice"), effective as of the date set forth in the
Damage Termination Notice (the "Damage Termination Date"), which Damage
Termination Date shall not be less than five (5) business days following the
end of such period or each such month, as the case may be. Notwithstanding
the foregoing, if Tenant delivers a Damage Termination Notice to Landlord,
then Landlord shall have the right to suspend the occurrence of the Damage
Termination Date for a period ending thirty (30) days after the Damage
Termination Date set forth in the Damage Termination Notice by delivering to
Tenant, within five (5) business days of Landlord's receipt of the Damage
Termination Notice, a certificate of Landlord's contractor responsible for
the repair of the damage certifying that it is such contractor's good faith
judgment that the repairs shall be substantially completed within thirty (30)
days after the Damage Termination Date. If repairs shall be substantially
completed prior to the expiration of such thirty (30) day period, then the
Damage Termination Notice shall be of no force or effect but if the repairs
shall not be substantially completed within such thirty (30) day period, then
this Lease shall terminate upon the expiration of such thirty (30) day
period. If Landlord undertakes repair and/or restoration pursuant to
Paragraph 24B and thereafter determines that it will not be able to complete
the same within the two hundred ten (210) day period set forth herein, then
Landlord shall promptly notify Tenant thereof and shall provide Tenant with
Landlord's revised estimate of the date upon which Landlord will complete the
same ("Revised Completion Date"). Within ten (10) business days after
Tenant's receipt of such notice, Tenant shall have the right to elect to
terminate this Lease or to agree to extend the two hundred ten (210) day
period to the Revised Completion Date. Such notice by Landlord shall identify
Tenant's option pursuant to the preceding
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sentence. Tenant's failure to elect to terminate or to extend such time
period to the Revised Completion Date by written notice to Landlord within
such ten (10) business day period shall be conclusively deemed to be Tenant's
election to extend the time to the Revised Completion Date. Upon any such
termination of this Lease pursuant to this Paragraph 24, Tenant shall pay the
monthly Base Rent and Additional Rent, properly apportioned up to such date
of termination, and both parties hereto shall thereafter be freed and
discharged of all further obligations hereunder, except as provided for in
provisions of this Lease which by their terms survive the expiration or
earlier termination of the Term.
I. LAST 12 MONTHS OF TERM. Landlord and Tenant shall each have the
right to terminate this Lease in the event any material damage by Casualty
occurs during the last twelve (12) months of the Term.
25. HOLDING OVER
Unless Landlord expressly consents in writing to Tenant's holding over,
Tenant shall be unlawfully and illegally in possession of the Premises,
whether or not Landlord accepts any rent from Tenant or any other person
while Tenant remains in possession of the Premises without Landlord's written
consent. If Tenant shall retain possession of the Premises or any portion
thereof without Landlord's consent following the expiration of this Lease or
sooner termination for any reason, then (i) for the first two (2) months of
such retention, Tenant shall pay to Landlord Base Rent (in addition to its
other obligations under this Lease) for each day of such retention in an
amount equal to one hundred twenty-five percent (125%) of the amount of Base
Rent as of the last month prior to the date of expiration or earlier
termination, and (ii) thereafter, Tenant shall pay to Landlord Base Rent (in
addition to its other obligations under this Lease) for each day of such
retention in an amount equal to one hundred fifty percent (150%) of the
amount of Base Rent as of the last month prior to the date of expiration or
earlier termination. Tenant shall also indemnify, defend, protect and hold
Landlord harmless from any loss, liability or cost, including consequential
and incidental damages and reasonable attorneys' fees, incurred by Landlord
resulting from delay by Tenant in surrendering the Premises, including,
without limitation, any claims made by the succeeding tenant founded on such
delay. Acceptance of Rent by Landlord following expiration or earlier
termination of this Lease, or following demand by Landlord for possession of
the Premises, shall not constitute a renewal of this Lease, and nothing
contained in this Paragraph 25 shall waive Landlord's right of reentry or any
other right. Additionally, if upon expiration or earlier termination of this
Lease, or following demand by Landlord for possession of the Premises, Tenant
has not fulfilled its obligation with respect to repairs and cleanup of the
Premises or any other Tenant obligations as set forth in this Lease, then,
upon notice to Tenant and the expiration of two (2) days following said
notice, Landlord shall have the right to perform any such obligations as it
deems necessary at Tenant's sole cost and expense, and any commercially
reasonable time required by Landlord to complete such obligations shall be
considered a period of holding over and the terms of this Paragraph 25 shall
apply to the extent Landlord is delayed in causing a new tenant to take
occupancy of all or a portion of the Premises. The provisions of this
Paragraph 25 shall survive any expiration or earlier termination of this
Lease.
26. DEFAULT
A. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default on the part of Tenant:
(1) ABANDONMENT. Abandonment of the Premises for a continuous period
in excess of five (5) business days after written notice. Tenant waives any
right to notice Tenant may have under Section 1951.3 of the Civil Code of
the State of California, the terms of this Paragraph 26.A. being deemed
such notice to Tenant as required by said Section 1951.3.
(2) NONPAYMENT OF RENT. Failure to pay any installment of Rent or any
other amount due and payable hereunder within five (5) days following
written
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notice that said amount is due, as to which time is of the essence
(which notice shall be in lieu of, and not in addition to, the notice
requirements of Section 1161 of the California Code of Civil Procedure or
any similar or successor law).
(3) OTHER OBLIGATIONS. Failure to perform any obligation, agreement
or covenant under this Lease other than those matters specified in
subparagraphs (1) and (2) of this Paragraph 26.A., such failure continuing
for thirty (30) days after written notice of such failure, as to which time
is of the essence, provided that if the nature of such default is such that
the same cannot reasonably be cured within a thirty (30) day period, Tenant
shall not be deemed to be in default if it diligently commences such cure
within such period and thereafter diligently proceeds to rectify and cure
said default.
(4) GENERAL ASSIGNMENT. A general assignment by Tenant for the
benefit of creditors.
(5) BANKRUPTCY. The filing of any voluntary petition in bankruptcy by
Tenant, or the filing of an involuntary petition by Tenant's creditors,
which involuntary petition remains undischarged for a period of sixty (60)
days. If under applicable law, the trustee in bankruptcy or Tenant has the
right to affirm this Lease and continue to perform the obligations of
Tenant hereunder, such trustee or Tenant shall, in such time period as may
be permitted by the bankruptcy court having jurisdiction, cure all defaults
of Tenant hereunder outstanding as of the date of the affirmance of this
Lease and provide to Landlord such adequate assurances as may be necessary
to ensure Landlord of the continued performance of Tenant's obligations
under this Lease.
(6) RECEIVERSHIP. The employment of a receiver to take possession of
substantially all of Tenant's assets or Tenant's leasehold of the Premises,
if such appointment remains undismissed or undischarged for a period of
sixty (60) days after the order therefor.
(7) ATTACHMENT. The attachment, execution or other judicial seizure
of all or substantially all of Tenant's assets or Tenant's leasehold of the
Premises, if such attachment or other seizure remains undismissed or
undischarged for a period of sixty (60) days after the levy thereof.
(8) INSOLVENCY. The admission signed by Tenant in writing of its
inability to pay its debts as they become due.
B. REMEDIES UPON DEFAULT.
(1) TERMINATION. In the event of the occurrence of any event of default,
Landlord shall have the right to give a written termination notice to Tenant,
and on the date specified in such notice, Tenant's right to possession shall
terminate, and this Lease shall terminate unless on or before such date all Rent
in arrears and all costs and expenses incurred by or on behalf of Landlord
hereunder shall have been paid by Tenant and all other events of default of
this Lease by Tenant at the time existing shall have been fully remedied to the
satisfaction of Landlord. At any time after such termination, Landlord may
recover possession of the Premises or any part thereof and expel and remove
therefrom Tenant and any other person occupying the same, including any
subtenant or subtenants notwithstanding Landlord's consent to any sublease, by
any lawful means, and again repossess and enjoy the Premises without prejudice
to any of the remedies that Landlord may have under this Lease, or at law or
equity by any reason of Tenant's default or of such termination, Landlord hereby
reserves the right, but shall not have the obligation, to recognize the
continued possession of any subtenant. The delivery or surrender to Landlord by
or on behalf of Tenant of keys, entry codes, or other means to bypass security
at the Premises shall not terminate this Lease.
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(2) CONTINUATION AFTER DEFAULT. Even though an event of default may
have occurred, this Lease shall continue in effect for so long as Landlord
does not terminate Tenant's right to possession under Paragraph 26.B.(1)
hereof, and Landlord may enforce all of Landlord's rights and remedies
under this Lease and at law or in equity, including without limitation, the
right to recover Rent as it becomes due, and Landlord, without terminating
this Lease, may exercise all of the rights and remedies of a landlord under
Section 1951.4 of the Civil Code of the State of California or any
successor code section. Acts of maintenance, preservation or efforts to
lease the Premises or the appointment of a receiver under application of
Landlord to protect Landlord's interest under this Lease or other entry by
Landlord upon the Premises shall not constitute an election to terminate
Tenant's right to possession.
C. DAMAGES AFTER DEFAULT. Should Landlord terminate this Lease
pursuant to the provisions of Paragraph 26.B.(1) hereof, Landlord shall have
the rights and remedies of a Landlord provided by Section 1951.2 of the Civil
Code of the State of California, or any successor code sections. Upon such
termination, in addition to any other rights and remedies to which Landlord
may be entitled under applicable law or at equity, Landlord shall be entitled
to recover from Tenant: (1) the worth at the time of award of the unpaid Rent
and other amounts which had been earned at the time of termination, (2) the
worth at the time of award of the amount by which the unpaid Rent and other
amounts that would have been earned after the date of termination until the
time of award exceeds the amount of such Rent loss that Tenant proves could
have been reasonably avoided; (3) the worth at the time of award of the
amount by which the unpaid Rent and other amounts for the balance of the Term
after the time of award exceeds the amount of such Rent loss that the Tenant
proves could be reasonably avoided; and (4) any other amount and court costs
necessary to compensate Landlord for all detriment proximately caused by
Tenant's failure to perform Tenant's obligations under this Lease or which,
in the ordinary course of things, would be likely to result therefrom. The
"worth at the time of award" as used in (1) and (2) above shall be computed
at the Applicable Interest Rate (defined below). The "worth at the time of
award" as used in (3) above shall be computed by discounting such amount at
the Federal Discount Rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%).
D. LATE CHARGE. In addition to its other remedies, Landlord shall have
the right to add to the amount of any payment required to be made by Tenant
hereunder, and which is not paid and received by Landlord within five (5)
days following written notice that said amount is past due, an amount equal
to five percent (5 %) of the delinquency for each month or portion thereof
that the delinquency remains outstanding to compensate Landlord for the loss
of the use of the amount not paid and the administrative costs caused by the
delinquency, the parties agreeing that Landlord's damage by virtue of such
delinquencies would be extremely difficult and impracticable to compute and
the amount stated herein represents a reasonable estimate thereof. Any waiver
by Landlord of any late charges or failure to claim the same shall not
constitute a waiver of other late charges or any other remedies available to
Landlord.
E. INTEREST. Interest shall accrue on all sums not paid when due
hereunder at the lesser of the "prime rate" charged by Wells Fargo Bank, N.A.
(San Francisco) or its successor plus 2% per annum or the maximum interest
rate allowed by law ("APPLICABLE INTEREST RATE") from the due date until
paid.
F. REMEDIES CUMULATIVE. All rights, privileges and elections or
remedies of the parties are cumulative and not alternative, to the extent
permitted by law and except as otherwise provided herein.
G. LANDLORD'S DEFAULT. Landlord shall not be in default under this
Lease unless Landlord fails to perform obligations required of Landlord
within thirty (30) days after written notice is delivered by Tenant to
Landlord and to the holder of any mortgages or deeds of trust (collectively,
"LENDER") covering the Premises whose name and address shall have theretofore
been furnished to Tenant in writing, specifying the obligation
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which Landlord has failed to perform; provided, however, that if the nature
of Landlord's obligation is such that more than thirty (30) days are required
for performance, then Landlord shall not be in default if Landlord or Lender
commences performance within such thirty (30) day period and thereafter
diligently prosecutes the same to completion.
27. LIENS
Tenant shall at all times keep the Premises and the Project free from
liens arising out of or related to work or services performed, materials or
supplies furnished or obligations incurred by or on behalf of Tenant or in
connection with work made, suffered or done by or on behalf of Tenant in or
on the Premises or Project. If Tenant shall not, within fifteen (15) business
days following receipt of notice of the imposition of any such lien, cause
the same to be released of record by payment or posting of a proper bond,
Landlord shall have, in addition to all other remedies provided herein and by
law, the right, but not the obligation, to cause the same to be released by
such means as Landlord shall deem proper, including payment of the claim
giving rise to such lien. All sums paid by Landlord on behalf of Tenant and
all expenses incurred by Landlord in connection therefor shall be payable to
Landlord by Tenant on demand with interest at the Applicable Interest Rate as
Additional Rent. Landlord shall have the right at all times to post and keep
posted on the Premises any notices permitted or required by law, or which
Landlord shall deem proper, for the protection of Landlord, the Premises, the
Project and any other party having an interest therein, from mechanics' and
materialmen's liens, and Tenant shall give Landlord not less than ten (10)
business days prior written notice of the commencement of any work in the
Premises or Project which could lawfully give rise to a claim for mechanics'
or materialmen's liens to permit Landlord to post and record a timely notice
of non-responsibility, as Landlord may elect to proceed or as the law may
from time to time provide, for which purpose, if Landlord shall so determine,
Landlord may enter the Premises in accordance with provisions of this Lease.
Tenant shall not remove any such notice posted by Landlord without Landlord's
consent, and in any event not before completion of the work which could
lawfully give rise to a claim for mechanics' or materialmen's liens.
28. INTENTIONALLY OMITTED.
29. TRANSFERS BY LANDLORD
In the event of a sale or conveyance by Landlord of the Building or a
foreclosure by any creditor of Landlord and provided said transferee (other
than a creditor of Landlord) assumes Landlord's obligations under this Lease,
the same shall operate to release Landlord from any liability upon any of the
covenants or conditions, express or implied, herein contained in favor of
Tenant to the extent required to be performed after the passing of title to
Landlord's successor-in-interest. In such event, Tenant agrees to look solely
to the responsibility of the successor-in-interest of Landlord under this
Lease with respect to the performance of the covenants and duties of
"Landlord" to be performed after the passing of title to Landlord's
successor-in-interest. This Lease shall not be affected by any such sale and
Tenant agrees to attorn to the purchaser or assignee.
30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS
All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense and without any abatement of Rent, except as otherwise provided
herein. If Tenant shall fail to pay any sum of money, other than Base Rent,
required to be paid by Tenant hereunder or shall fail to perform any other act
on Tenant's part to be performed hereunder, including Tenant's obligations
under Paragraph 11 hereof, and such failure shall continue for fifteen (15)
days after written notice thereof by Landlord, in addition to the other
rights and remedies of Landlord, Landlord may make any such payment and
perform any such
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act on Tenant's part. In the case of an emergency, no prior notification by
Landlord shall be required. Landlord may take such actions without any
obligation and without releasing Tenant from any of Tenant's obligations. All
sums so paid by Landlord and all incidental costs incurred by Landlord and
interest thereon at the Applicable Interest Rate, from the date of payment by
Landlord, shall be paid to Landlord on demand as Additional Rent.
31. WAIVER
If either Landlord or Tenant waives the performance of any term,
covenant or condition contained in this Lease, such waiver shall not be
deemed to be a waiver of any subsequent breach of the same or any other term,
covenant or condition contained herein, or constitute a course of dealing
contrary to the expressed terms of this Lease. The acceptance of Rent by
Landlord shall not constitute a waiver of any preceding breach by Tenant of
any term, covenant or condition of this Lease, regardless of Landlord's
knowledge of such preceding breach at the time Landlord accepted such Rent.
Payment by Tenant of any amount due and owing hereunder shall not constitute
a waiver of any preceding breach by Landlord of any term, covenant or
condition of this Lease. Failure by Landlord or Tenant to enforce any of the
terms, covenants or conditions of this Lease for any length of time shall not
be deemed to waive or decrease the right of Landlord or Tenant, as
applicable, to insist thereafter upon strict performance by the other party.
Waiver by Landlord or Tenant of any term, covenant or condition contained in
this Lease may only be made by a written document signed by Landlord or
Tenant, as applicable.
32. NOTICES
Each provision of this Lease or of any applicable governmental laws,
ordinances, regulations and other requirements with reference to sending,
mailing, or delivery of any notice or the making of any payment by Landlord
or Tenant to the other shall be deemed to be complied with when and if the
following steps are taken:
A. RENT. All Rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at Landlord's Remittance
Address set forth in the Basic Lease Information, or at such other address as
Landlord may specify from time to time by written notice delivered in
accordance herewith. Tenant's obligation to pay Rent and any other amounts to
Landlord under the terms of this Lease shall not be deemed satisfied until
such Rent and other amounts have been actually received by Landlord.
B. OTHER. All notices, demands, consents and approvals which may or
are required to be given by either party to the other hereunder shall be in
writing and either personally delivered, sent by commercial overnight
courier, mailed, certified or registered, postage prepaid or sent by
facsimile with confirmed receipt (and with an original sent by commercial
overnight courier), and in each case addressed to the party to be notified at
the Notice Address for such party as specified in the Basic Lease Information
or to such other place as the party to be notified may from time to time
designate by at least fifteen (15) days notice to the notifying party.
Notices shall be deemed served upon receipt or refusal to accept delivery.
C. REQUIRED NOTICES. Tenant shall immediately notify Landlord in
writing of any notice of a violation or a potential or alleged violation of
any Regulation that relates to the Premises or the Project, or of any
inquiry, investigation, enforcement or other action that is instituted or
threatened by any governmental or regulatory agency against Tenant or any
other occupant of the Premises, or any claim that is instituted or threatened
by any third party that relates to the Premises or the Project.
33. ATTORNEYS' FEES
In any action which Landlord or Tenant brings to enforce its respective
rights hereunder, the unsuccessful party shall pay all costs incurred by the
prevailing party
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including reasonable attorneys' fees, to be fixed by the court, and said
costs and attorneys' fees shall be a part of the judgment in said action.
34. SUCCESSORS AND ASSIGNS
This Lease shall be binding upon and inure to the benefit of Landlord,
its successors and assigns, and shall be binding upon and inure to the
benefit of Tenant, its successors, and to the extent assignment is approved
by Landlord as provided hereunder, Tenant's assigns.
35. FORCE MAJEURE
Except as otherwise provided herein, if performance by a party of any
portion of this Lease is made impossible by any prevention, delay, or
stoppage caused by strikes, lockouts, labor disputes, acts of God, inability
to obtain services, labor, or materials or reasonable substitutes for those
items, government actions, civil commotions, fire or other casualty, or other
causes beyond the reasonable control of the party obligated to perform,
performance by that party for a period equal to the period of that
prevention, delay, or stoppage (a "Force Majeure Delay") is excused. Tenant's
obligation to pay Rent, however, is not excused by this Paragraph 35.
36. SURRENDER OF PREMISES
Tenant shall, upon expiration or sooner termination of this Lease,
surrender the Premises to Landlord in the same condition as existed on the
date Tenant originally took possession thereof, reasonable wear and tear,
damage and destruction which is not Tenant's obligation to repair, and
approved Alterations which Landlord has not required Tenant to remove
excepted. Tenant shall remove all of its debris from the Project. At or
before the time of surrender, Tenant shall comply with the terms of Paragraph
12.A. hereof with respect to Alterations to the Premises and all other
matters addressed in such Paragraph. If the Premises are not so surrendered
at the expiration or sooner termination of this Lease, the provisions of
Paragraph 25 hereof shall apply. All keys to the Premises or any part thereof
in Tenant's possession shall be surrendered to Landlord upon expiration or
sooner termination of the Term. Within a reasonable period of time prior to
the expiration of the Term, Landlord shall notify Tenant in writing of (i)
Landlord's intent to conduct a joint inspection of the Premises immediately
prior to the date of Tenant's vacating the Premises, (ii) at least three (3)
different times and dates that Landlord proposes for such a joint inspection
to be conducted at the Premises, and (iii) the consequences to Tenant, as set
forth in the immediately succeeding sentence, if Tenant fails to timely
respond or if Tenant fails to have a representative available at the
designated time and date. If Tenant either fails to respond to Landlord
within five (5) days following Tenant's receipt of such notice regarding its
selection of a proposed time and date or if Tenant timely responds, but
Tenant fails to have a representative available at such scheduled time and
date to conduct the joint inspection with Landlord, then Landlord's
inspection at or after Tenant's vacating the Premises shall conclusively be
deemed correct for purposes of determining Tenant's responsibility for
repairs and restoration. Notwithstanding anything to the contrary contained
herein, but subject to the terms of Paragraph 15E above, upon the expiration
of the term of this Lease, or upon any earlier termination of this Lease,
Tenant may, at its expense, remove or cause to be removed from the Premises any
security system installed by Tenant in the Premises provided that Tenant
shall repair all damage resulting from such removal.
37. PARKING
Tenant and Tenant's Parties shall have the right to use up to the number
of parking spaces, if any, specified in the Basic Lease Information on an
unreserved, nonexclusive basis, for passenger-size automobiles, for use in
common by tenants of the Building, and also for certain reserved parking spaces
in front of the 3100 Building (the exact location of which is identified on
Exhibit "B" attached hereto), as same may be modified in the Basic Lease
Information.
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Tenant may request additional parking spaces from time to time and if
Landlord in its reasonable discretion agrees to make such additional spaces
available for use by Tenant, such spaces shall be provided on a
month-to-month unreserved and nonexclusive basis (unless otherwise agreed in
writing by Landlord), and subject to such parking charges as Landlord shall
determine (provided that such parking rates shall not increase annually, on a
percentage basis, by more than the annual percentage increase in parking
rental rates during the same period of time at the Comparable buildings
[defined below]), and shall otherwise be subject to such terms and conditions
as Landlord may reasonably require. For purposes of this paragraph, the term
"Comparable Buildings" shall mean the following office buildings in West Los
Angeles: (i) the office building located at 11150 Olympic Boulevard (Marathon
Building), (ii) the office building located at 11444 Olympic Boulevard, (iii)
the office buildings located at 11835 and 11845 Olympic Boulevard (Westside
Towers), (iv) the office buildings located at 2401-2500 Colorado Boulevard
(MGM Plaza), (v) the office building located at 2600 Colorado Boulevard (MTV
Building), and (vi) the office building located at 1601 Cloverfield (Water
Garden).
Tenant shall at all times comply and shall cause all Tenant's Parties
and visitors to comply with all Regulations and any reasonable,
non-discriminatory rules and regulations established from time to time by
Landlord relating to parking at the Project, including any keycard, sticker
or other identification or entrance system, as applicable.
Except to the extent resulting from Landlord's negligence or willful
misconduct, and subject to the terms of Articles 8 and 9 above, Landlord
shall have no liability for any damage to property or other items located in
the parking areas of the Project, nor for any personal injuries or death
arising out of the use of parking areas in the Project by Tenant or any
Tenant's Parties. Without limiting the foregoing, except to the extent
resulting from Landlord's negligence or willful misconduct, and subject to
the terms of Articles 8 and 9 above, if Landlord arranges for the parking
areas to be operated by an independent contractor not affiliated with
Landlord, Tenant acknowledges that Landlord shall have no liability for
claims arising through acts or omissions of such independent contractor.
Except as otherwise provided herein, in all events, Tenant agrees to look
first to its insurance carrier and to require that Tenant's Parties look
first to their respective insurance carriers for payment of any losses
sustained in connection with any use of the parking areas.
Landlord reserves the right to assign specific spaces, and to reserve
spaces for visitors, small cars, disabled persons or for other tenants or
guests, and Tenant shall not park and shall not allow Tenant's Parties to
park in any such assigned or reserved spaces. Tenant may validate visitor
parking by such non-discriminatory method as Landlord may approve, at the
validation rate from time to time generally applicable to visitor parking.
Landlord agrees, on a one-time basis, to provide Tenant with validation
stickers, free of charge, for validating visitor parking. Said validation
stickers shall (i) be implemented through a stamping machine to be installed
by Landlord, at Landlord's expense, in the lobby area of the Premises, and
(ii) validate parking by Tenant's visitors in an amount equivalent to
$43,000.00 worth of visitor parking fees. Landlord also reserves the right to
temporarily alter, modify, relocate or close all or any portion of the
parking areas in order to make repairs or perform maintenance service, or to
restripe or renovate the parking areas, or if required by casualty,
condemnation, act of God, Regulations or for any other reason deemed reasonable
by Landlord, provided that if any such work restricts Tenant from parking the
number of automobiles to which it is entitled to park in the parking
structure and/or lot serving the Building, Landlord shall use its
commercially reasonable efforts to provide Tenant with alternate parking
within a reasonable proximity to the Premises.
Tenant shall pay to Landlord (or Landlord's parking contractor, if so
directed in writing by Landlord), as Additional Rent hereunder, the monthly
charges established from time to time by Landlord for parking in such parking
areas (which shall initially be the charge specified in the Base Lease
Information, as applicable), provided that Tenant shall be entitled to a
credit equal of $72,212.00 to be applied against parking charges for
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any non-exclusive parking spaces leased by Tenant which are in excess of
three (3) non-exclusive parking spaces per 1,000 rentable square feet of the
Premises. Such parking charges shall be payable in advance with Tenant's
payment of Base Rent. No deductions from the monthly parking charge shall be
made for days on which the Tenant does not use any of the parking spaces
entitled to be used by Tenant. Tenant shall not be separately charged for the
use of any valet parking services identified in the Basic Lease Information
(except as an Operating Expense pass-through item), provided that any
subtenant or assignee of Tenant which uses such valet parking services shall
be directly charged for said valet parking services at the actual
out-of-pocket cost incurred by Landlord to provide such valet parking
services plus a management fee of 10% of such costs.
38. MISCELLANEOUS
A. GENERAL. The term "Tenant" or any pronoun used in place thereof
shall indicate and include the masculine or feminine, the singular or plural
number, individuals, firms or corporations, and their respective successors,
executors, administrators and permitted assigns, according to the context
hereof.
B. TIME. Time is of the essence regarding this Lease and all of its
provisions.
C. CHOICE OF LAW. This Lease shall in all respects be governed by the
laws of the State of California.
D. ENTIRE AGREEMENT. This Lease, together with its Exhibits, addenda
and attachments and the Basic Lease Information, contains all the agreements
of the parties hereto and supersedes any previous negotiations. There have
been no representations made by the Landlord or understandings made between
the parties other than those set forth in this Lease and its Exhibits,
addenda and attachments and the Basic Lease Information.
E. MODIFICATION. This Lease may not be modified except by a written
instrument signed by the parties hereto. Tenant and Landlord accept the area
of the Premises as specified in the Basic Lease Information as the
approximate area of the Premises for all purposes under this Lease, and
acknowledge and agree that no other definition of the area (rentable, usable
or otherwise) of the Premises shall apply. Neither Landlord nor Tenant shall
be entitled to a recalculation of the square footage of the Premises,
rentable, usable or otherwise, and no recalculation, if made, irrespective of
its purpose, shall modify Tenant's or Landlord's obligations under this Lease
in any manner, including without limitation the amount of Base Rent payable
by Tenant or Tenant's Proportionate Share of the Building and of the Project.
F. SEVERABILITY. If, for any reason whatsoever, any of the provisions
hereof shall be unenforceable or ineffective, all of the other provisions
shall be and remain in full force and effect.
G. RECORDATION. Tenant shall not record this Lease or a short form
memorandum hereof.
H. EXAMINATION OF LEASE. Submission of this Lease to Tenant does not
constitute an option or offer to lease and this Lease is not effective
otherwise until execution and delivery by both Landlord and Tenant.
I. ACCORD AND SATISFACTION. No payment by Tenant of a lesser amount
than the total Rent due nor any endorsement on any check or letter
accompanying any check or payment of Rent shall be deemed an accord and
satisfaction of full payment of Rent, and Landlord may accept such payment
without prejudice to Landlord's right to recover the balance of such Rent or
to pursue other remedies. All offers by or on behalf of Tenant of accord and
satisfaction are hereby rejected in advance.
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J. EASEMENTS. Landlord may grant easements on the Project and dedicate
for public use portions of the Project without Tenant's consent; provided that
no such grant or dedication shall materially interfere with Tenant's Permitted
Use of the Premises. Upon Landlord's request, Tenant shall execute, acknowledge
and deliver to Landlord documents, instruments, maps and plats necessary to
effectuate Tenant's covenants hereunder.
K. DRAFTING AND DETERMINATION PRESUMPTION. The parties acknowledge
that this Lease has been agreed to by both the parties, that both Landlord
and Tenant have consulted with attorneys with respect to the terms of this
Lease and that no presumption shall be created against Landlord because
Landlord drafted this Lease. Except as otherwise specifically set forth in
this Lease, with respect to any consent, determination or estimation of
Landlord required or allowed in this Lease or requested of Landlord,
Landlord's consent, determination or estimation shall be given or made solely
by Landlord in Landlord's good faith opinion, whether or not objectively
reasonable. If Landlord fails to respond to any request for its consent
within the time period, if any, specified in this Lease, Landlord shall be
deemed to have disapproved such request.
L. EXHIBITS. The Basic Lease Information, and the Exhibits, addenda
and attachments attached hereto are hereby incorporated herein by this
reference and made a part of this Lease as though fully set forth herein.
M. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of
light, air or view by any structure which may be erected on lands adjacent to
or in the vicinity of the Building shall in no way affect this Lease or
impose any liability on Landlord.
N. NO THIRD PARTY BENEFIT. This Lease is a contract between Landlord
and Tenant and nothing herein is intended to create any third party benefit.
O. QUIET ENJOYMENT. Upon payment by Tenant of the Rent, and upon the
observance and performance of all of the other covenants, terms and
conditions on Tenant's part to be observed and performed, Tenant shall
peaceably and quietly hold and enjoy the Premises for the term hereby demised
without hindrance or interruption by Landlord or any other person or persons
lawfully or equitably claiming by, through or under Landlord, subject,
nevertheless, to all of the other terms and conditions of this Lease.
Landlord shall not be liable for any hindrance, interruption, interference or
disturbance by other tenants or third persons, nor shall Tenant be released
from any obligations under this Lease because of such hindrance,
interruption, interference or disturbance, except as otherwise provided
herein.
P. COUNTERPARTS. This Lease may be executed in any number of
counterparts, each of which shall be deemed an original.
Q. MULTIPLE PARTIES. If more than one person or entity is named herein
as Tenant, such multiple parties shall have joint and several responsibility
to comply with the terms of this Lease.
R. PRORATIONS. Any Rent or other amounts payable to Landlord by Tenant
hereunder for any fractional month shall be prorated based on a period of
thirty (30) days in such month. As used herein, the term "fiscal year" shall
mean the calendar year or such other fiscal year as Landlord may deem
appropriate.
S. CONFIDENTIALITY. Tenant and Landlord each acknowledge that the
content of this Lease and any related documents are confidential information.
Tenant and Landlord shall keep such confidential information strictly
confidential and shall not disclose such confidential information to any
person or entity other than Tenant's or Landlord's financial, legal and space
planning consultants and any proposed subtenants or assignees.
T. EXECUTION OF NEW LEASE AGREEMENT. Tenant agrees, upon a request
from Landlord (which may be given at any time), to cooperate with Landlord
and execute any and all documents necessary to terminate this Lease and
concurrently therewith enter into
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two (2) new leases with Landlord (one lease with respect to the 2850 Space
and one lease with respect to the 3100 Space) on the same terms and
conditions as are set forth herein, provided that each such new lease shall
contain a cross-default provision based upon a default, beyond applicable
notice and cure periods by Tenant under the other lease. The intent of any
such re-documentation is not to change any of the respective rights, duties,
liabilities or obligations of Landlord or Tenant set forth under this Lease,
but simply to facilitate the creation of two (2) separate leases for the
Premises, rather than one (1).
39. ADDITIONAL PROVISIONS
A. EARLY ENTRY INTO PREMISES. Tenant may enter into the 3100 Space
fifteen (15) days prior to the Term Commencement Date, solely for the purpose
of installing furniture, trade fixtures, telephones, computers, photocopy
equipment, and other business equipment. Such early entry will not advance
the Term Commencement Date so long as Tenant does not commence business
operations from any part of the Premises. All of the provisions of this Lease
shall apply to Tenant during any early entry, including the indemnity in
Section 8.c, but excluding the obligation to pay Rent on the 3100 Space
unless and until Tenant has commenced business operations in the 3100 Space,
whereupon Rent for the 3100 Space shall commence. Tenant shall not be
obligated to pay any charges for electricity, restrooms, HVAC, water,
elevators, parking or access to loading docks with respect to the 3100 Space
during such early entry period. Landlord may revoke its permission for
Tenant's early entry if Tenant's activities or workers interfere with the
completion of the Tenant Improvements, provided that (i) Landlord and Tenant
agree to use their commercially reasonable efforts to coordinate their
respective schedules and improvement work to enable Tenant's early entry work
to be performed concurrently with the completion of the Tenant Improvements,
and (ii) Tenant acknowledges that in the event of a conflict between
Landlord's and Tenant's respective schedules or any interference by Tenant
with the performance of the Tenant Improvements, the completion of the Tenant
Improvements shall have first priority and accordingly Tenant will
accommodate Landlord's scheduling requests and not interfere with the
performance of the Tenant Improvements. If Tenant is granted early entry,
Landlord shall not be responsible for any loss, including theft, damage or
destruction to any work or material installed or stored by Tenant at the
Premises or for any injury to Tenant or Tenant's Parties. Landlord shall have
the right to post appropriate notices of non-responsibility and to require
Tenant to provide Landlord with evidence that Tenant has fulfilled its
obligation to provide insurance pursuant to this Lease.
B. RIGHT OF FIRST OFFER. Provided Tenant is not in default under this
Lease, beyond the expiration of any applicable notice and cure period,
Landlord hereby grants to Tenant a right of first offer with respect to all
of that certain space in the buildings outlined on Exhibit "D" attached
hereto and made a part hereof ("FIRST OFFER SPACE"). Notwithstanding the
foregoing, such first offer right shall be subordinate and secondary to all
rights of expansion, first refusal, first offer or similar rights identified
on Exhibit "D" attached hereto (which rights shall hereafter be known
collectively as "SUPERIOR RIGHTS"). Tenant's right of first offer shall be on
the terms and conditions set forth in this Paragraph 39B.
(1) PROCEDURE FOR OFFER. Landlord shall notify Tenant (the "FIRST
OFFER NOTICE") when Landlord first has received from a third party a lease
proposal or offer for the First Offer Space which Landlord intends to
respond to with a counter-offer or counter-lease proposal, where no holder
of a Superior Right desires to lease such space. The First Offer Notice
shall describe the space so offered to Tenant and shall set forth
Landlord's proposed good faith economic terms and conditions applicable to
Tenant's lease of such space (collectively, the "ECONOMIC TERMS").
Notwithstanding the foregoing, Landlord's obligation to deliver the First
Offer Notice shall not apply during the last nine (9) months of the initial
Term.
(2) PROCEDURE FOR ACCEPTANCE. If Tenant wishes to exercise Tenant's
right of first offer with respect to the space described in the First Offer
Notice, then
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within five (5) business days after delivery of the First Offer Notice to
Tenant, Tenant shall deliver notice to Landlord of Tenant's intention to
exercise its right of first offer with respect to the entire space
described in the First Offer Notice. If Tenant does not exercise its right
of first offer within the five (5) business day period, then Landlord shall
be free to lease the space described in the First Offer Notice to anyone to
whom Landlord desires on any terms which are not substantially more
favorable to said prospective tenant than the Economic Terms set forth in
the First Offer Notice and if Landlord enters into such a lease with said
prospective tenant, Tenant's right of first offer shall terminate as to the
First Offer Space described in the First Offer Notice. The term
"substantially more favorable" shall mean that the net effective rent
offered to the prospective tenant is ninety percent (90%) or less of the
net effective rent set forth in the First Offer Notice. The term "net
effective rent" shall mean the net rental amount to be paid to Landlord,
taking into account any tenant improvement expenses or allowances to be
incurred by Landlord and any other monetary concessions granted by
Landlord. Notwithstanding the foregoing, if Tenant fails to exercise its
right of first offer in accordance with the terms of this Paragraph 39B(2),
Tenant's right of first offer shall continue with respect to any applicable
First Offer Space if Landlord has not entered into a lease for such First
Offer Space within six (6) months following that date of Landlord's First
Offer Notice to Tenant or if such First Offer Space thereafter becomes
vacant. Notwithstanding anything to the contrary contained herein, Tenant
must elect to exercise its right of first offer, if at all, with respect to
all of the space offered by Landlord to Tenant at any particular time, and
Tenant may not elect to lease only a portion thereof.
(3) CONSTRUCTION OF FIRST OFFER SPACE. Except as set forth above,
including the determination of the Economic Terms, Tenant shall take the
First Offer Space in its "as-is" condition, and Tenant shall be entitled to
construct improvements in the First Offer Space in accordance with the
provisions of Paragraph 12 of this Lease.
(4) LEASE OF-FIRST OFFER SPACE. If Tenant timely exercises Tenant's
right to lease the First Offer Space as set forth herein, Landlord and
Tenant shall execute an amendment adding such First Offer Space to this
Lease upon the same non-economic terms and conditions as applicable to the
initial Premises, and the economic terms and conditions as provided in this
Paragraph 39B. Tenant shall commence payment of rent for the First Offer
Space and the Term of the First Offer Space shall commence upon the date
set forth in the Economic Terms (the "First Offer Space Delivery Date").
The Term for the First Offer Space shall expire co-terminously with
Tenant's lease of the initial Premises.
(5) NO DEFAULTS. The rights contained in this Paragraph 39B shall be
personal to the Original Tenant or an Affiliate, and may only be exercised
by the Original Tenant or Affiliate (and not any assignee, sublessee or
other transferee of the Original Tenant's interest in this Lease) if Tenant
occupies the entire Premises as of the date of the First Offer Notice.
Tenant shall not have the right to lease First Office Space as provided in
this Paragraph 39B if, as of the date of the First Offer Notice, or, at
Landlord's option, as of the scheduled date of delivery of such First Offer
Space to Tenant, Tenant is in default under this Lease, beyond all
applicable notice and cure periods.
C. LETTER OF CREDIT. Concurrently with the execution of this Lease by
Tenant, Tenant shall either (i) deliver the non-cash portion of its security
deposit to Landlord in the form of an irrevocable standby letter of credit in
favor of Landlord in an amount equal to $900,000 (the "Letter of Credit"), or
(ii) deposit with Landlord an amount equal to $900,000 in lawful money of the
United States, or any combination of the two. Tenant's obligations under the
preceding sentence may be satisfied by the delivery to Landlord of two (2)
letters of credit in a total amount equal to $900,000 (or one (1) letter of
credit and cash in a total amount equal to $900,000), provided each such
letter(s) of credit may be drawn against by Landlord after any default by Tenant
under this Lease (after the expiration of any applicable notice and cure period)
and is otherwise in accordance with the terms of this Paragraph 39C (including a
proration between such letters of credit of the applicable reduction in the
total amount of the Letter of Credit
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pursuant to the schedule set forth below). If Tenant elects to initially
deposit with Landlord all or a portion of the $900,000 in lawful money of the
United States as its security deposit, Tenant shall retain the right, from
time to time, upon ten (10) days prior written notice to Landlord, to replace
up to $900,000 of the Security Deposit with the Letter(s) of Credit. Tenant
shall also retain from time to time the right to cancel the Letter(s) of
Credit at any time provided Tenant concurrently replaces such Letter(s) of
Credit being canceled with cash in an amount equal to the then outstanding
amount of the Letter(s) of Credit which were canceled. The Letter(s) of
Credit, if any, shall be (i) from a bank reasonably acceptable to Landlord,
(ii) in the form and content of that attached hereto as Exhibit "E" (or on a
different form which is reasonably acceptable to Landlord), and (iii) subject
to the conditions stated in this paragraph. The Letter(s) of Credit shall
have a term of at least 12 months and be automatically renewed (or a
reasonably satisfactory replacement Letter(s) of Credit from a bank
reasonably acceptable to Landlord shall be in place in strict accordance with
the terms hereof) at least thirty (30) days prior to expiration of each 12
month period for additional periods of 12 months each until the 30th day
following the expiration of the Term. The Letter(s) of Credit shall be held
by Landlord as additional security for the full and faithful performance by
Tenant of the terms, covenants and conditions of this Lease during the Term.
Provided that Tenant is not in default under this Lease, beyond all
applicable notice and cure periods, and based upon a Letter(s) of Credit in
the original amount of $900,000, the amount of the Letter(s) of Credit shall
be reduced on the first day of each of the following months of the Term by
the amounts set forth in the schedule set forth below:
<TABLE>
<CAPTION>
Month of Term Amount of Reduction of Letter(s) of Credit
------------- ------------------------------------------
<S> <C>
13 $135,000.00
25 $114,750.00
37 $ 97,537.50
49 $ 82,906.88
</TABLE>
If Tenant becomes a publicly traded company on a nationally recognized
stock exchange with a market capitalization in excess of $100,000,000 for no
less than three (3) consecutive months, Tenant shall have the right to cancel
the Letter(s) of Credit (even if the Letter(s) of Credit was previously canceled
and then reinstated pursuant to the following sentence), provided that Tenant
maintains a cash security deposit or letter of credit (in accordance with the
terms hereof) with Landlord in an amount not less than $136,881.42. If Tenant
cancels the Letter(s) of Credit pursuant to the preceding sentence and
thereafter the market capitalization of Tenant falls below $80,000,000 for
thirty (30) consecutive days, Tenant shall be obligated to reinstate the
Letter(s) of Credit immediately following the end of such thirty (30) day
period, and within ten (10) days following written notice from Landlord
demanding the reinstatement of the Letter(s) of Credit (which notice shall
include supporting documentation from a third party stock brokerage company or
credit bureau reporting agency evidencing such reduced market capitalization
value).
In the event Tenant elects to initially deposit all or a portion of the $900,000
in lawful money of the United States, and thereafter exercise its right to
deposit the Letter(s) of Credit with Landlord in lieu of such cash security
deposit, within five (5) days following Landlord's demand therefor, Tenant shall
execute an amendment to this Lease to reflect Tenant's election to replace all
or a portion of the cash Security Deposit with the Letter(s) of Credit, If
Tenant breaches any of the terms or conditions of this Lease, beyond the
expiration of all applicable notice and cure periods, or if Tenant has filed a
voluntary petition under the United States Bankruptcy Code, or Tenant's
creditors have filed an involuntary petition under the United States Bankruptcy
Code, then Landlord may draw upon all or a portion of the Letter(s) of Credit
for the payment of the required amount of any sum in default, and for the
payment of any amount that Landlord may spend or may become obligated to spend
by reason of Tenant's default, and to compensate Landlord for any other loss or
damage that Landlord suffers by reason of Tenant's default to the extent
Landlord is entitled to compensation therefor pursuant to the terms of this
Lease (any amount of the Letter(s) of Credit which is drawn upon by Landlord in
accordance with the provisions hereof, but is not used or applied in accordance
with the terms of this Lease, shall be deemed a part of the Security Deposit).
The use, application or retention of the Letter(s) of Credit, or any portion
thereof, shall not prevent Landlord from exercising any other rights or remedies
provided under this Lease, it being intended that
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Landlord shall nor be required to proceed against the Security Deposit and/or
the Letter(s) of Credit, and shall not operate as a limitation on any
recovery to which Landlord may otherwise be entitled.
D. SIGNAGE. Subject to (a) the approval of all necessary governmental or
regulatory agencies with jurisdiction over the Project, and (b) the terms of
Paragraph 39D(ii) below, and provided Original Tenant or its Affiliate is not in
default under this Lease beyond applicable notice and cure provisions, Original
Tenant or Affiliate (and not any assignee, sublessee or other transferee of the
Original Tenant's or Affiliate's interest in this Lease) shall have the right to
install an exclusive monument sign facing Ocean Park Boulevard and at Original
Tenant's sole cost and expense; providing, however, that such identification
signage shall be consistent with the design, type and general appearance of
other monument signs in the Project and otherwise subject to Landlord's
approval, which shall not be unreasonably withheld or delayed. Notwithstanding
the foregoing, Landlord and Tenant agree that said monument sign shall be no
less than 23" in height and 117" in length. Tenant acknowledges that Landlord
retains the right to install additional monument signs for the 2850 Building and
3100 Building, provided that no other tenant of either the 2850 Building or 3100
Building shall have the right to an individual monument sign which is larger in
size than the monument sign provided to Tenant hereunder. Original Tenant
agrees, at its expense, to be responsible for the maintenance of said sign,
including any repair or restoration work required thereto. Such monument signage
shall be subject to the rules and regulations attached hereto as Exhibit "G."
Notwithstanding the foregoing, (I) the location of said monument signage shall
be subject and subordinate to the location of a monument sign to be installed
for the benefit of Activision, a tenant of the Project, (II) the monument sign
granted to Tenant hereunder shall be comparable in size to the other monument
signs currently located in the Project, and (III) in no event shall Original
Tenant or any Affiliate have the right to install a monument sign which contains
any word or name which relates to an entity which is of a character or
reputation, or is associated with a political orientation or faction, which is
inconsistent with the quality of the Project, or which would otherwise
reasonably offend a landlord of a building or project comparable to the Project
in the vicinity of the Project. Furthermore, (x) Tenant acknowledges that
Landlord is in the process of developing a master plan for signage at the
Project (the "Master Signage Plan") and that upon completion of the same
Landlord intends to submit said Master Signage Plan to the City of Santa Monica
for approval, (y) Landlord agrees, at its sole expense, to be responsible for
any additional costs incurred by Tenant as a result of required changes to its
monument sign to the extent said required changes result from the need to comply
with the Master Signage Plan or requirements of the City of Santa Monica
specifically resulting from the implementation of the Master Signage Plan, and
(z) Landlord agrees that neither the size of Tenant's monument sign nor the size
of the lettering or any logo thereon shall be significantly reduced in order to
comply with the Master Signage Plan.
E. OPTION TO RENEW. Tenant shall, provided this Lease is in full force
and effect and Tenant is not and has not been in default under any of the terms
and conditions of this Lease, beyond all applicable notice and cure periods,
have one (1) option to renew this Lease for a term of five (5) years (the
"Option Term") for the entire Premises or the entire 2850 Space or the entire
3100 Space on the same terms and conditions set forth in this Lease, except as
modified by the terms, covenants and conditions set forth below:
(1) If Tenant elects to exercise such option, then Tenant shall provide
Landlord with written notice no earlier than the date which is twelve
(12) month prior to the expiration of the then current term of this
Lease, but no later than 5:00 p.m. (Pacific Standard Time) on the date
which is six (6) months prior to the expiration of the then current
term of this Lease. If Tenant fails to timely provide such notice,
Tenant shall have no further or additional right to extend or renew
the term of this Lease.
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(2) The rent payable by Tenant during the Option Term (the "Option Rent")
shall be equal to (i) ninety-five percent (95%) of the "face" or
"stated" rental rate (including any escalation thereof if escalations
are contained in such "Comparable Deals," as that term is defined
below), at which tenants, as of the commencement of the Option Term,
are leasing non-sublease, non-encumbered, non-equity, non-expansion
and non-renewal space comparable in size, location and quality to the
Premises for a term of five (5) years, which comparable space is
located in comparable office buildings in Santa Monica, California
(the "Comparable Projects"), comparable in age, location, services and
amenities (the "Comparable Deals"); and shall take into account (ii)
one hundred percent (100%) of the following concessions, which shall
be granted by Landlord to Tenant to the extent granted in Comparable
Deals (collectively, the "Option Concessions"): (a) any operating
expense and tax protection granted in such Comparable Deals (e.g.,
"base year" or "expense stop" protection), (b) rental abatement
concessions, if any, being given such tenants in connection with such
Comparable Deals, (c) tenant improvements or allowances provided or to
be provided for such Comparable Deals, and (d) all other monetary
concessions, if any, being granted such tenants in connection with
such comparable space; provided, however, that (A) in determining any
tenant improvements or allowances provided in Comparable Deals,
Landlord and Tenant shall also take into account and credit Landlord
for the value to a general office user of the existing improvements in
the Premises, and (B) notwithstanding anything to the contrary
contained herein, no consideration shall be given to the fact that
Landlord is or is not required to pay a real estate brokerage
commission in connection with Tenant's exercise of its right to lease
the Premises during the Option Term
(3) Landlord shall advise Tenant of the new Base Rent for the Premises for
the renewal term based on Landlord's determination of fair market
rental value, as well as the terms and conditions for the renewal
term, no later than fifteen (15) days after receipt of notice of
Tenant's exercise of its option to renew.
(4) Landlord and Tenant shall negotiate in good faith to agree on the fair
market rental value of the Premises and terms and conditions for the
renewal term. If Tenant and Landlord are unable to agree on a mutually
acceptable rental rate for the renewal term within thirty (30) days
after notification by Landlord to Tenant of Landlord's determination
of the new Base Rent for the renewal term, but in any event no later
than the date which is ninety (90) days prior to the expiration of the
then current term, then on or before such date Landlord and Tenant
shall each appoint a licensed real estate broker with at least ten
(10) year's experience in leasing office space in the area in which
the Building is located to act as arbitrators. The two (2) arbitrators
so appointed shall determine the fair market rental value for the
Premises for the applicable renewal term based on the above criteria
and each shall submit his or her determination of such fair market
rental value to Landlord and Tenant in writing, within sixty (60) days
after their appointment.
If the two (2) arbitrators so appointed cannot agree on the fair
market rental value for the renewal term within such 60-day period,
the two (2) arbitrators shall within five (5) days thereafter appoint
a third arbitrator who shall be a licensed real estate broker with at
least ten (10) year's experience in leasing office space in the area
in
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which the Building is located. The third arbitrator so
appointed shall independently determine the fair market rental
value for the Premises for the renewal term within thirty (30)
days after appointment, by selecting from the proposals
submitted by each of the first two arbitrators the one that
most closely approximates the third arbitrator's determination
of such fair market rental value. The third arbitrator shall
have no right to adopt a compromise or middle ground or any
modification of either of the proposals submitted by the first
two arbitrators. The proposal chosen by the third arbitrator
as most closely approximating the third arbitrator's
determination of the fair market rental value shall constitute
the decision and award of the arbitrators and shall be final
and binding on the parties.
Each party shall pay the fees and expenses of the arbitrator
appointed by such party and one-half (1/2) of the fees and
expenses of the third arbitrator.
If either party fails to appoint an arbitrator, or if either of
the first two arbitrators fails to submit his or her proposal of
fair market rental value to the other party, in each case within
the time periods set forth above, then the decision of the other
party's arbitrator shall be considered final and binding.
In the event the third arbitrator fails to present a fair market
rental value within such 30-day period, then by mutual consent of
the Landlord and Tenant:
(a) the time period will be extended, or
(b) If either Landlord or Tenant do not wish to extend the time
period, a fourth arbitrator shall be selected by the first
two arbitrators and a new thirty (30) day period shall
begin.
(5) Tenant's right to exercise the option to renew under this
Paragraph 39E shall be conditioned upon Tenant directly occupying
no less than 80% of the entire Premises at the time of exercise
of the option and commencement of the renewal term.
(6) Any exercise by Tenant of the option to renew under this
Paragraph 39E shall be irrevocable. If requested by Landlord,
Tenant agrees to execute a lease amendment reflecting the
foregoing terms and conditions, prior to the commencement of the
renewal term. The option to renew granted under this Paragraph
39E is not transferable; the parties hereto acknowledge and agree
that they intend that the option to renew this Lease under this
Paragraph shall be "personal" to the specific Tenant named in
this Lease (the "Original Tenant") and any Affiliate and that in
no event will any other assignee or sublessee have any rights to
exercise such option to renew.
All references in this Paragraph 39E to the "Premises" shall mean and refer
to the entire Premises or if Tenant elects to renew this Lease as to less
than the entire Premises, either the entire 2850 Space or the entire 3100
Space, as applicable.
F. ARBITRATION.
(1) Any claim, controversy or dispute, whether sounding in contract,
statute, tort, fraud, misrepresentation, or other legal theory, related directly
or indirectly to this Lease, whenever brought and whether between the parties to
this Lease or between
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one of the parties to this Lease and the employees, agents, or affiliated
businesses of the other party, shall be resolved by arbitration as prescribed in
this section. The Federal Arbitration Act, 9 U.S.C. Sections 1-15, not state
law, shall govern the arbitrability of all claims.
(2) Notwithstanding the foregoing, the following claims,
controversies or disputes shall not be resolved by arbitration: (1) any action
by Landlord that seeks repossession of the Premises as part of Landlord's
remedy, (2) any action seeking an injunction or temporary restraining order, (3)
any action seeking any prejudgment remedy, (4) any action founded upon fraud,
willful misconduct, bad faith or other tortious action, and (5) any matter not
related to this Lease or the Premises.
(3) The arbitration shall be conducted under the then current rules
of the American Arbitration Association (the "AAA"). Where no disclosed claim or
counterclaim exceeds $300,000, exclusive of interest and attorneys' fees, there
shall be one arbitrator, who shall be an attorney with at least ten years'
experience in the commercial real estate field. In all other cases, there shall
be three arbitrators, at least one of whom shall be an attorney with at least
ten years' experience in the commercial real estate field. Subject to the
foregoing, the arbitrator or arbitrators shall be selected in accordance with
AAA procedures from a list of qualified people maintained by the AAA. The
arbitration shall be conducted in the regional AAA office closest to where the
claim arose, and all expedited procedures prescribed by the AAA rules shall
apply.
(4) There shall be no discovery other than the exchange of
information which is provided to the arbitrator or arbitrators by the parties.
The arbitrator or arbitrators shall have authority only to award compensatory
damages and shall not have authority to award punitive damages or other
noncompensatory damages; the parties hereby waive all rights to and claims for
monetary awards other than compensatory damages. The decision and award of the
arbitrator or arbitrators shall be final and binding, and judgment on the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The non-prevailing party shall pay the fees and expenses of the
arbitrator or arbitrators, as well as the costs and attorneys' fees of the
prevailing party.
(5) All parties shall proceed in good faith to conclude the
arbitration proceedings within 180 days after either party delivers to the other
a demand for arbitration, and the arbitrator or arbitrators shall be empowered
to impose sanctions for any party's failure to do so.
(6) If any party files a judicial or administrative action asserting
claims subject to arbitration as prescribed herein, and another party
successfully stays such action or compels arbitration of said claims, the party
filing said action shall pay the other party's costs and expenses incurred in
seeking such stay or compelling arbitration, including reasonable attorneys'
fees.
G. TERMINATION OF EXISTING LEASE. Effective on the day immediately
preceding the Term Commencement Date (the "Termination Date"), Landlord and
Tenant agree that the Existing Lease (defined below) shall terminate and be of
no further force or effect, except that all liabilities, duties and obligations
which have arisen or accrued under the Existing Lease by either party prior to
the Termination Date shall survive the Termination Date and remain continuing
liabilities, duties and/or obligations of such party fully enforceable in
accordance with the terms of this Lease. The term "Existing Lease" shall mean
that certain Lease dated as of June 25, 1998, by and between Landlord and Tenant
with respect to Suite 225, as amended by that certain First Amendment to Lease
dated as of August 6, 1998, by and between Landlord and Tenant.
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40. STANDARD FOR CONDUCT AND CONSENT
Notwithstanding anything to the contrary contained in the Lease, except to
the extent this Lease provides that Landlord's or Tenant's approval or consent
may be given or withheld in such party's "sole" or "absolute" discretion, any
time the consent of Landlord or Tenant is required, such consent shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
this Lease, whenever this Lease grants Landlord or Tenant the right to take
action, exercise discretion, establish rules and regulations or make allocations
or other determinations, Landlord and Tenant shall act reasonably and in good
faith.
41. JURY TRIAL WAIVER
EACH PARTY HERETO (WHICH INCLUDES ANY ASSIGNEE, SUCCESSOR HEIR OR PERSONAL
REPRESENTATIVE OF A PARTY) SHALL NOT SEEK A JURY TRIAL, HEREBY WAIVES TRIAL BY
JURY, AND HEREBY FURTHER WAIVES ANY OBJECTION TO VENUE IN THE COUNTY IN WHICH
THE BUILDING IS LOCATED, AND AGREES AND CONSENTS TO PERSONAL JURISDICTION OF THE
COURTS OF THE STATE IN WHICH THE PROPERTY IS LOCATED, IN ANY ACTION OR
PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST THE OTHER ON ANY
MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE
RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES,
OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY
STATUTE, EMERGENCY OR OTHERWISE, WHETHER ANY OF THE FOREGOING IS BASED ON THIS
LEASE OR ON TORT LAW. EACH PARTY REPRESENTS THAT IT HAS HAD THE OPPORTUNITY TO
CONSULT WITH LEGAL COUNSEL CONCERNING THE EFFECT OF THIS PARAGRAPH 41. THE
PROVISIONS OF THIS PARAGRAPH 41 SHALL SURVIVE THE EXPIRATION OR EARLIER
TERMINATION OF THIS LEASE.
The terms of that certain Addendum attached to this Lease are incorporated
herein and made a part hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
day and the year first above written.
LANDLORD
Spieker Properties, L.P.,
a California limited partnership
By: Spieker Properties, Inc.,
a Maryland corporation,
its general partner
By: /s/
---------------------------------
Name: John Davenport
Title: Regional Senior Vice President
Date:
-------------------------------
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TENANT
eToys, Inc.
a Delaware corporation
By: /s/
---------------------------------
Its:
-----------------------------
By: /s/
---------------------------------
Its:
-----------------------------
Date:
-------------------------------
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EXHIBIT A
RULES AND REGULATIONS
1. Sidewalks, halls, passages, exits, entrances, elevators, escalators
and stairways shall not be obstructed by tenants or used by tenants for any
purpose other than for ingress to and egress from their respective premises. The
halls, passages, exits, entrances, elevators and stairways are not for the use
of the general public and Landlord shall in all cases retain the right to
control and prevent access thereto by all persons whose presence, in the
reasonable judgment of Landlord, shall be prejudicial to the safety, character,
reputation and interests of the Building, the Project and its tenants, provided
that nothing herein contained shall be construed to prevent such access to
persons with whom any tenant normally deals in the ordinary course of such
tenant's business unless such persons are engaged in illegal activities. No
tenant, and no employees or invitees of any tenant, shall go upon the roof of
any Building, except as authorized by Landlord or for purposes related to
satellite dishes in strict accordance with the terms of this Lease. No tenant,
and no employees or invitees of any tenant shall move any common area furniture
without Landlord's consent.
2. Except as otherwise set forth in this Lease, no sign, placard, banner,
picture, name, advertisement or notice, visible from the exterior of the
Premises or the Building or the common areas of the Building shall be inscribed,
painted, affixed, installed or otherwise displayed by Tenant either on its
Premises or any part of the Building or Project without the prior written
consent of Landlord in Landlord's sole and absolute discretion. Landlord shall
have the right to remove any such sign, placard, banner, picture, name,
advertisement, or notice without notice to and at the expense of the Tenant,
which were installed or displayed in violation of this rule. If Landlord shall
have given such consent to Tenant at anytime, whether before or after the
execution of Tenant's Lease, such consent shall in no way operate as a waiver or
release of any of the provisions hereof or of the Lease, and shall be deemed to
relate only to the particular sign, placard, banner, picture, name,
advertisement or notice so consented to by Landlord and shall not be construed
as dispensing with the necessity of obtaining the specific written consent of
Landlord with respect to any other such sign, placard, banner, picture, name,
advertisement or notice.
All approved signs or lettering on doors and walls shall be printed,
painted, affixed or inscribed at the expense of Tenant by a person or vendor
reasonably approved by Landlord and shall be removed by Tenant at the time of
vacancy at Tenant's expense.
3. The directory of the Building will be provided exclusively for the
display of the name and location of tenants only (and approved assignees or
subtenants) and Landlord reserves the right to charge a reasonable fee for the
installation thereof.
4. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, awnings, hangings or decorations shall be attached to, hung or placed
in, or used in connection with, any window or door on the Premises without the
prior written reasonable consent of Landlord. In any event with the prior
written consent of Landlord, all such items shall be installed inboard of
Landlord's standard window covering and shall in no way be visible from the
exterior of the Building. All electrical ceiling fixtures hung in offices or
spaces along the perimeter of the Building must be fluorescent or of a quality,
type, design, and bulb color reasonably approved by Landlord. No articles shall
be placed or kept on the window sills so as to be visible from the exterior of
the Building. No articles shall be placed against glass partitions or doors
which Landlord considers unsightly from outside Tenant's Premises.
5. Landlord reserves the right to exclude from the Building and the
Project, between the hours of 6 p.m. and 8 a.m. and at all hours on Saturdays,
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Sundays and legal holidays, all persons who are not tenants or their guests in
the Building. Each tenant shall be responsible for all persons for whom it
allows to enter the Building or the Project and shall be liable to Landlord for
all acts of such persons, except as otherwise provided in this Lease.
Landlord and its agents shall not be liable for damages for any error
concerning the admission to, or exclusion from, the Building or the Project of
any person, except to the extent resulting from Landlord's negligence or willful
misconduct.
During the continuance of any invasion, mob, riot, public excitement
or other circumstance rendering such action advisable in Landlord's opinion,
Landlord reserves the right (but shall not be obligated) to prevent access to
the Building and the Project during the continuance of that event by any means
it considers appropriate for the safety of tenants and protection of the
Building, property in the Building and the Project.
6. All cleaning and janitorial services for the Building and the Premises
shall be provided exclusively through Landlord. Except with the written consent
of Landlord, no person or persons other than those reasonably approved by
Landlord shall be permitted to enter the Building for the purpose of cleaning
the same. Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation of good order and cleanliness
of its Premises. Landlord shall in no way be responsible to Tenant for any loss
of property on the Premises, however occurring, or for any damage done to
Tenant's property by the janitor or any other employee or any other person,
except to the extent resulting from Landlord's negligence or willful misconduct.
7. Tenant shall use commercially reasonable efforts to see that all
doors of its Premises are closed and securely locked and to observe strict
care and caution that all water faucets or water apparatus, coffee pots or
other heat-generating devices are entirely shut off before Tenant or its
employees leave the Premises, and that all utilities shall likewise be
carefully shut off, so as to prevent waste or damage. Tenant shall be
responsible for any damage or injuries sustained by other tenants or
occupants of the Building or Project or by Landlord for noncompliance with
this rule. On multiple-tenancy floors, all tenants shall keep the door or
doors to the Building corridors closed at all times except for ingress and
egress.
8. Except as provided in this Lease, Tenant shall not use any method of
heating or air-conditioning other than that supplied by Landlord. As more
specifically provided in the Tenant's lease of the Premises, Tenant shall not
waste electricity, water or air-conditioning and agrees to cooperate fully with
Landlord to assure the most effective operation of the Building's heating and
air-conditioning, and shall refrain from attempting to adjust any controls other
than room thermostats installed for Tenant's use.
9. Landlord will furnish Tenant free of charge with two keys to each door
in the Premises, Landlord may make a reasonable charge for any additional keys
(provided such charge shall not exceed the charge to any other tenant in the
Project for said additional keys), and Tenant shall not make or have made
additional keys. Tenant shall not alter any lock or access device or install a
new or additional lock or access device or bolt on any door of its Premises,
without the prior written consent of Landlord, which shall not be unreasonably
withheld. If Landlord shall give its consent, Tenant shall in each case furnish
Landlord with a key for any such lock (except for any secured areas which
Landlord has approved). Tenant, upon the termination of its tenancy, shall
deliver to Landlord the keys for all doors which have been furnished to Tenant,
or which have otherwise been made for Tenant, and in the event of loss of any
keys so furnished or made, shall pay Landlord therefor.
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10. The restrooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed and
no foreign substance of any kind whatsoever shall be thrown into them. The
expense of any breakage, stoppage, or damage resulting from violation of this
rule shall be borne by the tenant who, or whose employees or invitees, shall
have caused the breakage, stoppage, or damage.
11. Tenant shall not use or keep in or on the Premises, the Building or
the Project any kerosene, gasoline, or inflammable or combustible fluid or
material, except incidental to the Permitted Use and in compliance with all
Regulations and subject to Landlord's approval.
12. Tenant shall not use, keep or permit to be used or kept in its
Premises any foul or noxious gas or substance. Tenant shall not allow the
Premises to be occupied or used in a manner which unreasonably interferes with
Landlord or other occupants of the Building by reason of noise, odors and/or
vibrations or interfere in any way with other tenants or those having business
therein, nor shall any animals (other than guide dogs) or birds be brought or
kept in or about the Premises, the Building, or the Project.
13. No cooking shall be done or permitted by any tenant on the Premises,
except that use by the tenant of Underwriters' Laboratory (UL) approved
equipment, refrigerators and microwave ovens may be used in the Premises for the
preparation of coffee, tea, hot chocolate and similar beverages, storing and
heating food for tenants and their employees shall be permitted. All uses must
be in accordance with all applicable federal, state and city laws, codes,
ordinances, rules and regulations and the Lease.
14. Except with the prior written consent of Landlord, Tenant shall not
sell, or permit the sale, at retail, of newspapers, magazines, periodicals,
theater tickets or any other goods or merchandise in or on the Premises, nor
shall Tenant carry on, or permit or allow any employee or other person to carry
on, the business of stenography, typewriting or any similar business in or from
the Premises for the service or accommodation of occupants of any other portion
of the Building, nor shall the Premises be used for the storage of merchandise
or for manufacturing of any kind, or the business of a public barber shop,
beauty parlor, nor shall the Premises be used for any illegal, improper, or
immoral purpose, or any business or activity other than that specifically
provided for in such Tenant's Lease. Tenant shall not accept hairstyling,
barbering, shoeshine, nail, massage or similar services in the Premises or
common areas except as authorized by Landlord.
15. If Tenant requires telegraphic, telephonic, telecommunications, data
processing, burglar alarm or similar services, it shall first obtain, and comply
with, Landlord's instructions in their installation, except as otherwise
provided in this Lease.
16. Landlord will direct electricians as to where and how telephone,
telegraph and electrical wires are to be introduced or installed. No boring or
cutting for wires will be allowed without the prior consent of Landlord. The
location of burglar alarms, telephones, call boxes and other office equipment
affixed to the Premises shall be subject to the written approval of Landlord.
17. Except as otherwise set forth in this Lease, Tenant shall not install
any radio or television antenna, satellite dish, loudspeaker or any other device
on the exterior walls or the roof of the Building, without Landlord's consent.
Tenant shall not interfere with radio or television broadcasting or reception
from or in the Building, the Project or elsewhere.
18. Except in connection with the normal hanging of pictures or other
decorative items of art, Tenant shall not mark, or drive nails, screws or drill
into the
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partitions, woodwork or drywall or in any way deface the Premises or
any part thereof without Landlord's consent. Tenant may install nails and screws
in areas of the Premises that have been identified for those purposes to
Landlord by Tenant at the time those walls or partitions were installed in the
Premises. Tenant shall not lay linoleum, tile, carpet or any other floor
covering so that the same shall be affixed to the floor of its Premises in any
manner except as approved in writing by Landlord. The expense of repairing any
damage resulting from a violation of this rule or the removal of any floor
covering shall be borne by the tenant by whom, or by whose contractors,
employees or invitees, the damage shall have been caused.
19. No bulk furniture, freight, equipment, materials, supplies, packages,
merchandise or other property will be received in the Building or carried up or
down the elevators except between such hours and in such elevators as shall be
designated by Landlord.
Tenant shall not place a load upon any floor of its Premises which
exceeds the load per square foot which such floor was designed to carry or which
is allowed by law. Landlord shall have the right to prescribe the weight, size
and position of all safes, furniture or other heavy equipment brought into the
Building. Safes or other heavy objects shall, if considered necessary by
Landlord, stand on wood strips of such thickness as determined by Landlord to be
necessary to properly distribute the weight thereof. Landlord will not be
responsible for loss of or damage to any such safe, equipment or property from
any cause, and all damage done to the Building by moving or maintaining any such
safe, equipment or other property shall be repaired at the expense of Tenant.
Business machines and mechanical equipment belonging to Tenant which
cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenants in the Building shall be placed and maintained by
Tenant, at Tenant's expense, on vibration eliminators or other devices
sufficient to eliminate noise or vibration. The persons employed to move such
equipment in or out of the Building must be reasonably acceptable to Landlord.
20. Intentionally Omitted.
21. There shall not be used in any space, or in the public areas of the
Project either by Tenant or others, any hand trucks except those equipped with
rubber tires and side guards or such other material handling equipment as
Landlord may approve. Tenants using hand trucks shall be required to use the
freight elevator, or such elevator as Landlord shall designate. No other
vehicles of any kind shall be brought by Tenant into or kept in or about its
Premises.
22. Each tenant shall store all its trash and garbage within the interior
of the Premises. Tenant shall not place in the trash boxes or receptacles any
personal trash or any material that may not or cannot be disposed of in the
ordinary and customary manner of removing and disposing of trash and garbage in
the city, without violation of any law or ordinance governing such disposal. All
trash, garbage and refuse disposal shall be made only through entry-ways and
elevators provided for such purposes and at such times as Landlord shall
designate. If the Building has implemented a building-wide recycling program for
tenants, Tenant shall use good faith efforts to participate in said program.
23. Canvassing, soliciting, distribution of handbills or any other written
material and peddling in the Building and the Project are prohibited and each
tenant shall cooperate to prevent the same. No tenant shall make room-to-room
solicitation of business from other tenants in the Building or the Project,
without the written consent of Landlord.
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24. Landlord shall have the right, exercisable without notice and
without liability to any tenant, to change the name and address of the
Building and the Project.
25. Landlord reserves the right to exclude or expel from the Project
any person who, in Landlord's reasonable judgment, is under the influence of
alcohol or drugs or who commits any act in violation of any of these Rules
and Regulations.
26. Without the prior written consent of Landlord, Tenant shall not use
the name of the Building or the Project or any photograph or other likeness
of the Building or the Project in connection with, or in promoting or
advertising, Tenant's business except that Tenant may include the Building's
or Project's name in Tenant's address.
27. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations reasonably established by Landlord or any
governmental agency.
28. Except for Landlord's negligence or willful misconduct, Tenant
assumes any and all responsibility for protecting its Premises from theft,
robbery and pilferage, which includes keeping doors locked and other means of
entry to the Premises closed.
29. The requirements of Tenant will be attended to only upon
appropriate application at the office of the Building by an authorized
individual. Employees of Landlord shall not perform any work or do anything
outside of their regular duties unless under special instructions from
Landlord, and no employees of Landlord will admit any person (tenant or
otherwise) to any office without specific instructions from Landlord.
30. Landlord reserves the right to designate the use of the parking
spaces on the Project. Tenant or Tenant's guests shall park between
designated parking lines only, and shall not occupy two parking spaces with
one car. Parking spaces shall be for passenger vehicles, sport utility
vehicles and pick-up trucks only; no boats, trucks, trailers, recreational
vehicles or other types of vehicles may be parked in the parking areas
(except that trucks may be loaded and unloaded in designated loading areas).
Vehicles in violation of the above shall be subject to tow-away, at vehicle
owner's expense. Vehicles parked on the Project overnight without prior
written consent of the Landlord shall be deemed abandoned and shall be
subject to tow-away at vehicle owner's expense. No tenant of the Building
shall park in visitor or reserved parking areas. Any tenant found parking in
such designated visitor or reserved parking areas shall be subject to
tow-away at vehicle owner's expense. The parking areas shall not be used to
provide car wash, oil changes, detailing, automotive repair or other services
unless otherwise approved or furnished by Landlord.
31. No smoking of any kind shall be permitted anywhere within the
Building, including, without limitation, the Premises and those areas
immediately adjacent to the entrances and exits to the Building, or any other
area as Landlord elects. Smoking in the Project is only permitted in smoking
areas identified by Landlord, which may be relocated from time to time.
32. If the Building furnishes common area conferences rooms for tenant
usage, Landlord shall have the right to control each tenant's usage of the
conference rooms, including limiting tenant usage so that the rooms are
equally available to all tenants in the Building. Any common area amenities
or facilities shall be provided from time to time at Landlord's discretion.
33. Tenant shall not swap or exchange building keys or cardkeys with
other employees or tenants in the Building or the Project.
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34. Tenant shall be responsible for the observance of all of the
foregoing Rules and Regulations by Tenant's employees, agents, clients,
customers, invitees and guests.
35. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify, alter or amend, in whole or in part, the
terms, covenants, agreements and conditions of any lease of any premises in
the Project.
36. Subject to the terms of this Lease, Landlord reserves the right to
make such other and reasonable rules and regulations as in its judgment may
from time to time be needed for safety and security, for care and cleanliness
of the Building and the Project and for the preservation of good order
therein. Tenant agrees to abide by all such Rules and Regulations herein
stated and any additional rules and regulations which are adopted.
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EXHIBIT B
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EXHIBIT C
OFFICE LEASE IMPROVEMENT AGREEMENT
This Office Lease Improvement Agreement ("Improvement Agreement") sets
forth the terms and conditions relating to construction of the initial tenant
improvements described in the Plans referred to below (the "Tenant
Improvements") in the Premises. Capitalized terms used but not otherwise
defined herein shall have the meanings set forth in the Lease (the "Lease")
to which this Improvement Agreement is attached and forms a part.
1. BASE, SHELL AND CORE. Landlord shall be responsible, at its cost
(not to be applied against the Tenant Improvement Allowance), for causing the
base, shell and core of the Premises (the "Base, Shell and Core") to be in
material compliance with all Regulations (including all laws relating to
Hazardous Materials) as of the date of this Lease (without reference to the
performance of the Tenant Improvements and without regard to grandfathering).
2. PLANS AND SPECIFICATIONS.
2.1 Tenant shall directly retain the services of a space
planner/architect approved by Landlord (the "Space Planner") to prepare a
detailed space plan (the "Space Plan") for the construction of the Tenant
Improvements in the Premises (and Tenant shall pay said Space Planner
directly for said services, subject to reimbursement from Landlord out of the
Tenant Improvement Allowance in accordance with the terms of Paragraph 4
below). Landlord hereby approves of Wirt and Associates as Tenant's Space
Planner. Tenant's Space Planner shall submit the Space Plan to Landlord for
Landlord's review on or before January 29, 1999. Landlord shall either
approve or disapprove the Space Plan within five (5) business days following
Landlord's receipt of the same, provided that Landlord shall have no right to
disapprove the Space Plan unless there is a "Design Problem". The term
"Design Problem" shall mean any of the following: (i) any adverse effect on
the Building's structural elements or Building systems or the safety of the
Building or its occupants; (ii) non-compliance with any Regulations; (iii)
any adverse effect on the exterior appearance of the Building; (iv) the
existence of any Hazardous Materials which would violate applicable
Regulations or are not ordinarily used in connection with the construction of
improvements in similar office buildings; (v) any impairment to Landlord's
ability to furnish services to Tenant or other tenants; (vi) an increase in
the costs of operating the Building (above any increase which would typically
result from a general office use); and (vii) any adverse effect on another
tenant's premises. Based on and promptly following an approved Space Plan,
Tenant shall cause the Space Planner to prepare detailed plans,
specifications and working drawings for the construction of the Tenant
Improvements (the "Plans"). Landlord shall approve or disapprove the Plans
within five (5) business days following Landlord's receipt of the same,
provided that Landlord shall have no right to disapprove of the Plans unless
there is a Design Problem.
2.2 Notwithstanding Landlord's review and approval of the Space
Plan and the Plans and any revisions thereto, Landlord shall have no
responsibility or liability whatsoever for any errors or omissions contained
in the Space Plan or Plans (except to the extent said errors or omissions are
due to changes required by Landlord, rather than errors made by the Space
Planner), or to verify dimensions or conditions, or for the quality, design
or compliance with applicable Regulation of any improvements described
therein or constructed in accordance therewith. Landlord hereby assigns to
Tenant all warranties and guarantees by the Space Planner or the contractor
who constructs the Tenant Improvements relating to the Tenant Improvements
(which warranties shall guarantee the work performed against defective
workmanship and materials for a one (1) year period), and Tenant hereby
waives all claims against Landlord relating to, or arising out of the design
or construction of, the
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Tenant Improvements, except for punchlist work and to the extent resulting
from Landlord's negligence or willful misconduct.
3. SPECIFICATIONS FOR STANDARD TENANT IMPROVEMENTS.
3.1 The minimum specifications and quantities of standard building
components which will comprise and be used in the construction of the Tenant
Improvements ("Standards") are set forth in Schedule 1 to this Exhibit C. As
used herein, "Standards" or "Building Standards" shall mean the standards for
a particular item selected from time to time by Landlord for the Building,
including those set forth on Schedule 1 of this Exhibit C, or such other
standards of equal or better quality as may be mutually agreed between
Landlord and Tenant in writing.
3.2 No deviations from the Standards are permitted, except to the
extent set forth in the Plans. Landlord will approve a deviation from the
Standards to the extent said deviation is of a quality which is better than
the Standards and is otherwise consistent, in terms of appearance, with the
Standards.
4. TENANT IMPROVEMENT COST.
4.1 The cost of the Tenant Improvements shall be paid for by
Tenant, including, without limitation, the cost of: Standards; space plans
and studies; architectural and engineering fees; permits, approvals and other
governmental fees; labor, material, equipment and supplies; construction fees
and other amounts payable to contractors or subcontractors; any demolition
costs; certain costs identified in Paragraph 15 F(i)(C) of the Lease relating
to the 20-Ton Units; taxes; off-site improvements; remediation and
preparation of the Premises for construction of the Tenant Improvements;
taxes; filing and recording fees; premiums for insurance and bonds;
attorneys' fees; financing costs; and all other costs expended or to be
expended in the design and construction of the Tenant Improvements. The cost
of the Tenant Improvements shall not include any supervisory fee paid to
Landlord in connection with the construction of the Tenant Improvements.
4.2 Provided Tenant is not in default under the Lease, beyond
applicable notice and cure periods, including this Improvement Agreement,
Landlord shall contribute a one-time tenant improvement allowance not to
exceed $1,053,750.00 ($25.00 per rentable square foot of the 3100 Building)
("Tenant Improvement Allowance") to be credited by Landlord toward the cost
of the initial Tenant Improvements, which shall include the costs of the
Space Plan and Plans. If the actual cost of the Tenant Improvements exceeds
the Tenant Improvement Allowance at any time, Tenant shall pay Landlord such
excess cost within fifteen (15) business days after the performance of the
actual work and Tenant's receipt of an invoice reflecting the cost of such
work. No credit shall be given to Tenant if the cost of the Tenant
Improvements is less than the Tenant Improvement Allowance. Tenant shall
have the right to use any tenant improvement costs which Landlord remains
obligated to fund as of the date of this Lease under the Existing Lease at any
time on any portion of the Premises and Tenant shall have the right to use
any remaining portion of the Tenant Improvement Allowance, if any, against
any tenant improvement costs incurred by Tenant with respect to the 2850
Space.
4.3 If Tenant requests any changes(s) in the approved Plans after
approval of the estimate of the cost of the Tenant Improvements, Landlord
shall advise Tenant promptly of any cost increases and/or delays such
approved change(s) will cause in the construction of the Tenant Improvements.
Tenant shall approve or disapprove any or all such change(s) within three
(3) business days after notice from Landlord of such cost increases and/or
delays. To the extent Tenant disapproves any such cost increase and/or delay
attributable thereto, Landlord shall have the right, in its sole discretion,
to disapprove Tenant's request for any changes to the approved Plans.
C-2
<PAGE>
5. CONSTRUCTION OF TENANT IMPROVEMENTS.
5.1 Promptly upon the execution of this Improvement Agreement,
Landlord shall secure a building permit and commence construction of the
Tenant Improvements provided that Tenant shall cooperate with Landlord in
executing permit applications and performing other actions reasonably
necessary to enable Landlord to obtain any required permits or certificates
of occupancy. Without limiting the provisions of Paragraph 35 of the Lease,
Landlord shall not be liable for any direct or indirect damages suffered by
Tenant as a result of delays in construction beyond Landlord's reasonable
control except as set forth in the Lease, including, but not limited to,
delays due to strikes or unavailability of materials or labor, or delays
caused by Tenant as provided in Section 5 below (provided no Tenant delay
shall have commenced until Landlord has delivered to Tenant notice of said
delay)(including delays by the contractor or anyone else performing services
on behalf of Landlord or Tenant).
5.2 If any work is to be performed on the Premises by Tenant or
Tenant's contractor or agents:
(i) Such work shall proceed upon Landlord's written
approval (which approval shall not be unreasonably withheld and shall be
given within five (5) business days following Tenant's request therefor and
Tenant's submittal to Landlord of any applicable back-up documentation with
respect thereto) of Tenant's contractor, public liability and property damage
insurance carried by Tenant's contractor, and detailed plans and
specifications for such work shall be at Tenant's sole cost and expense, and
shall further be subject to the provisions of Paragraphs 12 and 27 of the
Lease.
(ii) All work shall be done in conformity with a valid
building permit when required, a copy of which shall be furnished to Landlord
before such work is commenced, and in any case, all such work shall be
performed in accordance with all applicable Regulations. Notwithstanding any
failure by Landlord to object to any such work, Landlord shall have no
responsibility for Tenant's failure to comply with all applicable
Regulations.
(iii) Intentionally omitted.
(iv) All work by Tenant or Tenant's contractor or agents
shall be reasonably scheduled through Landlord.
(v) Tenant's entry to the Premises for any purpose,
including, without limitation, inspection or performance of Tenant
construction by Tenant's agents, prior to the date Tenant's obligation to pay
rent commences shall be subject to all the terms and conditions of the Lease
except the payment of Rent. Tenant's entry shall mean entry by Tenant, its
officers, contractors, licensees, agents, servants, employees, guests,
invitees, or visitors.
(vi) Tenant shall promptly reimburse Landlord within
thirty (30) days after demand by Landlord for any reasonable out-of-pocket
expense actually incurred by the Landlord by reason of faulty work done by
Tenant or its contractors or by reason of any delays caused by such work, or
by reason of inadequate clean-up.
6. COMPLETION AND RENTAL COMMENCEMENT DATE.
6.1 Tenant's obligation to pay Rent under the Lease shall commence
on the applicable date described in Paragraph 2 of the Lease. However:
(i) If Tenant delays in approving any matter requiring
Tenant's approval within the time limits specified herein; or
C-3
<PAGE>
(ii) If the construction period is extended because
Tenant requests any changes in construction or modifies the Plans or if the
Plans do not comply with applicable Regulations (other than due to any
non-compliance of the Base, Shell and Core with applicable Regulations as of
the date of this Lease); or
(iii) If Landlord is otherwise delayed in the construction
of the Tenant Improvements by any act or omission of or breach by Tenant or
anyone performing services on behalf of Tenant (other than Landlord and
Landlord's agents) or on account of any work performed on the Premises by
Tenant or Tenant's contractors or agents, then the date described in
Paragraph 2 of the Lease shall be deemed to be accelerated by the total
number of days of Tenant delays described in (a) through (c) above (each, a
"TENANT DELAY"), but only to the extent the substantial completion of the
Tenant Improvements is actually delayed as a result thereof, calculated in
accordance with the provisions of Paragraph 4.2 below. No Tenant Delay shall
have commenced until Landlord has provided Tenant with notice of the Tenant
delay described in (a) through (c) above.
6.2 If the Term of the Lease has not already commenced pursuant to
the provisions of Paragraph 2 of the Lease and substantial completion of the
Tenant Improvements has been delayed on account of any Tenant Delays, then
upon actual substantial completion of the Tenant Improvements (as defined in
Paragraph 2 of the Lease), Landlord shall notify Tenant in writing of the
date substantial completion of the Tenant Improvements would have occurred
but for such Tenant Delays, and such date shall thereafter be deemed to be
the Term Commencement Date for all purposes under the Lease. Tenant shall pay
to Landlord, within thirty (30) days after receipt of such written notice
(which notice shall include a summary of Tenant Delays), the per diem Base
Rent times the number of days between the date the Term Commencement Date
would have otherwise occurred but for the Tenant Delays and the date of
actual substantial completion of the Tenant Improvements.
6.3 Promptly after substantial completion of the Tenant
Improvements, Landlord shall give notice to Tenant and Tenant shall conduct
an inspection of the Premises with a representative of Landlord and develop
with such representative of Landlord a punchlist of items, if any, of the
Tenant Improvements that are not complete or that require correction. Upon
receipt of such punchlist, Landlord shall proceed diligently to remedy such
items at Landlord's cost and expense provided such items are part of the
Tenant Improvements to be constructed by Landlord hereunder and are otherwise
consistent with Landlord's obligations under this Improvement Agreement.
Substantial completion shall occur notwithstanding delivery of any such
punchlist.
6.4 A default under this Improvement Agreement shall constitute a
default under the Lease, and the parties shall be entitled to all rights and
remedies under the Lease in the event of a default hereunder by the other
party (notwithstanding that the Term thereof has not commenced).
7. MISCELLANEOUS.
7.1 Tenant shall not be responsible for and the Tenant Improvement
Allowance shall not be applied to pay any portion of, and Landlord shall pay,
the following costs and expenses: (i) any costs incurred to remove,
encapsulate, contain or otherwise dispose of any Hazardous Materials in the
Premises; and (ii) any costs incurred in order to cause the Base, Shell and
Core to be in material compliance with all Regulations (including all laws
relating to Hazardous Materials) as of the date of this Lease (without
reference to the Tenant Improvements to be performed in the Premises and
without regard to grandfathering).
7.2 Prior to Tenant's move into the 3100 Space, Landlord shall
thoroughly clean same. In addition, after Tenant has completed its move into
the 3100 Space, Landlord shall, at Landlord's expense, thoroughly clean the
3100 Space such that
C-4
<PAGE>
Tenant may commence its business operations from the 3100 Space immediately
after Landlord completes such cleanup. The costs of the cleaning provided by
Landlord hereunder shall not be deducted from the Tenant Improvement
Allowance, but rather shall be paid by Landlord and included as an Operating
Expense.
C-5
<PAGE>
EXHIBIT "D"
FIRST OFFER SPACE
<TABLE>
<CAPTION>
Suite Square Ft. Expiration Superior Right
1. BUILDING LOCATED AT 2850 OCEAN PARK BOULEVARD:
<S> <C> <C> <C>
100 44,000 06/2003 Any renewal of Lease
292 8,000 12/2000 One five year option to renew
300 20,000 01/2002 One five year option to renew
right of first refusal for
additional space on third
floor
320 9,000 11/2001 Right to contiguous space
2. BUILDING LOCATED AT 2901 28TH STREET:
200 33,000 09/2002 One five year option to
renew and expansion option
on additional space in
building
3. BUILDING LOCATED AT 2950 31ST STREET:
300 24,000 01/2002 One five year option to renew
4. BUILDING LOCATED ON 3000 OCEAN PARK BOULEVARD:
1025 3,000 02/2002 One three year option to renew
1050 9,000 05/2000 One three year option to renew
2001 27,500 07/2000 One five year option to renew
3050 5,500 05/2002 Any renewal of Lease
5. BUILDING LOCATED AT 3250 OCEAN PARK BOULEVARD:
100 9,000 06/2001 One three year option to renew
and right to refusal on balance
of first floor
200 17,200 07/2001 Any renewal of Lease
300 7,500 11/2001 Any renewal of Lease
350 2,500 01/2000 One one year option to renew
3070 3,000 10/2001 Any renewal of Lease
</TABLE>
6. Any space leased by Activision and located in the Building at 3100 Ocean
Park Boulevard in the event (i) Activision defaults under its existing
lease and Landlord recovers possession of all or any portion of the space
currently leased by Activision, (ii) Activision surrenders all or a portion of
the space it currently leases to Landlord, or (iii) Activision and Landlord
enter into a mutual termination of all or a portion of the space currently
leased by Activision and Landlord regains possession of such space.
D-1
<PAGE>
EXHIBIT "E"
IRREVOCABLE STANDBY LETTER OF CREDIT NO. ______________
_________,199_
- ---------------------
- ---------------------
- ---------------------
Ladies and Gentlemen:
We hereby establish our Irrevocable Standby Letter of Credit in your favor
for the account of ___________: for an aggregate amount of $_______________
available to you by your drafts as SIGHT ON US and accompanied by the
following documents:
1. Original Irrevocable Standby Letter of Credit; and
2. Beneficiary's or its designee's signed certificate dated not more than
ten (10) calendar days before the date of the drawing under this letter of
credit, executed by Beneficiary or its designee and stating that either one
or more of the following events has occurred:
(a) Tenant has defaulted under any of the terms, covenants or
conditions under that certain Lease Agreement dated ________, 199_, by and
between Landlord and Tenant ("Lease"), beyond all applicable notice and
cure periods; or
(b) The filing of any voluntary petition by Tenant (or involuntary
petition by Tenant's creditors) under the United States Bankruptcy Code; or
(c) Tenant has failed to procure and deliver a replacement Letter of
Credit reasonably satisfactory to Beneficiary in compliance with the terms
of Paragraph 39C of the Lease on or before thirty (30) days prior to the
expiration of the Letter of Credit.
It is a condition of this Irrevocable Standby Letter of Credit that it shall
be deemed automatically extended for a period of one year from the present or
each future expiration date, unless thirty (30) days prior to the expiration
date we shall notify the Beneficiary by registered mail that we elect not to
renew this Letter of Credit.
Each draft drawn hereunder must bear the clause: "Drawn under ___________
Irrevocable Standby Letter of Credit No. ____________ dated ____________."
We hereby agree with you that drafts drawn under and in compliance with the
terms of this Credit will be duly honored upon presentation and delivery of
documents as specified to _________________ on or before _________________.
This Letter of Credit is freely transferrable in its entirety without our
consent or approval to a subsequent owner or lender of the Building, but with
written notice to us. In the event of such transfer, the transferee shall be
deemed the beneficiaries hereunder in the full place and stead and with all
the rights hereunder of the Original Beneficiary.
This Credit is subject to the Uniform Customs and Practice for Documentary
Credits (1993 Revision), International Chamber of Commerce Publication No.
500.
- ------------------------
Authorized Signature
E-1
<PAGE>
EXHIBIT F
JANITORIAL SPECIFICATIONS
F-1
[Intentionally Omitted]
<PAGE>
EXHIBIT G
EXTERIOR SIGNS
1. Tenant shall not install the monument signage referenced in
Paragraph 39D of this Lease ("Tenant's Exterior Sign") or thereafter replace
or make alterations to Tenant's Exterior Sign, until: (a) Landlord has
approved in writing the sign planner, engineer and installation company and
professionally prepared sign plans submitted by Tenant showing the design,
size, content, color, and quality of materials and placement of the sign, all
required engineering (which approval shall not be unreasonably withheld and
which Landlord's receipt of Tenant's request therefor and all back-up
documentation requested by Landlord with respect thereto), and (b) Tenant has
obtained and submitted to Landlord evidence of the insurance required
hereunder and any permits or approvals required by law. The original
installation work for Tenant's Exterior Sign shall be performed in a manner
so as to avoid damage to the Project or unreasonable interference with the
operation of the Project or any of its occupants. Without limiting the
generality of the foregoing, Landlord shall have the right to reasonably
approve all staging and other construction procedures. All installation or
other work hereunder shall be performed in a good and workman-like manner, in
accordance with all governmental requirements, and at Tenant's sole cost and
expense. If Tenant is required to remove any glass or other material from
the Project, Tenant will obtain Landlord's prior written consent (not to be
unreasonably withheld) to such removal (unless such removal is shown on the
plans previously approved by Landlord) and shall store all such material with
appropriate care and replace it when Tenant's Exterior Sign is removed.
2. Once installation of Tenant's Exterior Sign has commenced, it
shall be completed as soon as possible, and (subject to force majeure delays
and delays caused by Landlord) in no event later than three (3) months
thereafter.
3. Tenant shall maintain Tenant's Exterior Sign in good, slightly and
first-class appearance, condition and repair, and so as not to detract from
the appearance of the Project. Landlord shall have the right to approve
maintenance personnel. If Tenant shall fail to maintain or repair Tenant's
Exterior Sign in the condition required hereunder within thirty (30) days
after written notice by Landlord, Landlord may so repair and maintain
Tenant's Exterior Sign, at Tenant's sole cost and expense (which Tenant shall
pay to Landlord as additional rent when billed by Landlord), without limiting
Landlord's other rights and remedies.
4. Intentionally Omitted.
5. Landlord does not represent or warrant that installation of
Tenant's Exterior Sign hereunder will comply with any applicable federal,
state, county or local law or ordinances or the regulations of any of their
agencies or any quasi-governmental requirements or any other applicable
agreements. Landlord shall use its best efforts (without the expenditure of
any money unless paid by Tenant in advance of the required expenditure) to
assist Tenant in obtaining such approvals. Tenant shall at all times comply
with any applicable laws, ordinances, regulations and requirements pertaining
to Tenant's Exterior Sign.
6. Except to the extent arising out of the negligence or intentional
acts of Landlord, its agents or employees, Tenant shall defend, indemnify,
and hold Landlord harmless from and against any and all loss, cost, claim,
damage, liability or expense which Landlord may incur as a direct or indirect
result of Tenant's installation, maintenance or other activities in connection
therewith, and including but not limited to attorneys' fees, whether or not
any legal action is instituted. This indemnity obligation shall include
Landlord's partners, officers, directors, employees, trustees, beneficiaries,
affiliates and agents ("Indemnitees"). Tenant shall maintain commercial
G-1
<PAGE>
general liability insurance covering risks of bodily injury, death or
property damage arising directly or indirectly out of Tenant's installation,
maintenance or other activities in connection therewith, in the amount of at
least $3,000,000 combined single limit per occurrence with a responsible
insurance company reasonably satisfactory to Landlord having a rating of not
less than A-X in Best's Insurance Guide and licensed to do business in the
State of California, which policy shall include a contractual liability
endorsement and shall include Landlord and the other Indemnitees (as defined
above) as additional insureds. Tenant shall provide a certificate of such
insurance to Landlord prior to commencing the installation work for the
Tenant's Exterior Sign, and such insurance policy shall not be cancelable
without at least thirty (30) days written notice to Landlord. Except to the
extent arising out of the negligence or intentional acts of Landlord, its
agents and employees, Landlord shall not be responsible for Tenant's Exterior
Sign in the event of loss or damage thereto from any cause whatsoever.
Tenant, on behalf of its insurers, hereby waives any rights of subrogation
against Landlord (or the "Indemnitees" defined above).
7. Landlord shall have the right to use photographs of the Project,
including Tenant's Exterior Sign, in Landlord's brochures and other materials
without compensation to Tenant.
8. Upon termination of this Lease, or the sign rights hereunder by
expiration or otherwise, unless Landlord requests Tenant to leave Tenant's
Exterior Sign in place, Tenant shall (and may at any time during the Term
upon three (3) months' prior written notice) remove Tenant's Exterior Sign
and fully repair and restore the Project to the same or better condition than
prior to installation of Tenant's Exterior Sign. If Tenant does not commence
to repair any damage or injury to Tenant's Exterior Sign or to the Project as
a result of the installation or removal of Tenant's Exterior Sign, or does
not commence to remove (after Tenant's sign rights hereunder have terminated)
Tenant's Exterior Sign within ten (10) days after written request, or if
Tenant does not thereafter proceed to diligently complete such work, Tenant
hereby authorizes Landlord to make such repairs or remove and dispose of
Tenant's Exterior Sign, and Tenant shall promptly pay Landlord's reasonable
charges for doing so as additional rent. Landlord shall not be liable for
any property so disposed or removed by Landlord.
9. Tenant acknowledges that Tenant's signage rights with respect to
Tenant's Exterior Sign were negotiated by Landlord and Tenant in
consideration of, and would not have been granted by Landlord but for, the
high quality, first-class reputation of Tenant and the size and intended use
of the Premises. Tenant may not assign, sublease, or otherwise transfer such
signage rights to any third party or transferee (other than Affiliate) or
change the name on Tenant's Exterior Sign without the prior consent of
Landlord (which may be withheld in Landlord's reasonable discretion).
10. Tenant's rights to Tenant's Exterior Sign as set forth in this
Exhibit "G" shall constitute a license coupled with an interest. Landlord
agrees not to revoke this license until the Term (including any options to
renew thereunder validly exercised) expires or is sooner terminated, except
pursuant to Paragraph 39D of this Lease.
11. Tenant shall pay all costs directly or indirectly related to
Tenant's Exterior Sign, including, but not limited to their design,
installation, maintenance, replacement and removal, and except as expressly
set forth in this Lease, or this Exhibit, shall reimburse Landlord for any
out-of-pocket costs reasonably incurred by Landlord that Landlord would not
have incurred but for Tenant's exercise of its rights with respect to
Tenant's Exterior Sign.
G-2
<PAGE>
ADDENDUM TO
LEASE AGREEMENT
RE: LEASE OF PREMISES AT
2850 OCEAN PARK BOULEVARD AND
3100 OCEAN PARK BOULEVARD,
SANTA MONICA, CALIFORNIA
(THE "PREMISES")
NOTWITHSTANDING anything to the contrary contained in the Lease
Agreement (the "Lease"), between Spieker Properties, L.P., a California
limited partnership ("Lessor"), and eToys, Inc., a Delaware corporation
("Tenant"), the following provisions of this Addendum to Lease Agreement
(this "Addendum") shall be incorporated into and be a part of the Lease and
shall supersede any inconsistent provisions of the Lease.
1. GRANT OF LICENSE. Landlord hereby grants Tenant, at no charge, a
nonexclusive license to install on the roof of each of the 2850 Building and
the 3100 Building ONE (1) satellite dish which is no more than eighteen (18)
inches in diameter which shall be enclosed by a screen and the nonexclusive
right to run connecting lines to such satellite from the 2850 Space or 3100
Space, as applicable (such satellite dish and such connecting lines and
equipment herein referred to as the "Equipment"). Tenant shall not penetrate
the roof in connection with any installation or reinstallation of the
Equipment without Landlord's prior written consent, which consent shall not
be unreasonably withheld or delayed. The plans and specifications for all the
Equipment shall be approved by Landlord in writing prior to any installation.
Tenant shall be responsible for any damage to the roof or conduit system as a
result of Tenant's installation, maintenance and/or removal of the Equipment.
2. LOCATION. The location of the satellite dish and the rest of the
Equipment shall be subject to Landlord's prior written approval, which
approval shall not be unreasonably withheld or delayed. Tenant shall not
change the location of, or alter or install additional Equipment or paint the
satellite dish or the other Equipment without Landlord's prior written
reasonable consent. Tenant agrees that Landlord shall direct the placement
of the satellite dish inside the roof well (in a location which provides
Tenant with good reception), other than locations that are scheduled to
accommodate building equipment or services.
3. COMPLIANCE WITH LAW. Tenant, at Tenant's sole expense, shall
comply with all laws, rules, orders and regulations regarding the
installation, construction, operation, maintenance and removal of the
Equipment and shall be solely responsible for obtaining and maintaining in
force all permits, licenses and approvals necessary for such operations.
4. TAXES. Tenant shall be responsible for and promptly shall pay all
taxes, assessments, charges, fees and other governmental impositions levied
or assessed on the Equipment or based on the operation thereof.
5. RELOCATION. Landlord may require Tenant, at Tenant's sole cost and
expense, to relocate the Equipment during the term of the Lease to a
location approved by Tenant, which approval shall not be unreasonably
withheld, conditioned or delayed.
6. TERMINATION. Upon any termination of the Lease, Landlord reserves
the right to terminate Tenant's right pursuant to this Addendum immediately.
7. INTERFERENCE. Operation of the Equipment shall not unreasonably
interfere in any manner with equipment systems or utility systems of other
tenants, including without limitation, telephones, dictation equipment,
lighting, heat and air
-1-
<PAGE>
conditioning, computers, electrical systems and elevators. If operation of
the Equipment causes such unreasonable interference, Tenant immediately shall
suspend operation of the Equipment until such unreasonable interference is
eliminated.
8. MAINTENANCE AND REPAIR. Tenant shall maintain the Equipment in
good condition and repair, at Tenant's sole cost and expense. Landlord may
from time to time require that Tenant repaint the satellite dishes at
Tenant's expense to keep the same in an attractive condition. In the event
the Tenant fails to repair an maintain the Equipment in accordance with this
paragraph 8, Landlord may, but shall not be obligated to, make any such
repairs or perform any maintenance to the Equipment after 30 days notice to
Tenant and Tenant shall reimburse Landlord upon demand for all out-of-pocket
costs and expenses incurred by Landlord in connection therewith.
9. ACCESS. Tenant may access the roof for repair and maintenance of
each satellite dish, only during normal business hours, on not less than 24
hours prior written notice to Landlord unless otherwise approved by Landlord.
Tenant shall designate in writing to Landlord all persons whom Tenant
authorizes to have access to the roof for such purposes. Upon such
designation and prior identification to Landlords' building security
personnel, such authorized persons shall be granted access to the roof by
Landlord's building engineer. Tenant shall be responsible for all costs
and expenses incurred by Landlord in connection with Tenant's access to the
roof pursuant to this Paragraph 9.
10. INDEMNITY AND INSURANCE. Tenant shall indemnify, defend, protect
and hold harmless Landlord from and against any and all claims related to the
Equipment or operation of the same as if the Equipment were located wholly
within the Premises. Tenant shall provide evidence satisfactory to Landlord
that Tenant's property and liability insurance policies required under the
Lease include coverage for the Equipment and any claim, loss, damage, or
liability relating to the Equipment.
11. NO LANDLORD RESPONSIBILITY. Landlord shall have no responsibility
or liability whatsoever relating to (i) maintenance or repair of the
Equipment, (ii) damage to the Equipment; (iii) damage to persons or property
relating to the Equipment or the operation thereof, or (iv) interference with
use of the Equipment arising out of utility interruption or any other cause,
except for injury to persons or damage to property caused by the negligence
or intentional misconduct of Landlord, its agents or the Landlord Related
Parties. If no event shall Landlord be responsible for consequential damages.
Upon installation of the Equipment, Tenant shall accept the area where the
Equipment is located in its "as is" condition. Tenant acknowledges that
Landlord shall have no obligation whatsoever to improve, maintain or repair
the area in which the Equipment will be installed.
12. USE. Tenant shall use the Equipment solely for the operations
within the Premises and shall not use or allow use of the Equipment, for
consideration or otherwise, for the benefit of other tenants in the Project
or any other person or entity.
13. REMOVAL. Tenant shall, at Tenant's sole expense, remove each
satellite dish and such other portions of the Equipment as Landlord may
designate, and restore the affected areas to their condition prior to
installation of the Equipment (i) if Tenant fails to perform any of its
obligations under this Addendum within fifteen (15) days after request of
Landlord, or immediately in the event of emergency, (ii) immediately if such
removal is required by any governmental agency having jurisdiction over the
Equipment, and (iii) in any event, no later than fifteen (15) days after
expiration or earlier termination of the Lease. If Tenant fails to remove
the Equipment when and as required under this Addendum, Landlord reserves the
right to do so, and the expense of the same shall be immediately due and
payable from Tenant to Landlord as additional rent, together with interest
and late charges as provided in the Lease.
14. SURVIVAL. The covenants, obligations and indemnities under this
Addendum shall survive expiration or earlier termination of the Lease for any
reason.
-2-
<PAGE>
Except as expressly modified above, all terms and conditions of the
Lease remain in full force and effect and are hereby ratified and confirmed.
LANDLORD: TENANT:
Spieker Properties, L.P., a eToys, INC., a Delaware corporation
California limited partnership
By: Spieker Properties, Inc., a Maryland By: /s/
corporation --------------------------
Its General Partner Name:
-------------------
Its:
--------------------
Date:
------------------------
By: /s/
--------------------------
Name:
-------------------
Its: Senior Vice President
Date:
------------------------
-3-
<PAGE>
STANDARD INDUSTRIAL LEASE AGREEMENT
between
NEWCROW, a California general partnership
as Landlord
and
eTOYS, Inc., a Delaware corporation
as Tenant
Premises Location: 6000 Peachtree Street
Commerce, California 90040
<PAGE>
STANDARD INDUSTRIAL LEASE AGREEMENT
THIS STANDARD INDUSTRIAL LEASE AGREEMENT (this "Lease"), dated this ____
day of June, 1998, is made and entered into by and between NEWCROW, a California
general partnership, hereinafter referred to as "Landlord", and eToys, Inc., a
Delaware corporation hereinafter referred to as "Tenant".
BASIC LEASE PROVISIONS
1. Area of Premises: Approximately 49,850 rentable square feet.
(Paragraph 1.1)
2. Building Address: 6000 Peachtree Street
Commerce, California 90040
(Paragraph 1.1)
3. Commencement Date: Subject to the terms of Paragraph 1.3, the Commencement
Date shall be July 1, 1998. (Paragraph 1.3)
4. Term: Sixty (60) months. (Paragraph 1.2)
5. The amount of the First Month's Rent is as follows: (Paragraph 2.1)
<TABLE>
<S> <C>
(a) Base Rent (See Paragraph 2.2 for adjustments
thereto) $19,940.00
(b) Taxes $1,051.84
(c) Insurance $603.19
(d) Operating Expenses $1,164.55
FIRST MONTH'S RENT TOTAL $22,741.58
</TABLE>
6. Security Deposit: $172,741.58. (Paragraphs 2.3 and 22.33)
7. Building Area and Tenant's Proportionate Share: The Building contains
approximately 104,598 rentable square feet. The Premises comprise
Forty-Seven and 66/100ths percent (47.66%) of the Building (such percentage
shall be Tenant's Proportionate Share). (Paragraph 2.4)
8. Use of Premises: Warehousing and distribution of general merchandise and
general office purposes and other lawful purposes directly incidental
thereto. (Paragraph 3.1)
9. Parking: 40 automobiles and 6 trucks. (Paragraph 3.3)
10. Liability insurance amount: $2,000,000. (Paragraph 12.3.1)
11. Tenant's Address
For Notices Until
Commencement Date: 1640 5th Street, Suite 124
Santa Monica, California 90401
Attn: Jordan Posell
(Paragraph 22.21)
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12. Landlord's Address For
Payments and Notices: c/o Trammell Crow Company
5801 S. Eastern Avenue, Suite 100
Los Angeles, California 90040
(Paragraph 22.21)
13. Tenant's broker: Metrospace Corporation
(Paragraph 22.24)
14. Exhibits:
"A" Site Plan of Project
"B" Intentionally Omitted
"C" Form of Letter of Credit
"D" Signage Program
"E" Additional Provisions
"F" Environmental Questionnaire
The paragraphs of the Lease identified above in parentheses are those
provisions where references to particular items from the Basic Lease Provisions
appear, and such items are incorporated into the Lease as part thereof. In the
event of any conflict between any Basic Lease Provision and the Lease, the
former shall control.
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1. PREMISES AND TERM.
1.1 LEASE OF PREMISES. Landlord leases to Tenant, and Tenant hires
from Landlord, certain premises (the "PREMISES") consisting of the rentable area
shown in Item 1 of the Basic Lease Provisions within a building (the "BUILDING")
described in Item 2 of the Basic Lease Provisions. The location of the Building
and Premises are shown on the site plan attached hereto as "EXHIBIT A" and
incorporated herein. The "PROJECT" shall refer to the land shown on the site
plan (the "LAND") together with such additions and deletions to the Land as
Landlord may from time to time designate, plus all buildings and improvements
located thereon. Landlord and Tenant hereby agree that the rentable square
footage of the Premises set forth in Item 1 of the Basic Lease Provisions shall
be conclusive and binding on the parties.
1.2 TERM. The term of this Lease shall commence on the "COMMENCEMENT
DATE" specified in or established pursuant to Item 3 of the Basic Lease
Provisions, and except as otherwise provided herein, shall continue in full
force and effect through the number of months provided in Item 4 of the Basic
Lease Provisions (the "TERM"), provided, however, that if the Commencement Date
is a date other than the first day of a calendar month, the Term shall consist
of the remainder of the calendar month including and following the Commencement
Date, plus said number of full calendar months.
1.3 CONDITION OF PREMISES. Tenant acknowledges that it has inspected
and accepts the Premises in their present "as-is" condition as suitable for the
purpose for which the Premises are leased. Notwithstanding the preceding
sentence, Landlord shall re-paint and re-carpet the existing interior offices
within the Premises with Landlord's Building standard paint and carpet in such
Building standard colors as are mutually approved by Landlord and Tenant
("Landlord's Work"). Landlord shall use commercially reasonable efforts to
complete Landlord's Work by September 1, 1998, but Tenant acknowledges that such
target date is dependent upon no delay in the same resulting from a Force
Majeure Event (as defined below) or an act or omission of Tenant or Tenant's
Parties (as defined below). The taking of possession by Tenant shall be
conclusive to establish that the Premises are in good and satisfactory condition
when possession is taken. Notwithstanding the foregoing, Landlord hereby
represents that the existing mechanical, plumbing, electrical (including light
bulbs and tubes) and HVAC systems (collectively, the "Building Systems") shall
be in good working order as of the Commencement Date (except to the extent any
defects therein exist as a result of any act or omission of Tenant or Tenant's
Parties (as defined below)); provided, however, if Tenant does not deliver
written notice to Landlord of any material defects with respect to the condition
of the Building Systems within thirty (30) days following the Commencement Date,
then Tenant shall be deemed to have inspected and accepted the same in their
present condition, and the correction of any subsequently discovered defects
shall be the obligation of the applicable party pursuant to the other provisions
of this Lease (including, without limitation, Landlord's right to treat the cost
of the same as an Operating Expense). If a breach of the foregoing
representation exists, and Tenant timely (i.e., within thirty (30) days
following the Commencement Date) delivers written notice to Landlord setting
forth in reasonable detail a description of such breach, Landlord shall, as
Tenant's sole and exclusive remedy, rectify the same at Landlord's expense.
Tenant further acknowledges that no representations or promises were made by
Landlord or any agent of Landlord to repair, alter, remodel or improve the
Premises, except as expressly set forth in this Lease.
The Commencement Date shall be the date provided in Item 3 of the
Basic Lease Provisions. If this Lease is executed before the Premises become
vacant or otherwise available or if any present tenant or occupant of the
Premises holds over, and Landlord cannot acquire possession of the Premises in
time to deliver them by the Commencement Date, or if any required repairs,
alterations or improvements are not substantially completed by Landlord prior to
the Commencement Date, this Lease shall not be void or voidable, and Landlord
shall not be deemed to be in default hereunder, nor shall Landlord be liable for
any loss or damage directly or indirectly arising out of or resulting from such
holdover. Tenant agrees to accept possession of the Premises at such time as
Landlord is able to tender the same, which date shall thenceforth be deemed the
Commencement Date. Notwithstanding the foregoing, if Landlord has failed to
tender possession of the Premises to Tenant on or before August 1, 1998 (the
"Outside Date") and such failure is not due in whole or in part to a "Force
Majeure Event" or
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any act or omission of Tenant or Tenant's Parties, then Tenant shall have the
right to terminate this Lease upon written notice to Landlord within five (5)
days following the Outside Date; provided however, if no such written notice is
timely delivered by Tenant within five (5) days following the Outside Date, then
Tenant shall have no further right to termination under this Paragraph 1.3 and
this Lease shall remain in full force and effect. The term "Force Majeure
Event" means delay by reason of fire, earthquake or other acts of God, strikes,
boycotts, war, riot, insurrection, embargos, shortages of equipment, labor or
materials, delays in issuance of governmental permits or approvals, weather
delays or any other cause beyond the reasonable control of Landlord. After the
Commencement Date, Tenant shall, upon demand, execute and deliver to Landlord a
letter of acceptance of delivery of the Premises specifying the Commencement
Date.
1.4 EARLY ENTRY INTO PREMISES. Provided that the existing occupant of
the Premises has vacated and surrendered the Premises, Tenant may enter into the
Premises upon receipt of Landlord's consent, solely for the purpose of and,
subject to Tenant's compliance with Paragraph 7 below, a security system,
installing furniture, special flooring or carpeting, trade fixtures, telephones,
computers, photocopy equipment, and other business equipment including racks and
inventory. Such early entry will not advance the Commencement Date so long as
Tenant does not commence business operations from any part of the Premises. All
of the provisions of this Lease shall apply to Tenant during any early entry,
including the indemnity in Paragraph 12.1, but excluding the obligation to pay
Rent unless and until Tenant has commenced business operations in the Premises,
whereupon Rent shall commence. Landlord may revoke its permission for Tenant's
early entry to the extent Tenant's activities or workers interfere with the
completion of Landlord's Work. If Tenant is granted early entry, Landlord shall
not be responsible for any loss, including theft, damage or destruction to any
work or material installed or stored by Tenant at the Premises or for any injury
to Tenant or its agents, employees, contractors, subcontractors, subtenants,
assigns or invitees (collectively, "TENANT'S PARTIES"), except to the extent
resulting from Landlord's gross negligence or willful misconduct. Landlord
shall have the right to post appropriate notices of non-responsibility and to
require Tenant to provide Landlord with evidence that Tenant has fulfilled its
obligation to provide insurance pursuant to paragraphs 7(d) and 12.3 of this
Lease.
2. RENT AND SECURITY DEPOSIT.
2.1 RENT. Rent (as defined below) shall accrue hereunder from the
Commencement Date. The amounts per month provided in Item 5(a) of the Basic
Lease Provisions, as adjusted pursuant to Paragraph 2.2 ("BASE RENT"), plus the
"ADDITIONAL RENT" (as defined in Paragraph 2.5 below) together with any other
sums payable by Tenant under this Lease shall collectively constitute the
"RENT". The first full calendar month's Rent shall be due and payable upon
execution of this Lease in the total amount shown in Item 5 of the Basic Lease
Provisions. A like monthly installment, subject to the adjustments described
herein, shall be due and payable without demand on or before the first day of
each calendar month succeeding the Commencement Date during the Term, except
that Rent for any fractional calendar month at the commencement or end of the
Term shall be prorated on a daily basis.
2.2 ADJUSTMENT OF BASE RENT. Base Rent shall be increased as
follows:
<TABLE>
<CAPTION>
MONTHS OF TERM BASE RENT
-------------- ---------
<S> <C>
13-24 $20,438.50 per month
25-36 $20,949.46 per month
37-48 $21,473.19 per month
49-60 $22,010.03 per month
</TABLE>
2.3 SECURITY DEPOSIT. Tenant shall deposit with Landlord upon
execution of this Lease the sum provided in Item 6 of the Basic Lease Provisions
("SECURITY DEPOSIT"), which sum shall be held by Landlord in its general fund,
without obligation for interest, as security for the performance of Tenant's
covenants and obligations under this Lease, it being expressly understood and
agreed that the Security Deposit is not an advance rental deposit or a measure
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of Landlord's damages in case of Tenant's default beyond applicable notice and
cure periods. Upon the occurrence of any event of default by Tenant, Landlord
may, without prejudice to any other remedy provided herein or provided by law,
use the Security Deposit to the extent necessary to make good any arrears of
Rent or other payments due Landlord hereunder, all of which shall be deemed to
be Rent, and any other damage, injury, expense or liability caused by such event
of default; and Tenant shall pay to Landlord on demand the amount so applied in
order to restore the Security Deposit to its original amount. Any remaining
balance of the Security Deposit shall be returned by Landlord to Tenant within
fourteen (14) days after termination of this Lease, provided all of Tenant's
obligations under this Lease have been fulfilled.
2.4 TENANT'S PROPORTIONATE SHARE. "TENANT'S PROPORTIONATE SHARE", as
used in this Lease, shall mean (a) with respect to the cost of an item
attributable to the Building, that portion of the cost of the applicable item
that is obtained by multiplying such cost of the applicable item by a fraction,
the numerator of which is the rentable square footage of the Premises and the
denominator of which is the rentable square footage of the Building, which
fraction is set forth as a percentage figure in Item 7 of the Basic Lease
Provisions, and (b) with respect to the cost of an item attributable to the
common areas or Land in the Project (but not any buildings in the Project), that
portion of such cost of the applicable item that is obtained by multiplying the
fraction described in clause (a) above by the portion of the cost of the
applicable item that is allocated to the Building by Landlord in a reasonably
consistent manner which reflects the size of the Building and other buildings,
the types of uses to which the Building and other buildings are primarily suited
and the relative demands and burdens that such uses place on the Project.
2.5 ADDITIONAL RENT.
2.5.1 DEFINITION. In addition to the Base Rent set forth in
Paragraph 2.1, Tenant agrees to pay Tenant's Proportionate Share of (a) "TAXES"
as defined in and payable by Landlord pursuant to Paragraph 4.1 below,
(b) Landlord's costs of providing insurance on the Project pursuant to Paragraph
12.2 below, and (c) "OPERATING EXPENSES" as defined in and incurred pursuant to
Paragraph 5.1 below (collectively, "ADDITIONAL RENT").
2.5.2 MONTHLY PAYMENTS AND ANNUAL RECONCILIATION. On the
first day of each month of the Term, Tenant shall pay Landlord a sum equal to
1/12 of the estimated amount of Additional Rent for that particular year based
on Landlord's reasonable estimate thereof, to be delivered to Tenant on or about
April of each year during the Term. The monthly payments are subject to
increase or decrease as determined by Landlord to reflect revised estimates of
such costs. Tenant shall pay within thirty (30) days following demand therefor
by Landlord any increases in estimated Additional Rent upon receipt of any
initial or revised estimate retroactive to January of that calendar year. The
payments made by Tenant shall be reconciled annually. If Tenant's total
payments of Additional Rent are less than the actual Additional Rent due under
Paragraph 2.5.1, Tenant shall pay the difference within thirty (30) days
following demand therefor by Landlord; if the total payments of Rent made by
Tenant are more than the actual Additional Rent due under Paragraph 2.5.1,
Landlord shall retain such excess and credit it to Tenant's next accruing
Additional Rent payments, except at the end of the Term, when any excess will be
refunded. Any failure or delay of less than two (2) years by Landlord in
delivering any estimate, demand or reconciliation shall not affect the rights
and obligations of the parties hereunder.
2.5.3 TENANT'S AUDIT RIGHTS. Provided that Tenant is not
then in default beyond any applicable cure period of its obligations to pay
Rent, or any other payments required to be made by it under this Lease and
provided further that Tenant shall have the right, once each calendar year, to
cause a Qualified Person (as defined below) to reasonably review supporting data
for any portion of an actual statement of annual Operating Expenses delivered by
Landlord (the "Actual Statement") (provided, however, Tenant may not have an
audit right to all documentation relating to Building operations as this would
far-exceed the relevant information necessary to properly document a
pass-through billing statement, but real estate tax statements, and information
on utilities, repairs, maintenance and insurance will be available), in
accordance with the following procedure:
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(i) Tenant shall, within one hundred eighty (180)
days after any Actual Statement is delivered, deliver a written notice to
Landlord specifying the portions of the Actual Statement that are claimed to be
incorrect, and Tenant shall simultaneously pay to Landlord all amounts due from
Tenant to Landlord as specified in the Actual Statement. In no event shall
Tenant be entitled to withhold, deduct, or offset any monetary obligation of
Tenant to Landlord under the Lease (including without limitation, Tenant's
obligation to make all payments of Rent and all payments of Tenant's Operating
Expenses) pending the completion of and regardless of the results of any review
of records under this Paragraph. The right of Tenant under this Paragraph may
only be exercised once for any Actual Statement, and if Tenant fails to meet any
of the above conditions as a prerequisite to the exercise of such right, the
right of Tenant under this Paragraph for a particular Actual Statement shall be
deemed waived.
(ii) Tenant acknowledges that Landlord maintains its
records for the Project at Landlord's main office, and Tenant agrees that any
review of records under this Paragraph shall be at the sole expense of Tenant
and shall be conducted by a Qualified Person. Tenant acknowledges and agrees
that any records reviewed under this Paragraph constitute confidential
information of Landlord, which shall not be disclosed to anyone other than the
Qualified Person performing the review, the principals of Tenant who receive the
results of the review, and Tenant's accounting employees. The disclosure of
such information to any other person, whether or not caused by the conduct of
Tenant, shall constitute a material breach of this Lease.
(iii) If the results of such review show that
Landlord has overcharged Tenant, then Tenant may so notify Landlord in writing
and if Landlord does not object in writing to such results within forty-five
(45) days, Tenant shall deliver to Landlord a second written notice which shall
provide that, pursuant to this Paragraph, Landlord's failure to object to such
results may result in a required credit or reimbursement to Tenant as provided
in the following sentence and possibly a reimbursement to Tenant of Tenant's
review fees as provided below in this Paragraph. If within thirty (30) days
after Tenant's delivery of the second notice Landlord does not object in writing
to such results, Landlord shall, at Landlord's election, either give Tenant a
credit against Additional Rent next due or reimburse Tenant, in either case, in
an amount equal to the amount of such overcharge. If Landlord does timely
object to such results (either following the first or second notices), then
either party may submit such dispute to arbitration in accordance with the
Commercial Rules of the American Arbitration Association, and Tenant shall not
be entitled to reimbursement or a credit unless and until such time as the
dispute is resolved in Tenant's favor. Tenant agrees to pay the cost of
Tenant's review, provided that if any legal proceeding or the review (if
Landlord fails to object) shows that Landlord's determination of the contested
sums set forth in the Actual Statement was overstated by more than five percent
(5%), Landlord shall pay the reasonable out-of-pocket cost of such review. The
payment by Tenant of any amounts specified in the Actual Statement shall not
preclude Tenant from questioning the correctness, within one hundred eighty
(180) days after the date of delivery, of the Actual Statement, but the failure
of Tenant to object thereto prior to the expiration of the one hundred eighty
(180) day period shall be conclusively deemed Tenant's approval of the Actual
Statement. A "Qualified Person" means an accountant or other person experienced
in accounting for income and expenses of industrial projects engaged solely by
Tenant on terms which do not entail any compensation based or measured in any
way upon any savings in Additional Rent or reduction in Operating Expenses
achieved through the inspection process.
2.6 PAYMENT. Tenant shall pay Landlord all amounts due from Tenant
to Landlord hereunder, whether for Rent or otherwise, in lawful money of the
United States, at the place designated for the delivery of notices to Landlord
pursuant to Paragraph 22.21, without any deduction or offset whatsoever.
2.7 LATE CHARGES. Tenant acknowledges that late payment by Tenant of
any sum owed to Landlord under this Lease will cause Landlord to incur costs not
contemplated by this Lease, the exact amounts of which are extremely difficult
and impracticable to fix. Such costs include, without limitation, processing
and accounting charges, time spent addressing the
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issue with Tenant, and late charges that may be imposed on Landlord by the terms
of any obligation or note secured by any encumbrance covering the Premises.
Therefore, if any installment of rent or other payment due from Tenant is not
received by Landlord within five (5) business days from when due, Tenant shall
pay to Landlord an additional sum equal to five percent (5%) of the overdue rent
or other payment as a late charge. Late charges shall be deemed Additional
Rent. The parties agree that this late charge represents a fair and reasonable
estimate of the administrative and other costs that Landlord will incur by
reason of a late payment by Tenant. Acceptance of any late payment charge shall
not constitute a waiver of Tenant's default with respect to the overdue payment,
nor prevent Landlord from exercising any of the other rights and remedies
available to Landlord under this Lease, at law or in equity, including, but not
limited to, the interest charge imposed pursuant to Paragraph 22.2.
3. USE.
3.1 USE OF PREMISES. The Premises shall be used only for the
purposes set forth in Item 8 of the Basic Lease Provisions and for such other
lawful purposes as may be directly incidental thereto, and for no other use or
purpose. Tenant acknowledges that Landlord has not made any representations or
warranties with respect to the suitability of the Premises for Tenant's uses.
Tenant and Tenant's Parties shall at all times comply with all rules and
regulations regarding the Premises, the Building and/or the Project as Landlord
may reasonably establish in a nondiscriminatory manner from time to time.
Landlord shall not be responsible for nor liable to Tenant for any violation
and/or enforcement of such rules and regulations by any other tenant of the
Project.
Tenant shall be responsible for and shall at its own cost and
expense obtain any and all licenses and permits necessary for any such use.
Landlord shall be responsible for the Premises being in compliance with all laws
in effect as of the date of this Lease, but only to the extent compliance with
the same is actually being enforced by the applicable governmental authority,
and not in any manner required or triggered as a result of Tenant's particular
use of or alterations to the Premises. Tenant shall comply with all
governmental laws, ordinances and regulations applicable to the use of the
Premises, including, without limitation, the Americans with Disabilities Act of
1990 triggered subsequent to the Commencement Date as a result of Tenant's
alterations or use of the Premises. Without limiting the generality of the
foregoing, and subject to Paragraph 7 below, Tenant shall at its own cost and
expense install and construct all physical improvements to or needed to serve
the Premises (i) required by any federal, state or local building code or other
law or regulation enacted or becoming effective after the Commencement Date,
including, but not limited to, special plumbing, railings, ramps and other
improvements for use by the handicapped, or (ii) made necessary by the nature of
Tenant's use of the Premises; provided, however, that Landlord shall have the
option to install and construct such improvements, in which case the cost
thereof shall be equitably allocated by Landlord in its reasonable discretion
among the benefitted premises, and Tenant, upon demand, shall pay to Landlord,
as Additional Rent, such portion of the cost thereof as may be allocated
equitably, in Landlord's reasonable discretion, to the Premises. Tenant shall
not place a load upon the floor of the Premises which exceeds the load per
square foot which such floor was designed to carry and which is allowed by law.
Tenant shall promptly comply with all governmental orders and directives for the
correction, prevention and abatement of nuisances in or upon, or connected with,
the Premises, all at Tenant's sole expense. Tenant shall not permit any
objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to
emanate from the Premises, nor take any other action which would constitute a
nuisance or would disturb or endanger any other tenants of the Project or
unreasonably interfere with their use of their respective premises.
Tenant shall not permit the Premises to be used for any purpose
or in any manner (including without limitation any method of storage) which
would render the insurance thereon void or the insurance risk more hazardous or
cause the state insurance authority to disallow any sprinkler credits. If any
increase in the fire and extended coverage insurance premiums paid by Landlord
or other tenants for the Project is caused by Tenant's use and occupancy of the
Premises, or if Tenant vacates the Premises and causes any increase in such
premiums, then Tenant shall pay as Additional Rent the amount of such increase
to Landlord, and, within thirty (30) days of demand by Landlord, correct at
Tenant's expense the cause of
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such disallowance, increased cost, penalty or surcharge to the satisfaction of
the particular insurance provider or authority, as applicable.
3.2 HAZARDOUS MATERIALS. Except for the incidental use of certain
products for routine cleaning and maintenance of floors, bathrooms, windows,
kitchens, and administrative offices on the Premises or Project, Tenant hereby
represents, warrants and covenants that Tenant will not produce, use, store or
generate any "Hazardous Materials" (as defined below) on, under or about the
Premises and/or Project. Tenant has fully and accurately completed Landlord's
Pre-Leasing Environmental Exposure Questionnaire ("Environmental Questionnaire")
attached hereto as Exhibit "F" incorporated herein by reference. If Tenant's
Environmental Questionnaire indicates that Tenant will be utilizing Hazardous
Materials, in addition to all other rights and remedies Landlord may have under
this Lease, including, without limitation, declaring a default hereunder by
Tenant for breach of representation, Landlord may require Tenant to execute an
amendment to this Lease relating to such Hazardous Materials use and Tenant's
failure to execute any such amendment within ten (10) days of Landlord's
delivery thereof to Tenant shall constitute a default hereunder by Tenant.
Tenant shall not cause or permit any Hazardous Material to be brought upon,
placed, stored, manufactured, generated, blended, handled, recycled, disposed
of, used or released on, in, under or about the Premises and/or Project by
Tenant or Tenant's Parties. Tenant shall not excavate, disturb or conduct any
testing of any soils on or about the Project without obtaining Landlord's prior
written consent, and any investigation or remediation on or about the Project
shall be conducted only by a consultant approved in writing by Landlord and
pursuant to a work letter approved in writing by Landlord. Tenant shall keep,
operate and maintain the Premises in full compliance with all federal, state and
local environmental, health and/or safety laws, ordinances, rules, regulations,
codes, orders, directives, guidelines, permits or permit conditions currently
existing and as amended, enacted, issued or adopted in the future which are
applicable to the Premises (collectively, "ENVIRONMENTAL LAWS") and relate to
Hazardous Materials that are introduced or permitted on or about the Project by
Tenant or Tenant's Parties.
Landlord shall have the right (but not the obligation) to enter
upon the Premises and cure any non-compliance by Tenant with the terms of this
Paragraph 3.2 or any Environmental Laws or any release, discharge, spill,
improper use, storage, handling or disposal of Hazardous Materials on, under,
from, or about the Premises or Project, regardless of the quantity of any such
release, discharge, spill, improper use, storage, handling or disposal of
Hazardous Materials on or about the Premises or Project, the full cost of which
shall be deemed to be Rent and shall be due and payable by Tenant to Landlord
immediately upon demand if resulting from any act or omission of Tenant or
Tenant's Parties or from any breach of Tenant's obligations hereunder. If
Landlord elects to enter upon the Premises and cure any such non-compliance or
release, discharge, spill, improper use, storage, handling or disposal of
Hazardous Materials on, under, from, or about the Premises or Project, Tenant
shall not be entitled to participate in Landlord's activities on the Premises.
If any information provided to Landlord by Tenant in the
Environmental Questionnaire, or otherwise relating to information concerning
Hazardous Materials is false, incomplete, or misleading in any material respect,
the same shall be deemed an event of default by Tenant under this Lease.
Without limiting in any way Tenant's obligations under any other
provision of this Lease, Tenant and its successors and assigns shall indemnify,
protect, defend and hold Landlord, its partners, officers, directors,
shareholders, employees, agents, lenders, contractors and each of their
respective successors and assigns (collectively, the "INDEMNIFIED PARTIES")
harmless from any and all claims, judgments, damages, penalties, enforcement
actions, taxes, fines, remedial actions, liabilities, losses, costs and expenses
(including, without limitation, actual attorneys' fees, litigation, arbitration
and administrative proceeding costs, expert and consultant fees and laboratory
costs) including, without limitation, damages arising out of the diminution in
the value of the Premises or Project or any portion thereof, damages for the
loss of the Premises or Project, damages arising from any adverse impact on the
marketing of space in the Premises or Project, and sums paid in settlement of
claims, which arise during or after the Term in whole or in part as a result of
the presence or suspected
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presence of any Hazardous Materials, in, on, under, from or about the Premises
or the Project and/or other adjacent properties due to Tenant's or Tenant's
Parties' activities, or failures to act (including, without limitation, Tenant's
failure to report any spill or release to the appropriate regulatory agencies),
on or about the Premises or Project.
For purposes of this Lease, the term "HAZARDOUS MATERIAL" means
any chemical, substance, material, controlled substance, object, waste or any
combination thereof, which is or may be hazardous to human health, safety or to
the environment due to its radioactivity, ignitability, corrosiveness,
reactivity, explosiveness, toxicity, carcinogenicity, infectiousness or other
harmful or potentially harmful properties or effects, including, without
limitation, petroleum and petroleum products, benzene, toluene, ethyl benzene,
xylenes, waste oil, asbestos, radon, polychlorinated biphenyls (PCBs),
degreasers, solvents, and any and all of those chemicals, substances, materials,
controlled substances, objects, wastes or combinations thereof which are now or
may become in the future listed, defined or regulated in any manner as
"hazardous substances", "hazardous wastes", "toxic substances", "solid wastes,"
or bearing similar or analogous definitions pursuant to any and all
Environmental Laws.
3.3 USE OF COMMON AREAS. Tenant and Tenant's Parties shall have the
non-exclusive right, in common with the other parties occupying the Project, to
use the grounds, sidewalks, parking areas, driveways and alleys of the Project,
subject to such reasonable and nondiscriminatory rules and regulations as
Landlord may from time to time prescribe. Tenant and Tenant's Parties may park
only up to the maximum number of automobiles and trucks shown in Item 9 of the
Basic Lease Provisions near the Premises during normal business hours on a
non-exclusive basis. Outside storage is prohibited without Landlord's prior
written consent, which may be withheld in Landlord's sole and absolute
discretion. Tenant shall not succeed to any of Landlord's easement rights over
and relating to the Project, nor shall Tenant obtain any rights to common areas,
as designated by Landlord, other than those rights specifically granted to
Tenant in this Lease. Landlord shall have the sole right of control over the
use, maintenance, configuration, repair and improvement of the common area.
Landlord may make such changes to the use or configuration of, or improvements
comprising, the common area as Landlord may elect without liability to Tenant
(including the right to add or eliminate buildings from the Project), subject
only to Tenant's vehicular parking rights shown in Item 9 of the Basic Lease
Provisions so long as such changes do not materially and adversely impact
Tenant's parking rights or access to the Premises.
4. TAXES.
4.1 PAYMENT OF REAL PROPERTY TAXES. Landlord agrees to pay, before
they become delinquent, all real property taxes; current installments of any
general or special assessments (which shall be paid in the maximum number of
installments that such assessments may be paid without the imposition of any
interest or penalties); license fees, commercial rental taxes, in lieu taxes,
levies, charges, penalties or similar impositions imposed by any authority
having the direct power to tax, and are paid or incurred by Landlord, including
but not limited to, the following: (a) any tax on or measured by Rent received
by Landlord from the Project or as against Landlord's business of leasing any of
the Project; (b) any assessment, tax, fee, levy or charge imposed by
governmental agencies for such services as fire protection, street, sidewalk and
road maintenance, transportation, refuse removal and for other governmental
services formerly provided without charge to property owners or occupants;
(c) assessments due to deed restrictions and/or owner associations; and
(d) reasonable costs of determining, filing, contesting and appealing any such
tax, assessment or charge, including accountants', attorneys' and consultants'
fees, but excluding any income, inheritance, estate or corporate franchise taxes
of Landlord (collectively, "TAXES").
Taxes shall also include any assessment, tax, fee, levy or charge
in substitution, partially or totally, of any assessment, tax, fee, levy or
charge previously included within the definition of Taxes. It is hereby
acknowledged by Tenant and Landlord that Proposition 13 was adopted by the
voters of California in June 1978 and that assessments, taxes, fees, levies and
charges may be imposed by governmental agencies for such services as fire
protection, street, sidewalk and road maintenance, transportation, refuse
removal and other governmental services formerly provided without charge to
property owners or occupants. It
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is the intention of Tenant and Landlord that all such new and increased
assessments, taxes, fees, levies and charges, and all similar assessments,
taxes, fees, levies and charges be included within the definition of Taxes for
purposes of this Lease.
4.2 LIABILITY FOR ALL PERSONAL PROPERTY TAXES. Tenant shall be
liable for all taxes levied or assessed against personal property, furniture,
fixtures, above-standard Tenant Improvements and alterations, additions or
improvements placed by or for Tenant in the Premises. If any such taxes for
which Tenant is liable are levied or assessed against Landlord or Landlord's
property and if Landlord elects to pay the same or if the assessed value of
Landlord's property is increased by inclusion of personal property, furniture,
fixtures, above-standard Tenant Improvements or alterations, additions or
improvements placed by or for Tenant in the Premises, and Landlord elects to pay
the Taxes based on such increase, Tenant shall pay to Landlord, within thirty
(30) days of Landlord's demand therefor, that portion of the Taxes.
5. LANDLORD'S MAINTENANCE AND REPAIR.
5.1 LANDLORD'S MAINTENANCE. Landlord shall, at its sole cost,
maintain and repair only the exterior portions of the roof, and the foundation
and the structural soundness of the exterior walls of the Building and utility
facilities stubbed to the Premises in good condition, reasonable wear and tear
excepted. The term "WALLS" as used herein shall not include windows, glass or
plate glass, doors, special store fronts or office entries, unless otherwise
specified by Landlord in writing. Landlord shall maintain, repair and repaint
the exterior walls, overhead doors, canopies, entries, handrails, gutters and
other exposed parts of the Building as deemed necessary by Landlord to maintain
safety and aesthetic standards. Landlord shall maintain, repair, and operate
the common areas of the Project in good order and condition, including but not
limited to, mowing grass and general landscaping, maintenance of parking areas,
driveways and alleys, parking lot sweeping, paving and restriping, exterior
lighting, painting, pest control and window washing. The cost of all of the
foregoing, including the cost of all supplies, uniforms, equipment, tools and
materials, together with utility costs not otherwise charged directly to Tenant
or other tenants, all wages and benefits of employees and independent
contractors engaged in the operation, maintenance and repair of the Project, all
expenses for security and safety services and equipment, any license, permit and
inspection fees required in connection with the operation, maintenance or repair
of the Project (but not related to improvements to tenant space), management,
consulting, legal and accounting fees of independent contractors engaged by
Landlord (but not related to the negotiation or enforcement of leases), other
costs and expenses actually incurred by Landlord in connection with the
ownership, operation, leasing and management of the Project, and other usual
costs and expenses which are typically paid by other landlords to provide
on-site operation of industrial, warehouse and service center projects, are
collectively referred to herein as "OPERATING EXPENSES". To the extent that an
Operating Expense consists of a maintenance or repair (including renovation and
refurbishment) expense that is not properly fully deductible as an expense in
the year incurred in accordance with generally accepted accounting principles,
such expense shall be amortized over its useful life. Any amounts which are
amortized, together with Landlord's actual cost of funds, shall result in equal
payments being included in Operating Expenses for the year of expenditure and
succeeding years during the amortization period. Landlord shall reduce the
amount of expenses by any refunds actually received by Landlord in connection
with any expenses previously included in Operating Expenses.
Notwithstanding the foregoing, the following items shall not be
treated as Operating Expenses:
1. Leasing Commissions, attorneys' fees, costs,
disbursements and other expenses incurred in connection with
negotiations or disputes with tenants or leasing, renovating, or
improving rentable space for other tenants or occupants or
prospective tenants or occupants of the Project.
2. Costs, including permits, licenses and inspection
fees incurred with respect to the installation of tenant
improvements made for
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other occupants of the Project, or incurred in renovating or
otherwise improving, decorating, painting or redecorating space
for other tenants or occupants of the Project or other rentable
vacant space in the Project.
3. Expenses in connection with services or other
benefits which are not offered to Tenant, but which are provided
to other tenants or occupants of the Building, the cost of which
is included in Operating Expenses.
4. Costs incurred in conjunction with the remediation
and/or monitoring of Hazardous Materials, except to the extent
caused or exacerbated by Tenant or Tenant's Parties.
5. Overhead and profit increments paid to subsidiaries
or affiliates of Landlord for management or other services
provided to the Project, or for supplies or other materials, but
only to the extent that the cost of such services, supplies or
materials exceed the cost that would have been paid had the
services, supplies or materials been provided by unaffiliated
parties on a competitive basis.
6. Interest and principal on debt or amortization
payments pursuant to any mortgages or rental under any ground or
underlying lease.
7. Capital expenditures required by Landlord's failure
to comply with laws enacted and in effect prior to the
Commencement Date, except that such exclusion from Operating
Expenses shall not apply to capital expenditures (a) which are
reasonably intended to reduce Operating Expenses, but only to the
extent of the savings of the Operating Expenses that are
reasonably anticipated by Landlord, or (b) required to comply
with (i) changes in, or new interpretations of, existing laws
which occurred after the Commencement Date, or (ii) laws whose
compliance was triggered as a result of Tenant's particular use
of or alterations to the Premises.
8. Repair costs incurred to correct defects in the
initial construction of the Project.
9. Tax penalties incurred as a result of Landlord's
negligence, inability or unwillingness to make payments when due
except to the extent such failure is due to Tenant's failure to
pay Tenant's Proportionate Share of the same.
10. Costs for which Landlord is actually reimbursed
from insurance proceeds.
5.2 PROCEDURE AND LIABILITY. Tenant shall immediately give Landlord
written notice of any defect or the need for repair of the items for which
Landlord is responsible, after which Landlord shall have reasonable opportunity
to repair the same or cure such defect. Landlord's liability with respect to
any defects, repairs or maintenance for which Landlord is responsible under any
of the provisions of this Lease shall be limited to the cost of such repairs or
maintenance or the curing of such defect. If Tenant or Tenant's Parties caused
any damage necessitating such repair, then Tenant shall pay the cost thereof,
upon demand. Tenant hereby waives the benefit of California Civil Code
Sections 1941 and 1942, and any other statute providing a right to make repairs
and deduct the cost thereof from the Rent. Tenant waives any right to terminate
this Lease or offset or abate Rent by reason of any failure of Landlord to make
repairs to the Premises.
60 TENANT'S MAINTENANCE AND REPAIR.
6.1 TENANT'S MAINTENANCE. Tenant shall, at its own cost and expense,
keep and maintain all parts of the Premises (except those listed as Landlord's
responsibility in Paragraph
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5.1 above) in good and sanitary condition, promptly making all necessary repairs
and replacements, including but not limited to, windows, glass and plate glass,
doors, any special store front or office entry, interior walls and finish work,
floors and floor covering, heating and air conditioning systems (the "HVAC"),
dock boards, truck doors, dock bumpers, plumbing work and fixtures, termite and
pest extermination, and regular removal of trash and debris; provided, however,
if the HVAC unit needs to be replaced and such replacement is not necessitated
in whole or in part by Tenant or Tenant's Parties, Tenant shall only be
responsible for the amortized portion of such replacement cost based on a five
(5) year useful life. If Tenant shall fail to make any repair for which Tenant
is responsible within thirty (30) days following notice from Landlord requiring
the same, Landlord and its agents and contractors shall have the right, but not
the obligation, to enter upon the Premises and perform such repairs, the full
cost of which shall be deemed to be Rent and shall be due and payable by Tenant
to Landlord immediately upon demand. In the case of emergency, Landlord, its
agents and contractors may enter upon the Premises to perform such repairs
without the necessity of prior notice to Tenant. Tenant shall maintain its
trash receptacles within the Premises. Repairs shall be made in accordance with
all applicable laws, including without limitation, the Americans with
Disabilities Act of 1990. The cost of maintenance and repair of any common
party wall (any wall, divider, partition or any other structure separating the
Premises from any adjacent premises occupied by other tenants) shall be shared
equally by Tenant and the tenant(s) occupying such adjacent premises. Tenant
shall not damage any party wall or disturb the integrity and support provided by
any party wall nd shall, at its sole cost and expense, promptly repair any
damage or injury to any party wall caused by Tenant or Tenant's Parties.
6.2 MAINTENANCE/SERVICE CONTRACTS. Tenant shall, at its own cost and
expense, enter into a regularly scheduled preventive maintenance/service
contract with a maintenance contractor for serving all hot water, heating and
air conditioning systems and equipment within the Premises. The maintenance
contractor and the contract must be approved in writing by Landlord in advance.
The service contract shall include all services recommended by the equipment
manufacturer within the operation/maintenance manual and shall become effective
(and a copy thereof delivered to Landlord) within thirty (30) days following the
date Tenant takes possession of the Premises.
70 ALTERATIONS.
Tenant shall make no alterations, additions or improvements to the
Premises (including, without limitation, roof and wall penetrations) or any part
thereof without obtaining the prior written consent of Landlord in each
instance. Such consent may be granted or withheld in Landlord's reasonable
discretion, except if such alterations affect structural, exterior, electrical
or mechanical aspects of the Premises, in which event Landlord may withhold its
consent in its sole and absolute discretion; provided, however, Tenant may make
minor cosmetic alterations which do not affect structural, exterior, electrical
or mechanical aspects of the Premises without the prior written consent of
Landlord (but nevertheless requiring at least ten (10) days prior written
notice) provided that the cost of such alterations does not exceed Seven
Thousand Five Hundred and 00/100 Dollars ($7,500.00) in any one instance or
Twenty Five Thousand and 00/100 Dollars ($25,000.00) in the aggregate over the
initial Term. Landlord may impose as a condition to such consent such
requirements as Landlord may deem necessary, in its sole and absolute
discretion, including, without limitation that: (a) Landlord be furnished with
working drawings before work commences; (b) performance and labor and material
payment bonds in form and amount and issued by a company satisfactory to
Landlord be furnished; (c) Landlord approve the contractor by whom the work is
to be performed; (d) adequate course of construction and general liability
insurance be in place and Landlord be named as an additional insured under the
contractor's liability and property insurance policies; (e) Landlord's
instructions relating to the manner in which the work is to be performed and the
times during which it is to be accomplished shall be complied with. Subject to
(i) Landlord's review and approval of all plans and specifications, and (ii)
Tenant's compliance with all laws, rules and regulations and such other
requirements as Landlord may reasonably impose in connection with the same,
Landlord hereby agrees that Tenant shall have the right to install a restroom
within the Premises and Landlord shall not require such restroom (installed in
compliance with clauses (i) and (ii) above to be removed upon the expiration of
the Term. Tenant shall pay to Landlord all out-of-pocket costs incurred by
Landlord for any architectural,
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engineering, supervisory or legal services in connection with any alterations,
including, without limitation, Landlord's review of the plans, specifications
and budget for purposes of determining whether to consent. All such
alterations, additions or improvements must be performed in a good and
workmanlike manner in compliance with all laws, rules and regulations,
including, without limitation, the Americans with Disabilities Act of 1990, and
diligently prosecuted to completion. Tenant shall deliver to Landlord upon
commencement of such work, a copy of the building permit with respect thereto,
and a certificate of occupancy, if applicable, immediately upon completion of
the work. All such work shall be performed so as not to obstruct the access to
the premises of any other tenant in the Building or Project. Should Tenant make
any alterations without Landlord's prior written consent, or without
satisfaction of any of the conditions established by Landlord in conjunction
with granting such consent, Landlord shall have the right, in addition to and
without limitation of any right or remedy Landlord may have under this Lease, at
law or in equity, to require Tenant to remove all or some of the alterations,
additions or improvements at Tenant's sole cost and restore the Premises to the
same condition as existed prior to undertaking the alterations, or if Tenant
shall fail to do so, Landlord may cause such removal or restoration to be
performed at Tenant's expense and the cost thereof shall be Additional Rent to
be paid by Tenant immediately upon demand. Landlord shall have the right to
require Tenant, at Tenant's expense, to remove any and all alterations,
additions or improvements and to restore the Premises to its prior condition
upon the expiration or sooner termination of this Lease. Tenant shall notify
Landlord in writing at least ten (10) days prior to the commencement of any such
work in or about the Premises, and Landlord shall have the right at anytime and
from time to time to post and maintain notices of nonresponsibility in or about
the Premises.
80 LIENS.
Tenant shall have no authority, express or implied, to create or place
any lien or encumbrance of any kind or nature whatsoever upon, or in any manner
to bind, the interest of Landlord or Tenant in the Premises or to charge the
Rent payable hereunder for any claim in favor of any person dealing with Tenant,
including those who may furnish materials or perform labor for any construction
or repairs. Tenant shall pay or cause to be paid all sums legally due and
payable by it on account of any labor performed or materials furnished in
connection with any work performed by Tenant on the Premises. Tenant shall
discharge of record by payment, bonding or otherwise any lien filed against the
Premises on account of any labor performed or materials furnished in connection
with any work performed by Tenant on the Premises immediately upon the filing of
any claim of lien. Tenant shall indemnify, defend and hold Landlord harmless
from any and all liability, loss, cost or expense based on or arising out of
asserted claims or liens against the leasehold estate or against the right,
title and interest of Landlord in the Project or this Lease arising from the act
or agreement of Tenant. Tenant agrees to give Landlord immediate written notice
of the placing of any lien or encumbrance against the Premises. Landlord shall
have the right, at Landlord's option upon ten (10) business days prior written
notice to Tenant, of paying and discharging the same or any portion thereof
without inquiry as to the validity thereof, and any amounts so paid, including
expenses and applicable late charge, shall be Additional Rent immediately due
and payable by Tenant upon rendition of a bill therefor.
90 SIGNS.
9.1 LANDLORD'S SIGNAGE PROGRAM. Tenant shall abide by the terms of
Landlord's signage program attached hereto as EXHIBIT "D" and incorporated
herein as the same may be changed from time to time at Landlord's reasonable
discretion. Following Tenant's proper installation of its sign in accordance
with EXHIBIT "D" attached hereto, if Landlord requires Tenant to change its sign
due to changes Landlord makes to the sign criteria, and such changes are not in
any manner resulting from governmental laws, rules or regulations, Landlord
shall be responsible for any reasonable costs incurred by Tenant necessary to
comply with Landlord's changes in the signage criteria. Upon vacation of the
Premises or the removal or alteration of its sign for any reason, Tenant shall
be responsible, at its sole cost, for the repair, painting and/or replacement of
the structure to which signs are attached to its original condition. If Tenant
fails to perform such work, Landlord may cause
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the same to be performed, and the cost thereof shall be Additional Rent
immediately due and payable upon rendition of a bill therefor.
9.2 CRITERIA FOR CHANGES. Tenant shall not, without Landlord's prior
written consent, which may be withheld in Landlord's reasonable discretion:
(a) make any changes to or paint the exterior of the Building; (b) install any
exterior lights, decorations or paintings; or (c) erect or install any signs,
window or door lettering, placards, decorations or advertising media of any type
which can be viewed from the exterior of the Premises. All signs, decorations,
advertising media, blinds, draperies and other window treatment or bars or other
security installations visible from outside the Premises shall be subject to the
prior written approval of Landlord as to construction, method of attachment,
size, shape, height, design, lighting, color and general appearance. All signs
shall be in compliance with all applicable laws and regulations and all
covenants, conditions and restrictions relating to the Premises. All signs
shall be kept in good condition and in proper operating order at all times.
100 UTILITIES.
Tenant shall pay for all separately metered water, gas, heat, light,
telephone, sewer and sprinkler charges and for other utilities and services used
on or from the Premises, together with any taxes, penalties, surcharges or the
like pertaining thereto and any maintenance charges for utilities, and shall
furnish all electric light bulbs and tubes. If any utilities serving the
Premises are not separately metered, Tenant shall pay to Landlord its
proportionate share of the cost thereof as reasonably determined by Landlord.
Landlord shall in no event be liable for any damages directly or indirectly
resulting from or arising out of the interruption or failure of utility services
on the Premises. Tenant shall have no right to terminate this Lease nor shall
Tenant be entitled to any abatement in Rent as a result of any such interruption
or failure of utility services. No such interruption or failure of utility
services shall be deemed to constitute a constructive eviction of Tenant.
Notwithstanding the foregoing, if the utilities are interrupted and not
available ("Interruption") for more than five (5) consecutive business days
following notice to Landlord of the same, then beginning on the sixth (6th)
consecutive business day of Interruption through the last day of such
Interruption following notice to Landlord of the same, Tenant shall be entitled
to an abatement of Base Rent, and the Term shall be extended the same number of
days, but only if (i) the Interruption is not caused by a casualty covered by
Paragraph 11 of this Lease or by an act or omission of Tenant or Tenant's
Parties, (ii) Tenant is prevented by the Interruption from using and does not
use the Premises or any portion thereof, and (iii) Tenant has timely provided
Landlord with written notice of the same.
110 FIRE AND CASUALTY DAMAGE.
11.1 NOTICE OF DESTRUCTION. If the Premises are damaged or destroyed
by fire, earthquake or other casualty, Tenant shall give immediate written
notice thereof to Landlord.
11.2 LOSS COVERED BY INSURANCE. If at any time prior to the
expiration or termination of this Lease, the Premises or the Project are wholly
or partially damaged or destroyed, the loss to Landlord from which is fully
covered by proceeds of insurance maintained by Landlord or for Landlord's
benefit, which damage renders the Premises totally or partially inaccessible or
unusable by Tenant in the ordinary conduct of Tenant's business, then:
(a) If all repairs to the Premises or Project can, in
Landlord's reasonable judgment, be completed within two hundred (200) days
following the date of notice to Landlord of such damage or destruction without
the payment of overtime or other premiums, Landlord shall, at Landlord's expense
(provided Landlord can obtain all necessary governmental permits and approvals
therefor at reasonable cost and on reasonable conditions), repair the same, and
this Lease shall remain in full force and effect and a proportionate reduction
of Rent shall be allowed Tenant for such portion of the Premises as shall be
rendered inaccessible or unusable to Tenant during the period of time that such
portion is unusable or inaccessible. There shall be no proportionate reduction
of Rent by reason of any portion of the Premises being unusable or inaccessible
for a period equal to five (5) consecutive business days
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or less. Reduction of Rent shall only be permitted to the extent of Landlord's
recovery upon its loss of rental income insurance, which Landlord shall maintain
to the extent it remains commercially reasonable to do so.
(b) If all such repairs cannot, in Landlord's reasonable
judgment, be completed within two hundred (200) days following the date of
notice to Landlord of such damage or destruction without the payment of overtime
or other premiums, either party may, at its sole and absolute option, by written
notice to the other given within twenty (20) days following the date of
Landlord's notice to Tenant stating that all such repairs cannot, in Landlord's
judgment, be completed within two hundred (200) days, terminate this Lease as of
the date of the occurrence of such damage or destruction; provided, however, if
neither party elects to terminate this Lease within said twenty (20) day period,
then this Lease shall remain in full force and effect. If such repairs are not
in fact completed within such two hundred (200) day period and such failure is
not due in whole or in part to the acts or omissions of Tenant or Tenant's
Parties, then Tenant may, within ten (10) days following such two hundred (200)
day period, deliver notice to Landlord of Tenant's election to terminate this
Lease unless Landlord completes the repairs within sixty (60) days following
such notice; provided, however, if (i) Tenant fails to timely deliver such
termination notice to Landlord within such ten (10) day period, or (ii) the
repairs are completed within the sixty (60) day period following Landlord's
receipt of notice from Tenant, then this Lease shall remain in full force and
effect and Tenant's termination notice shall be deemed null and void and of no
force or effect.
Tenant shall pay to Landlord, within ten (10) days following
Landlord's demand therefor, the amount of the deductible under Landlord's
insurance policy (which amount shall not exceed commercially reasonable levels).
If the damage involves portions of the Project other than the Premises, Tenant
shall pay only a portion of the deductible based on the ratio of the cost of
repairing the damage in the Premises to the total cost of repairing all of the
damage in the Project.
11.3 LOSS NOT COVERED BY INSURANCE. If, at any time prior to the
expiration or termination of this Lease, the Premises or the Project are totally
or partially damaged or destroyed from a risk, the loss to Landlord from which
is not fully covered by insurance maintained by Landlord or for Landlord's
benefit, which damage renders the Premises inaccessible or unusable to Tenant in
the ordinary course of its business, and if such damage or destruction is not
the result of the negligence or willful misconduct or omission of Tenant or
Tenant's Parties, Landlord may, at its option, upon written notice to Tenant
within thirty (30) days after notice to Landlord of the occurrence of such
damage or destruction, elect to repair or restore such damage or destruction, or
Landlord may elect to terminate this Lease. If Landlord elects to repair or
restore such damage or destruction, this Lease shall continue in full force and
effect, but the Rent shall be proportionately reduced as provided in
Paragraph 11.2(a). If Landlord elects to terminate this Lease, such termination
shall be effective as of the date of the occurrence of such damage or
destruction.
11.4 LOSS CAUSED BY TENANT OR TENANT'S PARTIES. Notwithstanding the
foregoing, if the Premises or the Project are wholly or partially damaged or
destroyed as a result of the negligence or willful misconduct or omission of
Tenant or Tenant's Parties, Tenant shall forthwith diligently undertake to
repair or restore all such damage or destruction at Tenant's sole cost and
expense to the extent such damage results from the negligence or willful
misconduct of Tenant or Tenant's Parties, or Landlord may at its option
undertake such repair or restoration at Tenant's sole cost and expense to the
extent such damage results from the negligence or willful misconduct of Tenant
or Tenant's Parties; provided, however, that Tenant shall be relieved of its
repair and payment obligations pursuant to this Paragraph 11.4 to the extent
that insurance proceeds are collected by Landlord to repair such damage.
Landlord shall use reasonable efforts to collect insurance although Tenant shall
in all such events pay to Landlord the full amount of the deductible under
Landlord's insurance policy and any amounts not insured. This Lease shall
continue in full force and effect without any abatement or reduction in Rent or
other payments owed by Tenant.
11.5 DESTRUCTION NEAR END OF TERM. Notwithstanding the foregoing, if
the Premises or the Project are wholly or partially damaged or destroyed within
the final six (6)
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months of the Term, and such damage cannot be restored within sixty (60) days,
then either party may, at its option, elect to terminate this Lease upon written
notice given to the other within twenty (20) days following such damage or
destruction.
11.6 DESTRUCTION OF IMPROVEMENTS AND PERSONAL PROPERTY. In the event
of any damage to or destruction of the Premises or the Project, under no
circumstances shall Landlord be required to repair, replace or compensate
Tenant, Tenant's Parties or any other person for the personal property, trade
fixtures, machinery, equipment or furniture of Tenant or any of Tenant's
Parties, or any alterations, additions or improvements installed in the Premises
by Tenant, and Tenant shall promptly repair and replace all such personal
property and improvements at Tenant's sole cost and expense.
11.7 EXCLUSIVE REMEDY. The provisions of this Paragraph 11 shall
constitute Tenant's sole and exclusive remedy in the event of damage or
destruction to the Premises or the Project, and Tenant waives and releases all
statutory rights and remedies in favor of Tenant in the event of damage or
destruction, including without limitation those available under California Civil
Code Sections 1932 and 1933(4). No damages, compensation or claim shall be
payable by Landlord for any inconvenience, any interruption or cessation of
Tenant's business, or any annoyance, arising from any damage or destruction of
all or any portion of the Premises or the Project.
11.8 LENDER DISCRETION. Notwithstanding anything herein to the
contrary, in the event the holder of any indebtedness secured by a mortgage or
deed of trust covering the Premises requires that the insurance proceeds from
insurance held by Landlord be applied to such indebtedness, then Landlord shall
have the right to deliver written notice to Tenant terminating this Lease.
120 INDEMNITY AND INSURANCE.
12.1 INDEMNITY. Tenant hereby releases all Indemnified Parties, and
shall indemnify, protect, defend and hold the Indemnified Parties harmless from
any and all claims, judgments, damages, liabilities, losses, sums paid in
settlement of claims, costs and expenses (including, but not limited to,
reasonable attorneys' fees and litigation costs), obligations, liens and causes
of action, whether threatened or actual, direct or indirect (collectively,
"CLAIMS"), which arise in any way, directly or indirectly, resulting from or in
connection with, in whole or in part, Tenant's or Tenant's Parties' activities
in, on or about the Premises or Project, including, without limitation, Tenant's
breach or default of any obligation of Tenant to be performed under the terms of
this Lease, the conduct of Tenant's business, the nonobservance or
nonperformance of any law, ordinance or regulation or the negligence or
misconduct of Tenant or Tenant's Parties, the leakage of gas, oil, water, steam
or electricity emanating from their usual conduits, or due to any cause
whatsoever; except injury to persons or damage to property the sole cause of
which is the gross negligence or willful misconduct of Landlord, or the wrongful
failure of Landlord to repair any part of the Project which Landlord is
obligated to repair and maintain hereunder within a reasonable time after the
receipt of written notice from Tenant of needed repairs. Landlord hereby agrees
to indemnify and hold Tenant harmless from and against any Claims to the extent
the same results from the gross negligence or willful misconduct of Landlord,
its authorized agents or employees or the default by Landlord hereunder.
Landlord shall not be liable to Tenant for any damages arising from any act,
omission or neglect of any other tenant in the Project.
12.2 LANDLORD'S INSURANCE. Landlord shall maintain standard fire and
extended coverage insurance covering the Building in an amount equal to the
"replacement cost" (except deductibles) thereof, and such other types and
amounts of insurance as it deems necessary or desirable in its sole discretion,
which may (but need not) include, without limitation, liability, property
damage, earthquake and/or loss of rental income coverage. Such insurance shall
be for the sole benefit of Landlord and under its sole control. The premiums
for any such insurance shall be charged to Tenant as Additional Rent.
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12.3 TENANT'S INSURANCE OBLIGATIONS. Tenant agrees that at all times
from and after the date Tenant is given access to the Premises for any reason,
Tenant shall carry and maintain, at its sole cost and expense, the following
types, amounts and forms of insurance:
12.3.1 GENERAL LIABILITY INSURANCE. A broad form
comprehensive general liability or commercial general liability policy covering
property damage, personal injury, advertising injury and bodily injury, and
including blanket contractual liability coverage for obligations under this
Lease, covering the Project in an amount of not less than the amount per
occurrence specified in Item 10 of the Basic Lease Provisions. Such policy
shall be in the occurrence form with a per location general aggregate. Each
policy shall name Landlord and any management agent from time to time designated
by Landlord and any lender of Landlord as additional insureds, and shall provide
that any coverage to additional insureds shall be primary; when any policy
issued to Landlord provides duplicate coverage or is similar in coverage,
Landlord's policy will be excess over Tenant's policies. No deductibles in
excess of Ten Thousand Dollars ($10,000) per occurrence shall be permitted.
Tenant shall pay any deductibles. The amounts of such insurance required
hereunder shall be subject to adjustment from time to time as required by
Landlord based upon Landlord's reasonable determination as to (a) the amounts of
such insurance generally required at such time for comparable tenants, premises
and buildings in the general geographical location of the Building; (b) as
requested by any lender with an interest in the Building or Project;
(c) Tenant's activities; (d) increases in recovered liability claims;
(e) increased claims consciousness by the public; or (f) any combination of the
foregoing.
12.3.2 PROPERTY INSURANCE. A policy or policies, including
the Boiler and Machinery Perils and the Special Causes of Loss form of coverage
("ALL RISKS"), including vandalism and malicious mischief, theft, sprinkler
leakage (including earthquake sprinkler leakage) and water damage coverage in an
amount equal to the full replacement value, new without deduction for
depreciation, on an agreed amount basis (no co-insurance requirement), of all
trade fixtures, furniture and equipment in the Premises, and all alterations,
additions and improvements to the Premises installed by or for Tenant or
provided to Tenant. Such insurance shall also include business interruption and
extra expense coverage for Tenant's operations and debris removal coverage for
removal of property of Tenant and Tenant's Parties which may be damaged within
the Premises. Such coverage shall name the Landlord and any management agent
from time to time designated by Landlord and any lender of Landlord as
additional insureds and/or loss payees as its interest may appear. No
deductibles in excess of Ten Thousand Dollars ($10,000) shall be permitted.
Tenant shall pay any deductibles.
12.3.3 WORKERS' COMPENSATION INSURANCE. Workers' compensation
insurance, including employers' liability coverage, shall comply with applicable
California law. Such insurance shall include a waiver of subrogation in favor
of Landlord, if available.
12.4 EVIDENCE OF COVERAGE. All of the policies required to be
obtained by Tenant pursuant to Paragraph 12.3 shall be with companies and in
form satisfactory to Landlord. Each insurance company providing coverage shall
have a current Best's Rating of "A-X" or better. Tenant shall add Landlord and
any management agent from time to time designated by Landlord and any lender of
Landlord as an additional insured or loss payee, as their interests may appear.
Tenant shall provide Landlord with certificates and copies of endorsements (and
upon request, policies) of insurance acceptable to Landlord issued by each of
the insurance companies issuing any of the policies required pursuant to the
provisions of Paragraph 12.3, and said certificates and endorsements shall
provide that the insurance issued thereunder shall not be altered, canceled or
non-renewed until after thirty (30) days' written notice to Landlord. "CLAIMS
MADE" policies shall not be permitted. Each policy shall permit the waiver in
Section 12.5 below. Evidence of insurance coverage shall be furnished to
Landlord prior to Tenant's possession of the Premises and thereafter not fewer
than fifteen (15) days prior to the expiration date of any required policy.
Tenant may satisfy its insurance obligations hereunder by carrying such
insurance under a so-called blanket policy or policies of insurance which are
acceptable to Landlord. If Tenant fails to obtain any insurance required hereby
or provide evidence thereof to Landlord, upon one (1) business day notice,
Landlord may, but shall not be obligated to, and Tenant hereby appoints Landlord
as its agent to, procure such insurance and
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bill the cost of the insurance plus a five percent (5%) handling charge to
Tenant. Tenant shall pay such costs to Landlord as Additional Rent with the
next monthly payment of Rent.
12.5 WAIVERS OF SUBROGATION. Landlord waives any and all rights of
recovery against Tenant for or arising out of damage to, or destruction of the
Building or the Premises to the extent that Landlord's insurance policies then
in force or policies required by this Lease insure against such damage or
destruction and permit such waiver and only to the extent of insurance proceeds
actually received by Landlord for such damage or destruction. Tenant waives any
and all rights of recovery against Landlord for or arising out of damage to or
destruction of any property of Tenant to the extent that Tenant's insurance
policies then in force or the policies required by this Lease, whichever is
broader, insure against such damage or destruction.
130 LANDLORD'S RIGHT OF ACCESS.
Tenant shall permit Landlord and its employees and agents, at all
reasonable times upon 24 hours notice and at any time in case of emergency, in
such manner as to cause as little disturbance to Tenant as reasonably
practicable (a) to enter into and upon the Premises to inspect them, to protect
the Landlord's interest therein, or to post notices of non-responsibility,
(b) to take all necessary materials and equipment into the Premises, and perform
necessary work therein, and (c) to perform periodic environmental audits,
inspections, investigations, testing and sampling of the Premises and/or the
Project, and to review and copy any documents, materials, data, inventories,
financial data, notices or correspondence to or from private parties or
governmental authorities in connection therewith. No such work shall cause or
permit any rebate of Rent to Tenant for any loss of occupancy or quiet enjoyment
of the Premises, or damage, injury or inconvenience thereby occasioned, or
constitute constructive eviction. Landlord may at any time place on or about
the Building any ordinary "for sale" and "for lease" signs. Tenant shall also
permit Landlord and its employees and agents, upon request, to enter the
Premises or any part thereof, upon 24 hours notice during normal business hours,
to show the Premises to any fee owners, lessors of superior leases, holders of
encumbrances on the interest of Landlord under the Lease, or prospective
purchasers, mortgagees or lessees of the Project or Building as an entirety.
During the period of six (6) months prior to the expiration date of this Lease,
Landlord may exhibit the Premises to prospective tenants.
140 ASSIGNMENT AND SUBLETTING.
14.1 LANDLORD'S CONSENT. Tenant shall not assign all or any portion
of its interest in this Lease, whether voluntarily, by operation of law or
otherwise, and shall not sublet all or any portion of the Premises, including,
but not limited to, sharing them, permitting another party to occupy them or
granting concessions or licenses to another party, except with the prior written
consent of Landlord, which Landlord may withhold for any reasonable condition,
including, but not limited to: (a) Tenant is in default (beyond applicable
notice and cure periods) of this Lease; (b) the assignee or subtenant is
unwilling to assume in writing all of Tenant's obligations hereunder (prorated
for a subtenant of less than all of the Premises); (c) the assignee or subtenant
has a financial condition which is reasonably unsatisfactory to Landlord or
Landlord's mortgagee; (d) the Premises will be used for different purposes than
those set forth in Paragraph 3 or for a use requiring or generating increased or
different Hazardous Materials; and (e) the proposed assignee or subtenant or its
business is subject to compliance with additional requirements of the law
(including related resolutions) commonly known as the Americans with
Disabilities Act of 1990 beyond those requirements applicable to Tenant.
14.2 FEES. Tenant shall pay Landlord's reasonable attorneys' fees
incurred in evaluating any proposed assignment or sublease and documenting
Landlord's consent.
14.3 PROCEDURE. Whenever Tenant has obtained an offer to assign any
interest in this Lease or to sublease all or any portion of the Premises, Tenant
shall provide to Landlord the name and address of said proposed assignee or
sublessee, the base rent and all other compensation to be paid to Tenant, the
proposed use by the proposed assignee or sublessee, the
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proposed effective date of the assignment or subletting, and any other business
terms which are material to the offer and/or which differ from the provisions of
this Lease ("NOTICE OF OFFER"). Tenant shall also provide to Landlord the
nature of business, financial statement and business experience resume for the
immediately preceding five (5) years of the proposed assignee or sublessee and
such other information concerning such proposed assignee or sublessee as
Landlord may reasonably require. The foregoing information shall be in writing
and shall be received by Landlord no less than thirty (30) days prior to the
effective date of the proposed assignment or sublease.
Within fifteen (15) days following its receipt of a Notice of
Offer for the proposed assignment or subletting, Landlord shall be entitled to
terminate this Lease as to all of the Premises (unless Tenant proposes a
sublease of a portion of the Premises, in which event Landlord may terminate
this Lease as to such portion) by written notice to Tenant ("TERMINATION
NOTICE"), and such termination shall be effective as of the proposed effective
date of the proposed assignment or sublease. If Landlord does not elect to
terminate this Lease, Landlord shall either notify Tenant that Landlord consents
to the proposed assignment or subletting or withholds its consent for reasons to
be specified in the notice. If Landlord does not provide a Termination Notice
or a notice withholding its consent to Tenant within fifteen (15) days following
its receipt of a Notice of Offer, Landlord shall be deemed to have consented to
the proposed assignment or subletting.
14.4 BONUS RENT. If any interest in this Lease is assigned or all or
any portion of the Premises is subleased, Landlord shall receive one-half (1/2)
of all of the "BONUS RENT" to be realized from such assignment or subletting.
The bonus rent shall mean any lump sum payment or other value received by Tenant
that is attributable to the sublease, assignment and/or leasehold interest (as
opposed to the sale of Tenant's business or assets [(other than the leasehold
interest or property belonging to Landlord)]), plus any base rent, percentage
rent or periodic compensation received by Tenant from or for the benefit of an
assignee or sublessee in excess of (a) all amounts owed for Rent and other
charges pursuant to this Lease, (b) all reasonable commissions and fees paid to
any real estate broker or finder who is unaffiliated with Tenant in connection
with the assignment or subletting, and (c) all reasonable and necessary
out-of-pocket advertising fees, tenant improvement costs and attorneys' fees
paid by Tenant to unaffiliated third parties for the sole purpose of
consummating the assignment or sublease. If a portion of the Premises is
subleased, the amount in clause (a) shall be prorated based on the portion of
the Premises' rentable area to be subleased. The bonus rent shall be paid on
the first (1st) day of each calendar month next following tenant's receipt of
each payment from its assignee or sublessee, after reduction for all amounts
described in clauses (a), (b) and (c) above, amortized over the full term of the
assignment or sublease.
14.5 CONTINUING TENANT OBLIGATIONS. No subleasing or assignment shall
relieve Tenant from liability for payment of all forms of Rent and other charges
herein provided or from Tenant's obligations to keep and be bound by the terms,
conditions and covenants of this Lease.
14.6 WAIVER, DEFAULT AND CONSENT. The acceptance of Rent from any
other person shall not be deemed to be a waiver of any of the provisions of this
Lease or a consent to the assignment or subletting of the Premises. Any
assignment or sublease without the Landlord's prior written consent shall be
voidable, at Landlord's election, and shall constitute a noncurable event of
default under this Lease. Consent to any assignment or subletting shall not be
deemed a consent to any future assignment or subletting.
14.7 RESTRUCTURING OF BUSINESS ORGANIZATIONS. Any transfer of
corporate shares or partnership interests of Tenant, so as to result in a change
in the present voting control of Tenant by the person or persons owning a
majority of said corporate shares or partnership interests on the date of this
Lease (except for trading on an exchange), shall constitute an assignment and
shall be subject to the provisions of this Paragraph 14. Notwithstanding the
foregoing, (A) an assignment of this Lease by operation of law as a result of a
merger or consolidation of Tenant, or an assignment of this Lease in conjunction
with (i) the sale of all or substantially all of Tenant's assets, or (ii) a
public offering of the stock of Tenant, shall not constitute an assignment of
this Lease under this Paragraph 14; and (B) an assignment of this
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Lease or a subletting of the Premises to an entity ("Affiliate Entity") which
owns, or is owned by, Tenant, shall not constitute an assignment of this Lease
or a sublease under this paragraph 14, provided that such Affiliate Entity owns
more than fifty percent (50%) of the outstanding shares of all classes of voting
stock of Tenant, or Tenant owns more than fifty percent (50%) of all ownership
and controlling interests of such Affiliate Entity.
14.8 ASSIGNMENT OF SUBLEASE RENT. Tenant immediately and irrevocably
assigns to Landlord, as security for Tenant's obligations under this Lease, all
rents from any subletting of all or any part of the Premises, and Landlord, as
assignee and as attorney-in-fact for Tenant for purposes hereof, or a receiver
for Tenant appointed on Landlord's application, may collect such rents and apply
same toward Tenant's obligations under this Lease, except that, until the
occurrence of an event of default (beyond applicable notice and cure periods) by
Tenant, Tenant shall have the right and license to collect such rents.
14.9 ASSIGNMENT IN BANKRUPTCY. If this Lease is assigned to any
person or entity pursuant to the provisions of the United States Bankruptcy
Code, 11 U.S.C. Section 101 ET SEQ., or such similar laws or amendments thereto
which may be enacted from time to time (the "BANKRUPTCY CODE"), any and all
monies or other considerations payable or otherwise to be delivered in
connection with such assignment shall be paid or delivered to Landlord, shall be
and remain the exclusive property of Landlord and shall not constitute property
of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code.
Any and all monies or other considerations constituting Landlord's property
under the preceding sentence not paid or delivered to Landlord shall be held in
trust for the benefit of Landlord and be promptly paid or delivered to Landlord.
14.10 ASSUMPTION OF OBLIGATIONS. Any person or entity to which this
Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be
deemed, without further act or deed, to have assumed all of the obligations
arising under this Lease on and after the date of such assignment. Any such
assignee shall upon demand execute and deliver to Landlord an instrument
confirming such assumption.
150 CONDEMNATION.
15.1 TOTAL TAKING. If the whole or any substantial part of the
Premises or the Project shall be taken or damaged because of the exercise of the
power of eminent domain, whether by condemnation proceedings or otherwise,
including acts or omissions constituting inverse condemnation, or any transfer
of the Premises or Project or portion thereof in avoidance of the exercise of
the power of eminent domain (collectively, a "TAKING"), and the Taking would
prevent or materially interfere with the use of the Premises for the purpose for
which they are being used, this Lease shall terminate effective when the
physical Taking of the Premises shall occur.
15.2 PARTIAL TAKING. If part of the Premises shall be subject to a
Taking and this Lease is not terminated as provided in the Paragraph 15.1 above,
this Lease shall not terminate but the Rent payable hereunder during the
unexpired portion of this Lease shall be reduced in proportion to the area of
the Premises rendered unusable by Tenant.
15.3 CONDEMNATION AWARD. The entire award or compensation for any
Taking of the Project and/or the Premises, or any part thereof, or for
diminution in value, shall be the property of Landlord, and Tenant hereby
assigns its interest in any such award to Landlord; provided, however, Landlord
shall have no interest in any separate award made to Tenant for loss of
business, for relocation purposes, or for the taking of Tenant's fixtures and
improvements.
15.4 EXCLUSIVE REMEDY. This Paragraph 15 shall be Tenant's sole and
exclusive remedy in the event of any Taking. Tenant hereby waives the benefits
of California Code of Civil Procedure Section 1265.130 or any other statute
granting Tenant specific rights in the event of a Taking which are contrary to
the provisions of this Paragraph 15.
160 SURRENDER AND HOLDING OVER.
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16.1 SURRENDER. Upon the expiration or sooner termination of this
Lease, Tenant shall surrender the Premises in as good condition as when
received, reasonable wear and tear excepted, broom clean and free of trash and
rubbish, and free from all tenancies or occupancies by any person. Tenant shall
remove all trade fixtures, furniture, equipment and other personal property
installed in the Premises prior to the expiration or earlier termination of this
Lease. Unless otherwise provided in Paragraph 7 or waived by Landlord in
writing prior to the expiration or earlier termination of this Lease, Tenant
shall remove at its sole cost all alterations, additions and improvements made
by Tenant to the Premises; provided, however, if Tenant requests Landlord to
notify Tenant whether a particular alteration's removal will be required in
conjunction with Tenant's request for Landlord's consent to any particular
proposed alterations (together with such other documents, plans, etc. as
Landlord may request in accordance with Paragraph 7), Landlord shall notify
Tenant whether the removal of such alterations will be required at the
expiration or earlier termination of this Lease. Notwithstanding the foregoing,
at the election of Landlord, all (or such portion as Landlord shall designate)
alterations, additions and improvements to the Premises including, without
limitation, all wall coverings, floor coverings, built-in cabinets, paneling and
the like, shall become the property of Landlord and remain on the Premises at
the end of the Term. Tenant shall, at its own cost, completely repair any and
all damage to the Premises and the Building resulting from or caused by such
removal. The provisions of Paragraph 7 shall apply to such removal and repair
work.
16.2 HOLDING OVER. If Landlord agrees in writing that Tenant may hold
over after the expiration or earlier termination of this Lease, unless the
parties hereto otherwise agree in writing as to the terms of such holding over,
the holdover tenancy shall be subject to termination by Landlord or Tenant at
any time upon not less than thirty (30) days' prior written notice. If Tenant
holds over without the consent of Landlord, the same shall be a tenancy at will
terminable at any time, and Tenant shall be liable to Landlord for, and Tenant
shall indemnify, protect, defend and hold Landlord harmless from and against,
any damages, liabilities, losses, costs, expenses or claims suffered or caused
by such holdover, including damages and costs related to any successor tenant of
the Premises to whom Landlord could not deliver possession of the Premises when
promised. All of the other terms and provisions of this Lease shall be
applicable during any holdover period, with or without consent, except that
Tenant shall pay to Landlord from time to time upon demand, as Rent for the
period of any holdover, an amount equal to one hundred fifty percent (150%) of
the then applicable Base Rent plus all Additional Rent in effect on the
termination date, computed on a daily basis for each day of the holdover period.
No holding over by Tenant, whether with or without consent of Landlord, shall
operate to extend this Lease. The preceding provisions of this Paragraph 16.2
shall not be construed as Landlord's consent to any holding over by Tenant.
16.3 ENTRY AT END OF TERM. If during the last month of the Term,
Tenant shall have removed all of Tenant's property and personnel from the
Premises, Landlord may enter the Premises and repair, alter and redecorate the
same, without abatement of Rent and without liability to Tenant, and such acts
shall have no effect on this Lease. Tenant shall, prior to vacating the
Premises, arrange to meet with Landlord for a joint inspection of the Premises
prior to vacating. In the event of Tenant's failure to give such notice or
arrange such joint inspection, Landlord's inspection at or after Tenant's
vacation of the Premises shall be conclusively deemed correct for purposes of
determining Tenant's responsibility for repairs and restoration.
170 QUIET ENJOYMENT.
Landlord represents and warrants that it has full rights and authority to
enter into this Lease and that Tenant, upon paying the Rent and performing its
other covenants and agreements herein set forth, shall peaceably and quietly
have, hold and enjoy the Premises for the Term without hindrance or molestation
from Landlord, subject to the terms and provisions of this Lease, any ground
lease, any mortgage or deed of trust now or hereafter encumbering the Premises
or the Project, and all matters of record.
180 EVENTS OF DEFAULT.
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The following events shall be deemed to be events of default by Tenant
under this Lease:
18.1 FAILURE TO PAY RENT. Tenant shall fail to pay any installment of
the Rent herein reserved within five (5) business days from when due, or any
other payment or reimbursement to Landlord required herein when due.
18.2 INSOLVENCY. Tenant or any guarantor of Tenant's obligations
hereunder shall generally not pay its debts as they become due or shall admit in
writing the inability to pay its debts or shall make a general assignment for
the benefit of creditors.
18.3 APPOINTMENT OF RECEIVER. A receiver or trustee (or similar
official) shall be appointed for all or substantially all of the assets of
Tenant and not discharged within forty-five (45) days.
18.4 BANKRUPTCY. The filing of any voluntary petition by Tenant under
the Bankruptcy Code, or the filing of an involuntary petition by Tenant's
creditors, which involuntary petition remains undischarged for a period of
forty-five (45) days.
18.5 ATTACHMENT. The attachment, execution or other judicial seizure
or non-judicial seizure of all or substantially all of Tenant's assets located
at the Premises or of Tenant's interest in this Lease or the Premises, if such
attachment or other seizure remains undismissed or undischarged for a period of
twenty (20) business days after the levy thereof.
18.6 INTENTIONALLY OMITTED.
18.7 CERTIFICATES. Tenant shall fail to deliver to Landlord any
subordination agreement within the time limit prescribed in Paragraph 21 below,
or a Certificate of Occupancy, all financial statements or an estoppel
certificate within the time limits prescribed in Paragraph 22.7 below.
18.8 FAILURE TO DISCHARGE LIENS. Tenant shall fail to discharge any
lien placed upon the Premises in violation of Paragraph 8 hereof.
18.9 FALSE FINANCIAL STATEMENT. Landlord discovers that any financial
statement given to Landlord by Tenant, any assignee, subtenant or successor in
interest of Tenant, or any guarantor of Tenant's obligations hereunder, or any
of them, was materially false when given to Landlord.
18.10 FAILURE TO COMPLY WITH LEASE TERMS. Tenant shall fail to comply
with any other term, provision or covenant of this Lease, and shall not cure
such failure within thirty (30) days after written notice thereof to Tenant;
provided, however, that if the nature of Tenant's obligation is such that it is
not susceptible to cure within thirty (30) days, then Tenant shall not be in
default if Tenant commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
18.11 GUARANTOR DEFAULT. Any guarantor of Tenant's obligations
hereunder shall be in default under the terms of its guaranty.
18.12 Assignment or Subletting without Consent. Any assignment,
subletting or other transfer for which the prior consent of Landlord is required
under this Lease and has not been obtained.
Any notices to be provided by Landlord under this Paragraph 18 shall be
in lieu of, and not in addition to, any notice required under Section 1161 of
the California Code of Civil Procedure.
190 LANDLORD'S REMEDIES.
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Upon the occurrence of any event of default, Landlord may, at its option
without further notice or demand and in addition to any other rights and
remedies hereunder or at law or in equity, do any or all of the following:
19.1 TERMINATION. Terminate Tenant's right to possession of the
Premises by any lawful means upon at least 3 days' written notice (which notice
may be satisfied by any notice which may be given by Landlord pursuant to
Paragraph 18, if applicable), in which case Tenant shall immediately surrender
possession of the Premises to Landlord and, in addition to any rights and
remedies Landlord may have at law or in equity, Landlord shall have the
following rights:
(a) To re-enter the Premises then or at any time thereafter
and remove all persons and property and possess the Premises,
without prejudice to any other remedies Landlord may have by
reason of Tenant's default or of such termination, and Tenant
shall have no further claim hereunder.
(b) To recover all damages incurred by Landlord by reason
of the default, including without limitation (i) the worth at the
time of the award of the payments owed by Tenant to Landlord
under this Lease that were earned but unpaid at the time of
termination; (ii) the worth at the time of the award of the
amount by which the payments owed by Tenant to Landlord under the
Lease that would have been earned after the date of termination
until the time of the award exceeds the amount of the loss of
payments owed by Tenant to Landlord under this Lease for the same
period that Tenant proves could have been reasonably avoided;
(iii) the worth at the time of the award of the amount by which
the payments owed by Tenant to Landlord for the balance of the
Term after the time of the award exceeds the amount of the loss
of payments owed by Tenant for the same period that Tenant proves
could have been reasonably avoided; (iv) all costs incurred by
Landlord in retaking possession of the Premises and restoring
them to good order and condition; (v) all costs, including
without limitation brokerage commissions, advertising costs and
restoration and remodeling costs, incurred by Landlord in
reletting the Premises; plus (vi) any other amount, including
without limitation attorneys' fees and audit expenses, necessary
to compensate Landlord for all detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or
which in the ordinary course of things would be likely to result
therefrom. "The worth at the time of the award," as used in
clauses (i) and (ii) of this paragraph, is to be determined by
computing interest as to each unpaid payment owed by Tenant to
Landlord under the Lease, at the highest interest rate permitted
by law. "The worth at the time of the award," as referred to in
clause (iii) of this paragraph, is to be determined by
discounting such amount, as of the time of award, at the discount
rate of the San Francisco Federal Reserve Bank, plus 1%.
(c) To remove, at Tenant's sole risk, any and all personal
property in the Premises and place such in a public or private
warehouse or elsewhere at the sole cost and expense and in the
name of Tenant. Any such warehouser shall have all of the rights
and remedies provided by law against Tenant as owner of such
property. If Tenant shall not pay the cost of such storage
within thirty (30) days following Landlord's demand, Landlord
may, subject to the provisions of applicable law, sell any or all
such property at a public or private sale in such manner and at
such times and places as Landlord deems proper, without notice to
or demand upon Tenant. Tenant waives all claims for damages
caused by Landlord's removal, storage or sale of the property and
shall indemnify and hold Landlord free and harmless from and
against any and all loss, cost and damage, including without
limitation court costs and attorneys' fees. Tenant hereby
irrevocably appoints Landlord as Tenant's attorney-in-fact,
coupled with an interest, with all rights and powers necessary to
effectuate the provisions of this subparagraph.
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19.2 CONTINUATION OF LEASE. Maintain Tenant's right to possession, in
which case this Lease shall continue in effect whether or not Tenant shall have
abandoned the Premises. In such event, Landlord may enforce all of Landlord's
rights and remedies under this Lease, including the right to recover rent as it
becomes due hereunder, and, at Landlord's election, to re-enter and relet the
Premises on such terms and conditions as Landlord deems appropriate. Without
limiting the generality of the foregoing, Landlord shall have the remedy
described in California Civil Code Section 1951.4 (lessor may continue lease in
effect after lessee's breach and abandonment and recover rent as it becomes due,
if lessee has right to sublet or assign, subject only to reasonable
limitations). If Landlord relets the Premises or any portion thereof, any rent
collected shall be applied against amounts due from Tenant. Landlord may
execute any lease made pursuant hereto in its own name, and Tenant shall have no
right to collect any such rent or other proceeds. Landlord's re-entry and/or
reletting of the Premises, or any other acts, shall not be deemed an acceptance
of surrender of the Premises or Tenant's interest therein, a termination of this
Lease or a waiver or release of Tenant's obligations hereunder. Landlord shall
have the same rights with respect to Tenant's improvements and personal property
as under Paragraph 19.1 above, even though such re-entry and/or reletting do not
constitute acceptance of surrender of the Premises or termination of this Lease.
19.3 APPOINTMENT OF RECEIVER. Cause a receiver to be appointed in any
action against Tenant and to cause such receiver to take possession of the
Premises and to collect the rents or bonus rent derived therefrom. The
foregoing shall not constitute an election by Landlord to terminate this Lease
unless specific notice of such intent is given.
19.4 LATE CHARGE. Charge late charges as provided in Paragraph 2.7.
19.5 INTEREST. Charge interest on any amount not paid when due as
provided in Paragraph 22.2. Interest shall accrue from the date funds are first
due or, if the payment is for funds expended by Landlord on Tenant's behalf,
from the date Landlord expends such funds.
19.6 ATTORNEYS' FEES. Subject to Paragraph 22.11, collect, upon
demand, all reasonable attorneys' fees and expenses incurred by Landlord in
enforcing its rights and remedies hereunder.
19.7 INJUNCTION. To restrain by injunction or other equitable means
any breach or anticipated breach of this Lease.
20. TENANT'S REMEDIES.
20.1 LANDLORD'S DEFAULT. Landlord shall not be in default under this
Lease unless Landlord fails to perform obligations required of Landlord within
thirty (30) days after written notice is delivered by Tenant to Landlord and to
the holder of any mortgages or deeds of trust (collectively, "LENDER") covering
the Premises whose name and address shall have theretofore been furnished to
Tenant in writing, specifying the obligation which Landlord has failed to
perform; provided, however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for performance, then Landlord
shall not be in default if Landlord or Lender commences performance within such
thirty (30) day period and thereafter diligently prosecutes the same to
completion. All obligations of Landlord hereunder shall be construed as
covenants, not conditions.
20.2 TENANT'S REMEDIES. In the event of any default, breach or
violation of Tenant's rights under this Lease by Landlord, Tenant's exclusive
remedies shall be an action for specific performance or action for actual
damages. Tenant hereby waives the benefit of any laws granting it the right to
perform Landlord's obligation, or the right to terminate this Lease or withhold
Rent on account of any Landlord default.
20.3 LANDLORD DEFAULT/SELF-HELP RIGHTS. If Landlord fails to perform
any repair that Landlord is obligated to perform under this Lease ("Required
Repair") within the time period within which Landlord is obligated to perform
said repair work as set forth in Paragraph 20.1 above, then Tenant may proceed
to perform the Required Repair upon delivery of an additional ten (10) business
days notice to Landlord specifying that Tenant is performing
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<PAGE>
such Required Repair, and if such Required Repair was required under the terms
of this Lease to be performed by Landlord, then Tenant shall be entitled to
prompt reimbursement by Landlord of Tenant's reasonable costs and expenses in
taking such action.
In the event Tenant performs such Required Repair, such work
shall be performed in accordance with Paragraph 7 hereof (other than the
requirement of obtaining Landlord's prior consent). Further, if Landlord does
not deliver a detailed written objection to Tenant within thirty (30) days after
receipt of an invoice by Tenant of its costs of performing the Required Repair
which Tenant claims should have been taken by Landlord, and if such invoice from
Tenant sets forth a reasonably particularized breakdown of its costs and
expenses in connection with taking such action on behalf of Landlord, then
Tenant shall be entitled to deduct from Base Rent payable by Tenant under this
Lease, the amount set forth in such invoice. If, however, Landlord delivers to
Tenant within thirty (30) days after receipt of Tenant's invoice, a written
objection to the payment of such invoice, setting forth with reasonable
particularity Landlord's reasons for its claim that such Required Repair did not
have to be taken by Landlord pursuant to the terms of this Lease or that the
charges are excessive (in which case Landlord shall pay the amount it contends
would not have been excessive), then Tenant shall not be entitled to such
deduction from Base Rent, but as Tenant's sole remedy, Tenant may proceed to
institute legal proceedings against Landlord to collect the amount set forth in
the subject invoice.
20.4 NON-RECOURSE. Notwithstanding anything to the contrary in this
Lease, any judgment obtained by Tenant or any of Tenant's Parties against
Landlord or any Indemnified Parties shall be satisfied only out of Landlord's
equity interest in the Building and the legal parcel of land on which it sits.
Neither Landlord nor any Indemnified Parties shall have any personal liability
for any matter in connection with this Lease or its obligations as Landlord of
the Premises, except as provided above. Tenant shall not institute, seek or
enforce any personal or deficiency judgment against Landlord or any Indemnified
Parties, and none of their property shall be available to satisfy any judgment
hereunder, except as provided in this Paragraph 20.4.
20.5 SALE OF PREMISES. In the event of any sale or transfer of the
Premises (and provided that any security deposit held by the seller, transferor
or assignor (collectively, "Seller") is delivered or credited to the purchaser,
transferee or assignee (collectively, "Purchaser"), the Seller shall be and
hereby is entirely freed and relieved of all agreements, covenants and
obligations of Landlord thereafter to be performed and it shall be deemed and
construed without further agreement between the parties or their successors in
interest or between the Seller and the Purchaser on any such sale, transfer or
assignment that such Purchaser has assumed and agreed to carry out any and all
agreements, covenants and obligations of Landlord hereunder.
21. MORTGAGES.
At the election of Landlord, or the holder of any mortgage or deed of
trust affecting the Project or any ground lessor, this Lease and all of Tenant's
rights hereunder shall be subject and subordinate at all times to any deed of
trust, mortgage or ground lease which may now or hereafter affect the Project,
and to all renewals, modifications, consolidations, replacements and extensions
thereof. If any such mortgage or deed of trust is foreclosed or any ground
lease terminated, at the election of Landlord's successor in interest, Tenant
agrees, for the benefit of such successor in interest, to attorn to such
successor in interest and become its tenant on the terms and conditions of this
Lease for the remainder of the Term, and if required, to enter into a new lease
with such successor in interest in the form of this Lease. Tenant's agreement
to attorn shall survive the termination of this Lease. At the request of
Landlord, the holder of such mortgage or deed of trust or any ground lessor,
Tenant shall execute, acknowledge and deliver promptly in recordable form any
instrument or subordination agreement that Landlord or such holder may request;
provided, however, that such instrument shall include a provision requiring the
purchaser at any foreclosure sale to continue this Lease in full force and
effect in the same manner as if such purchaser were the Landlord so long as
Tenant is not otherwise in default (beyond applicable notice and cure periods)
and requiring Tenant to attorn to such purchaser. In addition, at the request
of Landlord, the holder of any mortgage or deed of trust
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or any ground lessor, Tenant shall execute, acknowledge and deliver promptly in
recordable form any instrument that Landlord or such holder may request to make
this Lease superior to such mortgage, deed or trust or ground lease. Provided
that Landlord notifies Tenant that its failure to timely execute such documents
shall constitute a default under this Lease, Tenant's failure to execute each
instrument, release or document within ten (10) business days after written
demand shall constitute an event of default by Tenant hereunder without further
notice to Tenant, or at Landlord's option Landlord shall execute such
instrument, release or document on behalf of Tenant as Tenant's
attorney-in-fact. Tenant does hereby make, constitute and irrevocably appoint
Landlord as Tenant's attorney-in-fact, coupled with an interest, and in Tenant's
name, place and stead, to execute such documents in accordance with this
Paragraph 21.
22. GENERAL PROVISIONS.
22.1 SINGULAR AND PLURAL. Words of any gender used in this Lease
shall be held and construed to include any other gender, and words in the
singular number shall be held to include the plural, unless the context
otherwise requires.
22.2 INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein
provided to the contrary, any amount due to Landlord not paid within five (5)
business days from when due shall bear interest at the lesser of 12% or the
maximum rate then allowable by law from the date due. Payment of such interest
shall not excuse or cure any default by Tenant under this Lease, provided,
however, that interest shall not be payable on late charges incurred by Tenant.
22.3 TIME OF ESSENCE. Time is of the essence.
22.4 BINDING EFFECT. The terms, provisions and covenants and
conditions contained in this Lease shall apply to, inure to the benefit of, and
be binding upon, the parties hereto and upon their respective heirs, legal
representatives, successors and permitted assigns, except as otherwise herein
expressly provided.
22.5 CHOICE OF LAW. This Lease shall be governed by the laws of the
State of California applicable to contracts made and to be performed in such
state.
22.6 CAPTIONS. The captions inserted in this Lease are for
convenience only and in no way define, limit or otherwise describe the scope or
intent of this Lease, or any provision hereof, or in any way affect the
interpretation of this Lease.
22.7 CERTIFICATES. Tenant agrees from time to time within ten (10)
business days after request of Landlord, to deliver to Landlord, or Landlord's
designee, a Certificate of Occupancy for work performed by Tenant or Tenant's
Parties in the Premises, annual financial statements for each of the previous
three (3) fiscal years of Tenant, and an estoppel certificate stating that this
Lease is unmodified and in full force and effect (or, if modified, stating the
nature of such modification and certifying that this Lease, as so modified, is
in full force and effect), the date to which Rent has been paid, the unexpired
Term of this Lease and such other matters pertaining to this Lease as may be
reasonably requested by Landlord or Landlord's designee. Any such certificate
may be conclusively relied upon by Landlord or Landlord's designee. At
Landlord's option, Tenant's failure to timely deliver such certificate shall be
an event of default by Tenant, without further notice to Tenant, or it shall be
conclusive upon Tenant that this Lease is in full force and effect, without
modification except as may be represented by Landlord, that there are no uncured
defaults in Landlord's performance, and that not more than one (1) month's rent
has been paid in advance. Landlord agrees from time to time within ten (10)
business days after request of Tenant (but not more than three (3) times during
the Term), to deliver to Tenant an estoppel certificate stating that this Lease
is unmodified and in full force and effect (or, if modified, stating the nature
of such modification), the date to which Rent has been paid and the unexpired
Term of this Lease, and whether Tenant is (to Landlord's knowledge) in default
under this Lease.
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22.8 AMENDMENTS. This Lease may not be altered, changed or amended
except by an instrument in writing signed and dated by both parties hereto.
Tenant agrees to make such reasonable modifications to this Lease as may be
required by any lender in connection with the obtaining of financing or
refinancing of the Project or any portion thereof, so long as such modifications
do not increase Tenant's monetary obligations or adversely impact Tenant's use
of or access to the Premises.
22.9 ENTIRE AGREEMENT. This Lease constitutes the entire
understanding and agreement of Landlord and Tenant with respect to the subject
matter of this Lease, and contains all of the covenants and agreements of
Landlord and Tenant with respect thereto, and supersedes all prior agreements or
understandings. Landlord and Tenant each acknowledge that no representations,
inducements, promises or agreements, oral or written, have been made by Landlord
or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not
contained herein, and any prior agreements, promises, negotiations, or
representations not expressly set forth in this Lease are of no force or effect.
22.10 WAIVERS. The waiver by either party of any term, covenant,
agreement or condition herein contained shall not be deemed to be a waiver of
any subsequent breach of the same or any other term, covenant, agreement or
condition herein contained, nor shall any custom or practice which may arise
between the parties in the administration of this Lease be construed to waive or
lessen the right of such party to insist upon the performance by the other party
in strict accordance with all of the provisions of this Lease. The subsequent
acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of
any preceding breach by Tenant of any provisions, covenant, agreement or
condition of this Lease, other than the failure of Tenant to pay the particular
Rent so accepted, regardless of Landlord's knowledge of such preceding breach at
the time of acceptance of such Rent.
22.11 ATTORNEYS' FEES. If either Landlord or Tenant commences or
engages in, or threatens to commence or engage in, an action by or against the
other party arising out of or in connection with this Lease or the Premises,
including but not limited to any action for recovery of Rent due and unpaid, to
recover possession or for damages for breach of this Lease, the prevailing party
shall be entitled to have and recover from the losing party reasonable
attorneys' fees and other costs incurred in connection with the action,
preparation for such action, any appeals relating thereto and enforcing any
judgments rendered in connection therewith.
22.12 MERGER. The voluntary or other surrender of this Lease by Tenant
or a mutual cancellation hereof shall not constitute a merger. Such event
shall, at the option of Landlord, either terminate all or any existing
subtenancies or operate as an assignment to Landlord of any or all of such
subtenancies.
22.13 SURVIVAL OF OBLIGATIONS. Paragraphs 2, 3.2, 4.2, 5.2, 8, 12.1,
12.5, 15.3, 16, 19, 20 and 22 and all obligations of Landlord and Tenant
hereunder not fully performed as of the expiration or earlier termination of the
Term shall survive the expiration or earlier termination of the Term, including
without limitation, all payment obligations with respect to Rent and all
obligations concerning the condition of the Premises. Upon the expiration or
earlier termination of the Term, and prior to Tenant vacating the Premises,
Tenant shall pay to Landlord any amount reasonably estimated by Landlord (i) as
necessary to perform Tenant's duties under paragraphs 6.1 and 16.1 and put the
Premises, including without limitation, all heating and air conditioning systems
and equipment therein, in good condition and repair, and (ii) as sufficient to
meet Tenant's obligation hereunder for prorated Additional Rent for the year in
which the Lease expires or terminates. All such amounts shall be used and held
by Landlord for payment of such obligations, with Tenant being liable for any
additional costs therefor upon demand by Landlord, or with any excess to be
returned to Tenant after all such obligations have been determined and satisfied
as the case may be. Any Security Deposit held by Landlord shall be credited
against the amounts payable by Tenant under this Paragraph 22.13.
22.14 SEVERABILITY. If any clause or provision of this Lease is
illegal, invalid or unenforceable under present or future laws effective during
the Term, the remainder of this
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Lease shall not be affected thereby, and in lieu of each clause or provision of
this Lease that is illegal, invalid or unenforceable, there shall be added as a
part of this Lease a clause or provision as similar in terms to such illegal,
invalid or unenforceable clause or provision as may be possible and be legal,
valid and enforceable.
22.15 SECURITY MEASURES. Tenant hereby acknowledges that the Rent
payable to Landlord hereunder does not include the cost of guard service or
other security measures, and that Landlord shall have no obligation whatsoever
to provide same. Tenant assumes all responsibility for the protection of
Tenant, Tenants' Parties and their property from acts of third parties.
22.16 EASEMENTS. Landlord reserves to itself the right, from time to
time, to grant such easements, rights and dedications that Landlord deems
necessary or desirable, and to cause the recordation of parcel maps, easement
agreements and covenants, conditions and restrictions, so long as such
easements, rights, dedications, maps and covenants, conditions and restrictions
do not unreasonably interfere with the permitted use of the Premises by Tenant.
Tenant shall sign any of the aforementioned documents upon request of Landlord
and failure to do so shall constitute a material breach of this Lease.
22.17 MULTIPLE PARTIES. If more than one person or entity is named as
Tenant herein, the obligations of Tenant hereunder shall be the joint and
several responsibility of all persons or entities so named.
22.18 CONFLICT. Any conflict between the printed provisions of this
Lease and any typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
22.19 NO THIRD PARTY BENEFICIARIES. This Lease is not intended by
either party to confer any benefit on any third party, including without
limitations any broker, finder, or brokerage firm.
22.20 EFFECTIVE DATE/NONBINDING OFFER. Submission of this Lease for
examination or signature by Tenant does not constitute an offer or option for
lease, and it is not effective as a lease or otherwise until executed and
delivered by both Landlord and Tenant.
22.21 NOTICES. Each provision of this Lease or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice or the making of any payment
by one party to the other shall be deemed to be complied with when and if the
following steps are taken:
(a) All Rent and other payments required to be made
hereunder shall be payable to the applicable party hereto as follows: to
Landlord at the address set forth in Item 12 of the Basic Lease Provisions, and
to Tenant at the Premises, or at such other addresses as the parties may have
hereafter specified by written notice. All obligations to pay Rent and/or any
other amounts under the terms of this Lease shall not be deemed satisfied until
such Rent and other amounts have been actually received by the respective party.
(b) Wherever any notice is required or permitted hereunder,
such notice shall be in writing. Any notice or document required or permitted
to be delivered hereunder shall be deemed to be delivered (i) upon personal
delivery; (ii) seventy-two (72) hours after deposit thereof in the United States
mail, postage prepaid, certified or registered mail, return receipt requested;
(iii) upon confirmation of delivery by Federal Express or other reputable
overnight delivery service; or (iv) upon written confirmation of delivery by
telegraph, telecopy or other electronic written transmission device; correctly
addressed to the parties hereto as follows: if to Tenant before the Commencement
Date, then at the address specified in Item 11 of the Basic Lease Provisions; if
to Tenant after the Commencement Date, then at the Premises; and if to Landlord,
then at the address specified in Item 12 of the Basic Lease Provisions; or at
such other address (but no more than one (1) address at a time, except as
provided in Paragraph 20.1) as the recipient may theretofore have specified by
written notice.
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22.22 WATER, OIL AND MINERAL RIGHTS. Landlord reserves all right,
title or interest in water, oil, gas or other hydrocarbons, other mineral rights
and air and development rights, together with the sole and exclusive right of
Landlord to sell, lease, assign or otherwise transfer the same, but without any
right of Landlord or any such transferee to enter upon the Premises during the
Term except as otherwise provided herein.
22.23 CONFIDENTIALITY. Tenant agrees to keep the Lease and its terms,
covenants, obligations and conditions strictly confidential and not to disclose
such matters to any other landlord, tenant, prospective tenant, or broker;
provided, however, Tenant may provide a copy of this Lease to its attorneys,
accountants and bankers, and to a non-party solely in conjunction with Tenant's
reasonable and good faith effort to secure an assignee or sublessee for the
Premises.
22.24 BROKER'S FEES. Tenant represents and warrants that it has dealt
with no broker, agent or other person in connection with this transaction and
that no broker, agent or other person brought about this transaction, other than
the brokerage firm specified in Item 13 of the Basic Lease Provisions, if any,
and Tenant shall indemnify, defend, protect and hold Landlord harmless from and
against any claims, losses, liabilities, demands, costs, expenses or causes of
action by any other broker, agent or other person claiming a commission or other
form of compensation by virtue of having dealt with Tenant with regard to this
leasing transaction.
22.25 REMEDIES CUMULATIVE. All rights, privileges and remedies of the
parties are cumulative and not alternative or exclusive to the extent permitted
by law, except as otherwise provided herein.
22.26 RETURN OF CHECK. If Tenant's check, given to Landlord in payment
of any sum, is returned by the bank for non-payment, Tenant shall pay to
Landlord immediately on demand, as Additional Rent, all expenses incurred by
Landlord as a result thereof.
22.27 NO RECORDATION OF LEASE. Neither this Lease nor any memorandum
hereof may be recorded.
22.28 AUTHORITY. If Tenant is a corporation or partnership, each
individual executing this Lease on behalf of such entity represents and warrants
that he or she is duly authorized to execute and deliver this Lease. Tenant
shall, within thirty (30) days following execution of this Lease, deliver to
Landlord evidence of such authority satisfactory to Landlord.
22.29 INTERPRETATION. This Lease shall be construed fairly according
to its terms without regard to which party, or which party's attorneys, prepared
its form.
22.30 ADDITIONAL PROVISIONS. Those additional provisions set forth in
EXHIBIT "E", if any, are hereby incorporated by this reference as if fully set
forth herein.
22.31 WAIVER OF RIGHT TO TRIAL BY JURY. Tenant and Landlord each
hereby waives the right to trial by jury.
22.32 LETTER OF CREDIT. Notwithstanding anything to the contrary
contained herein, upon ten (10) days prior written notice to Landlord, Tenant
may replace $150,000 of the Security Deposit with an irrevocable standby letter
of credit ("Letter of Credit") in favor of Landlord in the amount of $150,000.00
which shall be (i) from a bank reasonably acceptable to Landlord, (ii) in the
form and content of that attached hereto as Exhibit "C", and (iii) subject to
the conditions stated in this paragraph. The Letter of Credit shall have a term
of at least 12 months and be automatically renewed (or a reasonably satisfactory
replacement Letter of Credit from a bank acceptable to Landlord shall be in
place in strict accordance with the terms hereof) at least thirty (30) days
prior to expiration of each 12 month period for additional periods of 12 months
each until the 30th day following the expiration of the Term. The Letter of
Credit shall be held by Landlord as additional security for the full and
faithful performance by Tenant
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of the terms, covenants and conditions of this Lease during the Term. Provided
that Tenant is not and has not been in default (beyond applicable notice and
cure periods) under this Lease, the amount of the Letter of Credit shall be
reduced on the first day of each of the following months in accordance with the
schedule set forth below:
<TABLE>
<CAPTION>
Letter of Credit
Month of Term Reduced Amount
------------- ----------------
<S> <C>
19 $120,000
31 $ 96,000
43 $ 76,800
55 $ 61,440
</TABLE>
Within five (5) days following Landlord's demand therefor, Tenant shall execute
an amendment to this Lease to reflect Tenant's election to replace a portion of
the cash Security Deposit with the Letter of Credit. If Tenant breaches any of
the terms or conditions of this Lease (beyond applicable notice and cure
periods), or if Tenant has filed a voluntary petition under the United States
Bankruptcy Code, or Tenant's creditors have filed an involuntary petition under
the United States Bankruptcy Code, then Landlord may draw upon the Letter of
Credit for the payment of the required amount of any sum in default, and for the
payment of any amount that Landlord may spend or may become obligated to spend
by reason of Tenant's default, and to compensate Landlord for any other loss or
damage that Landlord suffers by reason of Tenant's default to the extent
Landlord is entitled to compensation therefor pursuant to the terms of this
Lease (any amount of the Letter of Credit which is drawn upon by Landlord in
accordance with the provisions hereof, but is not used or applied in accordance
with this Lease, shall be deemed a part of the Security Deposit). The use,
application or retention of the Letter of Credit, or any portion thereof, shall
not prevent Landlord from exercising any other rights or remedies provided under
this Lease, it being intended that Landlord shall not be required to proceed
against the Security Deposit and/or the Letter of Credit, and shall not operate
as a limitation on any recovery to which Landlord may otherwise be entitled.
Notwithstanding the foregoing, if Tenant (a) becomes a publicly traded company
on a major national exchange, AND (b) Tenant has maintained a tangible net worth
of more than $50,000,000.00 (as reasonably determined by Landlord), then within
ten (10) days following Landlord's receipt of evidence of the items described in
(a) and (b), Tenant may cause the Letter of Credit to be canceled.
LANDLORD: TENANT:
NEWCROW, a California general eTOYS, INC., a Delaware corporation
partnership
By: Crow Los Angeles Limited, By: /s/ Edward C. Lenk
-----------------------------
a Texas limited partnership Its: CEO
--------------------------
By /s/ Illegible: By: /s/ Frank C. Han
---------------------------- -----------------------------
Authorized Agent Its: Secretary
--------------------------
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EXHIBIT "A"
Site Plan
INTENTIONALLY OMITTED
<PAGE>
EXHIBIT "B"
INTENTIONALLY OMITTED
<PAGE>
EXHIBIT "C"
Form of Letter of Credit
IRREVOCABLE STANDBY LETTER OF CREDIT NO.
---------------
, 199
- ------------ --
- --------------------------
- --------------------------
- --------------------------
Ladies and Gentlemen:
We hereby establish our Irrevocable Standby Letter of Credit in your favor for
the account of ______________: for an aggregate amount of $_____________________
available to you by your drafts as SIGHT ON US and accompanied by the following
documents:
1. Original Irrevocable Standby Letter of Credit; and
2. Beneficiary's or its designee's signed certificate dated not more than
ten (10) calendar days before the date of the drawing under this letter
of credit, executed by Beneficiary or its designee and stating that
either one or more of the following events has occurred:
(a) Tenant has defaulted (beyond applicable notice and cure periods)
under any of the terms, covenants or conditions under that certain Lease
Agreement dated _________, 199_, by and between Landlord and Tenant
("Lease"); or
(b) The filing of any voluntary petition by Tenant (or involuntary
petition by Tenant's creditors) under the United States Bankruptcy Code;
or
(c) Tenant has failed to procure and deliver a replacement Letter of
Credit reasonably satisfactory to Beneficiary on or before thirty (30)
days prior to the expiration of the Letter of Credit.
It is a condition of this Irrevocable Standby Letter of Credit that it shall be
deemed automatically extended for a period of one year from the present or each
future expiration date, unless thirty (30) days prior to the expiration date we
shall notify the Beneficiary by registered mail that we elect not to renew this
Letter of Credit.
Each draft drawn hereunder must bear the clause: "Drawn under __________
Irrevocable Standby Letter of Credit No. __________ dated __________."
We hereby agree with you that drafts drawn under and in compliance with the
terms of this Credit will be duly honored upon presentation and delivery of
documents as specified to _______________ on or before _______________.
This Letter of Credit is freely transferrable in its entirety without our
consent or approval to a subsequent owner of the Building, but with written
notice to us. In the event of such transfer, the transferee shall be deemed the
beneficiaries hereunder in the full place and stead and with all the rights
hereunder of the Original Beneficiary.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500.
- ------------------------------
Authorized Signature
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<PAGE>
EXHIBIT "D"
TENANT SIGN CRITERIA
INTENTIONALLY OMITTED
<PAGE>
EXHIBIT "E"
ADDITIONAL LEASE PROVISIONS
A. OPTION TO EXTEND TERM. Landlord grants to Tenant one (1) option to
extend the Term of this Lease for a sixty (60) month period (the "Option")
commencing upon the expiration of the initial Term (or upon the expiration of
the preceding Option if any), upon each of the following conditions and terms:
1. Tenant shall give to Landlord, and Landlord shall actually
receive, on a date which is at least six (6) months and not more than twelve
(12) months prior to the then scheduled expiration date of the Term, a written
notice of Tenant's exercise of such Option (the "Option Notice"), time being of
the essence. If the Option Notice is not timely so given and received, such
Option shall automatically expire.
2. Tenant shall have no right to exercise an Option,
notwithstanding any provision hereof to the contrary, (a) during the time
commencing from the date Landlord gives to Tenant a notice of default pursuant
to Paragraph 18.10 of this Lease and continuing until the noncompliance alleged
in said notice of default is cured, or (b) during the period of time commencing
on the day after a monetary obligation to Landlord is due from Tenant and unpaid
and continuing until the obligation is paid, or (c) if Landlord has given to
Tenant three or more notices of default under Paragraph 18.10 of this Lease,
whether or not the defaults are cured, or Tenant has been late on three or more
occasions in the payment of a monetary obligation to Landlord (provided that
Landlord has delivered notice of the same to Tenant), during the 12 month period
of time immediately prior to the time that Tenant attempts to exercise the
Option, or (d) if Tenant has committed any non-curable breach, or is otherwise
in default (beyond applicable notice and cure periods) of any of the terms,
covenants or conditions of this Lease.
3. The period of time within which the Option may be exercised
shall not be extended or enlarged by reason of Tenant's inability to exercise an
Option because of the provisions of Paragraph A.2 above.
4. All Option rights of Tenant under this Paragraph A. shall
terminate and be of no further force or effect, notwithstanding Tenant's due and
timely exercise of the Option, if, after such exercise and during the initial
Term of this Lease (as and if previously extended), (a) Tenant fails to pay to
Landlord a monetary obligation of Tenant for a period of ten (10) days after
such obligation becomes due (provided that Landlord has delivered notice of the
same to Tenant), or (b) Tenant fails to commence to cure a default specified in
Paragraph 18.10 of this Lease within ten (10) days after the date that Landlord
gives notice to Tenant of such default and/or Tenant fails thereafter to
diligently prosecute said cure to completion within thirty (30) days after the
date of such notice, or (c) Landlord gives to Tenant two (2) or more notices of
default under Paragraph 18.10 of this Lease, or Tenant is late on two (2) or
more occasions in the payment of a monetary obligation to Landlord (provided
that Landlord has delivered notice of the same to Tenant), whether or not the
defaults are cured, or (d) Tenant has committed any incurable breach, or is
otherwise in default (beyond applicable notice and cure periods) of any of the
terms, covenants and conditions of this Lease.
5. The Option granted to Tenant in this Lease is personal to the
original Tenant and may be exercised only by the original Tenant or an Affiliate
Entity that has been assigned this Lease while occupying the Premises who does
so without the intent of thereafter assigning this Lease or subletting the
Premises or any portion thereof, and may not be exercised or be assigned,
voluntarily or involuntarily, by or to any person or entity other than Tenant.
The Option herein granted to Tenant is not assignable separate and apart from
this Lease, nor may the Option be separated from this Lease in any manner,
either by reservation or otherwise.
6. All of the terms and conditions of this Lease except where
specifically modified by this Paragraph A shall apply during the extended Term.
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<PAGE>
7. The monthly Base Rent payable during the first year of any
extended Term (each of which such extended Terms is herein referred to as an
"Option Period") shall be equal to the then current fair market value for the
Premises determined as of the beginning of such Option Period, as follows:
(i Promptly following receipt by Landlord of Tenant's
Option Notice, Landlord and Tenant shall attempt to reach agreement on the
initial Base Rent for the Option Period, which Base Rent shall be set at the
then current fair market monthly rental value for the Premises. If Landlord and
Tenant are able to agree on the initial Base Rent for the Option Period,
Landlord and Tenant shall immediately execute an amendment to this Lease stating
the initial Base Rent for such Option Period.
(ii If the parties are unable to agree on the initial Base
Rent for the Option Period within forty-five (45) days following Landlord's
receipt of the Option Notice, then each party, at its cost and by giving notice
to the other party, shall have ten (10) days within which to appoint an MAI
full-time commercial appraiser experienced in the area in which the Premises are
located, to appraise and set the initial Base Rent for such Option Period at the
then current fair market monthly rental value of the Premises for a term equal
to the Option Period. If a party does not appoint an appraiser within such ten
(10) day period, the single appraiser appointed shall be the sole appraiser and
shall set the initial Base Rent for such Option Period. If two appraisers are
appointed by the parties as stated in this paragraph, they shall meet promptly
and attempt to set the initial Base Rent for such Option Period. If they are
unable to agree within forty five (45) days after the second appraiser has been
appointed, they shall attempt to select a third appraiser meeting the
qualifications stated in this paragraph within ten (10) days after the last day
the two appraisers are given to set the initial Base Rent for such Option
Period. If they are unable to agree on the third appraiser, either of the
parties to this Lease, by giving ten (10) days notice to the other party, may
apply to the presiding judge of the Superior Court of the County in which the
Premises are located, for the selection of a third appraiser who meets the
qualifications stated in this paragraph. Each of the parties shall bear the
cost of its own appraiser and one-half (1/2) of the cost of appointing the third
appraiser and of paying the third appraiser's fee. The third appraiser, however
selected, shall be a person who has not previously acted in any capacity for
either party.
(iii Within twenty (20) days after the selection of the
third appraiser, a majority of the appraisers shall set the initial Base Rent
for the Option Period. If a majority of the appraisers are unable to agree upon
the initial Base Rent within the stipulated period of time, the two closest
appraisals shall be added together and their total divided by two, and the
resulting quotient shall be the initial Base Rent for the Premises during such
Option Period. In no event, however, shall the initial Base Rent for such
Option Period be less than the Base Rent payable during the immediately
preceding period.
8. If the Base Rent for the initial year of an Option Period has
not been determined by the commencement date of the Option Period, then until
such Base Rent is determined, Tenant shall pay Base Rent to Landlord at the rate
in effect immediately preceding the Option Period, and if the actual Base Rent
for the initial year of the Option Period is determined to be higher, then
within ten (10) days after the determination of such higher Base Rent, Tenant
shall pay to Landlord the difference for each month of the Option Period for
which Base Rent has already become due.
-2-
<PAGE>
EXHIBIT "F"
ENVIRONMENTAL QUESTIONNAIRE
FOR OFFICE USE ONLY:
PROPOSED LEASE COMMENCEMENT DATE: _____________ MARKETING DIRECTOR: __________
ORIGINAL RENEWAL EXPANSION
- ------------------------------------------------
- ------------------------------------------------
PRE-LEASING ENVIRONMENTAL EXPOSURE QUESTIONNAIRE
(To be completed prior to Lease Approval)
PROPERTY ADDRESS: 6000 Peachtree Street
------------------------------------------------------
Commerce, California 90040
------------------------------------------------------
PROPOSED TENANT: eToys, Inc.
------------------------------------------------------
------------------------------------------------------
(Include full legal name of proposed tenant and any d/b/a)
CURRENT ADDRESS: 1640 Fifth Street, Suite 124
------------------------------------------------------
Santa Monica, CA 90401
------------------------------------------------------
DESCRIPTION OF PROPOSED USE OF PROPERTY: Warehousing and distribution of toys
-------------------------------------
and general office purposes
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ------------------------------------------
- ------------------------------------------
PLEASE ANSWER THE FOLLOWING QUESTIONS ACCURATELY AND FULLY, ATTACHING ADDITIONAL
PAGES IF NECESSARY. YOUR RESPONSES TO THIS QUESTIONNAIRE, INCLUDING ANY AND ALL
ATTACHMENTS, SHALL BE INCORPORATED AS REPRESENTATIONS AND WARRANTIES IN THE
LEASE WHEN EXECUTED, AND INCORRECT, MISLEADING OR MATERIALLY INCOMPLETE
RESPONSES SHALL BE DEEMED A BREACH OF SAID LEASE.
1. Will any of the following chemicals, petroleum products or hazardous
materials be made, used, placed, or stored on the property in quantities
GREATER than the minimum quantity listed in column (1) below? If yes,
please mark column(s) (2), (3), and/or (4) as applicable.
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
MINIMUM
CATEGORIES OF CHEMICALS QUANTITY MADE USED PLACED STORED
----------------------- -------- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Solvents, Degreasers 1 Gallon ____ ____ ____ ____
Paint Thinners/Remover 1 Gallon ____ ____ ____ ____
Paint 5 Gallons ____ ____ ____ ____
Oil (New) 5 Gallons ____ ____ ____ ____
Gasoline 1 Gallon ____ ____ ____ ____
Antifreeze 5 Gallons ____ ____ ____ ____
Other Automotive Fluids 1 Gallon ____ ____ ____ ____
Diesel Fuel 5 Gallons ____ ____ ____ ____
Heavy (Toxic) Metal
Containing Compounds 1 Pound ____ ____ ____ ____
Liquid Plastics/Activators 1 Gallon ____ ____ ____ ____
Flammable Gases 20 Cu Ft ____ ____ ____ ____
Toxic Gases 20 Cu Ft ____ ____ ____ ____
Acids 1 Gl/5 Lb ____ ____ ____ ____
Bases (soda, ash, lye, etc.) 1 Gl/5 Lb ____ ____ ____ ____
Other Flammable Materials 1 Gl/5 Lb ____ ____ ____ ____
Other Corrosive Materials 1 Gl/5 Lb ____ ____ ____ ____
Other Toxic Materials 1 Gl/5 Lb ____ ____ ____ ____
Other Reactive Materials 1 Gl/5 Lb ____ ____ ____ ____
Liquid Hazardous Waste 1 Gallon ____ ____ ____ ____
Solid Hazardous Waste 1 Pound ____ ____ ____ ____
</TABLE>
-1-
<PAGE>
1.1 If required for your operations, please
provide Landlord a copy of your Hazardous
Material Business Management Plan.
YES NO
1.2 Do your operations require H-occupancy
storage or other special construction? X
--- ---
If yes, please explain:
---------------------------------------------
---------------------------------------------
2. Will any of the following structures be used on the
property? If yes, describe the contents of each. X
--- ---
FEATURE CONTENTS
------- --------
Underground Tank
------------------------------- --- ---
Above-ground Tank
------------------------------- --- ---
Clarifier
------------------------------- --- ---
Sump
------------------------------- --- ---
Trench
------------------------------- --- ---
Waste Pile
------------------------------- --- ---
Chemical Piping
------------------------------- --- ---
Floor Drain
------------------------------- --- ---
Other
------ ------------------------------- --- ---
------------- ------------------------------- --- ---
2.1 Please describe plans for secondary
containment and leak monitoring.
---------------------------------------------
---------------------------------------------
3. Will any hazardous wastes or liquid wastes be
generated by on site operations or brought on to
the property? X
--- ---
If yes, complete the following:
3.1 Identify each such hazardous waste or liquid
waste.
---------------------------------------------
---------------------------------------------
3.2 Describe onsite storage, including secondary
containment, and/or treatment.
---------------------------------------------
---------------------------------------------
3.3 Describe yours plans for disposal of
hazardous wastes or liquid waste including
off-site disposal.
---------------------------------------------
---------------------------------------------
4. Will operations result in any wastewater discharges
to the sewer? X
--- ---
Will operations result in any wastewater discharges
to locations other than the sewer (including storm
drain)? --- ---
If yes, describe each wastewater stream and plans
for handling wastewater discharges:
-2-
<PAGE>
---------------------------------------------
---------------------------------------------
4.1 Have you performed any testing or analysis of X
wastewater discharges or other wastewater --- ---
effluent from your current facility?
If yes, attach the results of any such testing
or analysis.
4.2 Will your operations require any stormwater X
discharge permits? --- ---
If yes, describe:
---------------------------------------------
---------------------------------------------
5. Will activities on the property require warnings to X
be given to workers or visitors on the Leased Premises --- ---
or the surrounding community?
If yes, please describe how you will provide such
communications or warnings.
---------------------------------------------------
---------------------------------------------------
6. Will operations result in any air emissions (including X
dust)? --- ---
If yes, describe:
---------------------------------------------------
---------------------------------------------------
6.1 Will permits from the Southern Coast Air Quality X
Management District be required? --- ---
7. Will operations result in air emissions which include X
hazardous or toxic air pollutants? --- ---
7.1 If yes, will any public notice or disclosure be --- ---
required?
8. Will operations be subject to Risk Management & X
Preview Planning requirements or other risk reductionc --- ---
requirements?
9. Will your operations involve any on-site vehicle or X
equipment maintenance, repair or cleaning, including --- ---
but not limited to oil changes, oil filter changes,
brake pad replacement, battery changes, radiator
flushing, radiator fluid replacement, and equipment,
and equipment wash down and cleaning?
If yes, describe all such maintenance:
---------------------------------------------------
---------------------------------------------------
9.1 Will these on-site vehicles or equipment use --- ---
batteries?
If yes, describe battery storage method:
---------------------------------------------
---------------------------------------------
10. Will your operations include a machine shop? X
--- ---
If yes, describe all operation:
-3-
<PAGE>
---------------------------------------------------
---------------------------------------------------
11. Will your operations include any metal plating or X
--- ---
metal fabrication?
If yes, describe:
---------------------------------------------------
---------------------------------------------------
12. Will your operations include the use of solvents? X
--- ---
If yes, describe:
---------------------------------------------------
---------------------------------------------------
13. Has your present facility or operation ever been the X
subject of an environmental investigation, an --- ---
environmental enforcement action, or permit revocation
proceeding?
If yes describe:
---------------------------------------------------
---------------------------------------------------
14. Have you ever been identified as a potentially X
responsible party for any environmental cleanup, --- ---
compliance or abatement proceedings?
If yes, describe:
---------------------------------------------------
---------------------------------------------------
15. Have you ever received a notice of violation or notice X
to comply from any environmental regulatory agency --- ---
within the past five years?
If yes, describe:
---------------------------------------------------
---------------------------------------------------
16. Have you had any complaints from neighbors relating X
to noise, odor, air emissions, or dust at your --- ---
present facility?
If yes, describe:
---------------------------------------------------
---------------------------------------------------
16.1 Have you had any complaints relating to X
hazardous materials handling, storage, --- ---
treatment or disposal from neighbors at your
present facility?
If yes, describe:
---------------------------------------------
---------------------------------------------
-4-
<PAGE>
17. Will the proposed use of the property require the X
filing of any environmental reports or other --- ---
documents to any agencies?
18. Attach copies of all Material Safety Data Sheets
("MSDS") for all chemicals you intend to use, sore,
or handle on the property.
19. Has an Environmental Audit been conducted at your X
present facility? (If yes, attach a copy of any --- ---
report prepared in connection with any such audit.)
20. Please provide the Landlord your Emergency Response
Plan and any contingency or emergency plans for the
property in case of an accidental release of
hazardous materials.
21. Identify the name, title and qualifications/experience of person
responsible for your environmental, health and safety program:
Name: Randy Villa
----------------------------------------------------------------------
Title: Director, Distribution
---------------------------------------------------------------------
Qualifications/experience: 10 year warehouse management experience
-------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
22. Name and telephone number of person to contact for additional information:
Name: Randy Villa
----------------------------------------------------------------------
Title: Director, Distribution
---------------------------------------------------------------------
Telephone Number: (510) 487-2467
----------------------------------------------------------
23. Please provide any additional information/comments concerning your
environmental compliance program and environmental compliance history:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The undersigned hereby certifies that the information above is correct and
complete.
eToys Inc.
- -------------------------------------------------------------
Name of Proposed Tenant
By: /s/ Jordan Posell
--------------------------------------------------------
Name: Jordan Posell
--------------------------------------------------------
Title: Director, Finance
-------------------------------------------------------
Date:06/22/98
-------------------------------------------------------
-5-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. PREMISES AND TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.1 Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Condition of Premises . . . . . . . . . . . . . . . . . . . . . 3
1.4 Early Entry into Premises . . . . . . . . . . . . . . . . . . . 4
2. RENT AND SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Adjustment of Base Rent . . . . . . . . . . . . . . . . . . . . 4
2.3 Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Tenant's Proportionate Share. . . . . . . . . . . . . . . . . . 5
2.5 Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . 5
2.5.1 Definition. . . . . . . . . . . . . . . . . . . . . . 5
2.5.2 Monthly Payments and Annual Reconciliation. . . . . . 5
2.5.3 Tenant's Audit Rights . . . . . . . . . . . . . . . . 5
2.6 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.7 Late Charges. . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 Use of Premises . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . 8
3.3 Use of Common Areas . . . . . . . . . . . . . . . . . . . . . . 9
4. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.1 Payment of Real Property Taxes. . . . . . . . . . . . . . . . . 9
4.2 Liability for all Personal Property Taxes . . . . . . . . . . .10
5. LANDLORD'S MAINTENANCE AND REPAIR . . . . . . . . . . . . . . . . . . .10
5.1 Landlord's Maintenance. . . . . . . . . . . . . . . . . . . . .10
5.2 Procedure and Liability . . . . . . . . . . . . . . . . . . . .12
6. TENANT'S MAINTENANCE AND REPAIR . . . . . . . . . . . . . . . . . . . .12
6.1 Tenant's Maintenance. . . . . . . . . . . . . . . . . . . . . .12
6.2 Maintenance/Service Contracts . . . . . . . . . . . . . . . . .12
7. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
8. LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
9. SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
9.1 Landlord's Signage Program. . . . . . . . . . . . . . . . . . .14
9.2 Criteria for Changes. . . . . . . . . . . . . . . . . . . . . .14
10. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
11. FIRE AND CASUALTY DAMAGE. . . . . . . . . . . . . . . . . . . . . . . .15
11.1 Notice of Destruction . . . . . . . . . . . . . . . . . . . . .15
11.2 Loss Covered by Insurance . . . . . . . . . . . . . . . . . . .15
11.3 Loss Not Covered by Insurance . . . . . . . . . . . . . . . . .15
11.4 Loss Caused by Tenant or Tenant's Parties . . . . . . . . . . .16
11.5 Destruction Near End of Term. . . . . . . . . . . . . . . . . .16
11.6 Destruction of Improvements and Personal Property . . . . . . .16
11.7 Exclusive Remedy. . . . . . . . . . . . . . . . . . . . . . . .16
11.8 Lender Discretion . . . . . . . . . . . . . . . . . . . . . . .16
12. INDEMNITY AND INSURANCE . . . . . . . . . . . . . . . . . . . . . . . .16
12.1 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . .16
12.2 Landlord's Insurance. . . . . . . . . . . . . . . . . . . . . .17
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C> <C>
12.3 Tenant's Insurance Obligations. . . . . . . . . . . . . . . . .17
12.3.1 General Liability Insurance . . . . . . . . . . . . .17
12.3.2 Property Insurance. . . . . . . . . . . . . . . . . .17
12.3.3 Workers' Compensation Insurance . . . . . . . . . . .18
12.4 Evidence of Coverage. . . . . . . . . . . . . . . . . . . . . .18
12.5 Waivers of Subrogation. . . . . . . . . . . . . . . . . . . . .18
13. LANDLORD'S RIGHT OF ACCESS. . . . . . . . . . . . . . . . . . . . . . .18
14. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . .19
14.1 Landlord's Consent. . . . . . . . . . . . . . . . . . . . . . .19
14.2 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
14.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . .19
14.4 Bonus Rent. . . . . . . . . . . . . . . . . . . . . . . . . . .19
14.5 Continuing Tenant Obligations . . . . . . . . . . . . . . . . .20
14.6 Waiver, Default and Consent . . . . . . . . . . . . . . . . . .20
14.7 Restructuring of Business Organizations . . . . . . . . . . . .20
14.8 Assignment of Sublease Rent . . . . . . . . . . . . . . . . . .20
14.9 Assignment in Bankruptcy. . . . . . . . . . . . . . . . . . . .20
14.10 Assumption of Obligations . . . . . . . . . . . . . . . . . . .20
15. CONDEMNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
15.1 Total Taking. . . . . . . . . . . . . . . . . . . . . . . . . .21
15.2 Partial Taking. . . . . . . . . . . . . . . . . . . . . . . . .21
15.3 Condemnation Award. . . . . . . . . . . . . . . . . . . . . . .21
15.4 Exclusive Remedy. . . . . . . . . . . . . . . . . . . . . . . .21
16. SURRENDER AND HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . .21
16.1 Surrender . . . . . . . . . . . . . . . . . . . . . . . . . . .21
16.2 Holding Over. . . . . . . . . . . . . . . . . . . . . . . . . .21
16.3 Entry at End of Term. . . . . . . . . . . . . . . . . . . . . .22
17. QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
18. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . .22
18.1 Failure to Pay Rent . . . . . . . . . . . . . . . . . . . . . .22
18.2 Insolvency. . . . . . . . . . . . . . . . . . . . . . . . . . .22
18.3 Appointment of Receiver . . . . . . . . . . . . . . . . . . . .22
18.4 Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . .22
18.5 Attachment. . . . . . . . . . . . . . . . . . . . . . . . . . .22
18.6 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . .22
18.7 Certificates. . . . . . . . . . . . . . . . . . . . . . . . . .23
18.8 Failure to Discharge Liens. . . . . . . . . . . . . . . . . . .23
18.9 False Financial Statement . . . . . . . . . . . . . . . . . . .23
18.10 Failure to Comply with Lease Terms. . . . . . . . . . . . . . .23
18.11 Guarantor Default . . . . . . . . . . . . . . . . . . . . . . .23
19. LANDLORD'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . .23
19.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . .23
19.2 Continuation of Lease . . . . . . . . . . . . . . . . . . . . .24
19.3 Appointment of Receiver . . . . . . . . . . . . . . . . . . . .24
19.4 Late Charge . . . . . . . . . . . . . . . . . . . . . . . . . .24
19.5 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
19.6 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . .25
19.7 Injunction. . . . . . . . . . . . . . . . . . . . . . . . . . .25
20. TENANT'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . .25
20.1 Landlord's Default. . . . . . . . . . . . . . . . . . . . . . .25
20.2 Tenant's Remedies . . . . . . . . . . . . . . . . . . . . . . .25
20.3 Landlord Default/Self-Help Rights . . . . . . . . . . . . . . .25
20.4 Non-Recourse. . . . . . . . . . . . . . . . . . . . . . . . . .26
20.5 Sale of Premises. . . . . . . . . . . . . . . . . . . . . . . .26
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C> <C>
21. MORTGAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
22. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .26
22.1 Singular and Plural . . . . . . . . . . . . . . . . . . . . . .26
22.2 Interest on Past-Due Obligations. . . . . . . . . . . . . . . .27
22.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . .27
22.4 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . .27
22.5 Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . .27
22.6 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . .27
22.7 Certificates. . . . . . . . . . . . . . . . . . . . . . . . . .27
22.8 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . .27
22.9 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . .27
22.10 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
22.11 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . .28
22.12 Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
22.13 Survival of Obligations . . . . . . . . . . . . . . . . . . . .28
22.14 Severability. . . . . . . . . . . . . . . . . . . . . . . . . .28
22.15 Security Measures . . . . . . . . . . . . . . . . . . . . . . .28
22.16 Easements . . . . . . . . . . . . . . . . . . . . . . . . . . .28
22.17 Multiple Parties. . . . . . . . . . . . . . . . . . . . . . . .29
22.18 Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . . .29
22.19 No Third Party Beneficiaries. . . . . . . . . . . . . . . . . .29
22.20 Effective Date/Nonbinding Offer . . . . . . . . . . . . . . . .29
22.21 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
22.22 Water, Oil and Mineral Rights . . . . . . . . . . . . . . . . .29
22.23 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . .29
22.24 Broker's Fees . . . . . . . . . . . . . . . . . . . . . . . . .30
22.25 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . .30
22.26 Return of Check . . . . . . . . . . . . . . . . . . . . . . . .30
22.27 No Recordation of Lease . . . . . . . . . . . . . . . . . . . .30
22.28 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . .30
22.29 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . .30
22.30 Additional Provisions . . . . . . . . . . . . . . . . . . . . .30
22.31 Waiver of Right to Trial by Jury. . . . . . . . . . . . . . . .30
22.32 Letter of Credit. . . . . . . . . . . . . . . . . . . . . . . .30
</TABLE>
-4-
<PAGE>
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("Amendment") is made and entered into as of
the 15th day of October, 1998, by and between NEWCROW, a California general
partnership ("Landlord"), on the one hand, and eTOYS, INC., a Delaware
corporation ("Tenant"), on the other hand.
RECITALS
A. Pursuant to the Standard Industrial Lease Agreement between
Landlord and Tenant dated June 26, 1998 (the "Lease"), Tenant has leased from
Landlord approximately 49,850 rentable square feet of space commonly known as
6000 Peachtree Street, Commerce, California (the "Premises").
B. Landlord and Tenant desire to modify the Lease to expand the
Premises in accordance with the terms of this Amendment.
C. Unless otherwise defined herein, all capitalized terms used
herein shall have the meanings ascribed to them in the Lease.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. PREMISES. Effective as of the Additional Premises Commencement
Date (as defined below), the "Premises" shall be expanded to also include those
certain premises consisting of nine thousand seven hundred ninety (9,790)
rentable square feet of space commonly known as 6060 Peachtree Street, Commerce,
California and identified on Exhibit "1" attached hereto and made a part hereof
(the "Additional Premises"), resulting in the aggregate rentable square footage
of the Premises as of the Additional Premises Commencement Date being fifty nine
thousand six hundred forty (59,640) rentable square feet. Landlord and Tenant
accept the above measurement of the Additional Premises and agree that it shall
not be remeasured or changed. From and after the Additional Premises
Commencement Date, the term "Premises" shall mean the original Premises plus the
Additional Premises.
2. ADDITIONAL PREMISES COMMENCEMENT DATE. The "Additional Premises
Commencement Date" shall be October 15, 1998, on or before which date Landlord
has or will deliver possession of the Additional Premises to Tenant. To prepare
the Additional Premises for Tenant's occupancy, Landlord has moved the existing
demising wall to the east to incorporate the Additional Premises in the Premises
and demolished the L-shaped wall, as shown on Exhibit "2" attached hereto and
made a part hereof (collectively, "Landlord's
<PAGE>
Work"). Tenant has agreed to pay the existing subtenant occupying a portion of
the Additional Premises the sum of One Thousand Dollars ($1,000) to induce it to
vacate the Additional Premises early.
3. BASE RENT.
(a) Effective as of the Additional Premises Commencement Date
through the end of the twelfth (12th) month of the Term, Base Rent shall be
increased by Three Thousand Nine Hundred Sixteen and 00/100 Dollars ($3,916.00)
per month, resulting in the Base Rent being Twenty Three Thousand Eight Hundred
Fifty Six and 00/100 Dollars ($23,856.00) per month. On or before the
Additional Premises Commencement Date, Tenant shall pay to Landlord the
additional Base Rent for the Additional Premises on a prorated basis for the
period from and including the Additional Premises Commencement Date through the
end of the calendar month in which the Additional Premises Commencement Date
occurs.
(b) Paragraph 2.2 of the Lease is deleted, and the following is
substituted therefor:
"2.2 ADJUSTMENT OF BASE RENT
<TABLE>
<CAPTION>
MONTHS OF TERM BASE RENT
-------------- ---------
<S> <C>
13-24 $24,452.40 per month
25-36 $25,063.71 per month
37-48 $25,690.30 per month
49-60 $26,332.56 per month"
</TABLE>
4. TENANT'S PROPORTIONATE SHARE. Effective as of the Additional
Premises Commencement Date, "Tenant's Proportionate Share" shall increase to
fifty seven and two/one hundredth's percent (57.02%) of the Building, and Tenant
shall be responsible for fifty seven and two/one hundredth's percent (57.02%) of
all Taxes, Landlord's cost of insurance and Operating Expenses pursuant to
Paragraph 2.5 of the Lease.
5. PARKING. Effective as of the Additional Premises Commencement
Date, Item 9 of the Basic Lease Provisions is amended to read as follows:
"9. Parking: 44 automobiles and 12 trucks (Paragraph 3.3)."
6. CONDITION OF ADDITIONAL PREMISES. Tenant acknowledges that it
has inspected and accepts the Additional Premises in their present "as-is,"
"where-is" condition as suitable for the purpose for which the Additional
Premises are leased. Landlord has completed the Landlord's Work. Tenant shall
not be required to bear any of the cost of the Landlord's Work. Tenant will
complete at its expense any lighting and electrical work necessitated by the
movement of the demising wall which is part of the Landlord's Work. Utilities
will be separately metered to the Additional Premises or added to the separate
meters for the Premises.
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<PAGE>
7. DEMOLITION OF EXISTING OFFICE. Tenant shall be permitted to
demolish the existing approximately 800 square foot office in the Additional
Premises. Except as hereafter provided in this Section 7, Tenant shall bear the
cost and expense of such demolition. The terms of Paragraph 7 of the Lease
shall be applicable to Tenant's demolition of the existing office, except that
Landlord hereby approves of the demolition and will not require bonding or plan
or working drawing approval with respect to such demolition work. Unless
Landlord otherwise notifies Tenant, Tenant at its sole expense shall be required
to reconstruct the existing office in the Additional Premises to its original
condition upon the expiration or sooner termination of the Lease, or if Tenant
fails to do so, then Landlord may reconstruct such existing office, and Tenant
shall be required to reimburse to Landlord immediately upon demand the
reasonable, out of pocket expenses paid by Landlord for such reconstruction.
Upon delivery by Tenant to Landlord of a factually correct notice of the
completion of Tenant's demolition of the existing office, Landlord shall give a
credit to Tenant of Two Thousand Dollars ($2,000) against the next monthly
payment of Base Rent becoming due after delivery to Landlord of such notice.
8. BROKER. Tenant and Landlord each represent and warrant to the
other that it has dealt with no broker, agent or other person in connection with
this transaction other than Metrospace Corporation (Matthew Miller) and Trammell
Crow Southern California ("Brokers"), and that, except for Brokers, no broker,
agent or other person which it has dealt with brought about this transaction,
and Tenant and Landlord each hereby agrees to indemnify, defend, protect and
hold the other harmless from and against any claims, losses, liabilities,
demands, costs, expenses or causes of action by any other broker, agent or other
person, claiming any commission or other form of compensation by virtue of
having dealt with the indemnifying party with regard to this transaction.
9. FURTHER ASSURANCES. In addition to the obligations required to
be performed under the Lease, as amended hereby, Landlord and Tenant shall each
perform such other acts, and shall execute, acknowledge and/or deliver such
other instruments, documents and other materials, as may be reasonably required
in order to accomplish the intent and purposes of the Lease, as hereby amended.
10. AUTHORITY. Each party hereby represents and warrants to the
other that it has the due power and authority to enter into this Amendment and
to be bound by the terms hereof.
11. BINDING EFFECT. This Amendment shall be binding upon and inure
to the benefit of Landlord, its successors and assigns and Tenant and its
permitted successors and permitted assigns.
12. ATTORNEYS' FEES. Should any party initiate a legal proceeding
against any other party, including an arbitration, then the prevailing party
shall be entitled to receive reasonable attorneys' fees and costs incurred in
connection with such legal proceeding.
-3-
<PAGE>
13. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument.
14. NO OTHER AMENDMENT. Except as modified by this Amendment, the
provisions of the Lease shall remain unaffected and in full force and effect.
To the extent that any terms or provisions of this Amendment are inconsistent
with any terms or provisions of the Lease, the terms and provisions of this
Amendment shall control.
15. ESTOPPEL. Tenant warrants, represents and certifies to Landlord
that as of the date of this Amendment, to Tenant's actual knowledge,
(a) Landlord is not in default under the Lease, and (b) Tenant does not have any
defenses or offsets to payment of rent and performance of its obligations under
the Lease as and when the same becomes due.
IN WITNESS WHEREOF, this Amendment is executed as of the day and year
aforesaid.
LANDLORD TENANT
NEWCROW, a California general eTOYS, INC., a Delaware corporation
partnership
By: Crow Los Angeles Limited, a Texas By: /s/ Edward C. Lenk
limited partnership, General ---------------------------
Partner Name: Edward C. Lenk
-------------------------
Title: President
---------------
By: /s/ illegible By: /s/ Frank Han
------------------------ ---------------------------
Authorized Agent Name: Frank Han
-------------------------
Title: Secretary
---------------
-4-
<PAGE>
EXHIBIT "1"
ADDITIONAL PREMISES
INTENTIONALLY OMITTED
<PAGE>
EXHIBIT "2"
LANDLORD'S WORK
INTENTIONALLY OMITTED
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "AGREEMENT") is made as of
____________, 199__, by and between eToys Inc., a Delaware corporation (the
"COMPANY"), and _________ (the "INDEMNITEE").
RECITALS
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers and key employees, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance. The Company and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting directors,
officers and key employees to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
Indemnitee does not regard the current protection available as adequate under
the present circumstances, and Indemnitee and agents of the Company may not be
willing to continue to serve as agents of the Company without additional
protection. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, and to indemnify its directors,
officers and key employees so as to provide them with the maximum protection
permitted by law.
AGREEMENT
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
(a) THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
Company, or, with respect to any criminal action or proceeding, that Indemnitee
had reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) MANDATORY PAYMENT OF EXPENSES. To the extent that Indemnitee has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement is intended
to create in Indemnitee any right to continued employment.
3. EXPENSES; INDEMNIFICATION PROCEDURE.
(a) ADVANCEMENT OF EXPENSES. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section l(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in
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<PAGE>
writing as soon as practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company and
shall be given in accordance with the provisions of Section 12(d) below. In
addition, Indemnitee shall give the Company such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
(c) PROCEDURE. Any indemnification and advances provided for in
Section 1 and this Section 3 shall be made no later than twenty (20) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within twenty (20) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) NOTICE TO INSURERS. If, at the time of the receipt of a notice
of a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) SELECTION OF COUNSEL. In the event the Company shall be
obligated under Section 3(a) hereof to pay the expenses of any proceeding
against Indemnitee, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, with counsel approved by Indemnitee, upon the
delivery to Indemnitee of written notice of its election so to do. After
delivery of such notice, approval of such counsel by Indemnitee and the
retention of such counsel
-3-
<PAGE>
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ counsel in any such proceeding at Indemnitee's expense; and
(ii) if (A) the employment of counsel by Indemnitee has been previously
authorized by the Company, (B) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense or (C) the Company shall not, in fact, have employed
counsel to assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(a) SCOPE. Notwithstanding any other provision of this Agreement,
the Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be deemed to be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) NONEXCLUSIVITY. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he or she may have ceased
to serve in any such capacity at the time of any action, suit or other covered
proceeding.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise.
-4-
<PAGE>
For example, the Company and Indemnitee acknowledge that the Securities and
Exchange Commission (the "SEC") has taken the position that indemnification is
not permissible for liabilities arising under certain federal securities laws,
and federal legislation prohibits indemnification for certain ERISA violations.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
-5-
<PAGE>
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) INSURED CLAIMS. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, references to the "COMPANY" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "OTHER ENTERPRISES"
shall include employee benefit plans; references to "FINES" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "SERVING AT THE REQUEST OF THE COMPANY" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "NOT
OPPOSED TO THE BEST INTERESTS OF THE COMPANY" as referred to in this Agreement.
11. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee
-6-
<PAGE>
with respect to such action, unless as a part of such action, the court of
competent jurisdiction determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the
Company under this Agreement or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses,
including attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action were made in bad faith or were
frivolous.
12. 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
Delaware, without giving effect to principles of conflict of law.
(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) 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.
(d) NOTICES. Any notice, demand or request required or permitted to
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram 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 as
set forth below or as subsequently modified by written notice.
(e) 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.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of
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<PAGE>
Indemnitee, who shall execute all documents required and shall do all acts that
may be necessary to secure such rights and to enable the Company to effectively
bring suit to enforce such rights.
[Signature Page Follows]
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<PAGE>
The parties hereto have executed this
Agreement as of the day and year set
forth on the first page of this
Agreement.
ETOYS INC.
By:
------------------------------
Title:
------------------------------
Address: 1640 Fifth Street, Suite 124
Santa Monica, CA 90401
AGREED TO AND ACCEPTED:
INDEMNITEE:
- ---------------------------------------
(Signature)
Address:
------------------------------
------------------------------
-9-
<PAGE>
EXHIBIT 10.19
December 5, 1998
John Hnanicek
2570 S.W. Beacon Hill Drive
West Linn, Oregon 97068
Dear Candidate:
eToys Inc. (the "Company") is pleased to offer you employment on the
following terms:
POSITION. You will serve in a full-time capacity as Chief Information
Officer of the Company. You will report to the Company's Chief Executive
Officer. You will be encouraged to participate in meetings of the Company's
Board of Directors (the "Board") at the discretion of the Company's Chief
Executive Officer. Your start date will be mutually agreed by you and the
Company but will be no later than Monday January 18th, 1999.
CASH COMPENSATION. You will be paid a monthly salary of not less than
$12,500.00, which is equivalent to $150,000 on an annual basis, payable in
monthly installments in accordance with the Company's standard payroll
practices for salaried employees. In addition, you will receive a signing
bonus of $60,000 payable in a lump sum in cash on or about your first day of
employment with the Company. You will vest with respect to your signing
bonus in 12 equal monthly installments for each of the 12 months during which
you continue to be employed by the Company following the commencement of your
employment. If your employment with the Company is terminated prior to the
end of this 12th month period, you will be obligated to refund to the Company
the unvested portion of your signing bonus. Your cash compensation will be
reviewed annually by the Board.
STOCK OPTIONS. In connection with the commencement of your employment, the
Company will recommend that the Board of Directors grant you stock options to
purchase 200,000 shares of the Company's Common Stock. The exercise price
will be equal to the fair market value of the Common Stock on the date of
grant. The option will be an incentive stock option to the maximum extent
permitted by applicable tax law and will be subject to the terms and
conditions applicable to options granted under the Company's 1997 Stock Plan,
as described in that Plan and the applicable stock option agreement
(including customary transfer and "lock-up" restrictions). The option will
be immediately exercisable, but the purchased shares will be subject to
repurchase by the Company at the exercise price in the event that your
employment terminates before you vest in the shares. You will vest in 1/4th
of the option shares after twelve months of employment, and the balance will
vest in monthly installments over the next 36 months of employment, as
described in the applicable stock option agreement. If you are terminated by
the Company without Cause within the first 6 months of employment, you will
vest a number of shares equivalent to 1/8th of the option shares. If you are
terminated by the Company without Cause within the first 6-12 months of
employment, you will vest a number of shares equivalent to 1/48th of the
option shares for each month of employment.
"Cause" means (a) willful and repeated failure to comply with the lawful
directions of the Board, (b) gross negligence or willful misconduct in the
performance of your duties to the Company, (c) commission of any act of fraud
against, or the misappropriation of material property belonging to, the
Company or (d)
1
<PAGE>
conviction of a crime that is materially injurious to the business or
reputation of the Company, in each case as determined in good faith by the
Board.
BENEFITS.
a. INSURANCE BENEFITS. The Company will provide you with standard medical and
dental insurance benefits. In addition, the Company currently indemnifies
all officers and directors to the maximum extent permitted by law, and you
will be requested to enter into the Company's standard form of
Indemnification Agreement giving you such protection. Pursuant to the
Indemnification Agreement, the Company will agree to advance any expenses
for which indemnification is available to the extent allowed by applicable
law.
b. VACATION. You will be entitled to 2 weeks paid vacation per year.
MOVING ASSISTANCE. The Company will, on a basis mutually agreed to by you
and the Company, enter into a relocation agreement with a relocation
specialist to assist in the sale of your current residence. In addition, the
company will pay a moving company to transport your belongings to the Los
Angeles area. The Company will also pay for two months of rent, at a
reasonable and mutually agreed monthly rental rate, toward temporary housing.
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company
employees, you will be required, as a condition to your employment with the
Company, to sign the Company's standard Employee Information and Inventions
Agreement, a copy of which is attached hereto as Exhibit A.
PERIOD OF EMPLOYMENT. Your employment with the Company will be "at will",
meaning that either you or the Company will be entitled to terminate your
employment at any time and for any reason, with or without cause. Any
contrary representations which may have been made to you are superseded by
this offer. This is the full and complete agreement between you and the
Company on this term. Although your job duties, title, compensation and
benefits, as well as the Company's personnel policies and procedures, may
change from time to time, the "at will" nature of your employment may only be
changed in an express written agreement signed by you and a duly authorized
officer of the Company.
PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be
required to provide to the Company documentary evidence of your identity and
eligibility for employment in the United States. Such documentation must be
provided to us within three (3) business days of your date of hire, or our
employment relationship with you may be terminated and, in such event, you
would not be entitled to the severance payment set forth in the preceding
paragraph.
WITHHOLDING TAXES. All forms of cash compensation referred to in this letter
are subject to reduction to reflect applicable withholding and payroll taxes.
CONFIDENTIALITY OF TERMS: You agree to follow the Company's strict policy
that employees must not disclose, either directly or indirectly, any
information, including any of the terms of this agreement, regarding salary,
bonuses, or stock purchase or option allocations to any person, including
other employees of the Company; provided, however, that you may discuss such
terms with members of your immediate family and any legal, tax or accounting
specialists who provide you with individual legal, tax or accounting advice.
ENTIRE AGREEMENT. This letter and the Exhibit attached hereto contain all of
the terms of your employment with the Company and supersede any prior
understandings or agreements, whether oral or written, between you and the
Company.
AMENDMENT AND GOVERNING LAW. This letter agreement may not be amended or
modified except by an express written agreement signed by you and a duly
authorized officer of the Company. The terms of this letter agreement and
the resolution of any disputes will be governed by California law.
We hope that you find the foregoing terms acceptable. You may indicate your
agreement with these terms and accept this offer by signing and dating both
the enclosed duplicate original of this letter and the
2
<PAGE>
enclosed Employee Information and Inventions Agreement and returning them to
me. This offer of employment is contingent upon the satisfactory completion
of reference checks regarding you past employment. As required by law, your
employment with the Company is also contingent upon your providing legal
proof of your identity and authorization to work in the United States.
We look forward to your decision to join eToys Inc. no later than December
7th, 1998 at 5 p.m. Pacific Standard Time.
Very truly yours,
By: /s/ TOBY LENK
--------------------------
Toby Lenk
Chief Executive Officer
eToys Inc.
I have read and accept this employment offer:
/s/ John R. Hnanicek
Signature of Candidate
Dated December 5, 1998
3
<PAGE>
[LETTERHEAD]
December 28, 1998
Lou Zambello
50 Woodland Road
Pownal, Maine 04609
Dear Candidate:
eToys Inc. (the "Company") is pleased to offer you employment on the
following terms:
POSITION. You will serve in a full-time capacity as Senior Vice President of
Operations of the Company. You will report to the Company's Chief Executive
Officer. You will be encouraged to participate in meetings of the Company's
Board of Directors (the "Board") at the discretion of the Company's Chief
Executive Officer. Your start date will be December 31st, 1998.
CASH COMPENSATION. You will be paid a monthly salary of not less than
$16,667.00, which is equivalent to $200,000 on an annual basis, payable in
monthly installments in accordance with the Company's standard payroll
practices for salaried employees. In addition, you will receive a signing
bonus of $115,000 payable on a schedule to be mutually agreed to by you and
the Company, but in no case later than January 31st, 2000. You will vest
with respect to your signing bonus in 12 equal monthly installments for each
of the 12 months during which you continue to be employed by the Company
following the commencement of your employment. If the Company terminates
your employment for any reason, with or without cause (see definition of
"cause" below) prior to the end of this 12 month period, or if you end your
employment with the Company, you will be obligated to refund to the Company
the unvested portion of your signing bonus. If the Company terminates your
employment without cause within the first 12 months of your employment, you
will receive a severance payment of $100,000, which is equivalent to 6 months
of salary. Your cash compensation will be reviewed annually by the Board.
STOCK OPTIONS. In connection with the commencement of your employment, the
Company will recommend that the Board of Directors grant you stock options to
purchase 275,000 shares of the Company's Common Stock. The exercise price
will be equal to the fair market value of the Common Stock on the date of
grant. The option will be an incentive stock option to the maximum extent
permitted by applicable tax law and will be subject to the terms and
conditions applicable to options granted under the Company's 1997 Stock Plan,
as described in that Plan and the applicable stock option agreement
(including customary transfer and "lock-up" restrictions.) The option will
be immediately exercisable, but the purchased shares will be subject to
repurchase by the Company at the exercise price in the event that your
employment terminates before you vest in the shares. You will vest in 1/4th
of the option shares after twelve months of employment, and the balance will
vest in monthly installments over the next 36 months of employment, as
described in the applicable stock option agreement. If you are terminated by
the Company without Cause within the first 6 months of employment, you will
vest a number of shares equivalent to 1/8th of the option shares. If you are
terminated by the Company without Cause within the first 6-12 months of
employment, you will vest a number of shares equivalent to 1/48th of the
option shares for each month of employment. If there is a change of control
of the Company during the two year period immediately following the date of
the commencement of your employment with the Company, you will vest in an
additional number of unvested option shares equal to the number in which you
would have vested if your employment had continued through the expiration of
such two year period.
1
<PAGE>
"Cause" means (a) willful and repeated failure to comply with the lawful
directions of the Board, (b) gross negligence or willful misconduct in the
performance of your duties to the Company, (c) commission of any act of fraud
against, or the misappropriation of material property belonging to, the
Company or (d) conviction of a crime that is materially injurious to the
business or reputation of the Company, in each case as determined in good
faith by the Board.
BENEFITS.
a. INSURANCE BENEFITS. The Company will provide you with standard medical
and dental insurance benefits. In addition, the Company currently
indemnifies all officers and directors to the maximum extent permitted
by law, and you will be requested to enter into the Company's standard
form of Indemnification Agreement giving you such protection. Pursuant
to the Indemnification Agreement, the Company will agree to advance any
expenses for which indemnification is available to the extent allowed
by applicable law.
b. VACATION. You will be entitled to 3 weeks paid vacation per year
MOVING ASSISTANCE. For the first 6 months of your employment, it is
anticipated that your family will remain in Maine, until the end of the
school year. After 6 months, it is expected that you and your family will
move to the Los Angeles area. The company will pay a moving company to
transport your belongings to the Los Angeles area.
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company
employees, you will be required, as a condition to your employment with the
Company, to sign the Company's standard Employee Information and Inventions
Agreement, a copy of which is attached hereto as Exhibit A.
PERIOD OF EMPLOYMENT. Your employment with the Company will be "at will",
meaning that either you or the Company will be entitled to terminate your
employment at any time and for any reason, with or without cause. Any
contrary representations which may have been made to you are superseded by
this offer. This is the full and complete agreement between you and the
Company on this term. Although your job duties, title, compensation and
benefits, as well as the Company's personnel policies and procedures, may
change from time to time, the "at will" nature of your employment may only be
changed in an express written agreement signed by you and a duly authorized
officer of the Company.
PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be
required to provide to the Company documentary evidence of your identity and
eligibility for employment in the United States. Such documentation must be
provided to us within three (3) business days of your date of hire, or our
employment relationship with you may be terminated and, in such event, you
would not be entitled to the severance payment set forth in the preceding
paragraph.
WITHHOLDING TAXES. All forms of cash compensation referred to in this letter
are subject to reduction to reflect applicable withholding and payroll taxes.
CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy
that employees must not disclose, either directly or indirectly, any
information, including any of the terms of this agreement, regarding salary,
bonuses, or stock purchase or option allocations to any person, including
other employees of the Company; provided, however, that you may discuss such
terms with members of your immediate family and any legal, tax, or accounting
specialists who provide you with individual legal, tax or accounting advice.
ENTIRE AGREEMENT. This letter and the Exhibit attached hereto contain all
of the terms of your employment with the Company and supersede any prior
understandings or agreements, whether oral or written, between you and the
Company.
AMENDMENT AND GOVERNING LAW. This letter agreement may not be amended or
modified except by an express written agreement signed by you and a duly
authorized officer of the Company. The terms of this letter agreement and
the resolution of any disputes will be governed by California law.
2
<PAGE>
We hope that you find the foregoing terms acceptable. You may indicate your
agreement with these terms and accept this offer by signing and dating both
the enclosed duplicate original of this letter and the enclosed Employee
Information and Inventions Agreement and returning them to me. This offer of
employment is contingent upon the satisfactory completion of reference checks
regarding you past employment. As required by law, your employment with the
Company is also contingent upon your providing legal proof of your identity
and authorization to work in the United States.
We look forward to your decision to join eToys Inc. no later than December
29th, 1998 at 5 p.m. Pacific Standard Time.
Very truly yours,
/s/ Toby Lenk
By:
Toby Lenk
Chief Executive Officer
eToys Inc.
I have read and accept this employment offer:
/s/ Lou Zambello
Signature of Candidate
Dated December 29th, 1998
3
<PAGE>
[LETTERHEAD]
January 12, 1999
Steven J. Schoch
24445 Valley Street
Newhall, California 91321
Dear Candidate:
eToys Inc. (the "Company") is pleased to offer you employment on the
following terms:
POSITION. You will serve in a full-time capacity as Senior Vice President and
Chief Financial Officer of the Company. You will report to the Company's
Chief Executive Officer. You will be encouraged to participate in meetings of
the Company's Board of Directors (the "Board") at the discretion of the
Company's Chief Executive Officer. Your start date will be January 31st, 1999.
CASH COMPENSATION. You will be paid a monthly salary of not less than
$10,416.67, which is equivalent to $125,000 on an annual basis, payable in
monthly installments in accordance with the Company's standard payroll
practices for salaried employees. In addition, you will receive a base
signing bonus of $25,000 payable within your first week of employment. In
addition, in the event that your previous employer does not pay you your
expected $200,000 cash bonus for fiscal '98 due to your departure, you will
be paid an additional signing bonus of up to 50% of your lost fiscal '98 cash
bonus, but in no case greater than $100,000. In the event your employer does
pay you your fiscal '98 cash bonus, you will not receive an additional
signing bonus. You will vest with respect to your base and additional signing
bonus in 12 equal monthly installments for each of the 12 months during which
you continue to be employed by the Company following the commencement of your
employment. If the Company terminates your employment for any reason, with or
without cause (see definition of "cause" below) prior to the end of this 12
month period, or if you end your employment with the Company, you will be
obligated to refund to the Company the unvested portion of your base and
additional signing bonus. If the Company terminates your employment without
cause within the first 12 months of your employment, you will receive a
severance payment of $93,750, which is equivalent to 9 months of salary. Your
cash compensation will be reviewed annually by the Board.
STOCK OPTIONS. In connection with the commencement of your employment, the
Company will recommend that the Board of Directors grant you stock options to
purchase 250,000 shares of the Company's Common Stock. The exercise price
will be equal to the fair market value of the Common Stock on the date of
grant. The option will be an incentive stock option to the maximum extent
permitted by applicable tax law and will be subject to the terms and
conditions applicable to options granted under the Company's 1997 Stock Plan,
as described in that Plan and the applicable stock option agreement
(including customary transfer and "lock-up" restrictions). The option will be
immediately exercisable, but the purchased shares will be subject to
repurchase by the Company at the exercise price in the event that your
employment terminates before you vest in the shares. You will vest in 1/4th
of the option shares after twelve months of employment, and the balance will
vest in monthly installments over the next 36 months of employment, as
described in the applicable stock option agreement. If you are terminated by
the
1
<PAGE>
Company without Cause within the first 6 months of employment, you will vest
a number of shares equivalent to 1/8th of the option shares. If you are
terminated by the Company without Cause within the first 6-12 months of
employment, you will vest a number of shares equivalent to 1/48th of the
option shares for each month of employment. If there is a change of control
of the Company during the eighteen month period immediately following the
date of the commencement of your employment with the Company, you will vest
in an additional number of unvested option shares equal to the number in
which you would have vested if your employment had continued through the
expiration of such eighteen month period.
"Cause" means (a) willful and repeated failure to comply with the lawful
directions of the Board, (b) gross negligence or willful misconduct in the
performance of your duties to the Company, (c) commission of any act of fraud
against, or the misappropriation of material property belonging to, the
Company or (d) conviction of a crime that is materially injurious to the
business or reputation of the Company, in each case as determined in good
faith by the Board.
BENEFITS.
a. INSURANCE BENEFITS. The Company will provide you with standard medical and
dental insurance benefits. In addition, the Company currently indemnifies all
officers and directors to the maximum extent permitted by law, and you will
be requested to enter into the Company's standard form of Indemnification
Agreement giving you such protection. Pursuant to the Indemnification
Agreement, the Company will agree to advance any expenses for which
indemnification is available to the extent allowed by applicable law.
b. VACATION. You will be entitled to 2 weeks paid vacation per year.
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company employees,
you will be required, as a condition to your employment with the Company, to
sign the Company's standard Employee Information and Inventions Agreement, a
copy of which is attached hereto as Exhibit A.
PERIOD OF EMPLOYMENT. Your employment with the Company will be "at will",
meaning that either you or the Company will be entitled to terminate your
employment at any time and for any reason, with or without cause. Any
contrary representations which may have been made to you are superseded by
this offer. This is the full and complete agreement between you and the
Company on this term. Although your job duties, title, compensation and
benefits, as well as the Company's personnel policies and procedures, may
change from time to time, the "at will" nature of your employment may only be
changed in an express written agreement signed by you and a duly authorized
officer of the Company.
PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be
required to provide to the Company documentary evidence of your identity and
eligibility for employment in the United States. Such documentation must be
provided to us within three (3) business days of your date of hire, or our
employment relationship with you may be terminated and, in such event, you
would not be entitled to the severance payment set forth in the preceding
paragraph.
WITHHOLDING TAXES. All forms of cash compensation referred to in this letter
are subject to reduction to reflect applicable withholding and payroll taxes.
CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy
that employees must not disclose, either directly or indirectly, any
information, including any of the terms of this agreement, regarding salary,
bonuses, or stock purchase or option allocations to any person, including
other employees of the Company; provided, however, that you may discuss such
terms with members of your immediate family and any legal, tax or accounting
specialists who provide you with individual legal, tax or accounting advice.
ENTIRE AGREEMENT. This letter and the Exhibit attached hereto contain all of
the terms of your employment with the Company and supersede any prior
understandings or agreements, whether oral or written, between you and the
Company.
2
<PAGE>
We hope that you find the foregoing terms acceptable. You may indicate your
agreement with these terms and accept this offer by signing and dating both
the enclosed duplicate original of this letter and the enclosed Employee
Information and Inventions Agreement and returning them to me. This offer of
employment is contingent upon the satisfactory completion of reference checks
regarding your past employment. As required by law, your employment with the
Company is also contingent upon your providing legal proof of your identity
and authorization to work in the United States.
We look forward to your decision to join eToys Inc. no later than January
20th, 1999 at 5 p.m. Pacific Standard Time.
Very truly yours,
/s/ Toby Lenk
By:
Toby Lenk
Chief Executive Officer
eToys Inc.
I have read and accept this employment offer:
/s/ Steven J. Schoch
Signature of Candidate
Dated January 10, 1999
3
<PAGE>
M A S T E R L E A S E A G R E E M E N T
MASTER LEASE AGREEMENT (the "Master Lease") dated December 24, 1998 by and
between COMDISCO, INC. ("Lessor") and ETOYS INC. ("Lessee").
IN CONSIDERATION of the mutual agreements described below, the parties agree as
follows (all capitalized terms are defined in Section 14.18):
1. PROPERTY LEASED.
Lessor leases to Lessee all of the Equipment described on each Summary Equipment
Schedule. In the event of a conflict, the terms of the applicable Schedule
prevail over this Master Lease.
2. TERM.
On the Commencement Date, Lessee will be deemed to accept the Equipment, will be
bound to its rental obligations for each item of Equipment and the term of a
Summary Equipment Schedule will begin and continue through the Initial Term and
thereafter until terminated by either party upon prior written notice received
during the Notice Period. No termination may be effective prior to the
expiration of the Initial Term.
3. RENT AND PAYMENT.
Rent is due and payable in advance on the first day of each Rent Interval at the
address specified in Lessor's invoice. Interim Rent is due and payable when
invoiced. If any payment is not made when due, Lessee will pay a Late Charge on
the overdue amount. Upon Lessee's execution of each Schedule, Lessee will pay
Lessor the Advance specified on the Schedule. The Advance will be credited
towards the final Rent payment if Lessee is not then in default. No interest
will be paid on the Advance.
4. SELECTION; WARRANTY AND DISCLAIMER OF WARRANTIES.
4.1 SELECTION. Lessee acknowledges that it has selected the Equipment and
disclaims any reliance upon statements made by the Lessor, other than as set
forth in the Schedule.
4.2 WARRANTY AND DISCLAIMER OF WARRANTIES. Lessor warrants to Lessee that, so
long as Lessee is not in default, Lessor will not disturb Lessee's quiet and
peaceful possession, and unrestricted use of the Equipment. To the extent
permitted by the manufacturer, Lessor assigns to Lessee during the term of the
Summary Equipment Schedule any manufacturer's warranties for the Equipment.
LESSOR MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER,
INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT OR ITS
FITNESS FOR A PARTICULAR PURPOSE. Lessor is not responsible for any liability,
claim, loss, damage or expense of any kind (including strict liability in tort)
caused by the Equipment except for any loss or damage caused by the willful
misconduct or negligent acts of Lessor. In no event is Lessor responsible for
special, incidental or consequential damages.
5. TITLE; RELOCATION OR SUBLEASE; AND ASSIGNMENT.
5.1 TITLE. Lessee holds the Equipment subject and subordinate to the rights of
the Owner, Lessor, any Assignee and any Secured Party. Lessee authorizes Lessor,
as Lessee's agent, and at Lessor's expense, to prepare, execute and file in
Lessee's name precautionary Uniform Commercial Code financing statements showing
the interest of the Owner, Lessor, and any Assignee or Secured Party in the
Equipment and to insert serial numbers in Summary Equipment Schedules as
appropriate. Lessee will, at its expense, keep the Equipment free and clear from
any liens or encumbrances of any kind (except any caused by Lessor) and will
indemnify and hold the Owner, Lessor, any Assignee and Secured Party harmless
from and against any loss caused by Lessee's failure to do so, except where such
is caused by Lessor.
5.2 RELOCATION OR SUBLEASE. Upon prior written notice, Lessee may relocate
Equipment to any location within the continental United States provided (i) the
Equipment will not be used by an entity exempt from federal income tax, and (ii)
all additional costs (including any administrative fees, additional taxes and
insurance coverage) are reconciled and promptly paid by Lessee.
Lessee may sublease the Equipment upon the reasonable consent of the Lessor and
the Secured Party. Such consent to sublease will be granted if: (i) Lessee meets
the relocation requirements set out above, (ii) the sublease is expressly
subject and subordinate to the terms of the Schedule, (iii) Lessee assigns its
rights in the sublease to Lessor and the Secured Party as additional collateral
and security, (iv) Lessee's obligation to maintain and insure the Equipment is
not altered, (v) all financing statements required to continue the Secured
Party's prior perfected security interest are filed, and (vi) Lessee executes
sublease documents acceptable to Lessor.
No relocation or sublease will relieve Lessee from any of its obligations under
this Master Lease and the relevant Schedule.
5.3 ASSIGNMENT BY LESSOR. The terms and conditions of each Schedule have been
fixed by Lessor in order to permit Lessor to sell and/or assign or transfer its
interest or grant a security interest in each Schedule and/or the Equipment to a
Secured Party or Assignee. In that event, the term Lessor will mean the Assignee
and any Secured Party. However, any assignment, sale, or other transfer by
Lessor will not relieve Lessor of its obligations to Lessee and will not
materially change Lessee's duties or materially increase the burdens or risks
imposed on Lessee. The Lessee consents to and will acknowledge such assignments
in a written notice given to Lessee. Lessee also agrees that:
(a) The Secured Party will be entitled to exercise all of Lessor's rights,
but will not be obligated to perform any of the obligations of Lessor. The
Secured Party will not disturb Lessee's quiet and peaceful possession and
unrestricted use of the Equipment so long as Lessee is not in default and the
Secured Party continues to receive all Rent payable under the Schedule; and
(b) Lessee will pay all Rent and all other amounts payable to the Secured
Party, despite any defense or claim which it has against Lessor. Lessee reserves
its right to have recourse directly against Lessor for any defense or claim;
(c) Subject to and without impairment of Lessee's leasehold rights in the
Equipment, Lessee holds the Equipment for the Secured Party to the extent of the
Secured Party's rights in that Equipment.
6. NET LEASE; TAXES AND FEES.
6.1 NET LEASE. Each Summary Equipment Schedule constitutes a net lease. Lessee's
obligation to pay Rent and all other amounts due hereunder is absolute and
unconditional and is not subject to any abatement, reduction, set-off, defense,
counterclaim, interruption, deferment or recoupment for any reason whatsoever.
6.2 TAXES AND FEES. Lessee will pay when due or reimburse Lessor for all taxes,
fees or any other charges (together with any related interest or penalties not
arising from the negligence of Lessor) accrued for or arising during the term of
each Summary Equipment Schedule against Lessor, Lessee or the Equipment by any
governmental authority (except only Federal, state, local and franchise taxes on
the capital or the net income of Lessor). Lessor will file all personal property
tax returns for the Equipment and pay all such property taxes due. Lessee will
reimburse Lessor for property taxes within thirty (30) days of receipt of an
invoice.
7. CARE, USE AND MAINTENANCE; INSPECTION BY LESSOR.
7.1 CARE, USE AND MAINTENANCE. Lessee will maintain the Equipment in good
operating order and appearance, protect the Equipment from deterioration, other
than normal wear and tear, and will not use the Equipment for any purpose other
than that for which it was designed. If commercially available and considered
common business practice for each item of Equipment, Lessee will maintain in
force a standard maintenance contract with the manufacturer of the Equipment, or
another party acceptable to Lessor, and will provide Lessor with a complete copy
of that contract. If Lessee has the Equipment maintained by a party other than
the manufacturer or self maintains, Lessee agrees to pay any costs necessary for
the manufacturer to bring the Equipment to then current release, revision and
engineering change levels, and to re-certify the Equipment as eligible for
manufacturer's maintenance at the expiration of the lease term, provided
re-certification is available and is required by Lessor. The lease term will
continue upon the same terms and conditions until recertification has been
obtained.
7.2 INSPECTION BY LESSOR. Upon reasonable advance notice, Lessee, during
reasonable business hours and subject to Lessee's security requirements, will
make the Equipment and its related log and maintenance records available to
Lessor for inspection.
8. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee hereby represents, warrants
and covenants that with respect to the Master Lease and each Schedule executed
hereunder:
(a) The Lessee is a corporation duly organized and validly existing in good
standing under the laws of the jurisdiction of its incorporation, is duly
qualified to do business in each jurisdiction (including the jurisdiction where
the Equipment is, or is to be, located) where its ownership or lease of property
or the conduct of its business requires such qualification, except for where
such lack of qualification would not have a material adverse effect on the
Company's business; and has full corporate power and authority to hold property
under the Master Lease and each Schedule and to enter into and perform its
obligations under the Master Lease and each Schedule.
(b) The execution and delivery by the Lessee of the Master Lease and each
Schedule and its performance thereunder have been duly authorized by all
necessary corporate action on the part of the Lessee, and the Master Lease and
each Schedule are not inconsistent with the Lessee's Articles of Incorporation
or Bylaws, do not
- 1 -
<PAGE>
contravene any law or governmental rule, regulation or order applicable to it,
do not and will not contravene any provision of, or constitute a default under,
any indenture, mortgage, contract or other instrument to which it is a party or
by which it is bound, and the Master Lease and each Schedule constitute legal,
valid and binding agreements of the Lessee, enforceable in accordance with their
terms, subject to the effect of applicable bankruptcy and other similar laws
affecting the rights of creditors generally and rules of law concerning
equitable remedies.
(c) There are no actions, suits, proceedings or patent claims pending or, to
the knowledge of the Lessee, threatened against or affecting the Lessee in any
court or before any governmental commission, board or authority which, if
adversely determined, will have a material adverse effect on the ability of the
Lessee to perform its obligations under the Master Lease and each Schedule.
(d) The Equipment is personal property and when subjected to use by the
Lessee will not be or become fixtures under applicable law.
(e) The Lessee has no material liabilities or obligations, absolute or
contingent (individually or in the aggregate), except the liabilities and
obligations of the Lessee as set forth in the Financial Statements and
liabilities and obligations which have occurred in the ordinary course of
business, and which have not been, in any case or in the aggregate, materially
adverse to Lessee's ongoing business.
(f) To the best of the Lessee's knowledge, the Lessee owns, possesses, has
access to, or can become licensed on reasonable terms under all patents, patent
applications, trademarks, trade names, inventions, franchises, licenses,
permits, computer software and copyrights necessary for the operations of its
business as now conducted, with no known infringement of, or conflict with, the
rights of others.
(g) All material contracts, agreements and instruments to which the Lessee is
a party are in full force and effect in all material respects, and are valid,
binding and enforceable by the Lessee in accordance with their respective terms,
subject to the effect of applicable bankruptcy and other similar laws affecting
the rights of creditors generally, and rules of law concerning equitable
remedies.
9. DELIVERY AND RETURN OF EQUIPMENT.
Lessee hereby assumes the full expense of transportation and in-transit
insurance to Lessee's premises and installation thereat of the Equipment. Upon
termination (by expiration or otherwise) of each Summary Equipment Schedule,
Lessee shall, pursuant to Lessor's instructions and at Lessee's full expense
(including, without limitation, expenses of transportation and in-transit
insurance), return the Equipment to Lessor in the same operating order, repair,
condition and appearance as when received, less normal depreciation and wear and
tear. Lessee shall return the Equipment to Lessor at 6111 North River Road,
Rosemont, Illinois 60018 or at such other address within the continental United
States as directed by Lessor, provided, however, that Lessee's expense shall be
limited to the cost of returning the Equipment to Lessor's address as set forth
herein. During the period subsequent to receipt of a notice under Section 2,
Lessor may demonstrate the Equipment's operation in place and Lessee will supply
any of its personnel as may reasonably be required to assist in the
demonstrations.
10. LABELING.
Upon request, Lessee will mark the Equipment indicating Lessor's interest with
labels provided by Lessor. Lessee will keep all Equipment free from any other
marking or labeling which might be interpreted as a claim of ownership.
11. INDEMNITY.
With regard to bodily injury and property damage liability only, Lessee will
indemnify and hold Lessor, any Assignee and any Secured Party harmless from and
against any and all claims, costs, expenses, damages and liabilities, including
reasonable attorneys' fees, arising out of the ownership (for strict liability
in tort only), selection, possession, leasing, operation, control, use,
maintenance, delivery, return or other disposition of the Equipment during the
term of this Master Lease or until Lessee's obligations under the Master Lease
terminate. However, Lessee is not responsible to a party indemnified hereunder
for any claims, costs, expenses, damages and liabilities occasioned by the
negligent acts of such indemnified party. Lessee agrees to carry bodily injury
and property damage liability insurance during the term of the Master Lease in
amounts and against risks customarily insured against by the Lessee on equipment
owned by it. Any amounts received by Lessor under that insurance will be
credited against Lessee's obligations under this Section.
12. RISK OF LOSS.
Effective upon delivery and until the Equipment is returned, Lessee relieves
Lessor of responsibility for all risks of physical damage to or loss or
destruction of the Equipment. Lessee will carry casualty insurance for each item
of Equipment in an amount not less than the Casualty Value. All policies for
such insurance will name the Lessor and any Secured Party as additional insured
and as loss payee, and will provide for at least thirty (30) days prior written
notice to the Lessor of cancellation or expiration, and will insure Lessor's
interests regardless of any breach or violation by Lessee of any representation,
warranty or condition contained in such policies and will be primary without
right of contribution from any insurance effected by Lessor. Upon the execution
of any Schedule, the Lessee will furnish appropriate evidence of such insurance
acceptable to Lessor.
Lessee will promptly repair any damaged item of Equipment unless such Equipment
has suffered a Casualty Loss. Within fifteen (15) days of a Casualty Loss,
Lessee will provide written notice of that loss to Lessor and Lessee will, at
Lessee's option, either (a) replace the item of Equipment with Like Equipment
and marketable title to the Like Equipment will automatically vest in Lessor or
(b) pay the Casualty Value and after that payment and the payment of all other
amounts due and owing with respect to that item of Equipment, Lessee's
obligation to pay further Rent for the item of Equipment will cease.
13. DEFAULT, REMEDIES AND MITIGATION.
13.1 DEFAULT. The occurrence of any one or more of the following Events of
Default constitutes a default under a Summary Equipment Schedule:
(a) Lessee's failure to pay Rent or other amounts payable by Lessee when due
if that failure continues for five (5) business days after written notice; or
(b) Lessee's failure to perform any other term or condition of the Schedule
or the material inaccuracy of any representation or warranty made by the Lessee
in the Schedule or in any document or certificate furnished to the Lessor
hereunder if that failure or inaccuracy continues for ten (10) business days
after written notice; or
(c) An assignment by Lessee for the benefit of its creditors, the failure by
Lessee to pay its debts when due, the insolvency of Lessee, the filing by Lessee
or the filing against Lessee of any petition under any bankruptcy or insolvency
law or for the appointment of a trustee or other officer with similar powers,
the adjudication of Lessee as insolvent, the liquidation of Lessee, or the
taking of any action for the purpose of the foregoing; or
(d) The occurrence of an Event of Default under any Schedule, Summary
Equipment Schedule or other agreement between Lessee and Lessor or its Assignee
or Secured Party.
13.2 REMEDIES. Upon the occurrence of any of the above Events of Default,
Lessor, at its option, may:
(a) enforce Lessee's performance of the provisions of the applicable Schedule
by appropriate court action in law or in equity;
(b) recover from Lessee any damages and or expenses, including Default Costs;
(c) with notice and demand, recover all sums due and accelerate and recover
the present value of the remaining payment stream of all Rent due under the
defaulted Schedule (discounted at the same rate of interest at which such
defaulted Schedule was discounted with a Secured Party plus any prepayment fees
charged to Lessor by the Secured Party or, if there is no Secured Party, then
discounted at 6%) together with all Rent and other amounts currently due as
liquidated damages and not as a penalty;
(d) with notice and process of law and in compliance with Lessee's security
requirements, Lessor may enter on Lessee's premises to remove and repossess the
Equipment without being liable to Lessee for damages due to the repossession,
except those resulting from Lessor's, its assignees', agents' or
representatives' negligence; and
(e) pursue any other remedy permitted by law or equity.
The above remedies, in Lessor's discretion and to the extent permitted by law,
are cumulative and may be exercised successively or concurrently.
13.3 MITIGATION. Upon return of the Equipment pursuant to the terms of Section
13.2, Lessor will use its best efforts in accordance with its normal business
procedures (and without obligation to give any priority to such Equipment) to
mitigate Lessor's damages as described below. EXCEPT AS SET FORTH IN THIS
SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE
OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY ANY OF
LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. Lessor may sell, lease or otherwise
dispose of all or any part of the Equipment at a public or private sale for cash
or credit with the privilege of purchasing the Equipment. The proceeds from any
sale, lease or other disposition of the Equipment are defined as either:
(a) if sold or otherwise disposed of, the cash proceeds less the Fair Market
Value of the Equipment at the expiration of the Initial Term less the Default
Costs; or
- 2 -
<PAGE>
(b) if leased, the present value (discounted at three percent (3%) over the
U.S. Treasury Notes of comparable maturity to the term of the re-lease) of the
rentals for a term not to exceed the Initial Term, less the Default Costs.
Any proceeds will be applied against liquidated damages and any other sums due
to Lessor from Lessee. However, Lessee is liable to Lessor for, and Lessor may
recover, the amount by which the proceeds are less than the liquidated damages
and other sums due to Lessor from Lessee.
14. ADDITIONAL PROVISIONS.
14.1 BOARD ATTENDANCE. Upon invitation of Lessee, one representative of Lessor
will have the right to attend Lessee's corporate Board of Directors meetings and
Lessee will give Lessor reasonable notice in advance of any special Board of
Directors meeting, which notice will provide an agenda of the subject matter to
be discussed at such board meeting. Lessee will provide Lessor with a certified
copy of the minutes of each Board of Directors meeting within thirty (30) days
following the date of such meeting held during the term of this Master Lease.
14.2 FINANCIAL STATEMENTS. As soon as practicable at the end of each month (and
in any event within thirty (30) days), Lessee will provide to Lessor the same
information which Lessee provides to its Board of Directors, but which will
include not less than a monthly income statement, balance sheet and statement of
cash flows prepared in accordance with generally accepted accounting principles,
consistently applied (the "Financial Statements"). As soon as practicable at the
end of each fiscal year, Lessee will provide to Lessor audited Financial
Statements setting forth in comparative form the corresponding figures for the
fiscal year (and in any event within ninety (90) days), and accompanied by an
audit report and opinion of the independent certified public accountants
selected by Lessee. Lessee will promptly furnish to Lessor any additional
information (including, but not limited to, tax returns, income statements,
balance sheets and names of principal creditors) as Lessor reasonably believes
necessary to evaluate Lessee's continuing ability to meet financial obligations.
After the effective date of the initial registration statement covering a public
offering of Lessee's securities, the term "Financial Statements" will be deemed
to refer to only those statements required by the Securities and Exchange
Commission.
14.3 OBLIGATION TO LEASE ADDITIONAL EQUIPMENT. Upon notice to Lessee, Lessor
will not be obligated to lease any Equipment which would have a Commencement
Date after said notice if: (i) Lessee is in default under this Master Lease or
any Schedule; (ii) Lessee is in default under any loan agreement, the result of
which would allow the lender or any secured party to demand immediate payment of
any material indebtedness; (iii) there is a material adverse change in Lessee's
credit standing; or (iv) Lessor determines (in reasonable good faith) that
Lessee will be unable to perform its obligations under this Master Lease or any
Schedule.
14.4 MERGER AND SALE PROVISIONS. Lessee will notify Lessor of any proposed
Merger at least sixty (60) days prior to the closing date. Lessor may, in its
discretion, either (i) consent to the assignment of the Master Lease and all
relevant Schedules to the successor entity, or (ii) terminate the Master Lease
and all relevant Schedules. If Lessor elects to consent to the assignment,
Lessee and its successor will sign the assignment documentation provided by
Lessor. If Lessor elects to terminate the Master Lease and all relevant
Schedules, then Lessee will pay Lessor all amounts then due and owing and a
termination fee equal to the present value (discounted at 6%) of the remaining
Rent for the balance of the Initial Term(s) of all Schedules, and will return
the Equipment in accordance with Section 9. Lessor hereby consents to any Merger
in which the acquiring entity has a Moody's Bond Rating of BA3 or better or a
commercially acceptable equivalent measure of creditworthiness as reasonably
determined by Lessor.
14.5 ENTIRE AGREEMENT. This Master Lease and associated Schedules and Summary
Equipment Schedules supersede all other oral or written agreements or
understandings between the parties concerning the Equipment including, for
example, purchase orders. ANY AMENDMENT OF THIS MASTER LEASE OR A SCHEDULE, MAY
ONLY BE ACCOMPLISHED BY A WRITING SIGNED BY THE PARTY AGAINST WHOM THE AMENDMENT
IS SOUGHT TO BE ENFORCED.
14.6 NO WAIVER. No action taken by Lessor or Lessee will be deemed to constitute
a waiver of compliance with any representation, warranty or covenant contained
in this Master Lease or a Schedule. The waiver by Lessor or Lessee of a breach
of any provision of this Master Lease or a Schedule will not operate or be
construed as a waiver of any subsequent breach.
14.7 BINDING NATURE. Each Schedule is binding upon, and inures to the benefit of
Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHTS OR OBLIGATIONS.
14.8 SURVIVAL OF OBLIGATIONS. All agreements, obligations including, but not
limited to those arising under Section 6.2, representations and warranties
contained in this Master Lease, any Schedule, Summary Equipment Schedule or in
any document delivered in connection with those agreements are for the benefit
of Lessor and any Assignee or Secured Party and survive the execution, delivery,
expiration or termination of this Master Lease.
14.9 NOTICES. Any notice, request or other communication to either party by the
other will be given in writing and deemed received upon the earlier of (1)
actual receipt or (3) three days after mailing if mailed postage prepaid by
regular or airmail to Lessor (to the attention of "the Comdisco Venture Group")
or Lessee, at the address set out in the Schedule, (3) one day after it is sent
by courier or (4) on the same day as sent via facsimile transmission, provided
that the original is sent by personal delivery or mail by the sending party.
14.10 APPLICABLE LAW. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE WILL HAVE
BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE GOVERNED
AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE OF
ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR
REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE
CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE.
14.11 SEVERABILITY. If any one or more of the provisions of this Master Lease or
any Schedule is for any reason held invalid, illegal or unenforceable, the
remaining provisions of this Master Lease and any such Schedule will be
unimpaired, and the invalid, illegal or unenforceable provision replaced by a
mutually acceptable valid, legal and enforceable provision that is closest to
the original intention of the parties.
14.12 COUNTERPARTS. This Master Lease and any Schedule may be executed in any
number of counterparts, each of which will be deemed an original, but all such
counterparts together constitute one and the same instrument. If Lessor grants a
security interest in all or any part of a Schedule, the Equipment or sums
payable thereunder, only that counterpart Schedule marked "Secured Party's
Original" can transfer Lessor's rights and all other counterparts will be marked
"Duplicate."
14.13 LICENSED PRODUCTS. Lessee will obtain no title to Licensed Products which
will at all times remain the property of the owner of the Licensed Products. A
license from the owner may be required and it is Lessee's responsibility to
obtain any required license before the use of the Licensed Products. Lessee
agrees to treat the Licensed Products as confidential information of the owner,
to observe all copyright restrictions, and not to reproduce or sell the Licensed
Products.
14.14 SECRETARY'S CERTIFICATE. Lessee will, upon execution of this Master Lease,
provide Lessor with a secretary's certificate of incumbency and authority. Upon
the execution of each Schedule with a purchase price in excess of $1,000,000,
Lessee will provide Lessor with an opinion from Lessee's counsel in a form
acceptable to Lessor regarding the representations and warranties in Section 8.
14.15 ELECTRONIC COMMUNICATIONS. Each of the parties may communicate with the
other by electronic means under mutually agreeable terms.
14.16 LANDLORD/MORTGAGEE WAIVER. Lessee agrees to provide Lessor with a
Landlord/Mortgagee Waiver with respect to the Equipment. Such waiver shall be in
a form satisfactory to Lessor.
14.17 EQUIPMENT PROCUREMENT CHARGES/PROGRESS PAYMENTS. Lessee hereby agrees that
Lessor shall not, by virtue of its entering into this Master Lease, be required
to remit any payments to any manufacturer or other third party until Lessee
accepts the Equipment subject to this Master Lease.
14.18 DEFINITIONS.
ADVANCE - means the amount due to Lessor by Lessee upon Lessee's execution of
each Schedule.
ASSIGNEE - means an entity to whom Lessor has sold or assigned its rights as
owner and Lessor of Equipment.
CASUALTY LOSS - means the irreparable loss or destruction of Equipment.
CASUALTY VALUE - means the greater of the aggregate Rent remaining to be paid
for the balance of the lease term or the Fair Market Value of the Equipment
immediately prior to the Casualty Loss. However, if a Casualty Value Table is
attached to the relevant Schedule its terms will control.
COMMENCEMENT DATE - is defined in each Schedule.
DEFAULT COSTS - means reasonable attorney's fees and remarketing costs resulting
from a Lessee default or Lessor's enforcement of its remedies.
DELIVERY DATE - means date of delivery of Inventory Equipment to Lessee's
address.
EQUIPMENT - means the property described on a Summary Equipment Schedule and any
replacement for that property required or permitted by this Master Lease or a
Schedule.
EVENT OF DEFAULT - means the events described in Subsection 13.1.
- 3 -
<PAGE>
FAIR MARKET VALUE - means the aggregate amount which would be obtainable in an
arm's-length transaction between an informed and willing buyer/user and an
informed and willing seller under no compulsion to sell.
INITIAL TERM - means the period of time beginning on the first day of the first
full Rent Interval following the Commencement Date for all items of Equipment
and continuing for the number of Rent Intervals indicated on a Schedule.
INTERIM RENT - means the pro-rata portion of Rent due for the period from the
Commencement Date through but not including the first day of the first full Rent
Interval included in the Initial Term.
LATE CHARGE - means the lesser of five percent (5%) of the payment due or the
maximum amount permitted by the law of the state where the Equipment is located.
LICENSED PRODUCTS - means any software or other licensed products attached to
the Equipment.
LIKE EQUIPMENT - means replacement Equipment which is lien free and of the same
model, type, configuration and manufacture as Equipment.
MERGER - means any consolidation or merger of the Lessee with or into any other
corporation or entity, any sale or conveyance of all or substantially all of the
assets or stock of the Lessee by or to any other person or entity in which
Lessee is not the surviving entity.
NOTICE PERIOD - means not less than ninety (90) days nor more than twelve (12)
months prior to the expiration of the lease term.
OWNER - means the owner of Equipment.
RENT - means the rent Lessee will pay for each item of Equipment expressed in a
Summary Equipment Schedule either as a specific amount or an amount equal to the
amount which Lessor pays for an item of Equipment multiplied by a lease rate
factor plus all other amounts due to Lessor under this Master Lease or a
Schedule.
RENT INTERVAL - means a full calendar month or quarter as indicated on a
Schedule.
SCHEDULE - means either an Equipment Schedule or a Licensed Products Schedule
which incorporates all of the terms and conditions of this Master Lease.
SECURED PARTY - means an entity to whom Lessor has granted a security interest
for the purpose of securing a loan.
SUMMARY EQUIPMENT SCHEDULE - means a certificate provided by Lessor summarizing
all of the Equipment for which Lessor has received Lessee approved vendor
invoices, purchase documents and/or evidence of delivery during a calendar
quarter which will incorporate all of the terms and conditions of the related
Schedule and this Master Lease and will constitute a separate lease for the
equipment leased thereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Master Lease on or as
of the day and year first above written.
eTOYS INC. COMDISCO, INC.,
as Lessee as Lessor
By: /s/ Jordan Posell By: /s/ [ILLEGIBLE]
-------------------------------- --------------------------------
Title: VP - Finance Title: SR VP
- 4 -
<PAGE>
ADDENDUM TO THE
MASTER LEASE AGREEMENT DATED AS OF DECEMBER 24, 1998
BETWEEN ETOYS INC., AS LESSEE
AND COMDISCO, INC., AS LESSOR
The undersigned hereby agree that the terms and conditions of the
above-referenced Master Lease are hereby modified and amended as follows:
1) Section 3., "RENT AND PAYMENT"
In the third line after "is not made" insert "within five (5) business days
of".
2) Section 4.2., "WARRANTY AND DISCLAIMER OF WARRANTIES"
In the second line, delete "Lessee is not in default" and insert "no Event
of Default has occurred and is continuing".
3) Section 5.3., "ASSIGNMENT BY LESSOR"
In the first paragraph, line 8, after "a written notice given to Lessee"
insert "provided that Lessor will continue to perform its obligations
hereunder".
In subparagraph (a), line 4, delete Lessee is not in default and the
Secured Party continues to receive all Rent payable under the schedule and"
and replace with "no Event of Default has occurred and is continuing".
In subparagraph (b), at the beginning of the first sentence insert "Upon
receipt of written notice from Lessor".
4) Section 6.1., "NET LEASE"
To the end of this section add "provided, however, that Lessee's ablility
to bring suit against Lessor for breach of this Master Lease shall not be
affected by this Section 6.1."
5) Section 6.2., "TAXES AND FEES"
In line 3, delete "accrued for" and after "arising during" insert "and
attributable to".
6) Section 8., "REPRESENTATIONS AND WARRANTIES OF LESSOR"
In subparagraph (c), add to the beginning of the first sentence, "To the
best of Lessee's knowledge," and in line 2, delete "To the knowledge of
Lessee,".
<PAGE>
In subparagraph (f), to the end of this paragraph add "except where the
failure to do so would not have a material adverse effect on the Company's
business taken as a whole".
7) Section 9., "DELIVERY AND RETURN OF EQUIPMENT"
In line 10, after "limited to the " insert "reasonable".
8) Section 11., "INDEMNITY"
In line 9, after "negligent acts" insert "or willfull misconduct".
9) Section 13., "DEFAULT"
In subparagraph (b), line 4, delete "ten (10)" and replace with "thirty
(30)".
In subparagraph (c), line 6, after "purpose of the foregoing" insert "and
any such involuntary event has not been dismissed or vacated within thirty
(30) days".
10) Section 14.1., "BOARD ATTENDANCE"
Delete this section in its entirety.
11) Section 14.2., FINANCIAL STATEMENTS"
In line 8, delete "ninety (90)" and replace with 'one hundred twenty
(120)".
12) Section 14.4., "MERGER AND SALE PROVSIONS"
In line 1, after "Lessor will" insert "use reasonable efforts".
In line 2, delete "sixty (60)" and replace with "twenty (20)".
In line 10, after "accordance with Section 9" insert "or purchase the
Equipment" and delete the last sentence and replace with "Lessor hereby
consents to any Merger in which the surviving entity has a net worth equal
to or greater than ten (10) times the present value of the remaining Rent
due or to become due under the Summary Equipment Schedules, and such entity
has a net worth of at least $10,000,000.".
13) Section 14.6., "NO WAIVER"
<PAGE>
At the beginning of the first sentence, insert "Except for a written
waiver,".
14) Section 14.7., "BINDING NATURE"
To the end of this section add ",except as contemplated by Section 14.4".
15) Section 14.10., "APPLICABLE LAW"
Delete "Illinois" and replace with "California" everywhere it appears and
in the second sentence, delete "Article 2A of the Uniform Commercial Code"
and insert "California Commercial Code Sections 10508-10522".
16) Section 14.14., "SECRETARY'S CERTIFICATE"
Delete the last sentence in its entirety.
17) Section 14.18., "DEFINITIONS"
In the definition of "Casualty Value", first line, after "greater of the"
insert "present value (discounted at 6%) of the"
ETOYS INC. COMDISCO, INC.
AS LESSEE AS LESSOR
By: /s/ Jordan Posell By: /s/ [ILLEGIBLE]
-------------------------- -------------------------
Title: VP Finance Title: Sr. VP
------------------------ -----------------------
Date: 12/24/98 Date: JAN 06 1999
------------------------- ------------------------
<PAGE>
EQUIPMENT SCHEDULE VL-1
DATED AS OF DECEMBER 24, 1998
TO MASTER LEASE AGREEMENT
DATED AS OF DECEMBER 24, 1998 (THE "MASTER LEASE")
LESSEE: ETOYS INC. LESSOR: COMDISCO, INC.
ADMIN. CONTACT/PHONE NO.: ADDRESS FOR ALL NOTICES:
Contact: Jordan Posell 6111 North River Road
TEL: (310) 576-6776 Rosemont, Illinois 60018
FAX: (310) 664-8101 Attn.: Venture Group
ADDRESS FOR NOTICES:
2850 Ocean Park Blvd., Suite 225
Santa Monica, CA 90405
CENTRAL BILLING LOCATION: RENT INTERVAL: Monthly
same as above
Attn.:
Lessee Reference No.:
--------------
(24 digits maximum)
LOCATION OF EQUIPMENT: INITIAL TERM: 36 months
same as above (Number of Rent Intervals)
LEASE RATE FACTOR: 3.091%
Attn.:
EQUIPMENT (as defined below): ADVANCE: $43,274
INTERIM RENT: None
Equipment specifically approved by Lessor, which shall be delivered to and
accepted by Lessee during the period December 24, 1998 through December 24, 1999
("Equipment Delivery Period"), for which Lessor receives vendor invoices
approved for payment, up to an aggregate purchase price of $1,400,000
("Commitment Amount"). Equipment shall exclude custom use equipment, leasehold
improvements, installation costs and delivery costs, rolling stock, special
tooling, "stand-alone" software, application software bundled into computer
hardware, hand held items, molds and fungible items.
<PAGE>
1. EQUIPMENT PURCHASE
This Schedule contemplates Lessor's acquisition of Equipment for lease to
Lessee, either by one of the first three categories listed below or by providing
Lessee with Equipment from the fourth category, in an aggregate value up to the
Commitment Amount referred to on the face of this Schedule. If the Equipment
acquired is of category (i), (ii) , (iii) below, the effectiveness of this
Schedule as it relates to those items of Equipment is contingent upon Lessee's
acknowledgment at the time Lessor acquires the Equipment that Lessee has either
received or approved the relevant purchase documentation between vendor and
Lessor for that Equipment.
(i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment
which is obtained from a vendor by Lessee for its use subject
to Lessor's prior approval of the Equipment.
(ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at
Lessee's site and to which Lessee has clear title and ownership
may be considered by Lessor for inclusion under this Lease (the
"Sale-Leaseback Transaction"). Any request for a Sale-Leaseback
Transaction must be submitted to Lessor in writing (along with
accompanying evidence of Lessee's Equipment ownership
satisfactory to Lessor for all Equipment submitted) no later than
30 days from the date hereof*. Lessor will not perform a
Sale-Leaseback Transaction for any request or accompanying
Equipment ownership documents which arrive after the date marked
above by an asterisk (*). Further, any sale-leaseback Equipment
will be placed on lease subject to: (1) Lessor prior approval of
the Equipment; and (2) if approved, at Lessor's actual net
appraised Equipment value pursuant to the schedule below:
<TABLE>
<CAPTION>
ORIGINAL EQUIPMENT INVOICE PERCENT OF ORIGINAL MANUFACTURER'S
DATE NET EQUIPMENT COST PAID BY LESSOR
-------------- ----------------------------------
<S> <C>
Sept. 24, 1998 - Dec. 24, 1998 100%
</TABLE>
Lessee represents that it has paid all California sales tax due on the cost of
that portion of Equipment to be installed in California and agrees to provide
evidence of such payment to Lessor. As a result of the election, Lessor agrees
that it will not invoice Lessee for use tax on the monthly rent for any item of
Sale- Leaseback Equipment as long as the Sale/Leaseback Transaction occurs
within 90 days of Lessee's first functional use of the equipment, as represented
to Lessor. Lessee agrees to pay any taxes, fees, or any other charges (together
with interest or penalties) related to any dispute of Lessee's election
hereunder and Lessee understands that this is an irrevocable election to measure
the tax by the Equipment cost and cannot be changed except prior to installation
of the Equipment.
(iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment
which is obtained from a third party by Lessee for its use
subject to Lessor's prior approval of the Equipment and at
Lessor's appraised value for such used Equipment.
(iv) 800 NUMBER EQUIPMENT. Upon Lessee's use of Comdisco's 1-800
Direct Service, Lessor will purchase new or used Equipment from a
third party or Lessor will supply new or used Equipment from its
inventory for use by Lessee at rates provided by Lessor.
2. COMMENCEMENT DATE
The Commencement Date for each item of new on-order or used on-order
Equipment will be the install date as confirmed in writing by Lessee as set
forth on the vendor invoice of which a facsimile transmission will constitute
an original document. The Commencement Date for sale-leaseback Equipment shall
be the date Lessor tenders the purchase price. The Commencement Date for 800
Number Equipment shall be fifteen (15) days from the ship date, such ship date
to be set forth on the vendor invoice or if unavailable on the vendor invoice
the ship date will be determined by Lessor upon other supporting shipping
documentation. Lessor will summarize all approved invoices, purchase
documentation and evidence of delivery, as applicable, received in the same
calendar month into a Summary Equipment Schedule in the form attached to this
Schedule as Exhibit 1, and the Initial Term will begin the first day of the
calendar month thereafter. Each Summary Equipment Schedule will contain the
Equipment location, description, serial number(s) and cost and will incorporate
the terms and conditions of the Master Lease and this Schedule and will
constitute a separate lease.
2
<PAGE>
3. OPTION TO EXTEND
So long as no Event of Default has occurred and is continuing hereunder,
and upon written notice no earlier than twelve (12) months and no later than
ninety (90) days prior to the expiration of the Initial Term of a Summary
Equipment Schedule, Lessee will have the right to extend the Initial Term of
such Summary Equipment Schedule for a period of one (1) year. In such event,
the rent to be paid during said extended period shall be mutually agreed upon
and if the parties cannot mutually agree, then the Summary Equipment Schedule
shall continue in full force and effect pursuant to the existing terms and
conditions until terminated in accordance with its terms. The Summary Equipment
Schedule will continue in effect following said extended period until terminated
by either party upon not less than ninety (90) days prior written notice, which
notice shall be effective as of the date of receipt.
4. PURCHASE OPTION
So long as no Event of Default has occurred and is continuing hereunder,
and upon written notice no earlier than twelve (12) months and no later than
ninety (90) days prior to the expiration of the Initial Term or the extended
term of the applicable Summary Equipment Schedule, Lessee will have the option
at the expiration of the Initial Term of the Summary Equipment Schedule to
purchase all, but not less than all, of the Equipment listed therein for a
purchase price not to exceed 15% of Lessor's cost hereunder and upon terms and
conditions to be mutually agreed upon by the parties following Lessee's written
notice, plus any taxes applicable at time of purchase. Said purchase price
shall be paid to Lessor at least thirty (30) days before the expiration date of
the Initial Term or extended term. Title to the Equipment shall automatically
pass to Lessee upon payment in full of the purchase price but, in no event,
earlier than the expiration of the fixed Initial Term or extended term, if
applicable. If the parties are unable to agree on the purchase price or the
terms and conditions with respect to said purchase, then the Summary Equipment
Schedule with respect to this Equipment shall remain in full force and effect.
Notwithstanding the exercise by Lessee of this option and payment of the
purchase price, until all obligations under the applicable Summary Equipment
Schedule have been fulfilled, it is agreed and understood that Lessor shall
retain a purchase money security interest in the Equipment listed therein and
the Summary Equipment Schedule shall constitute a Security Agreement under the
Uniform Commercial Code of the state in which the Equipment is located.
5. TECHNOLOGY EXCHANGE OPTION
So long as no Event of Default has occurred and is continuing, and there
is no material adverse change in Lessee's credit, on or after the expiration of
the 12th month of any Summary Equipment Schedule, Lessee shall have the option
to replace any of the Equipment subject to such summary Equipment Schedule with
new technology equipment ("New Technology Equipment") utilizing the following
guidelines:
A. Equipment being replaced with New Technology Equipment shall have an
aggregate original cost equal to or greater than $20,000 and be comprised of
full configurations of equipment.
B. This technology Exchange Option shall be limited to a maximum in the
aggregate of fifty percent (50%) of the original equipment cost and shall not
apply to software or any soft costs financed hereunder including but not limited
to tenant improvements and custom equipment.
C. The cost of the New Technology Equipment must be equal to or greater than
the original equipment cost of the replaced equipment, but in no event shall
exceed 200% of the original equipment cost.
D. The remaining lease payments applicable to the equipment being replaced by
the New Technology Equipment will be discounted to present value at 6%.
The wholesale market value of the equipment being replaced will be established
by Comdisco based upon then current market conditions. Upon the return of the
replaced equipment, the wholesale price will be deducted from the present value
of the remaining rentals and the differential will be added to the cost of the
New Technology Equipment in calculating the new rental. The lease for the New
Technology Equipment will contain terms and conditions substantially similar to
those for the replaced equipment and will have an Initial Term not less than the
balance of the remaining Initial Term for the replaced equipment.
6. OPTION AMOUNT
So long as no Event of Default shall have occurred and is continuing and
upon Lessee's request, subject to final review by Lessor, Lessor agrees to
provide to Lessee an additional $1,000,000 of Equipment upon rates and terms to
be negotiated.
3
<PAGE>
7. SPECIAL TERMS
The terms and conditions of the Lease as they pertain to this Schedule
are hereby modified and amended as follows:
Master Lease: This Schedule is issued pursuant to the Lease identified on page
1 of this Schedule. All of the terms and conditions of the Lease are
incorporated in and made a part of this Schedule as if they were expressly set
forth in this Schedule. The parties hereby reaffirm all of the terms and
conditions of the Lease (including, without limitation, the representations and
warranties set forth in Section 8) except as modified herein by this Schedule.
This Schedule may not be amended or rescinded except by a writing signed by both
parties.
ETOYS INC. COMDISCO, INC.
AS LESSEE AS LESSOR
By: /s/ Jordan Posell By: /s/ [ILLEGIBLE]
-------------------------------- ------------------------------
Title: VP - Finance Title: Sr. VP
----------------------------- ---------------------------
Date: 12/24/98 Date: JAN 06 1998
------------------------------ ----------------------------
4
<PAGE>
EXHIBIT 1
SUMMARY EQUIPMENT SCHEDULE
This Summary Equipment Schedule dated XXXX is executed pursuant to
Equipment Schedule No. X to the Master Lease Agreement dated XXXX between
Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions,
representations and warranties of the Master Lease Agreement and Equipment
Schedule No. X are incorporated herein and made a part hereof, and this Summary
Equipment Schedule constitutes a Schedule for the Equipment on the attached
invoices.
1. FOR PERIOD BEGINNING: AND ENDING:
2. INITIAL TERM STARTS ON: INITIAL TERM:
(Number of Rent Intervals)
3. TOTAL SUMMARY EQUIPMENT COST:
4. LEASE RATE FACTOR:
5. RENT:
6. ACCEPTANCE DOC TYPE:
5
<PAGE>
EQUIPMENT SCHEDULE VL-2
DATED AS OF DECEMBER 24, 1998
TO MASTER LEASE AGREEMENT
DATED AS OF DECEMBER 24, 1998 (THE "MASTER LEASE")
LESSEE: ETOYS INC. LESSOR: COMDISCO, INC.
ADMIN. CONTACT/PHONE NO.: ADDRESS FOR ALL NOTICES:
Contact: Jordan Posell 6111 North River Road
TEL: (310) 576-6776 Rosemont, Illinois 60018
FAX: (310) 664-8101 Attn.: Venture Group
ADDRESS FOR NOTICES:
2850 Ocean Park Blvd., Suite 225
Santa Monica, CA 90405
CENTRAL BILLING LOCATION: RENT INTERVAL: Monthly
same as above
Attn.:
Lessee Reference No.:
---------------
(24 digits maximum)
LOCATION OF EQUIPMENT: INITIAL TERM: 36 months
(Number of Rent Intervals)
LEASE RATE FACTOR: 3.091%
Attn.:
EQUIPMENT (as defined below): ADVANCE: $18,546
INTERIM RENT: None
Software and tenant improvements specifically approved by Lessor, which shall be
delivered to and accepted by Lessee during the period December 24, 1998 through
December 24, 1999 ("Equipment Delivery Period") for which Lessor receives vendor
invoices approved for payment, up to an aggregate purchase price of $600,000
("Commitment Amount").
1
<PAGE>
1. EQUIPMENT PURCHASE
This Schedule contemplates Lessor's acquisition of Equipment for lease to
Lessee, either by one of the first three categories listed below or by providing
Lessee with Equipment from the fourth category, in an aggregate value up to the
Commitment Amount referred to on the face of this Schedule. If the Equipment
acquired is of category (i), (ii) , (iii) below, the effectiveness of this
Schedule as it relates to those items of Equipment is contingent upon Lessee's
acknowledgment at the time Lessor acquires the Equipment that Lessee has either
received or approved the relevant purchase documentation between vendor and
Lessor for that Equipment.
(i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment
which is obtained from a vendor by Lessee for its use subject
to Lessor's prior approval of the Equipment.
(ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at
Lessee's site and to which Lessee has clear title and ownership
may be considered by Lessor for inclusion under this Lease (the
"Sale-Leaseback Transaction"). Any request for a Sale-Leaseback
Transaction must be submitted to Lessor in writing (along with
accompanying evidence of Lessee's Equipment ownership
satisfactory to Lessor for all Equipment submitted) no later than
30 days from the date hereof*. Lessor will not perform a
Sale-Leaseback Transaction for any request or accompanying
Equipment ownership documents which arrive after the date marked
above by an asterisk (*). Further, any sale-leaseback Equipment
will be placed on lease subject to: (1) Lessor prior approval of
the Equipment; and (2) if approved, at Lessor's actual net
appraised Equipment value pursuant to the schedule below:
<TABLE>
<CAPTION>
ORIGINAL EQUIPMENT INVOICE PERCENT OF ORIGINAL MANUFACTURER'S
DATE NET EQUIPMENT COST PAID BY LESSOR
---------------- ---------------------------------
<S> <C>
9/24/98 and 12/24/98 100%
</TABLE>
Lessee represents that it has paid all California sales tax due on the cost of
that portion of Equipment to be installed in California and agrees to provide
evidence of such payment to Lessor. As a result of the election, Lessor agrees
that it will not invoice Lessee for use tax on the monthly rent for any item of
Sale- Leaseback Equipment as long as the Sale/Leaseback Transaction occurs
within 90 days of Lessee's first functional use of the equipment, as represented
to Lessor. Lessee agrees to pay any taxes, fees, or any other charges (together
with interest or penalties) related to any dispute of Lessee's election
hereunder and Lessee understands that this is an irrevocable election to measure
the tax by the Equipment cost and cannot be changed except prior to installation
of the Equipment.
(iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment
which is obtained from a third party by Lessee for its use
subject to Lessor's prior approval of the Equipment and at
Lessor's appraised value for such used Equipment.
(iv) 800 NUMBER EQUIPMENT. Upon Lessee's use of Comdisco's 1-800
Direct Service, Lessor will purchase new or used Equipment from a
third party or Lessor will supply new or used Equipment from its
inventory for use by Lessee at rates provided by Lessor.
2. COMMENCEMENT DATE
The Commencement Date for each item of new on-order or used on-order
Equipment will be the install date as confirmed in writing by Lessee as set
forth on the vendor invoice of which a facsimile transmission will constitute
an original document. The Commencement Date for sale-leaseback Equipment shall
be the date Lessor tenders the purchase price. The Commencement Date for 800
Number Equipment shall be fifteen (15) days from the ship date, such ship date
to be set forth on the vendor invoice or if unavailable on the vendor invoice
the ship date will be determined by Lessor upon other supporting shipping
documentation. Lessor will summarize all approved invoices, purchase
documentation and evidence of delivery, as applicable, received in the same
calendar month into a Summary Equipment Schedule in the form attached to this
Schedule as Exhibit 1, and the Initial Term will begin the first day of the
calendar month thereafter. Each Summary Equipment Schedule will contain the
Equipment location, description, serial number(s) and cost and will incorporate
the terms and conditions of the Master Lease and this Schedule and will
constitute a separate lease.
2
<PAGE>
3. MISCELLANEOUS
In consideration of Lessor financing software and tenant improvements
hereunder, Lessee agrees in addition to its last Monthly Rent Payment to remit
to Lessor an amount equal to 15% of Lessor's aggregate cost of software and
tenant improvements provided hereunder.
4. SPECIAL TERMS
The terms and conditions of the Lease as they pertain to this Schedule
are hereby modified and amended as follows:
(a) SECTION 9, DELIVERY AND RETURN OF EQUIPMENT
Delete second, third and fourth sentences in their entirety.
Master Lease: This Schedule is issued pursuant to the Lease identified on page
1 of this Schedule. All of the terms and conditions of the Lease are
incorporated in and made a part of this Schedule as if they were expressly set
forth in this Schedule. The parties hereby reaffirm all of the terms and
conditions of the Lease (including, without limitation, the representations and
warranties set forth in Section 8) except as modified herein by this Schedule.
This Schedule may not be amended or rescinded except by a writing signed by both
parties.
ETOYS INC. COMDISCO, INC.
AS LESSEE AS LESSOR
By: /s/ Jordan Posell By: /s/ [ILLEGIBLE]
-------------------------------- ------------------------------
Title: VP - Finance Title: Sr. VP
----------------------------- ---------------------------
Date: 12/24/98 Date: JAN 06 1999
------------------------------ ----------------------------
3
<PAGE>
EXHIBIT 1
SUMMARY EQUIPMENT SCHEDULE
This Summary Equipment Schedule dated XXXX is executed pursuant to
Equipment Schedule No. X to the Master Lease Agreement dated XXXX between
Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions,
representations and warranties of the Master Lease Agreement and Equipment
Schedule No. X are incorporated herein and made a part hereof, and this Summary
Equipment Schedule constitutes a Schedule for the Equipment on the attached
invoices.
1. FOR PERIOD BEGINNING: AND ENDING:
2. INITIAL TERM STARTS ON: INITIAL TERM:
(Number of Rent Intervals)
3. TOTAL SUMMARY EQUIPMENT COST:
4. LEASE RATE FACTOR:
5. RENT:
6. ACCEPTANCE DOC TYPE:
4
<PAGE>
[LETTERHEAD]
December 7, 1998
Mr. Jordan Posell
eToys Inc.
2850 Ocean Park Blvd.
Suite 225
Santa Monica, CA 90405
RE: EQUIPMENT SCHEDULE VL-1 AND VL-2 DATED AS OF DECEMBER 7, 1998 AND RELATED
SUMMARY EQUIPMENT SCHEDULES TO THE MASTER LEASE AGREEMENT DATED AS OF
DECEMBER 7, 1998 BETWEEN COMDISCO, INC. AS LESSOR AND eTOYS INC. AS
LESSEE (THE EQUIPMENT SCHEDULES, SUMMARY EQUIPMENT SCHEDULES AND THE
MASTER LEASE AGREEMENT, COLLECTIVELY THE "LEASES").
Dear Mr. Posell:
Reference is made to the subject Leases. This writing shall serve to
confirm the agreement by and between the undersigned in connection with and in
consideration of the funding of the Leases by Comdisco, Inc. (hereinafter
"Comdisco") in the amount of $2,000,000 to eToys Inc. (hereinafter "eToys").
eToys will execute and deliver to Comdisco a Warrant Agreement in form and
substance reasonably satisfactory to Comdisco, upon the earlier of the following
(i) 15 days after the closing of the next preferred stock financing ("Next
Round"); or (ii) prior to the effective date of an initial public offering of
eToys' securities ("IPO"); or (iii) prior to the effective date of a
consolidation or merger of eToys with or into any other corporation or entity,
or any sale or conveyance of all or substantially all of the assets of stock of
eToys by or to any other person or entity ("Merger Event"). Such Warrant
Agreement shall grant to Comdisco the right to purchase that number of shares of
eToys' preferred stock (or common stock in the case of a IPO) equal to $80,000
divided by the exercise price ("Exercise Price") as defined below and shall be
in substantially the same format as Exhibit A (attached hereto and made a part
hereof) and shall contain anti-dilution and registration rights in parity with
those rights provided other investors. eToys shall use reasonable efforts to
provide Comdisco with at least twenty (20) days' prior written notice of any
proposed (i) Next Round; (ii) Merger Event; or (iii) IPO, where permissable by
law.
The Exercise Price shall equal to the sum of (x) $2.1032 ("Last Round Price"),
and (y) the product of (A) the difference between (i) the price per share (the
"Next Round Price") paid by investors for shares of preferred stock of the
Company issued in the Company's next private equity financing (the "Next
Round"), the initial price to public of the Common Stock sold by the Company in
its initial public offering (the "IPO") or the per share (based on the number of
then outstanding shares of the Company's capital stock) value of the
consideration to be received by the Company's securityholders upon the execution
by the Company of a definitive agreement to enter into a Merger Event (as
defined in the Warrant Agreement as Exhibit A) ('Merger") whichever event is the
first to occur, and (ii)the Last Round Price, multiplied by (B) the quotient
obtained by dividing (i) the number of days from the closing date of the
Company's sale and issuance of its Series B Preferred Stock ("Last Round") to
the date of execution of the Leases, by (ii) the number of days
<PAGE>
from the date from the last closing of the Last Round to the closing date of the
first to occur of the Next Round, the IPO or the Merger. Notwithstanding the
foregoing, if such closing date occurs after June 30, 1999, the Exercise Price
shall be $2.1032.
COMDISCO, INC.
By: /s/ [ILLEGIBLE]
-----------------------
Title: SR VP
-----------------------
AGREED AND ACCEPTED BY:
eToys, Inc.
By: /s/ Jordan Posell
------------------------
Title: VP Finance
------------------------
<PAGE>
EXHIBIT A
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL)
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS.
WARRANT AGREEMENT
TO PURCHASE SHARES OF THE SERIES _ PREFERRED STOCK OF
eTOYS INC.
DATED AS OF __________ __, 1998 (THE "EFFECTIVE DATE")
WHEREAS, eToys Inc., a ____________ corporation (the "Company") has
entered into a Master Lease Agreement dated as of ____________, 1998, Equipment
Schedule No. VL-1 and VL-2 dated as of _____________, 1998, and related Summary
Equipment Schedules (collectively, the "Leases") with Comdisco, Inc., a Delaware
corporation (the "Warrantholder"); and
WHEREAS, the Company desires to grant to Warrantholder, in consideration
for such Leases, the right to purchase shares of its Series _ Preferred Stock;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Leases and in consideration of mutual covenants and agreements
contained herein, the Company and Warrantholder agree as follows:
1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK.
The Company hereby grants to the Warrantholder, and the Warrantholder is
entitled, upon the terms and subject to the conditions hereinafter set forth, to
subscribe to and purchase, from the Company, ______ fully paid and
non-assessable shares of the Company's Series _ Preferred Stock ("Preferred
Stock") at a purchase price of $____ per share (the "Exercise Price"). The
number and purchase price of such shares are subject to adjustment as provided
in Section 8 hereof.
2. TERM OF THE WARRANT AGREEMENT.
Except as otherwise provided for herein, the term of this Warrant
Agreement and the right to purchase Preferred Stock as granted herein shall
commence on the Effective Date and shall be exercisable for a period of (i)
seven (7) years or (ii) three (3) years from the effective date of the Company's
initial public offering or (iii) the consummation of a Merger Event (as defined
in Section 8(a)), whichever is earlier.
3. EXERCISE OF THE PURCHASE RIGHTS.
The purchase rights set forth in this Warrant Agreement are exercisable
by the Warrantholder, in whole or in part, at any time, or from time to time,
prior to the expiration of the term set forth in Section 2 above, by tendering
to the Company at its principal office a notice of exercise in the form attached
hereto as Exhibit I (the "Notice of Exercise"), duly completed and executed.
Promptly upon receipt of the Notice of Exercise and the payment of the purchase
price in accordance with the terms set forth below, and in no event later than
twenty-one (21) days thereafter, the Company shall issue to the Warrantholder a
certificate for the number of shares of Preferred Stock purchased and shall
execute the acknowledgment of exercise in the form attached hereto as Exhibit II
(the "Acknowledgment of Exercise") indicating the number of shares which remain
subject to future purchases, if any.
The Exercise Price may be paid at the Warrantholder's election either (i)
by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as
determined below. If the Warrantholder elects the Net Issuance method, the
Company will issue Preferred Stock in accordance with the following formula:
X = Y(A-B)
------
- 1 -
<PAGE>
A
Where: X = the number of shares of Preferred Stock to be issued to
the Warrantholder.
Y = the number of shares of Preferred Stock requested
to be exercised under this Warrant Agreement.
A = the fair market value of one (1) share of
Preferred Stock.
B = the Exercise Price.
For purposes of the above calculation, current fair market value of
Preferred Stock shall mean with respect to each share of Preferred Stock:
(i) if the exercise is in connection with an initial public
offering of the Company's Common Stock, and if the Company's Registration
Statement relating to such public offering has been declared effective by
the SEC, then the fair market value per share shall be the product of (x)
the initial "Price to Public" specified in the final prospectus with
respect to the offering and (y) the number of shares of Common Stock into
which each share of Preferred Stock is convertible at the time of such
exercise;
(ii) if this Warrant is exercised after, and not in connection with
the Company's initial public offering, and:
(a) if traded on a securities exchange, the fair market
value shall be deemed to be the product of (x) the average of the
closing prices over a twenty-one (21) day period ending three days
before the day the current fair market value of the securities is
being determined and (y) the number of shares of Common Stock into
which each share of Preferred Stock is convertible at the time of such
exercise; or
(b) if actively traded over-the-counter, the fair market
value shall be deemed to be the product of (x) the average of the
closing bid and asked prices quoted on the NASDAQ system (or similar
system) over the twenty-one (21) day period ending three days before
the day the current fair market value of the securities is being
determined and (y) the number of shares of Common Stock into which
each share of Preferred Stock is convertible at the time of such
exercise;
(iii) if at any time the Common Stock is not listed on any
securities exchange or quoted in the NASDAQ System or the
over-the-counter market, the current fair market value of Preferred Stock
shall be the product of (x) the highest price per share which the Company
could obtain from a willing buyer (not a current employee or director)
for shares of Common Stock sold by the Company, from authorized but
unissued shares, as determined in good faith by its Board of Directors
and (y) the number of shares of Common Stock into which each share of
Preferred Stock is convertible at the time of such exercise, unless the
Company shall become subject to a merger, acquisition or other
consolidation pursuant to which the Company is not the surviving party,
in which case the fair market value of Preferred Stock shall be deemed to
be the value received by the holders of the Company's Preferred Stock on
a common equivalent basis pursuant to such merger or acquisition.
Upon partial exercise by either cash or Net Issuance, the Company shall
promptly issue an amended Warrant Agreement representing the remaining number of
shares purchasable hereunder. All other terms and conditions of such amended
Warrant Agreement shall be identical to those contained herein, including, but
not limited to the Effective Date hereof.
4. RESERVATION OF SHARES.
(a) AUTHORIZATION AND RESERVATION OF SHARES. During the term of this
Warrant Agreement, the Company will at all times have authorized and reserved a
sufficient number of shares of its Preferred Stock to provide for the exercise
of the rights to purchase Preferred Stock as provided for herein.
(b) REGISTRATION OR LISTING. If any shares of Preferred Stock
required to be reserved hereunder require registration with or approval of any
governmental authority under any Federal or State law (other than any
registration under the Securities Act of 1933, as amended ("1933 Act"), as then
in effect, or any similar Federal
- 2 -
<PAGE>
statute then enforced, or any state securities law, required by reason of any
transfer involved in such conversion), or listing on any domestic securities
exchange, before such shares may be issued upon conversion, the Company will, at
its expense and as expeditiously as possible, use its best efforts to cause such
shares to be duly registered, listed or approved for listing on such domestic
securities exchange, as the case may be.
5. NO FRACTIONAL SHARES OR SCRIP.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of the Warrant, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Exercise
Price then in effect.
6. NO RIGHTS AS SHAREHOLDER.
This Warrant Agreement does not entitle the Warrantholder to any voting
rights or other rights as a shareholder of the Company prior to the exercise of
the Warrant.
7. WARRANTHOLDER REGISTRY.
The Company shall maintain a registry showing the name and address of the
registered holder of this Warrant Agreement.
8. ADJUSTMENT RIGHTS.
The purchase price per share and the number of shares of Preferred Stock
purchasable hereunder are subject to adjustment, as follows:
(a) MERGER AND SALE OF ASSETS. If at any time there shall be a
capital reorganization of the shares of the Company's stock (other than a
combination, reclassification, exchange or subdivision of shares otherwise
provided for herein), including, but not limited to, a merger effected solely
for the purpose of changing domicile, or a merger or consolidation of the
Company with or into another corporation whether or not the Company is the
surviving corporation, or the sale of all or substantially all of the Company's
properties and assets to any other person, or any other transaction or series of
related transactions in which more that 50% of the voting power of the Company
is disposed of (hereinafter referred to as a "Merger Event"), then, as a part of
such Merger Event, lawful provision shall be made so that the Warrantholder
shall thereafter be entitled to receive, upon exercise of the Warrant, the
number of shares of preferred stock or other securities of the successor
corporation resulting from such Merger Event, equivalent in value to that which
would have been issuable if Warrantholder had exercised this Warrant immediately
prior to the Merger Event. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant Agreement with respect to the
rights and interest of the Warrantholder after the Merger Event to the end that
the provisions of this Warrant Agreement (including adjustments of the Exercise
Price and number of shares of Preferred Stock purchasable) shall be applicable
to the greatest extent possible.
(b) RECLASSIFICATION OF SHARES. If the Company at any time shall, by
combination, reclassification, exchange or subdivision of securities or
otherwise, change any of the securities as to which purchase rights under this
Warrant Agreement exist into the same or a different number of securities of any
other class or classes, this Warrant Agreement shall thereafter represent the
right to acquire such number and kind of securities as would have been issuable
as the result of such change with respect to the securities which were subject
to the purchase rights under this Warrant Agreement immediately prior to such
combination, reclassification, exchange, subdivision or other change.
(c) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time
shall combine or subdivide its Preferred Stock, the Exercise Price shall be
proportionately decreased in the case of a subdivision, or proportionately
increased in the case of a combination.
(d) STOCK DIVIDENDS. If the Company at any time shall pay a dividend
payable in, or make any other distribution (except any distribution specifically
provided for in the foregoing subsections (a) or (b)) of the Company's stock,
then the Exercise Price shall be adjusted, from and after the record date of
such dividend or distribution, to that price determined by multiplying the
Exercise Price in effect immediately prior to such record date by a fraction (i)
the numerator of which shall be the total number of all shares of the Company's
stock outstanding immediately prior to such dividend or distribution, and (ii)
the denominator of which shall be the total number of all shares of the
Company's stock outstanding immediately after such dividend or distribution.
The Warrantholder shall thereafter be
- 3 -
<PAGE>
entitled to purchase, at the Exercise Price resulting from such adjustment, the
number of shares of Preferred Stock (calculated to the nearest whole share)
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of shares of Preferred Stock issuable upon the exercise
hereof immediately prior to such adjustment and dividing the product thereof by
the Exercise Price resulting from such adjustment.
(e) RIGHT TO PURCHASE ADDITIONAL STOCK. If, the Warrantholder's total
cost of equipment leased pursuant to the Leases exceeds $2,000,000,
Warrantholder shall have the right to purchase from the Company, at the Exercise
Price (adjusted as set forth herein), an additional number of shares, which
number shall be determined by (i) multiplying the amount by which the
Warrantholder's total equipment cost exceeds $2,000,000 by 4%, and (ii) dividing
the product thereof by the Exercise Price per share referenced above.
(f) ANTIDILUTION RIGHTS. Additional antidilution rights applicable to
the Preferred Stock purchasable hereunder are as set forth in the Company's
Certificate of Incorporation, as amended through the Effective Date, a true and
complete copy of which is attached hereto as Exhibit ___ (the "Charter"). The
Company shall promptly provide the Warrantholder with any restatement,
amendment, modification or waiver of the Charter. The Company shall provide
Warrantholder with prior written notice of any issuance of its stock or other
equity security to occur after the Effective Date of this Warrant, which notice
shall include (a) the price at which such stock or security is to be sold, (b)
the number of shares to be issued, and (c) such other information as necessary
for Warrantholder to determine if a dilutive event has occurred.
(g) NOTICE OF ADJUSTMENTS. If: (i) the Company shall declare any
dividend or distribution upon its stock, whether in cash, property, stock or
other securities; (ii) the Company shall offer for subscription prorata to the
holders of any class of its Preferred or other convertible stock any additional
shares of stock of any class or other rights; (iii) there shall be any Merger
Event; (iv) there shall be an initial public offering; or (v) there shall be any
voluntary dissolution, liquidation or winding up of the Company; then, in
connection with each such event, the Company shall send to the Warrantholder:
(A) at least twenty (20) days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for such dividend,
distribution, subscription rights (specifying the date on which the holders of
Preferred Stock shall be entitled thereto) or for determining rights to vote in
respect of such Merger Event, dissolution, liquidation or winding up; (B) in the
case of any such Merger Event, dissolution, liquidation or winding up, at least
twenty (20) days' prior written notice of the date when the same shall take
place (and specifying the date on which the holders of Preferred Stock shall be
entitled to exchange their Preferred Stock for securities or other property
deliverable upon such Merger Event, dissolution, liquidation or winding up); and
(C) in the case of a public offering, the Company shall give the Warrantholder
at least twenty (20) days written notice prior to the effective date thereof.
Each such written notice shall set forth, in reasonable detail, (i) the
event requiring the adjustment, if applicable (ii) the amount of the adjustment,
if applicable (iii) the method by which such adjustment was calculated, (iv) the
Exercise Price, and (v) the number of shares subject to purchase hereunder after
giving effect to such adjustment, and shall be given by first class mail,
postage prepaid, addressed to the Warrantholder, at the address as shown on the
books of the Company.
(h) TIMELY NOTICE. Failure to timely provide such notice required by
subsection (g) above shall entitle Warrantholder to retain the benefit of the
applicable notice period notwithstanding anything to the contrary contained in
any insufficient notice received by Warrantholder. The notice period shall begin
on the date Warrantholder actually receives a written notice containing all the
information specified above.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
(a) RESERVATION OF PREFERRED STOCK. The Preferred Stock issuable upon
exercise of the Warrantholder's rights has been duly and validly reserved and,
when issued in accordance with the provisions of this Warrant Agreement, will be
validly issued, fully paid and non-assessable, and will be free of any taxes,
liens, charges or encumbrances of any nature whatsoever; provided, however, that
the Preferred Stock issuable pursuant to this Warrant Agreement may be subject
to restrictions on transfer under state and/or Federal securities laws. The
Company has made available to the Warrantholder true, correct and complete
copies of its Charter and Bylaws, as amended. The issuance of certificates for
shares of Preferred Stock upon exercise of the Warrant Agreement shall be made
without charge to the Warrantholder for any issuance tax in respect thereof, or
other cost incurred by the Company in connection with such exercise and the
related issuance of shares of Preferred Stock. The Company shall not be required
to pay any tax which may be payable in respect of any transfer involved and the
issuance and delivery of any certificate in a name other than that of the
Warrantholder.
- 4 -
<PAGE>
(b) DUE AUTHORITY. The execution and delivery by the Company of this
Warrant Agreement and the performance of all obligations of the Company
hereunder, including the issuance to Warrantholder of the right to acquire the
shares of Preferred Stock, have been duly authorized by all necessary corporate
action on the part of the Company, and the Leases and this Warrant Agreement are
not inconsistent with the Company's Charter or Bylaws, do not contravene any law
or governmental rule, regulation or order applicable to it, do not and will not
contravene any provision of, or constitute a default under, any indenture,
mortgage, contract or other instrument to which it is a party or by which it is
bound, and the Leases and this Warrant Agreement constitute legal, valid and
binding agreements of the Company, enforceable in accordance with their
respective terms except 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 or specific performance, injunctions relief or
other equitable remedies.
(c) CONSENTS AND APPROVALS. No consent or approval of, giving of
notice to, registration with, or taking of any other action in respect of any
state, Federal or other governmental authority or agency is required with
respect to the execution, delivery and performance by the Company of its
obligations under this Warrant Agreement, except for the filing of notices
pursuant to Regulation D under the 1933 Act and any filing required by
applicable state securities law, which filings will be effective by the time
required thereby.
(d) ISSUED SECURITIES. All issued and outstanding shares of Common
Stock, Preferred Stock or any other securities of the Company have been duly
authorized and validly issued and are fully paid and nonassessable. All
outstanding shares of Common Stock, Preferred Stock and any other securities
were issued in full compliance with all Federal and state securities laws. In
addition:
(i) The authorized capital of the Company consists of (A)
__________ shares of Common Stock, of which __________ shares are issued
and outstanding, and (B) __________ shares of preferred stock, of which
__________ shares are issued and outstanding and are convertible into
__________ shares of Common Stock at $______ per share.
(ii) The Company has reserved (A) __________ shares of Common
Stock for issuance under its 1997Stock Plan, under which __________
options are outstanding at an average price of $________ per share, and
(B) ________ shares of Common Stock for issuance under its Incentive
Stock Option Plan, under which __________ options are outstanding at an
average price of $________ per share. There are no other options,
warrants, conversion privileges or other rights presently outstanding to
purchase or otherwise acquire any authorized but unissued shares of the
Company's capital stock or other securities of the Company.
(iii) Other than as set forth in the Rights Agreement (as
defined below), in accordance with the Company's Articles of
Incorporation, no shareholder of the Company has preemptive rights to
purchase new issuances of the Company's capital stock.
(e) INSURANCE. The Company has in full force and effect insurance
policies, with extended coverage, insuring the Company and its property and
business against such losses and risks, and in such amounts, as are customary
for corporations engaged in a similar business and similarly situated and as
otherwise may be required pursuant to the terms of any other contract or
agreement.
(f) OTHER COMMITMENTS TO REGISTER SECURITIES. Except as set forth in
this Warrant Agreement and that certain Amended and Restated Investor Rights
Agreement, dated June 4, 1998, by and among the Company and certain investors
(the "Rights Agreement"), the Company is not, pursuant to the terms of any other
agreement currently in existence, under any obligation to register under the
1933 Act any of its presently outstanding securities or any of its securities
which may hereafter be issued.
(g) EXEMPT TRANSACTION. Subject to the accuracy of the
Warrantholder's representations in Section 10 hereof, the issuance of the
Preferred Stock upon exercise of this Warrant will constitute a transaction
exempt from (i) the registration requirements of Section 5 of the 1933 Act, in
reliance upon Section 4(2) thereof, and (ii) the qualification requirements of
the applicable state securities laws.
(h) COMPLIANCE WITH RULE 144. At the written request of the
Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise
of the Warrant in compliance with Rule 144 promulgated by the Securities and
Exchange Commission, the Company shall furnish to the Warrantholder, within ten
days after receipt of such request, a written statement confirming the Company's
compliance with the filing requirements of the Securities and Exchange
Commission as set forth in such Rule, as such Rule may be amended from time to
time.
- 5 -
<PAGE>
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER.
This Warrant Agreement has been entered into by the Company in reliance
upon the following representations and covenants of the Warrantholder:
(a) INVESTMENT PURPOSE. The right to acquire Preferred Stock or the
Preferred Stock issuable upon exercise of the Warrantholder's rights contained
herein will be acquired for investment and not with a view to the sale or
distribution of any part thereof, and the Warrantholder has no present intention
of selling or engaging in any public distribution of the same except pursuant to
a registration or exemption.
(b) PRIVATE ISSUE. The Warrantholder understands (i) that the
Preferred Stock issuable upon exercise of this Warrant (and the Common Stock
issuable upon conversion of such Preferred Stock) is not registered under the
1933 Act or qualified under applicable state securities laws on the ground that
the issuance contemplated by this Warrant Agreement will be exempt from the
registration and qualifications requirements thereof, and (ii) that the
Company's reliance on such exemption is predicated on the representations set
forth in this Section 10.
(c) DISPOSITION OF WARRANTHOLDER'S RIGHTS. In no event will the
Warrantholder make a disposition of any of its rights to acquire Preferred Stock
or Preferred Stock issuable upon exercise of such rights or the Common Stock
issuable upon conversion of such Preferred Stock unless and until (i) it shall
have notified the Company of the proposed disposition, and (ii) if requested by
the Company, it shall have furnished the Company with an opinion of counsel
(which counsel may either be inside or outside counsel to the Warrantholder)
satisfactory to the Company and its counsel to the effect that (A) appropriate
action necessary for compliance with the 1933 Act has been taken, or (B) an
exemption from the registration requirements of the 1933 Act is available.
Notwithstanding the foregoing, the restrictions imposed upon the transferability
of any of its rights to acquire Preferred Stock or Preferred Stock issuable on
the exercise of such rights or the Common Stock issuable upon conversion of such
Preferred Stock do not apply to transfers from the beneficial owner of any of
the aforementioned securities to its nominee or from such nominee to its
beneficial owner, and shall terminate as to any particular share of Preferred
Stock when (1) such security shall have been effectively registered under the
1933 Act and sold by the holder thereof in accordance with such registration or
(2) such security shall have been sold without registration in compliance with
Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the
Warrantholder at its request by the staff of the Securities and Exchange
Commission or a ruling shall have been issued to the Warrantholder at its
request by such Commission stating that no action shall be recommended by such
staff or taken by such Commission, as the case may be, if such security is
transferred without registration under the 1933 Act in accordance with the
conditions set forth in such letter or ruling and such letter or ruling
specifies that no subsequent restrictions on transfer are required. Whenever
the restrictions imposed hereunder shall terminate, as hereinabove provided, the
Warrantholder or holder of a share of Preferred Stock of Common Stock then
outstanding as to which such restrictions have terminated shall be entitled to
receive from the Company, without expense to such holder, one or more new
certificates for the Warrant or for such shares of Preferred Stock or Common
Stock not bearing any restrictive legend.
(d) FINANCIAL RISK. The Warrantholder has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment, and has the ability to bear the economic
risks of its investment.
(e) RISK OF NO REGISTRATION. The Warrantholder understands that if
the Company does not register with the Securities and Exchange Commission
pursuant to Section 12 of the 1934 Act (the "1934 Act"), or file reports
pursuant to Section 15(d), of the 1934 Act", or if a registration statement
covering the securities under the 1933 Act is not in effect when it desires to
sell (i) the rights to purchase Preferred Stock pursuant to this Warrant
Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to
purchase or the Common Stock issuable upon conversion of such Preferred Stock,
it may be required to hold such securities for an indefinite period. The
Warrantholder also understands that any sale of its rights of the Warrantholder
to purchase Preferred Stock or Preferred Stock or Common Stock which might be
made by it in reliance upon Rule 144 under the 1933 Act may be made only in
accordance with the terms and conditions of that Rule.
(f) ACCREDITED INVESTOR. Warrantholder is an "accredited investor"
within the meaning of the Securities and Exchange Rule 501 of Regulation D, as
presently in effect.
11. REQUESTS FOR REGISTRATION
Warrantholder and Company agree that all shares of Common Stock issuable
upon conversion of Preferred Stock subject to the Warrant Agreement shall be
deemed "Registerable Securities" for purposes of the Rights
- 6 -
<PAGE>
Agreement and shall have the same registration rights and be subject to the same
terms, and conditions and obligations with respect to the registration and sale
of such stock as possessed by Holders (as such terms is defined in the Rights
Agreement) under the Rights Agreement.
12. TRANSFERS.
Subject to the terms and conditions contained in Section 10 hereof, this
Warrant Agreement and all rights hereunder are transferable in whole or in part
by the Warrantholder and any successor transferee, provided, however, in no
event shall the number of transfers of the rights and interests in all of the
Warrants exceed three (3) transfers. The transfer shall be recorded on the
books of the Company upon receipt by the Company of a notice of transfer in the
form attached hereto as Exhibit III (the "Transfer Notice"), at its principal
offices and the payment to the Company of all transfer taxes and other
governmental charges imposed on such transfer.
13. MISCELLANEOUS.
(a) EFFECTIVE DATE. The provisions of this Warrant Agreement shall be
construed and shall be given effect in all respects as if it had been executed
and delivered by the Company on the date hereof. This Warrant Agreement shall
be binding upon any successors or assigns of the Company.
(b) ATTORNEY'S FEES. In any litigation, arbitration or court
proceeding between the Company and the Warrantholder relating hereto, the
prevailing party shall be entitled to attorneys' fees and expenses and all costs
of proceedings incurred in enforcing this Warrant Agreement.
(c) GOVERNING LAW. This Warrant Agreement shall be governed by and
construed for all purposes under and in accordance with the laws of the State of
California.
(d) COUNTERPARTS. This Warrant 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.
(e) NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery,
facsimile transmission (provided that the original is sent by personal delivery
or mail as hereinafter set forth) or seven (7) days after deposit in the United
States mail, by registered or certified mail, addressed (i) to the Warrantholder
at 6111 North River Road, Rosemont, Illinois 60018, Attention: Venture Lease
Administration, cc: Legal Department, Attention.: General Counsel, (and/or, if
by facsimile, (847) 518-5465 and (847)518-5088) and (ii) to the Company at 2850
Ocean Park Blvd. Suite 225, Santa Monica, CA 90405, Attention: Jordan Posell
(and/or if by facsimile, (310) 664-8101 or at such other address as any such
party may subsequently designate by written notice to the other party.
(f) REMEDIES. In the event of any default hereunder, the
non-defaulting party may proceed to protect and enforce its rights either by
suit in equity and/or by action at law, including but not limited to an action
for damages as a result of any such default, and/or an action for specific
performance for any default where Warrantholder will not have an adequate remedy
at law and where damages will not be readily ascertainable. The Company
expressly agrees that it shall not oppose an application by the Warrantholder or
any other person entitled to the benefit of this Agreement requiring specific
performance of any or all provisions hereof or enjoining the Company from
continuing to commit any such breach of this Agreement.
(g) NO IMPAIRMENT OF RIGHTS. The Company will not, by amendment of
its Charter or through any other means, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate in order to protect the rights of the
Warrantholder against impairment.
(h) SURVIVAL. The representations, warranties, covenants and
conditions of the respective parties contained herein or made pursuant to this
Warrant Agreement shall survive the execution and delivery of this Warrant
Agreement.
(i) SEVERABILITY. In the event any one or more of the provisions of
this Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision, which
comes closest to the intention of the parties underlying the invalid, illegal or
unenforceable provision.
- 7 -
<PAGE>
(j) AMENDMENTS. Any provision of this Warrant Agreement may be
amended by a written instrument signed by the Company and by the Warrantholder.
(k) ADDITIONAL DOCUMENTS. The Company, upon execution of this Warrant
Agreement, shall provide the Warrantholder with certified resolutions with
respect to the representations, warranties and covenants set forth in
subparagraphs (a) through (d), (f) and (g) of Section 9 above The Company shall
also supply such other documents as the Warrantholder may from time to time
reasonably request.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be executed by its officers thereunto duly authorized as of the Effective
Date.
COMPANY: ETOYS INC.
By:
------------------------
Title:
------------------------
WARRANTHOLDER: COMDISCO, INC.
By:
------------------------
Title:
------------------------
- 8 -
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE
TO:
--------------------------
(1) The undersigned Warrantholder hereby elects to purchase _______ shares
of the Series ____ Preferred Stock of _________________, pursuant to the
terms of the Warrant Agreement dated the ______ day of
________________________, 19__ (the "Warrant Agreement") between
_____________________________________ and the Warrantholder, and tenders
herewith payment of the purchase price for such shares in full, together
with all applicable transfer taxes, if any.
(2) In exercising its rights to purchase the Series ____ Preferred Stock of
________________________________________, the undersigned hereby
confirms and acknowledges the investment representations and warranties
made in Section 10 of the Warrant Agreement.
(3) Please issue a certificate or certificates representing said shares of
Series ____ Preferred Stock in the name of the undersigned or in such
other name as is specified below.
- ----------------------------------
(Name)
- ----------------------------------
(Address)
WARRANTHOLDER: COMDISCO, INC.
By:
--------------------------
Title:
--------------------------
Date:
--------------------------
- 9 -
<PAGE>
EXHIBIT II
ACKNOWLEDGMENT OF EXERCISE
The undersigned ____________________________________, hereby acknowledge
receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase ____ shares
of the Series ____ Preferred Stock of _________________, pursuant to the terms
of the Warrant Agreement, and further acknowledges that ______ shares remain
subject to purchase under the terms of the Warrant Agreement.
COMPANY:
By:
------------------------
Title:
------------------------
Date:
------------------------
- 10 -
<PAGE>
EXHIBIT III
TRANSFER NOTICE
(TO TRANSFER OR ASSIGN THE FOREGOING WARRANT AGREEMENT EXECUTE THIS FORM AND
SUPPLY REQUIRED INFORMATION. DO NOT USE THIS FORM TO PURCHASE SHARES.)
FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights
evidenced thereby are hereby transferred and assigned to
- ----------------------------------------------------------------
(Please Print)
whose address is
------------------------------------------------
- ----------------------------------------------------------------
Dated:
-------------------------------
Holder's Signature:
-----------------
Holder's Address:
-----------------
---------------------------------------
Signature Guaranteed:
---------------------------------------
NOTE: The signature to this Transfer Notice must correspond with the name as
it appears on the face of the Warrant Agreement, without alteration or
enlargement or any change whatever. Officers of corporations and those
acting in a fiduciary or other representative capacity should file
proper evidence of authority to assign the foregoing Warrant
Agreement.
- 11 -
<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, in the Registration Statement
(Form S-1) and related Prospectus of eToys Inc. for the registration of its
common stock.
Ernst & Young LLP
Los Angeles, California
February 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1999
<PERIOD-START> APR-01-1997 APR-01-1998
<PERIOD-END> MAR-31-1998 DEC-31-1998
<CASH> 1,552 18,545
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 224 4,971
<CURRENT-ASSETS> 1,811 23,910
<PP&E> 178 2,165
<DEPRECIATION> (18) (264)
<TOTAL-ASSETS> 2,459 27,199
<CURRENT-LIABILITIES> 355 13,793
<BONDS> 0 0
3,917 28,899
0 0
<COMMON> 1 1
<OTHER-SE> (1,814) (15,529)
<TOTAL-LIABILITY-AND-EQUITY> 2,459 27,199
<SALES> 687 23,900
<TOTAL-REVENUES> 687 23,900
<CGS> 568 19,008
<TOTAL-COSTS> 2,957 39,596
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15 46
<INCOME-PRETAX> (2,267) (15,257)
<INCOME-TAX> 1 1
<INCOME-CONTINUING> (2,268) (15,258)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,268) (15,258)
<EPS-PRIMARY> (.27) (1.38)
<EPS-DILUTED> (.27) (1.38)
</TABLE>
