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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 2000
REGISTRATION NO. 333-90311
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
ON FORM S-3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ETOYS INC.
(Exact Name of Registrant as Specified in Its Charter)
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<TABLE>
<S> <C> <C>
DELAWARE 95-4633006
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
3100 OCEAN PARK BLVD., SUITE 300
SANTA MONICA, CA 90405
(310) 664-8100
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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PETER JUZWIAK, ESQ.
GENERAL COUNSEL
ETOYS INC.
3100 OCEAN PARK BLVD., SUITE 300
SANTA MONICA, CA 90405
(310) 664-8100
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------
COPIES TO:
GREGG A. NOEL, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 SOUTH GRAND AVENUE
LOS ANGELES, CA 90071
(213) 687-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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, other than securities offered only in connection with dividend or interest
renewal plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 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.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SECURITYHOLDERS IDENTIFIED IN THIS PROSPECTUS MAY NOT SELL
THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 2, 2000
PROSPECTUS
[LOGO]
$150,000,000
ETOYS INC.
6.25% Convertible Subordinated Notes due December 1, 2004
------------------
The Selling Securityholders, including their transferees, pledgees or donees
or their successors, may from time to time offer and sell pursuant to this
prospectus any or all of the notes and common stock into which the notes are
convertible.
You may convert the notes into shares of common stock of eToys at any time
before their maturity unless we have previously redeemed or repurchased them.
The notes will mature on December 1, 2004. The conversion rate is
13.5323 shares per each $1,000 principal amount of notes, subject to adjustment
in certain circumstances. This is equivalent to a conversion price of
approximately $73.90 per share. On May 30, 2000, the last reported sale price
for the common stock on The Nasdaq National Market was $5.06 per share. The
common stock is quoted under the symbol "ETYS".
eToys will pay interest on the notes on December 1 and June 1 of each year.
The first interest payment will be made on June 1, 2000. The notes are
subordinated in right of payment to all Senior Debt (as that term is defined in
this prospectus) of eToys. The notes are issued only in denominations of $1,000
and integral multiples of $1,000.
On or after December 1, 2002, eToys has the option to redeem all or a
portion of the notes that have not been previously converted at the redemption
prices set forth in this offering circular. In the event of a Change in Control,
as that term is defined in this prospectus, you may require eToys to repurchase
any notes held by you.
The notes are evidenced by global notes deposited with a custodian for and
registered in the name of a nominee of The Depository Trust Company. Except as
described herein, beneficial interests in the global note will be shown on, and
transfers thereof will be effected only through, records maintained by The
Depository Trust Company and its direct and indirect participants.
Our corporate offices are located at 3100 Ocean Park Boulevard, at Suite
300, Santa Monica, CA 90405. Our telephone number at that location is
(310) 664-8100.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS TO READ ABOUT
IMPORTANT FACTORS YOU SHOULD CONSIDER BEFORE BUYING THE NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this prospectus is June 2, 2000.
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TABLE OF CONTENTS
PROSPECTUS
<TABLE>
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PAGE
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<S> <C>
Risk Factors................................................ 3
Information Regarding Forward-Looking Statements............ 18
The Company................................................. 19
Use of Proceeds............................................. 20
Ratio of Earnings to Fixed Charges.......................... 20
Description of the Notes.................................... 21
Description of Capital Stock................................ 36
Selling Securityholders..................................... 39
Plan of Distribution........................................ 41
Certain Federal Income Tax Consequences..................... 43
Legal Matters............................................... 44
Experts..................................................... 44
Where You Can Find More Information......................... 44
</TABLE>
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
AND THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN THE NOTES OR SHARES OF OUR
COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES. 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 THE NOTES AND 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. Among other things, the sources of such losses will include
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 and consumer-driven technology,
transaction processing systems and our computer network;
- the expansion of our product offerings and Web site content;
- development of relationships with strategic business partners;
- international expansion of our operations; and
- assimilation of operational personnel acquired with BabyCenter.
As of March 31, 2000, we had an accumulated deficit of $220.5 million. We
incurred net losses of $48.4 million for the quarter ended March 31, 2000 and
$189.6 million for the year ended March 31, 2000.
Also, as a result of our acquisition of BabyCenter, we have recorded a
significant amount of goodwill, the amortization of which will significantly
reduce our earnings and profitability for the foreseeable future. The recorded
goodwill of approximately $189.0 million is being 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 the notes and
our stock could decline.
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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. For more details, see the sections "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" each of which is incorporated by reference into this Prospectus, and
below under the heading "As a Result of This Offering, We Will Have a
Significant Amount of Debt and May Have Insufficient Cash Flow to Satisfy Our
Debt Service Obligations. In Addition, the Amount of Our Debt Could Impede Our
Operations and Flexibility".
ANY FAILURE BY US TO SUCCESSFULLY EXPAND OUR DISTRIBUTION OPERATIONS WOULD HAVE
A MATERIAL ADVERSE EFFECT ON US.
Any failure by us to successfully expand our distribution operations to
accommodate increases in demand and customer orders would have a material
adverse effect on our business prospects, financial condition and operating
results. Under such circumstances, the material adverse effects may include,
among other things, an inability to increase net sales in accordance with the
expectations of securities analysts and investors; increases in costs that we
may incur to meet customer expectations; increases in fulfillment expenses if we
are required to rely on more expensive fulfillment systems than anticipated or
incur additional costs for balancing merchandise inventories among multiple
distribution facilities; loss of customer loyalty and repeat business from
customers if they become dissatisfied with our delivery services; and damage to
our reputation and brand image arising from uncertainty with respect to our
distribution operations. These risks are greatest during the fourth calendar
quarter of each year, when our sales increase substantially relative to other
quarters and the demand on our distribution operations increases
proportionately. In addition, consistent with industry practice for online
retailers, we notify our customers via our Web site that we cannot guarantee all
products ordered after a specified date in December will be delivered by
Christmas day, which may deter potential customers from purchasing from us
following that date. Since our limited operating history makes it difficult to
accurately estimate the number of orders that may be received during the fourth
calendar quarter, we may experience either inadequate or excess fulfillment
capacity during this quarter, either of which could have a material adverse
impact on us. The occurrence of one or more of these events would be likely to
cause the market price of the notes and our common stock to decline.
We currently conduct our distribution operations through five facilities
operated by us, consisting of an approximately 105,000 square foot facility in
Commerce, California; an approximately 438,500 square foot facility in
Pittsylvania County, Virginia; an approximately 272,000 square foot facility in
Greensboro, North Carolina; an approximately 75,000 square foot facility in San
Francisco, California; and an approximately 46,000 square foot facility in
Swindon, England. Commencing in the fall of 2000, we also plan to conduct
distribution operations from an approximately 763,000 square foot facility in
Ontario, California that is currently being developed, to augment our Virginia
facility with an additional 715,000 square foot facility adjacent to the
existing facility, and to cease distribution operations at the San Francisco
facility described above. We have also entered into a lease for an approximately
108,000 square foot distribution facility in Belgium. On March 31, 2000, we
terminated our relationship with Fingerhut Business Services, Inc., a third-
party provider of distribution services. We have in the past and continue to
devote substantial resources to the expansion of our distribution operations
among these facilities. This expansion may cause disruptions in our business as
well as unexpected costs. We are not experienced with coordinating and managing
distribution operations in geographically distant locations. This may result in
increased costs as we seek to meet customers' expectations, balance merchandise
inventories among our distribution facilities and take other steps that may be
necessary to meet the demands placed on our distribution operations,
particularly during the fourth calendar quarter of the
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year. Despite the fact that we devote substantial resources to the expansion and
refinement of our distribution operations, there can be no assurance that our
existing or future distribution operations will be sufficient to accommodate
increases in demand and customer orders.
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 facilities. 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 and accurate manner
would damage our reputation and brand. We also depend upon temporary employees
to adequately staff our distribution facilities, particularly during the holiday
shopping season. If we do not have sufficient sources of temporary employees, we
could lose customers.
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
THE NOTES AND 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 the notes and 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 children's products, including toys, video games, books,
software, videos, music and baby-oriented products sold by us;
- seasonality;
- our inability to manage inventory levels or control inventory shrinkage;
- 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 and baby products associated
with movies, television and other entertainment events;
- our inability to obtain popular children's products, including toys, video
games, books, software, videos, music and baby-oriented products from our
vendors;
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- fluctuations in the amount of consumer spending on children's products,
including toys, video games, books, software, videos, music and
baby-oriented products;
- 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 cooperative
advertising campaigns with major brand names as we have done in the past;
- 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, including international expansion;
- unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
- technical difficulties, system downtime or Internet brownouts;
- government regulations related to use of the Internet for commerce or for
sales and distribution of children's products, including toys, video
games, books, software, videos, music and baby-oriented products; and
- economic conditions specific to the Internet, online commerce and the
children's and baby products industries.
A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of children's products, including toys, video games,
books, software, videos, music and baby-oriented products 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. For more details, see the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which is incorporated
by reference into this Prospectus.
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. For more details, see the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which is incorporated
into this Prospectus by reference.
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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 products, including toys,
video games, books, software, videos, music and baby-oriented products, subject
us to significant inventory risks. It is critical to our success that we
accurately predict these trends and do not overstock unpopular products. The
demand for specific products can change between the time the products are
ordered and the date of receipt. We are particularly exposed to this risk
because we derive a majority of our net sales in the fourth calendar quarter of
each year. Our failure to sufficiently stock popular toys and other products in
advance of such fourth calendar quarter would harm our operating results for the
entire fiscal year.
In the event that one or more products do not achieve widespread consumer
acceptance, we may be required to take significant inventory markdowns, which
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. For more details, see the sections "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" each
of which is incorporated by reference into this Prospectus.
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.
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 WILL 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. In addition, with the acquisition of BabyCenter, we added over 160
new employees, including managerial, technical and operations personnel, and
have been required to assimilate substantially all of BabyCenter's operations
into our operations. Further, during 1999 and 2000, we continued to expand our
distribution operations, which now include five facilities operated by us,
consisting of an approximately 105,000 square foot facility in Commerce,
California; an approximately 438,500 square foot facility in Pittsylvania
County, Virginia; an approximately 272,000 square foot facility in Greensboro,
North Carolina; an approximately 75,000 square foot facility in San Francisco,
California; and an approximately 46,000 square foot facility in Swindon,
England. Commencing in the fall of 2000, we also plan to conduct distribution
operations from an approximately 763,000 square foot facility in Ontario,
California that is currently being developed, to augment our Virginia facility
with an additional 715,000 square foot facility adjacent to the existing
facility, and to cease
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distribution operations at the San Francisco facility described above. We have
also entered into a lease for an approximately 108,000 square foot distribution
facility in Belgium. This expansion may cause disruptions in our business as
well as unexpected costs. We are not experienced with coordinating and managing
distribution operations in geographically distant locations.
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
and expansion of our distribution operations, our existing management team may
not be able to effectively train, supervise and manage all of our personnel or
effectively oversee all of our distribution operations. 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.
RISK OF INTERNATIONAL EXPANSION
In October 1999, we launched eToys.co.uk, which serves customers in the
United Kingdom, and in November 1999, we began serving all provinces of Canada
through our eToys.com store. We also offer content and community to parents and
expectant parents through BabyCentre.co.uk. Our European operations are
conducted through a Netherlands subsidiary, and we are exploring opportunities
to separately finance its operations and will continue to expand our presence in
foreign markets in a manner consistent with the availability and extent of such
financing opportunities.
We have relatively little experience in purchasing, marketing and
distributing products or services for these markets and may not benefit from any
first-to-market advantages. It will be costly to establish international
facilities and operations, promote our brand internationally, and develop
localized Web sites and stores and other systems. We may not succeed in our
efforts in these countries. If net sales from international activities do not
offset the expense of establishing and maintaining foreign operations, our
business prospects, financial condition and operating results will suffer.
As the international online commerce market continues to grow, competition
in this market will likely intensify. In addition, governments in foreign
jurisdictions may regulate Internet or other online services in such areas as
content, privacy, network security, encryption or distribution. This may affect
our ability to conduct business internationally.
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 products industries, including toy, video game, books,
software, video, music and baby-oriented products, are intensely competitive.
We currently or potentially compete with a variety of other companies,
including:
- other online companies that include toys and children's and baby products
as part of their product offerings, such as Amazon.com,
Barnesandnoble.com, CDnow, Beyond.com, Reel.com, iBaby, BabyCatalog.com,
iVillage and Women.com;
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- traditional store-based toy and children's and baby products retailers
such as Toys R Us, FAO Schwarz, Zany Brainy, Noodle Kidoodle, babyGap,
GapKids, Gymboree, KB Toys, The Right Start and Babies R Us;
- 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, FAO Schwarz, babyGap, GapKids, KB Toys
(i.e., KB Kids) and Gymboree;
- physical and online stores of entertainment entities that sell and license
children and baby products, such as The Walt Disney Company and Warner
Bros.;
- catalog retailers of children's and baby products as well as products for
toddlers and expectant mothers;
- vendors or manufacturers of children's and baby products that currently
sell some of their products directly online, such as Mattel and Hasbro;
- 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 and baby products, such as
BrainPlay.com, Red Rocket and ToySmart.com.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than 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 suppliers of children's products,
including toys, video games, books, software, video, music and baby-oriented
products 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. For more details, see the section
"Business" which is incorporated by reference into this Prospectus.
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,
such as 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. The
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.
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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.
We are vulnerable to natural disasters and other unanticipated problems that
are beyond our control. Our office facilities in Southern California, Northern
California and London, England, house substantially all of our product
development and information systems. Our third-party Web site hosting facilities
located in Sunnyvale, California and Herndon, Virginia, house substantially all
of our computer and communications hardware systems. Our distribution facilities
located in California, North Carolina, Virginia and England house substantially
all of our product inventory. A natural disaster, such as an earthquake, or
harsh weather or other comparable problems that are beyond our control could
cause interruptions or delays in our business and loss of data or render us
unable to accept and fulfill customer orders. Any such interruptions or delays
at 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, earthquakes 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 facilities 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.
Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins, denial of service attacks 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.
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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.
WE FACE THE RISK OF INVENTORY SHRINKAGE.
If the security measures we use at our distribution facilities do not reduce
or prevent inventory shrinkage, our gross profit margin may decrease. We have
undertaken a number of measures designed to address inventory shrinkage,
including the installation of enhanced security measures at our distribution
facilities. These measures may not successfully reduce or prevent inventory
shrinkage in future periods. Our failure to successfully improve the security
measures we use at our distribution facilities may cause our gross profit
margins and results of operations to be significantly below expectations in
future periods.
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, our transaction processing systems and our
computer network to meet 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 have also received a claim from the holders of a home shopping
video catalog patent and a remote query communication system patent that our
Internet marketing program and Web site operations, respectively, infringe such
patents, and BabyCenter has received a claim from the holder of an automated
registry patent that its Web site infringes such patent. 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
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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.
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. We currently hold registered trademarks for "eToys" and
"BabyCenter". 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 A REDUCTION IN 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 Chairman of the Board. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel as well as the 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.
THERE ARE RISKS ASSOCIATED WITH THE BABYCENTER MERGER AND OTHER POTENTIAL
ACQUISITIONS. AS A RESULT, WE MAY NOT ACHIEVE THE EXPECTED BENEFITS OF THE
BABYCENTER MERGER AND OTHER POTENTIAL ACQUISITIONS.
We may not realize the anticipated benefits from the BabyCenter merger.
In February 2000, we announced that we were uniting our baby businesses,
which then consisted of BabyCenter and the Baby Store at eToys, under the
BabyCenter brand. As part of this initiative, we have directed all eToys
customers seeking baby-related content and commerce to the BabyCenter.com site.
In addition, we will move all BabyCenter commerce functions, such as
distribution and customer service, from San Francisco to Southern California.
The transition, which is expected to be completed during the summer of 2000,
will reduce overlapping positions at BabyCenter and relocate other positions to
eToys.
We may not be able to successfully assimilate BabyCenter's additional
personnel, operations, acquired technology and products into our business. The
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 management and employees or increase our expenses. Further,
the physical expansion in facilities that has occurred as a result of this
merger may result in disruptions that seriously impair our business. In
particular, we have operations in multiple facilities in
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geographically distant areas. We are not experienced in managing facilities or
operations in geographically distant areas.
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 another company, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to the 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 would be
dilutive to us or our existing securityholders and could affect the price of the
notes and our common stock.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SECURITYHOLDERS.
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 securityholders.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
- the Board of Directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- on or subsequent to such date the business combination is approved by the
Board of Directors and authorized at an annual or special meeting of
stockholders.
A "business combination" generally includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our Amended and Restated Certificate of Incorporation and Bylaws do not
provide for the right of stockholders to act by written consent without a
meeting or for cumulative voting in the election of directors. In addition, our
Amended and Restated Certificate of Incorporation permits the Board of Directors
to issue preferred stock with voting or other rights without any stockholder
action. Commencing on the record date for our first annual meeting of
stockholders on which we have at least 800 stockholders, which is expected to be
the record date for our annual meeting held in 2000, our Amended and Restated
Certificate of Incorporation provides for the Board of Directors to be divided
into three classes, with staggered three-year terms. As a result, only one class
of directors will be elected at each annual meeting of stockholders. Each of the
two other classes of directors will continue to serve for the remainder of its
respective three-year term. These provisions, which require the vote of
stockholders holding at least a majority of the outstanding common stock to
amend, may have the effect of deterring hostile takeovers or delaying changes in
our management.
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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. 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 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, and the Federal Trade Commission's Children's Online Privacy
Protection Act became effective April 21, 2000. The European Union recently
enacted its own privacy regulations. In addition, we are subject to existing
federal, state and local regulations pertaining to consumer protection, such as
the Federal Trade Commission's Mail and Telephone Order Rule. 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. Any failure by us to comply with the rules and
regulations applicable to our business could result in action being taken
against us that could have a material adverse effect on our business and results
of operations.
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. For instance, 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 also need to modify our
software to further protect our customers' personal information.
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. In particular, our BabyCenter Web site offers a variety of content
for new and expectant parents, including content relating to pregnancy,
fertility and infertility, nutrition, child rearing and related subjects. 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 to cover claims of these types, there can be no assurance that such
insurance will be adequate to indemnify us for all liability that may be imposed
on us.
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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 or the notes and our stockholders will 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. Significant volatility in the stock markets, particularly with respect
to Internet stocks, may increase the difficulty of raising additional capital.
Although we believe that the net proceeds from the issuance of the notes,
together with current cash, cash equivalents and cash that may be generated from
operations, will be sufficient to meet our anticipated cash needs through
March 31, 2001, there can be no assurance to that effect.
THE MARKET PRICES OF THE NOTES AND OUR COMMON STOCK MAY BE VOLATILE, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL SECURITYHOLDERS.
The market prices for the notes and our common stock have been and are
likely to continue 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, increased cost of operations
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;
- volatility in the stock markets, particularly with respect to Internet
stocks, and decreases in the availability of capital for Internet-related
businesses;
- 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.
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From May 20, 1999 (the first day of public trading of our common stock),
through March 31, 2000, the high and low sales prices for our common stock
fluctuated between $84.50 and $8.84. On May 30, 2000, the closing price of our
common stock was $5.06. In the past, following periods of volatility in the
market price of their securities, 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 the prices of the notes and our common
stock to fall.
RISKS RELATED TO THE NOTE OFFERING
AS A RESULT OF THE NOTE OFFERING, WE HAVE A SIGNIFICANT AMOUNT OF DEBT AND MAY
HAVE INSUFFICIENT CASH FLOW TO SATISFY OUR DEBT SERVICE OBLIGATIONS. IN
ADDITION, THE AMOUNT OF OUR DEBT COULD IMPEDE OUR OPERATIONS AND FLEXIBILITY.
As a result of the note offering, we have a significant amount of debt and
debt service obligations. If we are unable to generate sufficient cash flow or
otherwise obtain funds necessary to make required payments on the notes,
including from cash and cash equivalents on hand, we will be in default under
the terms of the indenture which could, in turn, cause defaults under our other
existing and future debt obligations. For more details regarding our ability to
make payments on the notes, see the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which is incorporated
by reference into this Prospectus.
Even if we are able to meet our debt service obligations, the amount of debt
we have could adversely affect us in a number of ways, including by:
- limiting our ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes;
- limiting our flexibility in planning for, or reacting to, changes in our
business;
- placing us at a competitive disadvantage relative to our competitors who
have lower levels of debt;
- making us more vulnerable to a downturn in our business or the economy
generally;
- requiring us to use a substantial portion of our cash flow from operations
to pay principal and interest on our debt, instead of contributing those
funds to other purposes such as working capital and capital expenditures;
and
- requiring us to maintain specific financial ratios and comply with other
restrictive covenants in our existing and future agreements governing our
debt obligations.
To be able to meet our debt service requirements we must successfully
implement our business strategy. We cannot assure you that we will successfully
implement our business strategy or that we will be able to generate sufficient
cash flow from operating activities to meet our debt service obligations and
working capital requirements. Our ability to meet our obligations will be
dependent upon our future performance, which will be subject to prevailing
economic conditions and to financial, business and other factors.
To implement our business strategy, we will need to seek additional
financing. If we are unable to obtain such financing on terms that are
acceptable to us, we could be forced to dispose of assets to make up for any
shortfall in the payments due on our debt under circumstances that might not be
favorable to realizing the highest price for those assets. A substantial portion
of our assets consist of intangible assets, the value of which will depend upon
a variety of factors, including without limitation, the success of our business.
As a result, we cannot assure you that our assets could be sold quickly enough,
or for amounts sufficient, to meet our obligations, including our obligations
under the notes.
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WE MAY BE UNABLE TO REPURCHASE THE NOTES UPON THE OCCURRENCE OF A CHANGE OF
CONTROL.
Upon the occurrence of a change of control of eToys, we are required to
offer to repurchase all outstanding notes. Although the indenture allows us,
subject to satisfaction of certain conditions, to repurchase the notes using
shares of our common stock, if a change of control were to occur, our ability to
repurchase the notes with cash will depend on the availability of sufficient
funds and compliance with the terms of any debt ranking senior to the notes. Our
failure to repurchase tendered notes upon a change of control would constitute
an event of default under the indenture, which could result in the acceleration
of the maturity of the notes and all of our other outstanding debt. These
repurchase requirements may also delay or make it harder for others to obtain
control of us.
CLAIMS BY HOLDERS OF THE NOTES WILL BE SUBORDINATED TO CLAIMS BY HOLDERS OF OUR
SENIOR DEBT.
The notes rank behind all of our existing and future senior debt and
effectively behind all existing and future liabilities (including trade
payables) of our subsidiaries. As a result, if we declare bankruptcy, liquidate,
reorganize, dissolve or otherwise wind up our affairs or are subjected to
similar proceedings, we must repay all senior debt before we will be able to
make any payments on the notes. Likewise, upon a default in payment with respect
to any of our debt or an event of default with respect to this debt resulting in
its acceleration, our assets will be available to pay the amounts due on the
notes only after all senior debt has been paid in full. In addition, we have
located all of our inventory purchasing, distribution fulfillment functions,
customer service functions and other related activities in our distribution
subsidiary, eToys Distribution, LLC. The effect of this will be to increase the
amount of our subsidiary liabilities, especially during the third and fourth
calendar quarters. We may not have sufficient assets remaining to pay amounts
due on any or all of the notes then outstanding. The indenture does not prohibit
us or our subsidiaries from incurring additional senior debt, other debt or
other liabilities. Our ability to pay our obligations on the notes could be
adversely affected if we or our subsidiaries incur more debt.
As of March 31, 2000, we had outstanding $16.6 million of senior debt and
$23.5 million of subsidiary liabilities (of which $4.6 million also qualifies as
senior debt) to which the notes are subordinated. Both we and our subsidiaries
expect that from time to time we will incur additional debt to which the notes
will be subordinated.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES.
There is no public market for the notes. The initial purchasers made a
market in the notes, but it may cease its market-making at any time.
We do not intend to apply for a listing of any of the notes on any
securities exchange. We do not know if an active public market will develop for
the notes or, if developed, will continue. If an active market is not developed
or maintained, the market price and the liquidity of the notes may be adversely
affected.
In addition, the liquidity and the market price of the notes may be
adversely affected by changes in the overall market for convertible securities
and by changes in our financial performance or prospects, or in the prospects
for companies in our industry. As a result, you cannot be sure that an active
trading market will develop for these notes.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE AND THE PRICE
OF THE NOTES TO FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market prices of the
notes and 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. As of March 31, 2000, we had
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outstanding 121,214,105 shares of common stock and 22,463,321 options to acquire
common stock, of which 4,119,590 options were vested and exercisable. As of
March 31, 2000, of the shares that are currently outstanding, 47,848,398 are
freely tradeable in the public market and 73,365,707 are tradeable in the public
market subject to the restrictions, if any, applicable under Rule 144 and
Rule 145 of the Securities Act. All shares acquired upon exercise of options
will be freely tradeable in the public market.
In general, under Rule 144 as currently in effect, 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 (a) one percent of the number of shares of common stock then
outstanding (which for eToys was 1,212,141 shares as of March 31, 2000) or (b)
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. Although the
holders of a substantial amount of our common stock are subject to selling
restrictions contained in Rule 144, sales by such stockholders of a substantial
amount of our common stock could adversely affect the market price of the notes
and our common stock.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
In addition to the other information contained in this prospectus, investors
should carefully consider the risk factors disclosed in this prospectus,
including those beginning on page 3, in evaluating an investment in the notes or
the common stock issuable upon conversion of the notes. This prospectus includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. All statements other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any projections of earnings, revenues or other financial
items, any statements of the plans and objectives of management for future
operations, any statements concerning proposed new products or services, any
statements regarding future economic conditions or performance, and any
statement of assumptions underlying any of the foregoing. In some cases,
forward-looking statements can be identified by the use of terminology such as
"may", "will", "expects", "plans", "anticipates", "estimates", "potential", or
"continue" or the negative thereof or other comparable terminology. Although
eToys believes that the expectations reflected in the forward-looking statements
contained herein are reasonable, there can be no assurance that such
expectations or any of the forward-looking statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the forward-looking statements. eToys' future financial condition and results of
operations, as well as any forward-looking statements, are subject to inherent
risks and uncertainties, including but not limited to the risk factors set forth
below and for the reasons described elsewhere in this prospectus. All
forward-looking statements and reasons why results may differ included in this
prospectus are made as of the date hereof, and eToys assumes no obligation to
update any such forward-looking statement or reason why actual results might
differ.
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THE COMPANY
We are a leading Web-based retailer focused exclusively on childern's
products, including toys, video games, books, software, videos, music and
baby-oriented products. Through our wholly-owned subsidiary, BabyCenter, we
offer Webby-award winning content and community for new and expectant parents
and an online store with an extensive selection of baby-oriented products and
supplies. By combining our expertise in children's products and our commitment
to excellent customer service with the benefits of Internet retailing, we
believe 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 100,000 SKUs. 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.
In October 1999, we launched eToys.co.uk, which incorporates our technology
and online store design and offers consumers in the United Kingdom over 5,000
SKUs of children's toys, software, videos and video games tailored to this
market. In addition, in November 1999, we began offering services to all
provinces of Canada through our eToys.com store, and in March 2000 we launched
the BabyCenter brand in the United Kingdom, offering a content and community
site for parents and expectant parents located at www.babycentre.co.uk.
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USE OF PROCEEDS
The selling securityholders will receive all of the proceeds from the sale
of the securities sold pursuant to this prospectus. We will not receive any of
the proceeds from sales by the selling securityholders of the offered
securities.
RATIO OF EARNINGS TO FIXED CHARGES
We have not recorded earnings for any of the three years ended March 31,
2000 and therefore are unable to cover fixed charges and unable to disclose the
ratio of earnings to fixed charges. However, the following table discloses our
pre-tax loss from continuing operations and our amount of fixed charges for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Pre-tax loss from continuing operations..................... $ 2,267 $ 28,557 $ 189,626
Fixed charges:
Interest expense, including amortization of debt financing
costs................................................... 15 47 4,008
Interest component of rent expense on operating leases.... 8 95 939
Total Fixed charges......................................... $ 23 $ 142 $ 4,947
======= ======== =========
Ratio of loss to fixed charges.............................. (a) (a) (a)
======= ======== =========
</TABLE>
------------------------
(a) As a result of the loss incurred for the years ended March 31, 1998, 1999
and 2000, the ratio coverage was less than 1:1 because we were unable to
cover the indicated fixed charges. We must generate additional earnings of
$2,267, $28,557 and $189,626 for the years ended March 31, 1998, 1999 and
2000, respectively, to achieve a coverage of 1:1.
20
<PAGE>
DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture between us and U.S. Bank Trust
National Association, as trustee (the "Trustee"). The Indenture and the Notes
are governed by New York law. Because this section is a summary, it does not
describe every aspect of the Notes. This summary is subject to and qualified in
its entirety by reference to all the provisions of the Indenture, including
definitions of certain terms used in the Indenture. For example, in this section
we use capitalized words to signify defined terms that have been given special
meaning in the Indenture. We describe the meaning for only the more important
terms. We also include references in parentheses to certain Indenture sections.
Wherever we refer to particular sections or defined terms, those sections or
defined terms are incorporated herein by reference. In this section, references
to "eToys" or "we" or "us" refer solely to eToys Inc. and not its subsidiaries.
GENERAL
The Notes are general, unsecured obligations of eToys. The Notes are
subordinated, which means that they rank behind certain of our other
Indebtedness as described below. The Notes are for $150,000,000 aggregate
principal amount. Payment of the full principal amount of the Notes will be due
on December 1, 2004.
The Notes will bear interest at the annual rate shown on the front cover of
this prospectus from December 6, 1999. We will pay interest twice a year, on
each June 1 and December 1 (each, an "Interest Payment Date"), beginning
June 1, 2000, until the principal is paid or made available for payment.
Interest will be paid to the person in whose name the note is registered at the
close of business on the preceding May 15 or November 15, as the case may be
(each, a "Regular Record Date"). Interest payable per $1,000 principal amount of
notes for the period from December 6, 1999 to June 1, 2000, will be $30.38.
Interest will be calculated on the basis of a 360-day year consisting of twelve
30-day months.
The Notes are convertible into shares of our common stock initially at the
conversion rate stated on the front cover of this prospectus at any time before
the close of business on December 1, 2004, unless the Notes have been previously
redeemed or repurchased. The conversion rate may be adjusted as described below.
We may redeem the Notes at our option at any time on or after December 1,
2002, in whole or in part, at the redemption prices set forth below under the
heading "Optional Redemption", plus accrued and unpaid interest to the
redemption date. If there is a Change in Control, you may have the right to
require us to repurchase your Notes as described below under the heading
"Repurchase at Option of Holders Upon a Change in Control".
FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
The Notes are issued:
- only in fully registered form;
- without interest coupons; and
- in denominations of $1,000 and greater multiples.
Principal of, premium, if any, and interest (and Liquidated Damages, if any)
on the Notes will be payable, and the Notes may be presented for registration or
exchange, at the office or agency we maintain for such purpose in the Borough of
Manhattan, The City of New York. Until we designate otherwise, our office or
agency will be the Trustee's corporate trust office presently located in the
Borough of Manhattan, The City of New York.
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<PAGE>
The Notes initially are evidenced by a global note that is on deposit with
the Trustee as custodian for DTC and registered in the name of Cede & Co.
("Cede"), as nominee of DTC. The global note and any Notes issued in exchange
for the global note are subject to restrictions on transfer and bear a legend
regarding those restrictions. Except as set forth below, record ownership of the
global note may be transferred, in whole or in part, only to another nominee of
DTC or to a successor of DTC or its nominee.
The global note will not be registered in the name of any person, or
exchanged for Notes that are registered in the name of any person, other than
DTC or its nominee unless either of the following occurs:
- DTC has notified us that it is unwilling or unable to continue as
depositary for the global note or has ceased to be a clearing agency
registered as such under the Exchange Act or announces an intention
permanently to cease business or does in fact do so; or
- an Event of Default with respect to the Notes represented by the global
note has occurred and is continuing.
In those circumstances, DTC will determine in whose names any securities
issued in exchange for the global note will be registered.
DTC or its nominee will be considered the sole owner and holder of the
global note for all purposes, and as a result:
- you cannot receive Notes registered in your name it they are represented
by the global note;
- you cannot receive certificated (physical) Notes in exchange for your
beneficial interest in the global notes;
- you will not be considered to be the owner or holder of the global note or
any Note it represents for any purpose; and
- all payments on the global note will be made to DTC or its nominee.
The laws of some jurisdictions require that certain kinds of purchasers (for
example, certain insurance companies) can only own securities in definitive
(certificated) form. These laws may limit your ability to transfer your
beneficial interests in the global note to these types of purchasers.
Only institutions (such as a securities broker or dealer) that have accounts
with DTC or its nominee (called "participants") and persons that may hold
beneficial interests through participants can own a beneficial interest in the
global note. The only place where the ownership of beneficial interests in the
global note will appear and the only way the transfer of those interests can be
made will be on the records kept by DTC (for its participants' interests) and
the records kept by those participants (for interests of persons participants
hold on their behalf).
Secondary trading in bonds and notes of corporate issuers is generally
settled in clearing-house (that is, next-day) funds. In contrast, beneficial
interests in a global note usually trade in DTC's same-day funds settlement
system, and settle in immediately available funds. We make no representations as
to the effect that settlement in immediately available funds will have on
trading activity in those beneficial interests.
We will make cash payments of interest on, and principal of, and the
redemption or repurchase price of, the global note, as well as any payment of
Liquidated Damages, to Cede, the nominee for DTC, as the registered owner of the
global note. We will make these payments by wire transfer of immediately
available funds on each payment date.
22
<PAGE>
We have been informed that, with respect to any cash payment of interest on,
principal of, or the redemption or repurchase price of, the global note, as well
as any payment of Liquidated Damages, DTC's practice is to credit participants'
accounts on the payment date with payments in amounts proportionate to their
respective beneficial interests in the Notes represented by the global note as
shown on DTC's records, unless DTC has reason to believe that it will not
receive payment on that payment date. Payments by participants to owners of
beneficial interests in Notes represented by the global note held through
participants will be the responsibility of those participants, as is now the
case with securities held for the accounts of customers registered in "street
name."
We will send any redemption notices to Cede. We understand that if less than
all the Notes are being redeemed, DTC's practice is to determine by lot the
amount of the holdings of each participant to be redeemed.
We also understand that neither DTC nor Cede will consent or vote with
respect to the Notes. We have been advised that under its usual procedures, DTC
will mail an "omnibus proxy" to us as soon as possible after the record date.
The omnibus proxy assigns Cede's consenting or voting rights to those
participants to whose accounts the Notes are credited on the record date
identified in a listing attached to the omnibus proxy.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, the ability of a person having a beneficial
interest in the principal amount represented by the global note to pledge the
interest to persons or entities that do not participate in the DTC book entry
system, or otherwise take actions in respect of that interest, may be affected
by the lack of a physical certificate evidencing its interest.
DTC has advised us that it will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange) only at the
direction of one or more participants to whose account with DTC interests in the
global note are credited and only in respect of such portion of the principal
amount of the Notes represented by the global note as to which such participant
has, or participants have, given such direction.
DTC has also advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entry
changes in accounts of its participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Certain of such participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
DTC's management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on or after January 1, 2000, may encounter "Year 2000
problems." DTC has informed participants and other members of the financial
community that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and income payments) to securityholders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which is expected
to be completed within appropriate time frames. However, DTC's ability to
perform its services properly is also dependent upon other parties, including,
but not limited to, us and our
23
<PAGE>
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the financial community that
it is contacting, and will continue to contact, third party vendors from whom
DTC acquires services to impress upon them the importance of such services being
Year 2000 compliant, and to determine the extent of their efforts for Year 2000
remediation and, as appropriate, testing of their services. In addition, DTC is
in the process of developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the financial community for informational purposes only and is not
intended to serve as a representation.
DTC's policies and procedures, which may change periodically, will apply to
payments, transfers, exchanges and other matters relating to beneficial
interests in the global note. We and the Trustee have no responsibility or
liability for any aspect of DTC's or any participants' records relating to
beneficial interests in the global note, including for payments made an the
global note, and we and the Trustee are not responsible for maintaining,
supervising or reviewing any of those records.
CONVERSION RIGHTS
You may, at your option, convert any portion of the principal amount of a
Note that is an integral multiple of $1,000 into shares of our common stock at
any time prior to the close of business on the maturity date, unless the Note
has been previously redeemed or repurchased, at a conversion rate equal to
13.5323 shares per $1,000 principal amount of Notes. This conversion rate is
equivalent to a conversion price of approximately $73.90 per share. The
conversion rate is subject to adjustment as described below. Your right to
convert a Note called for redemption or delivered for repurchase will terminate
at the close of business on the Business Day immediately preceding the
redemption date or repurchase date for that Note, unless we default in making
the payment due upon redemption or repurchase.
The holder of a Note can convert the Note by delivering the Note at the
Trustee's Corporate Trust Office, accompanied by a duly signed and completed
notice of conversion, a copy of which may be obtained from the Trustee. In the
case of a global note, DTC will effect the conversion upon notice from the
holder of a beneficial interest in the global note in accordance with DTC's rule
and procedures. The conversion date will be the date on which the Note and the
duly signed and completed notice of conversion are so delivered. As promptly as
practicable on or after the conversion date, we will issue and deliver to the
Trustee a certificate or certificates for the number of full shares of common
stock issuable upon conversion, together with payment in lieu of any fraction of
a share, and the Trustee shall deliver the certificate(s) to the Conversion
Agent for delivery to the holder of the Note being converted. The shares of
common stock issuable upon conversion of the Notes will be fully paid and
nonassessable and will also rank equally with other shares of our common stock
outstanding from time to time.
If you surrender a Note for conversion on a date that is not an Interest
Payment Date, you will not be entitled to receive any interest for the period
from the preceding Interest Payment Date to the data of conversion, except as
described below. If you are a holder of a Note on a Regular Record Date,
including a Note that is subsequently surrendered for conversion after the
Regular Record Date, you will receive the interest payable on such Note on the
next Interest Payment Date. To correct for this resulting overpayment of
interest, we will require that any Note surrendered for conversion during the
period from the close of business on a Regular Record Date to the opening of
business on the next Interest Payment Date be accompanied by payment of an
amount equal to
24
<PAGE>
the interest payable on such Interest Payment Date on the principal amount of
Notes being surrendered for conversion. However, you will not be required to
make that payment if you are converting a Note, or a portion of a Note, that we
have called for redemption, or that you are entitled to require us to repurchase
from you, if your conversion right would terminate because of the redemption or
repurchase between the Regular Record Date and the close of business on the next
Interest Payment Date.
No other payment or adjustment for interest, or for any dividends on our
common stock, will be made upon conversion. If you receive common stock upon
conversion of a Note, you will not be entitled to receive any dividends payable
to holders of common stock as of any record date before the close of business on
the conversion date. We will not issue fractional shares upon conversion of
Notes. Instead, we will pay an amount in cash based on the average of the high
and low sales price of the common stock on the conversion date.
If you deliver a Note for conversion, you will not be required to pay any
taxes or duties in respect of the issue or delivery of common stock on
conversion. However, you will be required to pay any tax or duty that may be
payable in respect of any transfer involved in the issue or delivery of the
common stock in a name other than that of the holder of the Note. We will not
issue or deliver certificates representing shares of common stock unless the
person requesting the issuance or delivery has paid to us the amount of any such
tax or duty or has established to our satisfaction that no such tax or duty is
payable.
The conversion rate is subject to adjustment if, among other things:
(1) there is a dividend or other distribution payable in common stock on
shares of our common stock,
(2) we issue to all holders of common stock rights, options or warrants
entitling them to subscribe for or purchase common stock at less than the
then current market price, calculated as described in the Indenture, of
our common stock; however, if those rights, options or warrants are only
exercisable upon the occurrence of specified triggering events, then the
conversion rate will not be adjusted until the triggering events occur,
(3) we subdivide, reclassify or combine our common stock,
(4) we distribute to all holders of our common stock evidences of our
Indebtedness, shares of capital stock, cash or assets, including
securities, but excluding:
- those dividends, rights, options, warrants and distributions referred
to in paragraphs (1) and (2) above;
- dividends and distributions paid in cash (except as set forth in
paragraphs (5) and (6) below); and
- distributions upon a merger or consolidation as discussed below,
(5) we make a distribution consisting exclusively of cash (excluding cash
distributed upon a merger or consolidation as discussed below) to all
holders of our common stock if the aggregate amount of the distribution
combined together with (A) other such all cash distributions made within
the preceding 365-day period in respect of which no adjustment has been
made and (B) any cash and the fair market value of other consideration
payable in respect of any tender offer by us or any of our subsidiaries
for our common stock concluded within the preceding 365-day period in
respect of which no adjustment has been made exceeds 10% of our market
capitalization, being the product of the Current Market Price per share
of our common stock on the record date for such distribution and the
number of shares of common stock then outstanding, or
25
<PAGE>
(6) the successful completion of a tender offer made by us or any of our
subsidiaries for our common stock that involves aggregate consideration
that, together with (A) any cash and other consideration payable in a
tender offer by us or any of our subsidiaries for our common stock
concluded within the 365-day period preceding the completion of such
tender offer in respect of which no adjustment has been made and (B) the
aggregate amount of any such all cash distributions referred to in
paragraph (5) above to all holders of common stock within the 365-day
period preceding the expiration of such tender offer in respect of which
no adjustments have been made, exceeds 10% of our market capitalization
on the expiration of such tender offer.
We reserve the right to make such increases in the conversion rate in
addition to those required by the provisions described above as we may consider
to be advisable so that any event treated for United States federal income tax
purposes as a dividend of stock or stock rights will not be taxable to the
recipients. No adjustment of the conversion rate will be required to be made
until the cumulative adjustments amount to 1.0% or more of the conversion rate.
We will compute any adjustments to the conversion rate and give notice to the
holders of any such adjustments.
If we merge or consolidate with another person or sell or transfer all or
substantially all of our assets, each Note then outstanding will, without the
consent of the holder of any Note, become convertible only into the kind and
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of,
common stock into which the Note was convertible immediately prior to the
merger, consolidation or sale. This calculation will be made based on the
assumption that the holder of common stock failed to exercise any rights of
election that the holder may have to select a particular type of consideration.
The adjustment will not be made for a merger that does not result in any
reclassification, conversion, exchange or cancellation of our common stock.
We may, from time to time, increase the conversion rate by any amount for
any period of at least 20 days if our Board of Directors has determined that
such increase would be in our best interests. Any such determination will be
conclusive. We will give holders of Notes at least 15 days' notice of such an
increase in the conversion rate. No such increase will be taken into account for
purposes of determining whether the closing price of the common stock exceeds
the conversion price by 105% in connection with an event which otherwise would
be a "Change In Control", as defined below.
If at any time we make a distribution of property to our stockholders that
would be taxable to them as a dividend for United States federal income tax
purposes (e.g., distributions of evidences of indebtedness or assets of eToys,
but generally not stock dividends on common stock or rights to subscribe for
common stock) and, pursuant to the anti-dilution provisions of the Indenture,
the number of shares into which Notes are convertible is increased, that
increase may be deemed for United States federal income tax purposes to be the
payment of a taxable dividend to holders of Notes. For more details, see the
section "Certain Federal Income Tax Consequences."
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes
(including any Liquidated Damages (as defined herein) and any amounts payable
upon the redemption or repurchase of the Notes that the Indenture permits) is
subordinated in right of payment to the extent set forth in the Indenture to the
prior payment in full of all of our Senior Debt. "Senior Debt" means the
principal of, and premium, if any, and interest, including all interest accruing
subsequent to the commencement of any bankruptcy or similar proceeding, whether
or not a claim for post-petition interest is allowable as a claim in any such
proceeding, on, and all fees and other amounts payable in connection with, the
following, whether absolute or contingent, secured or unsecured,
26
<PAGE>
due or to become due, outstanding on the date of the Indenture or thereafter
created, incurred or assumed:
- all our Indebtedness evidenced by a credit or loan agreement, note, bond,
debenture or other similar instrument;
- all our obligations for money borrowed;
- all our obligations as lessee under leases required to be capitalized on
the balance sheet of the lessee under generally accepted accounting
principles;
- all our obligations under interest rate and currency swaps, caps, floors,
collars, hedge agreements, forward contracts or similar agreements or
arrangements;
- all our obligations with respect to letters of credit, bankers'
acceptances and similar facilities, including related reimbursement
obligations;
- all our obligations issued or assumed as the deferred purchase price of
property or services, but excluding trade accounts payable and accrued
liabilities arising in the ordinary course of business;
- all our obligations of the type referred to above of another person and
all dividends of another person, the payment of which, in either case, we
have assumed or guaranteed, or for which we are responsible or liable,
directly or indirectly, jointly or severally, as obligor, guarantor or
otherwise, or which are secured by a lien on our property; and
- renewals, extensions, modifications, replacements, restatements and
refundings of, or any Indebtedness or obligation issued in exchange for
any Indebtedness or obligation described in the bullets above.
Senior Debt will not include any Indebtedness or obligation if the terms of
the indebtedness or obligation, or the terms of the instrument under which the
Indebtedness or obligation is issued, expressly provide that the Indebtedness or
obligation is not superior in right of payment to the Notes. In addition, Senior
Debt will not include trade payables and any Indebtedness or obligation that we
may owe to any of our direct or indirect subsidiaries.
We will not make any payment on account of principal, premium or interest on
the Notes (including any Liquidated Damages and any amounts payable upon the
redemption or repurchase of the Notes) if either of the following occurs:
- we default in our obligations to pay principal, premium, interest or other
amounts on our Senior Debt, including a default under any redemption or
repurchase obligation (a "Payment Default"), and the default continues
beyond any grace period that we may have to make those payments; or
- a default (other than a Payment Default) occurs and is continuing on any
Designated Senior Debt, as defined below, and (1) the default permits the
holders of the Designated Senior Debt to accelerate its maturity and (2)
the Trustee has received a notice (a "Payment Blockage Notice") of the
default from a holder of the Designated Senior Debt (or, in the case of a
syndicated credit facility, the agent or representative of the lenders
thereunder).
If payments of the Notes have been blocked by a Payment Default, payments on
the Notes may resume (including missed payments, if any) when the Payment
Default has been cured or waived. If payments on the Notes have been blocked by
a default (other than a Payment Default) payments on the Notes may resume
(including missed payments, if any) on the earlier of (1) the date on which such
default is cured or waived, or (2) 179 days after the date on which the Trustee
receives the Payment Blockage Notice.
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<PAGE>
No nonpayment default that existed on the day a Payment Blockage Notice was
delivered to the Trustee can be used as the basis for any subsequent Payment
Blockage Notice. In addition, once a holder of Designated Senior Debt has
blocked payment on the Notes by giving a Payment Blockage Notice, no new period
of payment blockage can be commenced until both of the following are satisfied:
- 365 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
- all scheduled payments of principal, any premium and interest on the Notes
that have come due have been paid in full in cash.
"Designated Senior Debt" means our obligations under any particular Senior
Debt in which the instrument creating or evidencing the debt, or the assumption
or guarantee of the debt, or related agreements or documents to which we are a
party, expressly provides that the indebtedness will be "Designated Senior Debt"
for purposes of the Indenture. That instrument, agreement or other document may
place limitations and conditions on the right of that Senior Debt to exercise
the rights of Designated Senior Debt.
In addition, upon any acceleration of the principal due on the Notes as a
result of an Event of Default or payment or distribution of our assets to
creditors upon any dissolution, winding up, liquidation or reorganization,
whether voluntary or involuntary, marshaling of assets, assignment for the
benefit of creditors, or in bankruptcy, insolvency, receivership or other
similar proceedings, all principal, premium, interest and other amounts due on
all Senior Debt must be paid in full in cash or cash equivalents before you will
be entitled to receive any payment. Because of this subordination, in the event
of insolvency, our creditors who are holders of Senior Debt may recover more,
ratably, than you would, and this subordination may reduce or eliminate payments
to you. As of March 31, 2000, we had approximately $16.6 million of Senior Debt
outstanding.
In addition, the Notes are "structurally subordinated" to all indebtedness
and other liabilities, including trade payables and lease obligations, of our
subsidiaries. This occurs because any right we have to receive any assets of our
subsidiaries upon their liquidation or reorganization, and the consequent right
of the holders of the Notes to participate in those assets, will be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors, except to the extent that we are recognized as a creditor of the
subsidiary, in which case our claims would still be subordinate to any security
interest in the subsidiary's assets and any indebtedness of the subsidiary
senior to that which we hold.
The Indenture does not limit our ability or the ability of any of our
subsidiaries to incur indebtedness, including Senior Debt.
OPTIONAL REDEMPTION
On or after December 1, 2002, we may redeem the Notes, in whole or in part,
at our option, at the redemption prices specified below. The redemption price,
expressed as a percentage of principal amount, is as follows for the 12-month
periods beginning on December 1 of the following years:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2002........................................................ 102.500%
2003........................................................ 101.250%
</TABLE>
and, if applicable, thereafter is equal to 100% of the principal amount. In each
case, we will also pay accrued interest to the redemption date. The Indenture
requires us to give notice of redemption not more than 60 and not less than 30
days before the redemption date.
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<PAGE>
No "sinking fund" is provided for the Notes, which means that the Indenture
does not require us to redeem or retire the Notes periodically.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE IN CONTROL
If a Change In Control, as defined below, occurs, you will have the right,
at your option, to require us to repurchase all of your Notes not called for
redemption, or any portion of the principal amount of your Notes that is equal
to $1,000 or any greater integral multiple of $1,000. The price we are required
to pay is 100% of the principal amount of the Notes to be repurchased, together
with interest accrued to the repurchase date.
At our option, instead of paying the repurchase price in cash, we may pay
the repurchase price in our common stock, valued at 95% of the average of the
high and low sales prices of the common stock for each of the five trading days
immediately preceding and including the third trading day prior to the
repurchase date. We may only pay the repurchase price in common stock if we
satisfy conditions provided in the Indenture. Because the number of shares of
common stock to be delivered to holders of Notes in payment of the repurchase
price (should we elect such payment option) is determined on the basis of the
market price of our common stock after we have given notice of the occurrence of
the Change in Control and prior to the repurchase date, the value of the shares
of common stock on the date of delivery thereof to such holders may be more or
less than the repurchase price had we elected to pay such price in cash.
Within 30 days after the occurrence of a Change in Control, we are obligated
to give you notice of the Change in Control and of your repurchase right arising
as a result of the Change in Control. We must also deliver a copy of this notice
to the Trustee. To exercise the repurchase right, you must deliver, on or before
the 30th day (or such greater period as may be required by applicable law) after
the date of our notice, irrevocable written notice to the Trustee of your
exercise of your repurchase right, together with the Notes with respect to which
that right is being exercised. We are required to make the repurchase on a date
that is no later than 75 days after the occurrence of a Change in Control.
A Change in Control will be deemed to have occurred at such time after the
original issuance of the Notes any of the following occurs:
(1) any person, including any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Exchange Act, acquires beneficial
ownership, directly or indirectly, through a purchase, merger or other
acquisition transaction or series of transactions, of shares of our
capital stock entitling that person to exercise more than 50% of the
total voting power of all shares of our capital stock entitled to vote
generally in elections of directors; however, any acquisition by us, any
of our subsidiaries or any of our employee benefit plans will not trigger
this provision;
(2) we consolidate with or merge with or into any other person or another
person merges into us, except if the transaction satisfies any of the
following:
- the transaction is a merger (A) that does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of our capital stock and (B) pursuant to which holders of our
common stock immediately prior to the transaction have, directly or
indirectly, 50% or more of the total voting power of all shares of
capital stock or other ownership interest of the continuing or
surviving person entitled to vote generally in elections of directors
of the continuing or surviving person immediately after the
transaction; or
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<PAGE>
- the transaction is a merger effected only to change our jurisdiction of
incorporation and it results in a reclassification, conversion or
exchange of outstanding shares of our common stock only into shares of
common stock of us or another corporation; or
(3) we convey, transfer, sell, lease or otherwise dispose of all or
substantially all of our assets to another person, other than a
transaction pursuant to which holders of our common stock immediately
prior to the transaction have, directly or indirectly, 50% or more of the
total voting power of all shares of capital stock or other ownership
interest of the transferee person entitled to vote generally in elections
of directors of the transferee person immediately after the transaction.
However, a Change in Control will not be deemed to have occurred if the
average of the high and low sales price per share of our common stock for any
five trading days within (A) the period of 10 consecutive trading days ending
immediately after the later of the Change in Control and the public announcement
of the Change in Control, in the case of a Change in Control relating to an
acquisition of capital stock not involving a merger or consolidation covered by
clause (B) below, or (B) the period of 10 consecutive trading days ending
immediately before the Change in Control, in the case of Change in Control
relating to a merger, consolidation or asset sale, in each case, equals or
exceeds 105% of the conversion price of the Notes in effect on each of those
trading days.
For purposes of these provisions:
- the conversion price is equal to $1,000 divided by the conversion rate;
and
- whether a person is a "beneficial owner" will be determined in accordance
with Rule 13d-3 under the Exchange Act.
Any Change in Control will be made in compliance with all applicable laws,
rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent the provisions of any securities laws or
regulations conflict with the provisions of this covenant, our compliance with
such laws and regulations shall not be deemed to cause a breach of our
obligations under the Indenture.
We may, to the extent permitted by applicable law, at any time purchase
Notes in the open market or by tender at any price or by private agreement. Any
Note that we so purchase may, to the extent permitted by applicable law, be
reissued or resold or may, at our option, be surrendered to the Trustee for
cancellation. Any Notes surrendered may not be reissued or resold and will be
canceled promptly.
The definition of Change in Control includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our assets. There is no precise, established definition of the phrase
"substantially all" under applicable law. Accordingly, your ability to require
us to repurchase your Notes as a result of conveyance, transfer, sale, lease or
other disposition of less than all of our assets may be uncertain.
The foregoing provisions would not necessarily provide you with protection
if we are involved in a highly leveraged or other transaction that may adversely
affect you.
Our ability to repurchase Notes upon the occurrence of a Change in Control
is subject to important limitations. Some of the events constituting a Change in
Control could cause an event of default or be prohibited or limited by the terms
of Senior Debt. As a result, any repurchase of the Notes would, absent a waiver,
be prohibited under the Indenture's subordination provisions until the Senior
Debt is paid in full. Further, we cannot assure you that we would have the
financial resources, or would be able to arrange financing, to pay the
repurchase price for all the Notes that
30
<PAGE>
holders seeking to exercise their repurchase right deliver to us. If we were to
fail to repurchase the Notes when required following a Change in Control, an
Event of Default would occur, whether or not such repurchase is permitted by the
Indenture's subordination provisions. Any such default may, in turn, cause a
default under our Senior Debt. For more details, see above under the heading
"Subordination."
MERGERS AND SALES OF ASSETS
We may not consolidate with or merge into any other person or convey,
transfer, sell or lease our properties and assets substantially as an entirety
to any person, unless each of the following requirements is met.
- the person formed by the consolidation or into or with which we merge or
the person to which our properties and assets are conveyed, transferred,
sold or leased, is a corporation, limited liability company, partnership
or trust organized and existing under the laws of the United States, any
State or the District of Columbia and, if other than us, expressly assumes
the due and punctual payment of the principal of, any premium, and
interest on the Notes and the performance of our other covenants under the
Indenture; and
- immediately after giving effect to that transaction, no Event of Default,
and no event that, after notice or lapse of time or both, would become an
Event of Default, shall have occurred and be continuing.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
- we fail to pay principal of or any premium on any Note when due, whether
or not the payment is prohibited by the Indenture's subordination
provisions;
- we fail to pay any interest on any Note when due and that default
continues for 30 days, whether or not the payment is prohibited by the
Indenture's subordination provisions;
- we fail to give the notice that we are required to give if there is a
Change in Control, whether or not the notice is prohibited by the
Indenture's subordination provisions;
- we fail to perform any other covenant in the Indenture and that failure
continues for 60 days after written notice to us by the Trustee or the
holders of at least 25% in aggregate principal amount of outstanding
Notes;
- we fail to pay when due the principal of any indebtedness for money
borrowed by us or any of our subsidiaries in excess of $25 million if the
indebtedness is not discharged, or, if such indebtedness has been
accelerated, such acceleration is not annulled, within 30 days after
written notice to us by the Trustee or the holders of at least 25% in
aggregate principal amount of the outstanding Notes; and
- events of bankruptcy, insolvency or reorganization with respect to us and
our significant subsidiaries specified in the Indenture.
Subject to the provisions of the Indenture relating to the Trustee's duties,
if an Event of Default exists, the Trustee will not be obligated to exercise any
of its rights or powers under the Indenture at the request or direction of any
of the holders, unless they have offered to the Trustee reasonable indemnity.
Subject to such Trustee indemnification provisions, the holders of a majority in
aggregate principal amount of the outstanding Notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee, provided that such direction does not conflict with any rule of law
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<PAGE>
or with the Indenture, and the Trustee may take any other action the Trustee
deems proper which is not inconsistent with such direction.
If an Event of Default, other than an Event of Default arising from events
of bankruptcy, insolvency or reorganization, occurs and is continuing, either
the Trustee or the holders of at least 25% in principal amount of the
outstanding Notes may accelerate the maturity of all Notes. After acceleration,
but before a judgment or decree based on acceleration, the holders of a majority
in aggregate principal amount of outstanding Notes may, under circumstances set
forth in the Indenture, rescind the acceleration if all Events of Default, other
than the nonpayment of principal of the Notes which have become due solely
because of the acceleration, have been cured or waived as provided in the
Indenture. If an Event of Default arising from events of bankruptcy, insolvency
or reorganization occurs and is continuing, then the principal of, and accrued
interest on, all of the Notes will automatically become immediately due and
payable without any declaration or other act an the part of the holders of the
Notes or the Trustee.
Before you may take any action to institute any proceeding relating to the
Indenture, or to appoint a receiver or a trustee, or for any other remedy, each
of the following must occur:
- you must have given the Trustee written notice of a continuing Event of
Default;
- other holders of at least 25% of the aggregate principal amount of all
outstanding Notes must make a written request of the Trustee to take
action because of the default and must have offered reasonable
indemnification to the Trustee against the cost, liabilities and expenses
of taking such action; and
- the Trustee must not have taken action for 60 days after receiving such
notice and offer of indemnification.
These limitations do not apply to a suit for the enforcement of payment of
the principal of, or any premium or interest on, a Note, or the repurchase price
payable for a Note on or after the due dates for such payments, or of the right
to convert the Note in accordance with the Indenture.
We will furnish to the Trustee annually a statement as to our performance of
our obligations under the Indenture and as to any default in performance.
MODIFICATION AND WAIVER
The Indenture contains provisions permitting us and the Trustee to enter
into a supplemental indenture for certain limited purposes without the consent
of the holders of the Notes. With the consent of the holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding, we
and the Trustee are permitted to amend or supplement the Indenture or any
supplemental indenture or modify the rights of the holders, PROVIDED, that no
such modification may, without the consent of each Holder affected thereby
- change the stated maturity of the principal or interest of a Note;
- reduce the principal amount, any premium or interest on any Note;
- reduce the amount payable upon a redemption at our option;
- amend or modify our obligation to make or consummate a repurchase offer
upon a Change in Control after our obligation to make a Change in Control
repurchase offer arises;
- change the place or currency of payment on a Note;
- impair the right to institute suit for the enforcement of any payment on
any Note;
- modify the subordination provisions in a manner that is adverse to the
holders of the Notes;
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<PAGE>
- adversely affect the right of holders of Notes to convert any of the
Notes;
- reduce the percentage of holders whose consent is needed to modify, amend
or waive any provision in the Indenture; or
- modify the provisions dealing with modification and waiver of the
Indenture, except to increase any required percentage or to provide that
certain other provisions of the Indenture cannot be modified or waived
without the consent of the holder of each outstanding Note affected
thereby.
The holders of a majority in principal amount of the outstanding Notes must
consent to waive our compliance with certain restrictive provisions of the
Indenture. The holders of a majority in principal amount of the outstanding
Notes may waive any past default, except a default in the payment of principal,
any premium, interest or the repurchase price.
Notes will not be considered outstanding if money for their payment or
redemption has been deposited or set aside in trust for the holders.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to any surviving rights of conversion, or registration of transfer or
exchange, or replacement of Notes, any right to receive Liquidated Damages and
our obligations to the Trustee) as to all outstanding Notes when
(1) either
(A) all Notes theretofore authenticated and delivered (other than (x) Notes
that have been destroyed, lost or stolen and which have been replaced or
paid as provided in the Indenture and (y) Notes for whose payment money
has theretofore been deposited in trust or segregated and held in trust
by us and thereafter repaid to us or discharged from such trust, as
provided in the Indenture) have been delivered to the Trustee for
cancellation; or
(B) all such Notes not theretofore delivered to the Trustee or its agent for
cancellation (other than Notes referred to in clauses (x) and (y) of
clause (1)(A) above)
(I) have become due and payable, or
(II) will become due and payable within one year, or
(III) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in our name, and at our expense,
and we, in the case of clause (I), (II) or (III) above, have deposited with the
Trustee as trust funds (immediately available to the holders of the Notes in the
case of clause (I)) an amount sufficient to pay and discharge the entire
principal, premium, if any, and interest (including any Liquidated Damages) on
such Notes to the date of deposit (in the case of Notes which have become due
and payable) or to the final maturity or redemption date, as the case may be,
and
(2) we have paid all other sums payable by us under the Indenture.
In addition, we must deliver an officers' certificate stating that all
conditions precedent to satisfaction and discharge have been complied with.
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<PAGE>
REGISTRATION RIGHTS
We entered into a registration rights agreement with the Initial Purchasers
(the "Registration Rights Agreement"). In the Registration Rights Agreement we
agreed, for the benefit of the holders of the Notes and the shares of common
stock issuable upon conversion of the Notes (together, the "Registrable
Securities," but excluding securities that are eligible for disposition under
Rule 144 of the Securities Act) that we will, at our expense:
- file with the Commission, on or prior to 90 days following the date the
Notes are originally issued, a shelf registration statement covering
resales of the Registrable Securities;
- use our reasonable efforts to cause the shelf registration statement to be
declared effective under the Securities Act on or prior to 180 days
following the date the Notes are originally issued; and
- use our reasonable efforts to keep effective the shelf registration
statement until two years after the date it is declared effective or, if
earlier, until there are no outstanding Registrable Securities (the
"Effectiveness Period").
We will provide to each holder of Registrable Securities copies of the
prospectus that is a part of the shelf registration statement, notify each
holder when the shelf registration statement has become effective and take
certain other actions required to permit public resales of the Registrable
Securities.
Upon written notice to all the holders of Notes, we will be permitted to
suspend the use of the prospectus that is part of the shelf registration
statement in connection with sales of Registrable Securities during prescribed
periods of time if we possess material non-public information the disclosure of
which would have a material adverse effect on us and our subsidiaries taken as a
whole. The periods during which we can suspend the use of the prospectus may not
exceed a total of 45 days, whether or not consecutive, in any 90-day period or a
total of 90 days in any 365-day period.
Upon receipt of such notice, the holders of Notes are required to cease
disposing of securities under the prospectus and to keep the notice
confidential.
Liquidated damages ("Liquidated Damages") will accrue if either of the
following events ("Registration Defaults") occurs:
- on or prior to 90 days following the date the Notes were originally
issued, a shelf registration statement has not been filed with the
Commission; or
- on or prior to 180 days following the date the Notes were originally
issued, the Commission does not declare the shelf registration statement
effective.
In either case, Liquidated Damages will accrue from and including the day
following the Registration Default to but excluding the day on which the
Registration Default is cured. Liquidated Damages will be paid semi-annually in
arrears, with the first semi-annual payment due on the first Interest Payment
Date following the date on which the Liquidated Damages begin to accrue.
The rates at which Liquidated Damages for Registration Defaults will accrue
will be as follows:
- $.05 per week per $1,000 principal amount of the Notes to and including
the 90(th) day after the Registration Default; and
- $.05 per week per $1,000 principal amount of Notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum of $.25 per week per $1,000 principal amount of Notes.
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<PAGE>
In addition, Liquidated Damages will accrue if:
- the shelf registration statement ceases to be effective, or we otherwise
prevent or restrict holders of Registrable Securities from making sales
under the shelf registration statement, for more than 45 days, whether or
not consecutive, during any 90-day period; or
- the shelf registration statement ceases to be effective, or we otherwise
prevent or restrict holders of Registrable Securities from making sales
under the shelf registration statement, for more than 90 days, whether or
not consecutive, during any 365-day period.
In either such event, the Liquidated Damages will accrue (subject to the
limitation set forth above) at a rate of $.05 per week per $1,000 principal
amount of Notes from the 46th day of the 90-day period or the 91st day of the
365-day period. The Liquidated Damages will continue to accrue until the earlier
of the following:
- the time the shelf registration statement again becomes effective or the
holders of Registrable Securities are again able to make sales under the
shelf registration statement, depending on which event triggered the
Liquidated Damages; or
- the time the Effectiveness Period expires.
A holder who elects to sell any Registrable Securities pursuant to the shelf
registration statement will be required to be named as a selling security holder
in the related prospectus, may be required to deliver a prospectus to
purchasers, may be subject to certain civil liability provisions under the
Securities Act in connection with those sales and will be bound by the
provisions of the Registration Rights Agreement that apply to a holder making
such an election, including certain indemnification provisions.
We will mail a Notice and Questionnaire to the holders of Registrable
Securities not less than 30 calendar days prior to the time we intend in good
faith to have the shelf registration statement declared effective (the
"Effective Time").
No holder of Registrable Securities will be entitled to be named as a
selling security holder in the shelf registration statement as of the Effective
Time, and no holder of Registrable Securities will be entitled to use the
prospectus forming a part of the shelf registration statement for offers and
resales of Registrable Securities at any time, unless such holder has returned a
completed and signed Notice and Questionnaire to us by the deadline for response
set forth in the Notice and Questionnaire. Holders of Registrable Securities
will, however, have at least 20 calendar days from the date on which the Notices
and Questionnaire is first mailed to them to return a completed and signed
Notice and Questionnaire to us.
Beneficial owners of Registrable Securities who have not returned a Notice
and Questionnaire by the questionnaire deadline described above may receive
another Notice and Questionnaire from us upon request. When we receive a
completed and signed Notice and Questionnaire, we will include the Registrable
Securities covered thereby in the shelf registration statement, subject to
restrictions on the timing and number of supplements to the shelf registration
statement provided in the Registration Rights Agreement.
We agree in the Registration Rights Agreement to use our reasonable efforts
to cause the shares of common stock issuable upon conversion of the Notes to be
quoted on The Nasdaq National Market. However, if the common stock is not then
quoted on The Nasdaq National Market, we will use our reasonable efforts to
cause the shares of common stock issuable upon conversion of the Notes to be
quoted or listed on whichever market or exchange the common stock is then quoted
or listed, if any, on or prior to the effectiveness of the shelf registration
statement.
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<PAGE>
This summary of certain provisions of the Registration Rights Agreement is
not complete and is subject to, and qualified in its entirety by reference to,
all the provisions of the Registration Rights Agreement, a copy of which we will
make available to beneficial owners of the Notes upon request to us.
NOTICES
We will give notice to holders of the Notes by mail to the addresses of the
holders as they appear in the Security Register. Notices will be deemed to have
been given on the date of mailing.
REPLACEMENT OF NOTES
We will replace, at the holders' expense, Notes that become mutilated,
destroyed, stolen or lost upon delivery to the Trustee of the mutilated Notes or
evidence of the loss, theft or destruction thereof satisfactory to us and the
Trustee. In the case of a lost, stolen or destroyed Note, indemnity satisfactory
to the Trustee and us may be required at the expense of the holder of the Note
before a replacement Note will be issued.
NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS, DIRECTORS AND EMPLOYEES
No direct or indirect stockholder, officer, director or employee, as such,
past, present or future of eToys, or any successor entity, shall have any
personal liability in respect of our obligations under the Indenture or the
Notes solely by reason of his or its status as such stockholder, officer,
director or employee.
THE TRUSTEE
The Trustee for the holders of Notes issued under the Indenture is U.S. Bank
Trust National Association. If an Event of Default occurs, and is not cured, the
Trustee will be required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to these
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any holders of Notes,
unless they have offered the Trustee reasonable security or indemnity.
DESCRIPTION OF CAPITAL STOCK
We are 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 and by the provisions of applicable Delaware law.
COMMON STOCK
As of March 31, 2000, there were 121,214,105 shares of common stock
outstanding, held of record by approximately 942 stockholders. In addition, as
of March 31, 2000, there were 22,463,321 shares of common stock subject to
outstanding options.
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. 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
36
<PAGE>
rights, or redemption or sinking fund provisions. All outstanding shares of
common stock are fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors have the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock in one or more
series and to designate the rights, preferences, privileges and restrictions of
each such series. The issuance of preferred stock could have the effect of
restricting dividends on the common stock, diluting the voting power of the
common stock, impairing the liquidation rights of the common stock or delaying
or preventing our change in control without further action by the stockholders.
We currently do not have any shares of preferred stock outstanding, and we have
no present plans to issue any shares of preferred stock.
WARRANTS
As of March 31, 2000, there were warrants outstanding to purchase a total of
(a) 2,500 shares of common stock at a price of $50.375 per share and (b) 1,500
shares of common stock at a price of $11.375 per share.
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 November 16, 1999 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 May 25, 2004 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. The filing of the Registration Statement for which this
prospectus forms a part also does not trigger any registration rights under the
registration rights agreement.
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
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<PAGE>
negotiate with us. We believe that the benefits of increased protection of our
ability to negotiate with the proponent of an unfriendly or unsolicited
acquisition proposal outweigh the disadvantages of discouraging such proposals
because, among other things, negotiation could result in an improvement of their
terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
- the Board of Directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- on or subsequent to such date the business combination is approved by the
Board of Directors and authorized at an annual or special meeting of
stockholders.
A "business combination" generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
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 on the record
date for our first annual meeting of stockholders on which we have at least 800
stockholders, which is expected to be the record date for the annual meeting
held in 2000, 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.
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<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth, as of March 7, 2000, the respective
principal amount of convertible notes beneficially owned and offered hereby by
each selling securityholder, the common stock owned by each selling
securityholder and the common stock issuable upon conversion of the convertible
notes, which may be sold from time to time by selling securityholders pursuant
to this prospectus. Such information has been obtained from the selling
securityholders.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COMMON
OF NOTES PERCENT OF STOCK OWNED COMMON
BENEFICIALLY TOTAL PRIOR TO STOCK TO BE
OWNED AND OUTSTANDING THE NOTE REGISTERED
NAME OFFERED HEREBY NOTES OFFERING HEREBY (1)
---- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
AAM/Zazove Institutional Income
Fund, L.P........................ $ 1,000,000 * None 13,532
American Masters Fund "AG Absolute
Return Series" Limited........... 600,000 * None 8,119
Aragon Investments Ltd............. 890,000 * None 12,043
Bancroft Convertible Fund, Inc..... 750,000 * None 10,149
BankAmerica Pension Plan........... 3,000,000 2.0 None 40,596
Carty and Company Inc.............. 300,000 * None 4,059
Citadel Trading Group LLC.......... 550,000 * None 7,442
Convexity Partners LP.............. 200,000 * None 2,706
Credit Research & Trading LLC...... 2,000,000 1.3 None 27,064
Deeprock & Co...................... 1,500,000 1.0 None 20,298
Deutsche Bank Securities Inc....... 24,550,000 16.4 None 332,217
Donaldson, Lufkin & Jenrette
Securities Corp.................. 3,750,000 2.5 None 50,746
Ellsworth Convertible Growth and
Income Fund, Inc................. 750,000 * None 10,149
General Motors Welfare Benefit
Trust (L-T Veba)................. 4,000,000 2.7 None 54,129
Goldman Sachs and Company.......... 250,000 * None 3,383
Helix Convertible Opportunities
L.P.............................. 2,670,000 1.8 None 36,131
Helix Convertible Opportunity Fund
Ltd.............................. 1,120,000 * None 15,156
Highbridge International LLC....... 1,500,000 1.0 None 20,298
JMG Capital Partners, LP........... 6,625,000 4.4 None 89,651
JMG Triton Offshore Fund, Ltd...... 14,375,000 9.6 None 194,526
Jackson Investment Fund Ltd........ 60,000 * None 811
J.P. Morgan Securities............. 2,000,000 1.3 None 27,064
Luxor Master Fund.................. 1,000,000 * None 13,532
Merrill Lynch Pierce Fenner & Smith
Inc.............................. 1,150,000 * None 15,562
MichaelAngelo, L.P................. 5,825,000 3.9 None 78,825
Peoples Benefit Life Insurance
Company.......................... 4,800,000 3.2 None 64,955
Pine Grove Equitized Partners V,
LLC.............................. 1,000,000 * None 13,532
Putnam Advisory Company, Inc....... 1,655,000 1.1 None 23,395
Putnam Investment Management,
Inc.............................. 3,270,000 2.2 None 44,250
Ramius, L.P........................ 4,000,000 2.7 None 54,129
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COMMON
OF NOTES PERCENT OF STOCK OWNED COMMON
BENEFICIALLY TOTAL PRIOR TO STOCK TO BE
OWNED AND OUTSTANDING THE NOTE REGISTERED
NAME OFFERED HEREBY NOTES OFFERING HEREBY (1)
---- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Raphael II, Ltd.................... 600,000 * None 8,119
RCG Baldwin, L.P................... 2,000,000 1.3 None 27,064
RCG Multi-Strategy Account, L.P.... 5,825,000 3.9 None 78,825
Sagamore Hill Hub Fund Ltd......... 1,750,000 1.2 None 23,681
San Diego County Employees
Retirement Assoc................. 1,000,000 * None 13,532
SG Cowen Securities Corp........... 2,500,000 1.7 None 33,830
State Street Corp.................. 9,925,000 6.6 None 134,308
The Common Fund FAO Absolute Return
Fund............................. 350,000 * None 4,736
Triarc Companies, Inc.............. 600,000 * None 8,119
Tribeca Investments LLC............ 10,000,000 6.7 None 135,323
Van Kampen Convertible Securities
Fund............................. 969,000 * None 13,112
Van Kampen Harbor Fund............. 5,031,000 3.4 None 68,081
Worldwide Transactions Ltd......... 265,000 * None 3,586
WR Investment Partners Market
Neutral Fund L.P................. 95,000 * None 1,285
Other holders of notes or future
transferees of such holders(2)... 13,950,000 9.3 -- 188,775
------------ ----- ---- ---------
150,000,000 100% None 2,029,845
</TABLE>
------------------------
* less than one percent
(1) The shares of common stock to be registered are calculated on an "as
converted" basis using the conversion rate described on the front cover page
of this prospectus.
(2) Information about other selling securityholders will be set forth in
prospectus supplements if required.
None of the selling securityholders listed above has, or within the past
three years has had, any position, office or other material relationship with us
or any of our predecessors or affiliates, except that Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson
Stephens Inc. and Donaldson, Lufkin & Jenrette Securities Corporation were
underwriters for our initial public offering of common stock in May 1999.
Because the selling securityholders may offer all or some portion of the
above-referenced securities pursuant to this prospectus or otherwise, no
estimate can be given as to the amount or percentage of such securities that
will be held by the selling securityholders upon termination of any such sale.
In addition, the selling securityholders identified above may have sold,
transferred or otherwise disposed of all or a portion of such securities since
the date they provided the information regarding their securities, in
transactions exempt from the registration requirements of the Securities Act.
The selling securityholders may sell all, part or none of the securities listed
above.
Generally, only selling securityholders identified in the foregoing table
who beneficially own the securities set forth opposite their respective names
may sell the securities pursuant to the registration statement, of which this
prospectus forms a part. We may from time to time include additional selling
securityholders in supplements to this prospectus.
40
<PAGE>
PLAN OF DISTRIBUTION
We are registering the notes and the shares of common stock issuable upon
conversion of the notes to permit public secondary trading of these securities
by their holders from time to time after the date of this prospectus. We will
not receive any of the proceeds from the sale by the selling securityholders of
the securities. We will bear all fees and expenses incident to our obligation to
register the securities.
The selling securityholders may sell all or a portion of the securities
beneficially owned by them and offered hereby from time to time directly through
one or more underwriters, broker-dealers or agents. If the securities are sold
through underwriters or broker-dealers, the selling securityholder will be
responsible for underwriting discounts or commissions or agent's commissions.
The securities may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected in
transactions (which may involve crosses or block transactions)
(1) on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale,
(2) in the over-the-counter market,
(3) in transactions otherwise than on these exchanges or systems or in the
over-the-counter market,
(4) through the writing of options (whether such options are listed on an
options exchange or otherwise), or
(5) through the settlement of short sales.
In connection with sales of the securities or otherwise, the selling
securityholders may enter into hedging transactions with broker-dealers, which
may in turn engage in short sales of the securities in the course of hedging in
positions they assume. The selling securityholders may also sell securities
short and deliver securities to close out short positions, or loan or pledge
securities to broker-dealers that in turn may sell such securities. If the
selling securityholders effect such transactions by selling securities to or
through underwriters, broker-dealers or agents, such underwriters,
brokers-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling securityholders or commissions from
purchasers of securities for whom they may act as agent or to whom they may sell
as principal (which discounts, concessions or commissions as to particular
underwriters, brokers-dealers or agents may be in excess of those customary in
the types of transactions involved).
The selling securityholders may pledge or grant a security interest in some
or all of the securities owned by them and, if they default in the performance
of their secured obligations, the pledgees or secured parties may offer and sell
the securities from time to time pursuant to the prospectus. The selling
securityholders also may transfer and donate securities in other circumstances
in which case the transferees, donees, pledgees or other successors in interest
will be the selling beneficial owners for purposes of the prospectus.
The outstanding common stock is listed for trading on The Nasdaq National
Market under the symbol "ETYS." We do not intend to apply for listing of the
notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System. Accordingly, no
assurance can be given as to the development of liquidity or any trading market
for the convertible notes. For more details, see the section "Risk Factors."
41
<PAGE>
The selling securityholders and any broker-dealer participating in the
distribution of the securities may be deemed to be "underwriters" within the
meaning of the Securities Act, and any commissions paid, or any discounts or
concessions allowed to any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a particular
offering of the common shares is made, a prospectus supplement, if required,
will be distributed which will set forth the aggregate amount of common shares
being offered and the terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling shareholders and any discounts,
commissions or concessions allowed or reallowed or paid to broker-dealers. In
addition, upon our being notified by a named selling shareholder that a donee or
a pledgee intends to sell more than 500 shares, a supplement to this prospectus
will be filed.
Under the securities laws of certain states, the securities may be sold in
such states only through registered or licensed brokers or dealers. In addition,
in certain states the securities may not be sold unless the securities have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
There can be no assurance that any selling securityholder will sell any or
all of the securities registered pursuant to the shelf registration statement,
of which this prospectus forms a part. In addition, any securities covered by
this prospectus that qualify for sale pursuant to Rule 144 or Rule 144A of the
Securities Act may be sold under Rule 144 or Rule 144A rather than pursuant to
this prospectus.
The selling securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation,
Regulation M of the Exchange Act, which may limit the timing of purchases and
sales of any of the securities by the selling securityholders and any other
participating person. Regulation M may also restrict the ability of any person
engaged in the distribution of the securities to engage in market-making
activities with respect to the particular securities being distributed. All of
the foregoing may affect the marketability of the securities and the ability of
any person or entity to engage in market-making activities with respect to the
securities.
We will pay all expenses of the registration of the convertible notes and
common stock pursuant to the Registration Rights Agreement estimated to be
$155,000 in total, including, without limitation, Commission filing fees and
expenses of compliance with state securities or "blue sky" laws; PROVIDED,
HOWEVER, that the selling securityholders will pay all underwriting discounts
and selling commissions, if any. We will indemnify the selling securityholders
against civil liabilities, including certain liabilities under the Securities
Act, in accordance with the Registration Rights Agreement or the selling
securityholders will be entitled to contribution. We will be indemnified by the
selling securityholders against civil liabilities, including liabilities under
the Securities Act that may arise from any written information furnished to us
by the selling securityholders, in accordance with the Registration Rights
Agreement or will be entitled to contribution.
Once sold under the shelf registration statement, of which this prospectus
forms a part, the securities will be freely tradable in the hands of persons
other than our affiliates.
42
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain Federal income tax considerations that
are anticipated to be material for investors who purchase notes from the Selling
Securityholders and is based on the Federal income tax law now in effect, which
is subject to change, possibly retroactively. This summary does not discuss all
aspects of Federal income taxation that may be relevant to particular investors
in light of their individual investment circumstances or to certain types of
investors subject to special tax rules, such as financial institutions,
insurance companies, tax-exempt organizations, foreign taxpayers and persons
that will hold the notes as a position in a "straddle" or as part of a "hedging"
or "conversion" transaction for Federal income tax purposes or that have a
functional currency other than the U.S. dollar. In addition, this summary does
not discuss any state, local or foreign tax considerations. This summary assumes
that investors will hold their notes, and the common stock received upon
conversion of the notes, as "capital assets" (generally, property held for
investment) as defined in the Internal Revenue Code of 1986, as amended.
Prospective purchasers are urged to consult their tax advisors regarding the
specific Federal, state, local and foreign income and other tax consequences of
the purchase, ownership, conversion and disposition of the notes and the
ownership and disposition of the common stock received upon conversion of the
notes.
CONVERSION
A holder's conversion of a note into common stock is generally not a taxable
event (except with respect to any cash received in lieu of a fractional share).
The holder's tax basis in the common stock received on conversion of a note will
be the same as the holder's tax basis in the note at the time of conversion
(exclusive of any tax basis allocable to a fractional share), and the holding
period for the common stock received on conversion will include the holding
period of the note converted.
CONSTRUCTIVE DIVIDEND
If at any time eToys makes a distribution of property to shareholders that
would be taxable to such shareholders as a dividend for Federal income tax
purposes and, in accordance with the antidilution provisions of the notes, the
conversion price of the notes is decreased, the amount of such decrease may be
deemed to be the payment of a taxable dividend to holders of the notes. For
example, a decrease in the conversion price in the event of distributions of
evidences of indebtedness or assets of eToys will generally result in deemed
dividend treatment to holders, but generally a decrease in the event of pro-rata
stock dividends or the distribution of rights to subscribe for common stock will
not. See "Description of the Notes--Conversion Rights."
SALE OR DISPOSITION
Subject to the market discount rules discussed below, a holder will
generally recognize capital gain or loss upon the sale or other taxable
disposition (including, in the case of the notes, the redemption) of a note or
common stock in an amount equal to the difference between the amount realized
from such disposition and his tax basis in the note or common stock. Such gain
or loss will be long-term if the note or common stock has been held for more
than one year.
MARKET DISCOUNT
Holder of the notes, other than original purchasers, may be subject to the
market discount rules. A note will have "market discount" if its stated
redemption price at maturity exceeds its tax basis in the hands of the holder
immediately after its acquisition, unless a statutorily defined DE MINIMIS
exception applies. Under the market discount rules, gain recognized by a holder
upon the
43
<PAGE>
sale or other taxable disposition of notes with market discount will generally
be treated as ordinary income to the extent of the market discount accrued
during such holder's period of ownership. The market discount rules also provide
that a holder who acquires a note at a market discount may be required to defer
a portion of any interest expense that may otherwise be deductible on any
indebtedness incurred or maintained to purchase or carry such note until the
holder disposes of such note in a taxable transaction. Both of these rules will
not apply to a holder who had previously elected to include market discount in
income as it accrued for Federal income tax purposes.
LEGAL MATTERS
The validity of the issuance of the securities being offered hereby will be
passed upon for eToys by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at March 31, 2000 and 1999, and for each of the three years
in the period ended March 31, 2000 and the financial statements of
BabyCenter, Inc. as of March 31, 1999 and September 30, 1998 and 1997 and for
the six month period ended March 31, 1999, the year ended September 30, 1998 and
the period from inception (February 11, 1997) to September 30, 1997as set forth
in their report which is incorporated by reference in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
eToys is subject to the information requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). In accordance with the Exchange
Act, eToys files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by eToys may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's
following Regional Offices' New York Regional Office, 7 World Trade Center, New
York, New York, 10048; and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material also may be obtained at prescribed rates from the Public Reference
Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549-1004.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. eToys's common stock is listed on the Nasdaq Stock
Market-National Market System and such reports, proxy statements and other
information concerning eToys may be inspected at the offices of The Nasdaq Stock
Market, 1735 K Street, N.W., Washington, D.C. 20006-1506. The Commission
maintains a web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
If at any time during the two-year period following the date of original
issue of the notes, eToys is not subject to the information requirements of
Section 13 or 15(d) of the Exchange Act, eToys will furnish to holders of notes,
holders of common stock issued upon conversion thereof and prospective
purchasers thereof the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act in order to permit compliance with
Rule 144A in connection with resales of such notes and common stock issued on
conversion thereof.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and information we later file with the SEC will
automatically update and supersede this information. We incorporate
44
<PAGE>
by reference the documents listed below and any future filings we will make with
the SEC under Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act:
1. Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
2. Current Report on Form 8-K dated June 2, 2000.
You may request a copy of these filings, at no cost by writing or
telephoning us at the following address:
eToys Inc.
General Counsel
3100 Ocean Park Blvd.,
Suite 300
Santa Monica, CA 90405
(310) 664-8100
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. The selling
securityholders will not make an offer of the shares of our common stock in any
state where the offer is not permitted. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of those documents.
45
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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 Notes and Common Stock being registered. All amounts are estimates
except the SEC registration fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 21,954
Printing and engraving expenses............................. 100,000
Legal fees and expenses..................................... 15,000
Accounting fees and expenses................................ 15,000
Miscellaneous fees and expenses............................. 3,046
--------
Total................................................... $155,000
========
</TABLE>
ITEM 15. 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 and Article VI of our current Bylaws 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 with our officers and directors.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
4.2 Indenture for the 6.25% Convertible Subordinated Notes due
2004, dated as of December 6, 1999, by and between eToys.
and U.S. Bank Trust National Association, as debt trustee
including the form of 6.25% Convertible Subordinated Note
due 2004 in Section 2.1 of the Indenture.*
4.3 Registration Rights Agreement, dated as of December 1, 1999,
by and among eToys and the Initial Purchasers.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding the legality of the securities being registered.
12.1 Statement re: Computation of Ratio of Earnings to Fixed
Charges.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Attorneys (see Exhibit 5.1).
25.1 Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of U.S. Bank Trust National
Association, as Trustee under the Indenture included as
Exhibit 4.2.
</TABLE>
------------------------
* Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended March 31, 2000.
II-1
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Company's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered thereby, and the offering of such
securities at the time shall be deemed to be the initial BONA FIDE offering
thereof.
(c) 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 Act, and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than 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 Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Santa Monica, State of California on
June 2, 2000.
<TABLE>
<S> <C> <C>
ETOYS INC.
By: /s/ PETER JUZWIAK
-----------------------------------------
Peter Juzwiak
VICE PRESIDENT AND
GENERAL COUNSEL
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 1 TO THE 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>
* President, Chief
------------------------------------------- Executive Officer and June 2, 2000
Edward C. Lenk Chairman of the Board
*
------------------------------------------- Chief Financial Officer June 2, 2000
Steven J. Schoch
*
------------------------------------------- Director June 2, 2000
Peter C.M. Hart
*
------------------------------------------- Director June 2, 2000
Tony Hung
*
------------------------------------------- Director June 2, 2000
Michael Moritz
*
------------------------------------------- Director June 2, 2000
Daniel Nova
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ PETER JUZWIAK
--------------------------------------
Peter Juzwiak
ATTORNEY IN FACT
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding the legality of the securities issued.
12.1 Statement re: Computation of Ratio of Earnings to Fixed
Charges
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Attorneys (see Exhibit 5.1).
25.1 Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of U.S. Bank Trust National
Association, as Trustee under the Indenture previously
filed on Exhibit 4.2.
</TABLE>
