<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1999
REGISTRATION NO. 333-72469
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ETOYS INC.
(Exact Name of Registrant as Specified in Its Charter)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 5945 95-4633006
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
</TABLE>
2850 OCEAN PARK BLVD., SUITE 225
SANTA MONICA, CA 90405
(310) 664-8100
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
--------------------------
EDWARD C. LENK, PRESIDENT AND CEO
ETOYS INC.
2850 OCEAN PARK BLVD., SUITE 225
SANTA MONICA, CA 90405
(310) 664-8100
(Name, Address Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
--------------------------
COPIES TO:
GLEN R. VAN LIGTEN ROBERT V. GUNDERSON, JR.
AMY E. PAYE JEFFREY P. HIGGINS
MITCHELL S. ZUKLIE WILLIAM E. GROWNEY JR.
KRISTEN A. LAMB KIRIL M. DOBROVOLSKY
VENTURE LAW GROUP GUNDERSON DETTMER STOUGH
A PROFESSIONAL CORPORATION VILLENEUVE FRANKLIN &
2800 SAND HILL ROAD HACHIGIAN, LLP
MENLO PARK, CA 94025 155 CONSTITUTION AVENUE
(650) 854-4488 MENLO PARK, CA 94025
(650) 321-2400
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION. DATED APRIL , 1999.
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
8,200,000 Shares
[LOGO]
ETOYS INC.
Common Stock
------------------
This is an initial public offering of shares of common stock of eToys Inc.
All of the 8,200,000 shares of common stock are being sold by eToys.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $10.00 and $12.00. eToys intends to list the common stock
on the Nasdaq National Market under the symbol "ETYS".
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
----------- ---------
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to eToys............................. $ $
</TABLE>
In connection with this offering, the underwriters have reserved up to
1,230,000 shares of common stock being sold by eToys for sale at the initial
public offering price to directors, officers, employees and friends of eToys.
The underwriters may, under specific circumstances, purchase up to an
additional 1,230,000 shares from eToys at the initial public offering price,
less the underwriting discount.
------------------------
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
------------------------
Prospectus dated , 1999.
<PAGE>
The gatefold includes:
A TALE OF TWO ARTHURS.
<TABLE>
<CAPTION>
[A PICTURE OF ARTHUR] [A PICTURE OF ARTHUR]
with the following text below each picture:
<S> <C>
1. BUCKLE CHILDREN INTO CAR SEATS. 1. TURN ON COMPUTER.
2. DRIVE TO TOY STORE. 2. GO TO WWW.eTOYS.COM
3. CIRCLE PARKING LOT 4 TIMES FOR 3. ORDER ARTHUR.
PARKING SPACE. 4. ARTHUR IS DELIVERED, GIFT WRAPPED, TO
4. CHANGE ONE DIAPER. YOUR DOORSTEP.
5. LOSE ONE CHILD IN THE BARBIE SECTION.
6. FINALLY FIND ARTHUR.
7. COAX CHILD OUT OF PLAY HOUSE. [PICTURE OF ETOYS HOME PAGE]
8. WAIT IN LONG CHECK-OUT LINE.
9. PUT CANDY BARS BACK ON RACK. [ETOYS LOGO]
10. PLACATE CRYING CHILDREN. WE BRING THE TOY STORE TO YOU.(SM)
11. DRIVE HOME. WWW.ETOYS.COM
12. REMEMBER YOU NEED GIFT WRAP. AOL KEYWORD: ETOYS
</TABLE>
- -TM--C-Marc Brown 1999
At the bottom of the page is the following language:
eToys-Registered Trademark- is a registered trademark of eToys. Toysearch-TM-
and "We Bring The Toy Store To You."(sm) are trademarks of eToys. All other
brand names or trademarks appearing in this prospectus are the property of their
respective holders. The inclusion of the products in this prospectus is not an
endorsement of eToys or the offering of the securities being made hereby by the
vendors of such products.
The following text is contained on this gatefold:
Across the top of the two pages: [eToys logo] and We Bring The Toy Store To
You.(sm)
[Two page screen shot of eToys home page with textual descriptions of our Web
site shopping features, surrounded by the following text flowed to both sides in
a counter-clockwise fashion]
[PICTURE OF BLUE'S CLUES]
eToys.com shoppers will find an extensive selection of competitively priced
products, with over 9,500 SKUs representing more than 750 brands. We provide a
comprehensive selection of both traditional, well-known brands, such as Mattel,
Hasbro and LEGO, and specialty brands, such as BRIO, PLAYMOBIL and Learning
Curve.
Our Web site features detailed product information and innovative merchandising
through easy-to-use Web pages. We also provide our customers with helpful and
useful shopping services such as birthday reminders and wish lists. For shoppers
who are not certain what to get the kids, we offer product reviews,
recommendations and gift suggestions. Our online store is available 24 hours a
day, seven days a week and may be reached from the shopper's home or office.
eToys.com. Why go to the store, when the toy store can come to you?
TOYSEARCH.-TM-
OUR TOYSEARCH LETS CUSTOMERS BROWSE BY ANY COMBINATION OF AGE, CATEGORY, KEYWORD
OR PRICE.
<PAGE>
[PICTURE OF MADELINE DOLL]
GOOD ADVICE.
OUR AWARD WINNER SECTION FEATURES TOYS RECOMMENDED BY PROMINENT PARENTING AND
FAMILY PUBLICATIONS AS WELL AS ORGANIZATIONS WHO REVIEW CHILDREN'S TOYS,
SOFTWARE AND BOOKS. CUSTOMERS CAN ALSO VISIT OUR BESTSELLERS SECTION TO VIEW THE
MOST POPULAR TOYS SOLD OVER THE PAST 30 DAYS OR BROWSE THROUGH OUR OWN FAVORITES
BY AGE RECOMMENDATIONS.
TOY BRANDS.
WE CARRY BOTH TRADITIONAL, WELL-KNOWN BRANDS, SUCH AS MATTEL, HASBRO AND LEGO,
AND SPECIALTY TOY BRANDS, SUCH AS BRIO, PLAYMOBIL AND LEARNING CURVE.
[PICTURE OF WRAPPED GIFT]
GIFT CENTER.
WE SIMPLIFY GIFT SHOPPING THROUGH OUR GIFT CENTER, WHERE CUSTOMERS CAN OBTAIN
GIFT CERTIFICATES, GIFT RECOMMENDATIONS BY AGE AND GET INFORMATION ON A VARIETY
OF CHILD-APPROPRIATE GIFT WRAP STYLES AND PERSONALIZED MESSAGE CARDS TO
ACCOMPANY THE GIFT.
PICKS OF THE MONTH.
IN OUR PICKS OF THE MONTH SECTION, WE RECOMMEND TOYS FOR DIFFERENT AGE RANGES.
[PICTURE OF BRIO TRAIN]
TWENTY UNDER $20.
OUR TWENTY UNDER $20 SECTION HAS RECOMMENDATIONS ON TOYS THAT WON'T STRAIN THE
BUDGET.
DETAILED PRODUCT INFORMATION.
A SIMPLE CLICK OF THE MOUSE GIVES SHOPPERS ACCESS TO DETAILED PRODUCT
INFORMATION THEY NEED TO MAKE EDUCATED BUYING DECISIONS, INCLUDING PRODUCT
DESCRIPTIONS, ETOYS' OWN AGE RECOMMENDATIONS, A LIST OF ACCESSORIES AND RELATED
PRODUCTS AND INVENTORY STATUS.
[PICTURE OF PRODUCT DESCRIPTION OF TWO-WAY BATTERY-POWERED ENGINE]
MY ETOYS.
WE PERSONALIZE THE CUSTOMER'S SHOPPING EXPERIENCE BY OFFERING BIRTHDAY
REMINDERS, CHILDREN'S WISH LISTS AND AN ADDRESS BOOK.
EXTENSIVE PRODUCT SELECTION.
OUR ONLINE STORE IS EXCLUSIVELY FOCUSED ON CHILDREN'S PRODUCTS AND OFFERS AN
EXTENSIVE SELECTION OF TOYS, VIDEO GAMES, SOFTWARE, VIDEOS AND MUSIC.
[PICTURE OF SUPER MARIO BROS. VIDEO GAME, GOODNIGHT MOON BOOK, JUMPSTART
SOFTWARE BOX AND PADDINGTON BEAR]
At the bottom right of the two page gatefold is the following:
[ETOYS LOGO]
WE BRING THE TOY STORE TO YOU.(SM)
WWW.ETOYS.COM
AOL KEYWORD: ETOYS
The following text is centered on the inside back cover:
[ETOYS LOGO]
WE BRING THE TOY STORE TO YOU.(SM)
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING ETOYS AND THE FINANCIAL STATEMENTS AND NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THIS PROSPECTUS
ASSUMES THE AUTOMATIC CONVERSION OF OUR OUTSTANDING PREFERRED STOCK INTO
58,779,267 SHARES OF COMMON STOCK, ASSUMING FULL EXERCISE OF WARRANTS TO
PURCHASE 48,387 SHARES OF PREFERRED STOCK OUTSTANDING AS OF MARCH 31, 1999, UPON
CLOSING OF THE OFFERING AND THE THREE-FOR-ONE FORWARD SPLIT OF OUR COMMON STOCK
AND PREFERRED STOCK TO BE EFFECTED UPON THE CLOSING OF THIS OFFERING. THIS
PROSPECTUS ALSO ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION
AND DOES NOT INCLUDE THE AGGREGATE OF 18,720,000 SHARES OF OUR COMMON STOCK THAT
WILL BE ISSUED IN EXCHANGE FOR ALL OUTSTANDING SHARES OF BABYCENTER CAPITAL
STOCK AND RESERVED FOR ISSUANCE UPON THE EXERCISE OF OPTIONS WE ARE ASSUMING IN
CONNECTION WITH THE PROPOSED BABYCENTER MERGER. SPECIFIC STATEMENTS IN THIS
PROSPECTUS ASSUME THAT THE BABYCENTER MERGER HAS BEEN COMPLETED. HOWEVER, THE
MERGER IS SUBJECT TO SPECIFIC CLOSING CONDITIONS AND, AS A RESULT, IT MAY NOT BE
COMPLETED. REFERENCES IN THIS PROSPECTUS TO "WE", "US" OR "OUR" REFER TO ETOYS
AND DO NOT INCLUDE BABYCENTER UNLESS OTHERWISE NOTED. OUR FISCAL YEAR ENDS ON
MARCH 31ST OF EACH YEAR AND IS NAMED FOR THE CALENDAR YEAR JUST ENDED. FOR
EXAMPLE, OUR FISCAL YEAR ENDED MARCH 31, 1998 IS CALLED "FISCAL 1997".
ETOYS INC.
OUR BUSINESS
We are a leading Web-based retailer focused exclusively on children's
products, including toys, video games, software, videos and music. By combining
our expertise in children's products and our commitment to excellent customer
service with the benefits of Internet retailing, we are able to deliver a unique
shopping experience to consumers. Our online store offers an extensive selection
of competitively priced children's products, with over 9,500 SKUs representing
more than 750 brands. Our Web site features detailed product information,
helpful and useful shopping services and innovative merchandising through
easy-to-use Web pages. In addition, we offer customers the convenience and
flexibility of shopping 24 hours a day, seven days a week, with reliable and
timely product delivery and excellent customer service.
As of March 31, 1999, we have sold children's products to approximately
365,000 customers, of which approximately 75,000 were added during the quarter
ended March 31, 1999. Our net sales for the quarter ended December 31, 1998
totaled $22.9 million as compared to $0.5 million for the quarter ended December
31, 1997.
OUR MARKET OPPORTUNITY
We believe that many consumers find the toy shopping experience, especially
at traditional mass market retail outlets, to be time-consuming, inconvenient
and unpleasant due to factors such as location, store layout, product selection,
level of customer service and the challenges of shopping with children.
Our online store was created to provide consumers with a convenient and
enjoyable shopping experience in a Web-based retail environment. Key components
of our solution include:
- - CONVENIENT SHOPPING EXPERIENCE. Our online store is available 24 hours a day,
seven days a week, may be reached from the shopper's home or office and
features sophisticated browsing and search technology.
- - EXTENSIVE PRODUCT SELECTION AND INNOVATIVE MERCHANDISING. We offer a broad
array of children's products, which we believe includes the largest selection
of toys available on the Internet. In addition, we believe that we are the
only retailer to provide a comprehensive selection
3
<PAGE>
of both traditional, well-known brands, such as Mattel, Hasbro and LEGO, and
specialty brands, such as BRIO, PLAYMOBIL and Learning Curve.
- - HELPFUL AND USEFUL SHOPPING SERVICES. To assist our customers, who are
generally adults purchasing for children, we offer product reviews,
recommendations, gift suggestions and services such as birthday reminders and
wish lists. Many of these services are also designed to inform and involve
children in the shopping experience.
- - EXCELLENT CUSTOMER SERVICE. We are committed to providing the highest level of
customer service. We offer free pre- and post-sales support via telephone and
e-mail, online order tracking and helpful online shopping hints.
OUR STRATEGY
Our objective is to be one of the world's leading retailers of children's
products. Key elements of our strategy include:
- - FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS. We intend to become the
primary place for consumers to purchase 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. We focus our efforts primarily towards
mothers, who we believe are the principal decision-makers for purchases of
children's products.
- - PURSUE WAYS TO INCREASE OUR NET SALES. We intend to pursue new opportunities
to increase our net sales by opening new departments, increasing product
selection, adding more helpful and useful shopping services, pursuing
international opportunities and acquiring complementary businesses, products
or technologies.
- - PROMOTE REPEAT PURCHASES. We intend to maximize the number of repeat purchases
by our customers by targeting existing customers through direct marketing
techniques, building features unique to each individual customer and enhancing
our customer service.
- - MAINTAIN OUR TECHNOLOGY FOCUS AND EXPERTISE. We intend to enhance our service
offerings to take advantage of the unique characteristics of online retailing.
We plan to increase the efficiency of our relationships with product vendors
and manufacturers and our distribution operations.
RECENT DEVELOPMENTS
On April 18, 1999, we entered into a merger agreement with BabyCenter, Inc.
pursuant to which a new subsidiary of ours will merge into BabyCenter so that
BabyCenter becomes our wholly owned subsidiary. BabyCenter is a Web-based
business that offers a wide variety of content, community and products focused
on and serving expectant mothers and new parents. Visitors to the BabyCenter Web
site can read health articles and parenting news, interact online with other
families and purchase a wide selection of baby products and supplies. Upon the
completion of this merger, an aggregate of 18,720,000 shares of our common stock
will be issued in exchange for all outstanding shares of BabyCenter capital
stock and reserved for issuance upon the exercise of assumed BabyCenter options
in connection with the proposed merger. We anticipate that the BabyCenter merger
will close by the end of June 1999. The BabyCenter merger is subject to closing
conditions specified in the merger agreement, including government approvals,
approval of the merger by the stockholders of BabyCenter and other customary
closing conditions. As a result, the BabyCenter merger may not be completed.
4
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. Since our
inception in November 1996, we have incurred significant losses, and as of
December 31, 1998, we had an accumulated deficit of $17.6 million. We expect our
operating losses and negative cash flow to continue for the foreseeable future.
In addition, we encounter a number of the risks, including unpredictability of
operating results, seasonality, inventory risk, reliance on key vendors and
distributors, and intense competition. You should carefully consider these risks
and uncertainties as well as those other risks and uncertainties described in
"Risk Factors" beginning on page 8 of this prospectus before deciding whether to
invest in shares of our common stock.
CORPORATE INFORMATION
We were incorporated as Toys.com in Delaware in November 1996. In May 1997,
we changed our name to eToys.com Inc., and in June 1997, we changed our name to
eToys Inc. Our corporate offices are located at 2850 Ocean Park Blvd., Suite
225, Santa Monica, CA 90405. Our telephone number at that location is (310)
664-8100. Information contained on our Web site does not constitute part of this
prospectus.
5
<PAGE>
THE OFFERING
The following information assumes that the underwriters do not exercise the
option granted by us to purchase additional shares in the offering. The number
of shares outstanding after the offering indicated below differs from the shares
outstanding as of December 31, 1998 as indicated in the financial statements
included in this prospectus. The number below includes an aggregate of 2,170,113
shares issuable upon the exercise of warrants outstanding as of December 31,
1998, substantially all of which are expected to be exercised prior to the
completion of this offering and 1,999,998 shares of preferred stock issued by us
in a private offering in March 1999. The number below excludes 11,412 shares
issuable upon exercise of a warrant we issued to an equipment lessor in January
1999. The number below also excludes 39,371,439 shares of common stock reserved
for issuance under our stock option and stock purchase plans, of which
14,951,301 shares were subject to outstanding options as of March 31, 1999 with
a weighted average exercise price of $1.592 per share. The number below further
excludes the aggregate of 18,720,000 shares of our common stock to be issued in
exchange for all outstanding shares of BabyCenter capital stock and to be
reserved for issuance upon exercise of assumed BabyCenter options in connection
with the proposed BabyCenter merger. See "Underwriting", "Management--Stock
Plans" and Notes 6 and 8 of Notes to Financial Statements.
<TABLE>
<S> <C>
Shares offered by eToys...................... 8,200,000 shares
Shares to be outstanding after the 101,640,307 shares
offering...................................
Use of proceeds.............................. For general corporate purposes, principally
working capital and capital expenditures. See
"Use of Proceeds".
Proposed Nasdaq National Market symbol....... "ETYS"
</TABLE>
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information is derived from our financial
statements included elsewhere in this prospectus and should be read in
conjunction with those financial statements and the related notes. The summary
financial information below reflects that prior to June 1997, we had no
operations or activities. Our general and administrative operating expenses
include expenses related to the amortization of deferred compensation which is
$2,000 for the fiscal year ended March 31, 1998 and $1.6 million for the nine
months ended December 31, 1998. The balance sheet data displayed in the "As
Adjusted" column reflect the application of the net proceeds from the sale of
8,200,000 shares of common stock offered by us at an assumed initial public
offering price of $11.00 per share, after deducting the underwriting discount
and estimated offering expenses. The statement of operations data displayed in
the "Pro Forma BabyCenter Merger 1998" column gives effect to the BabyCenter
merger expected to be completed by the end of June 1999. You should review Note
1 to the notes to our financial statements included elsewhere in this prospectus
for an explanation of the determination of the number of shares and share
equivalents used in computing the pro forma per share amounts set forth below.
See "Use of Proceeds", "Capitalization" and "Unaudited Pro Forma Condensed
Combined Financial Information".
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL ENDED PRO FORMA
YEAR ENDED DECEMBER 31, BABYCENTER
MARCH 31, -------------------------- MERGER
1998 1997 1998 1998
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 687 $ 530 $ 23,900 $ 25,836
Gross profit................................... 119 92 4,892 6,649
Operating expenses:
Marketing and sales.......................... 1,290 632 14,354 15,207
Product development.......................... 421 206 2,006 3,380
General and administrative................... 678 366 4,106 4,851
Goodwill amortization........................ -- -- 239 30,876
------------ ------------ ------------ ------------
Operating loss................................. (2,270) (1,112) (15,813) (47,665)
Net loss....................................... $ (2,268) $ (1,127) $ (15,375) $ (47,133)
Basic net loss per share....................... $ (0.09) $ (0.05) $ (0.46) $ (0.95)
Pro forma basic net loss per share............. $ (0.08) $ (0.05) $ (0.19) $ (0.49)
Shares used to compute basic net loss per
share........................................ 25,129,888 23,326,095 33,157,034 49,844,090
Shares used to compute pro forma basic net loss
per share.................................... 30,232,902 23,879,498 79,287,459 95,974,515
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................ $ 18,545 $ 121,399
Working capital.......................................................................... 10,117 112,971
Total assets............................................................................. 27,550 130,404
Long-term capital lease obligations, less current portion................................ 35 35
Total stockholders' equity (deficit)..................................................... (15,177) 116,576
</TABLE>
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST
IN SHARES OF OUR COMMON STOCK. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. IN SUCH
CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE PART
OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING DIFFICULT.
We were incorporated in November 1996. We began selling products on our Web
site in October 1997. 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. This inability could cause our net losses in a given quarter to be
greater than expected.
WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW.
We expect operating losses and negative cash flow to continue for the
foreseeable future. We anticipate our losses will increase significantly from
current levels because we expect to incur additional costs and expenses related
to:
- - brand development, marketing and other promotional activities;
- - the expansion of our inventory management and distribution operations;
- - the continued development of our Web site, the systems that we use to process
customers' orders and payments, and our computer network;
- - the expansion of our product offerings and Web site content; and
- - development of relationships with strategic business partners.
As of December 31, 1998, we had an accumulated deficit of $17.6 million. We
incurred net losses of $2.3 million for the fiscal year ended March 31, 1998 and
$15.4 million for the nine months ended December 31, 1998.
In addition, if the BabyCenter merger is completed, we expect that our
losses will increase even more significantly because of additional costs and
expenses related to:
- - an increase in the number of employees;
- - an increase in sales and marketing activities;
- - additional facilities and infrastructure; and
- - assimilation of operations and personnel.
Also, if the BabyCenter merger is completed, we will record a significant
amount of goodwill, the amortization of which will significantly reduce our
earnings and profitability for the foreseeable
8
<PAGE>
future. We expect to record goodwill of approximately $204.2 million, to be
amortized over a five-year period. To the extent we do not generate sufficient
cash flow to recover the amount of the investment recorded, the investment may
be considered impaired and could be subject to earlier write-off. In such event,
our net loss in any given period could be greater than anticipated and the
market price of our stock could decline.
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 OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF
OUR COMMON STOCK MAY DECLINE SIGNIFICANTLY.
Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. Because our operating results are volatile and
difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. It is
likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may decline significantly.
Factors that may harm our business or cause our operating results to
fluctuate include the following:
- - our inability to obtain new customers at reasonable cost, retain existing
customers, or encourage repeat purchases;
- - decreases in the number of visitors to our Web site or our inability to
convert visitors to our Web site into customers;
- - the mix of toys, video games, software, videos and music sold by us;
- - seasonality;
- - our inability to manage inventory levels;
- - our inability to manage our distribution operations;
- - our inability to adequately maintain, upgrade and develop our Web site, the
systems that we use to process customers' orders and payments or our computer
network;
- - the ability of our competitors to offer new or enhanced Web sites, services or
products;
- - price competition;
- - an increase in the level of our product returns;
- - fluctuations in the demand for children's products associated with movies,
television and other entertainment events;
- - our inability to obtain popular children's toys, video games, software, videos
and music from our vendors;
- - fluctuations in the amount of consumer spending on children's toys, video
games, software, videos and music;
9
<PAGE>
- - the termination of existing or failure to develop new marketing relationships
with key business partners;
- - the extent to which we are not able to participate in advertising campaigns
such as those conducted by Visa and Intel;
- - increases in the cost of online or offline advertising;
- - the amount and timing of operating costs and capital expenditures relating to
expansion of our operations;
- - unexpected increases in shipping costs or delivery times, particularly during
the holiday season;
- - technical difficulties, system downtime or Internet brownouts;
- - government regulations related to use of the Internet for commerce or for
sales and distribution of toys, video games, software, videos and music; and
- - economic conditions specific to the Internet, online commerce and the
children's toy, video game, software, video and music industries.
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 reduce our gross
margins in future periods.
BECAUSE WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES, OUR QUARTERLY
RESULTS WILL FLUCTUATE AND OUR ANNUAL RESULTS COULD BE BELOW EXPECTATIONS.
We have historically experienced and expect to continue to experience
seasonal fluctuations in our net sales. These seasonal patterns will cause
quarterly fluctuations in our operating results. 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.
In anticipation of increased sales activity during the fourth calendar
quarter, we hire a significant number of temporary employees to bolster our
permanent staff and we significantly increase our inventory levels. For this
reason, if our net sales were below seasonal expectations during this quarter,
our annual operating results could be below the expectations of securities
analysts and investors.
Due to our limited operating history, it is difficult to predict the
seasonal pattern of our sales and the impact of such seasonality on our business
and financial results. In the future, our seasonal sales patterns may become
more pronounced, may strain our personnel and warehousing and order shipment
activities and may cause a shortfall in net sales as compared to expenses in a
given period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
WE FACE SIGNIFICANT INVENTORY RISK BECAUSE CONSUMER DEMAND CAN CHANGE FOR
PRODUCTS BETWEEN THE TIME THAT WE ORDER PRODUCTS AND THE TIME THAT WE RECEIVE
THEM.
We carry a significant level of inventory. As a result, the rapidly changing
trends in consumer tastes in the market for children's toys, video games,
software, videos and music subject us to significant inventory risks. It is
critical to our success that we accurately predict these trends and do not
overstock unpopular products. The demand for specific products can change
between the time the products are ordered and the date of receipt. We are
particularly exposed to this risk because we derive a majority of our net sales
in the fourth calendar quarter of each year. Our failure to
10
<PAGE>
sufficiently stock popular toys and other products in advance of such fourth
calendar quarter would harm our operating results for the entire fiscal year.
In the event that one or more products do not achieve widespread consumer
acceptance, we may be required to take significant inventory markdowns, which
could reduce our net sales and gross margins. This risk may be greatest in the
first calendar quarter of each year, after we have significantly increased
inventory levels for the holiday season. We believe that this risk will increase
as we open new departments or enter new product categories due to our lack of
experience in purchasing products for these categories. In addition, to the
extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any such increase would subject us to additional
inventory risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business".
BECAUSE WE DO NOT HAVE LONG-TERM OR EXCLUSIVE VENDOR CONTRACTS, WE MAY NOT BE
ABLE TO GET SUFFICIENT QUANTITIES OF POPULAR CHILDREN'S PRODUCTS IN A TIMELY
MANNER. AS A RESULT, WE COULD LOSE CUSTOMERS.
If we are not able to offer our customers sufficient quantities of toys or
other products in a timely manner, we could lose customers and our net sales
could be below expectations. Our success depends on our ability to purchase
products in sufficient quantities at competitive prices, particularly for the
holiday shopping season. As is common in the industry, we do not have long-term
or exclusive arrangements with any vendor or distributor that guarantee the
availability of toys or other children's products for resale. Therefore, we do
not have a predictable or guaranteed supply of toys or other products.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF PRODUCTS FROM OUR KEY
VENDORS, OUR NET SALES WOULD DECREASE.
If we were unable to obtain sufficient quantities of products from our key
vendors, we could lose customers and our net sales could be below expectations.
We derive a significant percentage of our net sales from sales of Mattel and
Hasbro products. We also derive a significant percentage of our net sales from
the sale of video game products that are primarily supplied to us by a single
distributor. From time to time, we have experienced difficulty in obtaining
sufficient product allocations from a key vendor. In addition, our key vendors
have established, and may continue to expand, their own online retailing
efforts, which may impact our ability to get sufficient product allocations from
such vendors.
TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT FINANCIAL
AND MANAGERIAL CONTROLS AND REPORTING SYSTEMS AND PROCEDURES. IF WE ARE UNABLE
TO DO SO SUCCESSFULLY, OUR RESULTS OF OPERATIONS WOULD BE IMPAIRED.
Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management, information systems and
resources. If the BabyCenter merger is completed, we will add over 100 new
employees, including managerial, technical and operations personnel, and will
need to assimilate substantially all of BabyCenter's operations into our
operations. In order to manage this growth effectively, we need to continue to
improve our financial and managerial controls and reporting systems and
procedures. If we continue to experience a significant increase in the number of
our personnel, our existing management team may not be able to effectively
train, supervise and manage all of our personnel. In addition, our existing
information systems may not be able to handle adequately the increased volume of
information and transactions that would result from increased growth. Our
failure to successfully implement, improve and integrate these systems and
procedures would cause our results of operations to be below expectations.
11
<PAGE>
IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR NEW ACCOUNTING AND FINANCIAL
REPORTING SYSTEMS, OUR STOCK PRICE COULD DECLINE.
If we fail to successfully implement and integrate our new financial
reporting and information systems with our existing systems or if we are not
able to expand these systems to accommodate our growth, we may not have
adequate, accurate or timely financial information. Our failure to have
adequate, accurate or timely financial information would harm our business and
could lead to volatility in our stock price. We recently implemented new
accounting and financial reporting software. In connection with the
implementation, we have encountered difficulties integrating this new software
with our other information systems. Additionally, we are in the process of
upgrading our other information systems and internal controls, including those
related to the purchase and receipt of inventory. If we grow rapidly, we will
face additional challenges in upgrading and maintaining such systems.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.
The online commerce market is new, rapidly evolving and intensely
competitive. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could seriously
harm our net sales and results of operations. We expect competition to intensify
in the future because current and new competitors can enter our market with
little difficulty and can launch new Web sites at a relatively low cost. In
addition, the children's toy, video game, software, video and music retailing
industries are intensely competitive.
We currently or potentially compete with a variety of other companies,
including:
- - traditional store-based toy and children's product retailers such as Toys R
Us, FAO Schwarz, Zany Brainy and Noodle Kidoodle;
- - major discount retailers such as Wal-Mart, Kmart and Target;
- - online efforts of these traditional retailers, including the online stores
operated by Toys R Us, Wal-Mart and FAO Schwarz;
- - physical and online stores of entertainment entities that sell and license
children's products, such as The Walt Disney Company and Warner Bros.;
- - catalog retailers of children's products;
- - vendors or manufacturers of children's products that currently sell some of
their products directly online, such as Mattel and Hasbro;
- - other online retailers that include children's products as part of their
product offerings, such as Amazon.com, Barnesandnoble.com, CDnow, Beyond.com
and Reel.com;
- - Internet portals and online service providers that feature shopping services,
such as AOL, Yahoo!, Excite and Lycos; and
- - various smaller online retailers of children's products, such as
BrainPlay.com, Red Rocket and Toysmart.com.
If the BabyCenter merger is completed, we will also compete with companies
that sell products or provide content for babies, toddlers and expectant
mothers. These companies include the competitors listed above and also include:
- - traditional store-based retailers such as BabyGap, Gymboree, The Right Start
and Babies R Us;
- - the online efforts of these traditional retailers, including the online stores
operated by BabyGap and Gymboree;
12
<PAGE>
- - catalog retailers of products for babies, toddlers and expectant mothers; and
- - various online companies such as iBaby, BabyCatalog.com, iVillage and
Women.com.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-financed
entities may join with online competitors or children's toy, video game,
software, video and music publishers or suppliers as the use of the Internet and
other online services increases.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. See "Business--Competition".
IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BRAND AND REPUTATION COULD BE DAMAGED AND WE COULD FAIL TO ATTRACT NEW
CUSTOMERS.
Any new department or product category that is launched or acquired by us,
including BabyCenter, which is not favorably received by consumers could damage
our brand or reputation. This damage could impair our ability to attract new
customers, which could cause our net sales to fall below expectations. An
expansion of our business to include BabyCenter or any other new department or
product category will require significant additional expenses, and strain our
management, financial and operational resources. This type of expansion would
also subject us to increased inventory risk. We may choose to expand our
operations by developing other new departments or product categories, promoting
new or complementary products, 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 other new or
complementary businesses, products or technologies, although we have no present
understandings, commitments or agreements with respect to any material
acquisitions or investments.
IF WE DO NOT SUCCESSFULLY EXPAND OUR DISTRIBUTION OPERATIONS, OUR NET SALES MAY
FALL BELOW EXPECTATIONS.
If we do not successfully expand our distribution operations to accommodate
increases in demand, particularly during the fourth calendar quarter of each
year, we will not be able to increase our net sales in accordance with the
expectations of securities analysts and investors. Our success depends on our
ability to rapidly expand our distribution operations in order to accommodate a
significant increase in customer orders. We must also be able to rapidly grow
our distribution operations and information systems to accommodate significant
increases in demand, which may require us to automate tasks that are currently
performed manually.
Our planned expansion may cause disruptions in our business. Our current
distribution operations are not adequate to accommodate significant increases in
customer demand that may occur during the fourth calendar quarter of 1999. We
intend to use a second distribution facility that will be located outside of the
greater Los Angeles area. We are not experienced in coordinating and managing
distribution operations in geographically distant locations.
13
<PAGE>
IF WE EXPERIENCE PROBLEMS IN OUR DISTRIBUTION OPERATIONS, WE COULD LOSE
CUSTOMERS.
We rely upon third-party carriers for product shipments, including shipments
to and from our distribution facility. We are therefore subject to the risks,
including employee strikes and inclement weather, associated with such carriers'
ability to provide delivery services to meet our shipping needs. In addition,
failure to deliver products to our customers in a timely manner would damage our
reputation and brand. We also depend upon temporary employees to adequately
staff our distribution facility, particularly during the holiday shopping
season. If we do not have sufficient sources of temporary employees, we could
lose customers.
IF WE DO NOT SUCCESSFULLY EXPAND OUR WEB SITE AND THE SYSTEMS THAT PROCESS
CUSTOMERS' ORDERS, WE COULD LOSE CUSTOMERS AND OUR NET SALES COULD BE REDUCED.
If we fail to rapidly upgrade our Web site in order to accommodate increased
traffic, we may lose customers, which would reduce our net sales. Furthermore,
if we fail to rapidly expand the computer systems that we use to process and
ship customer orders and process payments, we may not be able to successfully
distribute customer orders. As a result, we could lose customers and our net
sales could be reduced. In addition, our failure to rapidly upgrade our Web site
or expand these computer systems without system downtime, particularly during
the fourth calendar quarter, would further reduce our net sales. We may
experience difficulty in improving and maintaining such systems if our employees
or contractors that develop or maintain our computer systems become unavailable
to us. We have experienced periodic systems interruptions, which we believe will
continue to occur, while enhancing and expanding these computer systems.
OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED PROBLEMS. THE OCCURRENCE OF A NATURAL DISASTER OR OTHER UNEXPECTED
PROBLEM COULD DAMAGE OUR REPUTATION AND BRAND AND REDUCE OUR NET SALES.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our leased facility in Southern California, or at the third-party
facility in Sunnyvale, California that houses substantially all of our computer
and communications hardware systems, could cause interruptions or delays in our
business, loss of data or render us unable to accept and fulfill customer
orders. Our leased facility in Southern California houses substantially all of
our product development and information systems, as well as our inventory. Any
such interruptions or delays at either of these facilities would reduce our net
sales. In addition, our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events. We have no formal disaster recovery
plan and our business interruption insurance may not adequately compensate us
for losses that may occur. In addition, the failure by the third-party facility
to provide the data communications capacity required by us, as a result of human
error, natural disaster or other operational disruptions, could result in
interruptions in our service. The occurrence of any or all of these events could
damage our reputation and brand and impair our business.
OUR NET SALES COULD DECREASE IF OUR ONLINE SECURITY MEASURES FAIL.
Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales could decrease. We rely on security and authentication technology
that we license from third parties. With this technology, we perform real-time
credit card authorization and verification with our bank. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information.
14
<PAGE>
Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any breaches. We cannot assure that we can
prevent all security breaches.
OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE SIGNIFICANT
CREDIT CARD FRAUD.
A failure to adequately control fraudulent credit card transactions would
reduce our net sales and our gross margins because we do not carry insurance
against this risk. We have developed technology to help us to detect the
fraudulent use of credit card information. Nonetheless, to date, we have
suffered losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the orders.
Under current credit card practices, we are liable for fraudulent credit card
transactions because we do not obtain a cardholder's signature.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME
OBSOLETE AND WE COULD LOSE CUSTOMERS.
If we face material delays in introducing new services, products and
enhancements, our customers may forego the use of our services and use those of
our competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our online store. The Internet and the online
commerce industry are rapidly changing. If competitors introduce new products
and services embodying new technologies, or if new industry standards and
practices emerge, our existing Web site and proprietary technology and systems
may become obsolete.
To develop our Web site and other proprietary technology entails significant
technical and business risks. We may use new technologies ineffectively or we
may fail to adapt our Web site, systems that we use to process customers' orders
and payments and our computer network to customer requirements or emerging
industry standards.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS.
Other parties may assert infringement or unfair competition claims against
us. In the past, a toy distributor using a name similar to ours sent us notice
of a claim of infringement of proprietary rights, which claim was subsequently
withdrawn. We expect to receive other notices from other third parties in the
future. We cannot predict whether third parties will assert claims of
infringement against us, or whether any past or future assertions or
prosecutions will harm our business. If we are forced to defend against any such
claims, whether they are with or without merit or are determined in our favor,
then we may face costly litigation, diversion of technical and management
personnel, or product shipment delays. As a result of such a dispute, we may
have to develop non-infringing technology or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may be
unavailable on terms acceptable to us, or at all. If there is a successful claim
of product infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely basis, it
could impair our business.
15
<PAGE>
IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BRAND AND REPUTATION COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS.
The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success. We rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. In September 1998, the United States Patent and Trademark
Office granted us a registered trademark for "eToys" for online retail services
for toys and games. We have filed a trademark application for "eToys" for toys,
games and playthings and for sales of toys, games and playthings. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which we will sell our products and services
online. Furthermore, the relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights.
THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE,
COULD DISRUPT OUR OPERATIONS AND RESULT IN LOSS OF NET SALES.
The loss of the services of one or more of our key personnel could seriously
interrupt our business. We depend on the continued services and performance of
our senior management and other key personnel, particularly Edward C. Lenk, our
President, Chief Executive Officer and Uncle of the Board. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel. The majority of our senior management
joined us in the last four months, including our Chief Financial Officer, Chief
Information Officer and Senior Vice President of Operations. Our future success
depends on these officers effectively working together with our original
management team. Also, if we complete the BabyCenter merger, our success will
also depend on a successful integration of BabyCenter's management with our
senior 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 MAY BE ADVERSELY IMPACTED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER
SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.
Any failure of our material systems, our vendors' material systems or the
Internet to be year 2000 compliant would have material adverse consequences for
us. Such consequences would include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business. We are currently assessing the year
2000 readiness of the software, computer technology and other services that we
use which may not be year 2000 compliant. At this time, we have not yet
developed a contingency plan to address situations that may result if we or our
vendors are unable to achieve year 2000 compliance. The cost of developing and
implementing such a plan, if necessary, could be material.
We also depend on the year 2000 compliance of the computer systems and
financial services used by consumers. A significant disruption in the ability of
consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our services and would
have a material adverse effect on us. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
16
<PAGE>
THERE ARE RISKS ASSOCIATED WITH THE PROPOSED BABYCENTER MERGER AND OTHER
POTENTIAL ACQUISITIONS. AS A RESULT, WE MAY NOT ACHIEVE THE EXPECTED BENEFITS OF
THE PROPOSED BABYCENTER MERGER AND OTHER POTENTIAL ACQUISITIONS.
The BabyCenter merger is subject to a number of contingencies, including
approval of the merger by BabyCenter stockholders and governmental authorities
and other customary closing conditions. As a result, there can be no assurance
that the BabyCenter merger will be completed. If the merger is not completed,
the trading price of our common stock may fall.
If the BabyCenter merger is completed, we may not realize the anticipated
benefits from the merger. We may not be able to successfully assimilate the
additional personnel, operations, acquired technology and products into our
business. The proposed merger may further strain our existing financial and
managerial controls and reporting systems and procedures. In addition, key
BabyCenter personnel may decide not to work for us. These difficulties could
disrupt our ongoing business, distract our management and employees or increase
our expenses. Further, the physical expansion in facilities that would occur as
a result of this merger may result in disruptions that seriously impair our
business. In particular, if the BabyCenter merger is completed, we will have
operations in multiple facilities in geographically distant areas. We are not
experienced in managing facilities or operations in geographically distant
areas. In connection with the proposed merger, an aggregate of 18,720,000 shares
of our common stock will be issued in exchange for all outstanding shares of
BabyCenter capital stock and reserved for issuance upon the exercise of assumed
BabyCenter options in connection with the merger. The issuance of these
securities will be dilutive to our existing stockholders.
If we are presented with appropriate opportunities, we intend to make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any other acquisition or investment. If we
buy a company, we will likely face the same risks, uncertainties and disruptions
as discussed above with respect to the proposed BabyCenter merger. Furthermore,
we may have to incur debt or issue equity securities to pay for any additional
future acquisitions or investments, the issuance of which could be dilutive to
us or our existing stockholders.
EXECUTIVE OFFICERS, DIRECTORS AND ENTITIES AFFILIATED WITH THEM WILL CONTINUE TO
HAVE SUBSTANTIAL CONTROL OVER eTOYS AFTER THE OFFERING WHICH COULD DELAY OR
PREVENT A CHANGE IN OUR CORPORATE CONTROL FAVORED BY OUR OTHER STOCKHOLDERS.
Executive officers, directors and entities affiliated with them, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. These
stockholders will, in the aggregate, beneficially own approximately 70.9% of our
outstanding common stock following the completion of this offering. See
"Principal Stockholders".
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our Amended and Restated Certificate of Incorporation, our
Bylaws and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. See
"Description of Capital Stock".
INVESTORS IN THE OFFERING WILL EXPERIENCE IMMEDIATE DILUTION.
We expect the initial public offering price to be substantially higher than
the book value per share of the outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in this offering, you will
experience immediate dilution of approximately $9.85 in the book value per share
of the common stock from the price you pay for the common stock. See "Dilution".
17
<PAGE>
RISKS RELATED TO OUR INDUSTRY
IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRAND AND
REPUTATION COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS.
We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
As a result, we may be unable to prevent third parties from acquiring and using
domain names relating to our brand. Such use could damage our brand and
reputation and take customers away from our Web site. We currently hold various
relevant domain names, including the "eToys.com" domain name. The acquisition
and maintenance of domain names generally is regulated by governmental agencies
and their designees. For example, in the United States, the National Science
Foundation has appointed Network Solutions, Inc. as the current exclusive
registrar for the ".com", ".net" and ".org" generic top-level domains. The
regulation of domain names in the United States and in foreign countries is
subject to change in the near future. Such changes in the United States are
expected to include a transition from the current system to a system which is
controlled by a non-profit corporation and the creation of additional top-level
domains. Governing bodies may establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION INCREASES.
The adoption or modification of laws or regulations relating to the Internet
could adversely affect the manner in which we currently conduct our business. In
addition, the growth and development of the market for online commerce may lead
to more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on us. Laws and regulations directly
applicable to communications or commerce over the Internet are becoming more
prevalent. The United States Congress recently enacted Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material. The European Union recently enacted its own privacy
regulations. The law of the Internet, however, remains largely unsettled, even
in areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. In order to comply
with new or existing laws regulating online commerce, we may need to modify the
manner in which we do business, which may result in additional expenses. We may
need to spend time and money revising the process by which we fulfill customers'
orders to ensure that each shipment complies with applicable laws. We may need
to hire additional personnel to monitor our compliance with applicable laws.
WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.
As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. If we face liability, then our reputation and our business may
suffer. In the past, plaintiffs have brought these types of claims and sometimes
successfully litigated them against online services. Although we carry general
liability insurance, our insurance currently does not cover claims of these
types. However, this insurance is available, and we intend to obtain this
insurance in the near future. There can be no assurance that we will be able to
obtain such insurance or that it will be adequate to indemnify us for all
liability that may be imposed on us.
18
<PAGE>
OUR NET SALES COULD DECREASE IF WE BECOME SUBJECT TO SALES AND OTHER TAXES.
If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do not currently collect sales or
other similar taxes for physical shipments of goods into states other than
California. However, one or more local, state or foreign jurisdictions may seek
to impose sales tax collection obligations on us. In addition, any new operation
in states outside California could subject our shipments in such states to state
sales taxes under current or future laws. If we become obligated to collect
sales taxes, we will need to update our system that processes customers' orders
to calculate the appropriate sales tax for each customer order and to remit the
collected sales taxes to the appropriate authorities. These upgrades will
increase our operating expenses. In addition, our customers may be discouraged
from purchasing products from us because they have to pay sales tax, causing our
net sales to decrease. As a result, we may need to lower prices to retain these
customers.
RISKS RELATED TO SECURITIES MARKETS
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We cannot be certain that additional financing will be available to us on
favorable terms when required, or at all. If we raise additional funds through
the issuance of equity, equity-related or debt securities, such securities may
have rights, preferences or privileges senior to those of the rights of our
common stock and our stockholders may experience additional dilution. We require
substantial working capital to fund our business. Since our inception, we have
experienced negative cash flow from operations and expect to experience
significant negative cash flow from operations for the foreseeable future. We
currently anticipate that the net proceeds of this offering, together with our
available funds, will be sufficient to meet our anticipated needs for working
capital and capital expenditures through at least the next 12 months. We may
need to raise additional funds prior to the expiration of such period.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INDIVIDUAL STOCKHOLDERS.
The market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following,
some of which are beyond our control:
- - actual or anticipated variations in our quarterly operating results;
- - announcements of technological innovations or new products or services by us
or our competitors;
- - changes in financial estimates by securities analysts;
- - conditions or trends in the Internet and/or online commerce industries;
- - changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies;
- - announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
- - additions or departures of key personnel;
- - release of lock-up or other transfer restrictions on our outstanding shares of
common stock or sales of additional shares of common stock; and
- - potential litigation.
19
<PAGE>
IF OUR STOCK PRICE IS VOLATILE, WE COULD FACE A SECURITIES CLASS ACTION LAWSUIT.
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
would cause our stock price to fall.
SUBSTANTIAL SALES OF OUR COMMON STOCK AFTER THE OFFERING COULD CAUSE OUR STOCK
PRICE TO FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
101,640,307 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after March 31,
1999. Of these shares, the shares sold in this offering are freely tradable.
This leaves 93,440,307 remaining shares. 91,440,309 of such shares will be
eligible for sale in the public market beginning 180 days after the date of this
prospectus and 1,999,998 of such shares will be eligible for sale in the public
market beginning 365 days after the date of this prospectus, subject to volume
and other restrictions pursuant to Rule 144 under the Securities Act. If the
BabyCenter merger is completed, approximately 1,377,152 shares of our common
stock to be issued in exchange for outstanding shares of BabyCenter capital
stock and issuable upon exercise of assumed BabyCenter options will be
immediately eligible for sale in the public market upon closing of the merger in
accordance with the restrictions of Rule 144 under the Securities Act. The
remaining 17,342,848 shares of our common stock to be issued in exchange for
outstanding shares of BabyCenter capital stock and issuable upon exercise of
assumed BabyCenter options in connection with the merger will be eligible for
public sale in the public market beginning 180 days after the date of this
prospectus, subject in such case to the volume and other restrictions pursuant
to Rule 144 under the Securities Act. See "Management--Stock Plans", "Shares
Eligible for Future Sale" and "Underwriting".
20
<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 $11.00 per share are estimated to be $82.4
million, after deducting the underwriting discount and estimated offering
expenses payable by us, or $95.0 million if the underwriters' over-allotment
option is exercised in full.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate our future access
to the public capital markets, and to increase our visibility in the retail
marketplace. We expect to use up to approximately 30% of the net proceeds of
this offering for capital expenditures associated with technology and system
upgrades and the expansion of our distribution operations and corporate offices.
We have no specific plans for the remaining proceeds. The remainder of the net
proceeds will be used for general corporate purposes and working capital. This
allocation is only an estimate and we may adjust it as necessary to address our
operational needs in the future. For instance, we may also use a portion of the
net proceeds to acquire complementary technologies or businesses; however, with
the exception of the BabyCenter merger, 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.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998 on
an actual, pro forma, as adjusted and pro forma BabyCenter merger basis. The
"actual" column reflects our capitalization as of December 31, 1998 on a
historical basis, without any adjustments to reflect subsequent events or
anticipated events. The "pro forma" column reflects our capitalization as of
December 31, 1998 with adjustments for the following:
- - the filing of an amendment to our Certificate of Incorporation to provide for
authorized capital stock of 600,000,000 shares of common stock and 10,000,000
shares of undesignated preferred stock and a three-for-one forward stock split
of our common stock and preferred stock;
- - the issuance of 1,999,998 shares of our preferred stock in a private offering
in March 1999; and
- - the automatic conversion of all shares of outstanding preferred stock into
56,759,154 shares of common stock upon the closing of this offering.
The "as adjusted" column reflects our capitalization as of December 31, 1998
with the preceding "pro forma" adjustments plus:
- - the exercise of warrants outstanding as of December 31, 1998, resulting in the
anticipated issuance of 2,170,113 shares of common stock; and
- - the receipt of the estimated net proceeds from our sale of 8,200,000 shares of
common stock at an assumed initial public offering price of $11.00 per share.
The "pro forma BabyCenter merger" column reflects our capitalization as of
December 31, 1998 with the preceding "pro forma" and "as adjusted" adjustments
plus 16,687,056 shares of common stock to be issued in exchange for all
outstanding shares of BabyCenter capital stock in connection with the proposed
BabyCenter merger. See "Unaudited Pro Forma Condensed Combined Financial
Information" included elsewhere in this prospectus.
None of the columns set forth below reflect the following:
- - the 11,412 shares of common stock issuable upon exercise of a warrant that we
issued to an equipment lessor in January 1999;
- - the 39,371,439 shares of common stock reserved for issuance under our stock
option plans and stock purchase plans, of which 12,717,600 shares were subject
to outstanding options as of December 31, 1998; and
- - the 2,032,944 shares of common stock reserved for issuance upon the exercise
of assumed BabyCenter options in connection with the proposed BabyCenter
merger. See "Unaudited Pro Forma Condensed Combined Financial Information"
included elsewhere in this prospectus.
22
<PAGE>
The table below should be read in conjunction with our balance sheet as of
December 31, 1998 and the related notes, which are included elsewhere in this
prospectus. The table below reflects that we recorded deferred compensation of
$31.6 million for the nine months ended December 31, 1998. You should review
Notes 5 and 8 to the notes to our financial statements included elsewhere in
this prospectus for descriptions of our Series A preferred stock, Series B
preferred stock and Series C preferred stock.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------
PRO FORMA
BABYCENTER
ACTUAL PRO FORMA AS ADJUSTED MERGER
---------- ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term capital lease obligations, less current portion............... $ 35 $ 35 $ 35 $ 74
Redeemable Convertible Preferred Stock, 18,926,423 shares authorized:
Series A Preferred Stock; $.0001 par value; 6,366,403 shares issued
and outstanding, actual; no shares authorized, issued or
outstanding, pro forma, as adjusted and pro forma BabyCenter
merger.............................................................. 3,947 -- -- --
Series B Preferred Stock; $.0001 par value; 11,886,649 shares issued
and outstanding, actual; no shares authorized, issued or
outstanding, pro forma, as adjusted and pro forma BabyCenter
merger.............................................................. 24,952 -- -- --
Series C Preferred Stock, $.0001 par value, 666,666 shares issued in
March 1999; no shares authorized, issued or outstanding, pro forma,
as adjusted and pro forma BabyCenter merger......................... -- -- -- --
Stockholders' equity (deficit):
Preferred Stock: $.0001 par value, 5,000,000 shares authorized, none
issued or outstanding actual, 10,000,000 shares authorized, none
issued or outstanding, pro forma, as adjusted and pro forma
BabyCenter merger................................................... -- -- -- --
Common Stock: $.0001 par value, 150,000,000 shares authorized,
33,777,837 shares issued and outstanding actual; 600,000,000 shares
authorized, 90,536,991 issued and outstanding, pro forma;
100,907,104 shares issued and outstanding, as adjusted; 117,594,160
shares issued and outstanding, pro forma BabyCenter merger.......... 3 9 10 12
Additional paid-in capital.............................................. 32,668 81,561 164,414 370,332
Receivables from stockholders........................................... (147) (147) (147) (147)
Deferred compensation................................................... (30,058) (30,058) (30,058) (30,058)
Accumulated deficit..................................................... (17,643) (17,643) (17,643) (17,643)
---------- ----------- ------------ ------------
Total stockholders' equity (deficit)................................ (15,177) 33,722 116,576 322,496
---------- ----------- ------------ ------------
Total capitalization............................................ $ 13,757 $ 33,757 $ 116,611 $ 322,570
---------- ----------- ------------ ------------
---------- ----------- ------------ ------------
</TABLE>
23
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1998 was
approximately $33.0 million or $0.36 per share. Net tangible book value per
share represents the amount of our total tangible assets reduced by the amount
of our total liabilities and divided by the total number of shares of common
stock outstanding after giving effect to the automatic conversion of the
preferred stock. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common stock
immediately after the completion of this offering. After giving effect to the
sale of the 8,200,000 shares of common stock offered by us at an assumed initial
public offering price of $11.00 per share, and after deducting the underwriting
discount and estimated offering expenses payable by us, our pro forma net
tangible book value at December 31, 1998 would have been approximately $115.9
million or $1.15 per share of common stock. This represents an immediate
increase in net tangible book value of $0.79 per share to existing stockholders
and an immediate dilution of $9.85 per share to new investors of common stock.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 11.00
Pro forma net tangible book value per share before the offering........... $ 0.36
Increase per share attributable to new investors.......................... 0.79
---------
Pro forma net tangible book value per share after the offering (as
adjusted)................................................................. 1.15
---------
Dilution per share to new investors......................................... $ 9.85
---------
---------
</TABLE>
The following table summarizes on an as adjusted basis after giving effect
to the offering, as of December 31, 1998, the differences between the existing
stockholders and new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------------- --------- ---------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 92,707,104 91.9% $ 50,356,000 35.8% $ 0.54
New investors.................................. 8,200,000 8.1 90,200,000 64.2 11.00
-------------- --------- ---------------- ---------
Totals......................................... 100,907,104 100.0% $ 140,556,000 100.0%
-------------- --------- ---------------- ---------
-------------- --------- ---------------- ---------
</TABLE>
The preceding tables include an aggregate of 2,170,113 shares of common
stock issuable upon the exercise of warrants outstanding as of December 31,
1998, substantially all of which are expected to be exercised prior to the
completion of this offering. The preceding tables exclude 39,371,439 shares of
common stock reserved for issuance under our stock option plans and stock
purchase plans, of which 12,717,600 were subject to outstanding options as of
December 31, 1998 at a weighted average exercise price of $0.331 per share,
11,412 shares of common stock issuable upon exercise of a warrant that we issued
to an equipment lessor in January 1999. The preceding tables also exclude the
aggregate of 18,720,000 shares of common stock to be issued in exchange for all
outstanding shares of BabyCenter capital stock and reserved for issuance upon
the exercise of assumed BabyCenter options in connection with the proposed
BabyCenter merger.
24
<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 selected financial data reflect that prior to
June 1997, we had no operations or activities. The statement of operations data
set forth below for the fiscal year ended March 31, 1998 and for the nine months
ended December 31, 1998, and the selected balance sheet data as of March 31,
1998 and December 31, 1998 have been derived from our audited financial
statements appearing elsewhere in this prospectus. The financial data for the
nine months ended December 31, 1997 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which we consider necessary for a fair
presentation of the results of operations for these periods. The historical
results are not necessarily indicative of results to be expected for any future
period. The statement of operations data displayed in the "Pro Forma BabyCenter
Merger 1998" column and the balance sheet data displayed in the "Pro Forma
BabyCenter Merger" column give effect to the BabyCenter merger expected to be
completed by the end of June 1999. Our general and administrative operating
expenses include expenses related to the amortization of deferred compensation
which is $2,000 for the fiscal year ended March 31, 1998 and $1.6 million for
the nine months ended December 31, 1998. You should review Note 1 to the notes
to our financial statements included elsewhere in this prospectus for an
explanation of the determination of the number of shares and share equivalents
used in computing the pro forma per share amounts set forth below. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Unaudited Pro Forma Condensed Combined Financial Information".
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, PRO FORMA
MARCH 31, -------------------------- BABYCENTER
1998 1997 1998 MERGER 1998
------------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $ 687 $ 530 $ 23,900 $ 25,836
Cost of sales...................................... 568 438 19,008 19,187
------------------ ------------ ------------ -------------
Gross profit....................................... 119 92 4,892 6,649
Operating expenses:
Marketing and sales.............................. 1,290 632 14,354 15,207
Product development.............................. 421 206 2,006 3,380
General and administrative....................... 678 366 4,106 4,851
Goodwill amortization............................ -- -- 239 30,876
------------------ ------------ ------------ -------------
Total operating expenses................... 2,389 1,204 20,705 54,314
------------------ ------------ ------------ -------------
Operating loss..................................... (2,270) (1,112) (15,813) (47,665)
Interest income (expense), net..................... 3 (15) 439 533
------------------ ------------ ------------ -------------
Loss before income taxes........................... (2,267) (1,127) (15,374) (47,132)
Provision for income taxes......................... 1 -- 1 1
------------------ ------------ ------------ -------------
Net loss........................................... $ (2,268) $ (1,127) $ (15,375) $ (47,133)
------------------ ------------ ------------ -------------
------------------ ------------ ------------ -------------
Basic net loss per share........................... $ (0.09) $ (0.05) $ (0.46) $ (0.95)
------------------ ------------ ------------ -------------
------------------ ------------ ------------ -------------
Pro forma basic net loss per share................. $ (0.08) $ (0.05) $ (0.19) $ (0.49)
------------------ ------------ ------------ -------------
------------------ ------------ ------------ -------------
Shares used to compute basic net loss per share.... 25,129,888 23,326,095 33,157,034 49,844,090
------------------ ------------ ------------ -------------
------------------ ------------ ------------ -------------
Shares used to compute pro forma basic net loss per
share............................................ 30,232,902 23,879,498 79,287,459 95,974,515
------------------ ------------ ------------ -------------
------------------ ------------ ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
PRO FORMA
MARCH 31, BABYCENTER
1998 ACTUAL MERGER
----------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 1,552 $ 18,545 $ 19,747
Working capital............................................................ 1,456 10,117 11,189
Total assets............................................................... 2,927 27,550 234,415
Long-term capital lease obligations, less current portion.................. -- 35 74
Total stockholders' equity (deficit)....................................... (1,345) (15,177) 190,743
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE
STATEMENTS REFER TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS.
THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "EXPECTS",
"ANTICIPATES", "INTENDS", "PLANS" AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO, THE RISKS DISCUSSED IN THE SECTION TITLED "RISK FACTORS" IN THIS
PROSPECTUS.
OVERVIEW
We are a leading Web-based retailer focused exclusively on children's
products, including toys, video games, software, videos and music. We currently
offer an extensive selection of competitively priced children's products
consisting of over 9,500 SKUs representing more than 750 brands.
We were incorporated in November 1996 and began offering products for sale
on our Web site and entered into a marketing agreement with AOL on October 1,
1997. For the period from inception through October 1, 1997, we had no sales and
our operating activities related primarily to the development of the necessary
computer infrastructure and initial planning and development of our Web site and
operations. Since launching our online store, we have continued these operating
activities and have also focused on building sales momentum, expanding our
product offerings, establishing vendor relationships, promoting our brand name
and establishing distribution and customer service operations. Our cost of sales
and operating expenses have increased significantly since inception. This trend
reflects the costs associated with our formation as well as increased efforts to
promote our brand, build market awareness, attract new customers, recruit
personnel, build operating infrastructure and develop our Web site and
associated systems that we use to process customers' orders and payments.
We have grown rapidly since launching our online store in October 1997.
During the fall of 1998, we launched our redesigned Web site and added video
game, software, video and music departments to our online store. Our net sales
increased to $22.9 million for the quarter ended December 31, 1998 from $0.5
million for the quarter ended December 31, 1997. The market for children's toys,
video games, software, videos and music is highly seasonal. A disproportionate
amount of our net sales have been realized during the fourth calendar quarter
and we expect this trend to continue in future periods. In addition, since a
disproportionate amount of our net sales are realized during the fourth calendar
quarter, we significantly increase our purchases of inventory during such
quarter. Accordingly, our accounts payable are at their highest levels during
the fourth calendar quarter. Our gross margin was 20.6% for the quarter ended
December 31, 1998. Our gross margin will fluctuate in future periods based on
factors such as product mix, inventory management, inbound and outbound shipping
costs, the level of product returns, and the level of discount pricing and
promotional coupon usage.
Since 1997, we have significantly increased the depth of our management team
to help implement our growth strategy. To facilitate our growth, we have
recently expanded our senior management team to include a Chief Financial
Officer, Chief Information Officer and Senior Vice President of Operations.
On April 18, 1999, we entered into a merger agreement with BabyCenter, Inc.
pursuant to which a new subsidiary of ours will merge into BabyCenter so that
BabyCenter becomes our wholly owned subsidiary. BabyCenter is a Web-based
business that offers a wide variety of content, community and products focused
on and serving expectant mothers and new parents. Visitors to
26
<PAGE>
the BabyCenter Web site can read health articles and parenting news, interact
online with other families and purchase a wide selection of baby products and
supplies. BabyCenter derives its net sales principally from product sales and
sales of advertisement space as well as sponsorships with various companies.
BabyCenter is a Delaware corporation that is based in San Francisco, California,
with approximately 105 employees.
Upon the completion of this merger, an aggregate of 18,720,000 shares of our
common stock will be issued in exchange for all outstanding shares of BabyCenter
capital stock and reserved for issuance upon the exercise of assumed BabyCenter
options in connection with the proposed merger. In addition, if the BabyCenter
merger is completed, we will record a significant amount of goodwill that will
significantly reduce our earnings and profitability for the foreseeable future.
We expect to record goodwill of approximately $204.2 million, to be amortized
over a five-year period. To the extent we do not generate sufficient cash flow
to recover the amount of the investment recorded, the investment may be
considered impaired and could be subject to earlier write-off. We anticipate
that the BabyCenter merger will close by the end of June 1999. The BabyCenter
merger is subject to a number of conditions, including the receipt of
governmental approvals, approval of the merger by the stockholders of BabyCenter
and other customary closing conditions. As a result, the BabyCenter merger may
not be completed.
Since inception, we have incurred significant losses and, as of December 31,
1998, had an accumulated deficit of $17.6 million. We expect operating losses
and negative cash flow to continue for the foreseeable future. We anticipate our
losses will increase significantly from current levels because we expect to
incur additional costs and expenses related to brand development, marketing and
other promotional activities; the expansion of our inventory management and
distribution operations; the continued development of our Web site, systems that
we use to process customers' orders and payments and our computer network; the
expansion of our product offerings and Web site content; and development of
relationships with strategic business partners.
We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as online commerce. Such risks for us include, but are not limited to, an
evolving and unpredictable business model and management of growth. To address
these risks, we must, among other things, maintain and expand our customer base,
implement and successfully execute our business and marketing strategy, continue
to develop and upgrade our technology and systems that we use to process
customers' orders and payments, improve our Web site, provide superior customer
service, respond to competitive developments and attract, retain and motivate
qualified personnel. We cannot assure that we will be successful in addressing
such risks, and our failure to do so could have a material adverse effect on our
business, prospects, financial condition and results of operations.
In connection with this offering of shares of our common stock, options
granted in the fiscal years ended March 31, 1997 and 1998 have been considered
to be compensatory. Deferred compensation associated with such options for the
nine months ended December 31, 1998 amounted to $31.6 million. Of this amount,
$1.6 million was charged to operations for the nine months ended December 31,
1998 and $30.0 million will be amortized over the vesting periods of the
applicable options through the fiscal year ending March 31, 2003.
27
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS ENDED
ENDED DECEMBER 31,
MARCH 31, ------------------------
1998 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................................................. 100.0 % 100.0% 100.0%
Cost of sales.............................................................. 82.7 82.6 79.5
------ ----------- -----------
Gross profit............................................................... 17.3 17.4 20.5
Operating expenses:
Marketing and sales...................................................... 187.7 119.2 60.1
Product development...................................................... 61.3 38.9 8.4
General and administrative............................................... 98.7 69.1 18.2
------ ----------- -----------
Total operating expenses............................................. 347.7 227.2 86.6
------ ----------- -----------
Operating loss............................................................. (330.4) (209.8) (66.2)
Interest income (expense), net............................................. 0.4 (2.8) 1.8
Provision for income taxes................................................. 0.1 -- --
------ ----------- -----------
Net loss................................................................... (330.1)% (212.6)% (64.3)%
------ ----------- -----------
------ ----------- -----------
</TABLE>
QUARTERS ENDED DECEMBER 31, 1997 AND 1998
NET SALES
Net sales consist of product sales to customers and charges to customers for
outbound shipping and handling and gift wrapping and are net of product returns,
promotional discounts and coupons. Net sales increased to $22.9 million for the
quarter ended December 31, 1998 from $0.5 million for the quarter ended December
31, 1997 as a result of the significant growth of our customer base and an
increase in repeat purchases from our existing customers, reflecting the
relaunch of our Web site and the addition of new departments to our online store
during the fall of 1998.
COST OF SALES
Cost of sales consists primarily of the costs of products sold to customers,
outbound and inbound shipping and handling costs, and gift wrapping costs. Cost
of sales increased to $18.2 million for the quarter ended December 31, 1998 from
$0.4 million for the quarter ended December 31, 1997. This $17.8 million
increase was primarily attributable to our increased sales volume. We expect
cost of sales to increase in future periods to the extent that our sales volume
increases. Our gross profit margin increased to 20.6% of net sales for the
quarter ended December 31, 1998 from 17.4% of net sales for the quarter ended
December 31, 1997. This increase was primarily due to greater sales of higher
margin products as a percentage of our overall net sales and improved
purchasing. There can be no assurance that we will continue to achieve improved
purchasing in future periods.
OPERATING EXPENSES
MARKETING AND SALES. Marketing and sales expenses consist primarily of
advertising and promotional expenditures, distribution facility expenses,
including equipment and supplies, and payroll and related expenses for personnel
engaged in marketing, customer service and distribution
28
<PAGE>
activities. Marketing and sales expenses increased to $10.6 million for the
quarter ended December 31, 1998 from $0.4 million for the quarter ended December
31, 1997. This $10.2 million increase was primarily attributable to the
expansion of our online and offline advertising, including a comprehensive print
and television advertising campaign, as well as to increased personnel and
related expenses required to implement our marketing strategy. In addition, due
to a significant increase in our sales volume, we experienced higher
distribution and customer service expenses, including an increased level of
temporary staffing during the holiday season. Marketing and sales expenses as a
percentage of net sales decreased to 46.3% for the quarter ended December 31,
1998 from 83.8% for the quarter ended December 31, 1997. Such expenses decreased
significantly as a percentage of net sales during the quarter ended December 31,
1998 due to the significant increase in net sales during such period. We intend
to continue to pursue an aggressive branding and marketing campaign and,
therefore, expect marketing and sales expenses to increase significantly in
absolute dollars in future periods. In addition, to the extent that our sales
volume increases in future periods, we expect marketing and sales expenses to
increase in absolute dollars as we expand our distribution facilities to
accommodate such increases in sales volume.
PRODUCT DEVELOPMENT. Product development expenses consist primarily of
payroll and related expenses for merchandising, Web site development and
information technology personnel, Internet access and hosting charges and Web
content and design expenses. Product development expenses increased to $0.9
million for the quarter ended December 31, 1998 from $0.1 million for the
quarter ended December 31, 1997. This $0.8 million increase was primarily
attributable to increased staffing and associated costs related to enhancing the
features, content and functionality of our online store and increasing the
capacity of our systems that we use to process customers' orders and payments.
Product development expenses as a percentage of net sales decreased to 4.0% for
the quarter ended December 31, 1998 from 27.4% for the quarter ended December
31, 1997. Such expenses decreased significantly as a percentage of net sales
during the quarter ended December 31, 1998 due to the significant increase in
net sales during such period. We believe that continued investment in product
development is critical to attaining our strategic objectives and, as a result,
expect product development expenses to increase significantly in absolute
dollars.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
payroll and related expenses for executive and administrative personnel,
facilities expenses, professional services expenses, travel and other general
corporate expenses. General and administrative expenses increased to $3.2
million for the quarter ended December 31, 1998 from $0.2 million for the
quarter ended December 31, 1997. This $3.0 million increase was primarily
attributable to increased headcount and related expenses associated with the
hiring of additional personnel, and increased professional services expenses.
General and administrative expenses as a percentage of net sales decreased to
13.9% for the quarter ended December 31, 1998 from 44.2% for the quarter ended
December 31, 1997. Such expenses decreased significantly as a percentage of net
sales during the quarter ended December 31, 1998 due to the significant increase
in net sales during such period. We expect general and administrative expenses
to increase in absolute dollars as we expand our staff and incur additional
costs related to the growth of our business and being a public company. We
further expect our general and administrative expenses to increase if the
BabyCenter merger is completed due to the associated increase in personnel and
expenses related to the integration of BabyCenter's operations with our
operations.
In the quarter ended December 31, 1998, we recorded total deferred stock
compensation of $30.4 million in connection with stock options granted during
the period, including approximately $0.3 million which represents the fair value
of options granted to non-employees during this period. Such amount is amortized
to expense over the vesting periods of the applicable options, resulting in $1.5
million for the quarter ended December 31, 1998, which is included in general
and
29
<PAGE>
administrative expenses. These amounts represent the difference between the
exercise price of stock option grants and the deemed fair value of our common
stock at the time of such grants.
GOODWILL AND INTANGIBLE ASSETS
If the BabyCenter merger is completed, we will record a significant amount
of goodwill, the amortization of which will significantly reduce our earnings
and profitability for the foreseeable future. We expect to record goodwill of
approximately $204.2 million, to be amortized over a five-year period. To the
extent the amount of this recorded goodwill is increased or we do not generate
additional sufficient cash flow to recover the amount of the investment
recorded, the investment may be considered impaired or be subject to earlier
write-off. In such event, our net loss in any given period could be greater than
anticipated and the market price of our stock could decline.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consists of earnings on our cash and cash
equivalents, net of interest expense attributable to convertible notes in the
approximate principal amount of $895,000. These convertible notes were
subsequently converted into shares of preferred stock in December 1997. Net
interest income increased to $0.2 million for the quarter ended December 31,
1998 from net interest expense of $15,000 for the quarter ended December 31,
1997. This $0.2 million increase was primarily attributable to earnings on
higher average cash and cash equivalent balances during the quarter ended
December 31, 1998.
INCOME TAXES
As of December 31, 1998, we had $15.4 million of net operating loss
carryforwards for federal income tax purposes, which expire beginning in 2012.
We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability. Changes in the ownership of our common stock, as
defined in the Internal Revenue Code of 1986, as amended, may restrict the
utilization of such carryforwards. See Note 3 of Notes to Financial Statements.
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1998
Our fiscal year runs from April 1 through March 31. We commenced offering
products for sale on our Web site on October 1, 1997, and, accordingly, the nine
months ended December 31, 1997 only include a period of three months during
which we were generating net sales and incurring expenses. Consequently, our net
sales and expenses for the nine months ended December 31, 1998 have increased
due to a full nine months of net sales generated and expenses incurred during
such period as compared to three months of net sales and expenses during the
nine months ended December 31, 1997.
NET SALES
Net sales increased to $23.9 million for the nine months ended December 31,
1998 from $0.5 million for the nine months ended December 31, 1997 as a result
of the significant growth of our customer base and an increase in repeat
purchases from our existing customers, reflecting the relaunch of our Web site
and the addition of new departments to our online store during the fall of 1998.
30
<PAGE>
COST OF SALES
Cost of sales increased to $19.0 million for the nine months ended December
31, 1998 from $0.4 million for the nine months ended December 31, 1997. This
$18.6 million increase was primarily attributable to our increased sales volume
and the addition of new departments to our online store during such period. Our
gross profit margin increased to 20.5% of net sales for the nine months ended
December 31, 1998 from 17.4% of net sales for the nine months ended December 31,
1997. This increase was primarily due to greater sales of higher margin products
as a percentage of our overall net sales.
OPERATING EXPENSES
MARKETING AND SALES. Marketing and sales expenses increased to $14.4
million for the nine months ended December 31, 1998 from $0.6 million for the
nine months ended December 31, 1997. This $13.8 million increase was primarily
attributable to the expansion of our online and offline advertising, including a
comprehensive print and television advertising campaign, as well as to increased
personnel and related expenses required to implement our marketing strategy. In
addition, due to a significant increase in our sales volume, we experienced
higher distribution and customer service expenses, including an increased level
of temporary staffing during the holiday season. Marketing and sales expenses as
a percentage of net sales decreased to 60.1% for the nine months ended December
31, 1998 from 119.2% for the nine months ended December 31, 1997. Such expenses
decreased significantly as a percentage of net sales during the nine months
ended December 31, 1998 due to the significant increase in net sales during such
period.
PRODUCT DEVELOPMENT. Product development expenses increased to $2.0 million
for the nine months ended December 31, 1998 from $0.2 million for the nine
months ended December 31, 1997. This $1.8 million increase was primarily
attributable to increased staffing and associated costs related to enhancing the
features, content and functionality of our online store and the systems that we
use to process customers' orders and payments. Product development expenses as a
percentage of net sales decreased to 8.4% for the nine months ended December 31,
1998 from 38.9% for the nine months ended December 31, 1997. Such expenses
decreased significantly as a percentage of net sales during the nine months
ended December 31, 1998 due to the significant increase in net sales during such
period.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $4.3 million for the nine months ended December 31, 1998 from $0.4 million
for the nine months ended December 31, 1997. This $3.9 million increase was
primarily attributable to increased headcount and related expenses associated
with the hiring of additional personnel, and increased professional services
expenses. General and administrative expenses as a percentage of net sales
decreased to 18.2% for the nine months ended December 31, 1998 from 69.1% for
the nine months ended December 31, 1997. Such expenses decreased significantly
as a percentage of net sales during the nine months ended December 31, 1998 due
to the significant increase in net sales during such period.
In the nine months ended December 31, 1998, we recorded total deferred stock
compensation of $31.6 million in connection with stock options granted during
the period, including approximately $0.3 million which represents the fair value
of options granted to non-employees during this period. Such amount is amortized
to expense over the vesting periods of the applicable options, resulting in $1.6
million for the nine months ended December 31, 1998, which is included in
general and administrative expenses. These amounts represent the difference
between the exercise price of stock option grants and the deemed fair value of
our common stock at the time of such grants.
31
<PAGE>
In addition, during the three months ended March 31, 1999, we recognized
$7.9 million of additional deferred compensation. Amortization of deferred
compensation expense for each of the next five fiscal years is expected to be as
follows:
<TABLE>
<CAPTION>
AMOUNT
YEAR ENDED (IN THOUSANDS)
- ------------------------------------------------------------------------------ ---------------
<S> <C>
March 31, 1999................................................................ $ 4,060
March 31, 2000................................................................ 9,887
March 31, 2001................................................................ 9,887
March 31, 2002................................................................ 9,880
March 31, 2003................................................................ 5,831
</TABLE>
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net increased to $0.4 million for the nine months
ended December 31, 1998 from $3,000 for the nine months ended December 31, 1997.
This $0.4 million increase was primarily attributable to earnings on higher
average cash and cash equivalent balances during the nine months ended December
31, 1998.
INCOME TAXES
As of December 31, 1998, we had $15.4 million of net operating loss
carryforwards for federal income tax purposes, which expire beginning in 2012.
We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability. Changes in the ownership of our common stock, as
defined in the Internal Revenue Code of 1986, as amended, may restrict the
utilization of such carryforwards. See Note 3 of Notes to Financial Statements.
32
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for the five quarters ended December 31, 1998. This unaudited quarterly
information has been derived from our unaudited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods covered. The quarterly data should be read in conjunction with our
financial statements and related notes. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1998 1998 1998 1998
----------- ------------ ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 530 $ 157 $ 381 $ 608 $ 22,910
Cost of sales........................................ 438 130 311 496 18,201
----------- ------------ ----------- ----------- -----------
Gross profit......................................... 92 27 70 112 4,709
Operating expenses:
Marketing and sales................................ 444 658 1,370 2,372 10,611
Product development................................ 145 215 404 697 905
General and administrative(1)...................... 234 312 462 703 3,180
----------- ------------ ----------- ----------- -----------
Total operating expenses....................... 823 1,185 2,236 3,772 14,696
----------- ------------ ----------- ----------- -----------
Operating loss....................................... (731) (1,158) (2,166) (3,660) (9,987)
Interest income (expense), net....................... (15) 18 (5) 277 166
Provision for income taxes........................... -- 1 -- -- 1
----------- ------------ ----------- ----------- -----------
Net loss............................................. $ (746) $ (1,141) $ (2,171) $ (3,383) $ (9,822)
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
AS A PERCENTAGE OF NET SALES:
Net sales............................................ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales........................................ 82.6 82.8 81.6 81.6 79.4
----------- ------------ ----------- ----------- -----------
Gross profit......................................... 17.4 17.2 18.4 18.4 20.6
Operating expenses:
Marketing and sales................................ 83.8 419.1 359.6 390.1 46.3
Product development................................ 27.4 136.9 106.0 114.6 4.0
General and administrative(1)...................... 44.2 198.7 121.3 115.6 13.9
----------- ------------ ----------- ----------- -----------
Total operating expenses......................... 155.3 754.8 586.9 620.4 64.1
----------- ------------ ----------- ----------- -----------
Operating loss....................................... (137.9) (737.6) (568.5) (602.0) (43.6)
Interest income (expense), net....................... (2.8) 11.5 (1.3) 45.6 0.7
Provision for income taxes........................... -- 0.6 -- -- --
----------- ------------ ----------- ----------- -----------
Net loss............................................. (140.8)% (726.8)% (569.8)% (556.4)% (42.9)%
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
</TABLE>
- ------------------------------
(1) Included in general and administrative expenses are $2,000, $43,700, $69,300
and $1.51 million related to the amortization expense of deferred
compensation for the quarters ended March 31, 1998, June 30, 1998, September
30, 1998 and December 31, 1998, respectively.
33
<PAGE>
Our quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, many of which
are outside of our control. Factors that may harm our business or cause our
operating results to fluctuate include the following:
- - our inability to obtain new customers at reasonable cost, retain existing
customers, or encourage repeat purchases;
- - decreases in the number of visitors to our Web site or our inability to
convert visitors to our Web site into customers;
- - the mix of toys, video games, software, videos and music sold by us;
- - seasonality;
- - our inability to manage inventory levels;
- - our inability to manage our distribution operations;
- - our inability to adequately maintain, upgrade and develop our Web site,
systems that we use to process customers' orders and payments or our computer
network;
- - the ability of our competitors to offer new or enhanced Web sites, services or
products;
- - price competition;
- - an increase in the level of our product returns;
- - fluctuations in the demand for children's products associated with movies,
television and other entertainment events;
- - our inability to obtain popular children's toys, video games, software, videos
and music from our vendors;
- - fluctuations in the amount of consumer spending on children's toys, video
games, software, videos and music;
- - the termination of existing or failure to develop new marketing relationships
with key business partners;
- - the extent to which we are not able to participate in advertising campaigns
such as those conducted by Visa and Intel;
- - increases in the cost of online or offline advertising;
- - the amount and timing of operating costs and capital expenditures relating to
expansion of our operations;
- - unexpected increases in shipping costs or delivery times, particularly during
the holiday season;
- - technical difficulties, system downtime or Internet brownouts;
- - government regulations related to use of the Internet for commerce or for
sales and distribution of toys, video games, software, videos and music; and
- - economic conditions specific to the Internet, online commerce and the
children's toy, video game, software, video and music industries.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance. It
is likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our common stock may fall significantly.
34
<PAGE>
RESULTS OF OPERATIONS--BABYCENTER
Since inception, BabyCenter has incurred significant operating losses.
During the fiscal year ended September 30, 1998, BabyCenter recorded net sales
of approximately $1.9 million, primarily from sales of advertisment space and
sponsorships with various companies and the online sale of baby products and
supplies, and recorded a net loss of approximately $1.1 million. During the year
ended September 30, 1998, BabyCenter incurred total operating expenses of
approximately $3.0 million, which consisted primarily of marketing and sales and
technology and development expenses. At September 30, 1998, BabyCenter had
working capital of approximately $1.1 million and a total accumulated deficit of
approximately $1.6 million. It is expected that BabyCenter's marketing and sales
and technology and development expenses will continue to increase in future
periods.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of preferred stock which through December 31, 1998, totaled $28.7 million.
Net cash used in operating activities was $4.9 million in the nine months
ended December 31, 1998, and $1.0 million in the nine months ended December 31,
1997. Net cash used in operating activities for each of these periods primarily
consisted of net losses as well as increases in inventories and prepaid
expenses, partially offset by increases in accounts payable, accrued expenses
and depreciation and amortization. The significant increase in working capital
during the nine months ended December 31, 1998 was primarily due to significant
growth in our operations.
Net cash used in investing activities was $2.9 million in the nine months
ended December 31, 1998, and $0.1 million in the nine months ended December 31,
1997. Net cash used in investing activities for each of these periods primarily
consisted of leasehold improvements and purchases of equipment and systems,
including computer equipment and fixtures and furniture.
Net cash provided by financing activities was $24.9 million in the nine
months ended December 31, 1998, and $4.1 million in the nine months ended
December 31, 1997. Net cash provided by financing activities during the nine
months ended December 31, 1998 primarily consisted of proceeds of $24.8 million
from the issuance of preferred stock.
As of December 31, 1998 we had $18.5 million of cash and cash equivalents.
As of that date, our principal commitments consisted of obligations outstanding
under operating leases. Although we have no material commitments for capital
expenditures, we anticipate a substantial increase in our capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. We plan to open an additional distribution
facility during fiscal 1999, which may require us to purchase real estate or
commit to additional lease obligations and to purchase equipment and install
leasehold improvements.
We entered into a marketing agreement with AOL, the leading Internet online
service provider, in October 1997. This agreement established us as a provider
of children's toy products featured on the AOL Network and AOL's Web site,
aol.com. In addition, AOL agreed to prominently promote and advertise eToys on a
non-exclusive basis in online areas controlled by AOL specified in the
agreement. Furthermore, under the agreement, AOL has committed that AOL users
will annually access the online areas promoting eToys a specified number of
times. Over the 26-month term of the agreement, we are obligated to make minimum
payments totaling $3.1 million to AOL, of which $1.4 million remained to be paid
as of December 31, 1998. We have also agreed to offer for sale a substantial
selection of children's products, to feature different children's products each
week, to offer special deals to AOL users through the AOL online area, to
provide children's toy products that are competitive in price and performance
and to manage, operate and support such content
35
<PAGE>
and children's toy products. The agreement with AOL expires on December 31,
1999; however, AOL may terminate the agreement earlier in the event we
materially breach the agreement or in the event of bankruptcy or insolvency or
similar adverse financial events specified in the agreement. Although there can
be no assurance, we do not believe that there is any material risk that AOL
would be able to terminate the agreement earlier than December 31, 1999 because
of insolvency or any of the other specified adverse financial events.
During the fiscal year ended March 31, 1998, we entered into a number of
commitments for online and traditional offline advertising. As of December 31,
1998, our remaining commitments were $6.9 million, excluding amounts due under
our agreement with AOL, which will be paid by December 31, 1999.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through at least the next 12 months. We
may need to raise additional funds prior to the expiration of such period if,
for example, we pursue business or technology acquisitions or experience
operating losses that exceed our current expectations. If we raise additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and our stockholders may experience additional
dilution. We cannot be certain that additional financing will be available to us
on favorable terms when required, or at all.
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
phenomenon. For example, we are dependent on the financial institutions involved
in processing our customers' credit card payments for Internet services and a
third party that hosts our servers. We are also dependent on telecommunications
vendors to maintain our network and the United States Postal Service and other
third-party carriers to deliver orders to customers.
We are in the process of reviewing the year 2000 compliance of our
internally developed proprietary software. This review has included testing to
determine how our systems will function at and beyond the year 2000. We expect
to complete these tests during the summer of 1999. Since inception, we have
internally developed substantially all of the systems for the operation of our
Web site. These systems include the software used to provide our Web site's
search, customer interaction, and transaction-processing and distribution
functions, as well as monitoring and back-up capabilities. Based upon our
assessment to date, we believe that our internally developed proprietary
software is year 2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services, which include
software for use in our accounting, database and security systems. The failure
of such software or systems to be year 2000 compliant could have a material
negative impact on our corporate accounting functions and the operation of our
Web site. As part of the assessment of the year 2000 compliance of these
systems, we have sought assurances from these vendors that their software,
computer technology and other services are year 2000 compliant. We have expensed
amounts incurred in connection with year 2000 assessment since our formation
through December 31, 1998. Such amounts have not been material. We expect this
assessment process to be completed during the summer of 1999. Based upon the
results of this assessment, we will develop and implement, if necessary, a
remediation
36
<PAGE>
plan with respect to third-party software, third-party vendors and computer
technology and services that may fail to be year 2000 compliant. We expect to
complete any required remediation during the summer of 1999. At this time, the
expenses associated with this assessment and potential remediation plan that may
be incurred in the future cannot be determined; therefore, we have not developed
a budget for these expenses. The failure of our software and computer systems
and of our third-party suppliers to be year 2000 complaint would have a material
adverse effect on us.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
year 2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our operations consists
of a network of computers and telecommunications systems located throughout the
world and operated by numerous unrelated entities and individuals, none of which
has the ability to control or manage the potential year 2000 issues that may
impact the entire infrastructure. Our ability to assess the reliability of this
infrastructure is limited and relies solely on generally available news reports,
surveys and comparable industry data. Based on these sources, we believe most
entities and individuals that rely significantly on the Internet are carefully
reviewing and attempting to remediate issues relating to year 2000 compliance,
but it is not possible to predict whether these efforts will be successful in
reducing or eliminating the potential negative impact of year 2000 issues. A
significant disruption in the ability of consumers to reliably access the
Internet or portions of it or to use their credit cards would have an adverse
effect on demand for our services and would have a material adverse effect on
us.
At this time, we have not yet developed a contingency plan to address
situations that may result if we or our vendors are unable to achieve year 2000
compliance because we currently do not believe that such a plan is necessary.
The cost of developing and implementing such a plan, if necessary, could be
material. Any failure of our material systems, our vendors' material systems or
the Internet to be year 2000 compliant could have material adverse consequences
for us. Such consequences could include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business.
37
<PAGE>
BUSINESS
ETOYS
We are a leading Web-based retailer focused exclusively on children's
products, including toys, video games, software, videos and music. By combining
our expertise in children's products and our commitment to excellent customer
service with the benefits of Internet retailing, we are able to deliver a unique
shopping experience to consumers. Our online store offers an extensive selection
of competitively priced children's products, with over 9,500 SKUs representing
more than 750 brands. Our Web site features detailed product information,
helpful and useful shopping services and innovative merchandising through
easy-to-use Web pages. In addition, we offer customers the convenience and
flexibility of shopping 24 hours a day, seven days a week, with reliable and
timely product delivery and excellent customer service.
As of March 31, 1999, we have sold children's products to approximately
365,000 customers, of which approximately 75,000 were added during the quarter
ended March 31, 1999. Our net sales for the quarter ended December 31, 1998
totaled $22.9 million as compared to $0.5 million for the quarter ended December
31, 1997.
INDUSTRY OVERVIEW
ELECTRONIC COMMERCE
The Internet is an increasingly significant medium for communication,
information and commerce. International Data Corporation estimates that there
were 97 million Web users worldwide at the end of 1998 and anticipates this
number will grow to approximately 320 million users by the end of 2002. We
believe that growth in Internet usage and online commerce is being fueled by a
number of factors including:
- - a large and growing installed base of personal computers in the workplace and
home;
- - advances in the performance and speed of personal computers and modems;
- - improvements in network security, infrastructure and bandwidth;
- - easier and cheaper access to the Internet; and
- - the rapidly expanding availability of online content and commerce sites.
The unique characteristics of the Internet provide a number of advantages
for online retailers. Online retailers are able to "display" a larger number of
products than traditional store-based or catalog retailers at a lower cost. In
addition, online retailers are able to frequently adjust their featured
selections, editorial content and pricing, providing significant merchandising
flexibility. Online retailers also benefit from the minimal cost to publish on
the Web, the ability to reach a large group of customers from a central
location, and the potential for low-cost customer interaction. Unlike
traditional retail channels, online retailers do not have the burdensome costs
of managing and maintaining a retail store infrastructure or the significant
printing and mailing costs of catalogs. Online retailers can also easily obtain
demographic and behavioral data about customers, increasing opportunities for
direct marketing and personalized services.
TRADITIONAL CHILDREN'S PRODUCTS RETAIL INDUSTRY
The market for children's products includes many categories, from
traditional toys and books to video games and educational software. Toy
Manufacturers of America, Inc. estimates that the domestic toy category alone
had retail sales of approximately $23 billion in 1997. We believe that product
categories such as children's video games, software, videos and music also
represent significant market opportunities.
38
<PAGE>
Traditional store-based toy retailers include mass market retailers such as
Toys R Us, Wal-Mart, Kmart and Target, as well as specialty chains such as Zany
Brainy and Noodle Kidoodle. Mass market retailers tend to carry a deep selection
of well-known brand name toys from leading vendors such as Mattel, Hasbro and
LEGO. Specialty retailers generally carry a broader selection of specialty toy
brands such as BRIO, PLAYMOBIL and Learning Curve. However, they do not
typically have a significant selection of well-known brand name toys. As a
result, we believe that no traditional store-based retailer currently offers an
extensive product selection of both popular, well-known brand name toys and
diverse, harder-to-find, specialty toys.
We believe that traditional store-based retailers face a number of
challenges in providing a satisfying shopping experience for consumers of
children's products:
- - The number of SKUs and the amount of product inventory that a traditional
store-based retailer can carry in any one store is constrained by the physical
space available in the store, thereby limiting selection for consumers.
- - Limited shelf space and store layout constraints limit the merchandising
flexibility of traditional store-based retailers. As a result, traditional
retailers generally display products by brand, category or packaging. They
cannot easily adjust or blend these merchandising strategies.
- - Due to the significant cost of carrying inventory in multiple store locations,
traditional store-based retailers focus their product selection on the most
popular products that produce the highest inventory turns, thereby further
limiting consumer selection.
- - Traditional store-based retailers can only serve those customers who have
convenient access to their stores. Traditional store-based retailers must open
new stores to serve additional geographic areas, resulting in significant
investments in inventory, leasehold improvements and the hiring and training
of store personnel.
- - Traditional store-based retailers face challenges in hiring, training and
maintaining knowledgeable sales staff. This limits the level of customer
service available to consumers.
In addition, we believe that many consumers find the toy shopping
experience, especially at traditional mass market retail outlets, to be
time-consuming, inconvenient and unpleasant due to factors such as location,
store layout, product selection, level of customer service and the challenges of
shopping with children.
THE ETOYS SOLUTION
We are a leading Web-based retailer focused exclusively on children's
products. Our online store is designed to provide consumers with a convenient
and enjoyable shopping experience in a Web-based retail environment. Our
exclusive focus on children's products and commitment to excellent customer
service enable us to uniquely address the needs and desires of our customers.
The key components of our solution include:
CONVENIENT SHOPPING EXPERIENCE. Our online store provides customers with an
easy-to-use Web site. It is available 24 hours a day, seven days a week and may
be reached from the shopper's home or office. Our online store enables us to
deliver a broad selection of products to customers in rural or other locations
that do not have convenient access to physical stores. We also make the shopping
experience convenient by categorizing our products into easy-to-shop
departments. These include toys, video games, software, videos and music. Our
advanced search technology makes it easy for consumers to locate products
efficiently based on pre-selected criteria depending upon the department. For
example, by using a quick keyword search or a sophisticated product search in
our toy department, a customer can search by any combination of age, category,
keyword or price.
39
<PAGE>
EXTENSIVE PRODUCT SELECTION AND INNOVATIVE MERCHANDISING. We offer a broad
selection of children's products that would be economically or physically
impractical to stock in a traditional store. We believe that we offer the
largest selection of toys available on the Internet. We also believe we are the
only retailer to provide a comprehensive selection of both traditional,
well-known brands, such as Mattel, Hasbro and LEGO, and specialty toy brands,
such as BRIO, PLAYMOBIL and Learning Curve. In addition we offer a broad
selection of children's video games, software, videos and music. We focus
exclusively on children's products. Many of our brand name and specialty
products are individually selected and tested to provide our customers with the
highest quality products. In addition, the unique environment of the Internet
enables us to dynamically adjust our merchandising strategy and product mix to
respond to changing customer demand.
HELPFUL AND USEFUL SHOPPING SERVICES. Through our online store, we offer
helpful and useful services to assist our customers, who are generally adults
purchasing for children. Many of these services are also designed to inform and
involve children in the shopping experience. Our services include:
- - PRODUCT REVIEWS AND RECOMMENDATIONS. To assist customers in selecting
appropriate products, we provide regularly updated product recommendations
through our PICKS OF THE MONTH, FAVORITES BY AGE, TOY BOX ESSENTIALS and our
TWENTY UNDER $20 recommended list of affordable toys. In addition, we feature
product reviews and lists of award-winning products from prominent parenting
and family publications as well as from organizations solely dedicated to
children's products, including the OPPENHEIM TOY PORTFOLIO, FAMILY FUN
magazine, PARENTING magazine and DR. TOY.
- - GIFT CENTER. We simplify gift shopping through our Gift Center. Here,
consumers can obtain gift recommendations by age and get information on a
variety of child-appropriate gift wrap styles and personalized message cards
to accompany the gift. We also sell electronic gift certificates through our
Gift Center.
- - MY ETOYS. Through My eToys, we personalize the customer's shopping experience
by offering the following services:
- BIRTHDAY REMINDERS, in which we notify shoppers of a child's birthday
three weeks in advance via e-mail and proactively offer age-appropriate
gift recommendations;
- WISH LISTS, in which parents and children can e-mail friends and family a
list of a child's most desired toys, video games, software, videos and
music; and
- ADDRESS BOOK, in which we record the addresses of people to whom our
customers send gifts so they do not need to re-enter the same addresses
multiple times.
- - IN-STOCK NOTIFICATION. If a product is out of stock, our customers can request
that we e-mail them when the product is back in stock. We believe this service
helps customers avoid extended store-to-store searches for hard-to-find
products.
- - PRODUCT NEWS. Our free monthly e-mail newsletter, THE ETOYS NEWS, delivers
updates about new products and services and special offers to our customers.
EXCELLENT CUSTOMER SERVICE. We provide free pre- and post-sales support via
both e-mail and toll-free telephone service during extended business hours. Once
an order is made, customers can view order-tracking information on our Web site
or contact our customer service department to obtain the status of their orders
and, when necessary, resolve order and product questions. Furthermore, the
customer service area of our Web site contains extensive information for
first-time and repeat visitors. These include helpful hints in searching for,
shopping for, ordering and returning our products.
40
<PAGE>
BUSINESS STRATEGY
Our objective is to be one of the world's leading retailers of children's
products. Key elements of our strategy include:
FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS. We intend to become the
primary place for consumers to purchase children's products. Our online store is
exclusively focused on children's products and offers an extensive selection of
toys, video games, software, videos and music. We intend to enhance our product
offerings by expanding into additional children's product categories, which will
enable us to take advantage of our customer base, brand name, merchandising
expertise and distribution capabilities.
BUILD BRAND RECOGNITION. Through our advertising and promotional
activities, we target purchasers of children's products, with a primary focus on
mothers. We believe that mothers are the principal decision-makers for purchases
of children's products and strongly influence the purchasing decisions of family
and friends. We use offline and online marketing strategies to maximize customer
awareness and enhance our brand recognition:
- - OFFLINE ADVERTISING. We use offline advertising to promote both our brand name
and specific merchandising opportunities. Our traditional advertising efforts
have included print advertising in FAMILY FUN, FAMILY PC, PARENTING, PARENTS
and CHILD publications, and radio and television advertising in major markets.
In October 1998, we initiated television advertising, including a national
advertising campaign begun in November in which Visa co-promoted eToys in a
holiday commercial. We plan to increase our use of traditional offline
advertising in order to continue building our brand recognition.
- - ONLINE ADVERTISING. We partner with major online portals and Internet service
providers, parenting-related Web sites and children-oriented companies.
Accordingly, we have entered into relationships with AOL, Children's
Television Workshop and Moms Online. In addition, we advertise on the sites of
major online portals, including Excite, Infoseek, Microsoft Network, Yahoo!
and Lycos.
- - DIRECT ONLINE MARKETING. As our customer base grows, we continue to collect
significant data about our customers' buying preferences and habits in an
effort to increase repeat purchases by existing customers. We intend to
maximize the value of this information by delivering meaningful information
and special offers 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.
PURSUE WAYS TO INCREASE OUR NET SALES. We intend to pursue new
opportunities to increase our net sales by:
- - opening new departments on our Web site to expand into new children's product
categories;
- - increasing product selection in our existing departments;
- - adding more services to My eToys to further personalize the customer
experience;
- - pursuing international market opportunities; and
- - acquiring complementary businesses, products or technologies.
PROMOTE REPEAT PURCHASES. We are focused on promoting customer loyalty and
building repeat purchase relationships with our customers. To accomplish this
strategy, we intend to effectively use direct marketing techniques targeted at
existing customers, build features unique to each individual customer and
continually strive to enhance our customer service.
41
<PAGE>
MAINTAIN OUR TECHNOLOGY FOCUS AND EXPERTISE. We intend to use our 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. Among other
technology objectives, we intend to develop features unique to each individual
customer and to enhance the look-and-feel of our Web site. We also seek to
continuously increase the efficiency of our relationships with product vendors
and manufacturers and our distribution activities.
THE ETOYS ONLINE RETAIL STORE
We designed our online retail store to be the primary place for consumers to
purchase children's products. We believe our attractive, easy-to-use, online
store offers consumers a unique and enjoyable shopping experience as compared to
traditional store-based retailers. The look-and-feel of our Web site is playful
and entertaining, and navigation is consistent throughout. A consumer shopping
on our Web site can, in addition to ordering products, browse the different
departments of our store, conduct targeted searches, view recommended products,
visit our Gift Center, participate in promotions and check order status. In
contrast to a traditional retail store, the consumer can shop in the comfort and
convenience of his or her home or office.
OUR STORE DEPARTMENTS
We categorize products into different departments, including toys, video
games, software, videos and music. Within each department, products are
organized by brand, such as Mattel and Hasbro, by category, such as games, plush
toys and dolls, and by our recommendations, such as bestsellers and favorites.
The following is a summary of each of these departments:
TOYS. Since inception, we have focused on becoming the leading online
retailer of quality children's toys. We believe that we offer the largest
selection of toys available on the Internet. Through our toy department, we
offer an extensive selection of toys. We believe that we are the only retailer
of children's products to provide a comprehensive selection of both traditional,
well-known brands, such as Mattel, Hasbro and LEGO, and specialty toy brands,
such as BRIO, PLAYMOBIL and Learning Curve. We select and test many of our toys
before adding them to our online store collection.
VIDEO GAMES. Through our video game department, we offer an extensive
selection of game titles, including bestsellers and new releases, for the
popular Sony PlayStation, Nintendo 64 and Game Boy platforms. We provide our own
ratings for each video game with respect to content, language and level of
violence. In addition, we sell video game hardware and recommended accessories.
SOFTWARE. Through our children's software department, we offer a wide
selection of software with an emphasis on educational titles. We organize our
software into easy-to-use and understandable categories. We feature a variety of
well-known classic and currently popular brands including Broderbund, Disney
Interactive, Microsoft's Magic School Bus and Jumpstart.
VIDEOS. Through our children's video department, we offer videos for
children that are organized into easy-to-shop categories. We feature a variety
of well-known titles from popular television series, including Barney, Blue's
Clues, Dr. Seuss, Magic School Bus, Muppets, Peanuts, Rugrats, Teletubbies and
Winnie the Pooh. We also feature award-winning independent releases.
MUSIC. Through our children's music department, we offer an extensive
assortment of children's music in both cassette and CD format. Unlike most
retailers, we organize our children's music into different categories by
subject. We feature a variety of popular children's music categories, including
books on tape, Disney, educational, holiday, lullabies and bedtime, rock for
42
<PAGE>
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. These include enhanced selection, convenience,
ease-of-use, depth of content and information, and competitive pricing. Key
features of our online store include:
BROWSING. Our Web site offers visitors a variety of highlighted subject
areas and special features arranged in a simple, easy-to-use format intended to
enhance product search, selection and discovery. By clicking on the permanently
displayed department names, the consumer moves directly to the home page of the
desired department and can quickly view promotions and featured products.
Customers can use a quick keyword search in order to locate a specific product.
They can also execute more sophisticated searches based on pre-selected criteria
depending upon the department. In addition, customers can browse our online
store by hot-linking to specially designed pages dedicated to products from key
national and specialty brands. Customers can also hot-link to pages featuring
key product categories such as construction toys, just-for-girls software and
movie soundtrack music.
GETTING ANSWERS. One of the unique advantages of an Internet retail store
is the ability to provide product information and editorial content. On our Web
site customers can find detailed product information, including product
descriptions, manufacturers' and merchants' age recommendations, product
packaging, battery requirements, a list of accessories and related products that
are available and product awards. We also 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.
43
<PAGE>
PAYING. To pay for orders, a customer must use a credit card, which is
authorized during the checkout process, but which is charged when we ship the
customer's items from our distribution facility. Our Web site uses a security
technology that works with the most common Internet browsers and makes it
virtually impossible for unauthorized parties to read information sent by our
customers. Our system automatically confirms receipt of each order via e-mail
within minutes and notifies the customer when we ship the order, which is
typically within one to two business days for in-stock items. We also offer our
customers a money-back return policy.
GETTING HELP. From every page of our Web site, a customer can click on a
"help" button to go to our customer service area. The customer service area of
our Web site contains extensive information for first-time and repeat visitors.
In this area, we assist customers in searching for, shopping for, ordering and
returning our products as well as provide information on our low price
guarantee, shipping charges and other policies. In addition, we provide
customers with answers to the most frequently asked questions and encourage our
visitors to send us feedback and suggestions via e-mail. Furthermore, customer
service agents are available to answer questions about products and the shopping
process during extended business hours via our toll-free number, which is
displayed in the customer service area of our Web site.
MERCHANDISING
We believe that the breadth and depth of our product selection, together
with the flexibility of our online store and our range of helpful and useful
shopping services, enable us to pursue a unique merchandising strategy. We
provide an extensive selection of children's products. These include traditional
mass market toys, specialty toys and a broad selection of related children's
products, including video games, software, videos and music, that would be
economically impractical to stock in a traditional store. We focus exclusively
on children's products and we individually select and test many of the products
in our online store to ensure quality. This level of product evaluation enables
us to deliver valuable additional product information to our shoppers. For
example, we are able to develop detailed and helpful descriptions and our own
recommendations by age for many of the products in our online store.
Unlike store-based retail formats, our online store provides us significant
flexibility with regard to the organization and presentation of our product
selection. Our easy-to-use Web site allows customers to browse our product
selection by brand, age, product category and price, as well as by combinations
of these attributes. For example, a customer can easily search for
science-oriented toys designed for eight-year-old children or view all Barbie
dolls and related accessories without consulting store personnel or walking
multiple aisles within one or more traditional stores. Our online store enables
us to dynamically adjust our product mix to respond to changing customer demand.
In addition, our online store gives us flexibility in featuring or promoting
specific toys without having to alter the physical layout of a store.
To encourage purchases, we feature various promotions on a rotating basis
throughout the store and continually update our online recommendations. We also
actively create and maintain pages that are artistically designed to highlight
the most prominent product brands we sell in our different departments. We
believe this strategy provides us with an excellent opportunity to cross-sell a
brand across our departments and promote impulse purchases by customers.
Finally, our range of helpful and useful shopping services such as our Gift
Center, our recommendations and our TWENTY UNDER $20 feature enable us to
display and promote our product selection in a flexible and targeted manner.
We believe that our merchandising strategy provides a unique selling
opportunity 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.
44
<PAGE>
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 additional ways to increase our net sales.
Through our advertising and promotions, we target adult purchasers of
children's products, with a focus on mothers. We believe that mothers are the
principal decision-makers in purchases of children's products and strongly
influence children's products purchases by family and friends. Our advertising
campaigns are designed to identify with a mother's toy shopping experience. We
use offline and online marketing strategies to maximize customer awareness and
enhance brand recognition. To accomplish this strategy, we have entered into
relationships with AOL, Children's Television Workshop and Moms Online. Our
marketing agreements generally provide for us to be the preferred online toy
retailer on the sites of these providers specified in the agreements. We also
generally have the right to place banner advertisements and integrated links to
our store on specified children-related or other particular pages or through
keyword searches. In addition, we advertise on the sites of major online
portals, including Excite, Infoseek, Microsoft Network, Yahoo! and Lycos.
We entered into a marketing agreement with AOL, the leading Internet online
service provider, in October 1997. This agreement established us as a preferred
AOL provider of children's toy products featured on the AOL Network and AOL's
Web site, aol.com. In addition, AOL agreed to promote and advertise eToys on a
non-exclusive basis in online areas controlled by AOL specified in the
agreement. Furthermore, under the agreement, AOL has committed that AOL users
will annually access the online areas promoting eToys a specified number of
times. Over the 26-month term of the agreement, we are obligated to make minimum
payments totaling $3.1 million to AOL, of which $1.4 million remained to be paid
as of December 31, 1998. We have also agreed to offer for sale a substantial
selection of children's products, to feature different children's products each
week, to offer special deals to AOL users through the AOL online area, to
provide children's toy products that are competitive in price and performance
and to manage, operate and support such content and children's toy products. The
agreement with AOL expires on December 31, 1999; however, AOL may terminate the
agreement earlier in the event we materially breach the agreement or in the
event of bankruptcy or insolvency or similar adverse financial events specified
in the agreement. Although there can be no assurance, we do not believe that
there is any material risk that AOL would be able to terminate the agreement
earlier than December 31, 1999, because of insolvency or any of the other
specified adverse financial events.
We use traditional offline advertising, including print advertising in
FAMILY FUN, FAMILY PC, PARENTING, PARENTS and CHILD publications, and radio and
television advertising in major markets. In October 1998, we initiated
television advertising, including a national advertising campaign begun in
November in which Visa co-promoted eToys in a holiday commercial.
To direct traffic to our Web site, we have created inbound links that
connect directly to our Web site from other sites. Potential customers can
simply click on these links to become connected to our Web site from search
engines and community and affinity sites. In addition, in order to increase
exposure on the Internet and directly generate sales, we have an affiliates
program. Under
45
<PAGE>
this program, we pay one of our registered affiliates a referral fee for any
sale generated via their link to our Web site.
OPERATIONS
We obtain products from a network of large and small vendors, manufacturers
and distributors. We carry inventory of the products available for sale on our
Web site. We currently conduct our distribution operations in an approximately
60,000 square-foot facility located in Commerce, California. Both the facility
and the operations within it are operated solely by us. We send orders from our
Web site to our distribution facility over a secure connection and an internally
developed warehouse management system optimizes the pick, pack and ship process.
Our warehouse management system provides the Web site with data on inventory
receiving, shipping, inventory quantities and inventory location, which enables
us to display information about the availability of the products on our Web
site. Our warehouse management system also enables us to offer a variety of gift
wrap choices, custom gift cards and custom to/from labels for each individual
gift. In addition, we offer an order tracking service for our customers on our
Web site.
We offer three levels of shipping service: next day delivery, three-day
delivery, and ground delivery. We have developed relationships with both United
Parcel Service and the United States Postal Service to maximize our overall
service level to all 50 states. Priority orders are flagged and expedited
through our distribution processes. These capabilities are required due to the
time-sensitive nature of the gifts that we deliver to our customers.
On April 21, 1999, we entered into a warehouse and distribution agreement
with Fingerhut Business Services, Inc. The agreement has an initial term of
three years and can be renewed by us for three additional one-year terms.
Pursuant to this agreement, Fingerhut will provide us warehouse and distribution
services from its approximately 1,000,000 square foot warehouse and distribution
facility located in Utah. The scope and cost of such services are to be mutually
agreed upon by us and Fingerhut on a project by project basis. Fingerhut is not
obligated under this agreement to perform any project requested by us, and we
are not obligated to use any of Fingerhut's warehouse or distribution services.
Prior to using Fingerhut's operations, we will link Fingerhut's warehouse
management system with our Web site and management system so that we will obtain
the same data from the Fingerhut distribution facility as we do from our own
facility.
CUSTOMER SERVICE
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our customer service representatives
are available from 6:00 a.m. to 11:00 p.m. Pacific Time, seven days a week to
provide assistance via e-mail or telephone. We strive to answer all customer
inquiries within 24 hours. Our customer service representatives handle questions
about orders, assist customers in finding desired products and register
customers' credit card information over the telephone. Our customer service
representatives are a valuable source of feedback regarding user satisfaction.
We also use BizRate, an online market research company, to obtain monthly
customer feedback. Our Web site also contains a customer service page that
outlines store policies and provides answers to frequently asked questions.
OPERATIONS AND TECHNOLOGY
We have implemented a broad array of scaleable site management, search,
customer interaction, distribution services and systems that we use to process
customers' orders and payments. These services and systems use a combination of
our own technologies and commercially available, licensed technologies. The
systems that we use to process customers' orders and payments are integrated
with our accounting and financial systems. We focus our
46
<PAGE>
internal development efforts on creating and enhancing specialized 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 and enhancements and changing customer demands.
Accordingly, our future success will depend on our ability to:
- - adapt to rapidly changing technologies;
- - adapt our services to evolving industry standards;
- - continually improve the performance, features and reliability of our service
in response to competitive service and product offerings and evolving demands
of the marketplace.
Our failure to adapt to such changes would have a material adverse effect on
our business, results of operations and financial condition. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require substantial
expenditures by us to modify or adapt our services or infrastructure. This could
have a material adverse effect on our business, results of operations and
financial condition.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly applicable
to electronic commerce. However, the Internet is increasingly popular. As a
result, it is possible that a number of laws and regulations may be adopted with
respect to the Internet. These laws may cover issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Furthermore, the growth of electronic commerce may prompt calls for more
stringent consumer protection laws. Several states have proposed legislation to
limit the uses of personal user information gathered online or require online
services to establish privacy policies. The Federal Trade Commission has also
initiated action against at least one online service regarding the manner in
which personal information is collected from users and provided to third
parties. We do not currently provide personal information regarding our users to
third parties. However, the adoption of such consumer protection laws could
create uncertainty in Web usage and reduce the demand for our products and
services.
47
<PAGE>
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of such laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws
intended to address such issues could create uncertainty in the Internet market
place. Such uncertainty could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs.
In addition, because our services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that we are
required to qualify to do business in each such state or foreign country. We are
qualified to do business only in California. Our failure to qualify in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. It could also hamper our ability to enforce contracts in such
jurisdictions. The application of laws or regulations from jurisdictions whose
laws do not currently apply to our business could have a material adverse effect
on our business, results of operations and financial condition.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could seriously harm our net sales and
results of operations. Current and new competitors can enter our market with
little difficulty and can launch new Web sites at a relatively low cost. In
addition, the children's toy, video game, software, video and music retailing
industries are intensely competitive.
We currently or potentially compete with a variety of other companies,
including:
- - traditional store-based toy and children's product retailers such as Toys R
Us, FAO Schwarz, Zany Brainy and Noodle Kidoodle;
- - major discount retailers such as Wal-Mart, Kmart and Target;
- - online efforts of these traditional retailers, including the online stores
operated by Toys R Us, Wal-Mart and FAO Schwarz;
- - physical and online stores of entertainment entities that sell and license
children's products, such as The Walt Disney Company and Warner Bros.;
- - catalog retailers of children's products;
- - vendors of children's products that currently sell some of their products
directly online, such as Mattel and Hasbro;
- - other online retailers that include children's products as part of their
product offerings, such as Amazon.com, Barnesandnoble.com, CDnow, Beyond.com
and Reel.com;
- - Internet portals and online service providers that feature shopping services,
such as AOL, Yahoo!, Excite and Lycos; and
- - various smaller online retailers of children's products, such as
BrainPlay.com, Red Rocket and Toysmart.com.
We believe that the following are principal competitive factors in our
market:
- - brand recognition;
- - selection;
48
<PAGE>
- - convenience;
- - price;
- - speed and accessibility;
- - customer service;
- - quality of site content; and
- - reliability and speed of order shipment.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-financed
entities may join with online competitors or children's toy, video game,
software, video and music publishers or suppliers as the use of the Internet and
other online services increases.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. Some of our competitors such as Toys R
Us and Wal-Mart have significantly greater experience in selling children's
toys, video games, software, videos and music products.
Our online competitors are particularly able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of existing technologies, such as price
comparison programs, may increase competition.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a materially adverse effect on us.
INTELLECTUAL PROPERTY
We rely on various intellectual property laws and contractual restrictions
to protect our proprietary rights in products and services. These include
confidentiality, invention assignment and nondisclosure agreements with our
employees, contractors, suppliers and strategic partners. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our intellectual property without our authorization. In addition, we
pursue the registration of our trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not be
available in every country in which our services are made available online.
We have licensed various proprietary rights to third parties. We attempt to
ensure that these licensees maintain the quality of our brand. However, these
licensees may nevertheless take actions that materially adversely affect the
value of our proprietary rights or reputation. We also rely on technologies that
we license from third parties. These licenses may not continue to be available
to us on commercially reasonable terms in the future. As a result, we may be
required to obtain substitute technology of lower quality or at greater cost,
which could materially adversely affect our business, results of operations and
financial condition.
To date, we have not been notified that our technologies infringe the
proprietary rights of third parties. However, there can be no assurance that
third parties will not claim infringement by us with respect to our current or
future technologies. We expect that participants in our markets will be
49
<PAGE>
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any such claim, with or without
merit, could be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements might not be available on terms acceptable to us
or at all. As a result, any such claim of infringement against us could have a
material adverse effect upon our business, results of operations and financial
condition.
EMPLOYEES
As of March 31, 1999, we had 306 full-time employees. None of our employees
are represented by a labor union. We have not experienced any work stoppages and
consider our employee relations to be good.
Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom are bound by an employment agreement requiring service for any defined
period of time. The loss of services of one or more of our key employees could
have a material adverse effect on our business, financial condition and results
of operations. Our future success also depends in part upon our continued
ability to attract, hire, train and retain highly qualified technical, sales and
managerial personnel. Competition of such personnel is intense and there can be
no assurance that we can retain our key personnel in the future.
FACILITIES
Our corporate offices are located in Santa Monica, California, where we
lease approximately 60,000 square feet under a lease that expires in July 2003.
In addition, we lease approximately 60,000 square feet in Commerce, California
for our distribution operations under a lease that expires in August 2003.
50
<PAGE>
RECENT DEVELOPMENTS
THE BABYCENTER MERGER
On April 18, 1999, we entered into a merger agreement with BabyCenter
pursuant to which a new subsidiary of ours will merge with BabyCenter so that
BabyCenter becomes our wholly owned subsidiary. The following description of the
BabyCenter merger agreement, the merger and related transactions does not
purport to be complete and is subject to and qualified in its entirety by the
merger agreement dated April 18, 1999, and related agreements, which are
included as exhibits to the registration statement of which this prospectus
forms a part.
In connection with this merger, an aggregate of 18,720,000 shares of our
common stock will be issued in exchange for all outstanding shares of BabyCenter
capital stock and reserved for issuance upon the exercise of assumed BabyCenter
options in connection with the proposed merger. Each option we assume will
continue to have, and be subject to, the same terms and conditions as set forth
in the incentive stock plan of BabyCenter and the respective option agreements
governing such option immediately prior to the merger, except that such option
will be exercisable for shares of our common stock with adjustments to the
number of shares subject to the option and to the exercise price to reflect the
exchange ratio in the merger. We will account for the merger using the purchase
method of accounting and the merger is intended to qualify as a tax-free
reorganization under Section 368 of the Internal Revenue Code. Upon completion
of the offering, the shares of our common stock to be issued and reserved for
issuance in connection with the merger will constitute approximately 14% of our
common stock.
The merger agreement contains customary representations and warranties on
the part of BabyCenter regarding such matters as its corporate good standing,
capital structure, intellectual property ownership, pending litigation, assets
and liabilities, employee relations, material contracts, tax good standing,
compliance with laws and regulations and customers. We also made customary
representations and warranties to BabyCenter regarding specific matters.
Pursuant to the merger agreement, BabyCenter agreed to indemnify us and each
of our officers, directors and affiliates with respect to breaches of any
representations, warranties, covenants or other agreements made by BabyCenter in
the merger agreement. These indemnification obligations are subject to minimum
threshold limitations specified in the merger agreement. 300,000 of the shares
of our common stock to be issued to BabyCenter stockholders will be held in
escrow for a period of six months after the closing of the merger to secure
these indemnification obligations.
Pursuant to the merger agreement, upon consummation of the merger,
BabyCenter's Chief Executive Officer, Matthew Glickman, will be appointed to our
Board of Directors.
The BabyCenter merger is subject to a number of closing conditions specified
in the merger agreement, including approval of the merger by BabyCenter
stockholders and governmental authorities and other customary closing
conditions. As a result, there can be no assurance that the BabyCenter merger
will be completed.
In connection with the BabyCenter merger, BabyCenter has agreed that its
stockholders holding at least 95% of the shares of our common stock to be issued
in the acquisition as well as BabyCenter optionees holding at least 85% of the
shares to be issued upon exercise of assumed BabyCenter options in the
acquisition will enter into lock-up agreements similar to those entered into by
our directors, officers and securityholders. As a result, upon the closing of
the merger, approximately 1,377,152 shares of our common stock to be issued in
exchange for outstanding shares of BabyCenter capital stock and issuable upon
exercise of assumed BabyCenter options will be immediately eligible for sale in
the public market upon closing of the merger in accordance with the restrictions
of Rule 144 under the Securities Act. The remaining 17,342,848 shares of our
common stock to be issued in exchange for outstanding shares of BabyCenter
capital stock and issuable upon exercise of assumed BabyCenter options in
connection with the merger will be eligible for public sale in the public market
beginning 180 days after the date of this prospectus, subject to the volume and
other restrictions pursuant to Rule 144 under the Securities Act. See "Shares
Eligible for Future Sale".
51
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth specific information regarding our executive
officers and directors as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---------------------------- --- -----------------------------------------------------
<S> <C> <C>
Edward C. Lenk.............. 37 President, Chief Executive Officer and Uncle of the
Board
Steven J. Schoch............ 40 Senior Vice President and Chief Financial Officer
John R. Hnanicek............ 35 Senior Vice President and Chief Information Officer
Frank C. Han................ 35 Senior Vice President of Product Development
Louis V. Zambello III....... 41 Senior Vice President of Operations
Peter C.M. Hart............. 48 Director
Tony A. Hung................ 31 Director
Michael Moritz.............. 44 Director
Daniel J. Nova.............. 37 Director
</TABLE>
EDWARD C. LENK founded eToys and has served as our President, Chief
Executive Officer and a Director since June 1997. In December 1998, he was
appointed Uncle of the Board. Prior to founding eToys, from May 1994 to July
1996 Mr. Lenk was employed as Vice President of Strategic Planning at The Walt
Disney Company, where he was responsible for strategic planning and new business
development of Worldwide Attractions and Resorts. From May 1991 to May 1994, he
was a Director of Strategic Planning at The Walt Disney Company. Mr. Lenk
received a Bachelor of Arts SUMMA CUM LAUDE from Bowdoin College and a Masters
in Business Administration, with distinction, from Harvard Business School.
STEVEN J. SCHOCH has served as our Chief Financial Officer since January
1999. Prior to joining us, from December 1995 to January 1999, Mr. Schoch was
Vice President and Treasurer of Times Mirror Company, a newspaper and magazine
publishing company. He also served as Chief Executive Officer and President of a
wholly owned subsidiary of Times Mirror Company dedicated to the reduction and
containment of costs of the parent company. From March 1991 to October 1995, Mr.
Schoch worked at The Walt Disney Company, most recently as Vice President,
Treasurer--Euro Disney S.C.A. Mr. Schoch serves as a director of VDI Media. Mr.
Schoch received a Bachelor of Science from Tufts University and a Masters in
Business Administration from the Amos Tuck School of Business Administration at
Dartmouth College.
JOHN R. HNANICEK has served as our Chief Information Officer since December
1998. Prior to joining us, from October 1996 to December 1998, he was employed
as Senior Vice President of Information Systems for Hollywood Entertainment,
Inc., a nationwide retail video chain. From January 1996 to October 1996, Mr.
Hnanicek served as Chief Information Officer for Homeplace, Inc., a home
furnishings chain. From 1990 to 1995, he served as Senior Vice President of
Information Systems and Logistics at OfficeMax, Inc., a retail office supply
outlet. Mr. Hnanicek holds a Bachelor of Science in Computer Science and
Accounting from Cleveland State University.
FRANK C. HAN has served as our Senior Vice President of Product Development
since January 1999. From February 1997 to January 1999, Mr. Han was our Chief
Operating Officer and Vice President of Finance. Prior to joining us, Mr. Han
worked at Union Bank of California, serving as Vice President of Interactive
Markets from January 1995 to February 1997 and as Director of Strategic Planning
from 1993 to 1995. Mr. Han received a Bachelor of Science CUM LAUDE from Yale
University and a Masters in Business Administration from the Stanford Graduate
School of Business.
52
<PAGE>
LOUIS V. ZAMBELLO III has served as our Senior Vice President of Operations
since December 1998. Prior to joining us, from 1984 to 1998, he held a variety
of positions at L.L. Bean, Inc., an outdoor retailer. Most recently, Mr.
Zambello served as Senior Vice President of Operations and Creative from June
1998 to December 1998, as Senior Vice President of Operations from December 1993
to June 1998, as Vice President of Merchandise Services and Manufacturing from
December 1991 to August 1993 and in a variety of other positions since 1984. Mr.
Zambello received a Bachelor of Arts MAGNA CUM LAUDE from Cornell University and
a Masters in Business Administration from Harvard Business School.
PETER C.M. HART has served as a Director of eToys since October 1997. Since
January 1999, Mr. Hart has been a Managing Partner of Wildkin LLC, a distributor
of toys. Since November 1997, he has served as a business advisor to EdUsa, a
company that provides language instruction over the Internet. From 1983 to 1997,
he held a variety of positions at Ross Stores, Inc., an apparel retailer, most
recently as a Senior Vice President managing warehousing, distribution and MIS
operations. Previously, Mr. Hart was a Business Systems Analyst at Joseph Magnin
Department Store in San Francisco and at Rediffusion in Buckinghamshire,
England. Mr. Hart is a member of the Audit Committee of the Board of Directors.
TONY A. HUNG has served as a Director of eToys since December 1997. Since
1997, he has been a Vice President of DynaFund Ventures, a venture capital
partnership. Previously, Mr. Hung held a variety of positions at The Walt Disney
Company, serving as Manager of Corporate Strategic Planning from 1996 to 1997,
as Manager of Television and Telecommunications from 1995 to 1996, and as Senior
Analyst in the Corporate Treasury department from 1992 to 1995. Mr. Hung serves
on the boards of directors of a number of private companies. Mr. Hung holds a
Bachelor of Arts from Harvard University and a Masters in Business
Administration from The Anderson School at University of California at Los
Angeles. Mr. Hung is a member of the Audit Committee of the Board of Directors.
MICHAEL MORITZ has served as a Director of eToys since June 1998. He has
been a general partner of Sequoia Capital, a venture capital firm, since 1986.
Sequoia Capital provided the original venture capital financing to companies
such as Cisco Systems Inc., LSI Logic Corporation, Linear Technology
Corporation, Microchip Technology Inc. and International Network Services. Mr.
Moritz serves as a director of Yahoo! Inc. and Flextronics International Ltd.,
as well as several private companies. Mr. Moritz received a Master of Arts
degree from Oxford University and a Masters in Business Administration from the
Wharton School at the University of Pennsylvania. Mr. Moritz is a member of the
Compensation Committee of the Board of Directors.
DANIEL J. NOVA has served as a Director of eToys since June 1998. Since
August 1996, Mr. Nova has served as a general partner of Highland Capital
Partners, a venture capital firm. Previously, he was a general partner of
CMG@Ventures from January 1995 to August 1996 and a Senior Associate at Summit
Partners from June 1991 to January 1995. Mr. Nova is a director of Lycos, Inc.,
an online portal, and several private companies. Mr. Nova received a Bachelor of
Science in Computer Science and Marketing with honors from Boston College and a
Masters in Business Administration from Harvard Business School. Mr. Nova is a
member of the Audit and Compensation Committees of the Board of Directors.
Our Board of Directors currently consists of five members. Each director is
elected for a period of one year at our annual meeting of stockholders and
serves until the next annual meeting or until his successor is duly elected and
qualified.
Our executive officers serve at the discretion of the Board of Directors.
There are no family relationships among any of our directors or executive
officers.
53
<PAGE>
BOARD COMMITTEES
Our Board of Directors established the Compensation Committee in December
1998 and the Audit Committee in February 1999. The Compensation Committee
reviews and recommends to the Board of Directors the compensation and benefits
of all our officers and establishes and reviews general policies relating to
compensation and benefits of our employees. The Audit Committee reviews our
internal accounting procedures and consults with and reviews the services
provided by our independent accountants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our Compensation Committee of the Board of Directors are
currently Mr. Moritz and Mr. Nova, neither of whom has ever been an officer or
employee of eToys. Prior to establishing the Compensation Committee in December
1998, the Board of Directors as a whole performed the functions delegated to the
Compensation Committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation from us for
their service as members of the Board of Directors, although they are reimbursed
for travel and lodging expenses in connection with attendance at Board and
Committee meetings. Under our 1997 Stock Plan, nonemployee directors are
eligible to receive stock option grants and stock purchase rights at the
discretion of the Board of Directors or other administrator of the plan. Under
our 1999 Directors' Stock Option Plan, non-employee directors are eligible to
receive automatic stock option grants upon their initial appointment and at each
of our annual stockholders meetings. See "--Stock Plans". In September 1997 the
Board of Directors granted Mr. Hart an option to purchase 300,000 shares of
common stock at $0.005 per share in connection with his appointment as a member
of the Board of Directors. 1/4th of the shares vested upon June 15, 1998 and
1/48th of the total number of shares vest monthly from and after June 15, 1998.
From January 1998 to June 1998, Mr. Hart provided us consulting services. In
connection with these services, Mr. Hart received aggregate payments of $39,000,
reimbursement of his expenses and an option to purchase 63,000 shares of common
stock at $0.033 per share. This option, which vested at the rate of 1/6th per
month commencing upon February 1, 1998, is fully vested.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services
rendered to eToys during the fiscal years ended March 31, 1998 and March 31,
1999 by our Chief Executive Officer and our four other executive officers who
earned more than $100,000 during the fiscal year ended March 31, 1999.
54
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------
------------------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- ------------------------- ----------- ----------- ----------- ----------------------- -------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Lenk .......... 1998 105,000 -- -- 3,000,000 --
President and Chief 1997 80,000 -- -- -- --
Executive Officer
Louis V. Zambello 1998 50,000 28,750 -- 825,000 --
III(1) ................
Senior Vice President
of Operations
John R. Hnanicek(2) ..... 1998 37,500 15,000 -- 600,000 --
Senior Vice President
and Chief Information
Officer
Steven J. Schoch(3) ..... 1998 20,833 4,167 -- 750,000 --
Senior Vice President
and Chief Financial
Officer
Frank C. Han ............ 1998 93,750 10,000 -- 825,750 --
Senior Vice President 1997 69,167 -- -- -- --
of Product Development
</TABLE>
- ------------------------------
(1) Louis V. Zambello III became Senior Vice President of Operations in December
1998. On an annual basis, Mr. Zambello's salary would have been $200,000.
Mr. Zambello is entitled to a bonus of $115,000 which vests monthly over the
first year of his employment; the amount in the table reflects the portion
of his bonus that vested in fiscal 1998.
(2) John R. Hnanicek became Senior Vice President and Chief Information Officer
in December 1998. On an annual basis, Mr. Hnanicek's salary would have been
$150,000. Mr. Hnanicek was paid a bonus of $60,000 which vests monthly over
the first year of his employment; the amount in the table reflects the
portion of his bonus that vested in fiscal 1998.
(3) Steven J. Schoch became Senior Vice President and Chief Financial Officer in
January 1999. On an annual basis, Mr. Schoch's salary would have been
$125,000. Mr. Schoch is entitled to a bonus of $25,000 which vests monthly
over the first year of his employment; the amount in the table reflects the
portion of his bonus that vested in fiscal 1998.
We did not pay to our Chief Executive Officer or any named executive officer
any compensation intended to serve as incentive for performance to occur over a
period longer than one year pursuant to a long-term incentive plan in the fiscal
year ended March 31, 1998. We do not have any defined benefit or actuarial plan
with respect to our Chief Executive Officer or any named executive officer under
which benefits are determined primarily by final compensation and years of
service.
55
<PAGE>
OPTION GRANTS
The following table provides summary information regarding stock options
granted to our Chief Executive Officer and our four other highest compensated
executive officers during the fiscal year ended March 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED IN TERM(3)
OPTIONS FISCAL 1998 EXERCISE PRICE EXPIRATION ------------------------------
NAME GRANTED(#) (%)(1) ($/SHARE)(2) DATE 5% 10%
- ------------------------ ----------- ------------- --------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Lenk.......... 3,000,000(4) 21.25% $ 0.143 10/21/08 $ 43,279,730 $ 68,915,737
Louis V. Zambello III... 825,000(5) 5.84 1.667 12/31/08 9,854,812 15,692,141
John R. Hnanicek........ 600,000(5) 4.25 1.667 12/31/08 7,167,136 11,412,466
Steven J. Schoch........ 750,000(6) 5.31 3.333 1/31/09 6,922,802 11,023,405
Frank C. Han............ 825,000(4) 5.84 0.143 10/21/08 11,901,925 18,951,827
750(7) 0.01 2.833 1/31/09 7,533 11,996
</TABLE>
- ------------------------------
(1) We granted options for an aggregate of 14,115,900 shares to our employees
and consultants under the 1997 Stock Plan and the 1999 Stock Plan during the
fiscal year ended March 31, 1999. See "Stock Plans".
(2) Options were granted at an exercise price equal to the fair market value of
the common stock, as determined by the Board of Directors on the date of
grant.
(3) The potential realizable value is calculated assuming the exercise price on
the date of grant appreciates at the indicated rate for the entire term of
the option and that the option is exercised at the exercise price and sold
on the last day of its term at the appreciated price. All options listed
have a term of 10 years. Stock price appreciation of 5% and 10% is assumed
pursuant to the rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price will appreciate over the 10-year
option term at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the common stock appreciates over the option
term, no value will be realized from the option grants made to the named
executive officers.
(4) The options become exercisable at the rate of 1/4th of the total number of
shares on October 21, 1999 and 1/48th of the total number of shares monthly
from and after October 21, 1999.
(5) The options are immediately exercisable. However, if exercised, the
underlying shares are subject to a right of repurchase at cost in our favor
which lapses at the rate of 1/4th of the total number of shares on December
31, 1999 and 1/48th of the total number of shares monthly from and after
December 31, 1999.
(6) The option is immediately exercisable. However, if exercised, the underlying
shares are subject to a right of repurchase at cost in our favor which
lapses at the rate of 1/4th of the total number of shares on January 31,
2000 and 1/48th of the total number of shares monthly from and after January
31, 2000.
(7) The option is immediately exercisable.
56
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by our Chief
Executive Officer and our four other highest compensated executive officers as
of March 31, 1999.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT MARCH 31,
OPTIONS AT MARCH 31, 1999(1) 1999(1)(2)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Edward C. Lenk(3).................................... -- 3,000,000 -- $ 26,570,000
Louis V. Zambello III(4)............................. 825,000 -- $6,050,000 --
John R. Hnanicek(4).................................. 600,000 -- 4,400,000 --
Steven J. Schoch(5).................................. 750,000 -- 4,250,000 --
Frank C. Han(6)...................................... 750 825,000 4,625 7,306,750
</TABLE>
- ------------------------------
(1) No options were exercised as of the completion of the fiscal year ended
March 31, 1999.
(2) Based on the estimated fair market value of $9.00 for our common stock on
March 31, 1999.
(3) The option becomes exercisable at the rate of 1/4th of the total number of
shares on October 21, 1999 and 1/48th of the total number of shares monthly
from and after October 21, 1999.
(4) The options are immediately exercisable. However, if exercised, the
underlying shares are subject to a right of repurchase at cost in our favor
which lapses at the rate of 1/4th of the total number of shares on December
31, 1999 and 1/48th of the total number of shares monthly from and after
December 31, 1999.
(5) The option is immediately exercisable. However, if exercised, the underlying
shares are subject to a right of repurchase at cost in our favor which
lapses at the rate of 1/4th of the total number of shares on January 31,
2000 and 1/48th of the total number of shares monthly from and after January
31, 2000.
(6) Mr. Han holds an immediately exercisable option to purchase 750 shares. Mr.
Han holds a second option to purchase 825,000 shares which becomes
exercisable at the rate of 1/4th of the total number of shares on October
21, 1999 and 1/48th of the total number of shares monthly from and after
October 21, 1999.
STOCK PLANS
1999 STOCK PLAN. The Board of Directors adopted our 1999 Stock Plan in
February 1999 and our stockholders approved it in March 1999. We have reserved a
total of 21,600,000 shares of common stock for issuance under the 1999 Stock
Plan, plus an automatic annual increase on the first day of our fiscal years
beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 4,500,000
shares, 3.0% of our outstanding common stock on the last day of the immediately
preceding fiscal year or such lesser number of shares as the Board of Directors
determines. As of March 31, 1999, options to purchase 1,536,300 shares of common
stock with a weighted average exercise price equal to $8.900 have been granted,
none of which have been exercised.
The 1999 Stock Plan provides for the granting to employees, including
officers and directors, of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, and for the granting to
employees, consultants and nonemployee directors, of stock purchase rights and
nonstatutory stock options. If an optionee would have the right in any calendar
year to exercise for the first time incentive stock options for shares having an
aggregate fair market value (under all of our plans and determined for each
share as of the date the option to purchase the shares was granted) in excess of
$100,000, any such excess options shall be treated as nonstatutory stock
options. Unless terminated earlier, the 1999 Stock Plan will terminate in
February 2009.
The 1999 Stock Plan may be administered by the Board of Directors or a
committee of the Board, each known as the "administrator". The Board of
Directors currently administers the 1999 Stock Plan. The administrator
determines the terms of options and stock purchase rights granted
57
<PAGE>
under the 1999 Stock Plan, including the number of shares subject to an option
or stock purchase right, the exercise or purchase price, and the term and
exercisability of options. The administrator may grant an individual employee
options or stock purchase rights under the 1999 Stock Plan during any one fiscal
year to purchase a maximum of 9,000,000 shares. The exercise price of all
incentive stock options granted under the 1999 Stock Plan generally must be at
least equal to the fair market value of our common stock on the date of grant.
The administrator has the authority to grant nonstatutory stock options and
stock purchase rights at prices below fair market value, although the exercise
price of such awards granted to our Chief Executive Officer or our four other
most highly compensated officers will generally equal at least 100% of the fair
market value of the common stock on the date of grant. Payment of the purchase
price of options and stock purchase rights may be made in cash or other
consideration as determined by the administrator.
Generally, options granted under the plan have a term of ten years and are
nontransferable. The administrator may grant nonstatutory stock options with
limited transferability rights in circumstances specified in the 1999 Stock
Plan. The administrator determines the vesting terms of options and stock issued
pursuant to stock purchase rights. We expect that options and stock purchase
rights granted under the 1999 Stock Plan generally will vest at the rate of
1/4th of the total number of shares subject to the options or stock purchase
rights 12 months after the date of grant, and 1/48th of the total number of
shares each month thereafter.
In the event that we are acquired by another company, we expect that awards
outstanding under the 1999 Stock Plan will be assumed or equivalent awards
substituted by our acquiror. If an acquiror did not agree to assume or
substitute awards, the vesting of outstanding options and stock issued pursuant
to stock purchase rights will accelerate in full prior to consummation of the
transaction. If we are acquired pursuant to a transaction in which outstanding
awards are assumed or substituted by our acquiror and a participant holding an
assumed or substituted award is involuntarily terminated within 24 months
following the acquisition, the vesting of any award held by such person would
accelerate in full immediately prior to the date of his or her termination.
The Board has the authority to amend or terminate the 1999 Stock Plan as
long as such action does not materially and adversely affect any outstanding
option and provided that stockholder approval for any amendments to the 1999
Stock Plan shall be obtained to the extent required by applicable law.
1997 STOCK PLAN. The Board of Directors adopted and our stockholders
approved our 1997 Stock Plan in March 1997. We have reserved a total of
17,400,000 shares of common stock for issuance under the 1997 Stock Plan. As of
March 31, 1999, options to purchase 1,861,761 shares of common stock with a
weighted average exercise price of $0.035 had been exercised and options to
purchase a total of 13,415,001 shares at a weighted average exercise price of
$0.755 per share were outstanding. As of March 31, 1999, 2,123,238 shares
remained available for future issuance under the 1997 Stock Plan. However, the
Board has determined that all future grants to employees and consultants will
take place under our 1999 Stock Plan and therefore any shares remaining
available for issuance under the 1997 Stock Plan as of the date of this offering
will be returned to our authorized but unissued capital stock and will not be
available for future grant. Shares returning to the 1997 Stock Plan upon
cancellation of outstanding options may be made subject to future grant after
the date of this offering. Unless terminated earlier, the 1997 Stock Plan will
terminate in March 2007.
The terms of options and stock purchase rights issued under the 1997 Stock
Plan are generally the same as those which may be issued under the 1999 Stock
Plan, except with respect to the following features. The 1997 Stock Plan does
not impose an annual limitation on the number of shares subject to options or
stock purchase rights which may be issued to any individual employee.
Nonstatutory stock options or stock purchase rights granted under the 1997 Stock
Plan
58
<PAGE>
are nontransferable in all cases and must generally be granted with an exercise
price or purchase price equal to at least 85% of the fair market value of the
common stock on the date of grant.
In the event that we are acquired by another company, we expect that awards
outstanding under the 1997 Stock Plan will be assumed or equivalent awards
substituted by our acquiror. If an acquiror did not agree to assume or
substitute awards, the vesting of outstanding options and stock issued pursuant
to stock purchase rights will accelerate in full prior to consummation of the
transaction. If we are acquired pursuant to a transaction in which outstanding
awards are assumed or substituted by our acquiror and a participant holding an
assumed or substituted award is involuntarily terminated within 24 months
following the acquisition, the vesting of any award held by such person would
accelerate in full immediately prior to the date of his or her termination.
1999 DIRECTORS' STOCK OPTION PLAN. The Board of Directors adopted our 1999
Directors' Stock Option Plan in February 1999 and our stockholders approved it
in March 1999. We have reserved a total of 600,000 shares of common stock for
issuance under the 1999 Directors' Stock Option Plan. The 1999 Directors' Stock
Option Plan becomes effective upon the effective date of this offering and,
unless terminated earlier, it terminates in February 2009. As of the date of
this offering, no options to purchase shares of common stock have been issued
under the 1999 Directors' Stock Option Plan. The 1999 Directors' Stock Option
Plan is designed to work automatically without administration; however, to the
extent administration is necessary, it will be performed by the Board of
Directors. To the extent that conflicts of interest arise, we expect they will
be addressed by abstention of any interested director from both deliberations
and voting regarding matters in which such director has a personal interest.
The 1999 Directors' Stock Option Plan provides that each person who becomes
a nonemployee director after the date of this offering will be granted a
nonstatutory stock option to purchase 60,000 shares of common stock on the date
on which the optionee first becomes a nonemployee director. In addition, on the
date of each annual meeting of stockholders, each nonemployee director will
automatically be granted an additional option to purchase 15,000 shares of
common stock if, on such date, he or she has served on our Board of Directors
for at least six months. All options granted under the 1999 Directors' Stock
Option Plan shall have an exercise price equal to 100% of the fair market value
of the common stock as of the date of grant and will be exercisable in full
immediately upon grant. Options granted under the 1999 Directors' Stock Option
Plan are nontransferable.
A nonemployee director who ceases to serve as a director for any reason
other than death or disability has 90 days after the date he or she ceases to be
a director to exercise options granted under the 1999 Directors' Stock Option
Plan. To the extent that he or she does not exercise an option within such 90
day period, the option will terminate. If a director's service on our Board of
Directors terminates as a result of his or her death or disability, the director
or the director's estate will have the right to exercise an option for 12 months
following such termination date. Options granted under the 1999 Directors' Stock
Option Plan have a term of ten years.
In the event that we are acquired by another company, we expect that awards
outstanding under the 1999 Directors' Stock Option Plan will be assumed or
equivalent awards substituted by our acquiror. If an acquiror did not agree to
assume or substitute awards, all outstanding awards under the 1999 Directors'
Stock Option Plan would terminate to the extent not previously exercised upon
consummation of the acquisition. The Board of Directors may amend or terminate
the 1999 Directors' Stock Option Plan at any time as long as such action does
not adversely affect any outstanding option and stockholder approval for any
amendments is obtained to the extent required by applicable law.
59
<PAGE>
1999 EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors adopted our 1999
Employee Stock Purchase Plan in February 1999 and our stockholders approved it
in March 1999. We have reserved a total of 900,000 shares of common stock for
issuance under the 1999 Employee Stock Purchase Plan, plus an automatic annual
increase on the first day of each of our fiscal years beginning in 2000, 2001,
2002, 2003 and 2004 equal to the lesser of 540,000 shares, 0.5% of our
outstanding common stock on the last day of the immediately preceding fiscal
year, or such lesser number of shares as the Board of Directors shall determine.
The 1999 Employee Stock Purchase Plan becomes effective upon the date of this
offering and, unless terminated earlier by the Board of Directors, it will
terminate in February 2019.
The 1999 Employee Stock Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code. This plan consists of a series of overlapping
offering periods of 24 months' duration. The initial offering period is expected
to commence on the date of this offering and end on April 30, 2001 and the
initial purchase period is expected to begin on the date of this offering and
end on October 31, 1999.
The Board of Directors or a committee appointed by the Board of Directors
will administer the 1999 Employee Stock Purchase Plan. The 1999 Employee Stock
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation. The
purchase price is equal to the lower of 85% of the fair market value of the
common stock at the beginning of each offering period or at the end of each
purchase period. In circumstances specified in the 1999 Employee Stock Purchase
Plan, the purchase price may be adjusted during an offering period to avoid our
incurring adverse accounting charges. Our employees, including officers and
employee directors, are eligible to participate in the 1999 Employee Stock
Purchase Plan if they are employed by us for at least 20 hours per week and more
than five months per year. Employees may end their participation in the 1999
Employee Stock Purchase Plan at any time, and participation ends automatically
on termination of employment. If the fair market value of the common stock on a
purchase date is less than the fair market value at the beginning of the
offering period, each participant in the 1999 Employee Stock Purchase Plan shall
automatically be withdrawn from the offering period as of the end of the
purchase date and re-enrolled in the new 24-month offering period beginning on
the first business day following the purchase date.
The 1999 Employee Stock Purchase Plan limits the number of stock purchase
rights that can be granted to any single employee. An employee cannot be granted
rights to purchase stock under this plan if his or her rights accrue at a rate
which exceeds $25,000 worth of stock in any calendar year. In addition, no
employee may purchase more than 9,000 shares of common stock during any one
purchase period.
In the event that we are acquired by another company, the 1999 Employee
Stock Purchase Plan provides that each right to purchase stock will be assumed
or equivalent rights substituted by our acquiror. If an acquiror did not agree
to assume or substitute stock purchase rights, the offering period then in
progress would be shortened and a new exercise date occurring prior to
consummation of the acquisition would be set. The Board of Directors has the
power to amend or terminate the 1999 Employee Stock Purchase Plan and to change
or terminate offering periods as long as such action does not adversely affect
any outstanding rights to purchase stock thereunder. However, the Board of
Directors may amend or terminate the 1999 Employee Stock Purchase Plan or an
offering period even if it would adversely affect outstanding options in order
to avoid our incurring adverse accounting charges.
60
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- - any breach of their duty of loyalty to the corporation or its stockholders;
- - acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
- - unlawful payments of dividends or unlawful stock repurchases or redemptions;
or
- - any transaction from which the director derived an improper personal benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our Bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding arising out of such person's services as a
director or executive officer of eToys, any subsidiary of eToys or any other
entity to which the person provides services at our request. We believe that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
61
<PAGE>
CERTAIN TRANSACTIONS
In June 1997, we sold 7,500,000 shares of common stock to Edward C. Lenk at
$0.005 per share in exchange for $18,750 in cash and a promissory note in the
principal amount of $18,750. The note is full recourse and secured by 3,750,000
of Mr. Lenk's shares. 3,750,000 of Mr. Lenk's shares are subject to a repurchase
option in our favor. In the event of the termination of his employment, our
repurchase option enables us to repurchase a specific number of Mr. Lenk's
shares at $0.005 per share. Our repurchase option lapses over four years
according to the following schedule: 1/4th of such shares were released from our
repurchase option on December 1, 1997, and 1/48th of such total are released
from our repurchase option monthly from and after December 1, 1997 until
December 1, 2000. In addition, all shares are immediately released from our
repurchase option upon a change of control. This offering will not constitute
such a change of control.
In October 1998, we issued Mr. Lenk an option to purchase 3,000,000 shares
of common stock at $0.143 per share. The option vests over four years 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 until October 21, 2002. This option expires on October 21, 2008.
In June 1997, we sold 2,500,002 shares of common stock to Frank C. Han at
$0.005 per share in exchange for $6,250 in cash and a promissory note in the
principal amount of $6,250. The note is full recourse and secured by 1,250,001
of Mr. Han's shares. 1,250,001 of Mr. Han's shares are subject to a repurchase
option in our favor. In the event of the termination of his employment, our
repurchase option enables us to repurchase a specific number of Mr. Han's shares
at $0.005 per share. Our repurchase option lapses over four years according to
the following schedule: 1/4th of such shares were released from our repurchase
option on February 1, 1998, and 1/48th of such total are released from our
repurchase option monthly from and after February 1, 1998 until February 1,
2001. In addition, all shares are immediately released from our repurchase
option upon a change of control. This offering will not constitute such a change
of control.
In October 1998, we issued Mr. Han an option to purchase 825,000 shares of
common stock at $0.143 per share. The option vests over four years 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 until
October 21, 2002. This option expires on October 21, 2008. In January 1999, we
issued Mr. Han a fully vested option to purchase 750 shares of common stock at
$2.833 per share. This option expires on January 31, 2009.
In September 1997 we issued Peter C.M. Hart a stock option to purchase
300,000 shares of common stock at $0.005 per share. The option vests over four
years according to the following schedule: 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 until June 15, 2001. This option expires on September
29, 2007. In September 1997, we sold Mr. Hart a promissory note in the amount of
$20,000 and a warrant to purchase 48,387 shares of preferred stock at $0.207 per
share. The note converted into 98,817 shares of preferred stock in December 1997
and Mr. Hart exercised the warrant in full in March 1999. Mr. Hart was appointed
a Director in October 1997. In December 1997, we sold Mr. Hart 98,817 shares of
preferred stock at $0.207 per share. From January 1998 to June 1998, Mr. Hart
provided us part-time consulting services. In connection with these services, in
February 1998 we issued Mr. Hart a stock option to purchase 63,000 shares of
common stock at $0.033 per share. This option vested over six months according
to the following schedule: 1/6th of the shares subject to this option vested
monthly from and after February 1, 1998 until July 1, 1998. This option expires
on February 5, 2008.
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
62
<PAGE>
signing bonus of $60,000 which vests monthly over the first year of his
employment. In December 1998, we granted Mr. Hnanicek an option to purchase
600,000 shares of common stock at $1.667 per share. The option is immediately
exercisable and, if exercised, the underlying shares are subject to a right of
repurchase in our favor. In the event of the termination of Mr. Hnanicek's
employment, our repurchase option enables us to repurchase a specific number of
his shares at $1.667 per share. Our repurchase option lapses over four years
according to the following schedule: 1/4th of the shares will be released from
our repurchase option on December 31, 1999 and 1/48th of the total number of
shares will be released from our repurchase option monthly from and after
December 31, 1999 until December 31, 2002. If Mr. Hnanicek is terminated without
cause during the first six months of his employment, an additional 1/8th of such
shares shall be released from our repurchase option. If Mr. Hnanicek is
terminated without cause during his first six to 12 months of employment, an
additional 1/48th of such shares shall be released from our repurchase option
per each month of completed employment. This option expires on December 31,
2008.
In December 1998, we entered into an Offer Letter with Louis V. Zambello
III, our Senior Vice President of Operations. The agreement entitles Mr.
Zambello to a salary of $200,000 per year, a signing bonus of $115,000 which
vests monthly over the first year of his employment and severance benefits equal
to $100,000 if he is terminated without cause during the first 12 months of his
employment with us. In December 1998, we granted Mr. Zambello an option to
purchase 825,000 shares of common stock at $1.667 per share. The option is
immediately exercisable and, if exercised, the underlying shares are subject to
a right of repurchase in our favor. In the event of the termination of Mr.
Zambello's employment, our repurchase option enables us to repurchase a specific
number of his shares at $1.667 per share. Our repurchase option lapses over four
years according to the following schedule: 1/4th of the shares will be released
from our repurchase option on December 31, 1999 and 1/48th of the total number
of shares will be released from our repurchase option monthly from and after
December 31, 1999 until December 31, 2002. If Mr. Zambello is terminated without
cause during the first six months of his employment, an additional 1/8th of such
shares shall be released from our repurchase option. If Mr. Zambello is
terminated without cause during his first six to 12 months of employment, an
additional 1/48th of such shares shall be released from our repurchase option
for each month of completed employment. Furthermore, if we experience a change
of control within two years following his commencement of employment, a total of
412,500 of such shares shall immediately be released from our repurchase option.
This offering will not constitute such a change of control. This option expires
on December 31, 2008.
In January 1999, we entered into an Offer Letter with Steven J. Schoch, our
Chief Financial Officer. The agreement entitles Mr. Schoch to a salary of
$125,000 per year, a signing bonus of $25,000 which vests monthly over the first
year of his employment and severance benefits equal to $93,750 if he is
terminated without cause during the first 12 months of his employment with us.
In January 1999, we granted Mr. Schoch an option to purchase 750,000 shares of
common stock at $3.333 per share. The option is immediately exercisable and, if
exercised, the underlying shares are subject to a right of repurchase in our
favor. In the event of the termination of Mr. Schoch's employment, our
repurchase option enables us to repurchase a specific number of his shares at
$3.333 per share. Our repurchase option lapses over four years according to the
following schedule: 1/4th of the shares will be released from our repurchase
option on January 31, 2000 and 1/48th of the total number of shares will be
released from our repurchase option monthly from and after January 31, 2000
until January 31, 2003. If Mr. Schoch is terminated without cause during the
first six months of his employment, an additional 1/8th of such shares shall be
released from our repurchase option. If Mr. Schoch is terminated without cause
during his first six to 12 months of employment, an additional 1/48th of such
shares will be released from our repurchase option for each month of completed
employment. Furthermore, if we experience a change of control within 18 months
following his commencement of employment, a total of 281,250 of such shares
shall
63
<PAGE>
immediately be released from our repurchase option. This offering will not
constitute such a change of control. This option expires on January 31, 2009.
In June 1997, we sold 19,400,001 shares of common stock at $0.005 per share
and issued a note in the principal amount of $100,000 to idealab!. Pursuant to a
Letter Agreement dated November 5, 1997, idealab! returned shares of common
stock to us in the form of a capital contribution such that idealab!'s ownership
was reduced to 18,320,001 shares of common stock. Pursuant to a second Letter
Agreement dated November 5, 1997, idealab! forgave our indebtedness in the
amount of $100,000 as a capital contribution.
We have entered into indemnification agreements with our officers and
directors which may require us, among other things, to indemnify our officers
and directors against liabilities that may arise by reason of their status or
service as officers or directors, other than liabilities arising from willful
misconduct of a culpable nature, and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified. See
"Management--Limitation of Liability and Indemnification Matters".
The following table summarizes the shares of common stock and preferred
stock purchased by our directors and 5% stockholders and persons and entities
associated with them in private placement transactions. Each share of preferred
stock automatically converts into one share of common stock upon the closing of
this offering. The shares of common stock were sold at $0.005 per share, the
shares of Series A preferred stock were sold at $0.207 per share, the shares of
Series B preferred stock were sold at $0.701 per share and the shares of Series
C preferred stock were sold at $10.00 per share. See "Principal Stockholders".
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B SERIES C
ENTITIES AFFILIATED WITH DIRECTORS STOCK PREFERRED PREFERRED PREFERRED
- ---------------------------------------------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Entities affiliated with Highland Capital Partners (Daniel
Nova)(1)................................................ -- -- 11,411,184 999,999
Entities affiliated with Sequoia Capital (Michael
Moritz)(2).............................................. -- -- 7,131,990 999,999
Entities affiliated with DynaFund Ventures (Tony
Hung)(3)................................................ -- 4,838,709 2,852,796 --
Peter C.M. Hart........................................... -- 147,204 -- --
OTHER 5% STOCKHOLDERS
- ----------------------------------------------------------
Entities affiliated with idealab!(4)...................... 18,320,001 4,838,709 2,139,594 --
Intel Corporation......................................... -- 4,838,709 2,852,793 --
</TABLE>
- ------------------------
(1) Includes shares held by Highland Capital Partners III Limited Partnership,
Highland Entrepreneurs' Fund III Limited Partnership, Highland Capital
Partners IV Limited Partnership and Highland Entrepreneurs' Fund IV Limited
Partnership. Daniel Nova is a general partner of the general partner of the
Highland entities and is a Director of eToys. He disclaims beneficial
ownership of the shares held by the entities except to the extent of his
proportionate interest therein.
(2) Includes shares held by Sequoia Capital VIII, Sequoia International
Technology Partners VIII (Q), CMS Partners LLC, Sequoia International
Technology Partners VIII, Sequoia 1997, and Sequoia Capital Franchise Fund.
Michael Moritz is a general partner of the general partners of the Sequoia
entities and is a Director of eToys. He disclaims beneficial ownership of
the shares held by the entities except to the extent of his proportionate
interest therein.
64
<PAGE>
(3) Includes shares held by DynaFund L.P. and DynaFund International L.P. Tony
Hung is a vice president of the general partners of the DynaFund entities
and is a Director of eToys. He disclaims beneficial ownership of the shares
held by the entities except to the extent of his proportionate interest
therein.
(4) Includes shares held by idealab!, idealab! Capital Partners I-A, LP and
idealab! Capital Partners 1-B, LP. In November 1997, idealab! returned
shares of common stock to us in the form of a capital contribution such that
idealab!'s ownership was reduced to 18,320,001 shares of common stock.
idealab! Capital Partners I-A, LP and idealab! Capital Partners I-B, LP
disclaim ownership of the shares held by idealab! except to the extent of
their respective proportionate interest therein.
65
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 1999, as adjusted to
reflect the sale of the common stock offered hereby under this prospectus, by:
- - each stockholder known by us to own beneficially more than 5% of the common
stock,
- - each director,
- - our Chief Executive Officer and our four other highest compensated executive
officers, and
- - all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
---------------------------- ----------------------------
NUMBER PERCENTAGE(2) NUMBER PERCENTAGE(2)
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Entities affiliated with idealab!(3) .......... 25,298,304 27.07% 25,298,304 24.89%
130 West Union Street
Pasadena, CA 91103
Entities affiliated with Highland Capital
Partners(4) ................................. 12,411,183 13.28 12,411,183 12.21
Two International Place
Boston, MA 02110
Entities affiliated with Sequoia Capital
Partners(5) ................................. 8,131,989 8.70 8,131,989 8.00
3000 Sand Hill Road, Bldg. 4, Suite 280
Menlo Park, CA 94025
Entities affiliated with DynaFund
Ventures(6) ................................. 7,691,505 8.23 7,691,505 7.57
21311 Hawthorne Blvd., Suite 300
Torrance, CA 90503
Intel Corporation ............................. 7,691,502 8.23 7,691,502 7.57
2200 Mission Blvd.
Santa Clara, CA 95052
Daniel J. Nova(7) ............................. 12,411,183 13.28 12,411,183 12.21
Michael Moritz(8) ............................. 8,131,989 8.70 8,131,989 8.00
Tony Hung(9) .................................. 7,691,505 8.23 7,691,505 7.57
Edward C. Lenk ................................ 7,491,000 8.02 7,491,000 7.37
Peter C.M. Hart(10) ........................... 353,952 * 353,952 *
Frank C. Han(11) .............................. 2,488,752 2.66 2,488,752 2.45
Louis V. Zambello III(12) ..................... 825,000 * 825,000 *
Steven J. Schoch(13) .......................... 750,000 * 750,000 *
John R. Hnanicek(14) .......................... 600,000 * 600,000 *
All directors and executive officers as a group
(9 persons)(15) ............................. 40,743,381 42.45% 40,743,381 39.11%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Assumes no exercise of the Underwriters' over-allotment option. Except
pursuant to applicable community property laws or as indicated in the
footnotes to this table, to our knowledge, each stockholder identified in
the table possesses sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by such stockholder.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable
66
<PAGE>
within 60 days after March 31, 1999 are deemed outstanding, while such
shares are not deemed outstanding for computing percentage ownership of any
other person. Unless otherwise indicated in the footnotes below, the
persons and entities named in the table have sole voting and investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable.
(3) Includes 18,320,001 shares held by idealab!, 6,562,359 shares held by
idealab! Capital Partners I-A, LP and 415,944 shares held by idealab!
Capital Partners I-B, LP. idealab! Capital Partners I-A, LP and idealab!
Capital Partners I-B, LP disclaim beneficial ownership of the shares held
by idealab! except to the extent of their respective proportionate interest
therein.
(4) Includes 10,954,737 shares held by Highland Capital Partners III Limited
Partnership, 456,447 shares held by Highland Entrepreneurs' Fund III
Limited Partnership, 960,000 shares held by Highland Capital Partners IV
Limited Partnership and 39,999 shares held by Highland Entrepreneurs' Fund
IV Limited Partnership.
(5) Includes 6,463,722 shares held by Sequoia Capital VIII, 427,920 shares held
by Sequoia International Technology Partners VIII (Q), 142,641 shares held
by CMS Partners LLC, 82,017 shares held by Sequoia International Technology
Partners VIII, 15,690 shares held by Sequoia 1997, and 999,999 shares held
by Sequoia Capital Franchise Fund.
(6) Includes 4,155,894 shares held by DynaFund International L.P. and 3,535,611
shares held by DynaFund L.P.
(7) Includes 10,954,737 shares held by Highland Capital Partners III Limited
Partnership, 456,447 shares held by Highland Entrepreneurs' Fund III
Limited Partnership, 960,000 shares held by Highland Capital Partners IV
Limited Partnership and 39,999 shares held by Highland Entrepreneurs' Fund
IV Limited Partnership. Daniel Nova is a general partner of the general
partner of the Highland entities and is a Director of eToys. He disclaims
beneficial ownership of the shares held by the entities except to the
extent of his proportionate interest therein.
(8) Includes 6,463,722 shares held by Sequoia Capital VIII, 427,920 shares held
by Sequoia International Technology Partners VIII (Q), 142,641 shares held
by CMS Partners LLC, 82,017 shares held by Sequoia International Technology
Partners VIII, 15,690 shares held by Sequoia 1997, and 999,999 shares held
by Sequoia Capital Franchise Fund. Michael Moritz is a general partner of
the general partners of the Sequoia entities and is a Director of eToys. He
disclaims beneficial ownership of the shares held by the entities except to
the extent of his proportionate interest therein.
(9) Includes 4,155,894 shares held by DynaFund International L.P. and 3,535,611
shares held by DynaFund L.P. Tony Hung is a vice president of the general
partners of the DynaFund entities and is a Director of eToys. He disclaims
beneficial ownership of the shares held by the entities except to the
extent of his proportionate interest therein.
(10) Includes 206,748 shares issuable upon exercise of options which will be
vested within 60 days of March 31, 1999.
(11) Includes 750 shares issuable upon exercise of an option which will be
vested within 60 days of March 31, 1999.
(12) Includes 825,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of March 31, 1999, but which are subject to a
right of repurchase in our favor at cost in the event Mr. Zambello ceases
employment with us.
(13) Includes 750,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of March 31, 1999, but which are subject to a
right of repurchase in our favor at cost in the event Mr. Schoch ceases
employment with us.
(14) Includes 600,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of March 31, 1999, but which are subject to a
right of repurchase in our favor at cost in the event Mr. Hnanicek ceases
employment with us.
(15) Includes the shares described in Notes 7 through 14.
67
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
600,000,000 shares of common stock, $0.0001 par value, and 10,000,000 shares of
undesignated preferred stock, $0.0001 par value. The following description of
our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our Certificate of Incorporation and Bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of March 31, 1999 there were 93,440,307 shares of common stock
outstanding, held of record by approximately 127 stockholders, which reflects
the conversion of all outstanding shares of preferred stock into common stock.
In addition, as of March 31, 1999, there were 14,951,301 shares of common stock
subject to outstanding options and 11,412 shares of common stock subject to
outstanding warrants. Upon completion of this offering, there will be
101,640,307 shares of common stock outstanding assuming no exercise of the
underwriter's overallotment option or additional exercise of outstanding options
under our stock option plans and warrants.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available for that purpose. See "Dividend
Policy". In the event of our liquidation, dissolution or winding up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any outstanding
preferred stock. The common stock has no preemptive or conversion rights, other
subscription rights, or redemption or sinking fund provisions. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and non-assessable.
PREFERRED STOCK
As of March 31, 1999, we had three series of preferred stock: Series A
preferred stock, Series B preferred stock and Series C preferred stock. Each
series of preferred stock has the rights, preferences and privileges set forth
in our current Certificate of Incorporation, which is included as an exhibit to
the registration statement of which this prospectus forms a part. As of March
31, 1999, the number of outstanding shares for each series of our preferred
stock was:
- - 21,119,322 shares of Series A preferred stock, which number reflects the full
exercise of a warrant to purchase 48,387 shares of Series A preferred stock
outstanding as of March 31, 1999;
- - 35,659,947 shares of Series B preferred stock; and
- - 1,999,998 shares of Series C preferred stock.
Upon the closing of the offering, all outstanding shares of our preferred
stock will be converted on a share-by-share basis into 58,779,267 shares of
common stock, which reflects the full exercise of a warrant to purchase 48,387
shares of Series A preferred stock outstanding as of March 31, 1999, and
automatically retired. Thereafter, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 10,000,000
shares of preferred stock in one or more series and to designate the rights,
preferences, privileges and restrictions of each such series. The issuance of
preferred stock could have the effect of restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock or delaying or preventing our change in control
without further action by the
68
<PAGE>
stockholders. We have no present plans to issue any shares of preferred stock
after the completion of this offering.
WARRANTS
As of March 31, 1999 there were warrants outstanding to purchase a total of
11,412 shares of common stock at a price of $7.01 per share. In addition, there
was a warrant to purchase a total of 48,387 shares of preferred stock at a price
of $0.207 per share, which was exercised in April 1999.
REGISTRATION RIGHTS
The holders of 68,677,269 shares of common stock and options to purchase
3,825,750 shares of common stock (the "registrable securities") are entitled to
have their shares registered by us under the Securities Act under the terms of
an agreement between us and the holders of the registrable securities. Subject
to limitations specified in the agreement, these registration rights include the
following:
- - The holders of at least 25% of the then outstanding registrable securities may
require, on two occasions beginning 180 days after the date of this
prospectus, that we use our best efforts to register the registrable
securities for public resale.
- - If we register any common stock, either for our own account or for the account
of other security holders, the holders of registrable securities are entitled
to include their shares of common stock in such registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering in view of market conditions.
- - The holders of at least 25% of the then outstanding registrable securities may
require us on three occasions to register all or a portion of their
registrable securities on Form S-3 when use of such form becomes available to
us, provided that the proposed aggregate selling price is at least $2,000,000.
We will bear all registration expenses other than underwriting discounts and
commissions. All registration rights terminate on the date five years following
the closing of this offering, or, with respect to each holder of registrable
securities, at such time as the holder is entitled to sell all of its shares in
any three month period under Rule 144 of the Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS
Provisions of Delaware law and our Certificate of Incorporation and Bylaws
could make more difficult our acquisition by a third party and the removal of
our incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of eToys to first negotiate
with us. We believe that the benefits of increased protection of our ability to
negotiate with the proponent of an unfriendly or unsolicited acquisition
proposal outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
- - the Board of Directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested stockholder
attained such status;
69
<PAGE>
- - upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding shares owned by persons who are directors and also officers; or
- - on or subsequent to such date the business combination is approved by the
Board of Directors and authorized at an annual or special meeting of
stockholders.
A "business combination" generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our Certificate of Incorporation and Bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our Certificate of
Incorporation permits the Board of Directors to issue preferred stock with
voting or other rights without any stockholder action. Commencing at our first
annual meeting of stockholders following the date on which we have at least 800
stockholders, our Certificate of Incorporation provides for the Board of
Directors to be divided into three classes, with staggered three-year terms. As
a result, only one class of directors will be elected at each annual meeting of
stockholders. Each of the two other classes of directors will continue to serve
for the remainder of its respective three-year term. These provisions, which
require the vote of stockholders holding at least a majority of the outstanding
common stock to amend, may have the effect of deterring hostile takeovers or
delaying changes in our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address is 400 South Hope
Street, 4th Floor, Los Angeles, California 90071 and telephone number is (213)
553-9730.
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and impair our ability to raise
equity capital in the future.
Upon completion of the offering, we will have 101,640,307 outstanding shares
of common stock. Of these shares, the 8,200,000 shares sold in the offering,
plus any shares issued upon exercise of the underwriters' over-allotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors or 10%
stockholders.
The remaining 93,440,307 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Goldman, Sachs & Co. In
addition, some stockholders have entered into similar lock-up agreements
covering a period of 365 days from the date of this prospectus. Notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144, 144(k)
and 701, shares subject to lock-up agreements will not be salable until such
agreements expire or are waived by Goldman, Sachs & Co. Taking into account the
lock-up agreements, and assuming Goldman, Sachs & Co. does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:
- - Beginning on the effective date of this prospectus, only the shares sold in
the offering will be immediately available for sale in the public market.
- - Beginning 180 days after the effective date, approximately 7,940,763 shares
will be eligible for sale pursuant to Rule 701, approximately 1,701,000
additional shares will be eligible for sale pursuant to Rule 144(k), and
approximately 81,798,546 additional shares will be eligible for sale pursuant
to Rule 144. All but 20,089,620 of such shares are held by affiliates.
- - Beginning 365 days after the effective date, approximately 1,999,998 shares
will be eligible for sale pursuant to Rule 144, all of which are held by
affiliates.
In connection with the BabyCenter merger, BabyCenter has agreed that its
stockholders holding at least 95% of the shares of our common stock to be issued
in the acquisition as well as BabyCenter optionees holding at least 85% of the
shares to be issued upon exercise of assumed BabyCenter options in the
acquisition will enter into lock-up agreements similar to those entered into by
our existing directors, officers and securityholders. As a result, upon the
closing of the merger, approximately 1,377,152 shares of our common stock to be
issued in exchange for outstanding shares of BabyCenter capital stock and
issuable upon exercise of assumed BabyCenter options will be immediately
eligible for sale in the public market upon closing of the merger in accordance
with the restrictions of Rule 144 under the Securities Act. The remaining
17,342,848 shares of our common stock to be issued in exchange for outstanding
shares of BabyCenter capital stock and issuable upon exercise of assumed
BabyCenter options in connection
71
<PAGE>
with the merger will be eligible for public sale in the public market beginning
180 days after the date of this prospectus, subject to the volume and other
restrictions pursuant to Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- - one percent of the number of shares of common stock then outstanding which
will equal approximately 1,016,403 shares immediately after the offering; or
- - the average weekly trading volume of the common stock during the four calendar
weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice, and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144 but without compliance
with specific restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirement and that non-affiliates may sell such shares in reliance on Rule 144
without complying with the holding period, public information, volume limitation
or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options or
rights exercised under the 1997 Stock Plan, the 1999 Stock Plan, the 1999
Employee Stock Purchase Plan, the 1999 Directors' Stock Option Plan or any other
benefit plan after the effectiveness of the registration statements will also be
freely tradable in the public market. However, such shares held by affiliates
will still be subject to the volume limitation, manner of sale, notice and
public information requirements of Rule 144 unless otherwise resalable under
Rule 701. As of March 31, 1999 there were outstanding options for the purchase
of 14,951,301 shares of common stock, of which options to purchase 448,194
shares were exercisable. See "Risk Factors--Substantial Sales of Our Common
Stock Could Cause Our Stock Price to Fall", "Management--Stock Plans" and
"Description of Capital Stock--Registration Rights".
72
<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. A director of Venture Law Group and an investment partnership
affiliated with Venture Law Group own an aggregate of 41,772 shares of common
stock. If the BabyCenter merger is completed, certain directors of Venture Law
Group and two investment partnerships affiliated with Venture Law Group will own
an aggregate of approximately 75,234 shares of common stock (including the
shares described in the preceding sentence).
EXPERTS
The financial statements of eToys Inc. as of March 31, 1998 and December 31,
1998 and for the year ended March 31, 1998 and the nine months ended December
31, 1998 and of BabyCenter, Inc. as of September 30, 1997 and 1998 and for the
period from inception (February 11, 1997) to September 30, 1997 and for the year
ended September 30, 1998, appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given on the authority of such firm as experts in
accounting and auditing.
73
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedule thereto. For further information with respect to eToys and the common
stock offered in this offering, we refer you to the registration statement and
to the attached exhibits and schedules. Statements made in this prospectus
concerning the contents of any document referred to in this prospectus are not
necessarily complete. With respect to each such document filed as an exhibit to
the registration statement, we refer you to the exhibit for a more complete
description of the matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
obtain copies of all or any part of our registration statement from the
Securities and Exchange Commission upon payment of prescribed fees. You may also
inspect reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission without charge at a Web site maintained by the Securities and
Exchange Commission at http://www.sec.gov.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ETOYS INC.
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
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Statement of Operations for the period ended
December 31, 1998.................................................................. F-19
Unaudited Pro Forma Condensed Combined Balance Sheet at December 31, 1998............ F-20
Notes to Unaudited Pro Forma Condensed Combined Financial Information................ F-21
BABYCENTER, INC.
Report of Independent Auditors....................................................... F-23
Balance Sheets at September 30, 1997 and 1998........................................ F-24
Statements of Operations for the period from inception (February 11, 1997) to
September 30, 1997 and the year ended September 30, 1998........................... F-25
Statements of Stockholders' Equity (Deficit) for the period from inception (February
11, 1997) to September 30, 1997 and the year ended September 30, 1998.............. F-26
Statements of Cash Flows for the period from inception (February 11, 1997) to
September 30, 1997 and the year ended September 30, 1998........................... F-27
Notes to Financial Statements........................................................ F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
eToys Inc.
We have audited the accompanying balance sheets of eToys Inc. as of March
31, 1998 and December 31, 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the year ended March 31, 1998
and the nine months ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eToys Inc. as of March 31,
1998 and December 31, 1998, and the results of its operations and its cash flows
for the year ended March 31, 1998 and the nine months ended December 31, 1998,
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 15, 1999, except for Note 8, as to which
the date is April 18, 1999
The foregoing report is in the form that will be signed upon the completion
of the stock split described in Note 8 to the financial statements.
/s/ Ernst & Young LLP
Los Angeles, California
April 18, 1999
F-2
<PAGE>
ETOYS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998
------------ -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,552,000 $ 18,545,000
Inventories...................................................... 224,000 4,971,000
Prepaid expenses and other current assets........................ 35,000 394,000
------------ --------------
Total current assets............................................... 1,811,000 23,910,000
Property and equipment:
Equipment........................................................ 155,000 1,749,000
Furniture and fixtures........................................... 8,000 10,000
Leasehold improvements........................................... 15,000 331,000
Assets under capital lease....................................... -- 75,000
------------ --------------
178,000 2,165,000
Accumulated depreciation and amortization........................ (18,000) (264,000)
------------ --------------
160,000 1,901,000
Goodwill (net of accumulated amortization of $239,000 at December
31, 1998)........................................................ 956,000 717,000
Other assets....................................................... -- 1,022,000
------------ --------------
Total assets....................................................... $ 2,927,000 $ 27,550,000
------------ --------------
------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $ 346,000 $ 12,314,000
Accrued expenses................................................. 9,000 1,455,000
Current portion of capital lease obligations..................... 24,000
------------ --------------
Total current liabilities.......................................... 355,000 13,793,000
Long-term capital lease obligations................................ -- 35,000
Redeemable Convertible Preferred Stock, 18,926,423 shares
authorized:
Series A Preferred Stock; $.0001 par value; 6,318,017 and
6,366,403 shares issued and outstanding at March 31, 1998 and
December 31, 1998, respectively.............................. 3,917,000 3,947,000 --
Series B Preferred Stock, $.0001 par value, 11,886,649 shares
issued and outstanding....................................... -- 24,952,000 --
Series C Preferred Stock, $.0001 par value, 666,666 shares
issued in March 1999......................................... -- -- --
Commitments and contingencies......................................
Stockholders' equity:
Common Stock, $.0001 par value, 150,000,000 shares authorized;
32,799,276 and 33,777,837 shares issued and outstanding at
March 31, 1998 and December 31, 1998, respectively............. 3,000 3,000 9,000
Additional paid-in capital....................................... 1,003,000 32,668,000 81,561,000
Receivables from stockholders.................................... (30,000) (147,000) (147,000)
Deferred compensation............................................ (53,000) (30,058,000) (30,058,000)
Accumulated deficit.............................................. (2,268,000) (17,643,000) (17,643,000)
------------ -------------- ---------------
Total stockholders' equity (deficit)............................... (1,345,000) (15,177,000) $ 33,722,000
------------ -------------- ---------------
---------------
Total liabilities and stockholders' equity (deficit)............... $ 2,927,000 $ 27,550,000
------------ --------------
------------ --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ETOYS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
YEAR ENDED MARCH ---------------------------------
31, 1998 1998
---------------- 1997 ----------------
---------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales................................................... $ 687,000 $ 530,000 $ 23,900,000
Cost of sales............................................... 568,000 438,000 19,008,000
---------------- --------------- ----------------
Gross profit................................................ 119,000 92,000 4,892,000
Operating expenses:
Marketing and sales....................................... 1,290,000 632,000 14,354,000
Product development....................................... 421,000 206,000 2,006,000
General and administrative................................ 678,000 366,000 4,345,000
---------------- --------------- ----------------
2,389,000 1,204,000 20,705,000
---------------- --------------- ----------------
Operating loss.............................................. (2,270,000) (1,112,000) (15,813,000)
Other income (expense):
Interest income........................................... 18,000 -- 485,000
Interest expense.......................................... (15,000) (15,000) (46,000)
---------------- --------------- ----------------
Loss before provision for income taxes...................... (2,267,000) (1,127,000) (15,374,000)
Provision for income taxes.................................. 1,000 -- 1,000
---------------- --------------- ----------------
Net loss.................................................... $ (2,268,000) $ (1,127,000) $ (15,375,000)
---------------- --------------- ----------------
---------------- --------------- ----------------
Basic net loss per equivalent share......................... $ (0.09) $ (0.05) $ (0.46)
---------------- --------------- ----------------
---------------- --------------- ----------------
Pro forma basic net loss per equivalent share............... $ (0.08) $ (0.05) $ (0.19)
---------------- --------------- ----------------
---------------- --------------- ----------------
Shares used to compute basic net
loss per equivalent share................................. 25,129,888 23,326,095 33,157,034
---------------- --------------- ----------------
---------------- --------------- ----------------
Shares used to compute pro forma basic net loss per
equivalent share.......................................... 30,232,902 23,879,498 79,287,459
---------------- --------------- ----------------
---------------- --------------- ----------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ETOYS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLES
----------------------- PAID-IN FROM DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT TOTAL
---------- ----------- ----------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997........ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock...... 26,569,275 3,000 917,000 -- -- -- 920,000
Restricted stock issued....... 6,080,001 -- 30,000 (30,000) -- -- --
Exercise of stock options..... 150,000 -- 1,000 -- -- -- 1,000
Deferred compensation......... -- -- 55,000 -- (55,000) -- --
Amortization of deferred
compensation................ -- -- -- -- 2,000 -- 2,000
Net loss...................... -- -- -- -- -- (2,268,000) (2,268,000)
---------- ----------- ----------- ------------- -------------- ------------- -------------
Balance at March 31, 1998....... 32,799,276 3,000 1,003,000 (30,000) (53,000) (2,268,000) (1,345,000)
Restricted stock issued....... 525,000 -- 35,000 (117,000) (82,000)
Exercise of stock options..... 453,561 -- 4,000 4,000
Deferred compensation......... 31,626,000 (31,626,000) --
Amortization of deferred
compensation................ 1,621,000 1,621,000
Net loss...................... (15,375,000) (15,375,000)
---------- ----------- ----------- ------------- -------------- ------------- -------------
Balance at December 31, 1998.... 33,777,837 $ 3,000 $32,668,000 $ (147,000) $(30,058,000) $(17,643,000) $ (15,177,000)
---------- ----------- ----------- ------------- -------------- ------------- -------------
---------- ----------- ----------- ------------- -------------- ------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ETOYS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
YEAR ENDED -------------------------
MARCH 31, 1998 1997 1998
-------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................... $ (2,268,000) $(1,127,000) $(15,375,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash interest......................................... 15,000 15,000 38,000
Nonemployee stock compensation........................... 33,000 -- --
Amortization of deferred compensation.................... 2,000 -- 1,621,000
Depreciation............................................. 18,000 7,000 246,000
Amortization............................................. -- -- 239,000
Changes in operating assets and liabilities:
Inventories............................................ (198,000) (105,000) (4,747,000)
Prepaid expenses and other current assets.............. (35,000) (147,000) (359,000)
Accounts payable....................................... 297,000 387,000 11,968,000
Accrued expenses....................................... 9,000 6,000 1,446,000
-------------- ----------- ------------
Net cash used in operations................................ (2,127,000) (964,000) (4,923,000)
INVESTING ACTIVITIES:
Capital expenditures for property and equipment............ (178,000) (102,000) (1,913,000)
Acquisition of Toys.com.................................... (270,000) -- --
Other assets............................................... -- -- (1,022,000)
-------------- ----------- ------------
Net cash used in investing activities...................... (448,000) (102,000) (2,935,000)
FINANCING ACTIVITIES:
Proceeds from bridge loan.................................. -- -- 5,000,000
Payments on bridge loan.................................... -- -- (2,238,000)
Proceeds from the issuance of Common Stock................. 224,000 224,000 4,000
Exercise of stock options.................................. 1,000 1,000 --
Proceeds from the issuance of Redeemable Convertible
Preferred Stock.......................................... 3,007,000 3,007,000 22,047,000
Proceeds from the issuance of convertible
notes.................................................... 895,000 895,000 --
Payments on capital leases................................. -- -- (15,000)
Proceeds from receivables from stockholders................ -- -- 23,000
Proceeds from exercise of warrants......................... -- -- 30,000
-------------- ----------- ------------
Net cash provided by financing activities.................. 4,127,000 4,127,000 24,851,000
-------------- ----------- ------------
Net increase in cash and cash equivalents.................. 1,552,000 3,061,000 16,993,000
Cash and cash equivalents at beginning of period........... -- -- 1,552,000
-------------- ----------- ------------
Cash and cash equivalents at end of period................. $ 1,552,000 $ 3,061,000 $ 18,545,000
-------------- ----------- ------------
-------------- ----------- ------------
Supplemental disclosures:
Income taxes paid.......................................... $ 1,000 $ -- $ 1,000
Interest paid.............................................. $ -- $ -- $ 8,000
</TABLE>
See accompanying notes.
F-6
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
GENERAL
eToys Inc. (the Company) was incorporated in November 1996 in the state of
Delaware. Prior to June 1997, the Company had no operations or activities. In
June 1997, initial issuances of Common Stock occurred. The Company launched its
Web site in October 1997. The Company is a Web-based retailer focused
exclusively on children's products, including toys, video games, software,
videos and music.
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern. The Company has incurred
significant operating losses since inception of operations and has limited
working capital. Management believes that the proceeds raised through the sale
of equity securities, in addition to revenue generated from product sales, will
support the Company's operations through 1999. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the eventual outcome of this uncertainty.
INTERIM FINANCIAL STATEMENTS
The accompanying statements of operations and cash flows for the nine months
ended December 31, 1997 are unaudited. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results of
operations and cash flows for the interim period.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ materially from those
estimates.
CASH EQUIVALENTS
The Company considers those investments which are highly liquid, readily
convertible to cash and which mature within three months from the date of
purchase as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (using the first in-first out
method) or market and consist primarily of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method based upon estimated useful lives, which range from three
to five years. Leasehold
F-7
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
improvements are recorded at cost. Amortization is provided using the
straight-line method over the shorter of the term of the related lease or
estimated useful lives of the assets.
GOODWILL
Goodwill represents the excess of the purchase price over the estimated fair
market value of net assets acquired in a business combination. Goodwill is
amortized on a straight-line basis over three years.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
No such impairment losses have been identified by the Company.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of Common Stock outstanding. Shares associated with stock options and the
Redeemable Convertible Preferred Stock are not included because they are
antidilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Redeemable Convertible Preferred Stock into shares
of the Company's Common Stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on April 1, 1997, or at
the date of original issuance, if later.
F-8
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and pro forma net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
YEAR ENDED --------------------------------
MARCH 31, 1998 1997 1998
-------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Numerator:
Net loss..................................................... $ (2,268,000) $ (1,127,000) $ (15,375,000)
Denominator:
Weighted average shares...................................... 25,129,888 23,326,095 33,157,034
-------------- --------------- ---------------
Denominator for basic calculation............................ 25,129,888 23,326,095 33,157,034
Weighted average effect of pro forma securities:
Series A Redeemable Convertible Preferred Stock............ 5,103,014 553,403 19,000,760
Series B Redeemable Convertible Preferred Stock............ -- -- 27,129,665
-------------- --------------- ---------------
Denominator for pro forma calculation........................ 30,232,902 23,879,498 79,287,459
-------------- --------------- ---------------
-------------- --------------- ---------------
Net loss per share:
Basic........................................................ $ (0.09) $ (0.05) $ (0.46)
-------------- --------------- ---------------
-------------- --------------- ---------------
Pro forma.................................................... $ (0.08) $ (0.05) $ (0.19)
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to customers. Outbound shipping and handling
charges are included in net sales. The Company provides an allowance for sales
returns in the period of sale, based upon historical experience.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. For the year ended March
31, 1998 and the nine months ended December 31, 1997 and 1998, the Company
incurred advertising costs of $917,000, $299,000 and $7,747,000, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock
awards granted subsequent to January 1, 1995, be recognized as compensation
expense based on their fair value at the date of grant. Alternatively, a company
may use Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees," and disclose pro forma income amounts which would have
resulted from recognizing such awards at their fair value. The Company has
elected to account for stock-based compensation expense under APB No. 25 and
make the required pro forma disclosures for compensation (see Note 6).
F-9
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended March 31, 1998:
Convertible notes in the amount of $895,000, plus accrued interest of
$15,000, were converted into Series A Redeemable Convertible Preferred
Stock.
The Company expensed approximately $33,000 for services rendered from
several vendors in exchange for Common Stock.
The Company issued stock in return for notes receivable totaling $30,000
from employees. Such notes have been classified in the equity section of the
balance sheet.
The Company issued 2,340,000 shares of Common Stock as part of the
acquisition of Toys.com. See Note 2.
During the 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 accrued interest of
$38,000, were converted into Series B Redeemable Convertible Preferred
Stock.
2. ACQUISITION OF TOYS.COM
In March 1998, the Company acquired certain assets and assumed certain
liabilities and obligations of one of its online competitors, Toys.com,
including $25,000 in toy inventories and assumed certain advertising liabilities
in the amount of $48,000, and the assumption of future contingent advertising
contracts. The acquisition was accounted for under the purchase method of
accounting and included a cash payment of $270,000 and the issuance of 2,340,000
shares of Common Stock with an estimated deemed fair value of approximately
$663,000. Goodwill resulting from the acquisition was $956,000. Subsequent to
the acquisition, Toys.com ceased operations as a separate entity.
F-10
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
As a result of the net operating losses, the provision for income taxes
consists solely of minimum state taxes. The following is a reconciliation of the
statutory federal income tax rate to the Company's effective income tax rate:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
31,
YEAR ENDED MARCH ----------------------------
31, 1998 1997 1998
----------------- --------------- -----
(UNAUDITED)
<S> <C> <C> <C>
Statutory federal income tax expense
(benefit)................................. (34)% (34)% (34)%
State income tax expense (benefit).......... (6) (6) (6)
Valuation allowance......................... 40 40 29
Non-deductible stock compensation........... -- -- 10
Non-deductible goodwill amortization........ -- -- 1
-- -- --
--% --% --%
-- -- --
-- -- --
</TABLE>
The components of the deferred tax assets and related valuation allowance at
March 31, 1998 and December 31, 1998, are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1998
------------ ---------------
<S> <C> <C>
Other......................................................... $ -- $ 161,000
Net operating loss carryforwards.............................. 914,000 6,121,000
------------ ---------------
Deferred tax assets........................................... 914,000 6,282,000
Valuation allowance........................................... (914,000) (6,282,000)
------------ ---------------
$ -- $ --
------------ ---------------
------------ ---------------
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
The Company has net operating losses for both federal and state tax purposes
of approximately $15,366,000 expiring beginning in the years 2012 for federal
and 2005 for state. The net operating losses can be carried forward to offset
future taxable income. Utilization of the above carryforwards may be subject to
utilization limitations, which may inhibit the Company's ability to use
carryforwards in the future.
4. CONVERTIBLE NOTES AND BRIDGE FINANCING
During the year ended March 31, 1998, the Company received $895,000 in
proceeds from the issuance of 6.07% convertible notes. The notes were
automatically converted into Series A Redeemable Convertible Preferred Stock due
to certain conditions as specified within the initial note agreement. As a
result of the conversion, the initial proceeds from the convertible notes of
$895,000, plus $15,000 of accrued interest, were converted into 1,468,018 shares
of Series A Redeemable Convertible Preferred Stock.
F-11
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE NOTES AND BRIDGE FINANCING (CONTINUED)
In conjunction with the issuance of the 6.07% convertible notes, the Company
issued to the purchasers of the 6.07% convertible notes, 721,757 stock warrants
for the purchase of Series A Redeemable Convertible Preferred Stock at $.62 per
share. As of December 31, 1998, 48,386 warrants have been exercised. The
warrants are immediately exercisable and expire on December 31, 2002, or on the
closing date of an initial public offering, if sooner. No value has been
allocated to the warrants as the amount is not deemed to be significant.
On May 6, 1998, the Company entered into a $5,000,000 bridge financing
agreement with a group of investors. The bridge financing was in the form of
Convertible Subordinated Promissory Notes (the Notes) which were payable on
demand after May 6, 1999 accruing interest at a rate of 8% per annum until paid
and compounded annually. In July 1998, $2.8 million of the Notes plus interest
were converted into 1,331,235 shares of Series B Redeemable Convertible
Preferred Stock. The remaining balance of the Notes of $2.2 million plus accrued
interest was repaid in cash to the investors in June 1998.
5. CAPITAL STRUCTURE
COMMON AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 2, 1998, the Company amended its Certificate of Incorporation to,
among other matters, increase the authorized number of shares of Common and
Preferred Stock to 150,000,000 and 18,926,423, respectively.
In conjunction with this amendment, the Company authorized 11,886,649 shares
of Series B Redeemable Convertible Preferred Stock (Series B). In December 1997,
the issuance of Series A Redeemable Convertible Preferred Stock (Series A)
resulted in proceeds of $3,007,000, representing 4,849,999 shares issued and
outstanding at $0.62 per share. In conjunction with this offering, $895,000 of
convertible notes, plus related accrued interest of $15,000, were converted into
1,468,018 shares of Series A (see Note 4). In June 1998, the issuance of Series
B resulted in proceeds of $25,000,000 representing 11,886,649 shares issued and
outstanding at $2.1032 per share. The following summarizes the Series A and
Series B activity:
<TABLE>
<CAPTION>
SERIES A SERIES B
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at April 1, 1997............................ -- $ -- -- $ --
Issuance of Series A................................ 6,318,017 3,917,000 -- --
------------- ------------- ------------- --------------
Balance at March 31, 1998........................... 6,318,017 3,917,000 -- --
Issuance of Series A................................ 48,386 30,000 -- --
Issuance of Series B................................ -- -- 11,886,649 24,952,000
------------- ------------- ------------- --------------
Balance at December 31, 1998........................ 6,366,403 $ 3,947,000 11,886,649 $ 24,952,000
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
F-12
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
The following table is presented to summarize the Common Stock authorized at
December 31, 1998:
<TABLE>
<CAPTION>
COMMON
SHARES ISSUED
DESCRIPTION OF INSTRUMENT OR RESERVED
- ------------------------------------------------------------------------------ --------------
<S> <C>
Common Stock outstanding 33,777,837
Series A Redeemable Convertible Preferred Stock 19,099,209
Series B Redeemable Convertible Preferred Stock 35,659,947
Employee Incentive Stock Option Plan 17,400,000
Preferred and Common Stock warrants 2,170,113
--------------
Common Stock issued or reserved 108,107,106
--------------
Common Stock available 41,892,894
--------------
--------------
</TABLE>
Each share of Redeemable Convertible Preferred Stock is convertible, at the
stockholder's option, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $0.62 in the case of Series A and
$2.1032 in the case of Series B by the Conversion Price, as defined. In the
event of a public offering of the Company's equity securities resulting in gross
proceeds to the Company of $20 million or greater, all outstanding Redeemable
Convertible Preferred Stock will automatically be converted into Common Stock.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A and Series B are
entitled to receive preference to the Common Stock holders to any distribution
of any assets of the Company in an amount per share equal to $0.62 and $2.1032
per share, respectively. After the initial distribution of assets, the holders
of Series A and Series B are entitled to participate with the holders of the
Common Stock on a pro rata basis until the holders of Series A and Series B have
received an aggregate of $1.86 and $6.31, respectively (as adjusted for any
stock splits, stock dividends, recapitalizations, or the like).
On or at any time after November 26, 2002, subject to the written consent of
66 2/3% of the then outstanding shares of Series A and Series B, the Redeemable
Convertible Preferred Stock may be redeemed for cash in whole or in part for
$0.62 and $2.1032 per share (as adjusted for any stock dividends, combinations
or splits with respect to such share) plus all declared but unpaid dividends,
for Series A and Series B, respectively.
The voting rights of the Series A and Series B are equal to one vote for
each share of Common Stock into which such Redeemable Convertible Preferred
Stock may be converted. Each share of Series A and Series B entitles the holder
to receive dividends in cash at an annual rate of $0.043 and $0.1472 per share,
respectively (as adjusted for any stock splits, stock dividends,
recapitalizations, or the like). Dividends are payable quarterly when and if
declared by the board of directors and are not cumulative.
RECEIVABLES FROM STOCKHOLDERS
Receivables from stockholders, totaling $30,000 and $147,000 at March 31,
1998 and December 31, 1998, respectively, represent interest bearing notes from
certain stockholders issued to finance the purchase of 6,605,001 and 50,000
shares of the Company's Common and Series B, respectively. The notes bear
interest rates between 6.0% and 8.0% per year with interest due upon
F-13
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
payment of the notes. The notes are payable on different dates ranging from
December 1, 1999 to July 27, 2002, or upon termination of employment or transfer
of any of the purchased shares.
DEFERRED COMPENSATION
The Company recorded deferred compensation of $55,000, $0 and $31,626,000
for the year ended March 31, 1998, and the nine months ended December 31, 1997
and 1998, respectively. The amounts recorded represent the difference between
the grant price and the deemed fair value of the Company's Common Stock for
shares subject to options granted. The amortization of deferred compensation
will be charged to operations over the vesting period of the options, which is
typically four years. Total amortization recognized was $2,000, $0 and
$1,621,000 for the year ended March 31, 1998 and the nine months ended December
31, 1997 and 1998, respectively.
6. STOCK OPTION PLANS
The Company adopted the 1997 Stock Plan, as amended June 1998 (the Plan),
which provides for the granting of options for purchases up to 17,400,000 shares
of the Company's Common Stock. Under the terms of the Plan, options may be
granted to employees, nonemployees, directors or consultants at prices not less
than the fair value at the date of grant. Options granted to nonemployees are
recorded at the value of negotiated services received. Options vest over four
years, 25% for the first year and ratably over the remaining three years and
generally expire ten years from the date of grant.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
NUMBER OF PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------- ------------------- ------------------
<S> <C> <C> <C>
Outstanding at March 31, 1997.......... --
Granted.............................. 4,407,000 $ 0.005 to $0.033 $ 0.010
Exercised............................ (150,000) 0.005 to 0.005 0.005
Canceled............................. -- --
-------------
Outstanding at March 31, 1998.......... 4,257,000 0.005 to 0.033 0.010
Granted.............................. 10,746,600 0.033 to 1.667 0.399
Exercised............................ (978,561) 0.005 to 0.140 0.039
Canceled............................. (1,307,439) 0.005 to 0.140 0.015
-------------
Outstanding at December 31, 1998....... 12,717,600 0.033 to 1.667 0.331
-------------
-------------
</TABLE>
Options granted during the year ended March 31, 1998 and the nine months
ended December 31, 1998 resulted in a total compensation amount of $55,000 and
$31,626,000, respectively, and were recorded as deferred compensation in
stockholders' equity. The deferred compensation amount will be recognized as
compensation expense over the vesting period. During the year ended March 31,
1998 and the nine months ended December 31, 1998, such compensation expense
amounted to $2,000 and $1,621,000, respectively. Options outstanding at March
31, 1998 and December 31, 1998 were exercisable for 321,000 and 906,726 shares
of Common Stock, respectively. Common Stock available for future grants at March
31, 1998 and December 31, 1998 were 4,165,500 and 3,508,839 shares,
respectively.
F-14
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
Additional information with respect to the outstanding options as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE -------------------------------
WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE SHARES PRICE
------------- ------------------ --------------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
RANGE OF EXERCISE PRICES
$0.005 to $0.033....... 3,847,500 $ 0.016 8.91 838,625 $ 0.008
$0.140 to $0.140....... 726,600 0.140 9.53 9,600 0.140
$0.143 to $1.667....... 8,143,500 0.495 9.85 58,500 1.510
------------- -----------
$0.005 to $1.667....... 12,717,600 906,725
------------- -----------
------------- -----------
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of the grant using the minimum value option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, 1998 DECEMBER 31, 1998
------------------- ---------------------
<S> <C> <C>
Risk-free interest rates............................... 6.0% 5.14%
Expected lives (in years).............................. 5 4
Dividend yield......................................... 0% 0%
Expected volatility.................................... 0% 0%
</TABLE>
The compensation cost associated with the stock-based compensation plans did
not result in a material difference from the reported net loss for the year
ended March 31, 1998 or the nine months ended December 31, 1998.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office and warehouse facilities under long-term
noncancelable operating leases. For the year ended March 31, 1998 and the nine
months ended December 31, 1997 and 1998, total rent expense incurred related to
these leases amounted to $52,000, $26,000 and $405,000, respectively.
F-15
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1998, future lease commitments under these agreements were
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- ---------
<S> <C> <C>
1999............................................................... $ 699,000 $ 27,000
2000............................................................... 718,000 27,000
2001............................................................... 739,000 10,000
2002............................................................... 759,000 --
2003............................................................... 462,000 --
------------- ---------
3,377,000 64,000
Less amounts representing interest................................. -- (5,000)
------------- ---------
$ 3,377,000 $ 59,000
------------- ---------
------------- ---------
</TABLE>
EQUIPMENT FINANCING ARRANGEMENT
During December 1998, the Company entered into a line of credit arrangement
with a leasing institution that provides for sale and leaseback transactions of
capital equipment up to a maximum of $2,000,000. Under this agreement,
$2,000,000 was available for future financing transactions at December 31, 1998.
In addition, the agreement provides the leasing institution warrants, with value
equal to approximately $80,000 with the number of shares to be determined
pursuant to a formula, as defined, at the time of issuance. Such warrants were
issued on January 31, 1999.
ADVERTISING COMMITMENTS
During 1998, the Company entered into a number of commitments for online,
print and broadcast advertising. At December 31, 1998, the advertising
commitments amounted to:
<TABLE>
<CAPTION>
TOTAL
YEARS ENDING DECEMBER 31, COMMITMENTS
- ------------------------------------------------------------------------------ --------------
<S> <C>
1999.......................................................................... $ 8,291,000
2000.......................................................................... 171,000
--------------
$ 8,462,000
--------------
--------------
</TABLE>
PURCHASE COMMITMENTS
At December 31, 1998, the Company had approximately $8.7 million in
outstanding orders with certain suppliers for the purchase of inventory. Such
purchase commitments are expected to be fulfilled from April to September 1999.
8. SUBSEQUENT EVENTS
In February 1999, the Board of Directors adopted the 1999 Stock Plan, the
1999 Directors' Stock Option Plan and the 1999 Employee Stock Purchase Plan. In
March 1999 the stockholders approved these plans. The 1999 Stock Plan provides
for 21,600,000 shares of Common Stock to be granted under terms similar to the
1997 Stock Plan. The 1999 Directors' Stock Option Plan reserves a total of
600,000 shares of Common Stock for grants of options to nonemployee directors.
The 1999 Employee Stock Purchase Plan reserves a total of 900,000 shares of
Common Stock for limited purchases by employees through payroll deductions, with
a purchase price equal to 85% of the fair market value of the Common Stock.
F-16
<PAGE>
ETOYS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
In March 1999, the Company issued Series C Redeemable Convertible Preferred
Stock (Series C) which resulted in proceeds of approximately $20,000,000,
representing 666,666 shares issued and outstanding at $30 per share. Each share
of Series C is convertible, at the stockholder's option, into such number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
$30 by the Conversion Price, as defined. In the event of a public offering of
the Company's equity securities resulting in gross proceeds to the Company of
$20 million or greater, all outstanding shares of Series C 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 C are entitled to receive preference to the Common Stock holders to any
distribution of any assets of the Company in an amount per share equal to $30.00
per share. After the initial distribution of assets, the holders of Series C are
entitled to participate with the holders of the Common Stock on a pro rata basis
until the holders of Series C have received an aggregate of $90.00 (as adjusted
for any stock splits, stock dividends, recapitalizations, or the like).
In February 1999, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its Common Stock to the public. Upon
completion of the Company's initial public offering, the Series A, Series B and
Series C Redeemable Convertible Preferred Stock will convert into 56,759,154
shares of Common Stock. Unaudited pro forma stockholders' equity reflects the
assumed conversion of the Redeemable Convertible Preferred Stock as of December
31, 1998.
In March 1999, the Company's Board of Directors declared a stock split of 3
shares for every 1 share of Common Stock then outstanding. The stock split will
become effective at the date the Company's public offering of Common Stock is
closed. Accordingly, the accompanying financial statements and footnotes have
been restated to reflect the stock split. The par value of the shares of Common
Stock to be issued in connection with the stock split was credited to Common
Stock and a like amount charged to additional paid-in capital.
In April 1999, the Company entered into a merger agreement with BabyCenter.
In connection with this proposed merger, an aggregate of 18,720,000 shares of
the Company's Common Stock will be issued and reserved for issuance upon the
exercise of assumed BabyCenter options included in the proposed merger.
F-17
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
for eToys consists of the Unaudited Pro Forma Condensed Combined Statement of
Operations for the period ended December 31, 1998, and the Unaudited Pro Forma
Condensed Combined Balance Sheet as of December 31, 1998.
On April 18, 1998, eToys entered into a merger agreement to acquire
BabyCenter in exchange for 18,720,000 shares of eToys' common stock. The
Unaudited Pro Forma Condensed Combined Statement of Operations for the period
ended December 31, 1998 gives effect to the BabyCenter acquisition as if it had
taken place on April 1, 1998. The Unaudited Pro Forma Condensed Combined Balance
Sheet gives effect to the BabyCenter acquisition as if it had taken place on
December 31, 1998.
The Unaudited Pro Forma Condensed Combined Statement of Operations combines
eToys' historical results of operations for the nine months ended December 31,
1998 with BabyCenter's historical results for the year ended September 30, 1998.
The pro forma financial information is not necessarily indicative of what the
actual financial results would have been had the transaction taken place on
April 1, 1998 or December 31, 1998 and does not purport to indicate the results
of future operations.
The BabyCenter acquisition will be accounted for using the purchase method
of accounting. The pro forma financial information has been prepared on the
basis of assumptions described in the notes.
The pro forma financial information should be read in conjunction with the
related notes included in this document and the audited financial statements and
notes of eToys, and the audited financial statements and notes of BabyCenter,
included elsewhere in this prospectus.
F-18
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1998
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
ETOYS BABYCENTER ADJUSTMENTS TOTAL
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Net sales................................................... $ 23,900 $ 1,936 $ -- $ 25,836
Cost of sales............................................... 19,008 179 -- 19,187
---------- ------------ ------------ ----------
Gross profit................................................ 4,892 1,757 -- 6,649
Operating expenses
Marketing and sales....................................... 14,354 853 -- 15,207
Product development....................................... 2,006 1,374 -- 3,380
General and administrative................................ 4,106 745 -- 4,851
Goodwill amortization..................................... 239 -- 30,637(4) 30,876
---------- ------------ ------------ ----------
20,705 2,972 30,637 54,314
---------- ------------ ------------ ----------
Operating loss.............................................. (15,813) (1,215) (30,637) (47,665)
Other income:
Interest income........................................... 485 94 -- 579
Interest expense.......................................... (46) -- -- (46)
---------- ------------ ------------ ----------
Loss before provision for taxes............................. (15,374) (1,121) (30,637) (47,132)
Provision for taxes......................................... 1 -- -- 1
---------- ------------ ------------ ----------
Net loss.................................................... $ (15,375) $ (1,121) $ (30,637) $ (47,133)
---------- ------------ ------------ ----------
---------- ------------ ------------ ----------
Basic net loss per equivalent share......................... $ (0.46) $ (0.95)
---------- ----------
---------- ----------
Shares used to compute basic net loss per equivalent
share..................................................... 33,157 16,687 49,844
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
F-19
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1998
(Amount in thousands)
<TABLE>
<CAPTION>
PRO FORMA
ETOYS BABYCENTER ADJUSTMENTS TOTAL
--------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,545 $ 1,202 $ -- $ 19,747
Inventories............................................... 4,971 0 -- 4,971
Prepaid expenses and other current assets................. 394 776 -- 1,170
--------- ------------ ------------ -----------
Total current assets........................................ 23,910 1,978 -- 25,888
Property and equipment...................................... 2,165 691 -- 2,856
Accumulated depreciation and amortization................... (264) (90) -- (354)
--------- ------------ ------------ -----------
1,901 601 -- 2,502
Goodwill (net of accumulated amortization).................. 717 -- 204,249(2) 204,966
Other assets................................................ 1,022 37 -- 1,059
--------- ------------ ------------ -----------
Total assets................................................ $ 27,550 $ 2,616 $ 204,249 $ 234,415
--------- ------------ ------------ -----------
--------- ------------ ------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 12,314 $ 292 $ -- $ 12,606
Deferred revenues......................................... -- 465 -- 465
Accrued expenses.......................................... 1,479 149 -- 1,628
--------- ------------ ------------ -----------
Total current liabilities................................... 13,793 906 -- 14,699
Long-term capital lease obligations......................... 35 39 -- 74
Redeemable convertible preferred stock...................... 28,899 -- -- 28,899
Stockholders' equity (deficit).............................. (15,177) 1,671 $ 204,249(3) 190,743
--------- ------------ ------------ -----------
Total liabilities and stockholders' equity (deficit)........ $ 27,550 $ 2,616 $ 204,249 $ 234,415
--------- ------------ ------------ -----------
--------- ------------ ------------ -----------
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
F-20
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The pro forma information gives effect to eToys' acquisition of BabyCenter
through a merger and exchange of shares. The Unaudited Pro Forma Condensed
Combined Statement of Operations for the period ended December 31, 1998 reflects
this transaction as if it had taken place on April 1, 1998. The Unaudited Pro
Forma Condensed Combined Balance Sheet reflects this transaction as if it had
taken place on December 31, 1998.
The BabyCenter acquisition will be accounted for using the purchase method
of accounting. The pro forma financial information has been prepared on the
basis of assumptions described in the following notes and include assumptions
relating to the allocation of the consideration paid for the assets and
liabilities of BabyCenter based on preliminary estimates of their fair value.
The actual allocation of such consideration may differ from that reflected in
the pro forma financial information after valuations and other procedures to be
performed after the closing of the BabyCenter acquisition. eToys does not expect
that the final allocation of the purchase price will differ materially from the
preliminary allocations. In the opinion of eToys' management, all adjustments
necessary to present fairly such pro forma financial information have been based
on the proposed terms and structure of the BabyCenter merger.
The pro forma financial information is not necessarily indicative of what
the actual financial results would have been had this transaction taken place on
April 1, 1998 or December 31, 1998 and does not purport to indicate the results
of future operations.
The pro forma financial information gives effect to the following pro forma
adjustments:
1. In accordance with the reorganization agreement for the BabyCenter
merger:
The BabyCenter merger will be accounted for using the purchase method of
accounting. The purchase price was based on $11.00 per share, which is the
mid-point of eToys' filing range at the announcement of the BabyCenter merger.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
BABYCENTER FAIR VALUE
SHARES ETOYS SHARES (IN THOUSANDS)
------------ ------------- --------------
<S> <C> <C> <C>
Shares.......................................... 7,335,026 16,687,056 $ 183,558
Stock Options................................... 893,608 2,032,944 22,362
------------ ------------- --------------
Totals........................................ 8,228,634 18,720,000 $ 205,920
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
The BabyCenter shares were first converted to eToys equivalent shares by
taking the number of BabyCenter shares multiplied by the exchange ratio of
approximately 2.27 eToys shares for each BabyCenter share.
The fair value of "shares" was calculated by taking the fair value of the
stock ($11.00 per share) times the number of eToys shares to be exchanged.
With respect to stock options exchanged as part of the BabyCenter merger,
all BabyCenter options exchanged for eToys options are included as part of the
purchase price based on their fair value.
The fair value of the stock was calculated by taking the options to purchase
eToys shares (2,032,944 options) times the fair value of the stock ($11.00 per
share) less the proceeds which will be received from the optionholders upon
exercise.
F-21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The pro forma financial information has been prepared on the basis of
assumptions described in these notes and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of
BabyCenter based on preliminary estimates of their fair value. The actual
allocation of such consideration may differ from that reflected in the pro forma
financial information after valuations and other procedures to be performed
after the closing of the BabyCenter acquisition. Below is a table of the
estimated acquisition cost, purchase price allocation and annual amortization of
the intangible assets acquired (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION
OF
AMORTIZATION LIFE INTANGIBLES
------------------- -------------
<S> <C> <C> <C>
ESTIMATED ACQUISITION COST:
Estimated purchase price............................. $ 205,920
-----------------
-----------------
PURCHASE PRICE ALLOCATION:
Historical net book value of BabyCenter at September
30, 1998........................................... $ 1,671
Intangible assets acquired:
Goodwill............................................. 204,249 5 $ 40,850
-----------------
$ 205,920
-----------------
-----------------
</TABLE>
Tangible assets of BabyCenter acquired in the BabyCenter merger principally
include cash, and fixed assets. Liabilities of BabyCenter assumed in the
BabyCenter merger principally include accounts payable, accrued payroll and
other current liabilities.
2. The pro forma adjustment is for goodwill allocation of $204.2 million.
3. The pro forma adjustment to "stockholders' equity" reflects the
elimination of BabyCenter's stockholders' equity ($1.7 million) and the impact
of the issuance of eToys' common stock ($205.9 million) in connection with the
BabyCenter merger.
4. The pro forma adjustment is for amortization of goodwill.
F-22
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BabyCenter, Inc.
We have audited the accompanying balance sheets of BabyCenter, Inc. as of
September 30, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the period from inception (February 11,
1997) to September 30, 1997 and for the year ended September 30, 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BabyCenter, Inc. at
September 30, 1997 and 1998, and the results of its operations and its cash
flows for the period from inception (February 11, 1997) to September 30, 1997,
and for the year ended September 30, 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Palo Alto, California
April 21, 1999
F-23
<PAGE>
BABYCENTER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1997 1998
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $1,795,941 $ 1,201,786
Short-term investments.......................................... 972,713 --
Accounts receivable............................................. 11,500 706,136
Other current assets............................................ 18,913 69,367
---------- -----------
Total current assets.............................................. 2,799,067 1,977,289
Property and equipment, net....................................... 91,538 601,867
Other assets...................................................... 29,906 36,892
---------- -----------
$2,920,511 $ 2,616,048
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 34,004 $ 292,439
Accrued liabilities............................................. 6,206 25,202
Deferred revenue................................................ 53,876 464,920
Current portion of capital lease obligations.................... 33,421 124,135
---------- -----------
Total current liabilities......................................... 127,507 906,696
Capital lease obligations, net of current portion................. 51,079 38,661
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value, 3,200,000 shares
authorized, issuable in series: 2,862,717 and 2,895,930 shares
issued and outstanding at September 30, 1997 and 1998
(aggregate liquidation preference of $3,331,330 at September
30, 1998)..................................................... 2,863 2,896
Common stock, $0.001 par value, 6,800,000 shares authorized,
1,759,138 shares issued and outstanding....................... 1,759 1,759
Additional paid-in capital...................................... 3,258,118 3,308,085
Accumulated deficit............................................. (520,815) (1,642,049)
---------- -----------
Total stockholders' equity........................................ 2,741,925 1,670,691
---------- -----------
$2,920,511 $ 2,616,048
---------- -----------
---------- -----------
</TABLE>
See accompanying notes.
F-24
<PAGE>
BABYCENTER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 11,
1997) TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
-------------- --------------
<S> <C> <C>
Revenues......................................................................... $ 7,624 $ 1,935,668
Costs and expenses:
Cost of revenues............................................................... -- 178,924
Marketing and sales............................................................ 56,918 853,015
Technology and development..................................................... 200,057 1,374,012
General and administrative..................................................... 280,621 744,761
-------------- --------------
Total costs and expenses......................................................... 537,596 3,150,712
-------------- --------------
Loss from operations............................................................. (529,972) (1,215,044)
Interest and other income, net................................................... 9,157 93,810
-------------- --------------
Net loss......................................................................... $ (520,815) $ (1,121,234)
-------------- --------------
-------------- --------------
Basic and diluted net loss per share............................................. $ (1.17) $ (1.41)
-------------- --------------
-------------- --------------
Weighted-average shares used in per share calculation............................ 446,340 792,778
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-25
<PAGE>
BABYCENTER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL TOTAL
---------------------- ---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ----------- --------- ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash and
conversion of debt................. -- $ -- 1,759,138 $ 1,759 $ -- $ -- $ 1,759
Issuance of Series A convertible
preferred stock for cash, net of
issuance costs of $10,000.......... 1,202,046 1,202 -- -- 770,131 -- 771,333
Issuance of Series B convertible
preferred stock for cash, net of
issuance costs of $10,350.......... 1,660,671 1,661 -- -- 2,487,987 -- 2,489,648
Net loss............................. -- -- -- -- -- (520,815) (520,815)
--------- ----------- --------- ----------- ---------- ------------- --------------
Balance at September 30, 1997........ 2,862,717 2,863 1,759,138 1,759 3,258,118 (520,815) 2,741,925
Issuance of Series B convertible
preferred stock for cash........... 33,213 33 -- -- 49,967 -- 50,000
Net loss............................. -- -- -- -- -- (1,121,234) (1,121,234)
--------- ----------- --------- ----------- ---------- ------------- --------------
Balance at September 30, 1998........ 2,895,930 $ 2,896 1,759,138 $ 1,759 $3,308,085 $(1,642,049) $ 1,670,691
--------- ----------- --------- ----------- ---------- ------------- --------------
--------- ----------- --------- ----------- ---------- ------------- --------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
BABYCENTER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 11,
1997) TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (520,815) $ (1,121,234)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................... 9,443 80,101
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (11,500) (694,636)
Other current assets......................................................... (18,913) (50,454)
Other assets................................................................. (29,906) (6,986)
Accounts payable............................................................. 34,004 258,435
Accrued liabilities.......................................................... 6,206 18,996
Deferred revenue............................................................. 53,876 411,044
-------------- --------------
Net cash used in operating activities............................................ (477,605) (1,104,734)
-------------- --------------
INVESTING ACTIVITIES
Purchases of property and equipment.............................................. -- (400,112)
Purchase of short-term investments............................................... (972,713) --
Proceeds from maturity of short-term investments................................. -- 972,713
-------------- --------------
Net cash provided by (used in) investing activities.............................. (972,713) 572,601
-------------- --------------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock........................................ 3,260,981 50,000
Proceeds from issuance of common stock........................................... 1,759 --
Repayments of principal on capital leases........................................ (16,481) (112,022)
-------------- --------------
Net cash provided by (used in) financing activities.............................. 3,246,259 (62,022)
-------------- --------------
Net increase (decrease) in cash and cash equivalents............................. 1,795,941 (594,155)
Cash and cash equivalents at beginning of period................................. -- 1,795,941
-------------- --------------
Cash and cash equivalents at end of period....................................... $ 1,795,941 $ 1,201,786
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.................................................................... $ -- $ 17,008
-------------- --------------
-------------- --------------
Property and equipment acquired under lease financing............................ $ 100,981 $ 190,318
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-27
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
BabyCenter, Inc. (the "Company") is an Internet information and commerce
company serving new and expectant parents. BabyCenter, Inc. produces
BabyCenter.com, the Web's information source on preconception, pregnancy and
baby, and operates the BabyCenter Store, an online store with related products
and supplies. BabyCenter, Inc. also develops Internet information and marketing
products for healthcare companies. BabyCenter, Inc. was incorporated in Delaware
on February 11, 1997. BabyCenter, Inc. conducts its business within one industry
segment and all operations through September 30, 1998 were based in the United
States.
Since its incorporation, BabyCenter, Inc. has incurred cumulative losses
totaling approximately $1,600,000 and expects to incur additional losses for the
next several years. BabyCenter, Inc.'s current operating plan shows that
BabyCenter, Inc. will continue to require additional capital to fund its
operations and market its products. To date, BabyCenter, Inc. has financed its
operations with the net proceeds from private placements of its equity
securities, and capital equipment lease financing. BabyCenter, Inc. plans to
seek additional funding through public or private financing or other
arrangements with third parties. If the financing arrangements contemplated by
management are not consummated, BabyCenter, Inc. may have to seek other sources
of capital or reevaluate its operating plans (see Note 7).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ materially from these estimates.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
BabyCenter, Inc. considers all highly liquid investments with a maturity
from date of purchase of three months or less to be cash equivalents. Management
has designated these investments as available for sale. BabyCenter, Inc. invests
its excess cash in money market funds and corporate debt obligations of
financial institutions in the United States. The short-term investments at
September 30, 1997 were comprised of corporate debt obligations with maturities
of less than one year. These investments are reported at amortized cost which
approximates fair value. BabyCenter, Inc. had no short-term investments at
September 30, 1998. The carrying amount reported on the balance sheet for cash
and cash equivalents approximates their fair value. Fair values are estimated
based on quoted market prices or pricing models using current market rates.
Realized gains or losses for the period from inception (February 11, 1997) to
September 30, 1997 ("period ended September 30, 1997") and the year ended
September 30, 1998 were not material.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject BabyCenter, Inc. to concentrations of
credit risk consist principally of cash investments and accounts receivable.
BabyCenter, Inc. invests cash which is not required for immediate operating
needs principally in deposits and money market funds, which bear minimal risk.
BabyCenter, Inc. has not experienced any significant losses on these
investments.
F-28
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the period ended September 30, 1997, 3 customers accounted for 41%, 41%,
and 18% of total revenue. At September 30, 1997, 1 customer represented 100% of
the total balance of accounts receivable. For the year ended September 30, 1998,
3 customers accounted for 31%, 18%, and 16% of total revenue. At September 30,
1998, 2 customers represented 66% and 11% of the total balance of accounts
receivable. BabyCenter, Inc. performs ongoing credit evaluations of its
customers but does not require collateral. There have been no material losses on
individual customer receivables.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets, typically three to five
years. Assets acquired under lease and leasehold improvements are amortized
using the straight-line method over the shorter of the estimated life of the
asset or the remaining term of the lease.
ADVERTISING COSTS
Advertising costs are accounted for as expenses in the period in which they
are incurred. Advertisement expense for the period ended September 30, 1997 and
the year ended September 30, 1998 was approximately $14,500 and $260,000.
REVENUE RECOGNITION
Revenues primarily consist of online and publishing revenues. Online
revenues are derived principally from the sale of banner advertisements and
sponsorship advertising. In general, the sponsorship advertising contracts have
longer terms than standard banner advertising contracts and also involve more
integration, such as the placement of buttons which provide users with direct
links to the advertiser's website. Advertising revenues on both banner and
sponsorship contracts are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of a minimum number of "impressions,"
or times that an advertisement appears in pages viewed by users of BabyCenter,
Inc.'s online properties. To the extent minimum guaranteed impressions are not
met, BabyCenter, Inc. defers recognition of the corresponding revenues until the
remaining guaranteed impression levels are achieved.
BabyCenter, Inc. also earns revenue on sponsorship and Internet marketing
contracts which generally involve fees relating to the design, coordination,
editorial content, website hosting, and integration of the customer's content
and links into BabyCenter, Inc.'s online properties. These fees are generally
recognized as revenue as earned over the period in which related impressions or
services are delivered.
Revenues from electronic commerce transactions, which consist primarily of
merchandise sold via the Internet, include outbound shipping and handling
charges and are recognized when the products are shipped. To date, such revenue
has not been significant.
F-29
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Publishing revenue consists of developing customized print products. Such
revenue is recorded when earned, generally upon delivery of the product.
Payments received which are related to future performance are deferred and
recognized as revenue when earned.
COST OF REVENUES
Cost of online revenues consist of merchandise sold, inbound, and outbound
shipping costs and direct cost of order fulfillment. Cost of publishing revenue
comprises direct printing and publishing cost. Such costs are expensed as
incurred.
TECHNOLOGY AND DEVELOPMENT
Technology and development expenses consist principally of payroll and
related expense for development, editorial, systems and telecommunications
operations personnel and consultants, systems and telecommunications
infrastructure, store management, and costs of acquired content. To date, all
such development costs have been expensed as incurred.
STOCK-BASED COMPENSATION
BabyCenter, Inc. grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
grant date. BabyCenter, Inc. accounts for stock option grants in accordance with
the provisions of the Accounting Principles Board's Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and, accordingly, recognizes no
compensation expense for stock options granted with exercise prices that are not
less than the fair value of BabyCenter, Inc.'s common stock on the date of
grant.
NET LOSS PER SHARE
In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), basic
and diluted net loss per share has been computed using the weighted-average
number of shares of common stock outstanding during the period. Had BabyCenter,
Inc. been in a net income position, diluted earnings per share would have
included the shares used in the computation of basic net income per share as
well as the impact of outstanding options, using the treasury stock method, to
purchase an additional 281,895 shares for the period ended September 30, 1997
and 677,320 shares for the year ended September 30, 1998. Such shares have been
excluded because they are antidilutive for all periods presented. Shares of
convertible preferred stock have been excluded from the computation.
F-30
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of shares used in the calculation of basic and diluted net
loss per share follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
-------------- --------------
<S> <C> <C>
Net loss..................................................... $ (520,815) $ (1,121,234)
-------------- --------------
-------------- --------------
Basic and diluted:
Weighted-average shares of common stock outstanding........ 1,759,138 1,759,138
Less weighted-average shares subject to repurchase......... (1,312,798) (966,360)
-------------- --------------
Shares used in computing basic and diluted net loss per
share.................................................... 446,340 792,778
-------------- --------------
-------------- --------------
Basic and diluted net loss per share......................... $ (1.17) $ (1.41)
-------------- --------------
-------------- --------------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), and No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131") (collectively, the "Statements")
BabyCenter, Inc. is required to adopt these Statements in the year ending
September 30, 1999. SFAS 130 establishes new standards for reporting and
displaying comprehensive income and its components. SFAS 131 requires disclosure
of certain information regarding operating segments, products and services,
geographic areas of operation, and major customers. Adoption of these Statements
is expected to have no impact on BabyCenter, Inc.'s results of operations or
financial condition.
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which will be effective for the year ending September 30, 2000.
This statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. BabyCenter, Inc. believes the adoption of SFAS 133
will not have a material effect on the financial statements, since it currently
does not invest in derivative instruments and engage in hedging activities.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize
certain costs related to internal use software once certain criteria have been
met. BabyCenter, Inc. is required to implement SOP 98-1 for the year ending
September 30, 2000. Adoption of SOP 98-1 is expected to have no material impact
on BabyCenter, Inc.'s financial condition or results of operations.
F-31
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Furniture and equipment............................................. $ 98,593 $ 685,858
Software............................................................ 2,388 2,653
Leasehold improvements.............................................. -- 2,900
----------- -----------
100,981 691,411
Less accumulated depreciation....................................... (9,443) (89,544)
----------- -----------
Property and equipment, net......................................... $ 91,538 $ 601,867
----------- -----------
----------- -----------
</TABLE>
Property and equipment includes certain furniture, computers, and equipment
financed under capital leases. The cost of such assets under capital leases was
$100,981 and $285,745. Accumulated amortization for these assets was $9,443 and
$88,748 at September 30, 1997 and 1998.
3. COMMITMENTS
OPERATING LEASE COMMITMENTS
BabyCenter, Inc. leases its facilities under noncancelable operating leases
expiring in May and July 1999. Rent expense for facilities under operating
leases was approximately $25,300 and $107,000 for the period ended September
1997 and for the year ended September 30, 1998. Future minimal rental
commitments under operating leases are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 35,969
2000............................................................. 86,297
---------
$ 122,266
---------
---------
</TABLE>
CAPITAL LEASE OBLIGATIONS
BabyCenter, Inc. leases certain furniture, computers and equipment under
noncancelable capital leases. Obligations under capital leases represent the
present value of future noncancelable rental payments under various lease
agreements.
F-32
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. COMMITMENTS (CONTINUED)
Future minimum lease payments under capital leases are as follows at
September 30, 1998:
<TABLE>
<S> <C>
Fiscal year ended
1999.......................................................... $ 142,916
2000.......................................................... 93,225
2001.......................................................... 2,872
---------
Total minimum lease payments.................................... 239,013
Less amount representing interest............................... (76,217)
---------
Present value of net minimum lease payments..................... 162,796
Less current portion............................................ (124,135)
---------
Long-term portion............................................... $ 38,661
---------
---------
</TABLE>
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
BabyCenter, Inc.'s Certificate of Incorporation provide for the issuance of
up to 3,200,000 shares of convertible preferred stock, 1,307,693 of which have
been designated as Series A and 1,860,672 as Series B.
Each share of Series A and B preferred stock is convertible, at the option
of the holder, into a share of common stock, on a one-for-one basis, subject to
certain adjustments for dilution, if any, resulting from future stock issuances.
Additionally, the preferred shares automatically convert into common stock
concurrent with the closing of an underwritten public offering of common stock
under the Securities Act of 1933 in which BabyCenter, Inc. receives at least
$7,500,000 in gross proceeds and the price per share is at least $3.01 (subject
to adjustment for a recapitalization or certain other stock adjustments).
Series A and B preferred stockholders are entitled to annual noncumulative
dividends, before and in preference to any dividends paid on common stock, when
and as declared by the board of directors. No dividends have been declared
through September 30, 1998.
The Series A and B preferred stockholders are entitled to receive, upon
liquidation or merger, a distribution of $0.65 and $1.51 per share (subject to
adjustment for a recapitalization) plus all declared but unpaid dividends.
Thereafter, the remaining assets and funds, if any, shall be distributed ratably
on a per-share basis among the common stockholders and the Series A and B
preferred stockholders.
The Series A and B preferred stockholders have voting rights equal to the
common shares they would own upon conversion.
As of September 30, 1998, BabyCenter, Inc. has reserved 2,895,930 shares of
common stock for issuance upon conversion of its Series A and B preferred stock
(see Note 7).
F-33
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
In February 1997, BabyCenter, Inc. issued 1,750,392 shares of common stock
to founders for cash. The common stock is subject to repurchase until vested.
Vesting with respect to 25% of these shares occurs immediately, another 25% of
these shares vest at the end of one year after issuance and the balance vests
ratably over a period of two years thereafter as specified in the purchase
agreements. At September 30, 1998, approximately 619,921 shares were subject to
repurchase. The weighted-average grant date fair value of unvested stock issued
during the period since inception (February 11, 1997) is $0.06 per share.
1997 STOCK PLAN
In February 1997, the board of directors adopted the 1997 Stock Plan (the
"Plan") for issuance of options of common stock to eligible participants.
Options granted may be either incentive stock options or nonstatutory stock
options. Incentive stock options may be granted to employees with exercise
prices of no less than the fair value and nonstatutory options may be granted to
eligible participants at exercise prices of no less than 85% of the fair value
of the common stock on the grant date as determined by the board of directors.
Options are generally exercisable upon grant, subject to repurchase rights by
BabyCenter, Inc. until vested. Options generally vest at the rate of 25% after
one year from the date of grant, with the remaining balance vesting monthly over
the next three years with a term of 10 years. BabyCenter, Inc. has reserved
1,161,500 shares of common stock for the grant of options under the Plan.
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if BabyCenter, Inc. had accounted for its employee stock
options under the fair value method as specified by SFAS 123. The fair value of
these options was estimated at the date of grant using the minimum value method
with the following weighted-average assumptions: no dividends; an expected life
of five years; and a risk-free interest rate of approximately 6% for the period
ended September 30, 1997 and for the year ended September 30, 1998.
The effect of applying the FASB statement's minimum value method to
BabyCenter, Inc.'s stock options granted did not result in pro forma net loss
amounts that are materially different from the reported historical amounts.
Therefore, such pro forma information is not separately presented herein. Future
pro forma net income (loss) results may be materially different from actual
amounts reported.
F-34
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of activity under BabyCenter, Inc.'s stock option plan was as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES AVAILABLE AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
----------------- ---------- ---------------
<S> <C> <C> <C>
Shares authorized for issuance................ 559,440 -- --
Options granted............................... (281,895) 281,895 $ 0.07
-------- ----------
Balance at September 30, 1997................. 277,545 281,895 $ 0.07
Additional authorization...................... 602,060 -- --
Options granted............................... (521,612) 521,612 $ 0.17
Options exercised............................. -- -- --
Options forfeited............................. 126,187 (126,187) $ 0.08
-------- ----------
Balance at September 30, 1998................. 484,180 677,320 $ 0.14
-------- ----------
-------- ----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------
OPTIONS WEIGHTED- OPTIONS WEIGHTED-
OUTSTANDING AT AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICE SEPTEMBER 30, EXERCISE SEPTEMBER 30, EXERCISE
RANGE 1998 PRICE 1998 PRICE
- ---------------- --------------- WEIGHTED- ----------- -------------- -----------
AVERAGE
REMAINING
CONTRACTUAL
LIFE
---------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.07-$0.30 677,320 3.2 $ 0.14 109,570 $ 0.07
</TABLE>
The weighted-average fair value of options granted during the period ended
September 30, 1997 and the year ended September 30, 1998 was $0.04.
5. INCOME TAXES
As of September 30, 1998, BabyCenter, Inc. had federal net operating loss
carryforwards of approximately $1,600,000. The net operating loss and credit
carryforwards will expire at various dates beginning in 2012 through 2018, if
not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of September 30, 1997
and 1998, BabyCenter, Inc. had deferred tax assets of approximately $600,000 and
$200,000. The net deferred tax assets have been fully offset by a valuation
allowance.
BabyCenter, Inc. recorded a net valuation allowance of $200,000 during the
period ended September 30, 1997. Deferred tax assets relate primarily to net
operating loss carryforwards.
F-35
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. YEAR 2000 ISSUE (UNAUDITED)
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries in order to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies will need to be upgraded to
comply with Year 2000 requirements. Significant uncertainty exists concerning
the potential effects associated with this issue. Although BabyCenter, Inc.
believes that its products and services are Year 2000 compliant, there can be no
assurance that Year 2000 errors or defects will not be discovered in BabyCenter,
Inc.'s current and future products or services. Any failure by BabyCenter, Inc.
to make its products Year 2000 compliant could result in a decrease in revenue
and an increase in the allocation of resources to address Year 2000 problems
without additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by BabyCenter, Inc.'s
customers due to such Year 2000 problems.
BabyCenter, Inc. has conducted a preliminary assessment of its internal
information technology ("IT") and non-IT systems to identify the systems that
could be affected by the Year 2000 issue. Based on this preliminary assessment,
BabyCenter, Inc. currently has no reason to believe that its IT and non-IT
systems are not Year 2000 compliant. BabyCenter, Inc. intends to continue to
assess the Year 2000 compliance of its internal systems.
To date, BabyCenter, Inc. has not made any material expenditures related to
the Year 2000 compliance of its internal information technology systems and
BabyCenter, Inc. does not currently anticipate spending any material amounts for
Year 2000 remediation. There can be no assurance that Year 2000 errors or
defects will not be discovered in BabyCenter, Inc.'s internal IT and non-IT
systems. In the event Year 2000 errors or defects are discovered in BabyCenter,
Inc.'s internal IT and non-IT systems and BabyCenter, Inc. is not able to remedy
such errors or defects in a timely manner or the cost to remedy such errors or
defects is significant, there would be a material adverse effect on BabyCenter,
Inc.'s business, results of operation, or financial condition.
BabyCenter, Inc. relies on third-party vendors and service providers for
various products and services. There can be no assurance that third parties'
failure to ensure Year 2000 compliance would not have an adverse impact on
BabyCenter, Inc.'s financial condition or results of operations.
BabyCenter, Inc. currently does not have a specific contingency plan
intended to mitigate the effects of any potential Year 2000 disruption. However,
BabyCenter, Inc. would formulate such a plan in the future, if necessary.
7. SUBSEQUENT EVENTS
PREFERRED STOCK FINANCING
In October 1998, BabyCenter, Inc. issued 2,000,000 shares of Series C
preferred stock at a purchase price of $5.00 per share for an aggregate
consideration of $10,000,000. The total number of authorized shares designated
as Series C preferred stock is 2,500,000. Series C preferred stockholders are
entitled to noncumulative dividends, before and in preference to any dividends
paid on common stock, when and as declared by the board of directors. No
dividends have been declared. The Series A, B, and C preferred stockholders are
entitled to receive, upon liquidation or certain mergers, a distribution of
$0.65, $1.51, and $5.00 per share (subject to adjustment for a
recapitalization), plus all declared but unpaid dividends. Additionally, the
preferred shares
F-36
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS (CONTINUED)
automatically convert into common stock concurrent with the closing of an
underwritten public offering of common stock in which BabyCenter receives at
least $15,000,000 in gross proceeds and the price per share is at least $10.00
(subject to adjustment for a recapitalization or certain other stock
adjustments).
SHARE PURCHASE RIGHTS
In October 1998, BabyCenter, Inc. entered into an agreement with a vendor to
supply goods and certain fulfillment services to support electronic commerce
transactions of BabyCenter, Inc. In connection with this agreement, BabyCenter,
Inc. granted the vendor rights to purchase up to 120,000 shares of common stock
of BabyCenter, Inc. at a price of $0.40 per share. These shares are subject to
lapsing right of repurchase over the term of the agreement.
ACQUISITION
On April 18, 1999, BabyCenter, Inc. and eToys Inc. signed a definitive
agreement to merge BabyCenter, Inc. with eToys Inc. Consummation of the merger
is expected by the end of the quarter ended June 30, 1999 and is subject to
certain closing conditions, including governmental approvals and approval by the
stockholders of BabyCenter, Inc. Under the terms of agreement, eToys Inc. would
issue its shares to the stockholders of BabyCenter, Inc. The merger is to be
treated as a purchase for accounting purposes.
F-37
<PAGE>
UNDERWRITING
eToys and the Underwriters named below (the "underwriters") have entered
into an underwriting agreement with respect to the shares being offered. Subject
to certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co.,
BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- --------------------------------------------------------------- -----------
<S> <C>
Goldman, Sachs & Co............................................
BancBoston Robertson Stephens Inc..............................
Donaldson, Lufkin & Jenrette Securities Corporation............
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
-----------
Total......................................................
-----------
-----------
</TABLE>
------------------------
The underwriters are committed to take and pay for all of the shares
indicated in the table above, if any are taken.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,230,000 shares from eToys to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by eToys. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 1,230,000 additional shares.
Paid by eToys
<TABLE>
<CAPTION>
No Exercise Full Exercise
------------- ---------------
<S> <C> <C>
Per Share....................................... $ $
Total........................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
eToys and its directors, officers, employees and other securityholders have
agreed with the underwriters not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of the representatives. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock has been
negotiated among eToys and the representatives of
U-1
<PAGE>
the underwriters. Among the factors considered in determining the initial public
offering price of the shares, in addition to prevailing market conditions, were
eToys' historical performance, estimates of eToys' business potential and
earnings prospects, an assessment of eToys' management and the consideration of
the above factors in relation to market valuation of companies in related
businesses.
eToys has applied to have the common stock listed on the Nasdaq National
Market under the symbol "ETYS".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short-sale covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
The underwriters have reserved for sale, at the initial public offering
price, up to 1,230,000 of the common stock offered hereby for certain
individuals designated by eToys who have expressed an interest in purchasing
such shares of common stock in the offering. The number of shares available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the underwriters to the general public on the same basis as other shares offered
hereby.
eToys estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1,200,000.
eToys has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
U-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 8
Use of Proceeds...................... 21
Dividend Policy...................... 21
Capitalization....................... 22
Dilution............................. 24
Selected Financial Data.............. 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 26
Business............................. 38
Recent Developments.................. 51
Management........................... 52
Certain Transactions................. 62
Principal Stockholders............... 66
Description of Capital Stock......... 68
Shares Eligible for Future Sale...... 71
Legal Matters........................ 73
Experts.............................. 73
Additional Information............... 74
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
8,200,000 Shares
ETOYS INC.
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
Representatives of the Underwriters
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by eToys in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................................... $ 31,970
NASD filing fee................................................................ 12,000
Nasdaq National Market listing fee............................................. 95,000
Printing and engraving expenses................................................ 500,000
Legal fees and expenses........................................................ 400,000
Accounting fees and expenses................................................... 320,000
Blue Sky qualification fees and expenses....................................... 5,000
Transfer Agent and Registrar fees.............................................. 5,000
Miscellaneous fees and expenses................................................ 81,030
----------
Total...................................................................... $1,450,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article VII of our current
Certificate of Incorporation (Exhibit 3.1 hereto) and Article VI of our current
Bylaws (Exhibit 3.3 hereto) provide for indemnification of our directors,
officers, employees and other agents to the maximum extent permitted by Delaware
law. In addition, we have entered into Indemnification Agreements (Exhibit 10.14
hereto) with our officers and directors. The Underwriting Agreement (Exhibit
1.1) also provides for cross-indemnification among eToys and the Underwriters
with respect to certain matters, including matters arising under the Securities
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our incorporation in November 1996, we have sold and issued the
following securities:
1. On June 27, 1997 we issued 11,680,002 shares of common stock to five
founders for an aggregate consideration of $58,400.01. On June 27, 1997 we also
issued 19,400,001 shares of common stock and a Note in the principal amount of
$100,000 to one investor for an aggregate consideration of $197,000.01.
2. On September 29, 1997, we issued one investor a warrant to purchase
150,000 shares of common stock in connection with the transfer of certain
intellectual property.
3. On August 15, 1997 and September 26, 1997, we issued Notes in the
principal amount of $895,000 and warrants to purchase 2,165,271 shares of Series
A preferred stock to 40 investors for an aggregate consideration of $895,000.
The Notes converted into 4,404,054 shares of Series A preferred stock.
II-1
<PAGE>
4. On December 23, 1997, we issued 18,954,051 shares of Series A preferred
stock to fifty accredited investors for an aggregate consideration of
$3,917,170.54.
5. On March 11, 1998, we issued 2,340,000 shares of common stock to one
accredited investor in exchange for substantially all of the assets of a
business owned by the investor (less $270,000 cash).
6. On May 6, 1998, we issued Notes in the aggregate principal amount of
$2,530,679.61 to four accredited investors. The Notes converted into 3,609,756
shares of Series B preferred stock.
7. On June 4, 1998, we issued 31,424,510 shares of Series B preferred stock
to twelve accredited investors for am aggregate consideration of $22,030,677.17.
8. On June 17, 1998, we issued 4,235,436 shares of Series B preferred stock
to sixteen accredited investors for an aggregate consideration of $2,969,322.97.
9. On January 31, 1999 we issued a warrant to purchase 11,412 shares of
common stock to a lessor in connection with an equipment financing.
10. On March 24, 1999 we issued an aggregate of 1,999,998 shares of Series C
preferred stock to two large institutional accredited investors for aggregate
consideration of $19,999,980.
11. Since inception we have issued an aggregate of 18,522,900 options to
purchase common stock of eToys to a number of our employees, directors and
consultants.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances described in Item 11 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement dated April , 1999.
2.1 Agreement and Plan of Reorganization by and among eToys, BabyCenter, Inc. and,
with respect to Article VII only, Pat Kenealy as Shareholder Representative,
dated as of April 18, 1999.
3.1* Amended and Restated Certificate of Incorporation of eToys (superseded by Exhibit
3.5).
3.2* Amended and Restated Certificate of Incorporation of eToys (proposed) (superseded
by Exhibit 3.6).
3.3* Amended and Restated Bylaws of eToys.
3.4* Amended and Restated Bylaws of eToys (proposed).
3.5* Amended and Restated Certificate of Incorporation of eToys.
3.6* Amended and Restated Certificate of Incorporation of eToys (proposed).
4.1* Specimen Stock Certificate.
5.1 Opinion of Venture Law Group regarding the legality of the Common Stock being
registered.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
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!.
10.6*+ Interactive Marketing Agreement dated October 1, 1997 between eToys and America
Online, Inc. (amended January 1, 1998).
10.7* Series A Preferred Stock Purchase Agreement dated December 23, 1997 among eToys
and certain investors.
10.8* Series B Preferred Stock Purchase Agreement dated June 4, 1998 among eToys and
certain investors.
10.9* Amended and Restated Investors' Rights Agreement dated June 4, 1998, among eToys
and certain investors (superseded by Exhibit 10.24).
10.10* Amended and Restated Voting Agreement dated June 4, 1998, among eToys and certain
investors (superseded by Exhibit 10.25).
10.11* Amended and Restated Right of First Refusal and Co-Sale Agreement dated June 4,
1998, among eToys, Edward C. Lenk, Frank C. Han and certain investors
(superseded by Exhibit 10.26).
10.12* Lease dated January 22, 1999 between eToys and Spieker Properties, L.P.
10.13* Standard Industrial Lease Agreement dated June 26, 1998 between eToys and Newcrow
(amended October 15, 1998).
10.14* Form of Indemnification Agreement between eToys and each of its officers and
directors.
10.15* 1997 Stock Plan (superseded by Exhibit 10.27).
10.16* 1999 Stock Plan.
10.17* 1999 Employee Stock Purchase Plan.
10.18* 1999 Directors' Stock Option Plan.
10.19* Offer Letter dated December 5, 1998 between eToys and John R. Hnanicek.
10.20* Offer Letter dated December 28, 1998 between eToys and Louis V. Zambello III.
10.21* Offer Letter dated January 12, 1999 between eToys and Steven J. Schoch.
10.22* Equipment Lease Line dated December 24, 1998 between eToys and Comdisco, Inc.
10.23* Series C Preferred Stock Purchase Agreement dated March 24, 1999 among eToys and
certain investors.
10.24* Amended and Restated Investors' Rights Agreement dated March 24, 1999 among eToys
and certain investors.
10.25* Amended and Restated Voting Agreement dated March 24, 1999 among eToys and certain
investors.
10.26* Amended and Restated Right of First Refusal and Co-Sale Agreement dated March 24,
1999 among eToys and certain investors.
10.27 1997 Stock Plan (as amended).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.28 Fulfillment Services Agreement by and between eToys and Fingerhut Business
Services, Inc. dated as of April 21, 1999.
23.1 Consent of Accountants.
23.2 Consent of Accountants.
23.3 Consent of Attorneys (see Exhibit 5.1).
24.1* Power of Attorney.
</TABLE>
- ------------------------
* Previously filed by the registrant with the Commission.
+ Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Santa
Monica, State of California on April 22, 1999.
<TABLE>
<S> <C> <C>
ETOYS INC.
By: /s/ EDWARD C. LENK
-----------------------------------------
Edward C. Lenk
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
UNCLE OF THE BOARD
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ EDWARD C. LENK President, Chief Executive
- ------------------------------ Officer and Uncle of the April 22, 1999
Edward C. Lenk Board
/s/ STEVEN J. SCHOCH
- ------------------------------ Chief Financial Officer April 22, 1999
Steven J. Schoch
PETER C.M. HART*
- ------------------------------ Director April 22, 1999
Peter C.M. Hart
TONY HUNG*
- ------------------------------ Director April 22, 1999
Tony Hung
MICHAEL MORITZ*
- ------------------------------ Director April 22, 1999
Michael Moritz
DANIEL NOVA*
- ------------------------------ Director April 22, 1999
Daniel Nova
</TABLE>
*Power of Attorney
<TABLE>
<S> <C> <C> <C>
By: /s/ STEVEN J. SCHOCH
-------------------------
Steven J. Schoch
ATTORNEY IN FACT
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
ETOYS INC.
BABYCENTER, INC.,
AND, WITH RESPECT TO ARTICLE VII ONLY,
PAT KENEALY
AS STOCKHOLDER REPRESENTATIVE
DATED AS OF APRIL 18, 1999
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of April 18, 1999 by and among eToys Inc., a Delaware
corporation ("Buyer"), BabyCenter, Inc., a Delaware corporation (the "Company"),
and, with respect to Article VII only, Pat Kenealy as Stockholder
Representative.
RECITALS
WHEREAS, the Boards of Directors of each of the Company and Buyer
believe it is in the best interests of each company and their respective
Stockholders that Buyer acquire the Company through the statutory merger of a
to-be-formed, wholly owned subsidiary of Buyer with and into the Company (the
"Merger") and, in furtherance thereof, have approved the Merger.
WHEREAS, pursuant to the Merger, among other things, all of the issued
and outstanding shares of capital stock of the Company shall be converted into
the right to receive shares of common stock of Buyer.
WHEREAS, a portion of the shares of common stock of Buyer otherwise
issuable by Buyer in connection with the Merger shall be placed in escrow by
Buyer for purposes of satisfying damages, losses, expenses and other similar
charges which result from breaches of the representations, warranties and
covenants of the Company contained herein.
WHEREAS, the parties intend that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
WHEREAS, the Company and Buyer desire to make certain representations,
warranties, covenants and other agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1. FORMATION OF MERGER SUBSIDIARY.
1.1.1. As promptly as practicable following the execution
of this Agreement, Buyer shall cause BCI
Acquisition Company, a Delaware corporation
("Merger Sub"), to be organized for the sole
purpose of effectuating the Merger contemplated
hereby.
1.1.2. The Certificate of Incorporation and Bylaws of
Merger Sub shall be in such forms as shall be
determined by Buyer.
<PAGE>
1.1.3. The unauthorized capital stock of Merger Sub shall
initially consist of 1,000 shares of common stock,
$.0001 par value per share, which shall be issued
to Buyer at a price of $1.00 per share.
1.1.4. As promptly as practicable following the execution
of this Agreement and the organization of Merger
Sub, Buyer shall (i) elect the directors of Merger
Sub, (ii) cause the directors of Merger Sub to
elect the officers of Merger Sub, and (iii) cause
the directors of Merger Sub to ratify and approve
this Agreement and to approve the form of the
Merger Agreement (as defined below).
1.2. THE MERGER. At the Effective Time (as defined in Section 1.3)
and subject to and upon the terms and conditions of this Agreement
and the applicable provisions of the Delaware General Corporation
Law ("DGCL"), Merger Sub shall be merged with and into the
Company, the separate corporate existence of Merger Sub shall
cease and the Company shall continue as the surviving corporation
and as a wholly-owned subsidiary of Buyer. The surviving
corporation after the Merger is hereinafter sometimes referred
to as the "Surviving Corporation."
1.3. EFFECTIVE TIME. Unless this Agreement is earlier terminated
pursuant to Section 8.1, the closing of the Merger (the "Closing")
will take place as promptly as practicable, but no later than
two (2) business days following the approval of the Merger by
either (i) written consent of the Company's Stockholders or
(ii) consent of the Company's Stockholders at the Company
Stockholders Meeting (as described in Section 5.1) and the
satisfaction or waiver of the conditions set forth in
Article VI, at the offices of Irell & Manella LLP, 333 South
Hope Street, Suite 3300, Los Angeles, California, 90071 unless
another place or time is agreed to in writing by Buyer and the
Company. The date upon which the Closing actually occurs is
herein referred to as the "Closing Date." On the Closing Date,
the parties hereto shall cause the Merger to be consummated by
filing an Agreement of Merger (or like instrument) substantially
in the form attached hereto as Exhibit A (the "Merger Agreement")
with the Secretary of State of the State of Delaware, in
accordance with the applicable provisions of the DGCL (the time
of acceptance by such Secretary of State of such filing being
referred to herein as the "Effective Time").
1.4. EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of
Delaware law. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of the Company and
Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
-3-
<PAGE>
1.5. CERTIFICATE OF INCORPORATION; BYLAWS.
1.5.1. Unless otherwise determined by Buyer prior to the
Effective Time, at the Effective Time, the
Certificate of Incorporation of Merger Sub shall be
the Certificate of Incorporation of the Surviving
Corporation until thereafter amended as provided by
law and such Certificate of Incorporation.
1.5.2. Unless otherwise determined by Buyer prior to the
Effective Time, the Bylaws of Merger Sub, as in
effect immediately prior to the Effective Time,
shall be the Bylaws of the Surviving Corporation
until thereafter amended.
1.6. DIRECTORS AND OFFICERS. The directors of Merger Sub
immediately prior to the Effective Time shall be the
directors of the Surviving Corporation immediately after the
Effective Time, each to hold the office of director of the
Surviving Corporation in accordance with the provisions of
the applicable laws of the State of Delaware and the
Certificate of Incorporation and Bylaws of the Surviving
Corporation until their successors are duly qualified and
elected. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving
Corporation immediately after the Effective Time, each to
hold office in accordance with the provisions of the Bylaws
of the Surviving Corporation. In particular, Matthew
Glickman shall be the Chief Executive Officer of the
Surviving Corporation and Mark Selcow shall be President of
the Surviving Corporation.
1.7. CERTAIN DEFINITIONS. For all purposes of this Agreement,
the following terms shall have the following meanings:
"Buyer Common Stock" shall mean shares of the common stock,
$.0001 par value per share, of Buyer.
"Buyer IPO" shall mean the initial public offering of Buyer
Common Stock to be made pursuant to the Buyer Registration
Statement, which is anticipated to be consummated prior to
the consummation of the Merger.
"Buyer Registration Statement" means Amendment No. 1 to the
Registration Statement on Form S-1 of Buyer pertaining to
the Buyer IPO, which was filed with the SEC on April 5,
1999.
"Buyer Stock Split" shall mean the 3-for-1 stock split of
Buyer Common Stock that is expected to be effected
concurrently with the consummation of the Buyer IPO. All
references to numbers of shares of Buyer Common Stock herein
are to numbers of such shares before consummation of the
Buyer Stock Split.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Company Capital Stock" shall mean all shares of Company
Common Stock, Company Preferred Stock and any other capital
stock of the Company.
-4-
<PAGE>
"Company Common Stock" shall mean shares of the Common Stock
of the Company.
"Company Option Plan" shall mean the BabyCenter, Inc. 1997
Stock Plan.
"Company Options" shall mean all issued and outstanding
options, warrants and other rights to acquire or receive
Company Capital Stock (whether or not vested).
"Company Preferred Stock" shall mean shares of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock and any other Series of preferred stock of
the Company.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Exchange Ratio" shall equal the quotient obtained by
dividing (i) 6,240,000 by (ii) the sum of: (x) the aggregate
number of Total Outstanding Company Shares and (y) the
aggregate number of shares of Company Capital Stock subject
to Company Options (in the case of Company Options, if any,
exercisable for convertible securities, computed on a
Company Common Stock equivalent basis, giving effect to the
conversion ratio governing each such convertible security)
outstanding immediately prior to the Effective Time.
"GAAP" shall mean generally accepted accounting principles
in effect from time to time in the United States, applied on
a consistent basis for the relevant entity.
"Knowledge" of a person shall mean the actual knowledge of
the person, and knowledge of a corporation shall mean the
actual knowledge of an officer or director of the
corporation, in each case following reasonable
investigation.
"Material Adverse Effect" shall mean any change, event or
effect that is materially adverse to the business, assets
(including intangible assets), financial condition, results
of operations or prospects of the entity referred to.
"Related Agreements" shall mean all such ancillary
agreements required in this Agreement to be executed and
delivered in connection with the transactions contemplated
hereby.
"SEC" shall mean the Securities Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Stockholder" shall mean each holder of any Company Capital
Stock immediately prior to the Effective Time.
"Total Outstanding Company Shares" shall be the aggregate
number of shares of Company Capital Stock outstanding
immediately prior to the Effective Time (in the case of
convertible securities, computed on a Company Common Stock
-5-
<PAGE>
equivalent basis, giving effect to the conversion ratio
governing each such convertible security).
1.8. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS.
1.8.1. EFFECT ON COMPANY CAPITAL STOCK. At the Effective
Time, by virtue of the Merger and without any
action on the part of Merger Sub, the Company or
the Stockholders, each share of Company Capital
Stock issued and outstanding immediately prior to
the Effective Time (other than any Dissenting
Shares (as defined in Section 1.8.6)) will be
canceled and extinguished and be converted
automatically into the right to receive, upon
surrender of the certificate representing such
share of Company Capital Stock in the manner
provided for in this Section 1.8.1, a fraction of a
share of Buyer Common Stock (subject to
Section 1.8.5) equal to the Exchange Ratio. In the
case of Company Capital Stock consisting of
convertible securities (including, without
limitation, shares of Company Preferred Stock that
remain outstanding immediately prior to the
Effective Time), the Exchange Ratio shall be
applied to such shares on a Company Common Stock
equivalent basis, giving effect to the conversion
ratio governing each such convertible security.
All shares of Buyer Common Stock issued in exchange
for shares of Company Capital Stock subject to
Company repurchase rights or vesting schedules
shall be subject to the same repurchase rights
and/or vesting schedules and other terms as
applicable to such shares of Company Capital Stock,
with Buyer succeeding to the rights of the Company
thereunder and with a proportionate adjustment to
any per share repurchase price applicable to such
shares to reflect the Exchange Ratio.
Notwithstanding anything contained in this Section
1.8.1 to the contrary, each share of Company
Capital Stock issued and held in the Company's
treasury immediately prior to the Effective Time
shall, by virtue of the Merger, cease to be
outstanding and shall be canceled and retired
without payment of any consideration therefor.
1.8.2. EFFECT ON COMPANY OPTIONS; AGREEMENT CONCERNING
WARRANTS. At the Effective Time, each Company
Option will, in connection with the Merger, be
assumed by Buyer. Each Company Option so assumed by
Buyer under this Agreement shall continue to have,
and be subject to, the same terms and conditions,
including vesting, applicable thereto prior to the
Effective Time, except that (A) such assumed
Company Option will be exercisable for that number
of whole shares of Buyer Common Stock equal to the
product obtained by multiplying the number of
shares of Company Capital Stock that were issuable
upon exercise in full of such assumed Company
Option immediately prior to the Effective Time (in
the case of Company Options, if any, exercisable
for convertible securities, computed on a Company
Common Stock equivalent basis, giving effect to the
conversion ratio governing each such convertible
security) by the Exchange Ratio, rounded down to
the nearest whole number of shares of
-6-
<PAGE>
Buyer Common Stock and (B) the per share exercise price
for the shares of Buyer Common Stock issuable upon
exercise of such assumed Company Option shall be equal
to the quotient obtained by dividing the exercise
price per share of Company Capital Stock at which
such Company Option was exercisable immediately
prior to the Effective Time (in the case of Company
Options, if any, exercisable for convertible
securities, computed on a Company Common Stock
equivalent basis, giving effect to the conversion
ratio governing each such convertible security) by
the Exchange Ratio, rounded up to the nearest whole
cent. It is the intention of the parties that
options issued by Buyer following the Closing will,
to the extent permitted by applicable law, qualify
as incentive stock options as defined in Section
422 of the Code, to the extent Company Options in
respect of which Buyer options were issued
qualified as incentive stock options immediately
prior to the Closing. The Company agrees to use its
commercially reasonable efforts to cause all other
warrants to acquire Company Capital Stock
(including without limitation that certain Warrant
Agreement dated as of October 28, 1998 issued to
Comdisco, Inc., a Delaware corporation) to be
exercised in full or otherwise cancelled (without
the payment of any consideration) prior to the
Effective Time, and to provide evidence thereof
reasonably satisfactory to the Buyer prior to or at
the Closing. Notwithstanding anything herein to
the contrary, prior to the Effective Time, the
Company shall cause all commitments to issue or
grant options or similar rights to purchase or
receive Company Capital Stock to be terminated or,
to the extent the Company elects not to or is
unable to terminate such commitments, to be treated
as outstanding Company Options for purposes of
computing the Exchange Ratio; PROVIDED, HOWEVER,
that the Company covenants to terminate prior to
the Effective Time the commitment previously made
to Mr. Steve Fram relating to the possible issuance
to him of up to .25% equity interest in the
Company.
1.8.3. EFFECT ON CAPITAL STOCK OF MERGER SUB. Each share
of common stock, $.0001 par value per share, of
Merger Sub issued and outstanding immediately prior
to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and
nonassessable share of common stock, $.0001 par
value per share, of the Surviving Corporation. Each
stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to
evidence ownership of such shares of capital stock
of the Surviving Corporation.
1.8.4. ADJUSTMENT TO BUYER COMMON STOCK. The number of
shares of Buyer Common Stock issuable hereunder
shall be adjusted to reflect fully the effect of
any stock split (including, without limitation, the
anticipated Buyer Stock Split, if consummated prior
to the consummation of the Merger), reverse split,
stock dividend (including any dividend or
distribution of securities convertible into Buyer
Common Stock or Company Capital Stock),
reorganization, recapitalization or other like
-7-
<PAGE>
change with respect to Buyer Common Stock or
Company Capital Stock occurring after the date
hereof and prior to the Effective Time.
1.8.5. FRACTIONAL SHARES. Notwithstanding anything to the
contrary in this Agreement, no fractional shares of
Buyer Common Stock shall be issued pursuant to the
Merger. In lieu of the issuance of any fractional
share of Buyer Common Stock pursuant to the Merger,
cash adjustments will be paid to holders in respect
of any fractional share of Company Capital Stock
that would otherwise be issuable, and the amount of
such cash adjustment shall be equal to the product
of (a) such fractional amount and (b) either (i) if
Buyer Common Stock is then publicly traded, the
average closing price of Buyer Common Stock on the
Nasdaq National Market for the five (5) trading
days ending on the trading day prior to the
Effective Time or (ii) if Buyer Common Stock is not
then publicly traded, the fair market value of a
share of Buyer Common Stock as determined by the
Buyer's Board of Directors in good faith.
1.8.6. DISSENTING SHARES. Notwithstanding any provision
of this Agreement to the contrary, any shares of
Company Capital Stock issued and outstanding
immediately prior to the Effective Time that are
held by a Stockholder who has exercised and
perfected appraisal rights for such shares in
accordance with the DGCL and who, as of the
Effective Time, has not effectively withdrawn or
lost such appraisal rights ("Dissenting Shares"),
shall not be converted into or represent a right to
receive Buyer Common Stock pursuant to Section
1.8.1, but the holder thereof shall only be
entitled to such rights as are granted by the DGCL.
Notwithstanding the provisions of this Section, if
any holder of Dissenting Shares shall effectively
withdraw or lose (through failure to perfect or
otherwise) his or her appraisal rights, then, as of
the later of the Effective Time and the occurrence
of such event, such holder's shares shall
automatically be converted into and represent only
the right to receive the shares of Buyer Common
Stock to which such Stockholder would otherwise be
entitled under Section 1.8.1 (less the number of
shares allocable to such Stockholder that have been
deposited into the Escrow Fund on such holder's
behalf pursuant to Article VII), upon surrender of
the certificate representing such shares. The
Company shall give Buyer (i) prompt notice of any
written demand for appraisal received by the
Company pursuant to the applicable provisions of
the DGCL and (ii) the opportunity to participate in
all negotiations and proceedings with respect to
such demands. The Company shall not, except with
the prior written consent of Buyer, voluntarily
make any payment with respect to any such demands
or offer to settle or settle any such demands. To
the extent that the Company makes any payments in
respect of any Dissenting Shares prior to the
Effective Time, Buyer shall be entitled to recover
under the terms of Article VII hereof the aggregate
amount by which such payment or payments exceed the
aggregate consideration that otherwise would have
-8-
<PAGE>
been payable in respect of such shares (for this
purpose, valued in the same manner specified in
Section 7.2.5(b) below).
1.8.7. SURRENDER OF CERTIFICATES.
(a) Buyer shall appoint a reputable
institution to serve as exchange agent
(the "Exchange Agent") in the Merger.
(b) Within three (3) business days after the
Effective Time, Buyer shall make available
to the Exchange Agent for exchange in
accordance with this Article I the shares
of Buyer Common Stock issuable pursuant to
Section 1.8.1 in exchange for all the
outstanding shares of Company Capital
Stock; provided, however, that on behalf
of the Stockholders, pursuant to Section
7.2 hereof, Buyer shall deposit into an
escrow account 100,000 of the shares of
Buyer Common Stock otherwise issuable to
the Stockholders pursuant to Section 1.8.1
(the "Escrow Amount"). The portion of the
Escrow Amount contributed on behalf of
each Stockholder shall be in proportion to
the aggregate number of shares which such
Stockholder would otherwise be entitled to
receive in the Merger by virtue of
ownership of outstanding shares of Company
Capital Stock unless so otherwise agreed
by certain Stockholders.
(c) On the Closing Date or promptly
thereafter, the Stockholders will
surrender the certificates representing
their Company Capital Stock (the
"Certificates") to the Exchange Agent for
cancellation together with a letter of
transmittal in such form and having such
provisions as Buyer may reasonably
request. Buyer shall provide such letter
of transmittal to the Stockholders on the
Closing Date or as promptly thereafter as
practicable. Upon surrender of a
Certificate for cancellation to the
Exchange Agent, together with such letter
of transmittal, duly completed and validly
executed in accordance with the
instructions thereto, the Exchange Agent
will promptly deliver to the holder of
such Certificate in exchange therefor a
certificate representing the number of
whole shares of Buyer Common Stock (less
the number of shares of Buyer Common Stock
to be deposited in the Escrow Fund on such
holder's behalf pursuant to
Section 1.8.7(b) and Article VII) to which
such Stockholder is entitled pursuant to
Section 1.8.1, and the Certificate so
surrendered shall forthwith be canceled.
Until so surrendered, each outstanding
Certificate that, prior to the Effective
Time, represented shares of Company
Capital Stock will be deemed from and
after the Effective Time, for all
corporate purposes, other than the payment
of dividends, to evidence only the right
to receive the number of full shares of
Buyer Common Stock into which such shares
of Company Capital Stock shall have been
converted pursuant to this Article I
(except as may otherwise
-9-
<PAGE>
be provided under the DGCL with respect to
Dissenting Shares), together with any cash in
lieu of fractional shares. As soon as
practicable after the Effective Time, and subject
to and in accordance with the provisions of
Article VII hereof, Buyer shall cause to
be distributed to the Escrow Agent (as
defined in Article VII) a certificate or
certificates representing that number of
shares of Buyer Common Stock equal to the
Escrow Amount, which shall be registered
in the name of the Escrow Agent. Such
shares shall be beneficially owned by the
holder on whose behalf such shares were
deposited in the Escrow Fund and shall be
available to compensate Buyer as provided
in Article VII.
(d) No dividends or other distributions
declared or made after the Effective Time
with respect to Buyer Common Stock with a
record date after the Effective Time will
be paid to any holder of any unsurrendered
Certificate with respect to the shares of
Buyer Common Stock represented thereby
until the holder of record of such
Certificate shall surrender such
Certificate. Subject to applicable law,
following surrender of any such
Certificate, there shall be paid to the
record holder of the certificates
representing whole shares of Buyer Common
Stock issued in exchange therefor, without
interest, at the time of such surrender,
the amount of dividends or other
distributions with a record date after the
Effective Time theretofore paid with
respect to such whole shares of Buyer
Common Stock.
(e) If any certificate for shares of Buyer
Common Stock is to be issued in a name
other than that in which the certificate
surrendered in exchange therefor is
registered, it will be a condition to the
issuance thereof that the certificate so
surrendered will be properly endorsed and
otherwise in proper form for transfer and
that the person requesting such exchange
will have paid to Buyer or any agent
designated by it any transfer or other
taxes required by reason of the issuance
of a certificate for shares of Buyer
Common Stock in any name other than that
of the registered holder of the
certificate surrendered, or established to
the satisfaction of Buyer or any agent
designated by it that such tax has been
paid or is not payable.
(f) In the event any certificates evidencing
shares of Company Capital Stock shall have
been lost, stolen or destroyed, the
Exchange Agent shall issue in exchange for
such lost, stolen or destroyed
certificates, upon the making of an
affidavit of that fact by the holder
thereof, the number of shares of Buyer
Common Stock, if any, as may be required
pursuant to Section 1.8.1; provided,
however, that Buyer may, in its discretion
and as a condition precedent to the
issuance thereof, require the owner of
such lost,
-10-
<PAGE>
stolen or destroyed certificates to
deliver a bond in such sum as it may
reasonably direct against any claim that
may be made against Buyer or the Exchange
Agent with respect to the certificates
alleged to have been lost, stolen or
destroyed.
(g) Notwithstanding anything to the contrary
in this Section 1.8, none of the Exchange
Agent, the Surviving Corporation or any
party hereto shall be liable to a holder
of shares of Buyer Common Stock or Company
Capital Stock for any amount properly paid
to a public official pursuant to any
applicable abandoned property, escheat or
similar law.
(h) All shares of Buyer Common Stock issued
upon the surrender for exchange of shares
of Company Capital Stock in accordance
with the terms hereof shall be deemed to
be issued in full satisfaction of all
rights pertaining to such shares of
Company Capital Stock, and there shall be
no further registration of transfers on
the records of the Surviving Corporation
of shares of Company Capital Stock that
were outstanding immediately prior to the
Effective Time. If, after the Effective
Time, Certificates are presented to the
Surviving Corporation for any reason, they
shall be canceled and exchanged as
provided in this Article I.
(i) Dissenting Shares, if any, after payments
of fair value in respect thereto have been
made to dissenting Stockholders of the
Company pursuant to the DGCL and this
Article I, shall be canceled.
1.8.8. TAX CONSEQUENCES. It is intended by the parties
hereto that the Merger shall constitute a
reorganization within the meaning of Section 368 of
the Code. Each party has consulted with its own
tax advisors with respect to the tax consequences
of the Merger.
1.8.9. FURTHER ASSURANCES. If, at any time after the
Effective Time, any further action is necessary or
desirable to consummate the Merger, to carry out
the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and
possession to all assets, property, rights,
privileges, powers and franchises of the Company
and Merger Sub, the officers and directors of the
Company and Buyer are fully authorized in the name
of their respective corporations or otherwise to
take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Buyer, subject to such
exceptions as are specifically disclosed in the disclosure schedule referencing
the appropriate section and paragraph numbers (provided that the failure to
refer to a particular section or paragraph will not
-11-
<PAGE>
affect the applicability of a disclosure to such section or paragraph if the
nature of such disclosure makes reasonably clear the applicability thereof to
the subject matter of such section or paragraph) supplied by the Company to
Buyer (the "Disclosure Schedule") and dated as of the date hereof, that on
the date hereof and as of the Effective Time as though made at the Effective
Time as follows:
2.1. ORGANIZATION OF THE COMPANY. The Company is a corporation
duly organized, validly existing and in good standing under
the laws of the State of Delaware. The Company has the
corporate power to own its properties and to carry on its
business as now being conducted. The Company is duly
qualified to do business and in good standing as a foreign
corporation in each jurisdiction in which the failure to be
so qualified would be reasonably likely to have a Material
Adverse Effect. The Company has delivered a true and correct
copy of its Certificate of Incorporation and Bylaws, each as
amended to date, to Buyer. Section 2.1 of the Disclosure
Schedule lists the directors and officers of the Company.
The operations now being conducted by the Company have not
been conducted under any other name.
2.2. SUBSIDIARIES. The Company does not have, and has never
had, any subsidiaries or affiliated companies and does not
otherwise own, and has not otherwise owned, any shares in
the capital of or any interest in, or control, directly or
indirectly, any corporation, partnership, association, joint
venture or other business entity.
2.3. COMPANY CAPITAL STRUCTURE.
2.3.1. The authorized capital stock of the Company
consists of (i) 11,000,000 shares of Company Common
Stock, of which 2,297,096 shares were outstanding
as of March 31, 1999; (ii) 1,307,693 shares of
Series A Preferred Stock, of which 1,202,046 shares
are outstanding; (iii) 1,860,672 shares of Series B
Preferred Stock, of which 1,693,884 shares are
outstanding; and (iv) 2,500,000 shares of Series C
Preferred Stock, of which 2,000,000 shares are
outstanding. In addition, there are outstanding
warrants exercisable for 120,000 shares of Common
Stock and 22,000 shares of Series C Preferred
Stock. The Company Capital Stock is held by the
persons, with the domicile addresses and in the
amounts set forth in Section 2.3.1 of the
Disclosure Schedule. All outstanding shares of
Company Capital Stock are duly authorized, validly
issued, fully paid and nonassessable and not
subject to preemptive rights created by statute,
the Certificate of Incorporation or Bylaws of the
Company or any agreement to which the Company is a
party or by which it is bound and have been issued
in compliance with federal and state securities
laws. There are no declared or accrued unpaid
dividends with respect to any shares of the Company
Capital Stock. The Company has no other capital
stock authorized, issued or outstanding.
2.3.2. Except for the Company Option Plan, the Company has
never adopted or maintained any stock option plan
or other plan providing for equity
-12-
<PAGE>
compensation of any person. The Company has
reserved 2,261,500 shares of Company Capital Stock
for issuance to employees and consultants pursuant
to the Company Option Plan. Of such shares, as of
March 31, 1999, 537,958 have been issued upon
exercise of Company Options and 893,608 shares are
subject to outstanding unexercised options. Section
2.3.2.1 of the Disclosure Schedule sets forth for
each outstanding Company Option, the name of the
holder of such option, the domicile address of such
holder, the number and class or series of shares of
Company Capital Stock subject to such option, the
exercise price of such option, the vesting schedule
for such option, including the extent vested to
date and whether the exercisability of such option
will be accelerated by the transactions
contemplated by this Agreement, and whether such
option is intended to qualify as an incentive stock
option as defined in Section 422 of the Code.
Except for the Company Options as set forth in
Section 2.3.2.2 of the Disclosure Schedule, there
are no options, warrants, calls, convertible
securities (other than the Company Preferred
Stock), exchangeable securities, rights,
commitments or agreements of any character, written
or oral, to which the Company is a party or by
which it is bound obligating the Company to issue,
deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed,
any shares of Company Capital Stock or obligating
the Company to grant, extend, accelerate the
vesting of, change the price of, otherwise amend or
enter into any such option, warrant, call,
convertible security, exchangeable security, right,
commitment or agreement. Except as set forth on
Section 2.3.2.3 of the Disclosure Schedule, there
is no outstanding Company Capital Stock which is
subject to vesting. Section 2.3.2.3 of the
Disclosure Schedule sets forth the name of the
holder of any Company Capital Stock subject to
vesting, the number of shares of Company Capital
Stock subject to vesting and the vesting schedule
for such Company Capital Stock, including the
extent vested to date and whether the vesting of
such shares of Company Capital Stock will be
accelerated by the transactions contemplated by
this Agreement.
2.3.3. There are no outstanding or authorized stock
appreciation, phantom stock, profit participation,
or other similar rights with respect to the
Company. The Company is not a party to and, to the
Company's knowledge, there are no voting trusts,
proxies, or other agreements or understandings with
respect to the voting stock of the Company.
2.3.4. As a result of the Merger, Buyer will be the record
and sole beneficial owner of all outstanding
Company Capital Stock and all rights to acquire or
receive any Company Capital Stock, whether or not
such Company Capital Stock is outstanding.
2.4. AUTHORITY. The Company has all requisite power and
authority to enter into this Agreement and the Related
Agreements to which it is a party and to consummate the
transactions contemplated hereby and thereby. The execution
and delivery of
-13-
<PAGE>
this Agreement and any Related Agreements to which it is a
party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all
necessary corporate action on the part of the Company, and
no further action is required on the part of the Company to
authorize this Agreement, any Related Agreements to which
it is a party and the transactions contemplated hereby and
thereby, subject only to the approval of this Agreement by
the Stockholders and the receipt of required third party
consents (which material third party consents are identified
in Section 2.6 of the Disclosure Schedule). This Agreement,
the Merger and any Related Agreements to which the Company
is a party have been unanimously approved by the Board of
Directors of the Company. This Agreement has been, and any
Related Agreements to which the Company is a party have been
or will have been prior to the Effective Time, duly executed
and delivered by the Company and, assuming the due
authorization, execution and delivery by the other parties
hereto and thereto, constitute the valid and binding
obligation of the Company, enforceable in accordance with
their respective terms, except as such enforceability may be
limited by principles of public policy and subject to the
laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law
governing specific performance, injunctive relief or other
equitable remedies.
2.5. NO CONFLICT. Except as set forth in Section 2.5 of the
Disclosure Schedule, the execution and delivery of this
Agreement and any Related Agreements to which it is party by
the Company do not, and, the consummation of the
transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or
give rise to a right of termination, cancellation,
modification or acceleration of any obligation or loss of
any benefit (any such event, a "Conflict") under (i) any
provision of the Certificate of Incorporation and Bylaws of
the Company, (ii) any mortgage, indenture, lease, contract
or other agreement or instrument, permit, concession,
franchise or license to which the Company or any of its
properties or assets are subject, or (iii) any judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or its properties or assets;
except for a Conflict under subsection (ii) or (iii) above
that would not have a Material Adverse Effect on the Company
or on the ability of the parties to consummate the Merger or
the other transactions contemplated by this Agreement and
the Related Agreements.
2.6. CONSENTS. Except as set forth in Section 2.6 of the
Disclosure Schedule, no consent, waiver, approval, order or
authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or
other federal, state, county, local or other foreign
governmental authority, instrumentality, agency or
commission ("Governmental Entity") or any third party,
including a party to any agreement with the Company (so as
not to trigger any Conflict), is required by or with respect
to the Company in connection with the execution and delivery
of this Agreement and any Related Agreements to which the
Company is a party or the consummation of the transactions
contemplated hereby and thereby, except for (i)
-14-
<PAGE>
such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required
under applicable securities laws, (ii) any applicable
filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (iii)
the filing of the Merger Agreement with the Secretary of
State of the State of Delaware, (iv) the approval of the
Merger by the Company's Stockholders, (v) any other filings
or approvals as may be required under Delaware state law,
and (vi) consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings
which, if not obtained or made, would not have a Material
Adverse Effect on the Company or on the ability of the
parties to consummate the Merger or the other transactions
contemplated by this Agreement.
2.7. COMPANY FINANCIAL STATEMENTS. Section 2.7 of the
Disclosure Schedule sets forth the Company's unaudited
balance sheets as of January 31, 1999, December 31, 1998 and
September 30, 1998 and the Company's unaudited statements of
income and cash flow for the one-month period ended
January 31, 1999, three-month period ended December 31, 1998
and the year ended September 30, 1998 (collectively, the
"Financials"). The Financials are correct in all material
respects and have been prepared in accordance with GAAP,
applied on a basis consistent throughout the periods
indicated and consistent with each other (except that the
interim period Financials may not contain all the notes that
may be required by GAAP). The Financials present fairly the
financial condition and operating results of the Company as
of the dates and during the periods indicated therein,
subject to normal year-end adjustments, which will not be
material in amount or significance. The Company's Balance
Sheet as of January 31, 1999 shall be hereinafter referred
to as the "Current Balance Sheet."
2.8. NO UNDISCLOSED LIABILITIES. Except as set forth in
Section 2.8 of the Disclosure Schedule, the Company has no
liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether
accrued, absolute, contingent, matured, unmatured or
otherwise (collectively, "Contingent Liabilities") (whether
or not required to be reflected in financial statements in
accordance with GAAP), other than (i) Contingent Liabilities
that are reserved or otherwise reflected expressly in the
Current Balance Sheet and (ii) Contingent Liabilities that
have arisen in the ordinary course of business consistent
with past practices since January 31, 1999 (which, in the
aggregate, are not material in amount or significance).
2.9. NO CHANGES. Except as set forth in Section 2.9 of the
Disclosure Schedule or as contemplated by this Agreement or
the Related Agreements, from January 31, 1999 through the
date of this Agreement, there has not been, occurred or
arisen any:
(a) amendments or changes to the Certificate
of Incorporation or Bylaws of the Company;
-15-
<PAGE>
(b) capital expenditure or commitment by the
Company, either individually exceeding
$50,000 or in the aggregate exceeding
$100,000;
(c) destruction of, damage to or loss of any
material assets, business or customer of
the Company (whether or not covered by
insurance);
(d) labor trouble or claim of wrongful
discharge or other unlawful labor practice
or action;
(e) change in accounting methods or practices
(including any change in depreciation,
revenue recognition or amortization
policies or rates) by the Company;
(f) revaluation by the Company of any of its
assets;
(g) declaration, setting aside or payment of a
dividend or other distribution with
respect to the Company Capital Stock or
any direct or indirect redemption,
purchase or other acquisition by the
Company of Company Capital Stock;
(h) increase in the salary or other
compensation payable or to become payable
by the Company to any of its officers,
directors, employees or advisors, or the
declaration, payment or commitment or
obligation of any kind for the payment, by
the Company, of a bonus or other
additional salary or compensation to any
such person;
(i) any agreement, contract, covenant,
instrument, lease, license or commitment
to which the Company is a party or by
which it or any of its assets are bound or
any termination, extension, amendment or
modification of the terms of any
agreement, contract, covenant, instrument,
lease, license or commitment to which the
Company is a party or by which it or any
of its assets are bound other than in the
ordinary course of the Company's business,
consistent with past practice;
(j) sale, lease, license or other disposition
of any of the assets or properties of the
Company or any creation of any security
interest in such assets or properties
other than in the ordinary course of the
Company's business, consistent with past
practice;
(k) loan by the Company to any person or
entity, incurring by the Company of any
indebtedness, guaranteeing by the Company
of any indebtedness, issuance or sale of
any debt securities of the Company or
guaranteeing of any debt securities of
others, except for advances to employees
for travel and business expenses in the
ordinary course of business, consistent
with past practice;
-16-
<PAGE>
(l) incurrence by the Company of any liability
in excess of $50,000 individually or
$100,000 in the aggregate;
(m) waiver or release of any right or claim of
the Company including any write-off or
other compromise of any account receivable
of the Company (other than compromises of
invoices with customers in the ordinary
course of business consistent with past
practice, which compromises are not in the
aggregate material in amount or
significance);
(n) the commencement or notice or threat of
any lawsuit or proceeding or investigation
against the Company or its affairs;
(o) notice of any claim or potential claim of
ownership by any person other than the
Company of the Company Intellectual
Property (as defined in Section 2.13) or
of infringement by the Company of any
other person's Intellectual Property (as
defined in Section 2.13);
(p) issuance or sale, or contract to issue or
sell, by the Company of any shares of
Company Capital Stock or securities
exchangeable, convertible or exercisable
therefor, or any securities, warrants,
options or rights to purchase any of the
foregoing, except for options to purchase
capital stock of the Company granted to
employees of and consultants to the
Company in the ordinary course of business
consistent with past practice;
(q) (i) selling or entering into any material
license agreement with respect to the
Company Intellectual Property with any
third party or (ii) buying or entering
into any material license agreement with
respect to the Intellectual Property of
any third party;
(r) any event or condition of any character
that has had a Material Adverse Effect on
the Company;
(s) any transaction by the Company except in
the ordinary course of business as
conducted on that date and consistent with
past practices; or
(t) negotiation or agreement by the Company or
any officer thereof to do any of the
things described in the preceding clauses
(a) through (s) (other than negotiations
with Buyer and its representatives
regarding the transactions contemplated by
this Agreement).
2.10. TAX MATTERS.
2.10.1. DEFINITION OF TAXES. For the purposes of this
Agreement, "Tax" or, collectively, "Taxes", means
(i) any and all federal, state, local and foreign
taxes, assessments and other governmental charges,
duties, impositions
-17-
<PAGE>
and liabilities, including taxes based upon or
measured by gross receipts, income, profits, sales,
use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll,
recapture, employment, excise and property taxes,
together with all interest, penalties and additions
imposed with respect to such amounts; (ii) any
liability for the payment of any amounts of the type
described in clause (i) as a result of being a
member of an affiliated, consolidated, combined or
unitary group for any period; and (iii) any
liability for the payment of any amounts of the
type described in clause (i) or (ii) as a result of
any express or implied obligation to indemnify any
other person or as a result of any obligations
under any agreements or arrangements with any other
person with respect to such amounts and including
any liability for taxes of a predecessor entity.
2.10.2. TAX RETURNS AND AUDITS.
(a) As of the Effective Time, the Company will
have prepared and timely filed all
required federal, state, local and foreign
returns, estimates, information statements
and reports ("Returns") relating to any
and all Taxes concerning or attributable
to the Company or its operations and such
Returns are true and correct and have been
completed in accordance with applicable
law (other than Taxes not yet due for
which adequate reserves may have been
established on the Current Balance Sheet).
(b) As of the Effective Time, the Company (A)
will have paid all Taxes it is required to
pay and will have withheld with respect to
its employees all federal and state income
taxes, Federal Insurance Contribution Act
("FICA"), Federal Unemployment Tax Act
("FUTA") and other Taxes required to be
withheld, (other than Taxes not yet due
for which adequate reserves may have been
established on the Current Balance Sheet)
and (B) will have accrued on the Current
Balance Sheet all unpaid Taxes (whether or
not due) attributable to all periods
through the date of the Current Balance
Sheet and will not have incurred any
liability for Taxes for the period from
the date of the Current Balance Sheet to
the Effective Time other than in the
ordinary course of business, consistent
with past practice.
(c) The Company has not been delinquent in the
payment of any Tax (other than items for
which adequate reserves may have been
established on the Current Balance Sheet)
nor is there any Tax deficiency
outstanding, assessed or proposed against
the Company, nor has the Company executed
any waiver of any statute of limitations
on or extending the period for the
assessment or collection of any Tax.
-18-
<PAGE>
(d) No audit or other examination of any
Return of the Company is presently in
progress, nor has the Company been
notified of any request for such an audit
or other examination.
(e) No adjustment relating to any Returns
filed by the Company has been proposed
formally or informally by any Tax
authority to the Company or any
representative thereof.
(f) The Company has no liabilities for unpaid
federal, state, local and foreign Taxes
which have not been accrued or reserved
against in accordance with GAAP on the
Current Balance Sheet, whether asserted or
unasserted, contingent or otherwise, and
the Company has not incurred any liability
for Taxes since the date of the Current
Balance Sheet other than in the ordinary
course of business, consistent with past
practice.
(g) The Company has made available to Buyer or
its legal counsel, copies of all foreign,
federal and state income and all state
sales and use Returns for the Company
filed for all periods since its inception.
(h) There are (and immediately following the
Effective Time there will be) no liens,
pledges, charges, claims, restrictions on
transfer, mortgages, security interests or
other encumbrances of any sort
(collectively, "Liens") on the assets of
the Company relating to or attributable to
Taxes other than Liens for Taxes not yet
due and payable.
(i) None of the Company's assets are treated
as "tax-exempt use property," within the
meaning of Section 168(h) of the Code.
(j) The Company is not subject to any
contract, agreement, plan or arrangement,
including but not limited to the
provisions of this Agreement, covering any
employee or former employee of the
Company that, individually or
collectively, could give rise to the
payment of any amount that would not be
deductible by the Company as an expense
under applicable law (including, without
limitation, Sections 280G, 404 and 162(m)
of the Code).
(k) The Company has not filed any consent
agreement under Section 341(f) of the Code
or agreed to have Section 341(f)(4) of the
Code apply to any disposition of a
subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by
the Company.
(l) The Company is not a party to any tax
sharing, indemnification or allocation
agreement nor does the Company owe any
amount under any such agreement.
-19-
<PAGE>
(m) The Company is not, and has not been at
any time, a "United States Real Property
Holding Corporation" within the meaning of
Section 897(c)(2) of the Code.
2.11. RESTRICTIONS ON BUSINESS ACTIVITIES. Except as set forth on
Section 2.11 of the Disclosure Schedule, to the Company's
Knowledge, there is no agreement (noncompete or otherwise),
commitment, judgment, injunction, order or decree to which
the Company is a party or otherwise binding upon the Company
which has or may have the effect of prohibiting or impairing
any business practice of the Company, any acquisition of
property (tangible or intangible) by the Company or the
conduct of business as currently run by the Company. Without
limiting the foregoing, the Company has not entered into any
agreement under which the Company is restricted from
selling, licensing or otherwise distributing any of its
technology or products to or providing services to,
customers or potential customers or any class of customers,
in any geographic area, during any period of time or in any
segment of the market.
2.12. TITLE OF PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES;
CONDITION OF EQUIPMENT.
2.12.1. The Company does not own any real property, and has
never owned any real property. Section 2.12.1 of
the Disclosure Schedule sets forth a list of all
real property currently leased by the Company, the
name of the lessor and the date of the lease and
each amendment thereto. All such current leases are
in full force and effect, are valid and effective
in accordance with their respective terms, and
there is not, under any of such leases, any
existing default or event of default (or event
which with notice or lapse of time, or both, would
constitute a default).
2.12.2. The Company has good and valid title to, or, in the
case of leased properties and assets, valid
leasehold interests in, all of its tangible
properties and assets, real, personal and mixed,
used or held for use in its business, free and
clear of any Liens, except as reflected in the
Current Balance Sheet and except for Liens for
Taxes not yet due and payable and such
imperfections of title and encumbrances, if any,
which are not material in character, amount or
extent, and which do not detract from the value, or
interfere with the present use, of the property
subject thereto or affected thereby.
2.12.3. All material items of equipment (the "Equipment")
owned or leased by the Company are (i) adequate for
the conduct of the business of the Company as
currently conducted and (ii) in acceptable
operating condition, regularly and properly
maintained, subject to normal wear and tear.
2.12.4. The Company has not transferred rights to customer
or end-user files or other customer or end-user
information it compiles relating to customers or
end-users of the Company's current and former
customers or end-users
-20-
<PAGE>
(the "Customer Information"). To the Company's
Knowledge, no person other than the Company
possesses any claims or rights with respect to use
of the Customer Information.
2.13. INTELLECTUAL PROPERTY.
2.13.1. For the purposes of this Agreement, the following
terms have the following definitions:
(a) "Intellectual Property" shall mean any or
all of the following and all rights in,
arising out of, or associated therewith:
(i) all United States and foreign patents
and applications therefor and all
reissues, divisions, renewals, extensions,
provisionals, continuations and
continuations-in-part thereof; (ii) all
inventions (whether patentable or not),
invention disclosures, improvements, trade
secrets, proprietary information, know
how, technology, technical data and
customer lists, and all documentation
relating to any of the foregoing; (iii)
all copyrights, copyrights registrations
and applications therefor and all other
rights corresponding thereto throughout
the world; (iv) all mask works, mask work
registrations and applications therefor;
(v) all industrial designs and any
registrations and applications therefor
throughout the world; (vi) all trade
names, logos, common law trademarks and
service marks; trademark and service mark
registrations and applications therefor
and all goodwill associated therewith
throughout the world; (vii) all databases
and data collections and all rights
therein throughout the world; (viii) all
computer software including all source
code, object code, firmware, development
tools, files, records and data, all media
on which any of the foregoing is recorded,
all Internet and Worldwide Web addresses,
URLs, sites and domain names; (ix) any
similar, corresponding or equivalent
rights to any of the foregoing; and (x)
all documentation related to any of the
foregoing.
(b) "Company Intellectual Property" shall mean
any Intellectual Property that is owned by
or exclusively licensed to the Company.
(c) "Registered Intellectual Property" shall
mean all United States, international and
foreign: (i) patents, patent applications
(including provisional applications); (ii)
registered trademarks, applications to
register trademarks, intent-to-use
applications, or other registrations or
applications related to trademarks; (iii)
registered copyrights and applications for
copyright registration; (iv) any mask work
registrations and applications to register
mask works; and (v) any other Company
Intellectual Property that is the subject
of an application, certificate, filing,
registration or other document
-21-
<PAGE>
issued by, filed with, or recorded by, any
state, government or other public legal
authority.
2.13.2. Section 2.13.2 of the Disclosure Schedule lists all
Registered Intellectual Property owned by, or filed
in the name of, the Company (the "Company
Registered Intellectual Property") and lists any
proceedings or actions before any court, tribunal
(including the United States Patent and Trademark
Office (the "PTO") or equivalent authority anywhere
in the world) related to any of the Company
Registered Intellectual Property Rights.
2.13.3. Except as set forth in Section 2.13.3 of the
Disclosure Schedule, each item of Company
Intellectual Property, including all Company
Registered Intellectual Property listed in Section
2.13.3 of the Disclosure Schedule and all
Intellectual Property licensed to the Company, is
free and clear of any Liens other than subject to
existing UCC's, which UCC's are listed on Section
2.13.3 of the Disclosure Schedule. The Company has
rights to the trademarks, trade names and
copyrights used in connection with the operation or
conduct of the business of the Company that are
sufficient to enable the Company to conduct its
business as the business is currently conducted,
including the sale of any products or technology or
the provision of any services by the Company (other
than with respect to products acquired from third
parties). The Company, to its knowledge, owns
exclusively, and has good title to, all copyrighted
works that are Company products or other works of
authorship that the Company otherwise purports to
own.
2.13.4. To the extent that any Intellectual Property has
been developed or created by any person other than
the Company for which the Company has, directly or
indirectly, paid, the Company has a written
agreement with such person with respect thereto and
the Company thereby has obtained ownership of, and
is the exclusive owner of, by operation of law or
by valid assignment, all such Intellectual
Property.
2.13.5. Except as set forth in Section 2.13.5 of the
Disclosure Schedule, the Company has not
transferred ownership of or granted any license of
or right to use or authorized the retention of any
rights to use any Intellectual Property that is or
was Company Intellectual Property, to any other
person.
2.13.6. The Company Intellectual Property constitutes all
the Intellectual Property used in and/or necessary
to the conduct of its business as it currently is
conducted, including, without limitation, the
design, development, manufacture, use, import and
sale of the products, technology and services of
the Company (including products, technology or
services currently under development).
-22-
<PAGE>
2.13.7. Except as listed in Section 2.13.7 of the
Disclosure Schedule, to the Company's Knowledge, no
person who has licensed Intellectual Property from
the Company has ownership in such Intellectual
Property.
2.13.8. To the Company's Knowledge, Section 2.13.8 of the
Disclosure Schedule lists all contracts, licenses
and agreements between the Company and any other
person wherein or whereby the Company has agreed
to, or assumed, any obligation or duty to assume or
incur any obligation or liability or provide a
right of rescission with respect to the
infringement or misappropriation by the Company or
such other person of the Intellectual Property of
any person other than the Company.
2.13.9. To the Company's Knowledge, the operation of the
business of the Company as it currently is
conducted, including but not limited to the
Company's design, development, use, import,
manufacture and sale of the Company's website and
the Company's products, technology or services
(including portions of the Company's website or the
Company's products, technology or services
currently under development) does not infringe or
misappropriate any Intellectual Property of any
person, violate the rights of any person (including
rights to privacy or publicity), or constitute
unfair competition or trade practices under the
laws of any jurisdiction. The Company has not
received any notice from any person that the
operation of the business of the Company as it
currently is conducted, including but not limited
to the Company's design, development, use, import,
manufacture and sale of the products, technology or
services (including products, technology or
services currently under development) of the
Company infringes or misappropriates the
Intellectual Property (other than trademarks, trade
names and service marks) of any person or
constitutes unfair competition or trade practices
under the laws of any jurisdiction.
2.13.10. All necessary registration, maintenance
and renewal fees in connection with such Registered
Intellectual Property have been paid and all
necessary documents and certificates in connection
with such Company Registered Intellectual Property
have been filed with the relevant patent,
copyright, trademark or other authorities in the
United States or foreign jurisdictions, as the case
may be, for the purposes of maintaining such
Registered Intellectual Property.
2.13.11. To the Company's knowledge, there are no
contracts, licenses or agreements between the
Company and any other person with respect to
Company Intellectual Property under which there is
any dispute known to the Company regarding the
scope of such agreement, or performance under such
agreement including with respect to any payments to
be made or received by the Company thereunder.
-23-
<PAGE>
2.13.12. To the Company's Knowledge, as of the date
of this Agreement, no person is infringing or
misappropriating any Company Intellectual Property.
2.13.13. The Company has, and enforces, a policy
requiring each employee, consultant and contractor
to execute proprietary information, confidentiality
and assignment agreements substantially in the
Company's standard forms, and all current
employees, consultants and contractors of the
Company have executed such an agreement.
2.13.14. To the Company's Knowledge, as of the date
of this Agreement, no Company Intellectual Property
or product, technology or service of the Company,
including its website, is subject, or may
reasonably be expected to become subject to, any
proceeding or outstanding decree, order, judgment,
agreement or stipulation that restricts in any
manner the use, transfer or licensing thereof by
the Company or may affect the validity, use or
enforceability of such Company Intellectual
Property.
2.13.15. To the Company's Knowledge, no: (i)
product, technology, service or publication of the
Company, including its website, (ii) material
published or distributed by the Company, including
its website, or (iii) conduct or statement of
Company constitutes obscene material, a defamatory
statement or material false advertising.
2.13.16. Except as set forth in Section 2.13.16 of
the Disclosure Schedule, all of the Company's
products (including its website and products
currently under development) will record, store,
process, calculate and present calendar dates
falling on and after (and if applicable, spans of
time including) January 1, 2000, and will calculate
any information dependent on or relating to such
dates in the same manner, and with the same
functionality, data integrity and performance, as
the products record, store, process, calculate and
present calendar dates on or before December 31,
1999, or calculate any information dependent on or
relating to such dates.
2.14. AGREEMENTS, CONTRACTS AND COMMITMENTS.
2.14.1. Except as set forth in Section 2.14.1 of the
Disclosure Schedule, as of the date of this
Agreement, the Company is not a party to nor is it
bound by:
(a) any employment or consulting agreements,
contracts or commitments with employees or
individual consultants or salespersons or
consulting or sales agreements, contracts
or commitments with a firm or other
organization, which agreements, contracts
or commitments are not terminable by the
Company without further liability upon
payment in the aggregate of more than
$50,000 with respect to all such
agreements, contracts and
-24-
<PAGE>
commitments; and the Company has no
employment agreements providing for
employment other than on an at-will basis;
(b) any agreement or plan, including, without
limitation, any stock option plan, stock
appreciation rights plan or stock purchase
plan, any of the benefits of which will be
increased, or the vesting of benefits of
which will be accelerated, by the
occurrence of any of the transactions
contemplated by this Agreement or the
value of any of the benefits of which will
be calculated on the basis of any of the
transactions contemplated by this
Agreement;
(c) any fidelity or surety bond or completion
bond;
(d) any lease of personal property with fixed
annual rental payments in excess of
$100,000;
(e) any agreement, contract or commitment
containing any covenant limiting the
freedom of the Company to engage in any
line of business or to compete with any
person;
(f) any agreement, contract or commitment
relating to capital expenditures and
involving future payments in excess of
$50,000 either individually or $100,000 in
the aggregate;
(g) any agreement, contract or commitment
relating to the disposition or acquisition
of assets or any interest in any business
enterprise outside the ordinary course of
the Company's business;
(h) any mortgages, indentures, loans or credit
agreements, security agreements or other
agreements or instruments relating to the
borrowing of money or extension of credit;
(i) any purchase order or contract for the
purchase of materials involving in excess
of $50,000 individually or $100,000 in the
aggregate;
(j) any construction contracts;
(k) any agreement for the provision of
advertising content or space or for the
licensing of content from third parties
for inclusion in the Company's website, or
any other dealer, distribution, joint
marketing or development agreement;
(l) any sales representative, original
equipment manufacturer, value added
reseller, remarketer or other agreement
for distribution of the Company's products
or services; or
-25-
<PAGE>
(m) any other agreement, contract or
commitment that involves $100,000 or more
or is not cancelable without penalty
within forty-five (45) days.
2.14.2. To its knowledge, the Company is in compliance with
and has not breached, violated or defaulted under,
or received notice that it has breached, violated
or defaulted under, any of the terms or conditions
of any agreement, contract, covenant, instrument,
lease, license or commitment to which the Company
is a party or by which it is bound (collectively a
"Contract"), nor is the Company aware of any event
that would constitute such a breach, violation or
default with the lapse of time, giving of notice or
both. Each Contract is in full force and effect and
is not subject to any default thereunder by any
party obligated to the Company pursuant thereto.
2.15. INTERESTED PARTY TRANSACTIONS. No officer, director or
Stockholder of the Company (nor any ancestor, sibling,
descendant or spouse of any of such persons, or any trust,
partnership or corporation in which any of such persons has
or has had an interest), has or has had, directly or
indirectly, (i) an interest in any entity which furnished or
sold, or furnishes or sells, services, products or
technology that the Company furnishes or sells, or proposes
to furnish or sell, or (ii) any interest in any entity that
purchases from or sells or furnishes to the Company any
goods or services, or (iii) a beneficial interest in any
Contract; provided, that ownership of no more than one
percent (1%) of the outstanding voting stock of a publicly
traded corporation shall not be deemed an "interest in any
entity" for purposes of this Section 2.15.
2.16. GOVERNMENTAL AUTHORIZATION. The Company has obtained all
necessary consents, licenses, permits, grants or other
authorizations necessary to operate or conduct its business
as currently conducted or hold any interest in its
properties or assets (collectively "Company
Authorizations").
2.17. LITIGATION. There is no action, suit or proceeding of any
nature pending nor has the Company received notice (oral or
written) of any actions, suits or proceedings threatened
against the Company, its properties or any of its officers
or directors, nor to the Company's Knowledge as of the date
of this Agreement is there any reasonable basis therefor. To
the Company's Knowledge, there is no investigation pending
or threatened against the Company, its properties or any of
its officers or directors by or before any Governmental
Entity, nor to the Company's Knowledge as of the date of
this Agreement is there any reasonable basis therefor. No
Governmental Entity has at any time challenged or questioned
the legal right of the Company to conduct its operations as
presently or previously conducted.
2.18. ACCOUNTS RECEIVABLE. All accounts receivable, including,
without limitation, all accounts receivable derived from
advertising, charter sponsorships and merchandise sales of
the Company arose in the ordinary course of business, are
carried at values determined in accordance with GAAP
consistently applied and
-26-
<PAGE>
are collectible except to the extent of reserves therefor
set forth in the Current Balance Sheet. No person has any
lien, encumbrance or other similar right with respect to any
of such accounts receivable and no request or agreement for
deduction or discount has been made with respect to any of
such Accounts Receivable.
2.19. MINUTE BOOKS. The minutes of the Company made available to
counsel for Buyer are the only minutes of the Company and
contain a reasonably accurate summary of all meetings of the
Board of Directors (or committees thereof) of the Company
and its Stockholders or actions by written consent since the
incorporation of the Company.
2.20. ENVIRONMENTAL MATTERS.
2.20.1. To the Company's knowledge, the Company has not
transported, stored, used, manufactured, disposed
of, released or exposed its employees or others to
Hazardous Materials in violation of any law in
effect on or before the Effective Time, nor has the
Company disposed of, transported, sold, or
manufactured any product containing a Hazardous
Material (any or all of the foregoing being
collectively referred to as "Hazardous Materials
Activities") in violation of any rule, regulation,
treaty or statute promulgated by any Governmental
Entity in effect prior to or as of the date hereof
to prohibit, regulate or control Hazardous
Materials or any Hazardous Material Activity.
2.20.2. To the Company's knowledge, the Company currently
holds all environmental approvals, permits,
licenses, clearances and consents (the
"Environmental Permits") necessary for the conduct
of the Company's Hazardous Material Activities,
respectively, and other businesses of the Company
as such activities and businesses are currently
being conducted.
2.20.3. No action, proceeding, revocation proceeding,
amendment procedure, writ, injunction or claim is
pending nor has the Company received notice (oral
or written) of any action, proceeding, revocation
proceeding, amendment procedure, writ, injunction
or claim threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous
Materials Activity of the Company.
2.21. BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES. Except as
set forth in Section 2.21 of the Disclosure Schedule, the
Company has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
Section 2.21 of the Disclosure Schedule sets forth the
principal terms and conditions of any agreement, written or
oral, with respect to such fees. Section 2.21 of the
Disclosure Schedule also sets forth the Company's current
estimate of Third Party Expenses (as defined in Section
5.4.1) expected to be incurred by the Company in connection
with the negotiation and
-27-
<PAGE>
effectuation of the terms and conditions of this Agreement
and the transactions contemplated hereby.
2.22. EMPLOYEE MATTERS AND BENEFIT PLANS.
2.22.1. DEFINITIONS. With the exception of the definition
of "Affiliate" set forth in Section 2.22.1(a) below
(which definition shall apply only to this Section
2.22), for purposes of this Agreement, the
following terms shall have the meanings set forth
below:
(a) "Affiliate" shall mean any other person or
entity under common control with the
Company within the meaning of Section
414(b), (c), (m) or (o) of the Code and
the regulations issued thereunder;
(b) "Company Employee Plan" shall mean any
plan, program, policy, practice, contract,
agreement or other arrangement providing
for compensation, severance, termination
pay, deferred compensation, performance
awards, stock or stock-related awards,
fringe benefits or other employee benefits
or remuneration of any kind, whether
written or unwritten or otherwise, funded
or unfunded, including without
limitation, each "employee benefit plan,"
within the meaning of Section 3(3) of
ERISA which is or has been maintained,
contributed to, or required to be
contributed to, by the Company or any
Affiliate for the benefit of any Employee,
or with respect to which the Company or
any Affiliate has or may have any
liability or obligation;
(c) "COBRA" shall mean the Consolidated
Omnibus Budget Reconciliation Act of 1985,
as amended;
(d) "DOL" shall mean the Department of Labor;
(e) "Employee" shall mean any current or
former employee, consultant or director of
the Company or any Affiliate;
(f) "Employee Agreement" shall mean each
management, employment, severance,
consulting, relocation, repatriation,
expatriation, visas, work permit or other
agreement, contract or understanding
between the Company or any Affiliate and
any Employee;
(g) "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended;
(h) "FMLA" shall mean the Family Medical Leave
Act of 1993, as amended;
-28-
<PAGE>
(i) "International Employee Plan" shall mean
each Company Employee Plan that has been
adopted or maintained by the Company or
any Affiliate, whether informally or
formally, or with respect to which the
Company or any Affiliate will or may have
any liability, for the benefit of
Employees who perform services outside the
United States;
(j) "IRS" shall mean the Internal Revenue
Service;
(k) "Multiemployer Plan" shall mean any
"Pension Plan" (as defined below) which is
a "multiemployer plan," as defined in
Section 3(37) of ERISA;
(l) "PBGC" shall mean the Pension Benefit
Guaranty Corporation; and
(m) "Pension Plan" shall mean each Company
Employee Plan which is an "employee
pension benefit plan," within the meaning
of Section 3(2) of ERISA.
2.22.2. SCHEDULE. Schedule 2.22.2 contains an accurate and
complete list of each Company Employee Plan. The
Company has no agreements with employees other than
the offer letters substantially similar in form to
that previously provided to the Buyer. The Company
does not have any plan or commitment to establish
any new Company Employee Plan or Employee
Agreement, to modify any Company Employee Plan or
Employee Agreement (except to the extent required
by law or to conform any such Company Employee Plan
or Employee Agreement to the requirements of any
applicable law, in each case as previously
disclosed to Buyer in writing, or as required by
this Agreement), or to enter into any Company
Employee Plan or Employee Agreement.
2.22.3. DOCUMENTS. The Company has provided to Buyer: (i)
correct and complete copies of all documents
embodying each Company Employee Plan and each
Employee Agreement including (without limitation)
all amendments thereto and all related trust
documents; (ii) the most recent annual actuarial
valuations, if any, prepared for each Company
Employee Plan; (iii) the three (3) most recent
annual reports (Form Series 5500 and all schedules
and financial statements attached thereto), if any,
required under ERISA or the Code in connection with
each Company Employee Plan; (iv) if the Company
Employee Plan is funded, the most recent annual and
periodic accounting of Company Employee Plan
assets; (v) the most recent summary plan
description together with the summary(ies) of
material modifications thereto, if any, required
under ERISA with respect to each Company Employee
Plan; (vi) all IRS determination, opinion,
notification and advisory letters, and all
applications and correspondence to or from the IRS
or the DOL with respect to any such application or
-29-
<PAGE>
letter; (vii) all material written agreements and
contracts relating to each Company Employee Plan,
including, but not limited to, administrative
service agreements, group annuity contracts and
group insurance contracts; (viii) all
communications material to any Employee or
Employees relating to any Company Employee Plan and
any proposed Company Employee Plans, in each case,
relating to any amendments, terminations,
establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or
other events which would result in any liability to
the Company; (ix) all correspondence to or from any
governmental agency relating to any Company
Employee Plan; (x) all COBRA forms and related
notices; (xi) all policies pertaining to fiduciary
liability insurance covering the fiduciaries for
each Company Employee Plan; (xii) all
discrimination tests for each Company Employee Plan
for the most recent plan year, if required; and
(xiii) all registration statements, annual reports
Form 11-K and all attachments thereto) and
prospectuses prepared in connection with each
Company Employee Plan.
2.22.4. EMPLOYEE PLAN COMPLIANCE. (i) The Company has
performed all material obligations required to be
performed by it under, is not in default or
violation of, and has no knowledge of any material
default or violation by any other party to each
Company Employee Plan, and each Company Employee
Plan has been established and maintained in
accordance with its terms and in material
compliance with all applicable laws, statutes,
orders, rules and regulations, including but not
limited to ERISA or the Code; (ii) each Company
Employee Plan intended to qualify under Section
401(a) of the Code and each trust intended to
qualify under Section 501(a) of the Code has either
received a favorable determination, opinion,
notification or advisory letter from the IRS with
respect to each such Plan as to its qualified
status under the Code, including all amendments to
the Code effected by the Tax Reform Act of 1986 and
subsequent legislation, or has remaining a period
of time under applicable Treasury regulations or
IRS pronouncements in which to apply for such a
letter and make any amendments necessary to obtain
a favorable determination as to the qualified
status of each such Company Employee Plan; (iii) no
"prohibited transaction," within the meaning of
Section 4975 of the Code or Sections 406 and 407 of
ERISA, and not otherwise exempt under Section 408
of ERISA, has occurred with respect to any Company
Employee Plan; (iv) there are no actions, suits or
claims pending or threatened or reasonably
anticipated (other than routine claims for
benefits) against any Company Employee Plan or
against the assets of any Company Employee Plan;
(v) each Company Employee Plan can be amended,
terminated or otherwise discontinued after the
Effective Time in accordance with its terms,
without liability to Buyer, the Surviving
Corporation, the Company or any Affiliate (other
than ordinary administration expenses); (vi) there
are no audits, inquiries or proceedings pending or,
to the Knowledge of the Company or any Affiliates,
threatened by the IRS or DOL with respect to any
Company Employee Plan; and (vii) neither the
Company nor any
-30-
<PAGE>
Affiliate is subject to any penalty or tax with
respect to any Company Employee Plan under Section
502(i) of ERISA or Sections 4975 through 4980 of the
Code.
2.22.5. PENSION PLAN. Neither the Company nor any Affiliate
has ever maintained, established, sponsored,
participated in, or contributed to, any Pension
Plan which is subject to Title IV of ERISA or
Section 412 of the Code.
2.22.6. MULTIEMPLOYER PLANS. At no time has the Company or
any Affiliate contributed to or been required to
contribute to any Multiemployer Plan.
2.22.7. NO POST-EMPLOYMENT OBLIGATIONS. No Company Employee
Plan provides, or reflects or represents any
liability to provide, retiree life insurance,
retiree health or other retiree employee welfare
benefits to any person for any reason, except as
may be required by COBRA or other applicable
statute, and the Company has never represented,
promised or contracted (whether in oral or written
form) to any Employee (either individually or to
Employees as a group) or any other person that such
Employee(s) or other person would be provided with
retiree life insurance, retiree health or other
retiree employee welfare benefit, except to the
extent required by statute.
2.22.8. COBRA. Neither the Company nor any Affiliate has,
prior to the Effective Time, violated any of the
health care continuation requirements of COBRA, the
requirements of FMLA or any similar provisions of
state law applicable to its Employees where such
violation could result in material liability to the
Company.
2.22.9. EFFECT OF TRANSACTION. (i) The execution of this
Agreement and the consummation of the transactions
contemplated hereby will not constitute an event
under any Company Employee Plan, Employee
Agreement, trust or loan that will or may result in
any payment (whether of severance pay or
otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with
respect to any Employee (excluding from this
representation the effect of any termination of an
Existing Employee under Section 5.11.2 or 5.11.3 of
this Agreement). (ii) No payment or benefit which
will or may be made by the Company or its
Affiliates with respect to any Employee as a result
of the transactions contemplated by this Agreement
or otherwise will be characterized as a "parachute
payment," within the meaning of Section 280G(b)(2)
of the Code (but without regard to clause (ii)
thereof).
2.22.10. EMPLOYMENT MATTERS. The Company: (i) is in
material compliance in all respects with all
applicable foreign, federal, state and local laws,
rules and regulations respecting employment,
employment practices, terms and conditions of
employment and wages and hours, in
-31-
<PAGE>
each case, with respect to Employees; (ii) has
withheld and reported all amounts required by law or
by agreement to be withheld and reported with
respect to wages, salaries and other payments to
Employees; (iii) is not liable for any arrears of
wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not
liable for any payment to any trust or other fund
governed by or maintained by or on behalf of any
governmental authority, with respect to unemployment
compensation benefits, social security or other
benefits or obligations for Employees (other than
routine payments to be made in the normal course of
business and consistent with past practice). There
are no pending, or to the Knowledge of the Company,
threatened or reasonably anticipated claims or
actions against the Company under any worker's
compensation policy or long-term disability policy.
2.22.11. LABOR. No work stoppage or labor strike
against the Company is pending, threatened or
reasonably anticipated. The Company does not know
of any activities or proceedings of any labor union
to organize any Employees. There are no actions,
suits, claims, labor disputes or grievances pending
or threatened or reasonably anticipated against the
Company relating to any labor, safety or
discrimination matters involving any Employee,
including, without limitation, charges of unfair
labor practices or discrimination complaints,
which, if adversely determined, would, individually
or in the aggregate, result in any liability to
the Company, Buyer, the Surviving Corporation or
any Affiliate. Neither the Company nor any of its
subsidiaries has engaged in any unfair labor
practices within the meaning of the National Labor
Relations Act. The Company is not presently, nor
has it been in the past, a party to, or bound by,
any collective bargaining agreement or union
contract with respect to Employees and no
collective bargaining agreement is being negotiated
by the Company.
2.22.12. NO INTERFERENCE OR CONFLICT. To the
Company's knowledge, no officer, director,
consultant or employee of the Company is obligated
under any contract or agreement subject to any
judgement, decree or order of any court or
administrative agency that would interfere with
such person's efforts to promote the interests of
the Company or that would interfere with the
Company's business. Neither the execution nor
delivery of this Agreement, nor the carrying on of
the Company's business as presently conducted or
proposed to be conducted nor any activity of such
officers, directors, employees or consultants in
connection with the carrying on of the Company's
business as presently conducted or proposed to be
conducted, will conflict with or result in a breach
of the terms, conditions or provisions of, or
constitute a default under, any contract or
agreement under which any of such officers,
directors, employees or consultants is now bound.
-32-
<PAGE>
2.23. INSURANCE. Section 2.23 of the Disclosure Schedule lists
all insurance policies and fidelity bonds covering the
assets, business, equipment, properties, operations,
employees, officers and directors of the Company. There is
no claim pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by
the underwriters of such policies or bonds. All premiums due
and payable under all such policies and bonds have been
paid, and the Company and any covered parties are otherwise
in compliance with the terms of such policies and bonds (or
other policies and bonds providing substantially similar
insurance coverage).
2.24. COMPLIANCE WITH LAWS. To the Company's knowledge, the
Company has complied with, in all material respects, is not
in violation of, and has not received any notices of
violation with respect to, any foreign, federal, state or
local statute, law or regulation.
2.24 WARRANTIES; INDEMNITIES. Except for the warranties and
indemnities contained in those contracts and agreements set
forth in Section 2.24 of the Disclosure Schedule, the
Company has not issued any warranties or indemnities
relating to products or technology sold or licensed or
services rendered by the Company, other than warranties and
indemnities that are not in the aggregate, reasonably
expected to have a Material Adverse Effect.
2.25. PROXY STATEMENT AND STOCKHOLDER INFORMATION STATEMENT. The
information supplied by the Company for inclusion in (x) the
Proxy Statement or the Stockholder Information Statement or
the Form S-4 Registration Statement (each as defined below)
or any application filed in connection with a "fairness
hearing" pursuant to Section 5.1 hereof, will not on the
date it (or any amendment or supplement thereto) is first
sent to Stockholders, on either (i) the date of circulation
of the written consent or (ii) the date of the Company's
Stockholder Meeting and at the Effective Time, and (y) the
Buyer Registration Statement (or any amendment or supplement
thereto) will not at any time prior to the Effective Time,
contain any statement which, at such time and in light of
the circumstances under which it is made, is false or
misleading with respect to any material fact, or will omit
to state any material fact necessary in order to make the
statements therein not false or misleading. If at any time
prior to the Effective Time any event relating to the
Company or any of its respective affiliates, officers or
directors should be discovered by the Company which should
be set forth in an amendment or a supplement to the Proxy
Statement or the Stockholder Information Statement or the
Form S-4 Registration Statement or the Buyer Registration
Statement, the Company will promptly inform the Buyer.
Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to any information
supplied by Buyer that is contained in any of the foregoing
documents.
2.26 VOTING AGREEMENTS. The Stockholders delivering to Buyer
executed Stockholder Agreements (as defined in Section 5.18
of this Agreement) simultaneously with the execution and
delivery of this Agreement possess sufficient voting power
-33-
<PAGE>
to approve (without the consent or approval of any other
Stockholders) this Agreement, the Merger and all of the
other transactions contemplated by this Agreement and the
Stockholder Agreements, and such Stockholder Agreements
constitute the due and valid approval thereof.
2.27 REPRESENTATIONS COMPLETE. None of the representations or
warranties made by the Company (as modified by the
Disclosure Schedule), nor any statement made in any schedule
or certificate furnished by the Company pursuant to this
Agreement or furnished in or in connection with documents
mailed or delivered to the Shareholders for use in
soliciting their consent to this Agreement and the Merger
contains or will contain at the Effective Time (when read
together with the Proxy Statement or Shareholder Information
Statement (as amended or supplemented) and the Form S-4
Registration Statement at the Effective Time), any untrue
statement of a material fact, or omits or will omit at the
Effective Time (when read together with the Proxy Statement
or Shareholder Information Statement) (as amended or
supplemented) and the Form S-4 Registration Statement at the
Effective Time), to state any material fact necessary in
order to make the statements contained herein or therein, in
the light of the circumstances under which made, not
misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Company that on the date hereof
and, except as expressly provided otherwise below and except as may be modified
to appropriately reflect the transactions contemplated hereby, the Buyer IPO and
the Buyer Stock Split, and as of the Effective Time as though made at the
Effective Time as follows:
3.1. ORGANIZATION, STANDING AND POWER. Buyer is a corporation
duly organized, validly existing and in good standing under
the laws of the State of Delaware. As of the Effective Time,
Merger Sub will be a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware. Buyer has the corporate power to own its
properties and to carry on its business as now being
conducted and is duly qualified to do business and is in
good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a
Material Adverse Effect on the ability of Buyer to
consummate the Merger or the other transactions contemplated
hereby.
3.2. CHARTER AND BYLAWS. The Certificate of Incorporation and
Bylaws of Buyer filed as exhibits to the Buyer Registration
Statement are complete and accurate copies thereof and are
in full force and effect. Buyer is not in violation of any
of the provisions of its Certificate of Incorporation or
Bylaws.
3.3. AUTHORITY.
3.3.1. Buyer has all requisite power and authority to
enter into this Agreement and any Related
Agreements to which it is a party and to consummate
the
-34-
<PAGE>
transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and
any Related Agreements to which it is a party and
the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all
necessary corporate action on the part of Buyer,
and no further action is required on the part of
Buyer to authorize this Agreement, any Related
Agreements to which it is a party or the
transactions contemplated hereby and thereby. Buyer
has duly executed and delivered this Agreement and,
as of the Effective Time, will have duly executed
and delivered each Related Agreement to which it is
a party. Assuming the due authorization, execution
and delivery by the other parties hereto and
thereto, this Agreement and such Related Agreements
constitute or, as of the Effective Time in the case
of the Related Agreements, will constitute, the
valid and binding obligations of Buyer, enforceable
in accordance with their respective terms, except
as such enforceability may be limited by principles
of public policy and subject to the laws of general
application relating to bankruptcy, insolvency and
the relief of debtors and rules of law governing
specific performance, injunctive relief or other
equitable remedies.
3.3.2. As of the Effective Time, Merger Sub will have all
requisite power and authority to enter into any
Related Agreements to which it is a party and to
consummate the transactions contemplated hereby and
thereby. As of the Effective Time, the execution
and delivery of any Related Agreements to which it
is a party and the consummation of the transactions
contemplated hereby and thereby will have been duly
authorized by all necessary corporate action on the
part of Merger Sub, and no further action will be
required on the part of Merger Sub to authorize any
Related Agreements to which it is a party or the
transactions contemplated hereby and thereby
(except that, with respect to Section 5.19 of this
Agreement, Buyer will be required to obtain the
consent of certain of its Stockholders to an
increase in the size of Buyer's Board of Directors,
in order to permit the election of the
representative of the Company in accordance with
such Section 5.19). As of the Effective Time,
Merger Sub will have duly executed and delivered
each Related Agreement to which it is a party.
Assuming the due authorization, execution and
delivery by the other parties thereto, as of the
Effective Time such Related Agreements will
constitute the valid and binding obligations of
Merger Sub, enforceable in accordance with their
respective terms, except as such enforceability may
be limited by principles of public policy and
subject to the laws of general application relating
to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance,
injunctive relief or other equitable remedies.
3.3.3. MERGER SHARES. The shares of Buyer Common Stock to
be issued pursuant to the Merger will be duly
authorized, validly issued, fully paid,
non-assessable and will be issued in compliance with
all applicable federal and state securities laws.
-35-
<PAGE>
3.4. NO CONFLICT. The execution and delivery of this Agreement
and any Related Agreement to which Buyer or Merger Sub is or
will be a party by Buyer or Merger Sub, as the case may be,
do not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with, or
result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a
Conflict under (i) any provision of the Certificate of
Incorporation or Bylaws of Buyer or Merger Sub, (ii) any
mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise or license to
which Buyer or Merger Sub or any of their respective
properties or assets are subject and that has been filed as
an exhibit to the Buyer Registration Statement, or (iii) any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Buyer or Merger Sub or their
respective properties or assets, except for a Conflict under
subsection (ii) or (iii) above that would not have a
Material Adverse Effect on the ability of the parties to
consummate the Merger or the other transactions contemplated
by this Agreement.
3.5. CONSENTS. No consent, waiver, approval, order or
authorization of, or registration, declaration or filing
with, any Governmental Entity or any third party is
required, including a party to any agreement with Buyer or
Merger Sub (so as not to trigger any Conflict), by or with
respect to Buyer or Merger Sub in connection with the
execution and delivery of this Agreement and any Related
Agreements to which Buyer or Merger Sub is or will be a
party or the consummation of the transactions contemplated
hereby and thereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable
securities laws, (ii) any applicable filings required under
the HSR Act, (iii) the filing of the Merger Agreement with
the Secretary of State of the State of Delaware, (iv) any
other filings or approvals as may be required under Delaware
state law, and (v) consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings
which, if not obtained or made, would not have a Material
Adverse Effect on Buyer or on the ability of the parties to
consummate the Merger or the other transactions contemplated
by this Agreement.
3.6. PROXY STATEMENT AND STOCKHOLDER INFORMATION STATEMENT. The
information supplied by Buyer for inclusion in the Proxy
Statement or Stockholder Information Statement and the Form
S-4 Registration Statement or any application filed in
connection with "fairness hearing" pursuant to Section 5.1
hereof will not, on the date it (or any amendment or
supplement thereto) is first mailed to Stockholders, at the
time of the Company Stockholders Meeting and at the
Effective Time, contain any statement which, at such time
and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or
will omit to state any material fact necessary in order to
make the statements therein not false or misleading. If at
any time prior to the Effective Time any event relating to
Buyer, Merger Sub or any of their respective affiliates,
officers or directors should be discovered by Buyer or
Merger Sub which should be set forth in an amendment or a
supplement to the Proxy Statement or Stockholder Information
Statement, Buyer or Merger Sub will promptly inform
-36-
<PAGE>
the Company. Notwithstanding the foregoing, Buyer and Merger
Sub make no representation or warranty with respect to any
information supplied by the Company that is contained in any
of the foregoing documents.
3.7. MERGER SUB. Merger Sub will be formed for the sole purpose
of effecting the Merger and, except as contemplated by this
Agreement, Merger Sub will not conduct any business
activities and will not have any material liabilities or
obligations.
3.8 SEC FILINGS; FINANCIAL STATEMENTS.
3.8.1 The Buyer Registration Statement (including,
without limitation information concerning capitalization
included on pages 5 and 19 therein) (i) at the time it was
filed, complied as to form in all material respects with the
requirements of the Securities Act and (ii) did not at the
time it was filed (or if amended or superseded by a filing
prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated
therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
3.8.2 The financial statements (including, in each case,
any related notes thereto) (the "Buyer Financial
Statements") contained in the Buyer Registration Statement
have been prepared in accordance with GAAP applied on a
consistent basis throughout the period involved (except as
may be indicated in the notes thereto) and fairly present in
all material respects the financial position of Buyer as at
the respective dates thereof and the results of its
operations and cash flows for the periods indicated, except
that any unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which
were not or are not expected to be, individually or in the
aggregate, materially adverse to Buyer.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1. CONDUCT OF BUSINESS OF THE COMPANY. During the period from
the date of this Agreement and continuing until the earlier
of the termination of this Agreement or the Effective Time,
the Company agrees (except to the extent that Buyer shall
otherwise consent in writing), to carry on the Company's
business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to
pay the debts and Taxes of the Company when due, to pay or
perform other obligations when due consistent with the past
practices of the Company, and, to the extent consistent with
such business, use its commercially reasonable efforts
consistent with past practice and policies to preserve
intact the Company's present business organizations, keep
available the services of the Company's present officers and
key employees and preserve the Company's relationships with
customers, advertisers, suppliers, distributors, licensors,
-37-
<PAGE>
licensees, and others having business dealings with it, all
with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The
Company shall promptly notify Buyer of any event or
occurrence or emergency not in the ordinary course of
business of the Company and any material event involving the
Company. Except as expressly contemplated by this Agreement
or as set forth in Section 4.1 of the Disclosure Schedule,
the Company shall not, without the prior written consent or
e-mail of Buyer:
4.1.1. Except in the ordinary course of business and
consistent with past practice, (i) sell or enter
into any license agreement with respect to the
Company Intellectual Property with any person or
entity or (ii) buy or enter into any license
agreement with respect to the Intellectual Property
of any person or entity;
4.1.2. Except in the ordinary course of business and
consistent with past practice, transfer to any
person or entity any rights to the Company
Intellectual Property;
4.1.3. Enter into or amend any single Contract (or series
of related Contracts) with a potential obligation
or value of $750,000 or more or multiple Contracts
in any calendar month with aggregate potential
obligations or value of $1,500,000 or more,
excluding the entering into of charter sponsorship
arrangements in the ordinary course of business
consistent with past practice;
4.1.4. Amend or otherwise modify (or agree to do so),
except in the ordinary course of business, or
violate, in any material respect, the terms of, any
of the Contracts set forth or described in the
Disclosure Schedule, (for this purpose, an
amendment to the agreement with Blue Shield of
California dated October 4, 1998, shall not be
deemed in the ordinary course of business);
4.1.5. Commence any litigation or settle: (I) any
litigation for $50,000 or more or (ii) any
litigation relating to intellectual property
rights; provided that the Company shall have the
right to settle litigation outstanding as of the
date hereof, so long as the terms of such
settlement involve no monetary obligation or other
liability imposed on the Company;
4.1.6. Declare, set aside or pay any dividends on or make
any other distributions (whether in cash, stock or
property) in respect of any of its capital stock,
or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in
substitution for shares of capital stock of the
Company, or repurchase, redeem or otherwise
acquire, directly or indirectly, any shares of the
capital stock of the Company or options, warrants
or other rights exercisable therefor (except for
the Company's repurchase of Company
-38-
<PAGE>
Capital Stock from its employees at the purchase
price paid by such employees for such stock);
4.1.7. Issue, grant, deliver or sell, contract to issue,
grant, deliver or sell, or authorize or propose the
issuance, grant, delivery or sale of, or purchase
or propose the purchase of, any shares of its
capital stock (other than the exercise of currently
outstanding stock options and the exercise of
outstanding warrants) or securities convertible
into or exchangeable for, or subscriptions, rights,
warrants or options to acquire, or other agreement
or commitments of any character obligating it to
issue or purchase any such shares or other
convertible securities (excluding employee and
consultant stock options or exercises thereof and
grants of restricted stock pursuant to the Company
Option Plan);
4.1.8. Cause or permit any amendments to its Certificate
of Incorporation or Bylaws or other organizational
documents;
4.1.9. Acquire or agree to acquire any assets or business
which are material, individually or in the
aggregate, to the Company's business;
4.1.10. Make any capital expenditures in excess of $750,000
individually or $1,500,000 in the aggregate;
4.1.11. Sell, lease, license or otherwise dispose of any of
its properties or assets, except in the ordinary
course of business and consistent with past
practices;
4.1.12. Incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell
any debt securities or guarantee any debt
securities of others or issue or become subject to
any fidelity, surety or completion bond, except
pursuant to existing agreements set forth on the
Disclosure Schedule;
4.1.13. Incur liabilities outside of the ordinary course of
business in excess of $50,000 individually or
$100,000 in the aggregate;
4.1.14. Grant any loans to others outside ordinary course
of business or purchase debt securities of others
or amend the terms of any outstanding loan
agreement;
4.1.15. Grant (or enter into or amend any contract or
arrangement providing for) any severance or
termination pay: (i) to any director or officer or
(ii) to any other employee except payments made
pursuant to written agreements outstanding on the
date hereof and disclosed in the Disclosure
Schedule;
4.1.16. Adopt any employee benefit plan, or enter into any
employment contract or pay or agree to pay any
special bonus or special remuneration to any
director;
-39-
<PAGE>
4.1.17. Revalue any of its assets, including without
limitation writing down the value of inventory or
writing off notes or accounts receivable other than
in the ordinary course of business;
4.1.18. Pay, discharge or satisfy, in an amount in excess
of $50,000 (in any one case) or $100,000 (in the
aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved
against in the Current Balance Sheet;
4.1.19. Make or change any material election in respect of
Taxes, adopt or change any accounting method in
respect of Taxes, enter into any closing agreement,
settle any claim or assessment in respect of Taxes,
or consent to any extension or waiver of the
limitation period applicable to any claim or
assessment in respect of Taxes provided that Buyer
shall not unreasonably withhold its consent for any
of the foregoing;
4.1.20. Enter into any strategic alliance or joint
marketing arrangement or agreement that (i) would
substantially change any line of business in which
the Company operates or (ii) relates to any
business segment of the Buyer, including toys,
videos, video game books and software;
4.1.21. Accelerate the vesting schedule of any of the
outstanding Company Options or Company Capital
Stock;
4.1.22. (i) Terminate any officer or key employee, (ii)
hire an employee with an annual salary in excess of
$130,000, (iii) hire an officer or (iv) hire any
material number of employees (for these purposes,
an increase of 30% or more in the size of the
Company's workforce shall be deemed material);
4.1.23 Agree in writing to take any of the actions
described in Sections 4.1.1 through 4.1.22; or
4.1.24 Take, or agree in writing to take any other action
that would prevent the Company from performing or
cause the Company not to perform its covenants
hereunder.
4.2. NO SOLICITATION.
4.2.1. For purposes of this Section 4.2, the following
terms shall have the following meanings:
(a) "Acquisition Proposal" shall mean any
offer or proposal (other than an offer or
proposal by Buyer) contemplating or
otherwise relating to any Company
Acquisition Transaction.
-40-
<PAGE>
(b) A party's "Associates" shall include such
party's subsidiaries and other affiliates
and the respective directors, officers,
employees, agents, representatives,
consultants, accountants, attorneys and
financial advisors of such party and its
affiliates.
(c) "Company Acquisition Transaction" shall
mean any transaction not contemplated by
this Agreement involving: (A) any sale,
lease, exchange, transfer or other
disposition of the assets of the Company
or any subsidiary of the Company
constituting more than 5% of the assets of
the Company or accounting for more than 5%
of the revenues of the Company in any one
transaction or in a series of related
transactions; or (B) any offer to
purchase, tender offer, exchange offer or
any similar transaction or series of
related transactions made by any person,
group or entity involving more than 5% of
the outstanding shares of capital stock of
the Company; or (C) any merger,
consolidation, business combination, share
exchange, reorganization or similar
transaction or series of related
transactions involving the Company other
than any transaction which results in the
Stockholders of the Company before the
transaction continuing to hold at least
95% of the outstanding voting securities
of the Company after such transaction.
(d) "Termination Date" shall mean the earlier
of (i) the Effective Time, or (ii) the
date that this Agreement is terminated in
accordance with its terms.
4.2.2. The Company agrees that prior to and through the
Termination Date, it shall not, directly or
indirectly, and shall not authorize or permit any
Associate of the Company to (i) solicit, initiate,
encourage or induce the making, submission or
announcement of any Acquisition Proposal or take
any action that could reasonably be expected to
lead to an Acquisition Proposal, (ii) furnish any
information regarding the Company or any subsidiary
of the Company to any person, group or entity in
connection with or in respect to any Acquisition
Proposal, (iii) continue or engage in discussions
with any person, group or entity with respect to
any Acquisition Proposal, (iv) approve, endorse or
recommend any Acquisition Proposal or (v) enter
into any letter of intent, term sheet or similar
document or any contract, commitment or other
obligation of any kind contemplating or otherwise
relating to any Company Acquisition Transaction
(other than with Buyer and Merger Sub). Without
limiting the generality of the foregoing, the
Company acknowledges and agrees that any violation
of any of the restrictions set forth in the
preceding sentence by an Associate of the Company
shall be deemed to constitute a breach of this
Section 4.2. In addition, the Company agrees that
any negotiations with respect to any of the above
activities (other than negotiations with Buyer and
Merger Sub) in progress as of the date hereof will
be suspended during the period from the date hereof
through the Termination Date. In
-41-
<PAGE>
the event that the Company receives, directly or
indirectly, any Acquisition Proposal, the Company
shall immediately notify Buyer thereof, including
information as to the identity of the offeror or
the party making any such Acquisition Proposal and
the specific terms of such Acquisition Proposal.
The Company agrees that its obligations under this
Section 4.2 are necessary and reasonable in order
to protect Buyer and its business, and expressly
agrees that monetary damages would be inadequate
to compensate Buyer for any breach of this
Section 4.2. Accordingly, the Company agrees and
acknowledges that any such violation or
threatened violation will cause irreparable injury
to Buyer and that, in addition to any other
remedies that may be available in law, in equity or
otherwise, Buyer shall be entitled to obtain
injunctive relief against the threatened breach of
this Agreement or the continuation of any such
breach, without the necessity of proving damages.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1. FAIRNESS HEARING; PROXY STATEMENT AND STOCKHOLDER
INFORMATION STATEMENT; REGISTRATION STATEMENTS.
5.1.1. Notwithstanding anything in this Agreement to the
contrary, the parties agree to use commercially
reasonable efforts to qualify the issuance of Buyer
Common Stock in the Merger under the exemption
provided by Section 3(a)(10) of the Securities Act.
Consistent therewith, the parties agree to
cooperate with one another, commencing promptly
following the date hereof, to prepare and file with
the Commissioner of Corporations of the State of
California an application for qualification of the
Buyer Common Stock in the Merger pursuant to a
"fairness hearing" procedure, and to take such
other actions as may be reasonably necessary to
perfect such exemption. If, despite the parties'
commercially reasonable efforts, such qualification
is denied or such exemption cannot otherwise be
perfected by June 30, 1999, (a "Fairness Hearing
Failure") then the provisions of this Agreement
calling for registration of the Buyer Common Stock
to be issued in the Merger on Form S-4 (or another
appropriate form) under the Securities Act shall
immediately be invoked and complied with in order
to have such registration declared effective at the
earliest practicable time. All references in this
Agreement to the Form S-4 Registration Statement
(as hereinafter defined), the filing thereof with
the SEC and similar matters shall be deemed
applicable only following a Fairness Hearing
Failure, notwithstanding anything in this Agreement
to the contrary. The foregoing limitation shall
not, however, otherwise affect the parties'
obligations with respect to the Stockholder
Information Statement and the Proxy Statement.
Subject to the foregoing, Buyer and the Company
shall jointly prepare and cause to be filed with
the SEC preliminary Stockholder solicitation
materials, which shall be in the form of a
Stockholder information statement (the "Stockholder
-42-
<PAGE>
Information Statement") or a proxy statement (the
"Proxy Statement"), as determined jointly by Buyer
and the Company, for the solicitation of approval
of the Stockholders of the Company of this
Agreement, the Merger and the transactions
contemplated hereby. Buyer shall also prepare and
cause to be filed with the SEC a Registration
Statement on Form S-4 (or other appropriate form)
of Buyer pertaining to the shares of Buyer Common
Stock to be issued pursuant to the Merger (the
"Form S-4 Registration Statement"), in which the
Stockholder Information Statement or Proxy
Statement, as the case may be, will be included as
a prospectus. Each of Buyer and the Company shall
provide promptly to the other such information
concerning its business and financial statements
and affairs as, in the reasonable judgment of the
providing party or its counsel, may be required or
appropriate for inclusion in the Stockholder
Information Statement or Proxy Statement, as the
case may be, or in any amendments or supplements
thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in
the preparation of the Stockholder Information
Statement or Proxy Statement, as the case may be.
The Stockholder Information Statement or Proxy
Statement, as the case may be, shall include
information regarding the Company, the terms of the
Merger and this Agreement and the unanimous
recommendation of the Board of Directors of the
Company in favor of the Merger. Each of Buyer and
the Company shall use all reasonable efforts to
cause the Form S-4 Registration Statement and the
Stockholder Information Statement or Proxy
Statement, as the case may be, to comply with
applicable law and the rules and regulations
promulgated by the SEC and to cause the Stockholder
Information Statement or Proxy Statement, as the
case may be, to be mailed to the Company's
Stockholders as promptly as practicable If any
event relating to Buyer or the Company occurs, or
if Buyer or the Company becomes aware of any
information, that should be disclosed in an
amendment or supplement to the Stockholder
Information Statement or Proxy Statement, as the
case may be, then Buyer or the Company, as
applicable, shall inform the other thereof and
shall cooperate with each other in completing such
amendment or supplement, and, if appropriate, in
mailing such amendment or supplement to the
Company's Stockholders.
5.1.2. Prior to the Effective Time, Buyer shall use
commercially reasonable efforts to obtain all
regulatory approvals needed to ensure that the
Buyer Common Stock to be issued in the Merger: (i)
will be registered or qualified under the
securities law of every jurisdiction of the United
States in which any registered holder of the
Company Capital Stock who is receiving shares of
registered Buyer Common Stock has an address of
record or be exempt from such registration; and
(ii) will be approved for quotation at the
Effective Time on the Nasdaq National Market;
provided, however, that, in the case of clause (i)
above, Buyer shall not, pursuant to the foregoing,
be required (I) to qualify to do business as a
foreign corporation in any jurisdiction in which it
is not currently qualified or (II) to file a
general consent to service of process in any
jurisdiction with
-43-
<PAGE>
respect to matters unrelated to the issuance of
Buyer Common Stock pursuant hereto.
5.1.3. Each of Buyer and the Company (in respect of the
information respectively supplied by it) agrees
that: (i) none of the information to be supplied
by it or its Affiliates for inclusion in the
Stockholder Information Statement or Proxy
Statement, as the case may be, will, at the time
such document is mailed to the Stockholders of the
Company, or as of the Effective Time, contain any
untrue statement of a material fact or omit to
state any material fact required to be stated
therein or necessary in order to make the
statements therein, in light of the circumstances
under which they were made, not misleading; and
(ii) as to matters respecting it, the Stockholder
Information Statement or the Proxy Statement, as
the case may be, will comply as to form in all
material respects with the provisions of the
Securities Act and the Exchange Act, as applicable,
and the rules and regulations promulgated by the
SEC thereunder, except that no covenant,
representation or warranty is made by Buyer with
respect to statements made or incorporated by
reference therein based on information supplied by
the Company for inclusion or incorporation by
reference therein and no covenant, representation
or warranty is made by the Company with respect to
statements made or incorporated by reference
therein based on information supplied by Buyer for
inclusion or incorporation by reference therein.
5.1.4. The Company shall promptly after the date hereof
take all action necessary in accordance with
applicable law and its Certificate of Incorporation
and Bylaws to approve this transaction by written
consent of the stockholders. It is understood and
intended by the parties hereto that the Stockholder
Agreements and the irrevocable proxies delivered to
Buyer by the Company are sufficient to approve the
transactions contemplated hereby by the Company's
Stockholders, and the Company shall not in any way
challenge the validity, enforceability or
effectiveness of the Stockholder Agreements or
proxies.
5.1.5. The Company and Buyer will prepare and file any
other filings required under any Blue Sky laws
relating to the Merger and the transactions
contemplated by this Agreement (the "Other
Filings"). Each of the Company and Buyer will
notify the other promptly upon the receipt of any
correspondence or communications from any
government officials concerning the Stockholder
Information Statement, the Proxy Statement or any
Other Filing and will supply the other with copies
of all correspondence between such party or any of
its representatives, on the one hand, and any other
government officials, on the other hand, with
respect to the Stockholder Information Statement,
the Proxy Statement, the Merger or any Other
Filing. The Proxy Statement, the Stockholder
Information Statement and the Other Filings will
comply in all material
-44-
<PAGE>
respects with all applicable requirements of law
and the rules and regulations promulgated
thereunder.
5.1.6. Promptly after the date of this Agreement, the
Company shall provide to Buyer such information
concerning its business and financial statements
and affairs as, in the reasonable judgment of Buyer
and its counsel, may be required or appropriate for
inclusion in the Buyer Registration Statement or in
any amendments or supplements thereto in order to
reflect the transactions contemplated hereby and
other information concerning the Company, and to
cause the Company's counsel and auditors to
cooperate with Buyer's counsel and auditors in the
preparation of the Buyer Registration Statement or
any amendments or supplements thereto. The Company
shall use all reasonable efforts to ensure that the
information provided by it for inclusion in the
Buyer Registration Statement complies with
applicable law and the rules and regulations
promulgated by the SEC, to assist Buyer in
responding promptly to any comments of the SEC or
its staff, and to assist Buyer in having the Buyer
Registration Statement declared effective under the
Securities Act as promptly as practicable. If any
event relating to the Company occurs, or if the
Company becomes aware of any information, that
should be disclosed in an amendment or supplement
to the Buyer Registration Statement, then the
Company shall inform Buyer thereof and shall
cooperate with Buyer in filing such amendment or
supplement with the SEC. The Company represents
and warrants to Buyer that all information provided
by the Company for inclusion in the Buyer
Registration Statement shall not, at the time it
was provided, contain any untrue statement of a
material fact or omit to state a material fact
required to be stated therein or necessary in order
to make the statements therein, in light of the
circumstances under which they were made, not
misleading.
5.2. COOPERATION; ACCESS TO INFORMATION. The Company shall
afford Buyer and its accountants, counsel and other
representatives, reasonable access during normal business
hours and upon reasonable notice during the period prior to
the Effective Time to (a) all of the Company's properties,
books, contracts, commitments and records, (b) all other
information concerning the business, properties and
personnel (subject to restrictions imposed by applicable
law) of the Company as Buyer may reasonably request and (c)
all officers and, as scheduled through officers, key
employees of the Company. The Company agrees to provide to
Buyer and its accountants, counsel and other representatives
copies of internal financial statements (including by
returns and supporting documentation) promptly upon
request. No information or knowledge obtained in any
investigation pursuant to this Section 5.2 shall affect or
be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of
the parties to consummate the Merger.
5.3. CONFIDENTIALITY. Each of the parties hereto hereby agrees
that the information obtained in any investigation pursuant
to Section 5.2, or pursuant to the
-45-
<PAGE>
negotiation and execution of this Agreement or the
effectuation of the transaction contemplated hereby, shall
be governed by the terms of the Confidentiality Agreement
effective as of April 15, 1999 between the Company and
Buyer.
5.4. EXPENSES.
5.4.1. Whether or not the Merger is consummated, except as
set forth in Section 5.4.2, all fees and expenses
incurred in connection with the Merger including,
without limitation, all legal, accounting,
investment banking, broker, financial advisory,
consulting and all other fees and expenses of third
parties ("Third Party Expenses") incurred by a
party in connection with the negotiation and
effectuation of the terms and conditions of this
Agreement and the transactions contemplated hereby,
shall be the obligation of the respective party
incurring such fees and expenses; provided, however
that Buyer and the Company shall share equally in
all fees and expenses, other than Third Party
Expenses, incurred in relation to any 3(a)(10)
filing or filing of the Form S-4 Registration
Statement any required HSR filings and printing the
Proxy Statement or Stockholder Information
Statement (as the case may be and the Form S-4
Registration Statement, if required).
5.4.2. In the event that the Merger is consummated, Buyer
agrees to pay those Third Party Expenses incurred
by the Company, provided that Buyer shall have full
recourse to the Escrow Fund (as defined herein) for
payment of all Third Party Expenses incurred by the
Company exceeding $400,000 (excluding the expense
of the Company's accounting professionals to
prepare an audit of the Company's
post-September 30, 1998 financial statements, if
required for the Buyer Registration Statement).
5.5. PUBLIC DISCLOSURE. Unless otherwise required by law, prior
to the Effective Time, no disclosure (whether or not in
response to an inquiry) of the subject matter of this
Agreement shall be made by any party hereto unless approved
by Buyer and Company prior to release. Any public
announcement by Buyer regarding the subject matter of this
Agreement shall be delivered to and approved by the Company
prior to release (such approval to not be unreasonably
withheld).
5.6. CONSENTS. The Company shall use reasonable commercial
efforts to obtain the consents, waivers, assignments and
approvals under any of the Contracts set forth in Section
2.6 of the Disclosure Schedule so as to preserve all rights
of, and benefits to, the Company thereunder.
5.7. FIRPTA COMPLIANCE. On the Closing Date, the Company shall
deliver to Buyer a properly executed statement in a form
reasonably acceptable to Buyer for purposes of satisfying
Buyer's obligations under Treasury Regulation Section
1.1445-2(c)(3).
-46-
<PAGE>
5.8. REASONABLE EFFORTS. Subject to the terms and conditions
provided in this Agreement, each of the parties hereto shall
use commercially reasonable efforts to take promptly, or
cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make
effective the transactions contemplated hereby, to obtain
all necessary waivers, consents and approvals and to effect
all necessary registrations and filings and to remove any
injunctions or other impediments or delays, legal or
otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated
by this Agreement (including, without limitation the Buyer
IPO); provided that Buyer shall not be required to agree to
any divestiture by Buyer or the Company or any of Buyer's
subsidiaries or affiliates of shares of capital stock or of
any business, assets or property of Buyer or its
subsidiaries or affiliates or of the Company, its
affiliates, or the imposition of any material limitation on
the ability of any of them to conduct their businesses or to
own or exercise control of such assets, properties and
stock.
5.9. NOTIFICATION OF CERTAIN MATTERS. The Company and Buyer shall
give prompt notice to the other of: (i) the occurrence or
nonoccurrence of any event, the occurrence or nonoccurrence
of which is likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate at or
prior to the Effective Time and (ii) any failure to comply
with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided,
however, that the delivery of any notice pursuant to this
Section 5.9 shall not limit or otherwise affect any remedies
available to the party receiving such notice and no
disclosure pursuant to this Section 5.9 shall be deemed to
amend or supplement the disclosure schedules or prevent or
cure any misrepresentations, breach of warranty or breach of
covenant.
5.10. ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES. Each party
hereto, at the request of another party hereto, shall use
reasonable commercial efforts to execute and deliver such
other instruments and do and perform such other acts and
things as may be necessary in the written opinion of counsel
to the requesting party for effecting the consummation of
this Agreement and the transactions contemplated hereby.
5.11. CERTAIN EMPLOYEE MATTERS.
5.11.1. FOR PURPOSES OF THIS SECTION 5.11:
(a) "Applicable Company Options" shall mean
any Company Options granted to an Existing
Employee at any time prior to the
Effective Time.
(b) "Approved by Senior Management" shall mean
an action has been approved in writing or
by e-mail by (i) the Chief Executive
Officer
-47-
<PAGE>
of Buyer and (ii) both Matt Glickman and
Mark Selcow (or, if only one such officer
shall remain employed by the Surviving
Corporation or Buyer, that remaining
officer, or if neither such officer
remains employed by the Surviving
Corporation or Buyer, then neither such
officer).
(c) "Cause" exists if any one or more of the
following should occur as determined in
good faith by Buyer: An Existing Equity
Employee's (i) failure to perform his or
her duties or failure to follow the
directions of any supervisor, after a
written warning except in the case of a
willful failure to perform his or her
duties, in each such case provided that
Matt Glickman and Mark Selcow acknowledge
such failure in writing, (ii) breach of
his or her fiduciary duties to Buyer
and/or the Surviving Corporation, as
evidenced by a written acknowledgement or
opinion regarding such breach by Buyer's
counsel, or (iii) conviction by a court of
competent jurisdiction of a felony or
other serious crime.
(d) "Constructive Termination" shall mean
(i) providing an Existing Employee with a
base salary, an amount or level of
employee benefits or a title, position or
responsibility that is not reasonably
comparable to the base salary, amount and
level of employee benefits or title,
position or responsibility that such
Existing Employee enjoyed as of the date
of this Agreement if employed as of such
date or as of the Effective Time if hired
after the date of this Agreement (for this
purpose, disregarding any enhancement in
the salary, benefits, title, position or
responsibility of comparably positioned
employees at any time between the date of
this Agreement and the Effective Time
outside of the ordinary course of business
consistent with past practice) or
(ii) requiring any Existing Employee to
relocate outside of the San Francisco Bay
Area.
(e) "Existing Employee" shall mean each
Company employee who, as of the Closing
Date, is actively employed by the Company
on a full-time basis. Without limiting
the generality of the foregoing, for
purposes of clarification, an "Existing
Employee" would not include any part-time
employee (i.e., a person hired for less
than 1000 hours per year or less than 20
hours per week), any person on disability
leave, leave of absence or other
non-active status (other than any person
on maternity, paternity or family leave),
or any person who is merely an independent
contractor or consultant of the Company or
in any comparable non-employee
relationship with the Company.
-48-
<PAGE>
5.11.2. No Existing Employee may be terminated without
Cause or pursuant to a Constructive Termination
prior to the second anniversary of the Closing Date
unless such termination has been approved by Senior
Management.
5.11.3. In the event that, at any time prior to the second
anniversary of the Closing Date, notwithstanding
Section 5.11.2 hereof, Buyer terminates the
employment of any Existing Employee (i) without
Cause or pursuant to a Constructive Termination and
(ii) without such termination having been Approved
by Senior Management, then the terminated Existing
Employee shall be entitled either to (i) enforce
the terms of this Section 5.11 as a third-party
beneficiary hereof and seek damages from Buyer or
(ii) obtain the following benefits as liquidated
damages for such employee's claims hereunder, in
which event the following shall be the sole and
exclusive remedy of the terminated Existing
Employee: (i) all Applicable Company Options held
by such Existing Employee as of the date of such
termination will vest an additional 24 months
following the date of such termination or in the
event such termination is by a successor to or
acquiror of Buyer, then all Applicable Company
Options held by such Existing Employee shall have
their vesting fully accelerated; and (ii) if such
Existing Employee has a title of Vice President or
above, such Existing Employee shall also be paid by
Buyer a cash severance payment equal to one
(1) year's base salary as of the date of
termination.
5.11.4. Nothing contained in this Section 5.11 shall
create, or be deemed to create or imply, any
specified term of employment, any promise of
continued employment or any other agreement
regarding duration of employment or the necessity
for "Cause" for purposes of terminating employment
with respect to any Existing Employee. Following
the Closing Date, all employees of the Company will
be employed on an at-will basis, unless otherwise
specified in a written agreement between the
respective employee and the Company or Buyer.
5.11.5. The provisions of this Section 5.11 shall be
binding upon any successor to Buyer or Buyer's
business by way of merger, consolidation,
reorganization, sale of substantially all of
Buyer's assets or other comparable transaction.
5.12. NON-DISCLOSURE AGREEMENTS. The Company agrees to use its
commercially reasonable efforts to cause all of its current
employees and consultants to execute, to the extent they
have not already done so, a Non-Disclosure Agreement (with
Intellectual Property assignment provisions) in
substantially the form currently used by the Company.
5.13. AFFILIATE AGREEMENTS. Schedule 5.13 sets forth those persons
who, in the Company's reasonable judgment, are or may be
"affiliates" of the Company within the meaning of Rule 145
(each such person a "Rule 145 Affiliate") promulgated under
the Securities Act ("Rule 145"). The Company shall provide
-49-
<PAGE>
Buyer such information and documents as Buyer shall
reasonably request for purposes of reviewing such list. The
Company shall deliver or cause to be delivered to Buyer,
concurrently with the execution of this Agreement (and in
any case prior to the Closing Date) from each of the Rule
145 Affiliates of the Company, an executed Affiliate
Agreement ("Affiliate Agreement") in the form attached
hereto as Exhibit B, each of which will be in full force and
effect as of the Effective Time. Buyer shall be entitled to
place appropriate legends on the certificates evidencing any
Buyer Common Stock to be received by such Affiliates
pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent
for Buyer Common Stock, consistent with the terms of such
Affiliate Agreements.
5.14. TAX-FREE REORGANIZATION. The parties intend to adopt this
Agreement and the Merger as a tax-free plan of
reorganization under Section 368(a)(1)(A) of the Code by
virtue of the provisions of Section 368(a)(2)(E) of the
Code. The Buyer Common Stock issued in the Merger will be
issued solely in exchange for the Company Capital Stock, and
no other transaction other than the Merger represents,
provides for or is intended to be an adjustment to the
consideration paid for the Company Capital Stock. No
consideration that could constitute "other property" within
the meaning of Section 356(b) of the Code is being
transferred by Buyer for the Company Capital Stock in the
Merger. The parties shall not take a position on any tax
return inconsistent with this Section 5.14. From and after
the Closing, neither Buyer nor the Surviving Corporation
shall take any action that could reasonably be expected to
cause the Merger not to be treated as a reorganization
within the meaning of Section 368 of the Code.
5.15. POOLING ACCOUNTING. Buyer may, following consultation with
the Company, to the extent it deems advisable in its sole
discretion, cause or attempt to cause the business
combination to be effected by the Merger to be accounted for
as a pooling of interests. In the event that Buyer
determines at any time, in its sole discretion, for any
reason or no reason (and no reason need be given), that it
is not possible, expedient, advisable or convenient to
obtain such pooling treatment, then Buyer may cease any and
all efforts to obtain such pooling treatment without any
liability hereunder and without being deemed in breach of
this Agreement. The Company acknowledges and agrees that
the business combination to be effected by the Merger may be
accounted for either as a pooling of interests or as a
purchase, which determination shall be made by Buyer in its
sole discretion. However, the Company shall not take any
actions, and it shall, to the extent possible, cause its
Affiliates not to take any actions that would adversely
affect the ability of Buyer to account for the business
combination to be effected by the Merger as a pooling of
interests.
5.16. DIRECTORS' AND OFFICERS' INDEMNIFICATION. From and after
the Effective Time, Buyer shall (i) assume, as of the
Effective Time, all obligations of the Company under Article
VII(B) of the Company's Certificate of Incorporation, as
currently in effect and the Company's Indemnification
Agreements with the Company's officers and directors, and
(ii) pay or cause the Surviving Corporation to pay all
-50-
<PAGE>
amounts that become due and payable under such provisions.
This Section 5.16 shall survive the consummation of the
Merger, is intended to benefit the Company, the Surviving
Corporation and each indemnified party, shall be binding,
jointly and severally, on all successors and assigns of the
Surviving Corporation and Buyer, and shall be enforceable by
the indemnified parties.
5.17. BOARD REPRESENTATION. Prior to the Effective Time, Buyer
will take such action as may be required so that Matthew
Glickman, if he is then ready and willing so to serve, will
be elected effective as of the Effective Time as a member of
Buyer's Board of Directors.
5.18. VOTING AGREEMENTS. The Company has delivered to Buyer,
concurrently with the execution of this Agreement, an
executed Voting and Lock-Up Agreement substantially in the
form attached hereto as Exhibit C (the "Stockholder
Agreement"), duly executed and delivered by a majority in
interest of the Stockholders (as described in Section 2.26
hereof). The Company agrees to obtain and deliver to Buyer
duly authorized and executed Stockholder Agreements from
additional Stockholders such that, within ten (10) business
days following the date of this Agreement, Buyer shall have
received Agreements from Stockholders owning not less than
ninety-five percent (95%) of the Total Outstanding Company
Shares (the "Stockholder Requirement"). Further, the
Company agrees to commence to seek, promptly following the
date hereof, from the holders of all outstanding Company
Options a lock-up agreement or arrangement identical to that
contained in the Stockholder Agreement or provided by
Buyer's underwriters in the Buyer IPO (a "Lock-Up"). The
parties agree to condition any opportunity of a Company
Option holder to purchase directed shares in the Buyer IPO
that is made available to such holder by the Company or
Buyer upon such holder's execution and delivery to Buyer of
a Lock-Up.
5.19. REGULATORY FILINGS. As soon as may be reasonably
practicable, to the extent required by applicable law, Buyer
and the Company each shall file with the United States
Federal Trade Commission (the "FTC") and the Antitrust
Division of the United States Department of Justice ("DOJ")
Notification and Report Forms relating to the transactions
contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the
merger notification or control laws and regulations of any
applicable jurisdiction, as agreed to by the parties. Buyer
and the Company each shall promptly (a) supply the other
with any information which may be required in order to
effectuate such filings and (b) supply any additional
information which reasonably may be required by the FTC, the
DOJ or the competition or merger control authorities of any
other jurisdiction and which the parties may reasonably deem
appropriate.
5.20. DIRECTOR ACTION WITH RESPECT TO OPTION PLANS. Prior to the
Effective Time, the Board of Directors of the Company shall
take such actions as shall ensure that Company Options do
not have their vesting accelerated as a result of the
consummation of the Merger and the transactions contemplated
hereby other than
-51-
<PAGE>
pursuant to agreements in existence prior to the date of
this agreement as set forth in the Disclosure Schedule.
5.21. MAINTENANCE OF BUSINESS LINES. Buyer agrees that, during the
twelve-month period following the Closing, it will not
(unless Approved By Senior Management) materially change or
cause to be discontinued any of the Company's or Surviving
Corporation's current business lines (i.e., charter sponsors
and advertising, e-commerce and Consumer Health
Interactive).
5.22 LEGAL OPINIONS. Buyer agrees to use commercially reasonable
efforts to cause Irell & Manella LLP to deliver a legal
opinion in substantially the Form of Exhibit D. The Company
agrees to use commercially reasonable efforts to cause
Venture Law Group, A Professional Corporation, to deliver a
legal opinion in substantially the Form of Exhibit E.
5.23 EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE. Each of
the parties hereto, as applicable, and each of Matthew
Glickman and Mark Selcow agree to execute and deliver at the
Closing (i) an Employment Agreement for each of Matthew
Glickman and Mark Selcow in the form attached hereto as
Exhibit F and (ii) a Covenant Not to Compete for each of
Matthew Glickman and Mark Selcow in the form attached hereto
as Exhibit G.
5.24 PIGGYBACK REGISTRATION RIGHTS. Buyer agrees to use
commercially reasonable efforts to cause the parties to the
Company's Amended and Restated Investors' Rights Agreements
to be added to Buyer's existing registration rights
agreement effective upon the Effective Date, or to provide
upon the Effective Date substantially similar registration
rights to such persons.
5.25 ADVICE CONCERNING CERTAIN TRANSACTIONS. Prior to the
Effective Time, in the event that Buyer's management
proposes to make a formal presentation to Buyer's Board of
Directors concerning a transaction that would result in a
change of control of Buyer or the sale of twenty percent
(20%) or more of Buyer's assets or the issuance (in
connection with the acquisition of another business) of
securities representing twenty percent (20%) or more of
Buyer's outstanding securities, then Matthew Glickman shall
be entitled to notice of such presentation and to be present
for such presentation (provided that in Buyer's sole
discretion, Buyer may condition the foregoing on the receipt
of a confidentiality agreement from Mr. Glickman reasonably
satisfactory in form and substance to Buyer). This
provision shall terminate upon the Effective Time or upon
the termination of this Agreement in accordance with its
terms.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1. CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE
MERGER. The respective obligations of each party to this
Agreement to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the
following conditions:
-52-
<PAGE>
6.1.1. NO INJUNCTION OR RESTRAINTS; ILLEGALITY. No
temporary restraining order, preliminary or
permanent injunction or other order issued by any
court of competent jurisdiction or other legal
restraint or prohibition preventing the
consummation of the Merger shall be in effect, nor
shall any proceeding brought by an administration,
agency or commission or other governmental
authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; nor shall
there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or
deemed applicable to the Merger, which makes the
consummation of the Merger illegal.
6.1.2. GOVERNMENTAL APPROVAL. No Governmental Approval
shall be required to be obtained which, if not so
obtained, would render consummation of the Merger
illegal.
6.1.3. NO ORDER; HSR ACT. No Governmental Entity shall
have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in
effect and which has the effect of making the
Merger illegal or otherwise prohibiting
consummation of the Merger. All waiting periods
under the HSR Act relating to the transactions
contemplated hereby (if any) will have expired or
terminated early.
6.1.4. TAX OPINIONS. Buyer and the Company shall each have
received written opinions from their respective tax
counsel (Irell & Manella LLP and Venture Law Group,
A Professional Corporation, respectively), in form
and substance reasonably satisfactory to them, to
the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a)
of the Code and such opinions shall not have been
withdrawn; provided, however, that if counsel to
either Buyer or the Company does not render such
opinion, this condition shall nonetheless be deemed
to be satisfied with respect to such party if the
other party's counsel renders such opinion to such
party. The parties to this Agreement agree to make
reasonable representations as requested by such
counsel for the purpose of rendering such opinions.
6.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligations of the Company to consummate and effect this
Agreement and the transactions contemplated hereby shall be
subject to the satisfaction at or prior to the Closing Date
of each of the following conditions, any of which may be
waived, in writing, exclusively by the Company:
6.2.1. REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations and warranties of Buyer in this
Agreement shall be true and correct in all material
respects (except that in the case of any
representation or warranty that is itself qualified
by reference to materiality, such representation or
warranty shall be true and correct) on and as of
the Effective Time as
-53-
<PAGE>
though such representations and warranties were made
on and as of such time and Buyer shall have
performed and complied in all material respects with
all covenants of this Agreement (including without
limitation those in Article IV) required to be
performed and complied with by it as of the
Effective Time; PROVIDED, HOWEVER, that any
inaccuracies in such representations, warranties or
failure to observe such covenants shall not
constitute a failure of this condition unless the
aggregate of such matters would reasonably be likely
to have a Material Adverse Effect valued at $25
million or more (the "$25 Million Condition"),
PROVIDED, FURTHER, that for purposes of this Section
6.2.1., any change, event, effect or condition on or
of the business in the existing business of the
Buyer that is primarily attributable (i) to the
Merger or the announcement or effects of
announcement of the Merger or (ii) to general
industry-wide changes in such existing lines of
business shall be disregarded. The $25 Million
Condition shall not be applicable, however, in the
case of a knowing and intentional breach of any
covenant of Buyer in this Agreement by or at the
direction or pursuant to the authorization of Edward
Lenk, Steve Schoch or Peter Juzwiak (it being
understood that each of those individuals has
reviewed and is fully familiar with all of the terms
included in this Agreement; however, the parties do
not intend for any of such named individuals to have
personal liability as a result of the foregoing
provision.).
6.2.2. CERTIFICATE OF BUYER. The Company shall have been
provided with a certificate executed on behalf of
Buyer by the Chief Financial Officer or Chief
Executive Officer of Buyer certifying (i) as to
compliance with the matters set forth in Section
6.2.1 above and (ii) that all covenants (including
without limitation those in Article IV) of this
Agreement to be performed by Buyer on or before
such date have been so performed in all material
respects.
6.2.3 NO MATERIAL ADVERSE CHANGES. Except as set forth in
the Disclosure Schedule, there shall not have
occurred any material adverse change in the
business, assets (including intangible assets),
results of operations, liabilities (contingent or
accrued), prospects or financial condition of the
Buyer since the date of this Agreement; PROVIDED,
HOWEVER, that any such material adverse changes
shall not constitute a failure of this condition
unless such matters in the aggregate would be
reasonably likely to have a Material Adverse Effect
valued at $700 million or more, and PROVIDED
FURTHER that no third party litigation claim (other
than any claim asserted by a governmental agency or
authority) shall constitute material adverse
changes for purposes of this Section 6.2.3.
6.2.4 BUYER IPO CONSUMMATED. The Buyer IPO shall have
closed.
6.3. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF BUYER. The
obligations of Buyer to consummate and effect this Agreement
and the transactions contemplated
-54-
<PAGE>
hereby shall be subject to the satisfaction at or prior to
the Effective Time of each of the following conditions, any
of which may be waived, in writing, exclusively by Buyer:
6.3.1. REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations and warranties of the Company (as
modified by the Disclosure Schedule) in this
Agreement shall be true and correct in all material
respects (except that in the case of any
representation or warranty that is itself qualified
by reference to materiality, such representation or
warranty shall be true and correct) on and as of
the Effective Time as though such representations
and warranties were made on and as of the Effective
Time, the Company shall have performed and complied
in all material respects with all covenants of this
Agreement (including without limitation those in
Article IV) required to be performed and complied
with by it as of the Effective Time and each of
Matthew Glickman and Mark Selcow shall have
executed and delivered the agreements specified
above in Section 5.23; PROVIDED, HOWEVER, that any
inaccuracies in such representations and warranties
or failure to observe such covenants shall not
constitute a failure of this condition unless the
aggregate of such matters would reasonably be
likely to have a Material Adverse Effect valued at
$25 million or more (the "$25 Million Condition"),
PROVIDED; FURTHER, that for purposes of this
Section 6.3.1., any change, event, effect or
condition on or of the business in the existing
lines of the Company that is primarily attributable
(i) to the Merger or the announcement or effects of
the announcement of the Merger or (ii) to general
industry-wide changes in such existing lines of
business shall be disregarded. The $25 Million
Condition shall not be applicable, however, in the
case of a knowing and intentional breach of any
covenant of the Company in this Agreement by or at
the direction or pursuant to the authorization of
Matthew Glickman, Mark Selcow or Jason Lemkin (it
being understood that each of those individuals has
reviewed and is fully familiar with all of the
terms included in this Agreement; however, the
parties do not intend for any of such named
individuals to have personal liability as a result
of the foregoing provision).
6.3.2. NO MATERIAL ADVERSE CHANGES. Except as set forth in
the Disclosure Schedule, there shall not have
occurred any material adverse change in the
business, assets (including intangible assets),
results of operations, liabilities (contingent or
accrued), prospects or financial condition of the
Company since the date of this Agreement; PROVIDED,
HOWEVER, that any such material adverse changes
shall not constitute a failure of this condition
unless such matters in the aggregate would be
reasonably likely to have a Material Adverse Effect
valued at $100 million or more, and PROVIDED
FURTHER that no third party litigation claim (other
than any claim asserted by a governmental agency or
authority) shall constitute material adverse
changes for purposes of this Section 6.3.2.
-55-
<PAGE>
6.3.3. STOCKHOLDER APPROVAL. The Stockholders of the
Company shall have approved this Agreement, the
Merger and the transactions contemplated hereby;
the Stockholder Requirement shall have been
satisfied and Lock-Ups shall have been obtained
from holders of Company Options representing 85% of
the shares issuable upon exercise of such options.
6.3.4. CERTIFICATE OF THE COMPANY. Buyer shall have been
provided with a certificate executed on behalf of
the Company by its Chief Executive Officer or its
Chief Financial Officer certifying (i) as to
compliance with the matters set forth in Section
6.3.1 above and (ii) that all covenants (including
without limitation those in Article IV) of this
Agreement to be performed by the Company on or
before such date have been so performed in all
material respects.
6.3.5. LISTING; EFFECTIVENESS OF REGISTRATION STATEMENT.
The shares of Buyer Common Stock to be issued in
the Merger shall have been approved for listing
(subject to notice of issuance) on the Nasdaq
National Market. In addition, either (i) the
issuance of Buyer Common Stock pursuant to the
Merger contemplated hereby shall be qualified for
the exemption provided under Section 3(a)(10) of
the Securities Act or (ii) the Form S-4
Registration Statement shall have become effective
in accordance with the provisions of the Securities
Act, and no stop order shall have been issued by
the SEC with respect to the Form S-4 Registration
Statement. Further, no proceeding similar to a
stop order in respect of the Proxy Statement or
Information Statement (as the case may be), shall
have been initiated or threatened in writing by the
SEC.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
7.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
Company's representations and warranties in this Agreement
or in any instrument delivered pursuant to this Agreement
shall survive the Merger and continue until the date that is
six (6) months following the Closing Date (the "Expiration
Date"). All of Buyer's representations and warranties
contained herein or in any instrument delivered pursuant to
this Agreement shall terminate on the Closing Date.
7.2. INDEMNIFICATION; ESCROW ARRANGEMENTS.
7.2.1. INDEMNIFICATION. The Company (on behalf of itself
and the Stockholders) agrees to indemnify and hold
Buyer and its officers, directors and affiliates
(the "Indemnified Parties") harmless against all
claims, losses, liabilities, damages, deficiencies,
costs and expenses, including reasonable attorneys'
fees and expenses of investigation (hereinafter
individually a "Loss" and collectively "Losses")
incurred by the Indemnified Parties directly or
indirectly as a result of: (i) any inaccuracy or
breach of a representation or
-56-
<PAGE>
warranty of the Company set forth in this Agreement
or in any certificate of any officer of the Company
delivered pursuant to this Agreement, (ii) any
failure by the Company to perform or comply with any
covenant (including, without limitation, those
contained in Article IV) contained in this
Agreement, and (iii) the Third Party Expenses
incurred by the Company exceeding $400,000
(excluding the expense of the Company's accounting
professionals to prepare an audit of the Company's
March 31, 1999 financial statements or any other
supplemental auditing work for a post-September 30,
1998 audit, if required for the Buyer Registration
Statement); PROVIDED, HOWEVER, that (x) the
aggregate amount recoverable by the Indemnified
Parties pursuant to this Article VII shall not
exceed the amount deposited in the Escrow Fund (as
defined below), and (y) the Indemnified Parties
shall not be entitled to indemnification hereunder
(1) with respect to any individual claim for less
than $5,000 ($25,000 in the case of breach of solely
Section 2.8) in value, or (2) unless the aggregate
amount for which valid indemnification claims are
made exceeds $100,000, in which case the Indemnified
Parties shall be entitled to indemnification from
the first dollar of indemnification claims. The
Escrow Fund shall be available to compensate the
Indemnified Parties for any such Losses. Nothing
herein shall limit the liability of the Company for
any breach of any representation, warranty or
covenant if the Merger is not consummated.
7.2.2. ESCROW FUND. As security for the indemnity provided
for in Section 7.2.1 and by virtue of this
Agreement, as soon as practicable after the
Effective Time, the Escrow Amount, without any act
of the Company, will be deposited with an
institution selected by Buyer and approved by the
Stockholder Representative (as defined in Section
7.2.9(L)) as Escrow Agent (the "Escrow Agent"),
provided that Stockholder Representative shall not
withhold such approval if Buyer selects a third
party that is unrelated to Buyer and that is
generally engaged in the escrow industry or the
financial services industry. The Escrow Agent will
either execute an acknowledgement and agreement to
the terms of this Article VII or enter into a
separate agreement that sets forth substantially
the same terms provided herein. The deposit of the
Escrow Amount will constitute an escrow fund (the
"Escrow Fund") to be governed by the terms set
forth herein. The Escrow Amount shall be
contributed on behalf of each Stockholder of the
Company in proportion to the aggregate Buyer Common
Stock which each such holder would otherwise be
entitled to under Section 1.8 hereof. The
Stockholders of the Company will be deemed to have
received and deposited with the Escrow Agent (as
defined below) the Escrow Amount (plus any
additional shares as may be issued upon any stock
split, stock dividend or recapitalization effected
by Buyer after the Effective Time with respect to
the Escrow Amount) without any act of any
Stockholder.
-57-
<PAGE>
7.2.3. ESCROW PERIOD; DISTRIBUTION UPON TERMINATION OF
ESCROW PERIODS. Subject to the following
requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall
terminate at 5:00 p.m., Los Angeles, California
local time on the Expiration Date (the "Escrow
Period"); provided, however, that the Escrow Period
shall not terminate with respect to any amount
which, in the reasonable judgment of Buyer, is
necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate (as defined
below) delivered to the Escrow Agent prior to
termination of such Escrow Period with respect to
facts and circumstances existing prior to the
termination of such Escrow Period. As soon as all
such claims have been resolved, the Escrow Agent
shall deliver to the Stockholders of the Company
the remaining portion of the Escrow Fund not
required to satisfy such claims. Deliveries of
Escrow Amounts to the Stockholders of the Company
pursuant to this Section 7.2 shall be made in
proportion to their respective original
contributions to the Escrow Fund.
7.2.4. PROTECTION OF ESCROW FUND.
(a) The Escrow Agent shall hold and safeguard
the Escrow Fund during the Escrow Period,
shall treat such fund as a trust fund in
accordance with the terms of this
Agreement and not as the property of Buyer
and shall hold and dispose of the Escrow
Fund only in accordance with the terms
hereof.
(b) Any shares of Buyer Common Stock or other
equity securities issued or distributed by
Buyer (including shares issued upon a
stock split) ("New Shares") in respect of
Buyer Common Stock in the Escrow Fund
which have not been released from the
Escrow Fund shall be added to the Escrow
Fund and become a part thereof. New Shares
issued in respect of shares of Buyer
Common Stock which have been released from
the Escrow Fund shall not be added to the
Escrow Fund but shall be distributed to
the record holders thereof. Cash dividends
on Buyer Common Stock shall not be added
to the Escrow Fund but shall be
distributed to the record holders thereof.
(c) Each Stockholder shall have voting rights
and the right to distributions of cash
dividends with respect to the shares of
Buyer Common Stock contributed to the
Escrow Fund by such Stockholder (and on
any voting securities added to the Escrow
Fund in respect of such shares of Buyer
Common Stock). As the record holder of
such shares, the Escrow Agent shall vote
such shares in accordance with the
instructions of the Stockholders having
the beneficial interest therein and shall
promptly deliver copies of all proxy
solicitation materials to such
Stockholders.
-58-
<PAGE>
7.2.5. CLAIMS UPON ESCROW FUND.
(a) (a) Upon receipt by the Escrow Agent at
any time on or before the last day of the
Escrow Period of a certificate signed by
any officer of Buyer (an "Officer's
Certificate"): (A) stating that Buyer has
paid or properly accrued or, with respect
to third-party claims of which Buyer, the
Company or the Surviving Corporation has
received notice, reasonably anticipates
that it will have to pay or accrue Losses,
and (B) specifying in reasonable detail
the individual items of Losses included in
the amount so stated, the date each such
item was paid or properly accrued, or the
basis for such anticipated liability, and
the nature of the misrepresentation,
breach of warranty or covenant to which
such item is related, the Escrow Agent
shall deliver to Buyer out of the Escrow
Fund, as promptly as practicable subject
to Section 7.2.6, shares of Buyer Common
Stock held in the Escrow Fund with a value
equal to such Losses; provided, however,
that in the event of a third party claim
that is the subject of the demand on the
Escrow Fund, no shares shall be delivered
out of the Escrow Fund until the claim is
settled or adjudicated.
(b) For the purposes of determining the number
of shares of Buyer Common Stock to be
delivered to Buyer out of the Escrow Fund
as indemnity pursuant to Section 7.2.5(a)
hereof, the shares of Buyer Common Stock
shall be valued at $33 per share, unless
the average closing price of the Buyer
Common Stock for any five (5) consecutive
trading days during the thirty (30) day
period preceding the assertion of a
particular indemnity claim exceeds $50 per
share, in which case the shares of Buyer
shall be valued at $50 per share or, if
the average closing price of the Buyer
Common Stock for any five (5) consecutive
days during the thirty (30) day period
preceding the assertion of a particular
indemnity claim is less than $16 per
share, then the shares of Buyer shall be
valued at $16 per share (subject to in
each case to the adjustment as a result of
the Buyer Stock Split).
7.2.6. OBJECTIONS TO CLAIMS. At the time of delivery of
any Officer's Certificate to the Escrow Agent, a
duplicate copy of such certificate shall be
delivered to the Stockholder Representative, and
for a period of thirty (30) days after such
delivery, the Escrow Agent shall make no delivery
to Buyer of any Escrow Amounts pursuant hereto
unless the Escrow Agent shall have received written
authorization from the Stockholder Representative
to make such delivery. After the expiration of such
thirty (30) day period, the Escrow Agent shall make
delivery of shares of Buyer Common Stock from the
Escrow Fund in accordance herewith; provided,
however, that no such payment or delivery may be
made if the Stockholder Representative shall object
in a written statement to the claim made in the
Officer's
-59-
<PAGE>
Certificate, and such statement shall have been
delivered to the Escrow Agent prior to the
expiration of such thirty (30) day period.
7.2.7. RESOLUTION OF CONFLICTS; ARBITRATION.
(a) In case the Stockholder Representative
shall object in writing to any claim or claims made
in any Officer's Certificate, the Stockholder
Representative and Buyer shall attempt in good
faith to agree upon the rights of the respective
parties with respect to each of such claims. If the
Stockholder Representative and Buyer should so
agree, a memorandum setting forth such agreement
shall be prepared and signed by both parties and
shall be furnished to the Escrow Agent. The Escrow
Agent shall be entitled to rely on any such
memorandum and distribute shares of Buyer Common
Stock from the Escrow Fund in accordance with the
terms thereof.
(b) If no such agreement can be reached after
good faith negotiation, either Buyer or
the Stockholder Representative may demand
arbitration of the matter unless the
amount of the damage or Loss is at issue
in pending litigation with a third party,
in which event arbitration shall not be
commenced until such amount is ascertained
or both parties agree to arbitration; and
in either such event the matter shall be
settled by arbitration conducted by one
arbitrator mutually agreeable to Buyer and
the Stockholder Representative. In the
event that within forty-five (45) days
after submission of any dispute to
arbitration, Buyer and the Stockholder
Representative cannot mutually agree on
one arbitrator, Buyer and the Stockholder
Representative shall each select one
arbitrator, and the two arbitrators so
selected shall select a third arbitrator.
The arbitrator or arbitrators, as the case
may be, shall set a limited time period
and establish procedures designed to
reduce the cost and time for discovery
while allowing the parties an opportunity,
adequate in the sole judgment of the
arbitrator or majority of the three
arbitrators, as the case may be, to
discover relevant information from the
opposing parties about the subject matter
of the dispute. The arbitrator or a
majority of the three arbitrators, as the
case may be, shall rule upon motions to
compel or limit discovery and shall have
the authority to impose sanctions,
including attorneys' fees and costs, to
the same extent as a competent court of
law or equity, should the arbitrators or a
majority of the three arbitrators, as the
case may be, determine that discovery was
sought without substantial justification
or that discovery was refused or objected
to without substantial justification. The
decision of the arbitrator or a majority
of the three arbitrators, as the case may
be, as to the validity and amount of any
claim in such Officer's Certificate shall
be binding and conclusive upon the parties
to this Agreement. Such decision shall
-60-
<PAGE>
be written and shall be supported by
written findings of fact and conclusions
which shall set forth the award, judgment,
decree or order awarded by the
arbitrator(s).
(c) Judgment upon any award rendered by the
arbitrator(s) may be entered in any court
having jurisdiction. Any such arbitration
shall be held in Los Angeles County,
California, under the rules then in effect
of the American Arbitration Association.
The arbitrator(s) shall determine how all
expenses relating to the arbitration shall
be paid, including without limitation, the
respective expenses of each party, the
fees of each arbitrator and the
administrative fee of the American
Arbitration Association.
7.2.8. THIRD-PARTY CLAIMS. In the event Buyer becomes
aware of a third-party claim which Buyer believes
may result in a demand against the Escrow Fund,
Buyer shall notify the Stockholder Representative
of such claim. Buyer may not settle any such claim
without the consent of the Stockholder
Representative, which consent shall not be
unreasonably withheld or delayed. In the event that
the Stockholder Representative has consented to any
such settlement, the Stockholders shall have no
power or authority to object under any provision of
this Article VII to the amount of any claim by
Buyer against the Escrow Fund with respect to such
settlement.
7.2.9. ESCROW AGENT.
(A) The Escrow Agent shall be
obligated only for the
performance of such duties as
are specifically set forth
herein, and as set forth in any
additional written escrow
instructions which the Escrow
Agent may receive after the date
of this Agreement which are
signed by an officer of Buyer
and the Stockholder
Representative, and may rely and
shall be protected in relying or
refraining from acting on any
instrument reasonably believed
to be genuine and to have been
signed or presented by the
proper party or parties. The
Escrow Agent shall not be liable
for any act done or omitted
hereunder as Escrow Agent while
acting in good faith and in the
exercise of reasonable judgment,
and any act done or omitted
pursuant to the advice of
counsel shall be conclusive
evidence of such good faith.
(B) The Escrow Agent is hereby
expressly authorized to
disregard any and all warnings
given by any of the parties
hereto or by any other person,
excepting only orders or process
of courts of law or of the
arbitrator(s) appointed pursuant
to Section 7.2.7, and is hereby
expressly authorized to comply
with and obey orders, judgments
or decrees of any
-61-
<PAGE>
court or of the arbitrator(s)
appointed pursuant to Section 7.2.7.
In case the Escrow Agent obeys or
complies with any such order,
judgment or decree of any court
or of the arbitration panel
appointed by Section 7.2.7, the
Escrow Agent shall not be liable
to any of the parties hereto or
to any other person by reason of
such compliance, notwithstanding
any such order, judgment or
decree being subsequently
reversed, modified, annulled,
set aside, vacated or found to
have been entered without
jurisdiction.
(C) The Escrow Agent shall not be
liable in any respect on account
of the identity, authority or
rights of the parties executing
or delivering or purporting to
execute or deliver this
Agreement or any documents or
papers deposited or called for
hereunder.
(D) The Escrow Agent shall not be
liable for the expiration of any
rights under any statute of
limitations with respect to this
Agreement or any documents
deposited with the Escrow Agent.
(E) In performing any duties under
this Agreement, the Escrow Agent
shall not be liable to any party
for damages, losses, or
expenses, except for negligence
or willful misconduct on the
part of the Escrow Agent. The
Escrow Agent shall not incur any
such liability for any action
taken or omitted in reliance
upon any instrument, including
any written statement of
affidavit provided for in this
Agreement that the Escrow Agent
shall in good faith believe to
be genuine, nor will the Escrow
Agent be liable or responsible
for forgeries, fraud,
impersonations, or determining
the scope of any representative
authority. In addition, the
Escrow Agent may consult with
legal counsel in connection with
Escrow Agent's duties under this
Agreement and shall be fully
protected in any act taken,
suffered, or permitted by
him/her in good faith in
accordance with the advice of
counsel. The Escrow Agent is not
responsible for determining and
verifying the authority of any
person acting or purporting to
act on behalf of any party to
this Agreement.
(F) If any controversy arises
between the parties to this
Agreement, or with any other
party, concerning the subject
matter of this Agreement, its
terms or conditions, the Escrow
Agent will not be required to
determine the controversy or to
take any action regarding it.
The Escrow Agent may hold all
documents and shares of Buyer
Common Stock and may wait for
settlement of any such
controversy by final appropriate
-62-
<PAGE>
legal proceedings or other means
as, in the Escrow Agent's
discretion, may be required,
despite what may be set forth
elsewhere in this Agreement. In
such event, the Escrow Agent
will not be liable for damage.
Furthermore, the Escrow Agent
may at its option, file an
action of interpleader requiring
the parties to answer and
litigate any claims and rights
among themselves. The Escrow
Agent is authorized to deposit
with the clerk of the court all
documents and shares of Buyer
Common Stock held in escrow,
except in respect of all costs,
expenses, charges and reasonable
attorney fees incurred by the
Escrow Agent due to the
interpleader action and which
the parties jointly and
severally agree to pay. Upon
initiating such action, the
Escrow Agent shall be fully
released and discharged of and
from all obligations and
liability imposed by the terms
of this Agreement.
(G) The parties and their respective
successors and assigns agree
jointly and severally to
indemnify and hold Escrow Agent
harmless against any and all
losses, claims, damages,
liabilities, and expenses,
including reasonable costs of
investigation, counsel fees,
including allocated costs of
in-house counsel and disbursements
that may be imposed on Escrow
Agent or incurred by Escrow
Agent in connection with the
performance of his/her duties
under this Agreement, including
but not limited to any
litigation arising from this
Agreement or involving its
subject matter other than
arising out of the Escrow
Agent's negligence or willful
misconduct.
(H) The Escrow Agent may resign at
any time upon giving at least
thirty (30) days written notice
to the parties; provided,
however, that no such
resignation shall become
effective until the appointment
of a successor escrow agent
which shall be accomplished as
follows: the parties shall use
their commercially reasonable
efforts to mutually agree on a
successor escrow agent within
thirty (30) days after receiving
such notice. If the parties fail
to agree upon a successor escrow
agent within such time, the
Escrow Agent shall have the
right to appoint a successor
escrow agent authorized to do
business in the State of
California. The successor escrow
agent shall execute and deliver
an instrument accepting such
appointment and it shall,
without further acts, be vested
with all the estates,
properties, rights, powers, and
duties of the predecessor escrow
agent as if originally named as
escrow agent. Upon appointment
of a successor escrow agent, the
Escrow Agent shall be discharged
from any further duties and
liability under this Agreement.
-63-
<PAGE>
(I) All fees of the Escrow Agent for
performance of its duties
hereunder shall be paid by Buyer
in accordance with the standard
fee schedule of the Escrow
Agent. It is understood that the
fees and usual charges agreed
upon for services of the Escrow
Agent shall be considered
compensation for ordinary
services as contemplated by this
Agreement. In the event that the
conditions of this Agreement are
not promptly fulfilled, or if
the Escrow Agent renders any
service not provided for in this
Agreement, or if the parties
request a substantial
modification of its terms, or if
any controversy arises, or if
the Escrow Agent is made a party
to, or intervenes in, any
litigation pertaining to the
Escrow Fund or its subject
matter, the Escrow Agent shall
be reasonably compensated for
such extraordinary services and
reimbursed for all costs,
attorney's fees, including
allocated costs of in-house
counsel, and expenses occasioned
by such default, delay,
controversy or litigation.
(J) In no event shall the Escrow
Agent be liable for special,
indirect or consequential loss
or damage of any kind whatsoever
(including but not limited to
lost profits), even if the
Escrow Agent has been advised of
the likelihood of such loss or
damage and regardless of the
form of action.
(K) Any corporation into which the
Escrow Agent in its individual
capacity may be merged or
converted or with which it may
be consolidated, or any
corporation resulting from any
merger, conversion or
consolidation to which the
Escrow Agent in its individual
capacity shall be a party, or
any corporation to which
substantially all the corporate
trust business of the Escrow
Agent in its individual capacity
may be transferred, shall be the
Escrow Agent under this Escrow
Agreement without further act.
(L) In the event that the Merger is
approved, upon the Effective
Time, and without further act of
any Stockholder, Pat Kenealy
shall be appointed as agent and
attorney-in-fact (the
"Stockholder Representative")
for each Stockholder, for and on
behalf of the Stockholders, to
give and receive notices and
communications, to authorize
delivery to Buyer of shares of
Buyer Common Stock from the
Escrow Fund in satisfaction of
claims by Buyer, to object to
such deliveries, to agree to,
negotiate, enter into
settlements and compromises of,
and demand arbitration and
comply with orders of courts and
awards of arbitrators with
respect to such claims, and to
take all actions necessary or
appropriate in the judgment of
the Stockholder Representative
for the accomplishment of the
-64-
<PAGE>
foregoing. Such agency may be
changed by the Stockholders from
time to time upon not less than
thirty (30) days prior written
notice to Buyer; provided,
however, that the Stockholder
Representative may not be
removed unless holders of a
majority in interest in the
Escrow Fund agree to such
removal and to the identity of
the substituted agent. Any
vacancy in the position of
Stockholder Representative may
be filled by approval of the
holders of a majority in
interest in the Escrow Fund. No
bond shall be required of the
Stockholder Representative, and
the Stockholder Representative
shall not receive compensation
for his or her services. Notices
or communications to or from the
Stockholder Representative shall
constitute notice to or from
each of the Stockholders. The
Stockholder Representative shall
not be liable for any act done
or omitted hereunder as
Stockholder Representative while
acting without gross negligence,
bad faith and willful
misconduct. The Stockholders on
whose behalf the Escrow Amount
was contributed to the Escrow
Fund shall severally indemnify
the Stockholder Representative
and hold the Stockholder
Representative harmless against
any loss, liability or expense
incurred without gross
negligence, bad faith or willful
misconduct on the part of the
Stockholder Representative and
arising out of or in connection
with the acceptance or
administration of the
Stockholder Representative's
duties hereunder, including the
reasonable fees and expenses of
any legal counsel retained by
the Stockholder Representative.
A decision, act, consent or
instruction of the Stockholder
Representative shall constitute
a decision of all Stockholders
for whom a portion of the Escrow
Amount otherwise issuable to
them are deposited in the Escrow
Fund and shall be final, binding
and conclusive upon each of such
Stockholders, and the Escrow
Agent and Buyer may rely upon
any such decision, act, consent
or instruction of the
Stockholder Representative as
being the decision, act, consent
or instruction of each and every
such Stockholder. The Escrow
Agent and Buyer are hereby
relieved from any liability to
any person for any acts done by
them in accordance with such
decision, act, consent or
instruction of the Stockholder
Representative.
7.3. MAXIMUM PAYMENTS; REMEDY. From and after the Effective Time,
this Article VII shall provide the sole and exclusive remedy
for any and all damages or other liability sustained or
incurred by the Indemnified Parties or their successors and
assigns as the result of any breach of any representation,
warranty or covenant contained in this Agreement or any
claim of negligent misrepresentation against the Company in
connection with this Agreement or the Merger. No
Stockholder
-65-
<PAGE>
shall have any right to contribution from the Company for
any claim made by Buyer after the Effective Time.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1. TERMINATION. Except as provided in Section 8.2, this
Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time:
(a) by mutual written consent of the Company
and Buyer;
(b) by Buyer or the Company if the Effective
Time has not occurred by December 31,
1999; provided, however, that the right to
terminate this Agreement under this
Section 8.1(b) shall not be available to
any party whose action or failure to act
has been a principal cause of or resulted
in the failure of the Merger to occur on
or before such date and such action or
failure to act constitutes a breach of
this Agreement;
(c) by Buyer or the Company if (i) there shall
be a final nonappealable order of a
federal or state court in effect
preventing consummation of the Merger; or
(ii) there shall be any statute, rule,
regulation or order enacted, promulgated
or issued or deemed applicable to the
Merger by any Governmental Entity that
would make consummation of the Merger
illegal;
(d) by Buyer if there shall be any action
taken, or any statute, rule, regulation or
order enacted, promulgated or issued or
deemed applicable to the Merger by any
Governmental Entity, which would: (i)
prohibit Buyer's or Merger Sub's ownership
or operation of any portion of the
business of the Company or (ii) compel
Buyer or the Company to dispose of or hold
separate all or a portion of the business
or assets of the Company or Buyer as a
result of the Merger;
(e) by Buyer if it is not in material breach
of its obligations under this Agreement
and there has been a breach of any
representation, warranty or covenant
contained in this Agreement on the part of
the Company, or if any representation or
warranty on the part of the Company has
become untrue, in either case such that
the condition set forth in Section 6.3.1
would not be satisfied as of the time of
such breach or as of the time such
representation or warranty shall have
become untrue and such inaccuracy in such
representation or warranty or breach shall
not have been cured within thirty (30)
calendar days after written notice to the
Company; provided, however, that, no cure
period shall be required for a breach
which by its nature cannot be cured;
-66-
<PAGE>
(f) by the Company if it is not in material
breach of its obligations under this
Agreement and there has been a breach of
any representation, warranty or covenant
contained in this Agreement on the part of
Buyer, or if any representation or
warranty on the part of Buyer has become
untrue, in either case such that the
condition set forth in Section 6.2.1 would
not be satisfied as of the time of such
breach or as of the time such
representation or warranty shall have
become untrue and such inaccuracy in such
representation or warranty or breach shall
not have been cured within thirty (30)
calendar days after written notice to
Buyer; provided, however, that, no cure
period shall be required for a breach
which by its nature cannot be cured;
(g) by Buyer if a majority of the Stockholders
of the Company vote against the Merger at
the Company Stockholders Meeting;
(h) by Buyer if an event having a Material
Adverse Effect on the Company shall have
occurred after the date of this Agreement,
such that the condition set forth in
Section 6.3.2 would not be satisfied; or
(i) by the Company if the Buyer IPO (whether
pursuant to the Buyer Registration
Statement or any other registration
statement declared effective under the
Securities Act) has not been consummated
by October 15, 1999.
8.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 8.1, this Agreement shall
forthwith become void and there shall be no liability or
obligation on the part of Buyer or the Company or their
respective officers, directors or Stockholders, provided
that each party shall remain liable for any breaches of this
Agreement prior to its termination; provided further that
the provisions of Sections 5.3 (confidentiality), 5.4
(expenses), 8.2 (effect of termination), 8.3 (termination
fees) and 9 (notices) shall remain in full force and effect
and survive any termination of this Agreement.
8.3. TERMINATION FEES. If this Agreement is terminated by (i)
Buyer pursuant to its rights under Section 8.1(e) or (ii)
the Company pursuant to its rights under Section 8.1(f),
then the terminating party shall be entitled, at its option,
to demand payment as liquidated damages from the
non-terminating party in the amount of $15 million in
immediately available funds. The parties agree that, if the
terminating party elects to demand such payment from the
non-terminating party, such payment shall be treated for all
purposes as a liquidated damage award and as the terminating
party's sole and exclusive remedy for any breach of any
representation, warranty, covenant or agreement by the
non-terminating party under this Agreement. Notwithstanding
anything to the contrary contained in this Section 8.3, if
one party fails to pay to the other any fee due hereunder
within 5 business days of the event giving rise to the
payment of such fees, in addition to
-67-
<PAGE>
any amounts paid or payable pursuant to this Section, the
defaulting party shall pay the out-of-pocket costs and
expenses (including reasonable legal fees and expenses)
in connection with any action, including the filing of any
lawsuit or other legal action, taken to collect payment
together with interest on the amount of any unpaid fee at
the publicly announced prime rate of Citibank N.A. from
the date such fee was required to be paid.
8.4. AMENDMENT. This Agreement may be amended by the parties
hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
8.5. EXTENSION; WAIVER. At any time prior to the Effective Time,
Buyer and the Company may, to the extent legally allowed,
(i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any
inaccuracies in the representations and warranties made to
such party contained herein or in any document delivered
pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only
if set forth in an instrument in writing signed on behalf of
such party.
ARTICLE IX
GENERAL PROVISIONS
9.1. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered
personally or by commercial messenger or courier service, or
mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of
complete transmission) to the parties at the following
addresses (or at such other address for a party as shall be
specified by like notice), provided, however, that notices
sent by mail will not be deemed given until received:
If to Buyer:
eToys Inc.
2850 Ocean Park Drive, Suite 225
Santa Monica, CA 90405
Attention: Steven Schoch
Peter Juzwiak, Esq.
Telephone No.: (310) 664-8100
Facsimile No: (310) 664-8101
-68-
<PAGE>
with a copy to:
Irell & Manella LLP
333 South Hope Street, Suite 3300
Los Angeles, CA 90071
Attention: Anthony T. Iler, Esq.
Telephone No.: (213) 620-1555
Facsimile No.: (213) 229-0515
If to the Company:
BabyCenter, Inc.
539 Bryant, Suite 200
San Francisco, CA 94107
Attention: Matt Glickman
Telephone No.: (415) 537-0900
Facsimile No: (415) 537-0909
with a copy to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Attention: Mark B. Weeks
Telephone No.: 650/854-4488
Facsimile No: 650/854-1121
If to the Stockholder Representative:
with a copy to:
9.2. INTERPRETATION. The words "include," "includes" and
"including" when used herein shall be deemed in each case to
be followed by the words "without limitation." The table of
contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.3. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the
same agreement and shall become effective when one or more
counterparts have been signed by each of the parties and
delivered to the other party, it being understood that all
parties need not sign the same counterpart.
-69-
<PAGE>
9.4. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the Exhibits
hereto, the Disclosure Schedule, and the documents and
instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings both
written and oral, among the parties with respect to the
subject matter hereof; (b) except as specifically provided
herein, are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned
(other than by operation of law).
9.5. SEVERABILITY. In the event that any provision of this
Agreement or the application thereof becomes or is declared
by a court of competent jurisdiction to be illegal, void or
unenforceable, the remainder of this Agreement will continue
in full force and effect and the application of such
provision to other persons or circumstances will be
interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such
void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the
extent possible, the economic, business and other purposes
of such void or unenforceable provision.
9.6. EQUITABLE REMEDIES; CUMULATIVE REMEDIES. The parties hereto
acknowledge that monetary damages may be inadequate to
compensate a party for a breach of this Agreement by the
other party. Accordingly, each party hereto shall be
entitled to seek equitable relief, including, without
limitation, the remedy of specific performance, in the event
of a breach of this Agreement by the other party. Except as
otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a
party of any one remedy will not preclude the exercise of
any other remedy.
9.7. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of
California, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws
thereof.
9.8. RULES OF CONSTRUCTION. The parties hereto agree that they
have been represented by counsel during the negotiation and
execution of this Agreement and, therefor, waive the
application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or
other document will be construed against the party drafting
such agreement or document.
-70-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed, all as of the date first written above.
eToys Inc.,
a Delaware corporation
By /s/ Edward C. Lenk
----------------------
Name:
Title:
BabyCenter, Inc.,
a Delaware corporation
By /s/ Matthew Glickman
----------------------
Name:
Title:
Stockholder Representative:
/s/ Pat Kenealy
-------------------------
Pat Kenealy
/s/ Matthew Glickman
-------------------------
Matthew Glickman
(solely with respect to Section 5.23)
/s/ Mark Selcow
-------------------------
Mark Selcow
(solely with respect to Section 5.23)
<PAGE>
Exhibit A = Certificate of Merger
Exhibit B = 145 Letter
Exhibit C = Lock-up Agreement
Exhibit D = Irell & Manella LLP Opinion [intentionally omitted]
Exhibit E = Venture Law Group Opinion [intentionally omitted]
Exhibit F = Employment Agreement
Exhibit G = Covenant Not to Compete
The Disclosure Schedules have been intentionally omitted.
<PAGE>
Exhibit A
CERTIFICATE OF MERGER
MERGING
BABYCENTER, INC.
WITH AND INTO
ETOYS INC.
Pursuant to Section 251 of the
Delaware General Corporation Law
The undersigned, being the __________________ of eToys Inc., a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, DOES HEREBY CERTIFY AS FOLLOWS:
FIRST: That the names and states of incorporation of each of the
constituent corporations of the merger is as follows:
NAME STATE OF INCORPORATION
BabyCenter, Inc. Delaware
eToys Inc. [Delaware]
SECOND: That the Agreement and Plan of Reorganization, dated as of
_________, 1996, by and among eToys Inc., BabyCenter, Inc. and [_________] as
of ____________, 1999, has been approved, adopted, certified, executed and
acknowledged by each of the constituent corporations in accordance with the
requirements of Section 251 of the General Corporation Law of the State of
Delaware.
THIRD: That eToys Inc. shall be the surviving corporation of the
merger.
FOURTH: That the certificate of incorporation of eToys Inc. shall be
the certificate of incorporation of the surviving corporation.
FIFTH: That the executed Agreement and Plan of Reorganization is on
file at the principal place of business of the surviving corporation. The
address of said principal place of business is [____________], California
[_____].
SIXTH: That a copy of the aforesaid Agreement and Plan of
Reorganization, will be furnished by the aforesaid surviving corporation, on
request, and without cost, to any stockholder of each of the aforesaid
constituent corporations.
IN WITNESS WHEREOF, eToys Inc. has caused this Certificate of Merger to
be signed by _____________, its _______________ this ____ day of _________,
1999.
ETOYS INC.
By:____________________________
Name:
Title:
<PAGE>
EXHIBIT B
[Form of Affiliate Agreement]
____________, 1999
[Toy]
__________________
__________________, California, ________
Ladies and Gentlemen:
The undersigned has been advised that as of the date hereof the
undersigned may be deemed to be an "affiliate" of [Toy], a Delaware corporation
("Toy"), or [Blue]., a Delaware corporation ("Blue"), as the term "affiliate" is
(i) defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and
Regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), and/or (ii) used in and for purposes of Accounting Series Releases 130
and 135, as amended, of the Commission. Pursuant to the terms of the Agreement
and Plan of Merger and Reorganization, dated as of [_____], 1999 (the
"Agreement"), between Toy and Blue, at the Effective Time (as defined in the
Agreement) Blue will be merged with and into Toy, with Toy remaining as the
surviving corporation.
As a result of the Merger (as defined in the Agreement), the undersigned
may receive shares of Common Stock, par value $___ per share of Toy ("Toy Common
Stock"). The undersigned would receive such shares in exchange for shares of
capital stock of Blue owned by the undersigned.
The undersigned hereby represents and warrants to, and covenants with, Toy
that in the event the undersigned receives any Toy Common Stock in the Merger:
(A) The undersigned shall not make any sale, transfer or other disposition
of (including a reduction of interest in or risk relating to) the Toy Common
Stock in violation of the Act or the Rules and Regulations.
(B) The undersigned has carefully read this letter and discussed its
requirements and other applicable limitations upon the undersigned's ability to
sell, transfer or otherwise
<PAGE>
dispose of the Toy Common Stock, to the extent the undersigned has felt it
necessary, with the undersigned's counsel.
(C) The undersigned has been advised that the issuance of shares of Toy
Common Stock to the undersigned in the Merger may be registered under the Act by
a Registration Statement on Form S-4 or qualified for issuance under the
exemption provided by Section 3(a)(10) of the Act. However, the undersigned has
also been advised and agrees that because (i) at the time of the Merger's
submission for a vote of the stockholders of Blue or Toy the undersigned may be
deemed an affiliate of Blue or Toy, as the case may be, and (ii) the
distribution by the undersigned of the Toy Common Stock has not been registered
under the Act, the undersigned may not sell, transfer or otherwise dispose of
Toy Common Stock issued to the undersigned in the Merger unless (a) such sale,
transfer or other disposition has been registered under the Act, (b) such sale,
transfer or other disposition is made in conformity with the volume and other
applicable limitations imposed by Rule 145 under the Act, or (c) in the opinion
of counsel reasonably acceptable to Toy, such sale, transfer or other
disposition is otherwise exempt from registration under the Act.
(D) The undersigned understands that Toy will be under no obligation to
register the sale, transfer or other disposition of the Toy Common Stock by the
undersigned or on the undersigned's behalf under the Act or to take any other
action necessary in order to make compliance with an exemption from such
registration available.
(E) The undersigned understands that stop transfer instructions will be
given to Toy's transfer agent with respect to the Toy Common Stock owned by the
undersigned and that there may be placed on the certificates for the Toy Common
Stock issued to the undersigned, or any substitutions therefor, a legend stating
in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 under the Securities Act of 1933
applies. The shares represented by this certificate may only be
transferred in accordance with the terms of a letter agreement
dated __________, 1999, a copy of which agreement is on file at
the principal offices of [Toy]."
(F) The undersigned also understands that unless the transfer by the
undersigned of the undersigned's Toy Common Stock has been registered under the
Act or is a sale made in conformity with the provisions of this letter, Toy
reserves the right, in its sole discretion, to place the following legend on the
certificates issued to any transferee of shares from the undersigned:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired
from a person who received such shares in a transaction to
which Rule 145 under the Securities Act of 1933 applies. The
shares have been acquired by the holder not with a view to, or
for resale in connection with, any distribution thereof within
the meaning of the Securities Act of 1933 and may not be
offered, sold, pledged or otherwise transferred except in
accordance with an exemption from the registration requirements
of the Securities Act of 1933."
-2-
<PAGE>
It is understood and agreed that the legend set forth in paragraph E or F
above shall be removed by delivery of substitute certificates without such
legend if the undersigned shall have delivered to Toy (i) a copy of a letter
from the staff of the Commission, or an opinion of counsel, in form and
substance reasonably satisfactory to Toy to the effect that such legend is not
required for purposes of the Act or (ii) reasonably satisfactory evidence or
representations that the shares represented by such certificates are being or
have been transferred in a transaction made in conformity with the provisions of
Rule 145.
This agreement shall be governed by and construed in accordance with the
laws of the State of California, without giving effect to principles of
conflicts of laws. This agreement shall be binding on the undersigned's
successors and assigns, including his or her heirs, executors and
administrators.
Very truly yours,
---------------------------
---------------------------
Print name
Acknowledged this ____ day
of _____________, 1999.
TOY
By:
-------------------------
Name:
Its:
-3-
<PAGE>
EXHIBIT C
VOTING AND LOCK-UP AGREEMENT
THIS VOTING AND LOCK-UP AGREEMENT is made and entered into as of April __,
1999 (this "Voting Agreement"), by and between [Toy], a Delaware corporation
("Buyer"), and the party identified on the signature page hereto
("Stockholder").
RECITALS
A. Buyer and [Blue], a Delaware corporation (the "Company"), have
contemporaneously with the execution of this Voting Agreement entered into an
Agreement and Plan of Reorganization dated as of even date herewith (the "Merger
Agreement") which provides, among other things, that a wholly-owned subsidiary
of Buyer to be formed ("Merger Sub") shall be merged (the "Merger") with and
into the Company pursuant to the terms and conditions thereof;
B. As an essential condition and inducement to Buyer to enter into the
Merger Agreement and in consideration therefor, Stockholder and Buyer have
agreed to enter into this Voting Agreement; and
C. As of the date hereof, the Stockholder owns of record and beneficially
the shares of common stock, par value $0.001 per share ("Company Common Stock")
and, if applicable, the shares of preferred stock, par value $0.001 per share
("Company Preferred Stock"), of the Company (collectively, the Company Common
Stock and the Company Preferred Stock are referred to herein as the "Company
Stock") set forth on the signature page hereto and desires to enter into this
Agreement with respect to such shares of Company Stock.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein and in the Merger Agreement, the parties hereto
agree as follows:
ARTICLE I
1. VOTING OF SHARES; CONVERSION OF SHARES.
1.1 VOTING AGREEMENT. Stockholder hereby agrees to (a) appear, or
cause the holder of record on any applicable record date (the "Record Holder")
to appear for the purpose of obtaining a quorum at any annual or special meeting
of stockholders of the Company and at any adjournment thereof at which matters
relating to the Merger, the Merger Agreement or any transaction contemplated
thereby are considered and (b) vote, or cause the Record Holder to vote, in
person or by proxy, all of the shares of Company Stock owned by Stockholder, or
with respect to which such Stockholder has or shares voting power or control,
and all of the shares of Company Stock which shall, or with respect to which
voting power or control shall, hereafter be acquired by Stockholder
(collectively, the "Shares") (i) in favor of the Merger, the Merger Agreement
and the transactions contemplated by the Merger Agreement and (ii) against any
amendment of the Company's certificate of incorporation or by-laws or other
proposal or transaction involving the Company, which would be reasonably likely
to impede, frustrate, prevent or nullify the
<PAGE>
Merger, the Merger Agreement or any of the other transactions contemplated by
the Merger Agreement or change in any manner the voting rights of any class
of Company Stock. In the event written consents are solicited or otherwise
sought from stockholders of the Company with respect to approval or adoption
of the Merger Agreement, with respect to the approval of the Merger or with
respect to any of the other actions contemplated by the Merger Agreement,
Stockholder shall (unless otherwise directed by Buyer) execute, or cause the
Record Holder to execute, with respect to all Shares, a written consent or
written consents to such proposed action.
1.2 GRANT OF PROXY. In furtherance of the foregoing, Stockholder,
by this Agreement, with respect to all Shares now owned of record or that may
hereafter be acquired by Stockholder at anytime prior to the Effective Time
(as defined in the Merger Agreement), does hereby constitute and appoint
Buyer and Merger Sub, or any nominee of Buyer and Merger Sub, with full power
of substitution, from the date hereof to the earlier to occur of the
termination of this Voting Agreement or the Effective Time, as its true and
lawful attorney-in-fact and proxy (its "Proxy"), for and in its name, place
and stead, to demand that the Secretary of the Company call a special meeting
of stockholders of the Company for the purpose of considering any action
related to the Merger Agreement and to vote each of such Shares as its Proxy
at every annual, special or adjourned meeting of stockholders of the Company,
including the right to sign its name (as stockholder) to any consent,
certificate or other document relating to the Company that the law of the
State of Delaware may permit or require, in favor of the Merger, the Merger
Agreement and the transactions contemplated by the Merger Agreement. This
Proxy and power of attorney is irrevocable to the fullest extent permitted by
the law of the State of Delaware and is coupled with an interest.
1.3 FURTHER ASSURANCES. Stockholder shall perform such further acts
and execute such further documents and instruments as may reasonably be required
to vest in Buyer and Merger Sub the power to carry out and give effect to the
provisions of this Voting Agreement.
1.4 NO OWNERSHIP INTEREST. Nothing contained in this Voting
Agreement shall be deemed to vest in Buyer any direct or indirect ownership or
incidence of ownership of or with respect to any Shares. All rights, ownership
and economic benefits of and relating to the Shares shall remain and belong to
Stockholder, and Buyer shall have no authority to manage, direct, superintend,
restrict, regulate, govern, or administer any of the policies or operations of
the Company or exercise any power or authority to direct Stockholder in the
voting of any of the Shares, except as otherwise provided herein, or the
performance of Stockholder's duties or responsibilities as a stockholder of the
Company.
1.5 DOCUMENTS DELIVERED. Stockholder acknowledges receipt of copies
of the following document: the Merger Agreement and all Exhibits and Schedules
thereto.
1.6 NO INCONSISTENT AGREEMENTS. Each Stockholder hereby covenants
and agrees that, except as contemplated by this Voting Agreement and the Merger
Agreement, the Stockholder (a) has not entered, and shall not enter at any time
while this
-2-
<PAGE>
Voting Agreement remains in effect, into any voting agreement and (b) has not
granted, and shall not grant at any time while this Voting Agreement remains
in effect, a proxy or power of attorney.
1.7 CONVERSION OF SHARES; OTHER ACTIONS. The Stockholder agrees to
take, or cause to be taken, all actions (including, without limitation, by
causing any director designee of such Stockholder to cause the Company to take
action) necessary to:
(a) terminate, not later than the Effective Time, the Amended
and Restated Investors Rights Agreement dated as of October 13, 1998 (as amended
to the date hereof) without requiring any payment, performance or obligation by
the Company;
(b) terminate, not later than the Effective Time, any other
agreement or arrangement between the Stockholder and the Company or
between/among the Stockholder and any other stockholder of the Company
restricting the registration, voting or transfer of Shares, or granting the
Stockholder registration rights without requiring any payment, performance or
obligation by the Company;
(c) convert, not later than the Effective Time, all shares of
Company Preferred Stock owned or held by the Stockholder into Company Common
Stock pursuant to Section 5(a) of the Company's Fourth Amended and Restated
Articles of Incorporation and to cause the automatic conversion of all
outstanding shares of Company Preferred Stock as a class into Company Common
Stock pursuant to, and by giving the consents required by, Section 5(b) of said
articles; PROVIDED, HOWEVER, that the effectiveness of each of the foregoing
actions described in clauses (a) - (c) shall be contingent upon consummation of
the Merger.
The Stockholder also agrees to provide Buyer with reasonably satisfactory
evidence of all of the preceding actions.
ARTICLE II
2. TRANSFER.
2.1 TRANSFER OF TITLE.
(a) Stockholder hereby covenants and agrees that Stockholder
will not, prior to the termination of this Voting Agreement, either directly or
indirectly, sell, assign, pledge, hypothecate, transfer, exchange, or dispose
("Transfer") of any Shares or options to purchase Company Stock ("Options") or
any other securities or rights convertible into or exchangeable for shares of
Company Stock, owned either directly or indirectly by Stockholder or with
respect to which Stockholder has the power of disposition, whether now or
hereafter acquired, without the prior written consent of Buyer; PROVIDED that
nothing contained herein will be deemed to restrict the exercise of Option; and
PROVIDED FURTHER that the foregoing requirements shall not prohibit any Transfer
to any person or entity where as a pre-condition to such Transfer the transferee
agrees to be bound by all the terms and conditions of this Voting Agreement and
deliver a duly executed copy of the Voting Agreement to Toy to evidence such
agreement.
-3-
<PAGE>
(b) Stockholder hereby agrees and consents to the entry of stop
transfer instructions by the Company against the transfer of any Shares or
Options consistent with the terms of Section 2.1(a) hereof.
ARTICLE III
3. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. Stockholder hereby
represents and warrants to Buyer as follows:
3.1 AUTHORITY RELATIVE TO THIS AGREEMENT. Stockholder is competent
to execute and deliver this Voting Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. This Voting
Agreement has been duly and validly executed and delivered by Stockholder and,
assuming the due authorization, execution and delivery by Buyer, constitutes a
legal, valid and binding obligation of Stockholder, enforceable against
Stockholder in accordance with its terms. If the Stockholder is a natural
person and is married, and the Shares and Options held or owned by the
Stockholder constitute community property or otherwise need spousal or other
approval for this Voting Agreement to be legal, valid and binding, this
Agreement has been duly authorized, executed and delivered by, and (making the
same assumption in the preceding sentence) constitutes a valid and binding
agreement of, the Stockholder's spouse, enforceable against such spouse in
accordance with its terms. No trust of which such Stockholder is a trustee
requires the consent of any beneficiary to the execution and delivery of this
Voting Agreement or to the consummation of the transactions contemplated hereby.
3.2 NO CONFLICT. The execution and delivery of this Voting Agreement
by Stockholder does not, and the performance of this Voting Agreement by
Stockholder shall not, result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance, on any of
the Shares or Options pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Stockholder is a party or by which Stockholder or the Shares
or Options are bound or affected.
3.3 TITLE TO THE SHARES. The Stockholder is the record and
beneficial owner of, and has good and marketable title to, the Shares and
Options set forth on the signature page hereto, and the Shares and Options held
by Stockholder are owned free and clear of all security interests, liens,
claims, pledges, options, rights of first refusal, agreements, limitations on
Stockholder's voting rights, charges and other encumbrances of any nature
whatsoever, and Stockholder has not appointed or granted any proxy, which
appointment or grant remains effective, with respect to the Shares (other than
under this Voting Agreement).
ARTICLE IV
4. LOCK-UP. Stockholder acknowledges that Buyer is currently in
registration with the Securities and Exchange Commission for the initial public
offering (the "IPO") of
-4-
<PAGE>
shares of Buyer's Common Stock, par value $.0001 per share ("Buyer Common
Stock"). Stockholder further acknowledges that, in connection with the IPO,
certain stockholders of Buyer will become bound by a 180-day lock-up
arrangement with the underwriters in the IPO that restricts the ability of
such stockholders to sell or otherwise transfer any interest in shares of
Buyer Common Stock held by them during such time period following the IPO
(the "Lock-Up"). As additional consideration for Buyer's agreement to enter
into and consummate the transactions contemplated by the Merger Agreement,
Stockholder agrees to be bound by the Lock-Up effective as of the Effective
Time of the Merger (as defined in the Merger Agreement) and continuing
through the end of such 180-day Lock-Up period, as if Stockholder were a
direct party thereto with the underwriters in the IPO, with respect to all
shares of Buyer Common Stock that may have been or are acquired by
Stockholder at any time, whether pursuant to the exchange of shares in the
Merger or otherwise.
ARTICLE V
5. MISCELLANEOUS.
5.1 NO SOLICITATION. From the date hereof until the Effective Time
or, if earlier, the termination of the Merger Agreement, Stockholder shall not
(whether directly or indirectly through advisors, agents or other
intermediaries) engage in any discussions or take any actions that, if engaged
in or taken by the Company, would violate Section 4.2 of the Merger Agreement.
5.2 TERMINATION. This Agreement shall terminate upon the earliest to
occur of (a) the termination of the Merger Agreement in accordance with its
terms or (b) the Effective Time. Upon such termination, no party shall have any
further obligations or liabilities hereunder other than as provided in Section 4
hereof, PROVIDED that no such termination shall relieve any party from liability
for any breach of this Voting Agreement prior to such termination.
5.3 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Voting Agreement were not performed in accordance with its specified terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Voting
Agreement and to specific performance of the terms and provisions hereof in
addition to any other remedy to which they are entitled at law or in equity.
5.4 SUCCESSORS AND AFFILIATES. This Voting Agreement shall inure to
the benefit of and shall be binding upon the parties hereto and their respective
heirs, legal representatives and permitted assigns. If Stockholder shall at any
time hereafter acquire ownership of, or voting power with respect to, any
additional Shares in any manner, whether by the exercise of any options or any
securities or rights convertible into or exchangeable for shares of Company
Stock, by operation of law or otherwise, such Shares shall be held subject to
all of the terms and provisions of this Voting Agreement. Without limiting the
foregoing, Stockholder specifically agrees that the obligations of Stockholder
-5-
<PAGE>
hereunder shall not be terminated by operation of law, whether by death or
incapacity of Stockholder or otherwise.
5.5 ENTIRE AGREEMENT. This Voting Agreement together with the
Affiliates Agreements, in the form attached as EXHIBIT B to the Merger
Agreement, if and to the extent entered into by Stockholder and Buyer,
constitutes the entire agreement among Buyer and Stockholder with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
both written and oral, among Buyer and Stockholder with respect to the subject
matter hereof.
5.6 CAPTIONS AND COUNTERPARTS. The captions in this Voting Agreement
are for convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Voting Agreement. This
Voting Agreement may be executed in several counterparts, each of which shall
constitute one and the same instrument.
5.7 AMENDMENT. This Voting Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
5.8 WAIVERS. Except as provided in this Voting Agreement, no action
taken pursuant to this Voting Agreement, including without limitation any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Voting Agreement. The
waiver by any party hereto of a breach of any provision hereunder shall not
operate or be construed as a wavier of any prior or subsequent breach of the
same or any other provision hereunder.
5.9 SEVERABILITY. If any term or other provision of this Voting
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Voting Agreement
shall nevertheless remain in full force and effect. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this Voting
Agreement so as to effect the original intent of the parties as closely as
possible to the fullest extent permitted by applicable law in a mutually
acceptable manner in order that the terms of this Voting Agreement remain as
originally contemplated to the fullest extent possible.
5.10 NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made and shall be effective upon receipt, if delivered personally, upon
receipt of a transmission confirmation if sent by facsimile (with a confirming
copy sent by overnight courier) and on the next business day if sent by Federal
Express, United Parcel Service, Express Mail or other reputable overnight
courier to the parties at the following addresses (or at such other address for
a party as shall be specified by notice):
If to Stockholder: At the address set forth opposite Stockholder's name on
the signature page hereto
-6-
<PAGE>
With a copy to:
----------------------------
----------------------------
----------------------------
Attention:
-----------------
Telephone:
-----------------
Telecopy No.:
--------------
If to Buyer or
Merger Sub: [Toy]
----------------------------
----------------------------
Attention:
-----------------
Telephone:
-----------------
Telecopy No.:
--------------
With a copy to: Irell & Manella LLP
333 South Hope Street, Suite 3300
Los Angeles, CA 90071
Attention: Anthony T. Iler
Telephone: (213) 620-1555
Telecopy No.: (213) 229-0515
5.11 GOVERNING LAW. This Voting Agreement shall be governed by, and
construed in accordance with, the laws of the State of California regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law.
5.12 DEFINITIONS. Capitalized terms used and not defined herein shall
have the meaning set forth in the Merger Agreement.
5.13 OFFICERS AND DIRECTORS. No person who is or becomes (during the
term hereof) a director or officer of the Company makes any agreement or
understanding herein in his or her capacity as such director or officer, and
nothing herein will limit or affect, or give rise to any liability to
Stockholder by virtue of, any actions taken by any Stockholder in his or her
capacity as an officer or director of the Company in exercising its rights under
the Merger Agreement.
5.14 INTERPRETATION. The parties have participated jointly in the
negotiation of this Voting Agreement. In the event that an ambiguity or
question of intent or interpretation arises, this Voting Agreement shall be
construed as if drafted jointly by the parties, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of the provisions of this Voting Agreement.
5.15 VOIDABILITY. If prior to the execution hereof, the Board of
Directors of the Company shall not have duly and validly authorized and approved
by all necessary corporate action, this Voting Agreement, the Merger Agreement
and the transactions contemplated hereby and thereby, so that by the execution
and delivery hereof Buyer or Merger Sub would become, or could reasonably be
expected to become, an
-7-
<PAGE>
"interested stockholder" with whom the Company would be prevented for any
period pursuant to Section 203 of the Delaware General Corporation Law from
engaging in any "business combination" (as such terms are defined in Section
203 of the Delaware General Corporation Law), then this Voting Agreement
shall be void and unenforceable until such time as such authorization and
approval shall have been duly and validly obtained.
-8-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have caused this Voting
Agreement to be duly executed as of the date first written above.
[TOY]
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
STOCKHOLDER
-------------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Address:
-----------------------------
-----------------------------
-----------------------------
-------------------------------------
Spouse (if necessary)
Number of Shares of Company
Common Stock owned:
-------------------------
Number of Shares of Company
Preferred Stock owned: Series A:___________;
Series B:___________;
Series C:___________
Number of Options:
--------------------------
-9-
<PAGE>
EXHIBIT F
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of _______, 1999,
is made and entered by and among Matthew Glickman [Mark Selcow] (the
"Executive"), eToys Inc., a Delaware corporation ("Parent"), and BabyCenter,
Inc., a Delaware corporation and wholly owned subsidiary of Parent (the
"Company").
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Reorganization dated as of
April __, 1999 (the "Merger Agreement"), between the Company and Parent, as of
the date hereof Parent has acquired the Company by way of a merger;
WHEREAS, Parent and the Company desire to be assured of the continued
provision of services by the Executive and therefore wish to have the Company
employ the Executive in the capacity and on the terms set forth below;
WHEREAS, the Executive desires to commit himself to serve the Company on
the terms set forth below;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the parties hereto agree as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Executive and the
Executive shall continue in the employ of the Company for the period
commencing on the date of this Agreement, and ending on ______________,
2004, unless sooner terminated in accordance with the provisions of this
Agreement or otherwise (the "Initial Term"). This Agreement may be
renewed or extended for one or more additional periods after the Initial
Term only by mutual written agreement to that effect by the parties
(each, a "Renewal Period"); provided, that any such Renewal Period may be
terminated as provided herein. The "Term" shall mean the period
beginning on the date hereof and ending on the date of termination of
Executive's services for the Company. Upon expiration of the Term,
except as expressly set forth herein (including in Section 6), this
Agreement and all of its provisions shall terminate and shall cease to
have any force or effect.
2. DUTIES
(a) During the Term, the Executive shall serve as the Chief Executive
Officer [President in the case of Selcow] of the Company, with
such authority and duties as are assigned to him from time to time
by the Board of Directors of the Company or the Board of Directors
of Parent, that are consistent with the customary duties
associated with such title and position. During the Term,
Executive shall report to the Chief Executive Officer of Parent or
the Board of Directors of the Company and/or Parent, as determined
by the Company or Parent from time to time.
<PAGE>
(b) During the Term, the Executive shall devote substantially all his
working time, attention, skill and efforts to the business and
affairs of the Company, will use his best efforts to promote the
success of the Company's business, and shall not enter the employ
of or serve as a consultant to, or in any way perform any
services, with or without compensation, for any other person,
enterprise, business, company, corporation, partnership, firm,
association or organization.
3. COMPENSATION AND RELATED MATTERS
(a) SALARY. During the Term, the Executive shall receive a salary at
the rate of $150,000 per annum, payable in accordance with the
Company's regular payroll practices. Executive's annual base
salary shall be subject to review from time to time for possible
increases by the Board of Directors of the Company or of Parent.
(Executive's base salary, as increased from time to time, shall be
referred to as the "Base Salary.")
(b) EXPENSES. The Company shall reimburse the Executive for all
reasonable travel and other reasonable out-of-pocket business
expenses incurred by the Executive in the performance of his
duties under this Agreement upon evidence of payment and otherwise
in accordance with the Company's procedures in effect from time to
time.
(c) EMPLOYEE BENEFITS. During the Term, except as provided in Section
2(d) below, the Executive shall be entitled to participate in or
receive benefits under any employee health benefit plan or other
arrangement made available by the Company or its subsidiaries to
its employees ("Health Benefit Plan") on terms no less favorable
than those generally applicable to other employees of the Company
or its subsidiaries, subject to and on a basis consistent with the
terms, conditions and overall administration of such Health
Benefit Plan. The Executive shall also be entitled to participate
in or receive benefits under any other employee benefit plans on
terms no less favorable than those generally applicable to
employees of the Company or its subsidiaries, subject to and on a
basis consistent with the terms, conditions and overall
administration of such other employee benefit plans.
(d) VACATION. The Executive shall be entitled to three weeks vacation
during each year of the Term.
(e) DEDUCTIONS AND WITHHOLDINGS. All amounts payable or which become
payable hereunder shall be subject to all deductions and
withholding required by law.
(f) STOCK OPTIONS. On the date hereof, the Board of Directors of
Parent shall cause to be issued to Executive, from Parent's 1999
Employee Stock Option Plan, options (the "Executive Options") to
purchase ____ [insert the product of 50,000 multiplied by the
ratio of the stock split effected in connection with the Parent
IPO] shares of the common stock, par value $.0001 per share, of
-2-
<PAGE>
Parent ("Parent Common Stock"). Such options shall have an
exercise price equal to the closing sales price of the Parent
Common Stock on the Nasdaq National Market on the date of this
Agreement. All other terms of the options, including the
four-year vesting schedule, shall be as specified in the 1999
Employee Stock Option Plan.
(g) ACCELERATED VESTING UNDER CERTAIN CIRCUMSTANCES. Parent agrees
that, in the event of a Change of Control of Parent (as defined
below), if Executive is terminated without Cause or pursuant to a
Constructive Termination (each as defined below) at any time prior
to the second anniversary of such Change of Control, then the
vesting of all options to acquire shares of Parent Common Stock
held by Executive shall be immediately accelerated and all such
options shall become exercisable in full
4. TERMINATION. The Executive's services for the Company and the Term of
this Agreement may be terminated under the following circumstances:
(a) DEATH. The Executive's services hereunder shall terminate upon
his death. In the case of the Executive's death, the Company
shall pay to the Executive's beneficiaries or estate, as
appropriate, after his death, his then current accrued and unpaid
Base Salary as well as 100% of any earned and unpaid bonus for any
years preceding the year of termination ("Unpaid Bonus") and other
benefits and payments then due (including, without limitation,
reimbursement of amounts under Section 3) to which the Executive
is then entitled hereunder. Executive and his beneficiaries, as
appropriate, shall be entitled to no other compensation under this
Agreement following, or as a result of, a termination under these
circumstances.
(b) DISABILITY
(i) If a Disability (as defined below) of the Executive occurs
during the Term, the Company may give the Executive written
notice of its intention to terminate his employment. In
such event, the Executive's services with the Company shall
terminate on the effective date specified in such notice.
In the case of a termination as a result of a Disability,
the Company shall pay to the Executive after his
termination his then current accrued and unpaid Base
Salary, Unpaid Bonus and other benefits and payments then
due (including, without limitation, reimbursement of
amounts under Section 3 to which the Executive is entitled
hereunder). Executive and his beneficiaries, as
appropriate, shall be entitled to no other compensation
under this Agreement following, or as a result of, a
termination under these circumstances.
(ii) For the purpose of this subsection 4(b), "Disability" shall
mean the Executive's inability to perform his duties to the
Company on a full-time basis for 90 consecutive days or a
total of 120 days in any twelve
-3-
<PAGE>
month period as reasonably determined by the Board of
Directors of the Company or of Parent.
(c) TERMINATION BY THE COMPANY FOR CAUSE
The Company may terminate the Executive's services hereunder
for Cause (as defined below) at any time upon written notice
to the Executive. In such event, the Executive's services
shall terminate on the effective date specified in such
notice. In the case of the Executive's termination for Cause,
the Company shall promptly pay to the Executive his then
current accrued and unpaid Base Salary and other benefits and
payments then due (including, without limitation,
reimbursement of amounts under Section 3 (other than payments
under any bonus plan for the year of termination)) to which
the Executive is entitled hereunder. The Executive and his
beneficiaries, as appropriate, shall be entitled to no other
compensation under this Agreement following, or as a result
of, a termination under these circumstances. For purposes of
this Agreement, the Company shall have "Cause" to terminate
Executive's services hereunder in the event the Company or
Parent shall determine in good faith that any of the following
has occurred: (A) acts or omissions by the Executive which
constitute material misconduct or a knowing violation of a
material written policy of the Company or any of its
subsidiaries (provided Executive has been provided with a copy
of such material written policy), (B) the Executive or any
affiliated or related person or entity receiving a benefit in
money, property or services from the Company or any of its
subsidiaries or from another person dealing with the Company
or any of its subsidiaries, in material violation of
applicable law or Company policy, (C) an act of fraud,
conversion, misappropriation, or embezzlement by the Executive
or his conviction of, or entering a guilty plea or plea of no
contest with respect to, a felony, or the equivalent thereof,
(D) a material breach by the Executive of any of the
provisions of Section 6 or Section 7 hereof, (E) the
Executive's failure or refusal (whether intentional, reckless
or negligent) to perform his duties under this Agreement or
(F) any other breach by the Executive of this Agreement in any
material respect.
(d) TERMINATION BY THE EXECUTIVE. The Executive may terminate his
employment hereunder, PROVIDED that Executive first gives the
Company a written notice of termination at least 30 calendar days
prior to the effective date of any such termination. In the event
the Executive terminates his employment, the Company shall pay to
the Executive his then current accrued and unpaid Base Salary and
other benefits and payments then due (including, without
limitation, reimbursement of amounts under Section 3 (other than
payments under any bonus plan for the year of termination)) to
which the Executive is entitled hereunder. The Executive and his
beneficiaries shall be entitled to no other compensation under
this Agreement following, or as a result of, a termination under
these circumstances.
(e) TERMINATION BY THE COMPANY WITHOUT CAUSE AND CONSTRUCTIVE
TERMINATION. The Company may terminate the Executive's services
hereunder without
-4-
<PAGE>
Cause at any time upon 30 days' written notice to the
Executive. Further, in the event that the Company either (i)
requires, as a condition of his employment and without his
consent, that Executive relocate outside of the San Francisco
Bay Area, or (ii) re-assigns Executive to a position, or
delegates to Executive duties and responsibilities, that are
materially less than those generally associated with the title
specified in Section 2(a) hereof for an executive in a company
that is reasonably comparable in size and nature of business to
the Company (either clause (i) or clause (ii), a "Constructive
Termination"), then Executive shall be entitled to elect to
treat such events specified in clause (i) or (ii) as a
constructive termination of his employment hereunder by
providing written notice of such election to the Company. In
the event that Executive is terminated without Cause or
pursuant to a Constructive Termination as provided herein,
Executive's services shall terminate on the effective date
specified in the respective notice specified above, all options
to acquire Parent Common Stock held by Executive will become
fully vested and immediately exerciseable, and the Company
shall pay to the Executive (A) his current accrued and unpaid
Base Salary, Unpaid Bonus and other benefits and payments
(including, without limitation, reimbursement of amounts under
Section 3) to which the Executive is entitled hereunder as of
such effective date and (B) either (x) if such termination
occurs at any time prior to the second anniversary of the date
hereof, 18 months of the Executive's then applicable Base
Salary, or (y) if such termination occurs at any time from the
second anniversary of the date hereof through and including the
fifth anniversary of the date hereof, 12 months of the
Executive's then applicable Base Salary (provided, however,
that under no circumstance shall any severance payment be made
in respect of any month that follows the fifth anniversary of
the date hereof), in each case subject to the Executive's
compliance with the terms of Section 6 and Section 7 hereof.
Notwithstanding the foregoing subclause (B), in the event that
Executive becomes employed in a position that is reasonably
comparable to his position with the Company in terms of base
salary and level of duties and responsibilities, then the
Company shall no longer be required to make the payments under
subclause (B) from and after the date of Employee's
commencement of such alternative employment. The Executive and
his beneficiaries shall be entitled to no other compensation
under this Agreement following, or as a result of, a
termination without Cause or a Constructive Termination under
this paragraph. Salary and bonus payments referred to in this
Section 4(e) will be paid in accordance with Sections 3(a) and
3(c), as applicable.
5. LIMITATIONS ON STOCK TRANSFER.
(a) DEFINED TERMS. For purposes of this Section 5, the following
terms shall have the following meanings:
"Change of Control" shall mean (a) a sale of all or substantially
all of the assets of Parent or (b) a merger, consolidation,
reorganization, combination or other comparable business
transaction involving Parent following which
-5-
<PAGE>
the shareholders of Parent immediately prior to such transaction
cease to own at least a majority of the outstanding voting
power of all classes of Parent capital stock following such
transaction.
"Exchange Ratio" shall have the meaning specified therefor in the
Merger Agreement.
"Subject Shares" means a number of shares of Parent Common Stock
owned by Executive as of the date hereof equal to the product of
(A) 875,199 [875,198 in the case of Selcow] MULTIPLIED BY (B) the
Exchange Ratio MULTIPLIED BY (C) 0.666667, rounded down to the
nearest even number. The number of Subject Shares shall be
adjusted from time to time to reflect any stock split, stock
dividend, reverse stock split or other comparable transaction of
Parent following the date hereof, and such adjusted number of
shares shall be subject to the terms of this Section 5.
"Transfer" means to sell, offer to sell, contract to sell, assign,
pledge, hypothecate, transfer, exchange, grant any option to
purchase or otherwise transfer or dispose of.
(b) LIMITATION ON TRANSFERS OF SUBJECT SHARES.
(i) LOCK-UP. Executive hereby agrees that, without Parent's
prior written consent, he will not, directly or indirectly,
Transfer (A) any of the Subject Shares at any time prior to
the first anniversary of the date of this Agreement or (B)
more than one-half of the Subject Shares at any time from
the first anniversary of the date of this Agreement through
and including the second anniversary of the date of this
Agreement; PROVIDED, HOWEVER, that the foregoing provisions
shall become null and void and of no further force or
effect in the event that (i) Parent terminates Executive
without Cause or pursuant to a Constructive Termination or
(ii) Parent experiences a Change of Control.
(ii) STOP TRANSFER; LEGEND. Executive hereby agrees and consents
to the entry of stop transfer instructions by Parent
against the Transfer of the Subject Shares consistent with
the terms of this Section 5. In addition, Executive hereby
agrees and consents to the placement of a legend on any
certificate representing the Subject Shares stating that
the Transfer of such Subject Shares is restricted by the
terms of this Agreement.
(iii) NO OWNERSHIP INTEREST BY PARENT. Nothing contained in this
Section 5 shall be deemed to vest in Parent any direct or
indirect ownership or incidence of ownership of or with
respect to any Subject Shares. All rights of ownership and
economic benefits of and relating to the Subject Shares,
including, without limitation, the right to vote the
Subject Shares and to receive dividends thereon, shall
remain and
-6-
<PAGE>
belong to Executive, subject only to the Transfer
restrictions contained in this Section 5.
(c) CERTAIN TRANSFERS OF SHARES OF PARENT COMMON STOCK. Executive
agrees that, if Executive elects at any time to Transfer 100,000
or more shares of Parent Common Stock in any single transaction or
series of related transactions, then Executive and Parent will
retain a nationally recognized investment banking firm, which
shall be approved in writing by both Executive and Parent, such
approval not to be unreasonably withheld by either party (the
"Investment Bank"). Executive and Parent will request that the
Investment Bank provide Executive and Parent with advice regarding
the manner of Transferring the respective shares that will most
effectively achieve the two goals of maximizing Executive's price
for the respective shares and minimizing any negative impact of
such Transfer on the public trading price of Parent Common Stock.
Each of Executive and Parent agrees to follow such advice of the
Investment Bank in connection with any such Transfer; provided
that, if the Investment Bank recommends a registered, underwritten
secondary offering of the respective shares, then Parent shall be
entitled to decline to follow such advice, in which event
Executive shall be entitled to sell the respective shares in a
manner designed solely to maximize the price paid to Executive for
the respective shares. All sales commissions payable to the
Investment Bank in connection with any Transfer under this
paragraph shall be paid by Executive, and the reasonable expenses
of the Investment Bank in connection with providing such services
to Executive and Parent will be paid by Parent.
6. CONFIDENTIAL AND PROPRIETARY INFORMATION.
(a) The parties agree and acknowledge that during the course of the
Executive's employment, the Executive has been given and will have access
to and be exposed to trade secrets and confidential information in
written, oral, electronic and other forms regarding Parent, the Company
and their subsidiaries (which includes but is not limited to all of its
business units, divisions and subsidiaries) and their business,
equipment, products and employees, including, without limitation: the
identities of Parent's and the Company's and their subsidiaries'
customers and key accounts and potential customers and key accounts
(hereinafter referred to collectively as "Customers"), including, without
limitation, the identity of Customers the Executive cultivates or
maintains while providing services at Parent, the Company or any of their
subsidiaries using Parent's the Company's, or any of their subsidiaries'
products, name and infrastructure, and the identities of contact persons
at those Customers; the particular preferences, likes, dislikes and needs
of those Customers and contact persons with respect to product types,
pricing, sales calls, timing, sales terms, rental terms, lease terms,
service plans, and other marketing terms and techniques; Parent's and the
Company's and their subsidiaries' business methods, practices,
strategies, forecasts, pricing, and marketing techniques; the identities
of
-7-
<PAGE>
Parent's and the Company's and their subsidiaries' licensors, vendors
and other suppliers and the identities of Parent's and the Company's
and their subsidiaries' contact persons at such licensors, vendors and
other suppliers; the identities of Parent's and the Company's and
their subsidiaries' key sales representatives and personnel and other
employees; advertising and sales materials; research, computer
software and related materials; and other facts and financial and
other business information concerning or relating to the Parent and
the Company or any of their subsidiaries and their business,
operations, financial condition, results of operations and prospects.
The Executive expressly agrees to use such trade secrets and
confidential information only for purposes of carrying out his duties
for the Company and its subsidiaries, and not for any other purpose,
including, without limitation, not in any way or for any purpose
detrimental to Parent, the Company or any of their subsidiaries. The
Executive shall not at any time, either during the course of his
employment hereunder or after the termination of such employment, use
for himself or others, directly or indirectly, any such trade secrets
and confidential information, and, except as required by law, the
Executive shall not disclose such trade secrets and confidential
information, directly or indirectly, to any other person or entity;
PROVIDED THAT the obligations under this sentence will not be
construed to restrict the Executive from calling on or otherwise
maintaining a relationship with Customers or suppliers of Parent, the
Company or any of their subsidiaries during or after the termination
of the Executive's employment with the Company. Trade secret and
confidential information hereunder shall not include any information
which (i) is already in or subsequently enters the public domain,
other than as a result of any direct or indirect disclosure by the
Executive, (ii) becomes available to the Executive on a
non-confidential basis from a source other than the Company or any of
its subsidiaries, PROVIDED THAT such source is not subject to a
confidentiality agreement or other obligation of secrecy or
confidentiality (whether pursuant to a contract, legal or fiduciary
obligation or duty or otherwise) to the Company or any of its
subsidiaries or any other person or entity or (iii) is approved for
release by the Company or any of its subsidiaries or which the Company
or any of its subsidiaries makes available to third parties without an
obligation of confidentiality.
(b) All physical property and all notes, memoranda, files, records, writings,
documents and other materials of any and every nature, written or
electronic, which the Executive shall prepare or receive in the course of
his employment with the Company and which relate to or are useful in any
manner to the business now or hereafter conducted by Parent, the Company
or any of their subsidiaries are and shall remain the sole and exclusive
property of the Company and its subsidiaries, as applicable. The
Executive shall not remove from the Company's premises any such physical
property, the original or any reproduction of any such materials nor the
information contained therein except for the purposes of carrying out his
duties to the Company or any of its subsidiaries and all such property
(except for any items of personal property not owned by the Company or
any of its subsidiaries), materials and information in his possession or
under his custody or control upon the termination of his employment shall
be immediately turned over to the Company and its subsidiaries, as
applicable.
(c) All inventions, improvements, trade secrets, reports, manuals, computer
programs, tapes and other ideas and materials developed or invented by
the Executive during the period of his employment, either solely or in
collaboration with others, which
-8-
<PAGE>
relate to the actual or anticipated business or research of Parent,
the Company or any of their subsidiaries which result from or are
suggested by any work the Executive may do for Parent, the Company or
any of their subsidiaries or which result from use of Parent's, the
Company's or any of their subsidiaries' premises or property
(collectively, the "Developments") shall be the sole and exclusive
property the Company and its subsidiaries, as applicable. The
Executive assigns and transfers to the Company his entire right and
interest in any such Development, and the Executive shall execute and
deliver any and all documents and shall do and perform any and all
other acts and things necessary or desirable in connection therewith
that the Company or any of its subsidiaries may reasonably request.
This paragraph does not apply to any inventions which the Executive
made prior to his employment by the Company (all of which are listed
on Exhibit A, which the Executive has attached hereto).
(d) The provisions of this Section 6 shall survive any termination of this
Agreement and termination of the Executive's employment with the Company
for any reason or no reason.
7. NO SOLICITATION OF EMPLOYEES. The Executive acknowledges and agrees that
he has gained and during the time of his employment with the Company,
will gain, valuable information about the identity, qualifications and
on-going performance of the employees of Parent, the Company and their
subsidiaries. During the Term and for a period of one year thereafter,
except pursuant to Executive's duties as an employee of the Company, the
Executive shall not directly or indirectly (i) seek to hire or employ any
of Parent's, the Company's or any of their subsidiaries' employees, (ii)
solicit or encourage any such employee to seek or accept employment with
any other person or entity or (iii) disclose any information, except as
required by law, about such employee to any prospective employer.
8. INJUNCTIVE RELIEF. The Executive and the Company (a) intend that the
provisions of Sections 6 and 7 be and become valid and enforceable, (b)
acknowledge and agree that the provisions of Sections 6 and 7 are
reasonable and necessary to protect the legitimate interests of Parent,
the Company and their business and (c) agree that any violation of
Section 6 or 7 will result in irreparable injury to Parent, the Company
and their subsidiaries, the exact amount of which will be difficult to
ascertain and the remedies at law for which will not be reasonable or
adequate compensation to Parent, the Company and their subsidiaries for
such a violation. Accordingly, the Executive agrees that if the
Executive violates the provisions of Section 6 or 7, in addition to any
other remedy which may be available at law or in equity, the Company
shall be entitled to specific performance and injunctive relief, without
posting bond or other security, and without the necessity of proving
actual damages.
9. ASSIGNMENT; SUCCESSORS AND ASSIGNS. The Executive agrees that he shall
not assign, sell, transfer, delegate or otherwise dispose of, whether
voluntarily or involuntarily, any rights or obligations under this
Agreement, nor shall the Executive's rights hereunder be subject to
encumbrance of the claims of creditors. Any purported assignment,
transfer, delegation, disposition or encumbrance in violation of this
Section 9 shall be null and void and of no force or effect. Nothing in
this Agreement
-9-
<PAGE>
shall prevent the consolidation or merger of Parent or the Company
with or into any other entity, or the sale by Parent or the Company of
all or any portion of its properties or assets, or the assignment by
Parent or the Company of this Agreement and the performance of the
Company's obligations hereunder to any successor in interest or any
affiliated entity, and the Executive hereby consents to any and all
such assignments. Subject to the foregoing, this Agreement shall be
binding upon and shall inure to the benefit of the parties and their
respective heirs, legal representatives, successors, and permitted
assigns, and, except as expressly provided herein, no other person or
entity shall have any right, benefit or obligation under this
Agreement as a third party beneficiary or otherwise.
10. GOVERNING LAW; JURISDICTION AND VENUE, WAIVER OF JURY TRIAL. This
Agreement shall be governed, construed, interpreted and enforced in
accordance with the substantive laws of the State of California without
regard to the conflicts of law principles thereof. Suit to enforce this
Agreement or any provision or portion thereof may be brought in the
federal courts located in Los Angeles, California, unless subject matter
jurisdiction is lacking, in which case suit may be brought in the state
courts located in Los Angeles, California. EACH OF THE PARTIES HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
11. SEVERABILITY OF PROVISIONS. In the event that any provision or any
portion thereof should ever be adjudicated by a court of competent
jurisdiction to exceed the time or other limitations permitted by
applicable law, as determined by such court in such action, then such
provisions shall be deemed reformed to the maximum time or other
limitations permitted by applicable law, the parties hereby acknowledging
their desire that in such event such action be taken. In addition to the
above, the provisions of this Agreement are severable, and the invalidity
or unenforceability of any provision or provisions of this Agreement or
portions thereof shall not affect the validity or enforceability of any
other provision, or portion of this Agreement, which shall remain in full
force and effect as if executed with the unenforceable or invalid
provision or portion thereof eliminated. Notwithstanding the foregoing,
the parties hereto affirmatively represent, acknowledge and agree that it
is their intention that this Agreement and each of its provisions are
enforceable in accordance with their terms and expressly agree not to
challenge the validity or enforceability of this Agreement or any of its
provisions, or portions or aspects thereof, in the future. The parties
hereto are expressly relying upon this representation, acknowledgement
and agreement in determining to enter into this Agreement.
12. WARRANTY. As an inducement to the Company to enter into this Agreement,
the Executive represents and warrants that he is not a party to any other
agreement or obligation for personal services, and that there exists no
impediment or restraint, contractual or otherwise, on his power, right or
ability to enter into this Agreement and to perform his or her duties and
obligations hereunder. As an inducement to the Executive to enter into
this Agreement, Company represents and warrants that the person signing
this Agreement for the Company has been duly authorized to do so by all
necessary corporate action and has the corporate power and authority to
execute
-10-
<PAGE>
this Agreement on the Company's behalf. The execution and delivery of
this Agreement and the consummation of the transactions contemplated
have been duly and effectively authorized by all necessary corporate
action of the Company.
13. NOTICES. All notices, requests, demands and other communications which
are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally
delivered; when transmitted if transmitted by telecopy, electronic or
digital transmission method upon receipt of telephonic or electronic
confirmation; the day after it is sent, if sent for next day delivery to
a domestic address by recognized overnight delivery service (E.G.,
Federal Express); and upon receipt, if sent by certified or registered
mail, return receipt requested. In each case notice will be sent to:
If to the Company:
(a) BabyCenter, Inc.
c/o eToys Inc.
2850 Ocean Park Blvd., Suite 225
Santa Monica, CA 90405
Attention: __________________
Telephone No. _______________
Telecopy No. ________________
with a copy to:
Irell & Manella LLP
333 South Hope Street
Suite 3300
Los Angeles, California 90071
Attention: Anthony T. Iler
Telephone No. (213) 620-1555
Telecopy: (213) 229-0515
(b) if to the Executive, to:
Matthew Glickman
___________________________
___________________________
or to such other place and with other copies as either party may
designate as to itself or himself by written notice to the others.
14. CUMULATIVE REMEDIES. All rights and remedies of either party hereto are
cumulative of each other and of every other right or remedy such party
may otherwise have at law or in equity, and the exercise of one or more
rights or remedies shall not prejudice or impair the concurrent or
subsequent exercise of other rights or remedies.
-11-
<PAGE>
15. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which will be deemed to be an original, but all of which together
shall constitute one and the same Agreement.
16. ENTIRE AGREEMENT. The terms of this Agreement are intended by the
parties to be the final expression of their agreement with respect to the
employment of the Executive by the Company and supersede, and may not be
contradicted by, modified or supplemented by, evidence of any prior or
contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statements of its
terms and that no extrinsic evidence whatsoever may be introduced in any
judicial, administrative or other legal proceeding to vary the terms of
this Agreement.
17. AMENDMENTS; WAIVERS. This Agreement may not be modified, amended, or
terminated except by an instrument in writing, approved by the Company
and signed by the then existing parties hereto. No waiver of any of the
provisions of this Agreement, whether by conduct or otherwise, in any one
or more instances, shall be deemed to be construed as a further,
continuing or subsequent waiver of any such provision or as a waiver of
any other provision of this Agreement. No failure to exercise and no
delay in exercising any right, remedy or power hereunder shall preclude
any other or further exercise of any other right, remedy or power
provided herein or by law or in equity.
18. REPRESENTATION OF COUNSEL; MUTUAL NEGOTIATION. Each party has had the
opportunity to be represented by counsel of its choice in negotiating
this Agreement. This Agreement shall therefore be deemed to have been
negotiated and prepared at the joint request, direction and construction
of the parties, at arm's-length, with the advice and participation of
counsel, and shall be interpreted in accordance with its terms without
favor to any party.
[signature page to follow]
-12-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
BabyCenter, Inc.
By:
-------------------------------
Name:
Title:
eToys Inc.
By:
-------------------------------
Name:
Title:
EXECUTIVE
-----------------------------------
Name:
-13-
<PAGE>
Exhibit A
INVENTIONS MADE PRIOR TO EMPLOYMENT
[List]
-14-
<PAGE>
EXHIBIT G
COVENANT NOT TO COMPETE
THIS COVENANT NOT TO COMPETE (the "Agreement"), dated as of ______, 1999,
by and between eToys Inc., a Delaware corporation (including its subsidiaries,
"Buyer"), and Matthew Glickman [Mark Selcow], an individual ("Stockholder"), is
to evidence the following agreements and understandings. Capitalized terms used
herein have the respective meanings in the Merger Agreement (as hereinafter
defined) unless otherwise specified herein.
RECITALS
WHEREAS, prior to the date hereof, Stockholder was a stockholder of
BabyCenter, Inc., a Delaware Corporation (the "Company");
WHEREAS, the Company carries on the business of advertising, marketing,
promoting, distributing and selling, through the online medium of the Internet,
a variety of products, services and content about or related to infants,
children, parents and families, including but not limited to commerce (i.e.,
merchandise sales), content (i.e., information), community (i.e., e-mail and
other interactive elements), and advertising and sponsorship components, as well
as website creation and hosting services for third parties, together with
various other related operations and services (the "Business");
WHEREAS, as of the date hereof, pursuant to that certain Agreement and Plan
of Reorganization, dated as of April ___, 1999 (the "Merger Agreement"), between
Buyer and the Company, Buyer acquired the Company by way of a merger, and as a
result the Business and associated goodwill as a going concern of the Company
was acquired by Buyer;
WHEREAS, as the holder of a significant equity position in the Company,
Stockholder is deriving substantial value from the transactions contemplated by
the Merger Agreement;
WHEREAS, by agreeing to enter into the Merger Agreement and consummate the
Merger, Buyer desires and is seeking to acquire the Business, including the
business and goodwill as a going concern of the Business; and if Stockholder
were able to compete with Buyer in any manner that is hereinafter proscribed or
to engage in any of the other activities that are hereinafter proscribed, then
Buyer would be deprived of a substantial portion of the goodwill and going
concern value sought to be obtained through the Merger;
WHEREAS, pursuant to Section _____ of the Merger Agreement, Stockholder is
required to enter into this Agreement;
<PAGE>
WHEREAS, Stockholder now desires to enter into this Agreement as required
under the Merger Agreement, and the parties desire to set forth the terms,
conditions and provisions of Stockholder's ongoing obligations during the Term
(as defined below);
NOW, THEREFORE, in consideration of the mutual promises, covenants,
agreements, representations and warranties hereinafter set forth and set forth
in the Merger Agreement and other good and valuable consideration, the receipt,
adequacy and sufficiency of which is hereby acknowledged, all subject to the
completion of the closing of the Merger, the parties hereto agree as follows:
1. DEFINITION OF TERM. The Term of this Agreement shall commence on the
date hereof and shall continue throughout the term of Stockholder's employment
with the Company under the Employment Agreement of even date herewith among
Buyer, the Company and Stockholder (the "Employment Agreement") and for a period
following the termination of Stockholder's employment under the Employment
Agreement equal to either (A) 18 months, in the event that Stockholder's
employment under the Employment Agreement terminates for any reason at any time
prior to the second anniversary of the date hereof or (B) 12 months, in the
event that Stockholder's employment under the Employment Agreement terminates
for any reason (including termination of the Employment Agreement in accordance
with its terms) at any time from or after the second anniversary of the date
hereof (the "Term"); provided, however, that (i) under no circumstances shall
the Term of this Agreement extend beyond the fifth anniversary of the date
hereof and (ii) in the event of a Change of Control (as defined in the
Employment Agreement) of Buyer, if Stockholder's employment under the Employment
Agreement is terminated without Cause or pursuant to a Constructive Termination
(each as defined in the Employment Agreement) following such Change of Control,
then the Term of this Agreement shall terminate immediately.
-2-
<PAGE>
2. AGREEMENT NOT TO COMPETE. As a condition to the transactions being
completed as of the Effective Time pursuant to the Merger Agreement, and as a
means reasonably designed to protect the intellectual property, confidential and
proprietary information concerning the Business during the Term, Stockholder
will not, without the prior written consent of Buyer, directly or indirectly,
engage in, assist (financially or otherwise), associate with, or perform
services (other than on behalf of Buyer or any of its Affiliates) in any
Restricted Business (as hereinafter defined), including, without limitation,
whether such engagement, assistance, association or performance is as an
individual, principal, officer, director, consultant, advisor, proprietor,
employee, partner, stockholder or other investor (other than as a holder of less
than one percent (1%) of the outstanding capital stock or other equity interest
of or in any corporation or other business enterprise, provided that
Stockholder's participation therein is solely as a passive investor and does not
include any role as director, officer, manager or other service provider),
creditor, guarantor, agent, sales representative or other participant. For
purposes of this Agreement, "Affiliate" shall mean any person, partnership,
limited liability company, joint venture, trust, corporation or other entity,
directly or indirectly, controlling, controlled by or under common control with
such person, partnership, limited liability company, joint venture, trust,
corporation or other entity. For purposes of this Agreement, "Restricted
Business" shall mean (a) the Business together with any other business or
industry being considered or proposed to be conducted or engaged in by the
Company as of the date of this Agreement and (b) the business of Amazon.com,
Toys R Us and iVillage, together with any of their respective subsidiaries,
Affiliates or related parties. For purposes of clarification, "Restricted
Business" shall not include the business of any entity that is engaged
principally in the healthcare industry, notwithstanding the fact that such
entity may be incidentally or insubstantially involved in any Restricted
Business.
3. NON-INTERFERENCE. During the Term, Stockholder will not, without the
prior written consent of Buyer or any of its Affiliates, directly, indirectly or
as an agent on behalf of or in conjunction with any person, firm, partnership,
corporation or other entity (a) solicit, encourage the resignation of, or in any
other manner seek to engage or seek to employ, any person who is as of the
Effective Time, or within the prior three (3) months had been, an employee of
Buyer, the Company or any of their Affiliates, whether or not for compensation
and whether as an officer, employee, consultant, adviser, independent sales
representative, vendor, independent contractor or participant, or (b) contact,
solicit or service, in connection with the operation of any Restricted Business,
any person or entity with whom Buyer, the Company or any of their Affiliates
have a former, current or prospective (as of the Effective Time) business
relationship or who is or was at any time during the Term a customer or client
of Buyer, the Company or any of their Affiliates, or a prospective (as of the
Effective Time) customer or client to which Buyer, the Company or any of their
Affiliates have made a business proposal.
-3-
<PAGE>
4. CONFIDENTIALITY. Stockholder agrees not to disclose, use, transfer or
sell any intellectual property, confidential or proprietary information
concerning the Business, whether Stockholder has such information in his or her
memory or embodied in writing or other physical form, unless such activities are
on behalf of Buyer, the Company or any of their Affiliates. For purposes of
this Agreement, the phrase "intellectual property, confidential or proprietary
information concerning the Business" means all information concerning the
business, affairs, products, suppliers, customers or employees of, or relating
to, the Business, including, without limitation, that which relates to marketing
or brand recognition matters, such as logos, typestyles, copyrights, trade
names, brand names, user names, service names, service marks and trademarks, or
to technical matters, such as patents, designs, drawings, specification sheets,
schematics, test data, technical literature, manufacturing and process
information, know-how, trade secrets, in process research efforts and technical
data of Buyer, the Company or any of their Affiliates, or to business matters
such as the identity of suppliers, customers or business partners or terms of
business relationships with suppliers, customers or business partners. The
phrase "intellectual property, confidential or proprietary information
concerning the Business" shall not, however, include any information to the
extent that (i) Stockholder is required to disclose any of the foregoing
pursuant to the provisions of applicable law; (ii) any such information becomes
generally known and available to the public otherwise than by reason of a
disclosure or communication of such information by Stockholder; or (iii) any
such information is disclosed after the written approval of Buyer, the Company
or any of their Affiliates. Stockholder agrees that the restrictions contained
in this Section 3 shall continue to apply without time restrictions, so long as
any information remains intellectual property, confidential or proprietary
information concerning the Business.
5. CONSIDERATION. Stockholder acknowledges that the consideration for
the covenants in Sections 2, 3 and 4 consists of substantial economic value to
be provided to Stockholder pursuant to the Merger Agreement, and that no
separate consideration shall be payable pursuant to this Agreement. Stockholder
also acknowledges that Buyer would not consummate the Merger unless Stockholder
entered into this Agreement.
6. MISCELLANEOUS.
6.1 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and any document
referred to herein or executed contemporaneously herewith set forth the entire
understanding of the parties relating to the subject matter hereof and supersede
all agreements, representations, warranties, statements, promises and
understandings, with respect to the subject matter hereof. None of the terms or
provisions hereof shall be modified or waived, and this Agreement may not be
amended or terminated, except by a written instrument signed by the party
against which modifications or waiver or amendment or termination is to be
enforced. No waiver of any one provision shall be considered a waiver of any
other provision, and the fact that an obligation is waived for a period of time
or in one instance shall not be considered to be a continuing waiver.
-4-
<PAGE>
6.2 REMEDIES NOT EXCLUSIVE. No remedy conferred by any of the
specific provisions of this Agreement is intended to be exclusive of any other
remedy, and each and every remedy will be cumulative and will be in addition to
every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise. The election of any one or more remedies
will not constitute a waiver of the right to pursue other available remedies.
6.3 NOTICES. All notices under this Agreement will be in writing and
will be delivered by personal service or telegram, telecopy or certified mail
(if such service is not available, then by first class mail), postage prepaid,
to such address as may be designated from time to time by the relevant party,
and which will initially be as set forth below. Any notice sent by certified
mail will be deemed to have been given three (3) days after the date on which it
is mailed. All other notices will be deemed given when received. No objection
may be made to the manner of delivery of any notice actually received in writing
by an authorized agent of a party. Notices will be addressed as follows or to
such other address as the party to whom the same is directed will have specified
in conformity with the foregoing:
(i) If to Buyer:
eToys Inc.
2850 Ocean Park Boulevard, Suite 220
Santa Monica, CA 90405
Attention:
Telephone No.:
Telecopy No.:
with a copy to:
Irell & Manella LLP
333 South Hope Street, Suite 3300
Los Angeles, California 90071
Attention: Anthony T. Iler
Telephone No.: (213) 620-1555
Telecopy No.: (213) 229-0515
-5-
<PAGE>
(ii) If to Stockholder:
Matthew Glickman
_________________________
_________________________
with a copy to:
_________________________
_________________________
_________________________
Attention:
Telephone:
Telecopy No.:
6.4 EQUITABLE RELIEF; ACCOUNTING. Stockholder acknowledges that the
covenants contained in Sections 2, 3 and 4 hereof are reasonable and necessary
to protect the legitimate interests of Buyer, that any breach or threatened
breach of such covenants will result in irreparable injury to Buyer and that the
remedy at law for such breach or threatened breach would be inadequate.
Accordingly, in the event of the breach by Stockholder of any of the provisions
of this Agreement, Buyer, in addition and as a supplement to such other rights
and remedies as may exist in its favor, may apply to any court of law or equity
having jurisdiction to enforce this Agreement, and/or may apply for injunctive
relief against any act that would violate any of the provisions of this
Agreement (without being required to post a bond). Stockholder further
understands that monetary damages will not be sufficient to avoid or compensate
for a breach of the covenants contained in Sections 2, 3 and 4 hereof and that
injunctive relief would be appropriate to prevent any such breach or threatened
breach. Such right to obtain injunctive relief may be exercised, at the option
of Buyer, concurrently with, prior to, after, or in lieu of, the exercise of any
other rights or remedies that Buyer may have as a result of any such breach or
threatened breach. In addition, Stockholder shall account for and pay over to
Buyer all compensation, profits and other benefits inuring to Stockholder's
benefit that are derived or received by Stockholder thereof resulting from any
action or transaction constituting a breach of the covenants contained in
Sections 2, 3 and 4 hereof.
6.5 THIRD-PARTY BENEFITS. None of the provisions of this Agreement
will be for the benefit of, or enforceable by, any third-party beneficiary.
6.6 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and
inure to the benefit of the parties, their respective successors and permitted
assigns. None of the parties hereto may assign any of their rights or
obligations under this Agreement without the prior written consent of all other
parties hereto, except that this Agreement may be assigned by Buyer to any
corporation or other business entity that succeeds to all or substantially all
of the business of Buyer through merger, consolidation, corporate
-6-
<PAGE>
reorganization or by acquisition of all or substantially all of the assets or
capital stock of Buyer.
6.7 GOVERNING LAW. All questions with respect to this Agreement and
the rights and liabilities of the parties shall be governed by the laws of the
state of California, regardless of the choice of law provisions of that state or
any other jurisdiction.
6.8 RULES OF CONSTRUCTION.
6.8.1 HEADINGS. The Section headings in this Agreement are
inserted only as a matter of convenience, and in no way define, limit, extend or
interpret the scope of this Agreement or any particular Section.
6.8.2 TENSE AND CASE. Throughout this Agreement, as the
context may require, references to any word used in one tense or case shall
include all other appropriate tenses or cases.
6.8.3 SEVERABILITY. The validity, legality or enforceability
of the remainder of this Agreement will not be affected even if one or more of
the provisions of this Agreement are held to be invalid, illegal or
unenforceable in any respect. Further, if the period of time, the extent of the
geographic area or the scope of the prescribed activities covered by this
Agreement should be deemed unenforceable, then this Agreement shall be construed
to cover the maximum period of time, geographic area and scope of prescribed
activities (not to exceed the maximum time, geographic area or scope set forth
herein) as may be valid under applicable law. The parties specifically intend
that any court determining the extent of the enforceability of this Agreement
shall, if it determines that the Agreement is not fully enforceable in
accordance with its terms, modify the period of time, geographic area or scope
of prescribed activities provided for herein to the minimum extent necessary
such that the provisions hereof as so modified are enforceable.
6.9 ATTORNEYS' FEES. If any action or proceeding is brought to
enforce or interpret any provision of this Agreement, the prevailing party shall
be entitled to recover as an element of its costs, and not its damages,
reasonable attorneys' fees and costs incurred in connection with such action or
proceeding.
6.10 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the first date set forth above.
eToys Inc.
By:________________________
Name:
Title:
STOCKHOLDER
___________________________
Name: Matthew Glickman
-8-
<PAGE>
EXHIBIT 5.1
April 22, 1999
eToys Inc.
2850 Ocean Park Blvd., Suite 225
Santa Monica, CA 90405
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-72469)
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-72469), as amended by Amendment No. 1 to Form S-1 and by Amendment No. 2
to Form S-1 (the "REGISTRATION STATEMENT") to be filed by you with the
Securities and Exchange Commission on April 22, 1999, in connection with the
registration under the Securities Act of 1933 of shares of you Common Stock
(the "SHARES"). As your legal counsel in connection with this transaction, we
have examined the proceedings taken and we are familiar with the proceedings
proposed to be taken by you in connection with the sale and issuance of the
Shares.
It is our opinion that 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 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 securities laws of the
United States of America.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever it appears in
the Registration Statement and in any amendment to it.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
/s/ VENTURE LAW GROUP
<PAGE>
ETOYS INC.
1997 STOCK PLAN
(AMENDED JUNE 1998 AND FEBRUARY 1999)
1. PURPOSES OF THE PLAN. The purposes of this 1997 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options (as
defined under Section 422 of the Code) or Nonstatutory Stock Options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the legal requirements relating to the
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any Stock Exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CHANGE OF CONTROL" means a sale of all or substantially all of
the Company's assets, or any merger or consolidation of the Company with or
into another corporation other than a merger or consolidation in which the
holders of more than 50% of the shares of capital stock of the Company
outstanding immediately prior to such transaction continue to hold (either by
the voting securities remaining outstanding or by their being converted into
voting securities of the surviving entity) more than 50% of the total voting
power represented by the voting securities of the Company, or such surviving
entity, outstanding immediately after such transaction.
(e) "CODE" means the Internal Revenue Code of 1986, as amended.
(f) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) and (b) of the Plan.
(g) "COMMON STOCK" means the Common Stock of the Company.
(h) "COMPANY" means eToys Inc., a Delaware corporation.
(i) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(j) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
<PAGE>
such leave is for a period of not more than 90 days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or
(iv) in the case of transfers between locations of the Company or between the
Company, its Subsidiaries or their respective successors. For purposes of this
Plan, a change in status from an Employee to a Consultant or from a Consultant
to an Employee will not constitute an interruption of Continuous Status as an
Employee or Consultant.
(k) "CORPORATE TRANSACTION" means a sale of all or
substantially all of the Company's assets, or a merger, consolidation or
other capital reorganization of the Company with or into another corporation.
(l) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment determined based upon such minimum number of hours or
periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment by the Company of a
director's fee to a director shall not be sufficient to constitute "employment"
of such director by the Company.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the fair market value
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in THE WALL STREET JOURNAL or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in THE WALL
STREET JOURNAL or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written Option Agreement.
(p) "LISTED SECURITY" means any security of the Company that is
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
<PAGE>
(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
Option Agreement.
(r) "OPTION" means a stock option granted pursuant to the Plan.
(s) "OPTION AGREEMENT" means a written agreement between an Optionee
and the Company reflecting the terms of an Option granted under the Plan and
includes any documents attached to such Option Agreement, including, but not
limited to, a notice of stock option grant and a form of exercise notice.
(t) "OPTIONED STOCK" means the Common Stock subject to an Option or a
Stock Purchase Right.
(u) "OPTIONEE" means an Employee or Consultant who receives an Option
or a Stock Purchase Right.
(v) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code, or any successor provision.
(w) "PLAN" means this 1997 Stock Plan.
(x) "REPORTING PERSON" means an officer, director, or greater than
10% stockholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(y) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 10 below.
(z) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written agreement
between a holder of a Stock Purchase Right and the Company reflecting the terms
of a Stock Purchase Right granted under the Plan and includes any documents
attached to such agreement.
(aa) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange
Act, as the same may be amended from time to time, or any successor provision.
(bb) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(cc) "STOCK EXCHANGE" means any stock exchange or consolidated stock
price reporting system on which prices for the Common Stock are quoted at any
given time.
(dd) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock
pursuant to Section 10 below.
(ee) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
<PAGE>
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 5,800,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should
expire or become unexercisable for any reason without having been exercised in
full, the unpurchased Shares that were subject thereto shall, unless the Plan
shall have been terminated, become available for future grant under the Plan.
In addition, any Shares of Common Stock which are retained by the Company upon
exercise of an Option or Stock Purchase Right in order to satisfy the exercise
or purchase price for such Option or Stock Purchase Right or any withholding
taxes due with respect to such exercise shall be treated as not issued and shall
continue to be available under the Plan. Shares repurchased by the Company
pursuant to any repurchase right which the Company may have shall not be
available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any, upon which
the Company becomes subject to the Exchange Act, the Plan shall be administered
by the Board or a Committee appointed by the Board.
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY, UPON WHICH THE COMPANY
BECOMES SUBJECT TO THE EXCHANGE ACT.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3, grants under the Plan may be made by different bodies with respect to
directors, non-director officers and Employees or Consultants who are not
Reporting Persons.
(ii) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS. With
respect to grants of Options or Stock Purchase Rights to Employees who are
Reporting Persons, such grants shall be made by (A) the Board if the Board may
make grants to Reporting Persons under the Plan in compliance with Rule 16b-3,
or (B) a Committee designated by the Board to make grants to Reporting Persons
under the Plan, which Committee shall be constituted in such a manner as to
permit grants under the Plan to comply with Rule 16b-3. Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
make grants to Reporting Persons under the Plan, all to the extent permitted by
Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options or Stock Purchase Rights to
Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board,
which Committee shall be constituted in such a manner as to satisfy the
Applicable Laws. Once appointed, such Committee shall continue to serve in
its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove
<PAGE>
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights or any combination thereof may from time to time be
granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights; and
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
<PAGE>
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees. An Employee or Consultant who has
been granted an Option or Stock Purchase Right may, if he or she is otherwise
eligible, be granted additional Options or Stock Purchase Rights.
(b) TYPE OF OPTION. Each Option shall be designated in the Option
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon the holder of any Option or Stock
Purchase Right any right with respect to continuation of employment or
consulting relationship with the Company, nor shall it interfere in any way with
such holder's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten years unless sooner terminated under
Section 15 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than
ten years from the date of grant thereof or such shorter term as may be provided
in the Option Agreement and provided further that, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than 10% of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five years from the date of grant thereof or such shorter term
as may be provided in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board and
set forth in the applicable agreement, but shall be subject to the following:
<PAGE>
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to a person who, at the time of the grant of
such Option, owns stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of grant if required by the Applicable Laws and, if not so
required, shall be such price as is determined by the Administrator.
(B) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security, to any other person, the per Share exercise
price shall be no less than 85% of the Fair Market Value per Share on the date
of grant if required by Applicable Law and, if not so required, shall be such
price as is determined by the Administrator.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash,
(2) check, (3) promissory note (subject to the provisions of Section 153 of the
Delaware General Corporation Law), (4) other Shares that (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six months on the date of surrender or such other period as may be
required to avoid a charge to the Company's earnings, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which such Option shall be exercised, (5) authorization for the
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (6) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price and
any applicable income or employment taxes, (7) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under the Applicable Laws. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
<PAGE>
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator and reflected in the Option Agreement, which
may include vesting requirements and/or performance criteria with respect to the
Company and/or the Optionee; provided however that, if required by the
Applicable Laws, any Option granted prior to the date, if any, upon which the
Common Stock becomes a Listed Security shall become exercisable at a rate of at
least 20% per year over five years from the date the Option is granted. In the
event that any of the Shares issued upon exercise of an Option (which exercise
occurs prior to the date, if any, upon which the Common Stock becomes a Listed
Security) should be subject to a right of repurchase in the Company's favor,
such repurchase right shall, if required by the Applicable Laws, lapse at the
rate of at least 20% per year over five years from the date the Option is
granted. Notwithstanding the above, in the case of an Option granted to an
officer, director or Consultant of the Company or any Parent or Subsidiary of
the Company, the Option may become fully exercisable, and a repurchase right, if
any, in favor of the Company shall lapse, at any time or during any period
established by the Administrator.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. Subject to
Section 9(c) below, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant with the Company, such Optionee may, but
only within three months (or such other period of time not less than 30 days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was entitled to exercise it at the date of
<PAGE>
such termination. To the extent that the Optionee was not entitled to
exercise the Option at the date of such termination, or if the Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate. No termination shall be deemed to occur
and this Section 9(b) shall not apply if (i) the Optionee is a Consultant who
becomes an Employee, or (ii) the Optionee is an Employee who becomes a
Consultant.
(c) DISABILITY OF OPTIONEE.
(i) Notwithstanding Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), such Optionee may, but only within twelve months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of termination, or if the Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), such Optionee may, but only within six months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of
Section 422 of the Code) within three months of the date of such termination,
the Option will not qualify for ISO treatment under the Code. To the extent
that the Optionee was not entitled to exercise the Option at the date of
termination, or if the Optionee does not exercise such Option to the extent so
entitled within six months from the date of termination, the Option shall
terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within 30 days following termination of the
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six months following the date of death (but in no
event later than the expiration date of the term of such Option as set forth in
the Option Agreement), by such Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of the Optionee's Continuous Status as an Employee or
Consultant. To the extent that the Optionee was not entitled to exercise the
Option at the date of death or termination, as the case may be, or if the
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
<PAGE>
(e) RULE 16b-3. Options granted to Reporting Persons shall comply
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
10. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed 30 days from the date upon
which the Administrator made the determination to grant the Stock Purchase
Right. In the case of a Stock Purchase Right granted prior to the date, if any,
on which the Common Stock becomes a Listed Security and if required by the
Applicable Laws at such time, the purchase price of Shares subject to such Stock
Purchase Rights shall not be less than 85% of the Fair Market Value of the
Shares as of the date of the offer, or, in the case of a person owning stock
representing more than 10% of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary, the price shall not be less
than 100% of the Fair Market Value of the Shares as of the date of the offer.
If the Applicable Laws do not impose the requirements set forth in the preceding
sentence and with respect to any Stock Purchase Rights granted after the date,
if any, on which the Common Stock becomes a Listed Security, the purchase price
of Shares subject to Stock Purchase Rights shall be as determined by the
Administrator. The offer shall be accepted by execution of a Restricted Stock
Purchase Agreement in the form determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided however that with respect to a Stock
Purchase Right granted prior to the date, if any, on which the Common Stock
becomes a Listed Security to a purchaser who is not an officer, director or
Consultant of the Company or of any Parent or Subsidiary of the Company, it
shall lapse at a minimum rate of 20% per year if required by the Applicable
Laws.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder
<PAGE>
when his or her purchase is entered upon the records of the duly authorized
transfer agent of the Company. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Stock Purchase
Right is exercised, except as provided in Section 12 of the Plan.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash or check payment, or (b) out
of the Optionee's current compensation, (c) if permitted by the Administrator,
in its discretion, by surrendering to the Company Shares that (i) in the case of
Shares previously acquired from the Company, have been owned by the Optionee for
more than six months on the date of surrender, and (ii) have a fair market value
on the date of surrender equal to or less than the Optionee's marginal tax rate
times the ordinary income recognized, or (d) by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option, or the Shares
to be issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "TAX DATE").
Any surrender by a Reporting Person of previously owned Shares to satisfy
tax withholding obligations arising upon exercise of this Option must comply
with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Stock Purchase Right as to which the election is made;
and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
<PAGE>
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN OTHER
TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least 15 days prior to such proposed action. To the extent it has not been
previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) CORPORATE TRANSACTIONS; CHANGE OF CONTROL.
(i) AWARDS ISSUED PRIOR TO FEBRUARY 15, 1999. With respect to
awards issued under the Plan prior to February 15, 1999, such awards shall be
treated upon a change of control of the Company as provided for in the
version of the Plan in effect at the time of grant and as set forth in any
applicable written agreements, including any amendments to such agreements.
(ii) AWARDS ISSUED ON OR AFTER FEBRUARY 15, 1999. With respect
to awards issued under the Plan after February 15, 1999, such awards shall be
treated upon a Corporate Transaction or a Change of Control as set forth in
this Section 12(c)(ii) and as set forth in any applicable written agreements,
including any amendments to such agreements.
In the event of a Corporate Transaction, each outstanding Option and
Stock Purchase Right shall be assumed or an equivalent option or right shall
be substituted by the successor corporation or a Parent or Subsidiary of such
successor corporation (such entity, the "SUCCESSOR CORPORATION"), unless the
Successor Corporation does not agree to such assumption or substitution, in
which case such Options and Stock Purchase Rights shall terminate upon
consummation of the transaction. Notwithstanding the preceding sentence, in
the event of a Change of Control, each outstanding Option and Stock Purchase
Right shall be assumed or an equivalent option or right shall be substituted
by the Successor Corporation, unless the Successor Corporation does not agree
to such assumption or substitution, in which case the vesting of each Option
shall accelerate and the Options shall become exercisable in full (including
with respect to Shares as to which an Option would not otherwise be vested
and exercisable), and any repurchase right in favor of the Company with
respect to any Shares purchased upon exercise of an Option or Stock Purchase
Right shall lapse in full, prior to consummation of the transaction at such
time and on such conditions as the Administrator shall determine. To the
extent an Option is not exercised prior to consummation of a Change of
Control in which the vesting of Options is being accelerated, such Option
shall terminate upon such consummation and the Administrator shall notify the
Optionee of such fact at least five (5) days prior to the date on which the
Option terminates.
In the event Plan awards are assumed or substituted in connection
with a Change of Control and a Participant holding such an assumed or
substituted award experiences an Involuntary Termination within twenty-four
(24) months following the Change of Control, any assumed or substituted
Option held by the terminated Participant at the time of termination shall
accelerate and become exercisable in full (including with respect to any
shares of stock then underlying the Option as to which the Option would not
otherwise be vested and exercisable), and any repurchase right in favor of
the Company or the Successor Corporation with respect to any Shares (or any
shares of stock issued in exchange for such Shares) purchased upon exercise
of an Option or Stock Purchase Right shall lapse in full, immediately prior
to the effective date of the Involuntary Termination.
(iii) For purposes of this Section 12(c), an Option or a Stock
Purchase Right shall be considered assumed, without limitation, if, at the
time of issuance of the stock or other consideration upon a Corporate
Transaction or a Change of Control, as the case may be, each holder of an
Option or Stock Purchase Right would be entitled to receive upon exercise of
the Option or Stock Purchase Right the same number and kind of shares of
stock or the same amount of property, cash or securities as such holder would
have been entitled to receive upon the occurrence of the transaction if the
holder had been, immediately prior to such transaction, the holder of the
number of Shares of Common Stock covered by the Option or the Stock Purchase
Right at such time (after giving effect to any adjustments in the number of
Shares covered by the Option or Stock Purchase Right as provided for in this
Section 12); provided however that if the consideration received in the
transaction is not solely common stock of the Successor Corporation, the
Administrator may, with the consent of the Successor Corporation, provide for
the consideration to be received upon exercise of the Option or Stock
Purchase Right to be solely common stock of the Successor Corporation equal
to the Fair Market Value of the per Share consideration received by holders
of Common Stock in the transaction.
(d) ACCOUNTING AND TAX TREATMENT. The following provisions shall
apply to awards issued under the Plan under Section 12(c)(ii) above.
(i) POOLING ISSUES. Notwithstanding Section 12(c)(ii) above,
no vesting acceleration or lapse of a repurchase right pursuant to such
section shall occur if such acceleration or lapse would cause a contemplated
Change of Control transaction that was intended to be accounted for as a
"pooling of interests" transaction to be ineligible for such treatment under
generally accepted accounting principles, as determined by the Company's
independent accountants prior to the Change of Control.
(ii) LIMITATION ON PAYMENTS. In the event that the vesting
acceleration or lapse of a repurchase right provided for in Section 12(c)(ii)
above (x) constitutes "parachute payments" within the meaning of Section 280G
of the Code, and (y) but for this Section 12(d)(ii) would be subject to the
excise tax imposed by Section 4999 of the Code (or any corresponding
provisions of state income tax law), then such vesting acceleration or lapse
of a repurchase right shall be either
(A) delivered in full, or
(B) delivered as to such lesser extent which would
result in no portion of such severance benefits being subject to excise tax
under Code Section 4999,
whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Code
Section 4999, results in the receipt by the Participant on an after-tax basis
of the greater amount of acceleration or lapse of repurchase rights benefits,
notwithstanding that all or some portion of such benefits may be taxable
under Code Section 4999. Any determination required under this Section 12(d)
shall be made in writing by the Company's independent accountants, whose
determination shall be conclusive and binding for all purposes on the Company
and any affected Participant. In the event that (ii)(A) above applies, then
the Participant shall be responsible for any excise taxes imposed with
respect to such benefits. In the event that (ii)(B) above applies, then each
benefit provided hereunder shall be proportionately reduced to the extent
necessary to avoid imposition of such excise taxes.
(e) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without
receipt of consideration by the Company, the Administrator may, in its
discretion, appropriately adjust the price per share of Common Stock covered
by each outstanding Option or Stock Purchase Right to reflect the effect of
such distribution.
13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be
<PAGE>
exercised or purchased during the lifetime of the Optionee or Stock Purchase
Rights Holder only by the Optionee or Stock Purchase Rights Holder.
14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided,
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AUTHORITY TO AMEND OR TERMINATE. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any Stock Exchange), the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a degree
as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
<PAGE>
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by
written Option Agreements and Restricted Stock Purchase Agreements,
respectively, in such form(s) as the Administrator shall approve from time to
time.
19. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve months before or after
the date the Plan is adopted. Such stockholder approval shall be obtained in
the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange upon which the Common Stock is listed. All Options
and Stock Purchase Rights issued under the Plan shall become void in the event
such approval is not obtained.
20. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. Prior to the
date, if any, upon which the Common Stock becomes a Listed Security and if
required by the Applicable Laws, the Company shall provide financial statements
at least annually to each Optionee and to each individual who acquired Shares
Pursuant to the Plan, during the period such Optionee or purchaser has one or
more Options or Stock Purchase Rights outstanding, and in the case of an
individual who acquired Shares pursuant to the Plan, during the period such
individual owns such Shares. The Company shall not be required to provide such
information if the issuance of Options or Stock Purchase Rights under the Plan
is limited to key employees whose duties in connection with the Company assure
their access to equivalent information. In addition, at the time of issuance of
any securities under the Plan, the Company shall provide to the Optionee or the
Purchaser a copy of the Plan and any agreement(s) pursuant to which securities
granted under the Plan are issued.
<PAGE>
ETOYS INC.
1997 STOCK PLAN
NOTICE OF STOCK OPTION GRANT
< < Optionee > >
_______________
_______________
You have been granted an option to purchase Common Stock "COMMON STOCK" of
eToys Inc. (the "COMPANY") as follows:
Board Approval Date: < < BoardApprovalDate > >
Date of Grant (Later of Board
Approval Date or Commence-
ment of Employment/Consulting): < < GrantDate > >
Vesting Commencement Date: < < VestingCommenceDate > >
Exercise Price per Share: $< < ExercisePrice > >
Total Number of Shares Granted: < < NoofShares > >
Total Exercise Price: $< < TotalExercisePrice > >
Type of Option: < < NoSharesISO Incentive
Stock Options > >
< < NoSharesNSO > > Nonstatutory Stock
Options > >
Term/Expiration Date: < < ExpirDate > >
Vesting Schedule: This Option may be exercised, in whole
or in part, in accordance with the
following schedule: 1/4th of the Shares
subject to the Option shall vest on the
first anniversary of the Vesting
Commencement Date and 1/48th of the
total number of Shares subject to the
Option shall vest each month thereafter.
Termination Period: Option may be exercised for 30 days
after termination of employment or
consulting relationship except as set
out in Sections 6 and 7 of the Stock
Option Agreement (but in no event later
than the Expiration Date).
<PAGE>
By your signature and the signature of the Company's representative
below, you and the Company agree that this option is granted under and governed
by the terms and conditions of the 1997 Stock Plan and the Stock Option
Agreement, both of which are attached and made a part of this document.
< < OPTIONEE: > > ETOYS INC.
By:
- ----------------------------------- ----------------------------------
Signature
- ----------------------------------- ----------------------------------
Print Name Print Name and Title
-2-
<PAGE>
ETOYS INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT
1. GRANT OF OPTION. eToys Inc., a Delaware corporation (the
"COMPANY"), hereby grants to < < Optionee > > ("OPTIONEE"), an option (the
"OPTION") to purchase a total number of shares of Common Stock (the "SHARES")
set forth in the Notice of Stock Option Grant, at the exercise price per
share set forth in the Notice of Stock Option Grant (the "EXERCISE PRICE")
subject to the terms, definitions and provisions of the eToys Inc. 1997 Stock
Plan (the "PLAN") adopted by the Company, which is incorporated herein by
reference. Unless otherwise defined herein, the terms defined in the Plan
shall have the same defined meanings in this Option.
If designated an Incentive Stock Option, this Option is intended to qualify as
an Incentive Stock Option as defined in Section 422 of the Code.
2. EXERCISE OF OPTION. This Option shall be exercisable during its
Term in accordance with the Vesting Schedule set out in the Notice of Stock
Option Grant and with the provisions of Section 9 of the Plan as follows:
(a) RIGHT TO EXERCISE.
(i) This Option may not be exercised for a fraction of
a share.
(ii) In the event of Optionee's death, disability or
other termination of employment, the exercisability of the Option is governed by
Sections 5, 6 and 7 below, subject to the limitation contained in
Section 2(a)(i).
(iii) In no event may this Option be exercised after the
date of expiration of the Term of this Option as set forth in the Notice of
Stock Option Grant.
(b) METHOD OF EXERCISE. This Option shall be exercisable by
execution and delivery of the Exercise Notice and Restricted Stock Purchase
Agreement attached hereto as EXHIBIT A (the "EXERCISE AGREEMENT") or of any
other form of written notice approved for such purpose by the Company which
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by Optionee and shall be delivered in
person or by certified mail to the Secretary of the Company. The written notice
shall be accompanied by payment of the Exercise Price. This Option shall be
deemed to be exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
<PAGE>
No Shares will be issued pursuant to the exercise of an Option
unless such issuance and such exercise shall comply with all relevant provisions
of applicable law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes
the Shares shall be considered transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any
of the following, or a combination thereof, at the election of Optionee:
(a) cash;
(b) check;
(c) surrender of other shares of Common Stock of the Company
which (i) in the case of Shares acquired pursuant to the exercise of a Company
option, have been owned by Optionee for more than six months on the date of
surrender, and (ii) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(d) if there is a public market for the Shares and they are
registered under the Securities Act of 1933, as amended, delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds required to
pay the Exercise Price.
4. RESTRICTIONS ON EXERCISE. This Option may not be exercised until
such time as the Plan has been approved by the stockholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations as promulgated by the
Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
5. TERMINATION OF RELATIONSHIP. In the event of termination of
Optionee's Continuous Status as an Employee or Consultant, Optionee may, to the
extent otherwise so entitled at the date of such termination (the "TERMINATION
DATE"), exercise this Option during the Termination Period set forth in the
Notice of Stock Option Grant. To the extent that Optionee was not entitled to
exercise this Option at such Termination Date, or if Optionee does not exercise
this Option within the Termination Period, the Option shall terminate.
6. DISABILITY OF OPTIONEE.
(a) Notwithstanding the provisions of Section 5 above, in the
event of termination of Optionee's Continuous Status as an Employee or
Consultant as a result of Optionee's total and permanent disability (as defined
in Section 22(e)(3) of the Code), Optionee may, but only within twelve months
from the Termination Date (but in no event later than the Expiration Date set
forth in the Notice of Stock Option Grant), exercise this
-2-
<PAGE>
Option to the extent Optionee was entitled to exercise it as of such Termination
Date. To the extent that Optionee was not entitled to exercise the Option as of
the Termination Date, or if Optionee does not exercise such Option (to the
extent so entitled) within the time specified in this Section 6(a), the Option
shall terminate.
(b) Notwithstanding the provisions of Section 5 above, in the
event of termination of Optionee's consulting relationship or Continuous Status
as an Employee as a result of disability not constituting a total and permanent
disability (as set forth in Section 22(e)(3) of the Code), Optionee may, but
only within six months from the Termination Date (but in no event later than the
Expiration Date set forth in the Notice of Stock Option Grant), exercise the
Option to the extent Optionee was entitled to exercise it as of such Termination
Date; provided, however, that if this is an Incentive Stock Option and Optionee
fails to exercise this Incentive Stock Option within three months from the
Termination Date, this Option will cease to qualify as an Incentive Stock Option
(as defined in Section 422 of the Code) and Optionee will be treated for federal
income tax purposes as having received ordinary income at the time of such
exercise in an amount generally measured by the difference between the Exercise
Price for the Shares and the Fair Market Value of the Shares on the date of
exercise. To the extent that Optionee was not entitled to exercise the Option
at the Termination Date, or if Optionee does not exercise such Option to the
extent so entitled within the time specified in this Section 6(b), the Option
shall terminate.
7. DEATH OF OPTIONEE. In the event of the death of Optionee (a)
during the Term of this Option and while an Employee or Consultant of the
Company and having been in Continuous Status as an Employee or Consultant since
the date of grant of the Option, or (b) within 30 days after Optionee's
Termination Date, the Option may be exercised at any time within six months
following the date of death (but in no event later than the Expiration Date set
forth in the Notice of Stock Option Grant), by Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent of the right to exercise that had accrued at the Termination
Date.
8. NON-TRANSFERABILITY OF OPTION. This Option may not be
transferred in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by him or
her. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of Optionee.
9. TERM OF OPTION. This Option may be exercised only within the
Term set forth in the Notice of Stock Option Grant, subject to the limitations
set forth in Section 7 of the Plan.
10. TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Option of certain of the federal and California tax consequences of
exercise of this Option and disposition of the Shares under the laws in effect
as of the Date of Grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
-3-
<PAGE>
(a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option
qualifies as an Incentive Stock Option, there will be no regular federal or
California income tax liability upon the exercise of the Option, although the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price will be treated as an adjustment to the alternative
minimum tax for federal tax purposes and may subject Optionee to the alternative
minimum tax in the year of exercise.
(b) EXERCISE OF NONSTATUTORY STOCK OPTION. If this Option
does not qualify as an Incentive Stock Option, there may be a regular federal
income tax liability and a California income tax liability upon the exercise of
the Option. Optionee will be treated as having received compensation income
(taxable at ordinary income tax rates) equal to the excess, if any, of the Fair
Market Value of the Shares on the date of exercise over the Exercise Price. If
Optionee is an employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.
(c) DISPOSITION OF SHARES. In the case of a Nonstatutory
Stock Option, if Shares are held for at least one year, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
and California income tax purposes. In the case of an Incentive Stock Option,
if Shares transferred pursuant to the Option are held for at least one year
after exercise and are disposed of at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal and California income tax purposes. In either case,
the long-term capital gain will be taxed for federal income tax and alternative
minimum tax purposes at a maximum rate of 28% if the Shares are held more than
one year but less than 18 months after exercise and at 20% if the Shares are
held more than 18 months after exercise. If Shares purchased under an Incentive
Stock Option are disposed of within one year after exercise or within two years
after the Date of Grant, any gain realized on such disposition will be treated
as compensation income (taxable at ordinary income rates) to the extent of the
difference between the Exercise Price and the lesser of (i) the fair market
value of the Shares on the date of exercise, or (ii) the sale price of the
Shares.
(d) NOTICE OF DISQUALIFYING DISPOSITION OF INCENTIVE STOCK
OPTION SHARES. If the Option granted to Optionee herein is an Incentive Stock
Option, and if Optionee sells or otherwise disposes of any of the Shares
acquired pursuant to the Incentive Stock Option on or before the later of
(i) the date two years after the Date of Grant, or (ii) the date one year after
the date of exercise, Optionee shall immediately notify the Company in writing
of such disposition. Optionee acknowledges and agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized by Optionee from the early disposition by payment in cash or out of
the current earnings paid to Optionee.
11. WITHHOLDING TAX OBLIGATIONS. Optionee understands that, upon
exercising a Nonstatutory Stock Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then Fair Market Value of the
Shares over the Exercise Price.
-4-
<PAGE>
However, the timing of this income recognition may be deferred for up to six
months if Optionee is subject to Section 16 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"). If Optionee is an employee, the Company
will be required to withhold from Optionee's compensation, or collect from
Optionee and pay to the applicable taxing authorities an amount equal to a
percentage of this compensation income. Additionally, Optionee may at some
point be required to satisfy tax withholding obligations with respect to the
disqualifying disposition of an Incentive Stock Option. Optionee shall satisfy
his or her tax withholding obligation arising upon the exercise of this Option
by one or some combination of the following methods: (a) by cash payment,
(b) out of Optionee's current compensation, (c) if permitted by the
Administrator, in its discretion, by surrendering to the Company Shares which
(i) in the case of Shares previously acquired from the Company, have been owned
by Optionee for more than six months on the date of surrender, and (ii) have a
Fair Market Value on the date of surrender equal to or greater than Optionee's
marginal tax rate times the ordinary income recognized, or (d) by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option that number of Shares having a Fair Market Value equal to the amount
required to be withheld. For this purpose, the Fair Market Value of the Shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined (the "TAX DATE").
If Optionee is subject to Section 16 of the Exchange Act (an "INSIDER"),
any surrender of previously owned Shares to satisfy tax withholding obligations
arising upon exercise of this Option must comply with the applicable provisions
of Rule 16b-3 promulgated under the Exchange Act ("RULE 16b-3").
All elections by Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable
Tax Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or
disapproval of the Administrator.
12. MARKET STANDOFF AGREEMENT. In connection with the initial public
offering of the Company's securities and upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities,
Optionee hereby agrees not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Shares (other than those
included in the registration) without the prior written consent of the Company
or such underwriters, as the case may be, for such period of time (not to exceed
180 days) from the effective date of such registration as may be requested by
the Company or such managing underwriters and to execute an agreement reflecting
the foregoing as may be requested by the underwriters at the time of the public
offering.
-5-
<PAGE>
[SIGNATURE PAGE FOLLOWS]
-6-
<PAGE>
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
document.
ETOYS INC.
By:
----------------------------------
----------------------------------
(Print name and title)
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT OR CONSULTANCY AT THE
WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that
he or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Dated:
------------------------ ------------------------------
< < Optionee > >
-7-
<PAGE>
EXHIBIT A
ETOYS INC.
1997 STOCK PLAN
EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT
This Agreement ("AGREEMENT") is made as of ______________, by and
between eToys Inc., a Delaware corporation (the "COMPANY"), and < < Optionee > >
("PURCHASER"). To the extent any capitalized terms used in this Agreement are
not defined, they shall have the meaning ascribed to them in the 1997 Stock
Plan.
1. EXERCISE OF OPTION. Subject to the terms and conditions hereof,
Purchaser hereby elects to exercise his or her option to purchase __________
shares of the Common Stock (the "SHARES") of the Company under and pursuant to
the Company's 1997 Stock Plan (the "PLAN") and the Stock Option Agreement dated
______________, (the "OPTION AGREEMENT"). The purchase price for the Shares
shall be $< < ExercisePrice > > per Share for a total purchase price of
$_______________. The term "SHARES" refers to the purchased Shares and all
securities received in replacement of the Shares or as stock dividends or
splits, all securities received in replacement of the Shares in a
recapitalization, merger, reorganization, exchange or the like, and all new,
substituted or additional securities or other properties to which Purchaser is
entitled by reason of Purchaser's ownership of the Shares.
2. TIME AND PLACE OF EXERCISE. The purchase and sale of the Shares
under this Agreement shall occur at the principal office of the Company
simultaneously with the execution and delivery of this Agreement in accordance
with the provisions of Section 2(b) of the Option Agreement. On such date, the
Company will deliver to Purchaser a certificate representing the Shares to be
purchased by Purchaser (which shall be issued in Purchaser's name) against
payment of the exercise price therefor by Purchaser by (a) check made payable to
the Company, (b) cancellation of indebtedness of the Company to Purchaser, (c)
delivery of shares of the Common Stock of the Company in accordance with Section
3 of the Option Agreement, or (d) by a combination of the foregoing.
3. LIMITATIONS ON TRANSFER. In addition to any other limitation on
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares except in compliance with the
provisions below and applicable securities laws.
(a) RIGHT OF FIRST REFUSAL. Before any Shares held by
Purchaser or any transferee of Purchaser (either being sometimes referred to
herein as the "HOLDER") may be sold or otherwise transferred (including transfer
by gift or operation of law), the Company or its assignee(s) shall have a right
of first refusal to purchase the Shares on the terms and conditions set forth in
this Section 3(a) (the "RIGHT OF FIRST REFUSAL").
(i) NOTICE OF PROPOSED TRANSFER. The Holder of the
Shares shall deliver to the Company a written notice (the "NOTICE") stating:
(i) the Holder's bona fide
-1-
<PAGE>
intention to sell or otherwise transfer such Shares; (ii) the name of each
proposed purchaser or other transferee ("PROPOSED TRANSFEREE"); (iii) the number
of Shares to be transferred to each Proposed Transferee; and (iv) the terms and
conditions of each proposed sale or transfer. The Holder shall offer the Shares
at the same price (the "OFFERED PRICE") and upon the same terms (or terms as
similar as reasonably possible) to the Company or its assignee(s).
(ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time
within 30 days after receipt of the Notice, the Company and/or its assignee(s)
may, by giving written notice to the Holder, elect to purchase all, but not less
than all, of the Shares proposed to be transferred to any one or more of the
Proposed Transferees, at the purchase price determined in accordance with
subsection (iii) below.
(iii) PURCHASE PRICE. The purchase price ("PURCHASE
PRICE") for the Shares purchased by the Company or its assignee(s) under this
Section 3(a) shall be the Offered Price. If the Offered Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined by the Board of Directors of the Company in
good faith.
(iv) PAYMENT. Payment of the Purchase Price shall be
made, at the option of the Company or its assignee(s), in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company (or, in the case of repurchase by an assignee, to the assignee),
or by any combination thereof within 30 days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this
Section 3(a), then the Holder may sell or otherwise transfer such Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within 60 days after the date of the
Notice and provided further that any such sale or other transfer is effected in
accordance with any applicable securities laws and the Proposed Transferee
agrees in writing that the provisions of this Section 3 shall continue to apply
to the Shares in the hands of such Proposed Transferee. If the Shares described
in the Notice are not transferred to the Proposed Transferee within such period,
or if the Holder proposes to change the price or other terms to make them more
favorable to the Proposed Transferee, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything
to the contrary contained in this Section 3(a) notwithstanding, the transfer of
any or all of the Shares during Purchaser's lifetime or on Purchaser's death by
will or intestacy to Purchaser's Immediate Family or a trust for the benefit of
Purchaser's Immediate Family shall be exempt from the provisions of this Section
3(a). "IMMEDIATE FAMILY" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section,
-2-
<PAGE>
and there shall be no further transfer of such Shares except in accordance
with the terms of this Section 3.
(b) INVOLUNTARY TRANSFER.
(i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY
TRANSFER. In the event, at any time after the date of this Agreement, of any
transfer by operation of law or other involuntary transfer (including death or
divorce, but excluding a transfer to Immediate Family as set forth in Section
3(a)(vi) above) of all or a portion of the Shares by the record holder thereof,
the Company shall have an option to purchase all of the Shares transferred at
the greater of the purchase price paid by Purchaser pursuant to this Agreement
or the Fair Market Value of the Shares on the date of transfer. Upon such a
transfer, the person acquiring the Shares shall promptly notify the Secretary of
the Company of such transfer. The right to purchase such Shares shall be
provided to the Company for a period of 30 days following receipt by the Company
of written notice by the person acquiring the Shares.
(ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to
any stock to be transferred pursuant to Section 3(b)(i), the price per Share
shall be a price set by the Board of Directors of the Company that will reflect
the current value of the stock in terms of present earnings and future prospects
of the Company. The Company shall notify Purchaser or his or her executor of
the price so determined within 30 days after receipt by it of written notice of
the transfer or proposed transfer of Shares. However, if the Purchaser does not
agree with the valuation as determined by the Board of Directors of the Company,
the Purchaser shall be entitled to have the valuation determined by an
independent appraiser to be mutually agreed upon by the Company and the
Purchaser and whose fees shall be borne equally by the Company and the
Purchaser.
(c) ASSIGNMENT. The right of the Company to purchase any
part of the Shares may be assigned in whole or in part to any stockholder or
stockholders of the Company or other persons or organizations; provided,
however, that an assignee, other than a corporation that is the parent or a 100%
owned subsidiary of the Company, must pay the Company, upon assignment of such
right, cash equal to the difference between the original purchase price and Fair
Market Value, if the original purchase price is less than the fair market value
of the Shares subject to the assignment.
(d) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of
Shares or any interest therein will receive and hold such Shares or interest
subject to the provisions of this Agreement. Any sale or transfer of the
Company's Shares shall be void unless the provisions of this Agreement are
satisfied.
(e) TERMINATION OF RIGHTS. The Right of First Refusal
granted the Company by Section 3(a) above and the option to repurchase the
Shares in the event of an involuntary transfer granted the Company by Section
3(b) above shall terminate upon the first sale of Common Stock of the Company to
the general public pursuant to a registration statement filed with and declared
effective by the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "SECURITIES ACT").. Upon termination of the Right of
First Refusal
-3-
<PAGE>
described in Section 3(a) above, a new certificate or certificates
representing the Shares not repurchased shall be issued, on request, without
the legend referred to in Section 6(a)(ii) herein and delivered to Purchaser.
4. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the securities.
Purchaser is purchasing these securities for investment for his or her own
account only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act.
(b) Purchaser understands that the securities have not been
registered under the Securities Act by reason of a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of
Purchaser's investment intent as expressed herein.
(c) Purchaser understands that the Shares are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, Purchaser must hold the Shares indefinitely unless they
are registered with the Securities and Exchange Commission and qualified by
state authorities, or an exemption from such registration and qualification
requirements is available. Purchaser acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
(d) Purchaser understands that Purchaser may suffer adverse
tax consequences as a result of Purchaser's purchase or disposition of the
Shares. Purchaser represents that Purchaser has consulted any tax consultants
Purchaser deems advisable in connection with the purchase or disposition of the
Shares and that Purchaser is not relying on the Company for any tax advice.
5. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. The certificate or certificates representing
the Shares shall bear the following legends (as well as any legends required by
applicable state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND
NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR
-4-
<PAGE>
DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL IN A FORM SATISFACTORY TO FOR
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF
AN AGREEMENT BETWEEN THE COMPANY AND THE
STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order
to ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required
(i) to transfer on its books any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Agreement or (ii) to
treat as owner of such Shares or to accord the right to vote or pay dividends to
any purchaser or other transferee to whom such Shares shall have been so
transferred.
6. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in
any manner whatsoever the right or power of the Company, or a parent or
subsidiary of the Company, to terminate Purchaser's employment, for any reason,
with or without cause.
7. MARKET STAND-OFF AGREEMENT. In connection with the initial
public offering of the Company's securities and upon request of the Company or
the underwriters managing any underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any Shares (other than those included
in the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting the
foregoing as may be requested by the underwriters at the time of the public
offering.
8. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement and all acts and
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of California, without giving effect to principles of conflicts of
law.
-5-
<PAGE>
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement
sets forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) SEVERABILITY. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, the parties agree
to renegotiate such provision in good faith. In the event that the parties
cannot reach a mutually agreeable and enforceable replacement for such
provision, then (i) such provision shall be excluded from this Agreement,
(ii) the balance of the Agreement shall be interpreted as if such provision were
so excluded and (iii) the balance of the Agreement shall be enforceable in
accordance with its terms.
(d) CONSTRUCTION. This Agreement is the result of
negotiations between and has been reviewed by each of the parties hereto and
their respective counsel, if any; accordingly, this Agreement shall be deemed to
be the product of all of the parties hereto, and no ambiguity shall be construed
in favor of or against any one of the parties hereto.
(e) NOTICES. Any notice required or permitted by this
Agreement shall be in writing and shall be deemed sufficient when delivered
personally or sent by telegram or fax or 48 hours after being deposited in the
U.S. mail, as certified or registered mail, with postage prepaid, and addressed
to the party to be notified at such party's address as set forth below or as
subsequently modified by written notice.
(f) COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) SUCCESSORS AND ASSIGNS. The rights and benefits of this
Agreement shall inure to the benefit of, and be enforceable by the Company's
successors and assigns. The rights and obligations of Purchaser under this
Agreement may only be assigned with the prior written consent of the Company.
(h) CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
-6-
<PAGE>
[SIGNATURE PAGE FOLLOWS]
-7-
<PAGE>
The parties have executed this Exercise Notice and Restricted Stock
Purchase Agreement as of the date first set forth above.
COMPANY:
ETOYS INC.
By:
-----------------------------------
Name:
---------------------------------
(print)
Title:
--------------------------------
2850 Ocean Park Boulevard
Santa Monica, California 90405
PURCHASER:
< < OPTIONEE > >
--------------------------------------
(Signature)
--------------------------------------
(Print Name)
Address:
---------------------
---------------------
I, ______________________, spouse of < < Optionee > >, have read and hereby
approve the foregoing Agreement. In consideration of the Company's granting
my spouse the right to purchase the Shares as set forth in the Agreement, I
hereby agree to be bound irrevocably by the Agreement and further agree that
any community property or similar interest that I may have in the Shares
shall hereby by similarly bound by the Agreement. I hereby appoint my spouse
as my attorney-in-fact with respect to any amendment or exercise of any
rights under the Agreement.
---------------------------------------
Spouse of < < Optionee > >
-8-
<PAGE>
RECEIPT
The undersigned hereby acknowledges receipt of Certificate No. _____ for
__________ shares of Common Stock of eToys Inc. (the "COMPANY").
Dated:
----------------- ---------------------------------------
< < Optionee > >
<PAGE>
RECEIPT
eToys Inc. (the "COMPANY") hereby acknowledges receipt of a check in the amount
of $_____________ given by < < Optionee > > as consideration for Certificate
No. _________ for ____________ shares of Common Stock of eToys Inc.
Dated:
------------------
ETOYS INC.
By:
-----------------------------------
Name:
----------------------------------
(print)
Title:
---------------------------------
<PAGE>
FULFILLMENT SERVICES AGREEMENT
THIS FULFILLMENT SERVICES AGREEMENT (this "Agreement") is made as of
this 21st day of April, 1999 (the "Effective Date"), by and between Fingerhut
Business Services, Inc., a Minnesota corporation with offices located at 4400
Baker Road, Minnetonka, Minnesota 55343 ("FBSI"), and eToys Inc., a Delaware
corporation with offices located at 2850 Ocean Park Boulevard, Suite 225,
Santa Monica, California 90405 ("eToys").
WHEREAS, FBSI desires to provide to eToys, and eToys desires to receive
from FBSI, support for eToys based in the western United States under the
terms and conditions of this Agreement and the Schedules (as defined below).
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, FBSI and eToys hereby agree as follows:
1. SCHEDULES
(a) The parties acknowledge and agree that the detailed terms and
conditions of any and all projects entered into between the parties shall be
set forth in a form and format substantially similar to the schedule of even
date herewith and delivered concurrently herewith (the "Original Schedule"),
which sets forth the fulfillment project. The parties acknowledge and agree
that in addition to the terms and conditions of the Original Schedule and any
other comparable schedule acknowledged in writing by the parties hereto and
referencing this Agreement (each a "Schedule" and collectively the
"Schedules"), the general terms of this Agreement shall apply to each project
contained therein, as applicable, and the overall relationship between the
parties. If there is a conflict between the terms of the Schedules and this
Agreement, the terms of the Schedules shall control.
(b) Commencing as of the date hereof and continuing during the term of
this Agreement, FBSI shall, subject to the terms and conditions of this
Agreement and any Schedules, provide eToys or cause FBSI's various affiliates
(all of which are collectively referred to as "FBSI") to provide the services
identified on any Schedules (collectively referred to as the "Fulfillment
Services").
(c) From time to time during the term of this Agreement, eToys may
request that FBSI take part in a new project(s). Any such request shall be
in writing. FBSI reserves the right to accept or decline any project in
which eToys seeks its participation for any reason; provided, however, that
FBSI shall discuss in good faith with eToys any request that FBSI take part
in a new project and shall give any such request due and fair consideration.
In the event a new project is accepted, a Schedule will be created pursuant
to the terms hereof and attached to and made a part of this Agreement as
contemplated in Section 1(a) above.
(d) PRICING OF FULFILLMENT SERVICES. The pricing of Fulfillment
Services for each individual project shall be set forth in the relevant
Schedule. Commencing after the expiration of one year from and after the
Effective Date, FBSI reserves the right, upon sixty (60) days prior written
notice to eToys, to increase the price of Fulfillment Services that FBSI
provides to eToys
<PAGE>
on a recurring basis on one occasion during each subsequent one year term of
this Agreement, which increases shall not exceed ten percent (10%) of the
price of the Fulfillment Services, as applicable, during the immediately
preceding one year term of this Agreement.
(e) POSTAGE AND FREIGHT. Postage and freight rates anticipated to apply
to the performance of any Fulfillment Services project shall be determined by
FBSI for each project and shall be communicated in writing to eToys prior to
the start of Fulfillment Services on each project. FBSI reserves the right
to increase these rates for ground shipping, contained in the Original
Schedule, at any time upon thirty (30) days notice to reflect actual
increases in costs. Any increase in these rates shall be substantiated in
writing by FBSI. FBSI considers all postage and freight information to be
Confidential Information (as defined in Section 11). National carrier
premium service rates, including, for example, United States Postal Service
Priority Mail, United Parcel Service, One, Two and Three day service and
Federal Express shall be billed to eToys at cost. eToys reserves the right,
in its sole discretion, to require FBSI to use, or to operate under separate
arrangements with, carriers with whom eToys or an eToys' affiliate has
separately negotiated postage and freight rates, in lieu of FBSI rates.
(f) TAX MATTERS. eToys acknowledges that it or its agent is solely
responsible for identifying and resolving sales and use tax collection issues
for product orders, including the necessity of charging and collecting such
taxes.
(g) REPORTS. The parties agree to provide each other such reports as
are mutually agreed upon and set forth in each Schedule or as either party
shall reasonably request during the performance of any Fulfillment Services.
2. PAYMENT TERMS
(a) FULFILLMENT SERVICES. FBSI shall invoice eToys for the Fulfillment
Services every fifteen (15) days, setting forth (i) a detailed list of
Fulfillment Services provided to eToys during the prior fifteen (15) days
(e.g., quantity/rate/extension) and (ii) associated charges for the services.
eToys shall pay all invoices within thirty (30) days of receipt.
(b) BILLING DISPUTES. eToys and FBSI shall use best efforts to
expediently resolve any disputed invoice through negotiations between each
party's Account Manager; provided, however, that disputed amounts not
resolved within ninety (90) calendar days of eToys' receipt of the invoice
shall be immediately due and payable.
(c) INTEREST. FBSI shall assess interest at a rate of 1% per month on
all receivables not paid within the above-stated time periods. Interest will
start accruing on the 45th day from the date of invoice, and will continue to
accrue until all overdue payments, plus interest charges, are paid in full.
3. BOOKS AND RECORDS
(a) RECORDKEEPING. Both parties agree to keep complete and accurate
books of account, records, and other documents with respect to this Agreement
and any Schedule ("Books and Records"). Such Books and Records shall be kept
by both parties for the longer of (i) a
-2-
<PAGE>
period of time consistent with FBSI's general document records management
policy, or (ii) three (3) years following expiration or termination of the
Agreement.
(b) AUDIT. The Books and Records shall be available for inspection and
copying by any qualified representative or agent of a party or its
affiliates, at the expense of that party, subject to the following terms and
conditions: (a) such examination shall take place at the principal place of
business or the location where the Books and Records are regularly
maintained, during normal business hours and only to the extent necessary to
verify inventory levels and payment amounts; (b) the party demanding the
audit shall give the other party at least seven (7) business days' written
notice prior to any such examination; (c) both parties shall keep each
party's Confidential Information disclosed to it during the examination
confidential in accordance with each party's obligations set forth in Section
13 below; and (d) a party may not conduct more than four (4) such inspections
during any twelve-month period during the term of this Agreement.
4. TERM AND TERMINATION
(a) TERM AND RENEWAL OPTION. Unless terminated earlier, the term of
this Agreement shall be for a period of three (3) years commencing on the
Effective Date and terminating on April 21, 2002 ("Expiration Date") (the
"Original Term"); provided, however, that eToys shall have the option of
extending the Original Term for three additional one (1) year terms
("Additional Terms") after the Expiration Date on the terms and conditions
provided herein, such option to be effected by eToys providing written notice
to FBSI of its intent to extend the Original Term no later than one hundred
eighty (180) days prior to the Expiration Date or, after the Expiration Date
and during an Additional Term, by providing such written notice 180 days
prior to the expiration date of the Additional Term, as applicable.
(b) TERMINATION. This Agreement may be terminated as follows:
(1) BREACH - by either party, upon 30 days prior written notice to
the other party, in the event of a material breach of this Agreement by the
other party. The written notice shall specify the precise nature of the
breach. In the event the breaching party cures the breach within the 30 day
notice period, this Agreement shall not terminate.
(2) INSOLVENCY - by either party, immediately upon written notice to
the other party, in the event the other party voluntarily files or has filed
involuntarily against it a petition under the United States Bankruptcy Code,
including a petition for Chapter 11 reorganization as set forth in the United
States Bankruptcy Code.
(3) CHANGE IN CONTROL - by eToys, upon 30 days prior written notice
to FBSI, if FBSI enters into an agreement with Toys R Us, Inc. or Amazon.com
or with any affiliate of any such entity (each, a "Prohibited Entity")
pursuant to which FBSI (i) proposes to sell the Facility to a Prohibited
Entity, (ii) proposes to enter into a transaction or series of transactions
with a Prohibited Entity in which (A) FBSI sells, conveys or otherwise
disposes of all or substantially all of its property to a Prohibited Entity,
(B) merges with or consolidates with a Prohibited Entity or (C) more than
fifty percent (50%) of the voting power of FBSI is transferred to a
Prohibited Entity.
-3-
<PAGE>
(c) OTHER RIGHTS. The rights of the parties to terminate this Agreement
or any Schedule are not exclusive of any other rights and remedies available
at law or in equity, and such rights shall be cumulative. The exercise of
any such right or remedy shall not preclude the exercise of any other rights
and remedies.
(d) POST-TERMINATION PERFORMANCE. Notwithstanding any termination by
either party of this Agreement or any Schedule, FBSI shall continue to
fulfill all orders from customers, and eToys shall continue to remit amounts
due to FBSI under this Agreement or any Schedule, in connection with any
product orders made prior to the effective date of such termination.
(e) RETURN OF PROPRIETARY INFORMATION. Upon termination of this
Agreement for any reason, each party shall immediately return to the other
all property (including without limitation, Confidential Information and all
material related to any customers) that it has received from the other party
in connection with the performance of its obligations hereunder except to the
extent such property is needed to fulfill its continuing obligations under
Section 4(d) above. In such event, such property shall be returned
immediately upon the party's fulfillment of its obligations under such
Section 4(d).
(f) SURVIVAL. Sections 3, 4(d), 4(e), 4(f), 8, 9, 11 and 12 shall
survive any expiration or termination of this Agreement or any Schedule.
5. LICENSE
(a) TRADEMARK LICENSE. eToys hereby grants to FBSI a limited,
revocable, non-exclusive license to use the trademarks, logos, or artwork
owned or licensed to eToys and identified in Exhibit I hereto (collectively
referred to as the "Licensed Marks"), solely for the purpose of displaying
such Licensed Marks on packaging, invoices and customer service
correspondence. Other than as contemplated by this Agreement or any
Schedule, FBSI shall not make any other use of the Licensed Marks or any
related marks or intellectual property of eToys.
(b) REPRESENTATION AND WARRANTY. eToys represents and warrants to FBSI
that it is authorized to grant the aforementioned trademark license and that
it shall fully indemnify and hold FBSI and its affiliates harmless against
any and all claims by a third party alleging a violation of such third
party's intellectual property or other proprietary rights in connection with
FBSI's use of the Licensed Marks pursuant to the trademark license or this
Agreement or any Schedule. The indemnification granted under this Section
5(b) expressly includes indemnification with respect to reasonable attorneys
fees and any and all expenses and costs incurred or amounts paid in
settlement or in satisfaction of any judgment or award.
6. RELATIONSHIP OF THE PARTIES
(a) INDEPENDENT CONTRACTORS. The relationship created hereunder between
FBSI and eToys shall be solely that of independent contractors entering into
an agreement. No representations or assertions shall be made or actions
taken by either party which could imply or establish any agency, joint
venture, partnership, employment or trust relationship between the parties
with respect to the subject matter of this Agreement or any Schedule.
Neither FBSI nor
-4-
<PAGE>
eToys shall have any authority or power whatsoever to enter into any
agreement, contract or commitment on behalf of the other, or to create any
liability or obligation whatsoever on behalf of the other, to any person or
entity.
(b) SUBCONTRACTORS. FBSI reserves the right to subcontract with other
individuals and businesses for Fulfillment Services required to be performed
pursuant to this Agreement and any Schedule. Use of any subcontractor shall
be subject to receipt of prior written consent of eToys, which consent shall
not be unreasonably withheld. FBSI shall be responsible for all payments to,
as well as the direction and control of the work to be performed by its
subcontractors, if any. Subject to and solely in accordance with the
provisions of Section 1, FBSI reserves the right to increase its pricing at
any time in accordance with any rate increases by subcontractors.
7. INVENTORY, FACILITIES AND RISK OF LOSS
(a) GENERAL. eToys shall provide FBSI with sufficient in ventory (the
"Inventory") to meet the fulfillment requirements under this Agreement. FBSI
shall have no liability to eToys or third parties for losses caused directly
or indirectly by eToys' failure to provide sufficient Inventory.
(b) TITLE. FBSI acknowledges that eToys shall retain all right and
title to all Inventory and packaging materials which eToys causes to be
delivered to FBSI under this Agreement. eToys reserves the right to
physically inspect or remove any and all Inventory from FBSI's possession and
control.
(c) RISK OF LOSS. FBSI shall be responsible for all risk of direct
physical loss of the Inventory while it is in FBSI's possession or control
during the term of this Agreement. eToys waives its right to recover
damages from FBSI for any loss of use of the Inventory or loss of income
therefrom, except to the extent provided pursuant to Section 9(a) of this
Agreement. FBSI shall maintain the same levels of insurance coverage on the
Inventory as it maintains with respect to its own inventory in the same
warehouse(s).
8. REPRESENTATIONS AND WARRANTIES
(a) REPRESENTATIONS AND WARRANTIES OF FBSI. With the knowledge that
eToys is relying thereon in entering into this Agreement and any Schedule,
FBSI hereby represents, warrants and covenants as follows:
(1) FBSI is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Minnesota.
(2) This Agreement and any and all Schedules constitute the legal,
valid, and binding obligation of FBSI, enforceable against FBSI in accordance
with its terms except as enforcement may be limited by any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and except as enforcement may be limited by general
principles of equity. As of the Effective Date, FBSI has taken all corporate
action necessary for the authorization, execution and delivery of this
Agreement and any Schedule, and for the performance by FBSI of its
obligations under this Agreement and any Schedule.
-5-
<PAGE>
(3) Neither the execution and delivery of this Agreement (including
the Original Schedule) nor the consummation or performance of any obligations
hereunder shall, directly or indirectly (with or without notice or lapse of
time) in any material respect, contravene, conflict with, or result in a
violation or breach of any provision of, or give any person the right to
declare a default or exercise any remedy under, or to accelerate the maturity
or performance of, or to cancel, terminate, or modify, any material contract
to which FBSI is a party.
(4) FBSI is not and shall not be required to give any notice to or
obtain any consent from any person in connection with the execution and
delivery of this Agreement and the Original Schedule or the consummation or
performance of any of its obligations hereunder.
(5) FBSI's facilities utilized to provide the Fulfillment Services
have been designed or will be modified to ensure continuous operation and use
prior to, during and after the calendar year 2000, and to operate during such
time periods so that eToys will not experience any loss of information or
assets, interruption in service, or invalid and/or incorrect reporting or
results.
(6) FBSI is, to its knowledge, and, at all times during the
performance of Fulfillment Services under this Agreement and any Schedules
hereunder, will remain in material compliance with all applicable laws, rules
and regulations, including, but not limited to, the laws, rules and
regulations of the Federal Trade Commission and the Direct Marketing
Association, including by way of illustration and not limitation, the Mail
Order Rule and Telemarketing Rule, if applicable.
(7) FBSI is not currently in default under any material contract or
agreement.
(b) REPRESENTATIONS AND WARRANTIES OF ETOYS. With the knowledge that
FBSI is relying thereon in entering into this Agreement and any Schedule,
eToys hereby represents, warrants and covenants as follows:
(1) eToys is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware, and has the full power
to grant the license rights set forth in this Agreement.
(2) This Agreement and the Original Schedule constitute the legal,
valid, and binding obligation of eToys, enforceable against eToys in
accordance with its terms except as enforcement may be limited by any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally and except as enforcement may be limited by
general principles of equity. As of the Effective Date, eToys has taken all
corporate action necessary for the authorization, execution and delivery of
this Agreement and any Schedule, and for the performance by eToys of its
obligations under this Agreement and any Schedule.
(3) Neither the execution and delivery of this Agreement and any
Schedule nor the consummation or performance of any obligations hereunder
shall, with or without notice or lapse of time, in any material respect,
contravene, conflict with, or result in a violation or breach of any
provision of, or give any person the right to declare a default or exercise
any
-6-
<PAGE>
remedy under, or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any material contract to which eToys is a party.
(4) eToys is not and shall not be required to give any notice to or
obtain any consent from any person in connection with the execution and
delivery of this Agreement and any Schedule or the consummation or
performance of any of its obligations hereunder.
(5) eToys' assets and equipment utilized in connection with this
Agreement and any Schedule have been designed or will be modified to ensure
continuous operation and use prior to, during and after the calendar year
2000, and to operate during such time periods so that FBSI will not
experience any loss of information or assets, interruption in service,
invalid and/or incorrect reporting or results.
(6) eToys is to its knowledge and, at all times during the term of
this Agreement, will remain in material compliance with all applicable laws
and regulations, including, but not limited to, the laws, rules and
regulations of the Federal Trade Commission and the Direct Marketing
Association.
(7) eToys is not currently in default under any material contract
or agreement.
(c) SURVIVAL. The representations and warranties under this Section
shall survive the termination of this Agreement and any Schedule.
9. INDEMNIFICATION, INSURANCE AND LIMITATIONS ON LIABILITY
(a) INDEMNIFICATION BY FBSI. Subject to the limitations specified in
this Section 9, FBSI shall indemnify, hold harmless and defend eToys and each
person or entity that is a stockholder, officer, director, partner, employee,
affiliate or agent of eToys from and against any and all losses, claims,
damages, liabilities, whether joint or several, expenses (including
reasonable legal fees and expenses), judgments, fines and other amounts paid
in settlement, incurred or suffered by any such person or entity arising out
of or in connection with (i) the inaccuracy of any representation or warranty
made by FBSI hereunder, (ii) any breach of this Agreement by FBSI, or
(iii) any negligent act or omission by FBSI or its employees or agents in
connection with the performance by FBSI or its employees or agents of the
Fulfillment Services hereunder, provided such negligent act or omission was
not done or omitted at the direction of eToys.
(b) INDEMNIFICATION BY ETOYS. Subject to the limitations specified in
this Section 9, eToys shall indemnify, hold harmless and defend FBSI and each
person or entity that is a stockholder, officer, director, partner, employee,
affiliate or agent of FBSI from and against any and all losses, claims,
damages, liabilities, whether joint or several, expenses (including
reasonable legal fees and expenses), judgments, fines and other amounts paid
in settlement, incurred, or suffered by any such person arising out of or in
connection with (i) the inaccuracy of any representation or warranty made by
eToys hereunder, (ii) any breach of this Agreement by eToys, (iii) any
negligent act or omission by eToys or its employees or agents in connection
with the performance by eToys or its employees or agents required of eToys
hereunder provided such negligent act or omission was not done or omitted at
the direction of eToys, or (iv) any claim or
-7-
<PAGE>
action for personal injury, death, property damage or other cause of action
(A) involving a product liability claim arising from or relating to products
for which Fulfillment Services are provided to eToys hereunder, or (B)
resulting from alleged defects in, or the inherently dangerous nature of,
eToys' products that are the subject of this Agreement and any Schedule.
(c) NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. If a claim for
indemnification hereunder arises from a claim or demand from a third party,
the rights of the indemnified parties to be indemnified pursuant to this
Agreement and any Schedule shall be governed by the following:
(1) Promptly after receipt by an indemnified party of notice of
any claim, allegation or facts which may result in a claim for
indemnification hereunder, an indemnified party shall give the indemnifying
party prompt notice thereof. The failure to give such notice shall not
affect the indemnified party's ability to seek reimbursement unless such
failure has materially and adversely affected the indemnifying party's
ability to defend the claims.
(2) An indemnified party shall have the right (i) to employ
separate counsel in any action as to which indemnification may be sought
under any provision of this Agreement and to participate in the defense
thereof, or (ii) to the extent that it may wish, jointly with any other
indemnified party, to assume the defense of any such action with counsel
reasonably satisfactory to the indemnifying party but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (x)
the indemnifying party has agreed in writing to pay such fees and expenses,
(y) the indemnifying party has failed to assume the defense thereof without
reservation and employ counsel within a reasonable period of time after being
given the notice required above, and as a consequence thereof the indemnified
party has employed separate counsel to protect its rights, or (z) the named
parties to any such action (including any impleaded parties) include both
such indemnified party and the indemnifying party and such indemnified party
shall have been advised by its counsel that representation of such
indemnified party and the indemnifying party by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or
not such representation by the same counsel has been proposed) due to actual
or potential differing interests between them. It is understood, however,
that the indemnifying party shall, in connection with any one such action or
separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
indemnified parties having actual or potential differing interest with the
indemnifying party.
(3) The indemnifying party shall not be liable for any settlement
of any such action effected without its written consent, which consent shall
not be unreasonably withheld, but if settled with such written consent, or if
there be a final judgment against any indemnified party in any such action,
the indemnifying party agrees to indemnify and hold harmless any indemnified
parties to the extent provided above from and against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
(d) INSURANCE. During the term of this Agreement, FBSI will maintain,
with a financially sound insurance company having an A.M. Best rating of A or
better, the following insurance coverage:
-8-
<PAGE>
(1) commercial general liability insurance with a combined single
limit of $2 million per occurrence for bodily injury, including death and
property damage;
(2) umbrella excess liability insurance with a combined single
limit of $5 million per occurrence for bodily injury, including death, and
property damage;
(3) worker's compensation, occupational disease, employer's
liability with limits of not less than $500,000 per accident for bodily
injury and $500,000 per employee for bodily injury by disease, disability
benefit and similar employee benefit insurance required under the laws of the
states where FBSI will perform the Fulfillment Services provided for
hereunder;
(4) fidelity insurance with limits no less than $1 million per
occurrence;
(5) FBSI will furnish eToys with certificates of insurance
evidencing this coverage upon written request.
(e) LIMITATIONS ON LIABILITY.
(1) IN NO EVENT SHALL EITHER PARTY'S LIABILITY HEREUNDER INCLUDE
ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES, EVEN IF
SUCH PARTY SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS
OR DAMAGE.
(2) Each of the parties hereto shall be liable to the other for
damages arising out of or in connection with any negligent act or breach of
this Agreement or any Schedule by such party to the extent permitted by law,
subject to the duty of the non-breaching party to take all reasonable actions
in order to mitigate such damages; PROVIDED, HOWEVER, that (i) FBSI's
liability for any Fulfillment Services provided hereunder shall be limited to
the recovery by eToys of the amount actually paid to FBSI by eToys for such
Fulfillment Service, and (ii) FBSI's total liability hereunder shall be
limited to the aggregate amount actually paid by eToys to FBSI for
Fulfillment Services. eToys and FBSI shall mutually develop a quarterly
inventory cycle count program. The year-end inventory accuracy standard
shall be 99.7%. If, at year-end, inventory accuracy has been maintained
between 97% and 99.7%, the cost of the inventory discrepancy shall be shared
equally by both parties. If the inventory accuracy is less than 97%, FBSI
shall reimburse eToys, at cost, for the inventory adjustment. eToys will
report monthly to FBSI, eToys' product costs and inventory value based upon
the monthly cycle counts completed by FBSI. eToys shall maintain the
necessary inventory Books and Records for FBSI's audit pursuant to Section 3.
Both parties will manage and report compliance issues monthly.
(f) DISPUTE RESOLUTION. To be selected jointly by two mediators
selected by the parties.
(1) If there is any controversy, dispute or claim arising out of or
relating to interpretation or breach of this Agreement, the parties will
endeavor to settle it promptly.
-9-
<PAGE>
(2) If such a dispute cannot be resolved, the parties will promptly
initiate and participate in good faith mediation of the dispute, with the
mediator to be selected jointly by the parties or, if the parties cannot
agree upon a mediator, by a mediator to be selected jointly by two mediators
selected by the parties.
(3) If the dispute is not resolved through mediation, the parties
will promptly submit such dispute to binding arbitration in accordance with
the Commercial Arbitration Rules and regulations of The American Arbitration
Association ("AAA"), with the arbitrator to be a retired federal or state
court judge jointly selected by the parties or, if the parties cannot agree,
by an arbitrator that satisfies such qualifications and that is jointly
selected by two arbitrators selected by the parties. Judgment upon the award
rendered by the arbitrator(s) may be entered in any court of competent
jurisdiction.
(4) Nothing shall prevent either party from directly seeking
injunctive or other equitable relief from any court of competent jurisdiction
in situations where damages would not adequately compensate for an alleged
breach of this Agreement. By way of illustration and not limitation, such
relief would be appropriate in the case of either party's need to: obtain
cooperation of the other party in litigation; secure the timely delivery of
information or services; or, prevent the disclosure of Confidential
Information.
(5) The prevailing party in any mediation, arbitration or legal
action to enforce or interpret this Agreement shall be entitled to recover
from the non-prevailing party all costs and expenses, including reasonable
attorneys' fees, incurred in such action or proceeding.
(g) GOVERNMENT ACTIONS. eToys hereby agrees to promptly provide FBSI
copies of all complaints or inquiries received by it from any governmental
agency that in any way relate to or have a potential effect on the
Fulfillment Services provided hereunder. In the event FBSI is required, as a
result of any such action, to change the manner in which it does business in
any material respect, FBSI shall have the option to terminate as soon as
practicable the availability of such Fulfillment Services hereunder. FBSI
hereby agrees that it will promptly forward to eToys copies of all written
complaints or written inquiries addressed to FBSI from any governmental
agency in any way relating to or having a potential effect on the Fulfillment
Services provided hereunder.
(h) SURVIVAL. The provisions of this Section shall survive the
termination of this Agreement and any Schedule.
10. MARKETING MATERIALS
Both parties agree to act as a customer reference for the other in
regard to the subject matter of this Agreement dur ing the term hereof. The
written consent of the other party shall be obtained before that party is
used as a reference in any particular instance. Until the expiration of 25
days following the date of the final prospectus relating to eToys proposed
initial public offering, FBSI shall not issue any press releases or make any
public statement in regard to this Agreement or the subject matter hereof.
Upon the expiration of this 25 day period, the parties shall issue a joint
press release that is mutually acceptable to each party. After the issuance
of such joint press release, either party may issue a press release regarding
this Agreement or the
-10-
<PAGE>
subject matter hereof provided such party obtains the written consent of the
other party, which consent will not be unreasonably withheld. In addition,
FBSI agrees not to use the Licensed Marks in any publicly distributed
marketing materials without prior written consent of eToys.
11. CONFIDENTIALITY
(a) GENERAL. As used herein, "Confidential Information" means (i) the
terms and provisions of this Agreement and any related documents delivered
concurrently herewith, and (ii) all computer hardware, all software, all
data, reports, analyses, compilations, studies, interpretations, forecasts,
records and other materials (in whatever form maintained, whether
documentary, computer storage or otherwise) that contain or otherwise reflect
information concerning eToys, FBSI, any of their subsidiaries or affiliates,
or any portion thereof, that one party or its Agents may provide to the
Receiving Party or its Agents in connection with this Agreement ("Provided
Information"), together with all data, reports, analyses, compilations,
studies, interpretations, forecasts, records or (ii) other materials (in
whatever form maintained, whether documentary, computer storage or otherwise)
prepared by the Disclosing Party receiving Provided Information or its Agents
that contain or otherwise reflect or are based upon, in whole or in part, any
Provided Information or that reflect the review of, interest in, or
evaluation of all or any portion of the transactions contemplated by this
Agreement and any related documents delivered concurrently herewith ("Derived
Information"). As used herein, "Agents" means, collectively, the respective
directors, employees, controlling persons or attorneys of eToys or FBSI. As
used herein, the term "person" shall be broadly interpreted to include,
without limitation, any corporation, partnership, trust or individual; the
term "Receiving Party" shall mean the person receiving Provided Information;
and the term "Disclosing Party" shall mean the person providing Provided
Information.
(b) ACKNOWLEDGMENT. The parties hereby agree that all Confidential
Information shall be kept confidential and shall not, without the prior
written consent of the Disclosing Party, be disclosed by the Receiving Party
in any manner whatsoever, in whole or in part, other than to the Disclosing
Party's Agents, and shall not be used, directly or indirectly, for any
purpose other than in connection with this Agreement and not in any way
inherently detrimental to the other party. Moreover, eToys and FBSI agree to
reveal Confidential Information only to their Agents if and to the extent
that such Agents, have a strict need to know such Confidential Information
for the purpose of the Receiving Party satisfying its obligations under this
Agreement and are informed of the confidential nature of the Confidential
Information and agree to be bound by the terms and conditions of this
Agreement. eToys and FBSI shall each be responsible for any breach of this
Agreement by their respective Agents (including Agents who, subsequent to the
first date of disclosure of Confidential Information hereunder, become former
Agents). Moreover, eToys and FBSI shall take all reasonably necessary
measures to restrain their respective Agents (and former Agents) from
unauthorized disclosure or use of the Confidential Information.
(c) EXCEPTIONS. Notwithstanding anything in this Agreement to the
contrary, Confidential Information shall not include any information which
(1) at the time of disclosure to the Receiving Party is generally
available to and known by the public (other than as a result of any
disclosure made directly or indirectly or
-11-
<PAGE>
other action or inaction by the Receiving Party or anyone to whom the
Receiving Party or any of its Agents transmit or transmitted any Confidential
Information);
(2) becomes publicly available in the future (other than as a
result of a disclosure made directly or indirectly or other action or
inaction by the Receiving Party or anyone to whom the Receiving Party or any
of its Agents transmit or have transmitted any Confidential Information);
(3) was available to the Receiving Party or its Agents on a
non-confidential basis from a source other than the Disclosing Party or any
of its Subsidiaries or affiliates or any of their respective Agents providing
such information (provided that to the best of the Receiving Party's
knowledge, after due inquiry, such source is not or was not bound to maintain
the confidentiality of such information); or
(4) has been independently acquired or developed by the Receiving
Party without violating any of its obli gations under this Agreement,
provided such independent development can reasonably be proven by the
Receiving Party upon written request.
In the event that a party or any of such party's Agents become legally
compelled (by deposition, interrogatory, request for documents, subpoena,
civil investigative demand or similar process) to disclose any of the
Confidential Information of the other party, that party or person under the
legal compulsion (the "Compelled Party") from whom such information is being
sought shall, unless prohibited by law, provide the party to whom such
Confidential Information belongs with prompt prior written notice of such
requirement so that it may seek a protective order or other appropriate
remedy, or both, or waive compliance with the terms of this Agreement. In
the event that such protective order or other remedy is not obtained, or the
other party waives compliance with the provisions hereof, the Compelled Party
agrees to furnish only such portion of the Confidential Information that the
Compelled Party is advised by written opinion of its counsel is legally
required to be furnished by it and shall exercise its reasonable best efforts
to obtain reliable assurance that confidential treatment shall be accorded
such Confidential Information. Notwithstanding the foregoing, to the extent
required under applicable state and federal securities laws, either party may
file this Agreement as an exhibit with federal and state securities filings,
provided that each party shall use its best efforts to obtain confidential
treatment of the portions of this Agreement that contain Confidential
Information. In this regard, the party making such filing shall obtain the
prior written consent of the other party, which consent shall not be
unreasonably withheld.
(d) USE OF CONFIDENTIAL INFORMATION. Each party shall be subject to the
obligations under this Section 13 until the expiration of three (3) years
following the termination of this Agreement. Other than as specifically
provided in this Agreement, neither party shall duplicate the Disclosing
Party's Confidential Information for any purpose other than for the
performance of its obligations under this Agreement and for the benefit of
the Disclosing Party; or use the Disclosing Party's Confidential Information
for any reason or purpose other than as expressly permitted in this Agreement.
(e) RETURN OF CONFIDENTIAL INFORMATION. Upon termination of this
Agreement or if either party so requests, the Receiving Party shall return to
the Disclosing Party or destroy all
-12-
<PAGE>
copies of the Confidential Information in its possession and the possession
of its Agents and will destroy all copies of any Derived Information;
provided, however, that this Agreement will continue to apply to the
Confidential Information and/or Derived Information contained or reflected in
such copies.
(f) The Parties agree that eToys and FBSI would be irreparably injured
by a breach of this Agreement by the other party or its Agents and that the
other party shall be entitled to seek equitable relief, including injunctive
relief and specific performance, in the event of any breach of the provisions
of this Section 11. Such remedies shall not be deemed to be the exclusive
remedies for a breach of this Section 11 by either party or their Agents, but
shall be in addition to all other remedies available at law or in equity.
12. MISCELLANEOUS PROVISIONS
(a) NOTICES. All notices, demands, requests, approvals, consents or
other communications to be given or delivered under this Agreement
("Notices") will be in writing and will be deemed to have been given
(1) when delivered in person or by courier or confirmed facsimile;
(2) upon confirmation of receipt when sent by certified mail,
return receipt requested; or
(c) five (5) days after deposit in first class U.S. mail, as the
case may be to the addresses indicated below:
(1) If to FBSI:
FBSI Business Services, Inc.
4400 Baker Road
Minnetonka, Minnesota 55343
Attention: Account Manager
Facsimile: (612) 936-5106
With a copy to: Fingerhut Companies, Inc.
4400 Baker Road
Minnetonka, Minnesota 55343
Attention: General Counsel
(2) If to eToys:
eToys, Inc.
2850 Ocean Park Boulevard, Suite 225
Santa Monica, CA 90405
Attention: President and Chief Executive Officer
Facsimile: (310) 664-8101
or to such other addresses as a party may designate from time to time by
written notice to the other party.
-13-
<PAGE>
(b) SEVERABILITY. Whenever possible, each provision of this Agreement
and any Schedule shall be interpreted in such a manner as to be effective and
valid under applicable law, but if any provision of this Agreement or any
Schedule is held to be prohibited by or invalid under applicable law, such
provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement and any Schedule.
(c) AMENDMENT AND WAIVER. This Agreement and any Schedule may be
amended, and any provision of this Agreement and any Schedule may be waived;
provided that any such amendment or waiver will be binding upon any party
hereto only if such amendment or waiver is set forth in a writing executed by
such party. No course of dealing between or among any persons having any
interest in this Agreement and any Schedule will be deemed effective to
modify or amend any part of this Agreement and any Schedule or any rights or
obligations of any person under or by reason of this Agreement or any
Schedule. The waiver of any default, or the remedying of any default in any
manner, shall not operate as a waiver of any other prior or subsequent
default. No extension of time for the performance of any obligation or act
shall be deemed to be an extension of time for the performance of any other
obligation or act hereunder. No delay or omission by a party to exercise
rights hereunder shall impair any such rights or shall be construed to be a
waiver of any such default or any acquiescence therein.
(d) COMPLETE AGREEMENT. This Agreement, all Schedules and exhibits
hereto and any related documents delivered concurrently herewith, contain the
complete agreement between the parties relating to the Fulfillment Services
and supersede any prior understandings, agreements or representations by or
between the parties, written or oral, which may be related to the subject
matter hereof in any way.
(e) FURTHER ASSURANCES. eToys and FBSI will each execute such other
documents and take such actions as the other may reasonably request in order
to effect the relationships, services and activities contemplated by this
Agreement and any Schedule and to account for and document those activities.
(f) HEADINGS. Section headings contained in this Agreement and any
Schedule are inserted for convenience of reference only, shall not be deemed
to be a part of this Agreement and any Schedule, respectively, or any
purpose, and shall not in any way define or affect the meaning, construction
or scope of any of the provisions hereof.
(g) GOVERNING LAW. The internal law, and not the law of conflicts, of
the State of Delaware will govern all questions concerning the construction,
validity and interpretation of this Agreement and any Schedule and the
performance of the obligations imposed by this Agreement and any Schedule.
(h) ASSIGNMENT. This Agreement and any Schedule and all of the
provisions will be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, except that
neither this Agreement and any Schedule nor any of the rights, interest or
obligations set forth in each may be assigned by any party hereto without the
prior written consent of the other party hereto, which shall not be
unreasonably withheld.
-14-
<PAGE>
Notwithstanding the foregoing, eToys shall have the right to assign this
Agreement to any wholly owned subsidiary of eToys, provided that eToys
guarantees the obligations of any such subsidiary hereunder.
(i) INTERPRETATION. Each party acknowledges it has participated in the
negotiation and preparation of this Agreement, and has reviewed this
Agreement and had the opportunity to consult with its counsel and accountants
with respect to its terms. Therefore, each Party agrees that the rule of
construction to the effect that any ambiguities in a document shall be
interpreted against the drafting party, will not be utilized in the
interpretation, construction, or enforcement of this Agreement, and no
consideration shall be given to the issue of which party hereto actually
prepared, drafted or requested any term or condition of this Agreement or any
Schedule or other instrument subject hereto.
(j) FORCE MAJEURE. Neither party shall be liable for any failure of or
delay in the performance of this Agreement or any Schedule for the period
that such failure or delay is due to acts of God, public enemy, war, strikes
or labor disputes, or any other cause beyond the parties' reasonable control
(each a "Force Majeure"), it being understood that lack of financial
resources shall not to be deemed a cause beyond a party's control. Each
party shall notify the other party promptly of the occurrence of any Force
Majeure and carry out this Agreement and any Schedule as promptly as
practicable after such Force Majeure is terminated. The existence of any
Force Majeure shall not extend the term of this Agreement or any Schedule.
(k) COUNTERPARTS. This Agreement may be signed in any number of
counterparts.
[SIGNATURE PAGE FOLLOWS]
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto executed this Agreement effective
as of the date first set forth above.
FINGERHUT BUSINESS SERVICES, INC.
By /s/ William J Lansing
----------------------------------
Name William J Lansing
--------------------------------
Its Chief Executive Officer
---------------------------------
eTOYS INC.
By /s/ Stephen E Paul
----------------------------------
Name Stephen E Paul
--------------------------------
Its V.P. of Business Development
---------------------------------
Attachments:
Exhibit I (Licensed Marks)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 15, 1999 (except Note 8, as to which the
date is April 18, 1999), in Amendment No. 2 to the Registration Statement (Form
S-1 No. 333-72469) and related Prospectus of eToys Inc. for the registration of
8,200,000 shares of its common stock.
Ernst & Young LLP
Los Angeles, California
The foregoing consent is in the form that will be signed upon the completion
of the stock split described in Note 8 to the financial statements.
/s/ Ernst & Young LLP
Los Angeles, California
April 21, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 21, 1999 with respect to the financial
statements of BabyCenter, Inc., in Amendment No. 2 to the Registration Statement
(Form S-1 No. 333-72469) and related Prospectus of eToys Inc. for the
registration of 8,200,000 shares of its common stock.
Ernst & Young LLP
Palo Alto, California
April 21, 1999
