<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 5945 95-4633006
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) 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)
------------------------------
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:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same
offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
6.25% Convertible Subordinated Notes due
December 1, 2004.......................... $150,000,000 55.438%(3) $83,157,000 $21,954
Common Stock, par value $0.0001............. 2,029,845 --(2) --(2) --(2)
</TABLE>
(1) This number represents the number of shares of Common Stock that are
initially issuable upon conversion of the 6.25% Convertible Subordinated
Notes due December 1, 2004 (the "Notes") registered hereby. For purposes of
estimating the number of shares of Common Stock to be included in the
Registration Statement upon conversion of the Notes, the Company calculated
the number of shares issuable upon conversion of the Notes based on a
conversion rate of 13.5323 shares per $1,000 principal amount of the Notes.
In addition to the shares set forth in the table, pursuant to Rule 416 under
the Securities Act of 1933, as amended, the amount to be registered includes
an indeterminate number of shares of Common Stock issuable upon conversion
of the Notes, as this amount may be adjusted in certain circumstances
outlined in the prospectus. For more details, see "Description of the Notes"
under the heading "Conversion Rights."
(2) No additional consideration will be received for the Common Stock, and,
therefore, no registration fee is required pursuant to Rule 457(i).
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) and based on the average of the high and low
prices, on February 3, 2000, for the 6.25% Convertible Subordinated Notes
due December 1, 2004, as traded on the PORTAL system.
------------------------------
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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<PAGE>
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 FEBRUARY 7, 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 February 3, 2000, the last reported sale
price for the common stock on The Nasdaq National Market was $19.125 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 2 OF THIS PROSPECTUS TO READ ABOUT
IMPORTANT FACTORS YOU SHOULD CONSIDER BEFORE BUYING THE NOTES.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY UNITED STATES
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this prospectus is , 2000.
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST
IN 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. We anticipate our losses will increase significantly from
current levels because we expect to incur additional costs and expenses related
to:
- - brand development, marketing and other promotional activities;
- - the expansion of our inventory management and distribution operations;
- - the continued development of our Web site 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; and
- - international expansion of our operations.
As of September 30, 1999, we had an accumulated deficit of $96.6 million. We
incurred net losses of $44.9 million for the quarter ended September 30, 1999
and $20.8 million for the quarter ended June 30, 1999.
In addition, because of our acquisition of BabyCenter, we expect that our
losses will increase even more significantly because of additional costs and
expenses related to:
- - an increase in the number of employees;
- - an increase in sales and marketing activities;
- - an increase in Web site development activities and associated content;
- - additional facilities and infrastructure; and
- - assimilation of operations and personnel.
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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.
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", 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 operate our own distribution facilities in Commerce, California
and Swindon, England, and we use the services of third-party distribution
facilities located in Provo, Utah and St. Cloud, Minnesota operated by
Fingerhut. We intend to reduce our use of such third-party distribution
facilities during the first half of 2000 and to increase our use of company-run
distribution facilities as our primary means of order fulfillment. Our
BabyCenter subsidiary also operates a distribution facility located in San
Francisco, California. 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 or with certain of
the automation and technological features of the distribution operations at the
Provo, Utah facility, which continue to be developed and refined to meet our
needs. This may result in increased costs as we seek to meet customers'
expectations, balance merchandise
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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 year. In addition, the
distribution facilities operated by Fingerhut also rely on the service of
unionized employees, exposing us to risks related to labor strikes or similar
activities. We have also leased a distribution facility located in Virginia,
which we are devoting substantial resources in order to begin operations at that
facility in 2000. 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;
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- - 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;
- - 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" under the heading
"Quarterly Results of Operations".
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
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given period. For more details, see the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
WE FACE SIGNIFICANT INVENTORY RISK BECAUSE CONSUMER DEMAND CAN CHANGE FOR
PRODUCTS BETWEEN THE TIME THAT WE ORDER PRODUCTS AND THE TIME THAT WE RECEIVE
THEM.
We carry a significant level of inventory. As a result, the rapidly changing
trends in consumer tastes in the market for children's 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".
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, we continued to expand our
distribution operations, which now include our own distribution facilities in
Commerce, California, San Francisco, California and Swindon, England, as well as
the use of services of third-party distribution facilities located in Provo,
Utah and St. Cloud, Minnesota operated by Fingerhut. During 2000 we intend to
increase the use of our company-run distribution facilities and to decrease our
reliance on third-party distribution facilities. Beginning in the fourth
calendar quarter of 2000, we will also operate a distribution facility located
in Virginia. This expansion may cause disruptions in our
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business as well as unexpected costs. We are not experienced with coordinating
and managing distribution operations in geographically distant locations or with
certain of the automation and technological features of the distribution
operations at the Provo, Utah facility. The integration of information systems
operated by us and Fingerhut may negatively affect our ability to obtain
financial information and other data on a timely and reliable basis.
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 plan to continue to expand our presence in
foreign markets. 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;
- - 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;
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- - 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" under the heading "Competition".
IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BRAND AND REPUTATION COULD BE DAMAGED AND WE COULD FAIL TO ATTRACT NEW
CUSTOMERS.
Any new department or product category that is launched or acquired by us,
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, Virginia, Utah, Minnesota 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 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. In addition, we have filed a lawsuit against the holders of the
"etoy.com" domain name (that is, "etoy" in the singular as opposed to "etoys" in
the plural), asserting claims of trademark infringement and dilution and unfair
competition, and the holders of such domain name have filed a cross-complaint
against us, seeking declaratory relief regarding the superiority of their mark,
an injunction against our use of the "eToys" name in specified jurisdictions and
a cancellation of our "eToys" registered trademark. If etoy were successful in
enjoining our use of the "eToys" name, our business and future prospects would
be materially and adversely affected. 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
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business. If we are forced to defend against any such claims, whether they are
with or without merit or are determined in our favor, then we may face costly
litigation, diversion of technical and management personnel, or product shipment
delays. As a result of such a dispute, we may have to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may be unavailable on terms acceptable to us,
or at all. If there is a successful claim of product infringement against us and
we are unable to develop non-infringing technology or license the infringed or
similar technology on a timely basis, it could impair our business.
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 Uncle of the Board. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel. The majority of our senior management
joined us in the last twelve months, including our Chief Financial Officer,
Chief Information Officer, Senior Vice President of Operations and Senior Vice
President of Marketing. Our future success depends on these officers effectively
working together with our original management team. Our success will also depend
on a successful integration of BabyCenter's management with our senior
management team. None of our officers or key employees is bound by an employment
agreement for any specific term other than the Chief Executive Officer and
President of BabyCenter. Our relationships with these officers and key employees
are at will. We do not have "key person" life insurance policies covering any of
our employees.
WE MAY BE ADVERSELY IMPACTED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER
SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.
Any failure of our material systems, our vendors' material systems or the
Internet to be year 2000 compliant would have material adverse consequences for
us. Such consequences would include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business. We have assessed the year 2000
readiness of the software, computer technology and other services that we use
which may not be year 2000 compliant. We have not developed a contingency plan
to address situations that may result if we or our vendors are unable to achieve
year 2000 compliance. The cost of developing and
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implementing such a plan, if necessary, could be material. Our material systems
did not experience disruption or failure upon the date change to January 1,
2000.
We also depend on the year 2000 compliance of the computer systems and
financial services used by consumers. A significant disruption in the ability of
consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our services and would
have a material adverse effect on us. For more information regarding our year
2000 readiness, see the section "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
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. We
may not be able to successfully assimilate the 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 now have
operations in multiple facilities in 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.
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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 at our first annual meeting of stockholders following the
date on which we have at least 800 stockholders, which is expected to be 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.
RISKS RELATED TO OUR INDUSTRY
IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRAND AND
REPUTATION COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS.
We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
As a result, we may be unable to prevent third parties from acquiring and using
domain names relating to our brand. Such use could damage our brand and
reputation and take customers away from our Web site. We currently hold various
relevant domain names, including the "eToys.com" domain name. The acquisition
and maintenance of domain names generally is regulated by governmental agencies
and their designees. For example, in the United States, the National Science
Foundation has appointed Network Solutions, Inc. as the current exclusive
registrar for the ".com", ".net" and ".org" generic top-level domains. The
regulation of domain names in the United States and in foreign countries is
subject to change in the near future. Such changes in the United States are
expected to include a transition from the current system to a system which is
controlled by a non-profit corporation and the creation of additional top-level
domains. Governing bodies may establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION INCREASES.
The adoption or modification of laws or regulations relating to the Internet
could adversely affect the manner in which we currently conduct our business. In
addition, the growth and development of the market for online commerce may lead
to more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on us. Laws and regulations directly
applicable to communications or commerce over the Internet are becoming more
prevalent. The United States Congress recently enacted Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material, and the Federal Trade Commission recently published the new
Children's Online Privacy Protection Rule to become effective April 21, 2000.
The European Union recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has been
some
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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.
The FTC has promulgated a variety of laws related to consumer protection, a
number of which apply to our business and operations. In January 2000 we
received two request letters from the FTC. The first letter relates to an FTC
study of the marketing of video games and software to children, particularly
those that have a rating of "mature" or higher under the Entertainment Software
Rating Board interactive rating system. The second letter relates to an FTC
inquiry to determine compliance with the FTC's Mail or Telephone Order
Merchandise Rule, which regulates the timeliness of the shipment of orders
placed by customers. We are in the process of replying to the FTC's requests and
inquiries. Any failure by us to comply with the rules and regulations
promulgated by the FTC or other governmental authorities 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.
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
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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. Although we believe that the net proceeds
of this offering, together with current cash, cash equivalents and cash that may
be generated from operations, will be sufficient to meet our anticipated cash
needs through December 31, 2000, 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 are likely to be highly
volatile and subject to wide fluctuations in response to factors including the
following, some of which are beyond our control:
- - actual or anticipated variations in our quarterly operating results;
- - announcements of technological innovations, 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;
- - 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.
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" under the heading
"Liquidity and Capital Resources."
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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.
If the implementation of our business strategy is delayed or unsuccessful,
or if we do not generate sufficient cash flow to meet our debt service and
working capital requirements, we may 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.
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
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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 are currently reorganizing
certain of our operations functions by relocating all of our inventory
purchasing, distribution fulfillment functions, customer service functions and
other related activities into 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 September 30, 1999, we had outstanding $9.5 million of senior debt and
$9.8 million of subsidiary liabilities 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 September 30, 1999, we had
outstanding 119,643,088 shares of common stock and 20,099,513 options to acquire
common stock, of which 1,210,894 options were vested and exercisable. Of the
shares that are currently outstanding, 14,476,743 are freely tradeable in the
public market, 103,166,347 are tradeable in the public market subject to the
restrictions, if any, applicable under Rule 144 and Rule 145 of the Securities
Act, and 1,999,998 are tradeable in the public market beginning on May 19, 2000
subject to the restrictions, if any, applicable under Rule 144 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 1,196,431 shares as of September 30, 1999) or
(b) the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale (which for eToys was 16,662,325 shares
assuming a sale date of December 1, 1999). 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
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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 2, 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.
18
<PAGE>
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.
PRICE RANGE OF COMMON STOCK
Our common stock trades on The Nasdaq National Market under the symbol
"ETYS". The following table sets forth high and low bid information for our
common stock for the periods indicated, as reported by The Nasdaq National
Market. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal Year ended March 31, 2000
First Quarter (from May 20(1))............................ $77.00 $37.50
Second Quarter............................................ $66.50 $30.00
Third Quarter............................................. $84.50 $25.56
Fourth Quarter (through February 4, 2000)................. $25.63 $14.50
</TABLE>
- ------------------------
(1) The date of our initial public offering of our common stock.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
19
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial and operating data set forth below
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes included elsewhere in this prospectus. You should review Note 1 to the
notes to our consolidated financial statements included elsewhere in this
prospectus for an explanation of the determination of the number of shares and
share equivalents used in computing the pro forma per share amounts set forth
below. The pro forma share amounts reflect the conversion of preferred stock
into common stock in May 1999 upon consummation of our initial public offering
of common stock.
The statement of operations data set forth below for the fiscal years ended
March 31, 1998 and 1999, and the selected balance sheet data as of March 31,
1998 and 1999 have been derived from our audited consolidated financial
statements appearing elsewhere in this prospectus. The statement of operations
data for the six months ended September 30, 1998 and 1999 and the balance sheet
data as of September 30, 1999 are unaudited and include normal recurring
adjustments necessary to present fairly our consolidated results of operations
and financial position for the respective periods. The consolidated results of
operations for the six months ended September 30, 1998 and 1999 are not
necessarily indicative of results that may occur for a full fiscal year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
----------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $ 687 $ 29,959 $ 989 $ 21,281
Cost of sales....................................... 568 24,246 807 17,209
---------- ---------- ---------- ----------
Gross profit........................................ 119 5,713 182 4,072
Operating expenses:
Marketing and sales............................... 1,290 20,719 3,742 31,585
Product development............................... 421 3,608 1,101 17,023
General and administrative........................ 676 4,352 893 7,254
Goodwill amortization............................. -- 319 159 9,626
Deferred compensation amortization................ 2 5,814 113 7,096
---------- ---------- ---------- ----------
Total operating expenses.................... 2,389 34,812 6,008 72,584
---------- ---------- ---------- ----------
Operating loss...................................... (2,270) (29,099) (5,826) (68,512)
Interest income, net................................ 3 542 272 2,786
---------- ---------- ---------- ----------
Loss before taxes................................... (2,267) (28,557) (5,554) (65,726)
Provision for taxes................................. (1) (1) -- (1)
---------- ---------- ---------- ----------
Net loss............................................ $ (2,268) $ (28,558) $ (5,554) $ (65,727)
========== ========== ========== ==========
Basic net loss per share............................ $ (0.09) $ (0.85) $ (0.17) $ (0.71)
========== ========== ========== ==========
Pro forma for conversion of preferred stock basic
net loss per share................................ $ (0.08) $ (0.35) $ (0.07) $ (0.60)
========== ========== ========== ==========
Shares used to compute basic net loss per share..... 25,130 33,428 32,866 92,960
========== ========== ========== ==========
Shares used to compute pro forma for conversion of
preferred stock basic net loss per share.......... 30,233 81,923 74,645 108,784
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------- SEPTEMBER 30,
1998 1999 1999
-------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,552 $ 20,173 $140,601
Working capital............................................. 1,456 21,821 134,312
Total assets................................................ 2,927 30,666 414,177
Total debt.................................................. -- 707 9,454
Total stockholders' equity (deficit)........................ (1,345) (24,098) 331,454
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE
STATEMENTS REFER TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS.
THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "EXPECTS",
"ANTICIPATES", "INTENDS", "PLANS" AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO, THE RISKS DISCUSSED IN THE SECTION "RISK FACTORS" IN THIS
PROSPECTUS.
OVERVIEW
We are a leading Web-based retailer focused exclusively on children'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. We currently offer an extensive selection of competitively priced
children's products consisting of over 100,000 SKUs.
We were incorporated in November 1996 and began offering products for sale
on our Web site and entered into a marketing agreement with AOL on October 1,
1997. For the period from inception through October 1, 1997, we had no sales and
our operating activities related primarily to the development of the necessary
computer infrastructure and initial planning and development of our Web site and
operations. Since launching our online store, we have continued these operating
activities and have also focused on building sales momentum, expanding our
product offerings, establishing vendor relationships, promoting our brand name
and establishing distribution and customer service operations. Our cost of sales
and operating expenses have increased significantly since inception. This trend
reflects the costs associated with our formation as well as increased efforts to
promote our brand, build market awareness, attract new customers, recruit
personnel, build operating infrastructure and develop our Web site and
associated systems that we use to process customers' orders and payments.
We have grown rapidly since launching our online store in October 1997.
During the fall of 1998, we launched our redesigned Web site and added video
game, software, video and music departments to our online store. In June 1999,
we began selling baby-oriented products through our baby department and in July
1999 we launched our children's book department which offers more than 80,000
children's book titles. In addition, we have added numerous specialty boutiques
designed to appeal to specific consumer interests, such as hobbies, dolls and
trains. We have also added a series of seasonal boutiques to enable consumers to
easily locate seasonal specific items, such as Halloween costumes and school
supplies.
On July 1, 1999, we completed the acquisition of BabyCenter. BabyCenter is a
Web-based business that offers a wide variety of content, community and products
focused on and serving expectant mothers and new parents. Visitors to the
BabyCenter Web site can read health articles and parenting news, interact online
with other families and purchase a wide selection of baby-oriented products and
supplies. BabyCenter derives its net sales principally from product sales and
sales of advertisement space as well as sponsorships with various companies. In
connection with the acquisition of BabyCenter, we recorded goodwill of
approximately $189.0 million, which is being amortized over a five-year period.
In January 2000, we completed the sale of substantially all of the assets and
related liabilities of BabyCenter's Consumer Health Interactive division for
approximately $20 million in a combination of cash and registrable securities.
CHI is a resource for health plans looking to use the Internet to attract and
retain members.
21
<PAGE>
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. In addition, in
November 1999, we began offering services to all provinces of Canada through our
eToys.com store.
The markets in which we compete are highly seasonal. A disproportionate
amount of our net sales have been realized during the fourth calendar quarter
and we expect this trend to continue in future periods. In addition, since a
disproportionate amount of our net sales are realized during the fourth calendar
quarter, we significantly increase our purchases of inventory during the third
and fourth calendar quarters. Accordingly, our accounts payable are at their
highest levels during the fourth calendar quarter. Our gross margin will
fluctuate in future periods based on factors such as product mix, inventory
management, inbound and outbound shipping costs, the level of product returns,
and the level of discount pricing and promotional coupon usage.
Since inception, we have incurred significant losses and, as of
September 30, 1999, had an accumulated deficit of $96.6 million. We expect
operating losses and negative cash flow to continue for the foreseeable future.
We anticipate our losses will increase significantly from current levels because
we expect to incur additional costs and expenses related to brand development,
marketing and other promotional activities; the expansion of our inventory
management and distribution operations; the continued development of our Web
site, systems that we use to process customers' orders and payments and our
computer network; the expansion of our product offerings and Web site content;
and development of relationships with strategic business partners.
We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as online commerce. Such risks for us include, but are not limited to, an
evolving and unpredictable business model and management of growth. To address
these risks, we must, among other things, maintain and expand our customer base,
implement and successfully execute our business and marketing strategy, continue
to develop and upgrade our technology and systems that we use to process
customers' orders and payments, improve our Web site, provide superior customer
service, respond to competitive developments and attract, retain and motivate
qualified personnel. We cannot assure you that we will be successful in
addressing such risks, and our failure to do so could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
In connection with our initial public offering, options granted in the
fiscal years ended March 31, 1997, 1998 and 1999 have been considered to be
compensatory. Deferred compensation associated with such options for the fiscal
year ended March 31, 1999 amounted to $44.7 million. Of this amount,
$5.8 million was charged to operations for the fiscal year ended March 31, 1999
and $38.9 million will be amortized over the vesting periods of the applicable
options through the fiscal year ending March 31, 2003. In April and May 1999, we
granted options to purchase an aggregate of 2,122,302 shares of our common stock
at an exercise price of $11.00 per share. We granted most of these options to 67
new employees. The options granted in May 1999 have been considered to be
compensatory. Deferred compensation associated with such options is
$13.8 million. This amount will be amortized to expense on a straight-line basis
over the four-year vesting periods of the applicable options through the fiscal
year ending March 31, 2004.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
MARCH 31, SEPTEMBER 30,
------------------- -------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................................... 100% 100% 100% 100%
Cost of sales............................................... 83 81 82 81
----- ----- ----- -----
Gross profit................................................ 17 19 18 19
Operating expenses:
Marketing and sales....................................... 188 69 378 148
Product development....................................... 61 12 111 80
General and administrative................................ 99 15 90 34
Goodwill amortization..................................... -- 1 16 45
Deferred compensation amortization........................ -- 19 12 34
----- ----- ----- -----
Total operating expenses.............................. 348 116 607 341
----- ----- ----- -----
Operating loss.............................................. (330) (97) (589) (322)
Interest income, net........................................ -- 2 27 13
Provision for taxes......................................... -- -- -- --
----- ----- ----- -----
Net loss.................................................... (330)% (95)% (562)% (309)%
===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
NET SALES
Net sales consist of product sales to customers and charges to customers for
outbound shipping and handling and gift wrapping and are net of product returns,
promotional discounts and coupons. Net sales increased to $21.3 million for the
six months ended September 30, 1999 from $1.0 million for the six months ended
September 30, 1998, reflecting a significant increase in units sold due to the
growth of our customer base, repeat purchases from our existing customers, and
the addition of BabyCenter's operations and growing customer base. Cumulative
customer accounts increased during the period to 611,000 at September 30, 1999,
an increase of 1,697% over September 30, 1998.
GROSS PROFIT
Gross profit is net sales less the cost of sales, which consists of the cost
of products sold to customers, outbound and inbound shipping and handling costs,
and gift wrapping costs. Gross profit increased in absolute dollars to
$4.1 million for the six months ended September 30, 1999 versus $0.2 million for
the six months ended September 30, 1998, reflecting our increased sales volume.
Additionally, our gross profit increased as a percentage of net sales by
approximately 1% for the six months ended September 30, 1999 as compared to the
six months ended September 30, 1998. The increase of gross profit as a
percentage of sales is primarily attributable to better purchasing efficiencies,
partially offset by a shift in product mix towards lower margin video game
products. We believe that providing our customers with superior customer service
is an essential component of our business strategy. Accordingly, we may incur
additional costs in order to meet customer expectations, which would impact
gross profit. Over time, we intend to expand our operations by adding new
product categories and by expanding the breadth and depth of our
23
<PAGE>
product or service offerings. Our gross margins attributable to new business
areas may be lower than those associated with our existing business activities.
MARKETING AND SALES
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, distribution facility expenses, including equipment
and supplies, and payroll and related expenses for personnel engaged in
marketing, customer service and distribution activities. Marketing and sales
expenses increased to $31.6 million for the six months ended September 30, 1999
from $3.7 million for the six months ended September 30, 1998. This
$27.9 million increase was primarily attributable to increases in our
advertising and promotional expenditures in anticipation of the upcoming peak
holiday shopping season, increased payroll and related costs for fulfilling the
higher level of customer demand, and additional costs incurred in the expansion
of our distribution facilities. Marketing and sales expenses as a percentage of
net sales decreased to 148% for the six months ended September 30, 1999 from
378% for the six months ended September 30, 1998. Such expenses decreased
significantly as a percentage of net sales during the six months ended
September 30, 1999 due to the significant increase in net sales during such
period. We intend to continue to pursue an aggressive branding and marketing
campaign and, therefore, expect marketing and sales expenses to increase
significantly in absolute dollars in future periods. In addition, we expect
marketing and sales expenses to increase in absolute dollars as we expand and
refine our distribution facilities and operations to accommodate increases in
our sales volume and we may incur additional costs in order to meet customer
expectations.
PRODUCT DEVELOPMENT
Product development expenses consist primarily of payroll and related
expenses for merchandising, Web site development and information technology
personnel, Internet access and hosting charges and Web content and design
expenses. Product development expenses increased to $17.0 million for the six
months ended September 30, 1999 from $1.1 million for the six months ended
September 30, 1998. This $15.9 million increase was primarily attributable to
increased staffing and associated costs related to enhancing the features,
content and functionality of our Web site and transaction-processing systems, as
well as increased investment in systems and telecommunications infrastructure.
Product development expenses as a percentage of net sales decreased to 80% for
the six months ended September 30, 1999 from 111% for the six months ended
September 30, 1998. Such expenses decreased significantly as a percentage of net
sales during the six months ended September 30, 1999 due to the significant
increase in net sales during such period. We believe that continued investment
in product development is critical to attaining our strategic objectives. In
addition to ongoing investments in our online stores and infrastructure, we
intend to increase investments in product, service and international expansion.
As a result, we expect product development expenses to increase significantly in
absolute dollars.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
services expenses, travel and other general corporate expenses. General and
administrative expenses increased to $7.3 million for the six months ended
September 30, 1999 from $0.9 million for the six months ended September 30,
1998. This $6.4 million increase was primarily due to increased headcount and
associated costs, legal and professional fees, facilities and other related
costs. General and administrative expenses as a percentage of net sales
decreased to 34% for the six months ended September 30, 1999 from 90% for the
six months ended September 30, 1998. Such expenses decreased significantly as a
percentage of net sales during the six months ended September 30, 1999 due to
the significant increase in net sales during such period. We expect general and
administrative expenses to
24
<PAGE>
increase in absolute dollars as we expand our staff and incur additional costs
related to the growth of our business and international expansion.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of
the net tangible assets acquired in a business combination. As a result of the
acquisition of BabyCenter on July 1, 1999, we recorded goodwill of approximately
$189.0 million, which is to be amortized over five years. As such, goodwill
amortization for the six months ended September 30, 1999 of $9.6 million,
reflects a full quarter of goodwill amortization from the BabyCenter purchase,
in addition to amortization of goodwill recorded from a previous acquisition. To
the extent the amount of this recorded goodwill is increased or we do not
generate additional sufficient cash flow to recover the amount of the investment
recorded, the investment may be considered impaired or be subject to earlier
write-off. In such event, our net loss in any given period could be greater than
anticipated and the market price of our stock could decline.
DEFERRED COMPENSATION
In the six months ended September 30, 1999, we recorded total deferred stock
compensation of $13.8 million in connection with stock options granted during
the period. Deferred stock compensation is amortized to expense over the vesting
periods of the applicable options, resulting in $7.1 million for the six months
ended September 30, 1999. We expect to record $7.0 million of amortization over
the remaining six months ended March 31, 2000. These amounts represent the
difference between the exercise price of stock option grants and the deemed fair
value of our common stock at the time of such grants.
Amortization of deferred compensation for each of the next four fiscal years
is expected to be as follows:
<TABLE>
<CAPTION>
AMOUNTS
IN
YEAR ENDED THOUSANDS
- ---------- ---------
<S> <C>
March 31, 2001.............................................. $13,974
March 31, 2002.............................................. 13,970
March 31, 2003.............................................. 9,791
March 31, 2004.............................................. 276
</TABLE>
INTEREST INCOME AND EXPENSE
Interest income consists of earnings on our cash and cash equivalents.
Interest income increased to $3.0 million for the six months ended
September 30, 1999 from $0.3 million for the six months ended September 30,
1998. This $2.7 million increase was due to higher cash balances resulting from
the proceeds of our initial public offering of our common stock. Interest
expense consists primarily of interest on asset acquisitions financed through
notes payable and capital leases. Interest expense increased to $0.2 million for
the six months ended September 30, 1999 from $44,000 for the six months ended
September 30, 1998. This increase was due to additional asset acquisitions
financed through notes payable and capital lease obligations.
INCOME TAXES
We have not generated any taxable income to date and therefore have not paid
any federal income taxes since inception. Utilization of our operating loss
carryforwards, which begin to expire in 2012, may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its
25
<PAGE>
realizability. Changes in the ownership of our common stock, as defined in the
Internal Revenue Code of 1986, as amended, may restrict the utilization of such
carryforwards. See Note 3 of Notes to Consolidated Financial Statements.
FISCAL YEARS ENDED MARCH 31, 1998 AND 1999
We commenced offering products for sale on our Web site on October 1, 1997,
and, accordingly, the fiscal year ended March 31, 1998 only includes a period of
six months during which we were generating net sales and incurring expenses.
Consequently, our net sales and expenses for the fiscal year ended March 31,
1999 have increased due to a full year of net sales generated and expenses
incurred during such period as compared to six months of net sales and expenses
incurred during the fiscal year ended March 31, 1998.
NET SALES
Net sales increased to $30.0 million for the fiscal year ended March 31,
1999 from $0.7 million for the fiscal year ended March 31, 1998 as a result of
the significant growth of our customer base and an increase in repeat purchases
from our existing customers, reflecting the relaunch of our Web site and the
addition of new departments to our online store during the fall of 1998.
GROSS PROFIT
Gross profit increased to $5.7 million for the fiscal year ended March 31,
1999 versus $0.1 million for the fiscal year ended March 31, 1998. Our gross
profit increased to 19% of net sales for the fiscal year ended March 31, 1999
from 17% of net sales for the fiscal year ended March 31, 1998. This increase
was primarily due to greater sales of higher margin products as a percentage of
our overall net sales and improved purchasing.
MARKETING AND SALES
Marketing and sales expenses increased to $20.7 million for the fiscal year
ended March 31, 1999 from $1.3 million for the fiscal year ended March 31, 1998.
This $19.4 million increase was primarily attributable to the expansion of our
online and offline advertising, including a comprehensive print and television
advertising campaign, as well as increased personnel and related expenses
required to implement our marketing strategy. In addition, due to a significant
increase in our sales volume, we experienced higher distribution and customer
service expenses, including an increased level of temporary staffing during the
holiday season. Marketing and sales expenses as a percentage of net sales
decreased to 69% for the fiscal year ended March 31, 1999 from 188% for the
fiscal year ended March 31, 1998. Such expenses decreased significantly as a
percentage of net sales during the fiscal year ended March 31, 1999 due to the
significant increase in net sales during such period.
PRODUCT DEVELOPMENT
Product development expenses increased to $3.6 million for the fiscal year
ended March 31, 1999 from $0.4 million for the fiscal year ended March 31, 1998.
This $3.2 million increase was primarily attributable to increased staffing and
associated costs related to enhancing the features, content and functionality of
our online store and increasing the capacity of our systems that we use to
process customers' orders and payments. Product development expenses as a
percentage of net sales decreased to 12% for the fiscal year ended March 31,
1999 from 61% for the fiscal year ended March 31, 1998. Such expenses decreased
significantly as a percentage of net sales during the fiscal year ended
March 31, 1999 due to the significant increase in net sales during such period.
26
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $4.4 million for the fiscal
year ended March 31, 1999 from $0.7 million for the fiscal year ended March 31,
1998. This $3.7 million increase was primarily attributable to increased
headcount and related expenses associated with the hiring of additional
personnel, and increased professional services expenses. General and
administrative expenses as a percentage of net sales decreased to 15% for the
fiscal year ended March 31, 1999 from 99% for the fiscal year ended March 31,
1998. Such expenses decreased significantly as a percentage of net sales during
the fiscal year ended March 31, 1999 due to the significant increase in net
sales during such period.
GOODWILL AND INTANGIBLE ASSETS
As of March 31, 1998 and 1999, goodwill resulting from an acquisition was
$956,000 and is being amortized on a straight-line basis over three years. The
acquisition was completed in March 1998 and therefore goodwill amortization for
the fiscal year ended March 31, 1999 reflects a full year of goodwill
amortization.
DEFERRED COMPENSATION
In the fiscal year ended March 31, 1999, we recorded total deferred stock
compensation of $44.7 million in connection with stock options granted during
the period, including approximately $0.3 million which represents the fair value
of options granted to non-employees during this period. Such amount is amortized
to expense over the vesting periods of the applicable options, resulting in
$5.8 million for the fiscal year ended March 31, 1999. These amounts represent
the difference between the exercise price of stock option grants and the deemed
fair value of our common stock at the time of such grants.
INTEREST INCOME AND EXPENSE
Interest income increased to $0.6 million for the fiscal year ended
March 31, 1999 from $18,000 for the fiscal year ended March 31, 1998. This
$0.6 million increase was primarily attributable to earnings on higher average
cash and cash equivalent balances during the fiscal year ended March 31, 1999.
Interest expense increased to $47,000 for the fiscal year ended March 31, 1999
as compared to $15,000 for the fiscal year ended March 31, 1998. The increase in
interest expense is attributable to interest paid on bridge loan financing
obtained, and subsequently repaid through a combination of preferred stock
issuance and cash payments, during the fiscal year ended March 31, 1999.
INCOME TAXES
As of March 31, 1999, we had $24.4 million of net operating loss
carryforwards for federal income tax purposes, which expire beginning in 2012.
27
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for the eight quarters ended September 30, 1999. This unaudited quarterly
information has been derived from our unaudited consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods covered. The quarterly data
should be read in conjunction with our consolidated financial statements and
related notes. The consolidated operating results for any quarter are not
necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1998 1998 1998 1998 1999
---------- ----------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 530 $ 157 $ 381 $ 608 $22,910 $ 6,059
Cost of sales......................... 438 130 311 496 18,201 5,238
------- ------- ------- ------- ------- --------
Gross profit.......................... 92 27 70 112 4,709 821
Operating expenses:
Marketing and sales................. 444 658 1,370 2,372 10,611 6,365
Product development................. 145 215 404 697 905 1,602
General and administrative.......... 234 310 339 554 1,590 1,869
Goodwill amortization............... -- -- 79 80 80 80
Deferred compensation amortization.. -- 2 44 69 1,510 4,191
------- ------- ------- ------- ------- --------
Total operating expenses........ 823 1,185 2,236 3,772 14,696 14,107
------- ------- ------- ------- ------- --------
Operating loss........................ (731) (1,158) (2,166) (3,660) (9,987) (13,286)
Interest income (expense), net........ (15) 18 (5) 277 166 104
Provision for taxes................... -- (1) -- -- (1) --
------- ------- ------- ------- ------- --------
Net loss.............................. $ (746) $(1,141) $(2,171) $(3,383) $(9,822) $(13,182)
======= ======= ======= ======= ======= ========
AS A PERCENTAGE OF NET SALES:
Net sales............................. 100 % 100 % 100 % 100 % 100 % 100 %
Cost of sales......................... 83 83 82 82 79 86
------- ------- ------- ------- ------- --------
Gross profit.......................... 17 17 18 18 21 14
Operating expenses:
Marketing and sales................. 84 419 360 390 46 105
Product development................. 27 137 106 115 4 26
General and administrative.......... 44 198 89 91 7 31
Goodwill amortization............... -- -- 21 13 -- 1
Deferred compensation amortization.. -- 1 11 12 7 69
------- ------- ------- ------- ------- --------
Total operating expenses.......... 155 755 587 620 64 233
------- ------- ------- ------- ------- --------
Operating loss........................ (138) (738) (569) (602) (44) (219)
Interest income (expense), net........ (3) 12 (1) 46 1 2
Provision for taxes................... -- (1) -- -- -- --
------- ------- ------- ------- ------- --------
Net loss.............................. (141)% (727)% (570)% (556)% (43)% (218)%
======= ======= ======= ======= ======= ========
<CAPTION>
QUARTER ENDED
-------------------------
JUNE 30, SEPT. 30,
1999 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 7,975 $ 13,306
Cost of sales......................... 6,457 10,752
-------- --------
Gross profit.......................... 1,518 2,554
Operating expenses:
Marketing and sales................. 11,573 20,012
Product development................. 4,835 12,188
General and administrative.......... 2,956 4,298
Goodwill amortization............... 80 9,546
Deferred compensation amortization.. 3,782 3,314
-------- --------
Total operating expenses........ 23,226 49,358
-------- --------
Operating loss........................ (21,708) (46,804)
Interest income (expense), net........ 926 1,860
Provision for taxes................... (1) --
-------- --------
Net loss.............................. $(20,783) $(44,944)
======== ========
AS A PERCENTAGE OF NET SALES:
Net sales............................. 100 % 100 %
Cost of sales......................... 81 81
-------- --------
Gross profit.......................... 19 19
Operating expenses:
Marketing and sales................. 145 150
Product development................. 61 92
General and administrative.......... 37 32
Goodwill amortization............... 1 72
Deferred compensation amortization.. 47 25
-------- --------
Total operating expenses.......... 291 371
-------- --------
Operating loss........................ (272) (352)
Interest income (expense), net........ 11 14
Provision for taxes................... -- --
-------- --------
Net loss.............................. (261)% (338)%
======== ========
</TABLE>
Our quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors. For example,
during the quarter ended March 31, 1999, we experienced approximately $270,000
of inventory theft, which resulted in a 4% decrease in our gross profit margin
for the quarter ended March 31, 1999 and a 1% decrease in our gross profit
margin for fiscal 1998. We have undertaken a number of measures designed to
address inventory theft, including the installation of enhanced security
measures at our distribution facility. These measures may not successfully
reduce or prevent inventory theft in future periods. If these measures are not
successful, our gross profit margins and results of operations may be
significantly below expectations in future periods.
28
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Other factors that may harm our business or cause our operating results to
fluctuate include the following, many of which are outside of our control:
- - 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 and 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,
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 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 and music and baby-oriented products from our
vendors;
- - 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 advertising campaigns
such as those conducted by Visa and Intel;
- - increases in the cost of online or offline advertising;
- - the amount and timing of operating costs and capital expenditures relating to
expansion of our operations, 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.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance. It
is likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of the notes and our common stock may fall significantly.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, our principal source of liquidity consisted of
$140.6 million of cash and cash equivalents compared to $20.2 million of cash
and cash equivalents at March 31, 1999.
Net cash used in operating activities was $46.0 million and $7.7 million for
the six months ended September 30, 1999 and 1998, respectively, and
$23.9 million and $2.1 million for the fiscal year ended March 31, 1999 and
1998, respectively. Net operating cash flows were primarily attributable to net
losses, reduced by noncash charges of depreciation and amortization, as well as
increases in inventories, prepaid expenses and other, which were offset by
increases in accounts payable and accrued expenses. The significant increase in
working capital during the six months ended September 30, 1999 and the fiscal
year ended March 31, 1999 from the corresponding prior year periods was
primarily due to significant growth in our operations.
Net cash used in investing activities was $8.8 million for the six months
ended September 30, 1999 and consisted of purchases of fixed assets and other
assets, offset by cash received from the acquisition of BabyCenter. Cash
available for investment purposes increased substantially in 1999 as a result of
the proceeds from the issuance of common stock in the initial public offering of
our common stock. Net cash used in investing activities for the six months ended
September 30, 1998 was $2.3 million and consisted of purchases of fixed assets
and other assets. For the fiscal years ended March 31, 1999 and 1998, net cash
used in investing activities was $2.7 million and $0.4 million, respectively.
Net cash used in investing activities for each of these periods primarily
consisted of leasehold improvements and purchases of equipment and systems,
including computer equipment and fixtures and furniture.
Net cash provided by financing activities of $175.2 million for the six
months ended September 30, 1999 resulted from our initial public offering,
offset by payments on notes payable and capital leases. Net cash provided by
financing activities of $24.8 million for the six months ended September 30,
1998 resulted from the issuance of redeemable convertible preferred stock and
proceeds from bridge loan financing, offset by payments on the bridge loan. For
the fiscal years ended March 31, 1999 and 1998, net cash provided by financing
activities was $45.3 million and $4.1 million, respectively. Net cash provided
by financing activities during the fiscal year ended March 31, 1999 primarily
consisted of $44.8 million of net proceeds from the issuance of preferred stock.
This stock was converted into our common stock on May 20, 1999, the date of our
initial public offering.
We believe that current cash, cash equivalents and cash that may be
generated from operations, together with the net proceeds of the note offering,
will be sufficient to meet our anticipated cash needs through December 31, 2000.
However, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If the net proceeds of the note offering, together with
current cash, cash equivalents and cash that may be generated from operations
are insufficient to satisfy our liquidity requirements, we will likely seek to
sell additional equity or debt securities or to obtain a line of credit. The
sale of additional equity or equity-related securities could result in
additional dilution to our stockholders. In addition, we will, from time to
time, consider the acquisition of or investment in complementary businesses,
products, services and technologies, which might impact our liquidity
requirements or cause us to issue additional equity or debt securities. There
can be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all.
YEAR 2000 IMPLICATIONS
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or
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<PAGE>
beyond the year 2000. We use software, computer technology and other services
internally developed and provided by third-party vendors that may fail due to
the year 2000 phenomenon. For example, we are dependent on the financial
institutions involved in processing our customers' credit card payments for
Internet services and a third party that hosts our servers. We are also
dependent on telecommunications vendors to maintain our network and the United
States Postal Service and other third-party carriers to deliver orders to
customers.
We have reviewed the year 2000 compliance of our internally developed
proprietary software. Our review has included testing to determine how systems
will function at and beyond the year 2000. Since inception, we have internally
developed substantially all of the systems for the operation of our Web site.
These systems include the software used to provide the Web site's search,
customer interaction, and transaction-processing and distribution functions, as
well as monitoring and back-up capabilities. Based upon our assessment to date,
we believe that our internally developed proprietary software is year 2000
compliant, although there can be no assurance in this regard.
We have assessed the year 2000 readiness of our third-party supplied
software, computer technology and other services, which include software for use
in our accounting, database and security systems. The failure of such software
or systems to be year 2000 compliant could have a material negative impact on
the accounting functions and the operation of the Web site. As part of our
assessment of the year 2000 compliance of these systems, we sought assurances
from these vendors that their software, computer technology and other services
are year 2000 compliant. We have expensed amounts incurred in connection with
year 2000 assessment since our formation. Such amounts have not been material.
Based upon the results of our assessment, we believe that our third-party
supplied software, computer technology and other services are year 2000
compliant. Accordingly, we have determined that it is not necessary to develop a
remediation plan with respect to third-party software, third-party vendors and
computer technology and services with respect to year 2000 compliance.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
year 2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our operations consists
of a network of computers and telecommunications systems located throughout the
world and operated by numerous unrelated entities and individuals, none of which
has the ability to control or manage the potential year 2000 issues that may
impact the entire infrastructure. Our ability to assess the reliability of this
infrastructure is limited and relies solely on generally available news reports,
surveys and comparable industry data. Based on these sources, we believe most
entities and individuals that rely significantly on the Internet are carefully
reviewing and attempting to remediate issues relating to year 2000 compliance,
but it is not possible to predict whether these efforts will be successful in
reducing or eliminating the potential negative impact of year 2000 issues. A
significant disruption in the ability of consumers to reliably access the
Internet or portions of it or to use their credit cards would have an adverse
effect on demand for our services and would have a material adverse effect on
us.
Any failure of material systems, vendors' material systems or the Internet
to be year 2000 compliant could have material adverse consequences. Such
consequences could include difficulties in operating the Web site effectively,
taking product orders, making product deliveries or conducting other fundamental
parts of our business. Our material systems did not experience disruption or
failure upon the date change to January 1, 2000.
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<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk related to changes in interest rates and
foreign currency exchange rates. We do not use derivative financial instruments.
INTEREST RATE RISK. We maintain a portfolio of highly liquid cash
equivalents maturing in three months or less as of the date of purchase. Given
the short-term nature of these investments, we believe we are not subject to
significant interest rate risk with respect to these investments. Additionally,
we are subject to interest rate risk related to our notes payable and capital
lease obligations. Our notes payable and capital lease obligations bear interest
at fixed rates, and their carrying amount approximates fair value based on
borrowing rates currently available to us. As such, we believe that market risk
arising from our notes payable and capital lease obligations is not material.
FOREIGN CURRENCY RISK. We currently have a wholly-owned subsidiary with
operations in the United Kingdom. All sales and expenses incurred by the foreign
subsidiary are denominated in the British pound, which is considered the
functional currency. As such, we are exposed to foreign currency risk which
arises in part from funding denominated in British pounds provided to the
foreign subsidiary and from the translation of the foreign subsidiary's
financial results into U.S. dollars during consolidation. As exchange rates
vary, our results from operations and profitability may be adversely impacted.
As of September 30, 1999, the effect of the foreign currency exchange rate
fluctuations has not been material.
32
<PAGE>
BUSINESS
ETOYS
We are a leading Web-based retailer focused exclusively on children'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 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.
As of September 30, 1999, we have sold children's products to approximately
611,000 customers, of which approximately 144,000 were added during the quarter
ended September 30, 1999. Our net sales for the fiscal year ended March 31, 1999
totaled $30.0 million as compared to $0.7 million for the fiscal year ended
March 31, 1998. Our net sales for the six months ended September 30, 1999
totaled $21.3 million as compared to $1.0 million for the six months ended
September 30, 1998.
INDUSTRY OVERVIEW
ELECTRONIC COMMERCE
The Internet is an increasingly significant medium for communication,
information and commerce. International Data Corporation estimates that there
were 97 million Web users worldwide at the end of 1998 and anticipates this
number will grow to approximately 500 million users by the end of 2003. We
believe that growth in Internet usage and online commerce is being fueled by a
number of factors including:
- - a large and growing installed base of personal computers in the workplace and
home;
- - advances in the performance and speed of personal computers and modems;
- - improvements in network security, infrastructure and bandwidth;
- - easier and cheaper access to the Internet; and
- - the rapidly expanding availability of online content and commerce sites.
The unique characteristics of the Internet provide a number of advantages
for online retailers. Online retailers are able to "display" a larger number of
products than traditional store-based or catalog retailers at a lower cost. In
addition, online retailers are able to frequently adjust their featured
selections, editorial content and pricing, providing significant merchandising
flexibility. Online retailers also benefit from the minimal cost to publish on
the Web, the ability to reach a large group of customers from a central
location, and the potential for low-cost customer interaction. Unlike
traditional retail channels, online retailers do not have the burdensome costs
of managing and maintaining a retail store infrastructure or the significant
printing and mailing costs of catalogs.
33
<PAGE>
Online retailers can also easily obtain demographic and behavioral data about
customers, increasing opportunities for direct marketing and personalized
services.
TRADITIONAL CHILDREN'S PRODUCTS RETAIL INDUSTRY
The market for children's products includes many categories, from
traditional toys and books to video games and educational software. Toy
Manufacturers of America, Inc. estimates that the domestic toy category alone
had retail sales of approximately $21 billion in 1998. We believe that product
categories such as children's video games, books, software, videos, music and
baby-oriented products also represent significant market opportunities.
Traditional store-based toy retailers include mass market retailers such as
Toys R Us, Wal-Mart, Kmart and Target, as well as specialty chains such as Zany
Brainy, KB Toys and Noodle Kidoodle. Mass market retailers tend to carry a deep
selection of well-known brand name toys from leading vendors such as Mattel,
Hasbro and LEGO. Specialty retailers generally carry a broader selection of
specialty toy brands such as BRIO and Learning Curve. However, they do not
typically have a significant selection of well-known brand name toys. As a
result, we believe that no traditional store-based retailer currently offers as
extensive a product selection of both popular, well-known brand name toys and
diverse, harder-to-find, specialty toys as we offer.
We believe that traditional store-based retailers face a number of
challenges in providing a satisfying shopping experience for consumers of
children's products:
- - The number of SKUs and the amount of product inventory that a traditional
store-based retailer can carry in any one store is constrained by the physical
space available in the store, thereby limiting selection for consumers.
- - Limited shelf space and store layout constraints limit the merchandising
flexibility of traditional store-based retailers. As a result, traditional
retailers generally display products by brand, category or packaging. They
cannot easily adjust or blend these merchandising strategies.
- - Due to the significant cost of carrying inventory in multiple store locations,
traditional store-based retailers focus their product selection on the most
popular products that produce the highest inventory turns, thereby further
limiting consumer selection.
- - Traditional store-based retailers can only serve those customers who have
convenient access to their stores. Traditional store-based retailers must open
new stores to serve additional geographic areas, resulting in significant
investments in inventory, leasehold improvements and the hiring and training
of store personnel.
- - Traditional store-based retailers face challenges in hiring, training and
maintaining knowledgeable sales staff. This limits the level of customer
service available to consumers.
In addition, we believe that many consumers find the toy shopping
experience, especially at traditional mass market retail outlets, to be
time-consuming, inconvenient and unpleasant due to factors such as location,
store layout, product selection, level of customer service and the challenges of
shopping with children.
THE ETOYS SOLUTION
We are a leading Web-based retailer focused exclusively on children's
products. Our online store is designed to provide consumers with a convenient
and enjoyable shopping experience in a Web-based retail environment. Our
exclusive focus on children's products and commitment to
34
<PAGE>
excellent customer service enable us to uniquely address the needs and desires
of our customers. The key components of our solution include:
CONVENIENT SHOPPING EXPERIENCE. Our online store provides customers with an
easy-to-use Web site. It is available 24 hours a day, seven days a week and may
be reached from the shopper's home or office. Our online store enables us to
deliver a broad selection of products to customers in rural or other locations
that do not have convenient access to physical stores. We also make the shopping
experience convenient by categorizing our products into easy-to-shop
departments. These include toys, video games, books, software, videos, music and
baby. Our advanced search technology makes it easy for consumers to locate
products efficiently based on pre-selected criteria depending upon the
department. For example, by using a quick keyword search or a sophisticated
product search in our toy department, a customer can search by any combination
of age, category, keyword or price. We also make it easy to find age appropriate
products through our shop by age feature.
EXTENSIVE PRODUCT SELECTION AND INNOVATIVE MERCHANDISING. We offer a broad
selection of children's products that would be economically or physically
impractical to stock in a traditional store. We believe that we offer the
largest selection of toys available on the Internet. We provide consumers with a
comprehensive selection of both traditional, well-known brands, such as Mattel,
Hasbro and LEGO, and specialty toy brands, such as BRIO, Discovery Toys and
Learning Curve. In addition, we offer a broad selection of children's video
games, books, software, videos, music and baby-oriented products. We strive to
merchandise our store in a way that makes it as easy as possible for consumers
to locate products. As a result, we have added numerous specialty boutiques
designed to appeal to specific consumer interests such as hobbies, dolls and
trains. We have also added a series of seasonal boutiques to enable consumers to
easily locate seasonal specific items such as Halloween costumes and school
supplies. In addition, the unique environment of the Internet enables us to
dynamically adjust our merchandising strategy and product mix to respond to
changing customer demand.
HELPFUL AND USEFUL SHOPPING SERVICES. Through our online store, we offer
helpful and useful services to assist our customers, who are generally adults
purchasing for children. Many of these services are also designed to inform and
involve children in the shopping experience. Our services include:
- - PRODUCT REVIEWS AND RECOMMENDATIONS. To assist customers in selecting
appropriate products, we provide regularly updated product recommendations
through our FAVORITES BY AGE, FANTASTIC FINDS and our 200 UNDER $20
recommended list of affordable toys. In addition, we feature product reviews
and lists of award-winning products from prominent parenting and family
publications as well as from organizations solely dedicated to children's
products, including the OPPENHEIM TOY PORTFOLIO, PARENTS CHOICE FOUNDATION,
FAMILY FUN magazine, PARENTING magazine and DR. TOY. For example, we have also
joined with EXCEPTIONAL PARENT magazine to provide consumers with age
appropriate product recommendations for children with special needs.
- - GIFT CENTER. We simplify gift shopping through our Gift Center. Here,
consumers can obtain gift recommendations by age and get information on a
variety of child-appropriate gift wrap styles and personalized message cards
to accompany the gift. We also sell electronic gift certificates through our
Gift Center.
- - MY ETOYS. Through My eToys, we personalize the customer's shopping experience
by offering the following services:
- BIRTHDAY REMINDERS, in which we notify shoppers of a child's birthday
three weeks in advance via e-mail and proactively offer age-appropriate
gift recommendations;
35
<PAGE>
- WISH LISTS, in which parents and children can e-mail friends and family a
list of a child's most desired toys, video games, books, software, videos,
music and baby-oriented products;
- GIFT REGISTRY, like a wedding registry, in which customers can purchase
gifts without duplicating the purchases of other friends and family; and
- ADDRESS BOOK, in which we record the addresses of people to whom our
customers send gifts so they do not need to re-enter the same addresses
multiple times.
- - IN-STOCK NOTIFICATION. If a product is out of stock, our customers can request
that we e-mail them when the product is back in stock. We believe this service
helps customers avoid extended store-to-store searches for hard-to-find
products.
- - PRE-ORDER SERVICE. Our pre-order service gives consumers the opportunity to be
one of the first to receive newly released video games, children's videos and
music. Pre-order allows customers to place orders for new and highly sought
after items on a first-come, first-served basis.
- - PRODUCT NEWS. Our free monthly e-mail newsletters deliver updates about new
products and services and special offers to our customers.
EXCELLENT CUSTOMER SERVICE. We provide free pre- and post-sales support via
both e-mail and toll-free telephone service during extended business hours. Once
an order is made, customers can view order-tracking information on our Web site
or contact our customer service department to obtain the status of their orders
and, when necessary, resolve order and product questions. Furthermore, the
customer service area of our Web site contains extensive information for
first-time and repeat visitors. These include helpful hints in searching for,
shopping for, ordering and returning our products.
BUSINESS STRATEGY
Our objective is to be one of the world's leading retailers of children's
products. Key elements of our strategy include:
FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS. We intend to become the
primary place for consumers to purchase children's products. Our online store is
exclusively focused on children's products and offers an extensive selection of
toys, video games, books, software, videos, music and baby-oriented products. We
intend to enhance our product offerings by expanding into additional children's
product categories, which will enable us to take advantage of our customer base,
brand name, merchandising expertise and distribution capabilities.
BUILD STRONG BRAND RECOGNITION. Through our advertising and promotional
activities, we target purchasers of children's products, with a primary focus on
mothers. We believe that mothers are the principal decision-makers for purchases
of children's products and strongly influence the purchasing decisions of family
and friends. We use offline and online marketing strategies and promotional
activities to maximize customer awareness and enhance our brand recognition:
- - OFFLINE ADVERTISING. We use offline advertising to promote both our brand name
and specific merchandising opportunities. Our traditional advertising efforts
have included television advertising, print advertising in FAMILY FUN, FAMILY
PC, PARENTING, PARENTS and CHILD publications, and billboard advertising in
major markets. In September 1999, we initiated a new national television,
print and billboard advertising campaign under the slogan, "eToys. Where Great
Ideas Come to You," which is intended to communicate our role as a parents'
ally and to underscore the ease and convenience of online shopping. We plan to
continue our use of traditional offline advertising in order to continue
building our brand recognition.
36
<PAGE>
- - ONLINE ADVERTISING. We have marketing arrangements with major online portals
and Internet service providers, parenting-related Web sites and
children-oriented companies. Accordingly, we have entered into relationships
with AOL, Children's Television Workshop and Moms Online. In addition, we
advertise on the sites of major online portals, including Excite, Infoseek,
Microsoft Network, Yahoo! and Lycos.
- - DIRECT ONLINE MARKETING. As our customer base grows, we continue to collect
significant data about our customers' buying preferences and habits in an
effort to increase repeat purchases by existing customers. We intend to
maximize the value of this information by delivering meaningful information
and special offers to our customers via e-mail and other means. In addition,
we use our in-house newsletters to alert customers to important developments
and merchandising initiatives.
- - PROMOTIONAL ACTIVITIES. We seek to enter into strategic promotional
initiatives with the highly recognized family-oriented brand names as a way to
build brand recognition. During 1999, we have entered into such relationships
with Rosie O'Donnell, McDonald's and LEGO, GapKids and babyGap, and Visa
U.S.A. and the Marine Corps' Toys for Tots program. We plan to continue our
use of selective partnering initiatives to further build our brand
recognition.
PURSUE WAYS TO INCREASE OUR NET SALES. We intend to pursue new
opportunities to increase our net sales by:
- - opening new departments on our Web site to expand into new children's product
categories;
- - increasing product selection in our existing departments;
- - adding more services to My eToys to further personalize the customer
experience; and
- - acquiring complementary businesses, products or technologies.
PROMOTE REPEAT PURCHASES. We are focused on promoting customer loyalty and
building repeat purchase relationships with our customers. To accomplish this
strategy, we intend to effectively use direct marketing techniques targeted at
existing customers, build features unique to each individual customer and
continually strive to enhance our customer service.
EXPAND INTO ADDITIONAL INTERNATIONAL MARKETS. We currently offer children's
products in the United States and Canada through our eToys.com online store and
in the United Kingdom through our eToys.co.uk online store. We intend to
continue expanding internationally and to pursue additional market opportunities
by leveraging our technology, our brand and our online retail expertise.
MAINTAIN OUR TECHNOLOGY FOCUS AND EXPERTISE. We intend to use our commerce
platform to enhance our service offerings and take advantage of the unique
characteristics of online retailing. To date, we have developed technologies and
implemented systems to support secure and reliable online retailing. Among other
technology objectives, we intend to develop features unique to each individual
customer and to enhance the look-and-feel of our Web site. We also seek to
continuously increase the efficiency of our relationships with product vendors
and manufacturers and our distribution operations.
THE ETOYS ONLINE RETAIL STORE
We designed our online retail store to be the primary place for consumers to
purchase children's products. We believe our attractive, easy-to-use, online
store offers consumers a unique and enjoyable shopping experience as compared to
traditional store-based retailers. The look-and-feel of our Web site is playful
and entertaining, and navigation is consistent throughout. A consumer shopping
on our Web site can, in addition to ordering products, browse the different
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departments of our store, conduct targeted searches, view recommended products,
visit our Gift Center, participate in promotions and check order status. In
contrast to a traditional retail store, the consumer can shop in the comfort and
convenience of his or her home or office.
OUR STORE DEPARTMENTS
We categorize products into different departments, including toys, video
games, books, software, videos, music and baby. Within each department, products
are organized by brand, such as Mattel and Hasbro, by category, such as games,
plush toys and dolls, and by our recommendations, such as bestsellers and
favorites. The following is a summary of each of these departments:
TOYS. Since inception, we have focused on becoming the leading online
retailer of quality children's toys. We believe that we offer the largest
selection of toys available on the Internet. We provide a comprehensive
selection of both traditional, well-known brands, such as Mattel, Hasbro and
LEGO, and specialty toy brands, such as BRIO, Discovery Toys and Learning Curve.
We individually select and test many of our toys before adding them to our
online store collection to ensure quality.
VIDEO GAMES. Through our video game department, we offer an extensive
selection of game titles, including bestsellers and new releases, for the
popular Sega Dreamcast, Sony PlayStation, Nintendo 64 and Game Boy platforms. We
provide our own ratings for each video game with respect to content, language
and level of violence. In addition, we sell video game hardware and recommended
accessories.
BOOKS. Through our children's book department, we offer more than 80,000
titles at competitive prices. We categorize books by age, favorite character,
series, subject, author and our recommendations. We attempt to bring the books
to life by providing thorough content descriptions and in many instances actual
sample pages. Additionally, just like the neighborhood book store, we offer
author interviews and autographed books from some of the most popular children's
authors.
SOFTWARE. Through our children's software department, we offer a wide
selection of software with an emphasis on educational titles. We organize our
software into easy-to-use and understandable categories. We feature a variety of
well-known classic and currently popular brands including Broderbund, Disney
Interactive, Microsoft's Magic School Bus and Jumpstart.
VIDEOS. Through our children's video department, we offer videos for
children that are organized into easy-to-shop categories. We feature a variety
of well-known titles from popular television series, including Barney, Blue's
Clues, Dr. Seuss, Magic School Bus, Muppets, Peanuts, Rugrats, Teletubbies and
Winnie the Pooh. We also feature award-winning independent releases.
MUSIC. Through our children's music department, we offer an extensive
assortment of children's music in both cassette and CD format. Unlike most
retailers, we organize our children's music into different categories by
subject. We feature a variety of popular children's music categories, including
books on tape, Disney, educational, holiday, lullabies and bedtime, rock for
kids, soundtracks, storytelling and Sesame Street. We also carry music from
artists associated with independent labels. We listen to many of our music
products in order to create helpful product descriptions and recommendations.
BABY. Through our baby department, we offer a broad assortment of products,
including car seats, baby carriers, clothes, bottles, nursery decor and
maternity gear. We provide expectant mothers and mothers both traditional,
well-known and specialty brands, point-by-point product comparison guides and
unique areas dedicated to preemies, twins and triplets.
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SHOPPING AT OUR STORE
We believe that the sale of children's products over the Web can offer
attractive benefits to consumers. These include enhanced selection, convenience,
ease-of-use, depth of content and information, and competitive pricing. Key
features of our online store include:
BROWSING. Our Web site offers visitors a variety of highlighted subject
areas and special features arranged in a simple, easy-to-use format intended to
enhance product search, selection and discovery. By clicking on the permanently
displayed department names, the consumer moves directly to the home page of the
desired department and can quickly view promotions and featured products.
Customers can use a quick keyword search in order to locate a specific product.
They can also execute more sophisticated searches based on pre-selected criteria
depending upon the department. In addition, customers can browse our online
store by hot-linking to specially designed pages dedicated to products from key
national and specialty brands. Customers can also hot-link to pages featuring
key product categories such as construction toys, just-for-girls software and
movie soundtrack music.
GETTING PRODUCT ANSWERS. One of the unique advantages of an Internet retail
store is the ability to provide product information and editorial content. On
our Web site customers can find detailed product information, including product
descriptions, manufacturers' and merchants' age recommendations, product
packaging, battery requirements, a list of accessories and related products that
are available, product awards and customer reviews. We also provide editorial
content for our customers through regularly updated product recommendations,
including FAVORITES BY AGE, FANTASTIC FINDS and 200 UNDER $20. Furthermore, on
our Web site we highlight award-winning products from prominent parenting and
family publications as well as from organizations solely dedicated to children's
products.
FINDING IDEAS AND ACTIVITIES. Through the ideas and activities section of
our Web site, we are striving to improve the consumer Internet experience by
combining content from world-renowned organizations, expert individuals and
organizations solely dedicated to children's products with Internet commerce.
For example, in September 1999, we launched Idea Center, which is designed to
help parents and children actively explore their interests and aspirations in an
online environment. By featuring content centered on nine major themes, such as
"when I grow up I want to be" and "the wonders of science", with more than 1,000
specially selected products to match these themes, parents and children are able
to find informative and valuable content and products which are tied directly to
a child's interests. The thematic content includes:
(1) Q&A, which is an exclusive kid-focused interview with each content provider
(for instance, for children interested in weather, there is an interview
with Al Roker of the Today Show);
(2) Fun for Kids, which are fun facts and trivia for use by parents and
children;
(3) Parent's Helper, which are helpful tips and links to other Web sites for
parents to enable them to find more information over the Internet on each
topic; and
(4) A Kid Inspired Idea, which is a community-building feature of customer ideas
shared via e-mail.
In addition, through our ideas and activities section, we highlight all the
latest trends in order to keep parents up-to-date on the most popular toys. We
have also partnered with the OPPENHEIM TOY PORTFOLIO to provide our consumers
with information on activities and playtips for simple and entertaining projects
to teach children basic skills.
FINDING A GIFT. Through our gift services, consumers can obtain gift
recommendations by age and obtain information on a variety of child-appropriate
gift wrap styles and personalized message cards to accompany the gift. In
addition, we offer a birthday reminder service, in which we
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notify shoppers of a child's birthday three weeks in advance via e-mail and
proactively offer age-appropriate recommendations to help our busy shoppers. We
also provide a children's wish list service, in which parents and children can
e-mail friends and family a list of a child's most desired gifts, and a gift
registry service, which is similar to our wish list service but helps friends
and families avoid duplicate purchases. We also sell electronic gift
certificates, which typically arrive within 24 hours of placing an order.
SELECTING A PRODUCT AND CHECKING OUT. To purchase products, customers
simply click on the "add to cart" button to add products to their virtual
shopping cart. Customers can add and subtract products from their shopping cart
as they browse around our store, prior to making a final purchase decision, just
as in a physical store. Because we maintain a fully-integrated inventory system
and stock each item we sell, we are able to notify customers in real-time
whether a selected product is currently in stock. To execute orders, customers
click on the "checkout" button and, depending upon whether the customer has
previously shopped with us, are prompted to supply shipping details online. We
also offer customers a variety of gift wrapping and shipping options during the
checkout process. Prior to finalizing an order by clicking the "submit" button,
customers are shown their total charges along with the various options chosen at
which point customers still have the ability to change their order or cancel it
entirely.
PAYING. To pay for orders, a customer must use a credit card, which is
authorized during the checkout process, but which is charged when we ship the
customer's items from our distribution facility. Our Web site uses a security
technology that works with the most common Internet browsers and makes it
virtually impossible for unauthorized parties to read information sent by our
customers. Our system automatically confirms receipt of each order via e-mail
within minutes and notifies the customer when we ship the order. We also offer
our customers a money-back return policy.
GETTING HELP. From every page of our Web site, a customer can click on a
"help" button to go to our customer service area. The customer service area of
our Web site contains extensive information for first-time and repeat visitors.
In this area, we assist customers in searching for, shopping for, ordering and
returning our products as well as provide information on our low price
guarantee, shipping charges and other policies. We also offer our customers a
guided tour of our site to help them learn how to shop our store. In addition,
we provide customers with answers to the most frequently asked questions and
encourage our visitors to send us feedback and suggestions via e-mail.
Furthermore, customer service agents are available to answer questions about
products and the shopping process during extended business hours via our
toll-free number, which is displayed in the customer service area of our Web
site.
OTHER WEB SITES OPERATED BY ETOYS
BABYCENTER.COM. BabyCenter, which was founded in 1997 and acquired by us on
July 1, 1999, is a Web-based business that offers a wide variety of information,
products and interactive forums focused on and serving expectant mothers and new
parents. Visitors to the BabyCenter Web site can read health articles and
parenting news, interact online with other families and purchase a wide
selection of baby-oriented products and supplies. BabyCenter is one of the Web's
most complete resources on preconception, pregnancy, babies and toddlers.
BabyCenter begins to develop relationships with expectant parents at least one
year before the baby is born by providing informative and valuable content from
world-renowned organizations and expert individuals on one of life's most
important decisions. During pregnancy and once the child is born, BabyCenter
deepens its relationship with expectant parents and parents by providing weekly
e-mail newsletters that highlight articles dealing with issues and questions
that are relevant to the mother's stage of pregnancy or the age of her baby. In
order to ensure the reliability of all content produced on the
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BabyCenter Web site, BabyCenter has set up a medical advisory board to review
all content prior to its usage.
In January 2000, we completed the sale of substantially all of the assets
and related liabilities of BabyCenter's Consumer Health Interactive division for
approximately $20 million in a combination of cash and registrable securities.
CHI is a resource for health plans looking to use the Internet to attract and
retain members.
INTERNATIONAL. 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 toys, software, videos and video games. In addition,
in November 1999, we began serving all provinces of Canada through our eToys.com
store.
MERCHANDISING
We believe that the breadth and depth of our product selection, together
with the flexibility of our online store and our range of helpful and useful
shopping services, enable us to pursue a unique merchandising strategy. We
provide an extensive selection of children's products. These include traditional
mass market toys, specialty toys and a broad selection of related children's
products, including video games, books, software, videos, music and
baby-oriented products, that would be economically impractical to stock in a
traditional store. We focus exclusively on children's products and we
individually select and test many of the products in our online store to ensure
quality. This level of product evaluation enables us to deliver valuable
additional product information to our shoppers. For example, we are able to
develop detailed and helpful descriptions and our own recommendations by age for
many of the products in our online store.
Unlike store-based retail formats, our online store provides us significant
flexibility with regard to the organization and presentation of our product
selection. Our easy-to-use Web site allows customers to browse our product
selection by brand, age, product category and price, as well as by combinations
of these attributes. For example, a customer can easily search for
science-oriented toys designed for eight-year-old children or view all Barbie
dolls and related accessories without consulting store personnel or walking
multiple aisles within one or more traditional stores. Our online store enables
us to dynamically adjust our product mix to respond to changing customer demand.
In addition, our online store gives us flexibility in featuring or promoting
specific toys without having to alter the physical layout of a store.
We strive to merchandise our store in a way that makes it as easy as
possible for consumers to locate products. As a result, we have added numerous
specialty boutiques designed to appeal to specific consumer interests such as
hobbies, dolls and trains. We have also added a series of seasonal boutiques to
enable consumers to easily locate seasonal specific items such as Halloween
costumes and school supplies. In addition, we recently entered into an agreement
with Discovery Toys, a premier direct seller of children's developmental
products, to become the exclusive online distributor of their educational toys.
Through our Discovery Toys boutique, parents can easily find products by age,
developmental benefits, bestsellers and award winners.
To encourage purchases, we feature various promotions on a rotating basis
throughout the store and continually update our online recommendations. We also
actively create and maintain pages that are artistically designed to highlight
the most prominent product brands we sell in our different departments. We
believe this strategy provides us with an excellent opportunity to cross-sell a
brand across our departments and promote impulse purchases by customers.
Finally, our range of helpful and useful shopping services such as our Gift
Center, our recommendations and our 200 UNDER $20 feature enable us to display
and promote our product selection in a flexible and targeted manner.
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We believe that our merchandising strategy provides a unique selling
opportunity for our vendors. We are able to offer all our vendors access to
purchasers of children's products regardless of the size or influence of the
individual vendor.
MARKETING AND PROMOTION
Our marketing and promotion strategy is designed to:
- - build brand recognition;
- - increase consumer traffic to our store;
- - add new customers;
- - build strong customer loyalty;
- - maximize repeat purchases; and
- - develop additional ways to increase our net sales.
Through our advertising and promotions, we target adult purchasers of
children's products, with a focus on mothers. We believe that mothers are the
principal decision-makers in purchases of children's products and strongly
influence children's products purchases by family and friends. We use offline
and online marketing strategies to maximize customer awareness and enhance brand
recognition. To accomplish this strategy, we have entered into relationships
with AOL, Children's Television Workshop and Moms Online. Our marketing
agreements generally provide for us to be the preferred online toy retailer on
the sites of these providers specified in the agreements. We also generally have
the right to place banner advertisements and integrated links to our store on
specified children-related or other particular pages or through keyword
searches. In addition, we advertise on the sites of major online portals,
including Excite, Infoseek, Microsoft Network, Yahoo! and Lycos.
We entered into a marketing agreement with AOL, the leading Internet online
service provider, in August 1999. This agreement replaced our initial agreement
with AOL that we entered into in October 1997. This agreement established us as
a premiere AOL provider of children's products featured on the AOL Network, with
"anchor" positions in such shopping areas as toys, educational toys, kid and
infant gear and electronic games. Furthermore, under the agreement, AOL has
committed that AOL users will access the online areas promoting eToys a
specified number of times. Over the 3-year term of the agreement, we are
obligated to make quarterly payments of $1.5 million to AOL, or a total of
$18 million during the term of the agreement. In addition, to the extent new
customers arriving from AOL exceed 1,800,000, we are required to pay $10 for
each new customer arriving from AOL. We have also agreed to offer for sale a
substantial selection of children's products, to offer special deals to AOL
users through the AOL online area, and to manage, operate and support such
children's toy products. The agreement with AOL expires in August 2002; however,
AOL may terminate the agreement earlier in the event we materially breach the
agreement, if we are acquired by a competitor of AOL or in the event of
bankruptcy or insolvency or similar adverse financial events specified in the
agreement. BabyCenter has also entered into a marketing agreement with AOL in
June 1999. The agreement provides BabyCenter with "anchor" positions in AOL's
Health, Families and Shop @ AOL; guaranteed visits from AOL customers; a term of
14 months expiring August 2000, and termination provisions similar to AOL's
agreement with eToys. Under the BabyCenter agreement, BabyCenter is required to
make aggregate payments of approximately $1.3 million to AOL.
We use traditional offline advertising, including television advertising,
print advertising in FAMILY FUN, FAMILY PC, PARENTING, PARENTS and CHILD
publications, and billboard advertising in major markets. In September 1999, we
initiated a new national television, print and billboard advertising
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campaign under the slogan, "eToys. Where Great Ideas Come to You," which is
intended to communicate our role as a parents' ally and to underscore the ease
and convenience of online shopping. It also demonstrates to consumers our focus
on kids and the Internet. The campaign captures the small but significant
moments that help form the bond between parents and children and explains to
consumers that we understand this dynamic and can play a role in building on the
magic of the moment.
We seek to enter into strategic promotional initiatives with highly
recognized family-oriented brand names as a way to build brand recognition.
During the second half of calendar 1999, we have entered into such relationships
with Rosie O'Donnell, McDonald's, Lego, GapKids and babyGap, and Visa U.S.A. and
the Marine Corps' Toys for Tots program. Through our relationship with
Rosie O'Donnell, we created Rosie's Readers, a literacy initiative that is
intended to promote kids' interests in books and serve as a fundraising platform
for Ms. O'Donnell's "For All Kids Foundation," a children's-oriented charity. In
connection with the program, Ms. O'Donnell makes four book selections each
month, which are regularly featured on "The Rosie O'Donnell Show" and the eToys
Web site, and we donate 10% of the revenue generated from Rosie's selections to
her charity. We also entered into an in-store and online cross-promotion with
GapKids and babyGap for the 1999 holiday season, which offers customers of
GapKids and babyGap stores and Web sites a $10 eToys gift certificate with any
purchase of $75 or more. Similarly, customers who spend $75 or more at our store
receive a $10 gift certificate for GapKids and babyGap stores and Web sites.
We use our in-house newsletters to alert customers to important developments
at our store. We currently produce three newsletters each month. Our main
newsletter is "Now Playing at eToys", which notifies customers about new helpful
and useful shopping services, new products and special offers. We offer our
customers the option of choosing a child's age and gender for this e-mail so
that we can make appropriate product recommendations. Our second newsletter is
"Reading Adventures", which delivers recommendations for children's books based
on age and reading level. Our final newsletter, "The Gamer's Bulletin", keeps
our video game customers up-to-date on new video games by platform.
To direct traffic to our Web site, we have created inbound links that
connect directly to our Web site from other sites. Potential customers can
simply click on these links to become connected to our Web site from search
engines and community and affinity sites. In addition, in order to increase
exposure on the Internet and directly generate sales, we have an affiliates
program. Under this program, we pay one of our registered affiliates a referral
fee for any sale generated via their link to our Web site.
OPERATIONS
We obtain products from a network of large and small vendors, manufacturers
and distributors. We carry inventory of the products available for sale on our
Web site. We currently conduct our distribution operations through three
facilities operated by us, consisting of an approximately 105,000 square-foot
facility located in Commerce, California, an approximately 75,000 square foot
facility located in San Francisco, California, and an approximately 25,000
square foot facility located in Swindon, England, as well as two facilities
operated by a third-party service provider, Fingerhut Business Services, Inc.,
consisting of a 1,000,000 square foot facility located in Provo, Utah, and a
facility located in St. Cloud, Minnesota, of which we use approximately 100,000
square feet. We intend to reduce our use of such third-party distribution
facilities during the first half of 2000 and to increase our use of company-run
distribution facilities as our primary means of order fulfillment. We send
orders from our Web sites to our distribution facilities over secure connections
and warehouse management systems that optimize the pick, pack and ship process.
The warehouse management system provides the Web site with data on inventory
receiving, shipping, inventory quantities and inventory location, which enables
us to display information about the
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availability of the products on our Web site. The management system also enables
us to offer a variety of gift wrap choices, custom gift cards and custom to/from
labels for each individual gift. In addition, we offer an order tracking service
for our customers on our Web site. See the section "Risk Factors" under the
heading "Any Failure by Us to Successfully Expand Our Distribution Operations
Would Have a Material Adverse Effect on Us" for more information regarding the
risks associated with our distribution operations.
We offer three levels of shipping service: next day delivery, three-day
delivery, and ground delivery. We have developed relationships with both United
Parcel Service and the United States Postal Service to maximize our overall
service level to all 50 states. Priority orders are flagged and expedited
through our distribution processes. These capabilities are required due to the
time-sensitive nature of the gifts that we deliver to our customers.
Our agreement with Fingerhut has an initial term of three years ending in
April 2002 and can be renewed by us for three additional one-year terms.
Pursuant to this agreement, Fingerhut will provide us warehouse and distribution
services on a mutually agreed upon basis.
On May 10, 1999, we entered into an agreement with East Bowles, L.L.C. to
lease an approximately 438,500 square-foot warehouse in Virginia. The lease has
an initial term of approximately five years and can be renewed by us for two
additional five-year terms. We plan to begin warehouse operations in this
facility in the fourth calendar quarter of 2000.
We are currently reorganizing certain of our operations functions by
relocating all of our inventory purchasing, distribution fulfillment functions,
customer service functions and other related activities into our distribution
subsidiary, eToys Distribution, LLC.
CUSTOMER SERVICE
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our customer service representatives
are available 24 hours a day, seven days a week to provide assistance via e-mail
or telephone. We strive to answer all customer inquiries within 24 hours. Our
customer service representatives handle questions about orders, assist customers
in finding desired products and register customers' credit card information over
the telephone. Our customer service representatives are a valuable source of
feedback regarding user satisfaction. Our customer service operations consist of
both our internal, self-operated customer service department and certain
third-party service providers such as Envisionet. We also use BizRate, an online
market research company, to obtain monthly customer feedback. Our Web site also
contains a customer service page that outlines store policies and provides
answers to frequently asked questions.
OPERATIONS AND TECHNOLOGY
We have implemented a broad array of scaleable site management, search,
customer interaction, distribution services and systems that we use to process
customers' orders and payments. These services and systems use a combination of
our own technologies and commercially available, licensed technologies. The
systems that we use to process customers' orders and payments are integrated
with our accounting and financial systems. We focus our internal development
efforts on creating and enhancing specialized software that is unique to our
business. We use a set of applications for:
- - accepting and validating customer orders;
- - organizing, placing and managing orders with suppliers;
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- - receiving product and assigning it to customer orders; and
- - managing shipment of products to customers based on various ordering criteria.
Our systems have been designed based on industry standard architectures and
have been designed to reduce downtime in the event of outages or catastrophic
occurrences. Our systems provide 24-hour-a-day, seven-day-a-week availability.
Our system hardware is hosted at third-party facilities in Sunnyvale,
California, and Herndon, Virginia, which provide redundant communications lines
and emergency power backup. We have implemented load balancing systems and our
own redundant servers to provide for fault tolerance. We have also created a
Network Operations Center through which we continually test and monitor the
operation of our Web site in order to promptly identify any deficiency or
failure in our systems.
We incurred product development expenses of $0.4 million in the fiscal year
ended March 31, 1998, $3.6 million in the fiscal year ended March 31, 1999 and
$17.0 million in the six months ended September 30, 1999. We anticipate that we
will continue to devote significant resources to product development in the
future as we add new features and functionality to our Web site. The market in
which we compete is characterized by rapidly changing technology, evolving
industry standards, frequent new service and product announcements and
enhancements and changing customer demands. Accordingly, our future success will
depend on our ability to:
- - adapt to rapidly changing technologies;
- - adapt our services to evolving industry standards; and
- - continually improve the performance, features and reliability of our service
in response to competitive service and product offerings and evolving demands
of the marketplace.
Our failure to adapt to such changes would have a material adverse effect on
our business, results of operations and financial condition. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require substantial
expenditures by us to modify or adapt our services or infrastructure. This could
have a material adverse effect on our business, results of operations and
financial condition.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly applicable
to electronic commerce. However, the Internet is increasingly popular. As a
result, it is possible that a number of laws and regulations may be adopted with
respect to the Internet. These laws may cover issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Furthermore, the growth of electronic commerce may prompt calls for more
stringent consumer protection laws. Several states have proposed legislation to
limit the uses of personal user information gathered online or require online
services to establish privacy policies. The Federal Trade Commission has also
initiated action against at least one online service regarding the manner in
which personal information is collected from users and provided to third
parties. We do not provide personal information regarding our users to third
parties. However, the adoption of such consumer protection laws could create
uncertainty in Web usage and reduce the demand for our products and services.
The FTC has promulgated a variety of laws related to consumer protection, a
number of which apply to our business and operations. In January 2000 we
received two request letters from the FTC. The first letter relates to an FTC
study of the marketing of video games and software to children, particularly
those that have a rating of "mature" or higher under the Entertainment Software
Rating Board interactive rating system. The second letter relates to an FTC
inquiry to determine compliance with the FTC's Mail or Telephone Order
Merchandise Rule, which regulates
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the timeliness of the shipment of orders placed by customers. We are in the
process of replying to the FTC's requests and inquiries. Any failure by us to
comply with the rules and regulations promulgated by the FTC or other
governmental authorities could result in action being taken against us that
could have a material adverse effect on our business and results of operations.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of such laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws
intended to address such issues could create uncertainty in the Internet market
place. Such uncertainty could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs.
In addition, because our services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that we are
required to qualify to do business in each such state or foreign country. We are
qualified to do business only in California. Our failure to qualify in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. It could also hamper our ability to enforce contracts in such
jurisdictions. The application of laws or regulations from jurisdictions whose
laws do not currently apply to our business could have a material adverse effect
on our business, results of operations and financial condition.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could seriously harm our net sales and
results of operations. Current and new competitors can enter our market with
little difficulty and can launch new Web sites at a relatively low cost. In
addition, the children's products industries, including toys, video games,
software, video, books, 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 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;
- - traditional store-based toy and children's and baby product 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's and baby products, such as The Walt Disney Company and Warner
Bros.;
- - catalog retailers of children's and baby products and 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
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- - various smaller online retailers of children's and baby products, such as
BrainPlay.com, Red Rocket and Toysmart.com.
We believe that the following are principal competitive factors in our
market:
- - brand recognition;
- - selection;
- - convenience;
- - price;
- - speed and accessibility;
- - customer service;
- - quality of site content; and
- - reliability and speed of order shipment.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-financed
entities may join with online competitors or publishers or suppliers of
children's products, including toys, video games, software, videos, books, 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. Some of our competitors such as Toys R
Us and Wal-Mart have significantly greater experience in selling children's
toys, video games, software, videos and music products.
Our online competitors are particularly able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of existing technologies, such as price
comparison programs, may increase competition.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. For instance, we have filed a
lawsuit against the holders of the "etoy.com" domain name (that is, "etoy" in
the singular as opposed to "etoys" in the plural), asserting claims of trademark
infringement and dilution and unfair competition, and the holders of such domain
name have filed a cross-complaint against us, seeking declaratory relief
regarding the superiority of their mark, an injunction against our use of the
"eToys" name in specified jurisdictions and a cancellation of our "eToys"
registered trademark. However, we believe that there are no claims or actions
pending or threatened against us, including the "etoy" lawsuit, the ultimate
disposition of which would have a materially adverse effect on us.
INTELLECTUAL PROPERTY
We rely on various intellectual property laws and contractual restrictions
to protect our proprietary rights in products and services. These include
confidentiality, invention assignment and nondisclosure agreements with our
employees, contractors, suppliers and strategic partners. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use
47
<PAGE>
our intellectual property without our authorization. In addition, we pursue the
registration of our trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not be
available in every country in which our services are made available online.
We have licensed various proprietary rights to third parties. We attempt to
ensure that these licensees maintain the quality of our brand. However, these
licensees may nevertheless take actions that materially adversely affect the
value of our proprietary rights or reputation. We also rely on technologies that
we license from third parties. These licenses may not continue to be available
to us on commercially reasonable terms in the future. As a result, we may be
required to obtain substitute technology of lower quality or at greater cost,
which could materially adversely affect our business, results of operations and
financial condition.
We expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, with or without merit, could be time-consuming,
result in costly litigation, cause service upgrade delays or require us to enter
into royalty or licensing agreements. Such royalty or licensing agreements might
not be available on terms acceptable to us or at all. As a result, any such
claim of infringement against us could have a material adverse effect upon our
business, results of operations and financial condition.
EMPLOYEES
As of September 30, 1999, we had 628 full-time employees. None of our
employees are represented by a labor union, although certain employees of
Fingerhut, the third-party supplier of some of our distribution operations, are
members of labor unions. We have not experienced any work stoppages and consider
our employee relations to be good.
Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom are bound by an employment agreement requiring service for any defined
period of time. The loss of services of one or more of our key employees could
have a material adverse effect on our business, financial condition and results
of operations. Our future success also depends in part upon our continued
ability to attract, hire, train and retain highly qualified technical, sales and
managerial personnel. Competition of such personnel is intense and there can be
no assurance that we can retain our key personnel in the future.
FACILITIES
Our corporate offices are located in Santa Monica, California, where we
lease approximately 60,000 square feet under a lease that expires in July 2003.
In October 2000 we intend to relocate our corporate offices to a new location in
Santa Monica pursuant to a 10 year lease that we signed in December 1999. Under
the lease agreement we have leased a 151,000 square foot building which is
currently being developed. In addition we have an option to lease a second
151,000 square foot building at the same location which is expected to be
completed in the third quarter of 2000. In addition, BabyCenter's corporate
offices consist of approximately 28,400 square feet located in San Francisco,
California under a lease that expires as to 24,000 square feet on September 1,
2004 and as to 4,400 square feet on December 31, 2004. In connection with our
distribution operations, we also lease approximately 105,000 square feet in
Commerce, California under a lease that expires in August 2003; approximately
438,500 square feet in Pittsylvania County, Virginia under a lease that expires
in July 2004; approximately 75,000 square feet in San Francisco, California
under a lease that expires as to 23,000 square feet on August 31, 2000 and as to
52,000 square feet on December 31, 2000; and approximately 25,000 square feet in
Swindon, England under a lease that expires September 27, 2008.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth specific information regarding our executive
officers and directors as of September 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- -------- -----------------------------------------------------
<S> <C> <C>
Edward C. Lenk.................... 38 President, Chief Executive Officer and Uncle of the
Board
Steven J. Schoch.................. 41 Senior Vice President and Chief Financial Officer
John R. Hnanicek.................. 35 Senior Vice President and Chief Information Officer
Frank C. Han...................... 35 Senior Vice President of Product Development
Janine Bousquette................. 39 Senior Vice President of Marketing
Louis V. Zambello III............. 41 Senior Vice President of Operations
Matthew N. Glickman............... 33 Director
Peter C.M. Hart................... 48 Director
Tony A. Hung...................... 32 Director
Michael Moritz.................... 44 Director
Daniel J. Nova.................... 37 Director
</TABLE>
EDWARD C. LENK founded eToys and has served as our President, Chief
Executive Officer and a Director since June 1997. In December 1998, he was
appointed Uncle of the Board. Prior to founding eToys, from May 1994 to July
1996, Mr. Lenk was employed as Vice President of Strategic Planning at The Walt
Disney Company, where he was responsible for strategic planning and new business
development of Worldwide Attractions and Resorts. From May 1991 to May 1994, he
was a Director of Strategic Planning at The Walt Disney Company. Mr. Lenk
received a Bachelor of Arts SUMMA CUM LAUDE from Bowdoin College and a Masters
in Business Administration, with distinction, from Harvard Business School.
STEVEN J. SCHOCH has served as our Chief Financial Officer since
January 1999. Prior to joining us, from December 1995 to January 1999,
Mr. Schoch was Vice President and Treasurer of Times Mirror Company, a newspaper
and magazine publishing company. He also served as Chief Executive Officer and
President of a wholly owned subsidiary of Times Mirror Company dedicated to the
reduction and containment of costs of the parent company. From March 1991 to
October 1995, Mr. Schoch worked at The Walt Disney Company, most recently as
Vice President, Treasurer--Euro Disney S.C.A. Mr. Schoch received a Bachelor of
Science from Tufts University and a Masters in Business Administration from the
Amos Tuck School of Business Administration at Dartmouth College.
JOHN R. HNANICEK has served as our Chief Information Officer since
December 1998. Prior to joining us, from October 1996 to December 1998, he was
employed as Senior Vice President of Information Systems for Hollywood
Entertainment, Inc., a nationwide retail video chain. From January 1996 to
October 1996, Mr. Hnanicek served as Chief Information Officer for
Homeplace, Inc., a home furnishings chain. From 1990 to 1995, he served as
Senior Vice President of Information Systems and Logistics at OfficeMax, Inc., a
retail office supply outlet. Mr. Hnanicek holds a Bachelor of Science in
Computer Science and Accounting from Cleveland State University.
FRANK C. HAN has served as our Senior Vice President of Product Development
since January 1999. From February 1997 to January 1999, Mr. Han was our Chief
Operating Officer and Vice President of Finance. Prior to joining us, Mr. Han
worked at Union Bank of California, serving as Vice President of Interactive
Markets from January 1995 to February 1997 and as Director of Strategic Planning
from 1993 to 1995. Mr. Han received a Bachelor of Science CUM LAUDE from Yale
University and a Masters in Business Administration from the Stanford Graduate
School of Business.
49
<PAGE>
JANINE BOUSQUETTE has served as our Senior Vice President of Marketing since
May 1999. Prior to joining us, from 1995 to May 1999, Ms. Bousquette worked at
PepsiCo Inc., a manufacturer of soft drinks, juices and snackfoods, serving most
recently as Vice President of Marketing and also serving as Vice President of
Marketing for the Flavor Brands. From 1982 to 1995, Ms. Bousquette worked in
brand management at The Procter & Gamble Company, a manufacturer of consumer
products, serving most recently as Senior Marketing Director. Ms. Bousquette
received a Bachelor of Arts PHI BETA KAPPA from the University of Michigan.
LOUIS V. ZAMBELLO III has served as our Senior Vice President of Operations
since December 1998. Prior to joining us, from 1984 to 1998, he held a variety
of positions at L.L. Bean, Inc., an outdoor retailer. Most recently,
Mr. Zambello served as Senior Vice President of Operations and Creative from
June 1998 to December 1998, as Senior Vice President of Operations from
December 1993 to June 1998, as Vice President of Merchandise Services and
Manufacturing from December 1991 to August 1993 and in a variety of other
positions since 1984. Mr. Zambello received a Bachelor of Arts MAGNA CUM LAUDE
from Cornell University and a Masters in Business Administration from Harvard
Business School.
MATTHEW N. GLICKMAN has served as a Director of eToys since July 1999.
Mr. Glickman co-founded BabyCenter and has served as its Chief Executive Officer
since October 1996. Prior to founding BabyCenter, he served as Product Manager
for Intuit Inc.'s Quicken personal finance software product and in other product
management roles at Intuit from July 1993 to October 1996. He previously served
as a consultant at Bain and Company. Mr. Glickman received a Bachelor of Arts,
Phi Beta Kappa, from Amherst College, a Master of Arts in Educational Policy
from the Stanford School of Education, and a Masters in Business Administration
from the Stanford Graduate School of Business.
PETER C.M. HART has served as a Director of eToys since October 1997. Since
January 1999, Mr. Hart has been a Managing Partner of Wildkin LLC, a distributor
of toys. Since November 1997, he has served as a business advisor to EdUsa, a
company that provides language instruction over the Internet. From 1983 to 1997,
he held a variety of positions at Ross Stores, Inc., an apparel retailer, most
recently as a Senior Vice President managing warehousing, distribution and MIS
operations. Previously, Mr. Hart was a Business Systems Analyst at Joseph Magnin
Department Store in San Francisco and at Rediffusion in Buckinghamshire,
England. Mr. Hart is a member of the Audit Committee of the Board of Directors.
TONY A. HUNG has served as a Director of eToys since December 1997. Since
1997, he has been a Vice President of DynaFund Ventures, a venture capital
partnership. Previously, Mr. Hung held a variety of positions at The Walt Disney
Company, serving as Manager of Corporate Strategic Planning from 1996 to 1997,
as Manager of Television and Telecommunications from 1995 to 1996, and as Senior
Analyst in the Corporate Treasury department from 1992 to 1995. Mr. Hung serves
on the boards of directors of a number of private companies. Mr. Hung holds a
Bachelor of Arts from Harvard University and a Masters in Business
Administration from The Anderson School at University of California at Los
Angeles. Mr. Hung is a member of the Audit Committee of the Board of Directors.
MICHAEL MORITZ has served as a Director of eToys since June 1998. He has
been a general partner of Sequoia Capital, a venture capital firm, since 1986.
Mr. Moritz serves as a director of Yahoo! Inc. and Flextronics International
Ltd., as well as several private companies. Mr. Moritz received a Master of Arts
degree from Oxford University and a Masters in Business Administration from the
Wharton School at the University of Pennsylvania. Mr. Moritz is a member of the
Compensation Committee of the Board of Directors.
DANIEL J. NOVA has served as a Director of eToys since June 1998. Since
August 1996, Mr. Nova has served as a general partner of Highland Capital
Partners, a venture capital firm.
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Previously, he was a general partner of CMG@Ventures from January 1995 to
August 1996 and a Senior Associate at Summit Partners from June 1991 to
January 1995. Mr. Nova is a director of Lycos, Inc., an online portal, and
several private companies. Mr. Nova received a Bachelor of Science in Computer
Science and Marketing with honors from Boston College and a Masters in Business
Administration from Harvard Business School. Mr. Nova is a member of the Audit
and Compensation Committees of the Board of Directors.
Our Board of Directors currently consists of six members with one vacancy.
Currently, each director is elected for a period of one year at our annual
meeting of stockholders and serves until the next annual meeting or until his
successor is duly elected and qualified. Commencing at our first annual meeting
of stockholders following the date on which we have at least 800 stockholders,
which is expected to be 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, following that time,
directors will serve for three-year terms and only one class of directors will
be elected at each annual meeting of stockholders.
Our executive officers serve at the discretion of the Board of Directors.
There are no family relationships among any of our directors or executive
officers.
BOARD COMMITTEES
Our Board of Directors established the Compensation Committee in
December 1998 and the Audit Committee in February 1999. The Compensation
Committee reviews and recommends to the Board of Directors the compensation and
benefits of all our officers and establishes and reviews general policies
relating to compensation and benefits of our employees. The Audit Committee
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent accountants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our Compensation Committee of the Board of Directors are
currently Mr. Moritz and Mr. Nova, neither of whom has ever been an officer or
employee of eToys. Prior to establishing the Compensation Committee in
December 1998, the Board of Directors as a whole performed the functions
delegated to the Compensation Committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation from us for
their service as members of the Board of Directors, although they are reimbursed
for travel and lodging expenses in connection with attendance at Board and
Committee meetings. Under our 1997 Stock Plan, nonemployee directors are
eligible to receive stock option grants and stock purchase rights at the
discretion of the Board of Directors or other administrator of the plan. Under
our 1999 Directors' Stock Option Plan, non-employee directors are eligible to
receive automatic stock option grants upon their initial appointment and at each
of our annual stockholders meetings. As described more fully below under the
heading "Stock Plans." In September 1997 the Board of Directors granted
Mr. Hart an option to purchase 300,000 shares of common stock at $0.005 per
share in connection with his appointment as a member of the Board of Directors.
1/4th of the shares vested upon June 15, 1998 and 1/48th of the total number of
shares vest monthly from and after June 15, 1998. From January 1998 to June
1998, Mr. Hart provided us consulting services. In connection with these
services, Mr. Hart received aggregate payments of $39,000, reimbursement of his
expenses and an option to purchase 63,000 shares of common stock at $0.033 per
share. This option, which vested at the rate of 1/6th per month commencing upon
February 1, 1998, is fully vested.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services
rendered to eToys during the fiscal years ended March 31, 1998 and March 31,
1999 by our (i) Chief Executive Officer, (ii) our four most highly compensated
executive officers who earned more than $100,000 during the fiscal year ended
March 31, 1999, and (iii) one additional executive officer that joined eToys
after the end of fiscal 1998. These individuals are referred to in this Offering
Circular collectively as our named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------
-------------------------------------------- SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- ------------------ -------- ---------- ---------- ------------------ -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Lenk .......... 1998 105,000 -- -- 3,000,000 --
President and Chief
Executive Officer
Louis V. Zambello 1998 50,000 28,750 -- 825,000 --
III(1) ................
Senior Vice President
of Operations
John R. Hnanicek(2) ..... 1998 37,500 15,000 -- 600,000 --
Senior Vice President
and Chief Information
Officer
Steven J. Schoch(3) ..... 1998 20,833 4,167 -- 750,000 --
Senior Vice President
and Chief Financial
Officer
Frank C. Han ............ 1998 93,750 10,000 -- 825,750 --
Senior Vice President
of Product Development
</TABLE>
- ------------------------------
(1) Louis V. Zambello III became Senior Vice President of Operations in
December 1998. On an annual basis, Mr. Zambello's salary would have been
$200,000. Mr. Zambello is entitled to a bonus of $115,000 which vests
monthly over the first year of his employment; the amount in the table
reflects the portion of his bonus that vested in fiscal 1998.
(2) John R. Hnanicek became Senior Vice President and Chief Information Officer
in December 1998. On an annual basis, Mr. Hnanicek's salary would have been
$150,000. Mr. Hnanicek was paid a bonus of $60,000 which vests monthly over
the first year of his employment; the amount in the table reflects the
portion of his bonus that vested in fiscal 1998.
(3) Steven J. Schoch became Senior Vice President and Chief Financial Officer in
January 1999. On an annual basis, Mr. Schoch's salary would have been
$125,000. Mr. Schoch is entitled to a bonus of $25,000 which vests monthly
over the first year of his employment; the amount in the table reflects the
portion of his bonus that vested in fiscal 1998.
We did not pay to our Chief Executive Officer or any named executive officer
any compensation intended to serve as incentive for performance to occur over a
period longer than one year pursuant to a long-term incentive plan in the fiscal
year ended March 31, 1999. We do not have any defined benefit or actuarial plan
with respect to our Chief Executive Officer or any named executive officer under
which benefits are determined primarily by final compensation and years of
service.
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<PAGE>
OPTION GRANTS
The following table provides summary information regarding stock options
granted to our named executive officers during the fiscal year ended March 31,
1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED IN OPTION TERM(3)
OPTIONS FISCAL 1998 EXERCISE PRICE EXPIRATION -------------------------------
NAME GRANTED(#) (%)(1) ($/SHARE)(2) DATE 5% 10%
- ---- ----------- ----------- -------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Lenk.......... 3,000,000(4) 21.25% $0.143 10/21/08 $ 43,279,730 $ 68,915,737
Louis V. Zambello III... 825,000(5)(8) 5.84 1.667 12/31/08 9,854,812 15,692,141
John R. Hnanicek........ 600,000(5) 4.25 1.667 12/31/08 7,167,136 11,412,466
Steven J. Schoch........ 750,000(6)(9) 5.31 3.333 1/31/09 6,922,802 11,023,405
Frank C. Han............ 825,000(4) 5.84 0.143 10/21/08 11,901,925 18,951,827
750(7) 0.01 2.833 1/31/09 7,533 11,996
</TABLE>
- ------------------------------
(1) We granted options for an aggregate of 14,116,650 shares to our employees
and consultants under the 1997 Stock Plan and the 1999 Stock Plan during the
fiscal year ended March 31, 1999. See "Stock Plans".
(2) Options were granted at an exercise price equal to the fair market value of
the common stock, as determined by the Board of Directors on the date of
grant.
(3) The potential realizable value is calculated assuming the exercise price on
the date of grant appreciates at the indicated rate for the entire term of
the option and that the option is exercised at the exercise price and sold
on the last day of its term at the appreciated price. All options listed
have a term of 10 years. Stock price appreciation of 5% and 10% is assumed
pursuant to the rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price will appreciate over the 10-year
option term at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the common stock appreciates over the option
term, no value will be realized from the option grants made to the named
executive officers.
(4) The options become exercisable at the rate of 1/4th of the total number of
shares on October 21, 1999 and 1/48th of the total number of shares monthly
from and after October 21, 1999.
(5) The options are immediately exercisable. However, if exercised, the
underlying shares are subject to a right of repurchase at cost in our favor
which lapses at the rate of 1/4th of the total number of shares on
December 31, 1999 and 1/48th of the total number of shares monthly from and
after December 31, 1999.
(6) The option is immediately exercisable. However, if exercised, the underlying
shares are subject to a right of repurchase at cost in our favor which
lapses at the rate of 1/4th of the total number of shares on January 31,
2000 and 1/48th of the total number of shares monthly from and after
January 31, 2000.
(7) The option is immediately exercisable.
(8) The option provides that in the event we undergo a change in control within
two years following the optionee's commencement of employment, a total of
412,500 shares subject to the option will be released from our repurchase
option.
(9) The option provides that in the event we undergo a change in control within
eighteen months following the optionee's commencement of employment, a total
of 281,250 shares subject to the option will be released from our repurchase
option.
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<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by our named
executive officers as of March 31, 1999.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
MARCH 31, 1999(1) MARCH 31, 1999(1)(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Edward C. Lenk(3).................................... -- 3,000,000 -- $26,570,000
Louis V. Zambello III(4)............................. 825,000 -- $6,050,000 --
John R. Hnanicek(4).................................. 600,000 -- 4,400,000 --
Steven J. Schoch(5).................................. 750,000 -- 4,250,000 --
Frank C. Han(6)...................................... 750 825,000 4,625 7,306,750
</TABLE>
- ------------------------------
(1) No options were exercised as of the completion of the fiscal year ended
March 31, 1999.
(2) Based on the estimated fair market value of $9.00 for our common stock on
March 31, 1999.
(3) The option becomes exercisable at the rate of 1/4th of the total number of
shares on October 21, 1999 and 1/48th of the total number of shares monthly
from and after October 21, 1999.
(4) The options are immediately exercisable. However, if exercised, the
underlying shares are subject to a right of repurchase at cost in our favor
which lapses at the rate of 1/4th of the total number of shares on
December 31, 1999 and 1/48th of the total number of shares monthly from and
after December 31, 1999.
(5) The option is immediately exercisable. However, if exercised, the underlying
shares are subject to a right of repurchase at cost in our favor which
lapses at the rate of 1/4th of the total number of shares on January 31,
2000 and 1/48th of the total number of shares monthly from and after
January 31, 2000.
(6) Mr. Han holds an immediately exercisable option to purchase 750 shares. Mr.
Han holds a second option to purchase 825,000 shares which becomes
exercisable at the rate of 1/4th of the total number of shares on
October 21, 1999 and 1/48th of the total number of shares monthly from and
after October 21, 1999.
STOCK PLANS
1999 STOCK PLAN. The Board of Directors adopted our 1999 Stock Plan in
February 1999 and our stockholders approved it in March 1999. We have reserved a
total of 24,800,000 shares of common stock for issuance under the 1999 Stock
Plan, plus an automatic annual increase on the first day of our fiscal years
beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 5,200,000
shares, 3.0% of our outstanding common stock on the last day of the immediately
preceding fiscal year or such lesser number of shares as the Board of Directors
determines. As of September 30, 1999, options to purchase 5,567,576 shares of
common stock with a weighted average exercise price equal to $18.34 have been
granted, 688 options of which have been exercised.
The 1999 Stock Plan provides for the granting to employees, including
officers and directors, of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, and for the
granting to employees and consultants, of stock purchase rights and nonstatutory
stock options. If an optionee would have the right in any calendar year to
exercise for the first time incentive stock options for shares having an
aggregate fair market value (under all of our plans and determined for each
share as of the date the option to purchase the shares was granted) in excess of
$100,000, any such excess options shall be treated as nonstatutory stock
options. Unless terminated earlier, the 1999 Stock Plan will terminate in
February 2009.
The 1999 Stock Plan may be administered by the Board of Directors or a
committee of the Board, each known as the "administrator". The Board of
Directors currently administers the 1999 Stock Plan. The administrator
determines the terms of options and stock purchase rights granted under the 1999
Stock Plan, including the number of shares subject to an option or stock
purchase right, the exercise or purchase price, and the term and exercisability
of options. The administrator
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<PAGE>
may grant an individual employee options or stock purchase rights under the 1999
Stock Plan during any one fiscal year to purchase a maximum of 9,000,000 shares.
The exercise price of all incentive stock options granted under the 1999 Stock
Plan generally must be at least equal to the fair market value of our common
stock on the date of grant. The administrator has the authority to grant
nonstatutory stock options and stock purchase rights at prices below fair market
value, although the exercise price of such awards granted to our Chief Executive
Officer or our four other most highly compensated officers will generally equal
at least 100% of the fair market value of the common stock on the date of grant.
Payment of the purchase price of options and stock purchase rights may be made
in cash or other consideration as determined by the administrator.
Generally, options granted under the plan have a term of ten years and are
nontransferable. The administrator may grant nonstatutory stock options with
limited transferability rights in circumstances specified in the 1999 Stock
Plan. The administrator determines the vesting terms of options and stock issued
pursuant to stock purchase rights. We expect that options and stock purchase
rights granted under the 1999 Stock Plan generally will vest at the rate of
1/4th of the total number of shares subject to the options or stock purchase
rights 12 months after the date of grant, and 1/48th of such total number of
shares each month thereafter.
If an optionee's continuous status as an employee or consultant terminates
other than as a result of his or her death or disability, his or her option may
be exercised to the extent provided for in the Notice of Stock Option Grant,
following which the option will terminate. If an optionee's continuous status as
an employee or consultant terminates as a result of his or her death or
disability (or, in the case of the optionee's death, within 30 days following
termination of the optionee's continuous status as an employee or consultant)
his or her option may be exercised for twelve months following such date of
death or disability to the extent such right to exercise had accrued through the
date of his or her death or disability. In no event may an option be exercised
following the option expiration date.
In the event that we undergo a change in control as defined in our 1999
Stock Plan, we expect that awards outstanding under the 1999 Stock Plan will be
assumed or equivalent awards substituted by our acquiror. If an acquiror did not
agree to assume or substitute awards, the vesting of outstanding options and
stock issued pursuant to stock purchase rights will accelerate in full prior to
consummation of the transaction. If we are acquired pursuant to a transaction in
which outstanding awards are assumed or substituted by our acquiror and a
participant holding an assumed or substituted award is involuntarily terminated
within 24 months following the acquisition, the vesting of any award held by
such person would accelerate in full immediately prior to the date of his or her
termination. Notwithstanding anything to the contrary, no vesting acceleration
or lapse of a repurchase right will occur if such vesting acceleration or lapse
of a repurchase right will cause a transaction intended to qualify as a "pooling
of interests" to be ineligible for such treatment. Moreover, in the event the
vesting acceleration or lapse of a repurchase right constitutes a "parachute
payment" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended, such vesting acceleration or lapse of a repurchase right may
be limited such that no portion of any benefits will be subject to excise tax
under Section 4999 of the Code.
The Board has the authority to amend or terminate the 1999 Stock Plan as
long as such action does not materially and adversely affect any outstanding
option and provided that stockholder approval for any amendments to the 1999
Stock Plan shall be obtained to the extent required by applicable law.
1997 STOCK PLAN. The Board of Directors adopted and our stockholders
approved our 1997 Stock Plan in March 1997. We have reserved a total of
17,400,000 shares of common stock for issuance under the 1997 Stock Plan. As of
September 30, 1999, options to purchase 2,452,716 shares of common stock with a
weighted average exercise price of $0.15 had been exercised and options to
purchase a total of 12,032,858 shares at a weighted average exercise price of
$0.73 per share were outstanding. As of September 30, 1999, 1,013,150 shares
remained available for future
55
<PAGE>
issuance under the 1997 Stock Plan. However, the Board has determined that all
future grants to employees and consultants will take place under our 1999 Stock
Plan and therefore any shares remaining available for issuance under the 1997
Stock Plan as of the date of this offering will be returned to our authorized
but unissued capital stock and will not be available for future grant. Shares
returning to the 1997 Stock Plan upon cancellation of outstanding options may be
made subject to future grant after the date of this offering. Unless terminated
earlier, the 1997 Stock Plan will terminate in March 2007.
The terms of options and stock purchase rights issued under the 1997 Stock
Plan are generally the same as those which may be issued under the 1999 Stock
Plan, except with respect to the following features. The 1997 Stock Plan does
not impose an annual limitation on the number of shares subject to options or
stock purchase rights which may be issued to any individual employee.
Nonstatutory stock options or stock purchase rights granted under the 1997 Stock
Plan are nontransferable in all cases and must generally be granted with an
exercise price or purchase price equal to at least 85% of the fair market value
of the common stock on the date of grant.
Awards issued prior to May 3, 1999 are governed by change in control
provisions as in effect at the time of grant and as set forth in any applicable
written agreements, including any amendments to such agreements.
BABYCENTER, INC. 1997 STOCK PLAN. In connection with the BabyCenter merger,
we assumed the outstanding options issued under the BabyCenter, Inc. 1997 Stock
Plan. Upon closing of the merger, options outstanding under the BabyCenter plan
became options to purchase an aggregate of 2,720,858 shares of our common stock.
The terms of the BabyCenter options are similar to the terms of options issuable
under our 1999 Stock Plan, except that if we were acquired, such options would
terminate if not assumed, or equivalent options substituted, by our acquiror.
1999 DIRECTORS' STOCK OPTION PLAN. The Board of Directors adopted our 1999
Directors' Stock Option Plan in February 1999 and our stockholders approved it
in March 1999. We have reserved a total of 600,000 shares of common stock for
issuance under the 1999 Directors' Stock Option Plan. The 1999 Directors' Stock
Option Plan became effective May 19, 1999 and, unless terminated earlier, will
continue in effect for ten years. As of the date hereof, no options to purchase
shares of common stock have been issued under the 1999 Directors' Stock Option
Plan. The 1999 Directors' Stock Option Plan is designed to work automatically
without administration; however, to the extent administration is necessary, it
will be performed by the Board of Directors.
The 1999 Directors' Stock Option Plan provides that each person who becomes
a nonemployee director after the effective date of the plan will be granted a
nonstatutory stock option to purchase 60,000 shares of common stock on the date
on which the optionee first becomes a nonemployee director. In addition, on the
date of each annual meeting of stockholders, each nonemployee director will
automatically be granted an additional option to purchase 15,000 shares of
common stock if, on such date, he or she has served on our Board of Directors
for at least six months. All options granted under the 1999 Directors' Stock
Option Plan shall have an exercise price equal to 100% of the fair market value
of the common stock as of the date of grant and will be vested and exercisable
in full immediately upon grant. Options granted under the 1999 Directors' Stock
Option Plan are nontransferable.
A nonemployee director who ceases to serve as a director for any reason
other than death or disability has 90 days after the date he or she ceases to be
a director to exercise options granted under the 1999 Directors' Stock Option
Plan. To the extent that he or she does not exercise an option within such
90 day period, the option will terminate. If a director's service on our Board
of Directors terminates as a result of his or her death or disability (or, in
the case of a nonemployee director's death within the 90 day period following
such director's termination date), the director or the director's estate will
have the right to exercise an option for 12 months following such termination
date. Options granted under the 1999 Directors' Stock Option Plan have a term of
ten years.
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<PAGE>
In the event that we are acquired by another company, we expect that awards
outstanding under the 1999 Directors' Stock Option Plan will be assumed or
equivalent awards substituted by our acquiror. If an acquiror did not agree to
assume or substitute awards, all outstanding awards under the 1999 Directors'
Stock Option Plan would terminate to the extent not previously exercised upon
consummation of the acquisition. The Board of Directors may amend or terminate
the 1999 Directors' Stock Option Plan at any time as long as such action does
not adversely affect any outstanding option and stockholder approval for any
amendments is obtained to the extent required by applicable law.
1999 EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors adopted our 1999
Employee Stock Purchase Plan in February 1999 and our stockholders approved it
in March 1999. We have reserved a total of 1,000,000 shares of common stock for
issuance under the 1999 Employee Stock Purchase Plan, plus an automatic annual
increase on the first day of each of our fiscal years beginning in 2000, 2001,
2002, 2003 and 2004 equal to the lesser of 620,000 shares, 0.5% of our
outstanding common stock on the last day of the immediately preceding fiscal
year, or such lesser number of shares as the Board of Directors shall determine.
The 1999 Employee Stock Purchase Plan became effective May 19, 1999 and, unless
terminated earlier by the Board of Directors, it will continue in effect for
twenty years.
The 1999 Employee Stock Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code. This plan consists of a series of
overlapping offering periods of 24 months' duration. Offering periods begin on
May 1 and November 1 of each year during the term of the plan (the first
offering period began on May 20, 1999 and will terminate on April 30, 2001). The
Board of Directors has the authority under the plan to set new offering or
purchase periods.
The Board of Directors or a committee appointed by the Board of Directors
will administer the 1999 Employee Stock Purchase Plan. The 1999 Employee Stock
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation. The
purchase price is equal to the lower of 85% of the fair market value of the
common stock at the beginning of each offering period or at the end of each
purchase period; provided, however, that for purposes of the first offering
period, the purchase price will be equal to the lower of 85% of the price of our
common stock to the public as set forth in our final prospectus for our initial
public offering as filed with the SEC, and the value of the common stock at
April 30, 2001. In circumstances specified in the 1999 Employee Stock Purchase
Plan, the purchase price may be adjusted during an offering period to avoid our
incurring adverse accounting charges. Our employees, including officers and
employee directors, are eligible to participate in the 1999 Employee Stock
Purchase Plan if they are employed by us for at least 20 hours per week and more
than five months per year. Employees may end their participation in the 1999
Employee Stock Purchase Plan at any time, and participation ends automatically
on termination of employment. If the fair market value of the common stock on a
purchase date is less than the fair market value at the beginning of the
offering period, each participant in the 1999 Employee Stock Purchase Plan shall
automatically be withdrawn from the offering period as of the end of the
purchase date and re-enrolled in the new 24-month offering period beginning on
the first business day following the purchase date.
The 1999 Employee Stock Purchase Plan limits the number of stock purchase
rights that can be granted to any single employee. An employee cannot be granted
rights to purchase stock under this plan if his or her rights accrue at a rate
which exceeds $25,000 worth of stock in any calendar year. In addition, no
employee may purchase more than 9,000 shares of common stock during any one
purchase period (equivalent to a maximum of 36,000 shares over a 24-month
offering period).
In the event that we are acquired by another company, the 1999 Employee
Stock Purchase Plan provides that each right to purchase stock will be assumed
or equivalent rights substituted by
57
<PAGE>
our acquiror. If an acquiror did not agree to assume or substitute stock
purchase rights, the offering period then in progress would be shortened and a
new exercise date occurring prior to consummation of the acquisition would be
set. The Board of Directors has the power to amend or terminate the 1999
Employee Stock Purchase Plan and to change or terminate offering periods as long
as such action does not adversely affect any outstanding rights to purchase
stock thereunder. However, the Board of Directors may amend or terminate the
1999 Employee Stock Purchase Plan or an offering period even if it would
adversely affect outstanding options in order to avoid our incurring adverse
accounting charges.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- - any breach of their duty of loyalty to the corporation or its stockholders;
- - acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
- - unlawful payments of dividends or unlawful stock repurchases or redemptions;
or
- - any transaction from which the director derived an improper personal benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our Bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding arising out of such person's services as a
director or executive officer of eToys, any subsidiary of eToys or any other
entity to which the person provides services at our request. We believe that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
EMPLOYMENT AGREEMENTS
In December 1998, we entered into an Offer Letter with John R. Hnanicek, our
Chief Information Officer. The agreement entitles Mr. Hnanicek to a salary of
$150,000 per year and a signing bonus of $60,000 which vests monthly over the
first year of his employment. In December 1998, we granted Mr. Hnanicek an
option to purchase 600,000 shares of common stock
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<PAGE>
at $1.667 per share. The option is immediately exercisable and, if exercised,
the underlying shares are subject to a right of repurchase in our favor. In the
event of the termination of Mr. Hnanicek's employment, our repurchase option
enables us to repurchase a specific number of his shares at $1.667 per share.
Our repurchase option lapses over four years according to the following
schedule: 1/4th of the shares will be released from our repurchase option on
December 31, 1999 and 1/48th of the total number of shares will be released from
our repurchase option monthly from and after December 31, 1999 until
December 31, 2002. If Mr. Hnanicek is terminated without cause during his first
six to 12 months of employment, an additional 1/48th of such shares shall be
released from our repurchase option per each month of completed employment. This
option expires on December 31, 2008.
In December 1998, we entered into an Offer Letter with Louis V. Zambello
III, our Senior Vice President of Operations. The agreement entitles
Mr. Zambello to a salary of $200,000 per year, a signing bonus of $115,000 which
vests monthly over the first year of his employment and severance benefits equal
to $100,000 if he is terminated without cause during the first 12 months of his
employment with us. In December 1998, we granted Mr. Zambello an option to
purchase 825,000 shares of common stock at $1.667 per share. The option is
immediately exercisable and, if exercised, the underlying shares are subject to
a right of repurchase in our favor. In the event of the termination of
Mr. Zambello's employment, our repurchase option enables us to repurchase a
specific number of his shares at $1.667 per share. Our repurchase option lapses
over four years according to the following schedule: 1/4th of the shares will be
released from our repurchase option on December 31, 1999 and 1/48th of the total
number of shares will be released from our repurchase option monthly from and
after December 31, 1999 until December 31, 2002. If Mr. Zambello is terminated
without cause during his first six to 12 months of employment, an additional
1/48th of such shares shall be released from our repurchase option for each
month of completed employment. Furthermore, if we experience a change of control
within two years following his commencement of employment, a total of 412,500 of
such shares shall immediately be released from our repurchase option. This
offering will not constitute such a change of control. This option expires on
December 31, 2008.
In January 1999, we entered into an Offer Letter with Steven J. Schoch, our
Chief Financial Officer. The agreement entitles Mr. Schoch to a salary of
$125,000 per year, a signing bonus of $25,000 which vests monthly over the first
year of his employment and severance benefits equal to $93,750 if he is
terminated without cause during the first 12 months of his employment with us.
In January 1999, we granted Mr. Schoch an option to purchase 750,000 shares of
common stock at $3.333 per share. The option is immediately exercisable and, if
exercised, the underlying shares are subject to a right of repurchase in our
favor. In the event of the termination of Mr. Schoch's employment, our
repurchase option enables us to repurchase a specific number of his shares at
$3.333 per share. Our repurchase option lapses over four years according to the
following schedule: 1/4th of the shares will be released from our repurchase
option on January 31, 2000 and 1/48th of the total number of shares will be
released from our repurchase option monthly from and after January 31, 2000
until January 31, 2003. If Mr. Schoch is terminated without cause during his
first six to 12 months of employment, an additional 1/48th of such shares will
be released from our repurchase option for each month of completed employment.
Furthermore, if we experience a change of control within 18 months following his
commencement of employment, a total of 281,250 of such shares shall immediately
be released from our repurchase option. This offering will not constitute such a
change of control. This option expires on January 31, 2009.
In May 1999, we entered into an Offer Letter with Janine Bousquette, our
Senior Vice President of Marketing. The agreement entitles Ms. Bousquette to a
salary of $138,462 per year, a signing bonus of $75,000 which vests monthly over
the first year of her employment and severance benefits equal to $100,000 if she
is terminated without cause during the first 12 months of her
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<PAGE>
employment with us. In May 1999, we granted to Ms. Bousquette an option to
purchase 480,000 shares of common stock at $11.00 per share. The option is
immediately exercisable and, if exercised, the underlying shares are subject to
a right of repurchase in our favor. In the event of the termination of
Ms. Bousquette's employment, our repurchase option enables us to repurchase a
specific number of her shares at $11.00 per share. Our repurchase option lapses
over four years according to the following schedule: 1/4th of the shares will be
released from our repurchase option on May 17, 2000 and 1/48th of the total
number of shares will be released from our repurchase option monthly from and
after May 17, 2000 until May 17, 2003. If Ms. Bousquette is terminated without
cause during the first six months of her employment, an additional 1/8th of such
shares shall be released from our repurchase option. If Ms. Bousquette is
terminated without cause during her first six to 12 months of employment, an
additional 1/48th of such shares shall be released from our repurchase option
for each month of completed employment. Furthermore, if we experience a change
of control within 18 months following her commencement of employment, a total of
180,000 of such shares shall immediately be released from our repurchase option.
This offering will not constitute such a change of control. This option expires
on May 17, 2009.
We have entered into indemnification agreements with our officers and
directors which may require us, among other things, to indemnify our officers
and directors against liabilities that may arise by reason of their status or
service as officers or directors, other than liabilities arising from willful
misconduct of a culpable nature, and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified. See
the section "Management" under the heading "Limitation of Liability and
Indemnification Matters".
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<PAGE>
CERTAIN TRANSACTIONS
In June 1997, we sold 7,500,000 shares of common stock to Edward C. Lenk at
$0.005 per share in exchange for $18,750 in cash and a promissory note in the
principal amount of $18,750. The note is full recourse and secured by 3,750,000
of Mr. Lenk's shares. 3,750,000 of Mr. Lenk's shares are subject to a repurchase
option in our favor. In the event of the termination of his employment, our
repurchase option enables us to repurchase a specific number of Mr. Lenk's
shares at $0.005 per share. Our repurchase option lapses over four years
according to the following schedule: 1/4th of such shares were released from our
repurchase option on December 1, 1997, and 1/48th of such total are released
from our repurchase option monthly from and after December 1, 1997 until
December 1, 2000. In addition, all shares are immediately released from our
repurchase option upon a change of control. This offering will not constitute
such a change of control.
In October 1998, we issued Mr. Lenk an option to purchase 3,000,000 shares
of common stock at $0.143 per share. The option vests over four years according
to the following schedule: 1/4th of the shares vested on October 21, 1999 and
1/48th of the total number of shares vest monthly from and after October 21,
1999 until October 21, 2002. This option expires on October 21, 2008.
In June 1997, we sold 2,500,002 shares of common stock to Frank C. Han at
$0.005 per share in exchange for $6,250 in cash and a promissory note in the
principal amount of $6,250. The note is full recourse and secured by 1,250,001
of Mr. Han's shares. 1,250,001 of Mr. Han's shares are subject to a repurchase
option in our favor. In the event of the termination of his employment, our
repurchase option enables us to repurchase a specific number of Mr. Han's shares
at $0.005 per share. Our repurchase option lapses over four years according to
the following schedule: 1/4th of such shares were released from our repurchase
option on February 1, 1998, and 1/48th of such total are released from our
repurchase option monthly from and after February 1, 1998 until February 1,
2001. In addition, all shares are immediately released from our repurchase
option upon a change of control. This offering will not constitute such a change
of control.
In October 1998, we issued Mr. Han an option to purchase 825,000 shares of
common stock at $0.143 per share. The option vests over four years according to
the following schedule: 1/4th of the shares vested on October 21, 1999 and
1/48th of the total number of shares vest monthly from and after October 21,
1999 until October 21, 2002. This option expires on October 21, 2008. In January
1999, we issued Mr. Han a fully vested option to purchase 750 shares of common
stock at $2.833 per share. This option expires on January 31, 2009.
In September 1997 we issued Peter C.M. Hart a stock option to purchase
300,000 shares of common stock at $0.005 per share. The option vests over four
years according to the following schedule: 1/4th of the shares subject to the
option vested on June 15, 1998 and 1/48th of the total have vested monthly from
and after June 15, 1998 until June 15, 2001. This option expires on
September 29, 2007. In September 1997, we sold Mr. Hart a promissory note in the
amount of $20,000 and a warrant to purchase 48,387 shares of preferred stock at
$0.207 per share. The note converted into 98,817 shares of preferred stock in
December 1997 and Mr. Hart exercised the warrant in full in March 1999.
Mr. Hart was appointed a Director in October 1997. From January 1998 to June
1998, Mr. Hart provided us part-time consulting services. In connection with
these services, in February 1998 we issued Mr. Hart a stock option to purchase
63,000 shares of common stock at $0.033 per share. This option vested over six
months according to the following schedule: 1/6th of the shares subject to this
option vested monthly from and after February 1, 1998 until July 1, 1998. This
option expires on February 5, 2008.
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<PAGE>
The following table summarizes the shares of common stock and preferred
stock purchased by our directors and 5% stockholders and persons and entities
associated with them in private placement transactions. Each share of preferred
stock automatically converted into one share of common stock upon the closing of
our initial public offering in May 1999. The shares of common stock were sold at
$0.005 per share, the shares of Series A preferred stock were sold at $0.207 per
share, the shares of Series B preferred stock were sold at $0.701 per share and
the shares of Series C preferred stock were sold at $10.00 per share. For more
details, see the section "Principal Stockholders".
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B SERIES C
ENTITIES AFFILIATED WITH DIRECTORS STOCK PREFERRED PREFERRED PREFERRED
---------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Entities affiliated with Highland Capital
Partners (Daniel Nova)(1)................... -- -- 11,411,184 999,999
Entities affiliated with Sequoia Capital
(Michael Moritz)(2)......................... -- -- 7,131,990 999,999
Entities affiliated with DynaFund Ventures
(Tony Hung)(3).............................. -- 4,838,709 2,852,796 --
Peter C.M. Hart............................... -- 147,204 -- --
OTHER 5% STOCKHOLDERS
- ----------------------------------------------
idealab!...................................... 18,320,001 -- -- --
Intel Corporation............................. -- 4,838,709 2,852,793 --
Entities affiliated with idealab! Capital
Management I, LLC(4)........................ -- 4,838,709 2,139,594 --
</TABLE>
- ------------------------
(1) Includes shares held by Highland Capital Partners III Limited Partnership,
Highland Entrepreneurs' Fund III Limited Partnership, Highland Capital
Partners IV Limited Partnership and Highland Entrepreneurs' Fund IV Limited
Partnership. Daniel Nova is a general partner of the general partner of the
Highland entities and is a Director of eToys. He disclaims beneficial
ownership of the shares held by the entities except to the extent of his
proportionate interest therein.
(2) Includes shares held by Sequoia Capital VIII, Sequoia International
Technology Partners VIII (Q), CMS Partners LLC, Sequoia International
Technology Partners VIII, Sequoia 1997, and Sequoia Capital Franchise Fund.
Michael Moritz is a general partner of the general partners of the Sequoia
entities and is a Director of eToys. He disclaims beneficial ownership of
the shares held by the entities except to the extent of his proportionate
interest therein.
(3) Includes shares held by DynaFund L.P. and DynaFund International L.P. Tony
Hung is a vice president of the general partner of the DynaFund entities and
is a Director of eToys. He disclaims beneficial ownership of the shares held
by the entities except to the extent of his proportionate interest therein.
(4) Includes shares held by idealab! Capital Partners I-A, LP and idealab!
Capital Partners I-B, LP. idealab! Capital Management I, LLC is the general
partner of idealab! Capital Partners I-A, LP and idealab! Capital
Partners I-B, LP, and exercises voting and investment power over the shares
held by these entities.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of September 30, 1999, by:
- - each stockholder known by us to own beneficially more than 5% of the common
stock,
- - each director,
- - our named executive officers, and
- - all directors and named executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
------------------------
<S> <C> <C>
NUMBER PERCENTAGE(2)
---------- -----
idealab! ................................................... 18,320,001 15.31%
130 West Union Street
Pasadena, CA 91103
Entities affiliated with Highland Capital
Partners(3) .............................................. 12,411,183 10.37
Two International Place
Boston, MA 02110
Entities affiliated with Sequoia Capital
Partners(4) .............................................. 8,131,989 6.80
3000 Sand Hill Road, Bldg. 4, Suite 280
Menlo Park, CA 94025
Entities affiliated with DynaFund
Ventures(5) .............................................. 7,691,505 6.43
21311 Hawthorne Blvd., Suite 300
Torrance, CA 90503
Intel Corporation .......................................... 7,691,502 6.43
2200 Mission Blvd.
Santa Clara, CA 95052
Entities affiliated with idealab! Capital .................. 6,978,303 5.83
Management I, LLC(6)
130 West Union Street
Pasadena, CA 91103
Daniel J. Nova(7) .......................................... 12,411,183 10.37
Michael Moritz(8) .......................................... 8,131,989 6.80
Tony Hung(9) ............................................... 7,691,505 6.43
Edward C. Lenk(10) ......................................... 8,303,500 6.89
Peter C.M. Hart(11) ........................................ 391,454 *
Frank C. Han(12) ........................................... 2,712,940 2.26
Louis V. Zambello III(13) .................................. 825,000 *
Steven J. Schoch(14) ....................................... 750,000 *
John R. Hnanicek(15) ....................................... 600,000 *
Matthew N. Glickman ........................................ 2,104,211 1.76
Janine Bousquette(16) ...................................... 480,000 *
All directors and named executive officers as a group (11
persons)(17) . 44,401,782 37.11%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Except pursuant to applicable community property laws or as indicated in
the footnotes to this table, to our knowledge, each stockholder identified
in the table possesses sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by such stockholder.
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<PAGE>
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within
60 days after September 30, 1999 are deemed outstanding, while such shares
are not deemed outstanding for computing percentage ownership of any other
person.
(3) Includes 10,954,737 shares held by Highland Capital Partners III Limited
Partnership, 456,447 shares held by Highland Entrepreneurs' Fund III
Limited Partnership, 960,000 shares held by Highland Capital Partners IV
Limited Partnership and 39,999 shares held by Highland Entrepreneurs' Fund
IV Limited Partnership. Highland Management Partners III LLC is the general
partner of Highland Capital Partners III Limited Partnership and exercises
voting and investment power over the shares held by this entity. HEF III
LLC is the general partner of Highland Entrepreneurs' Fund III Limited
Partnership and exercises voting and investment power over the shares held
by this entity. Highland Management Partners IV LLC is the general partner
of Highland Capital Partners IV Limited Partnership and exercises voting
and investment power over the shares held by this entity. Highland
Entrepreneurs' Fund IV LLC is the general partner of Highland
Entrepreneurs' Fund IV Limited Partnership and exercises voting and
investment power over the shares held by this entity.
(4) Includes 6,463,722 shares held by Sequoia Capital VIII, 427,920 shares held
by Sequoia International Technology Partners VIII (Q), 142,641 shares held
by CMS Partners LLC, 82,017 shares held by Sequoia International Technology
Partners VIII, 15,690 shares held by Sequoia 1997, and 999,999 shares held
by Sequoia Capital Franchise Fund. SC VIII Management, LLC is the general
partner of Sequoia Capital VIII, Sequoia International Technology Partners
VIII and Sequoia International Technology Partners VIII (Q) and exercises
investment and voting power over the shares held by these entities. SC VIII
Management, LLC also exercises investment and voting power over the shares
held by CMS Partners LLC and Sequoia 1997. SCFF Management, LLC is the
general partner of Sequoia Capital Franchise Fund and exercises investment
and voting power over the shares held by this entity.
(5) Includes 4,155,894 shares held by DynaFund International L.P. and 3,535,611
shares held by DynaFund L.P. DynaFund Ventures LLC is the general partner
of DynaFund L.P. and DynaFund International L.P. and exercises investment
and voting power over the shares held by these entities.
(6) Includes 6,562,359 shares held by idealab! Capital Partners I-A, LP and
415,944 shares held by idealab! Capital Partners I-B, LP. idealab! Capital
Management I, LLC is the general partner of idealab! Capital Partners I-A,
LP and idealab! Capital Partners I-B, LP, and exercises voting and
investment power over the shares held by these entities. William S. Elkus
and William T. Gross exercise voting and investment power over idealab!
Capital Management I, LLC.
(7) Includes 10,954,737 shares held by Highland Capital Partners III Limited
Partnership, 456,447 shares held by Highland Entrepreneurs' Fund III
Limited Partnership, 960,000 shares held by Highland Capital Partners IV
Limited Partnership and 39,999 shares held by Highland Entrepreneurs' Fund
IV Limited Partnership. Highland Management Partners III LLC is the general
partner of Highland Capital Partners III Limited Partnership and exercises
voting and investment power over the shares held by this entity. HEF III
LLC is the general partner of Highland Entrepreneurs' Fund III Limited
Partnership and exercises voting and investment power over the shares held
by this entity. Highland Management Partners IV LLC is the general partner
of Highland Capital Partners IV Limited Partnership and exercises voting
and investment power over the shares held by this entity. Highland
Entrepreneurs' Fund IV LLC is the general partner of Highland
Entrepreneurs' Fund IV Limited Partnership and exercises voting and
investment power over the shares held by this entity. Daniel Nova is a
general partner of the general partners of the Highland entities and is a
Director of eToys. He
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disclaims beneficial ownership of the shares held by the entities except to
the extent of his proportionate interest therein.
(8) Includes 6,463,722 shares held by Sequoia Capital VIII, 427,920 shares held
by Sequoia International Technology Partners VIII (Q), 142,641 shares held
by CMS Partners LLC, 82,017 shares held by Sequoia International Technology
Partners VIII, 15,690 shares held by Sequoia 1997, and 999,999 shares held
by Sequoia Capital Franchise Fund. SC VIII Management, LLC is the general
partner of Sequoia Capital VIII, Sequoia International Technology Partners
VIII and Sequoia International Technology Partners VIII (Q) and exercises
investment and voting power over the shares held by these entities.
SC VIII Management, LLC also exercises investment and voting power over the
shares held by CMS Partners LLC and Sequoia 1997. SCFF Management, LLC is
the general partner of Sequoia Capital Franchise Fund and exercises
investment and voting power over the shares held by this entity. Michael
Moritz is a general partner of the general partners of the Sequoia entities
and is a Director of eToys. He disclaims beneficial ownership of the shares
held by the entities except to the extent of his proportionate interest
therein.
(9) Includes 4,155,894 shares held by DynaFund International L.P. and 3,535,611
shares held by DynaFund L.P. DynaFund Ventures LLC is the general partner
of DynaFund L.P. and DynaFund International L.P. and exercises investment
and voting power over the shares held by these entities. Tony Hung is a
vice president of the general partner of the DynaFund entities and is a
Director of eToys. He disclaims beneficial ownership of the shares held by
the entities except to the extent of his proportionate interest therein.
(10) Includes 812,500 shares issuable upon exercise of options which will be
vested within 60 days of September 30, 1999.
(11) Includes 244,250 shares issuable upon exercise of options which will be
vested within 60 days of September 30, 1999.
(12) Includes 224,188 shares issuable upon exercise of an option which will be
vested within 60 days of September 30, 1999.
(13) Includes 825,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of September 30, 1999, but which are subject to
a right of repurchase in our favor at cost in the event Mr. Zambello
ceases employment with us.
(14) Includes 750,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of September 30, 1999, but which are subject to
a right of repurchase in our favor at cost in the event Mr. Schoch ceases
employment with us.
(15) Includes 600,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of September 30, 1999, but which are subject to
a right of repurchase in our favor at cost in the event Mr. Hnanicek
ceases employment with us.
(16) Includes 480,000 shares issuable upon exercise of an option which will be
exercisable within 60 days of September 30, 1999, but which are subject to
a right of repurchase in our favor at cost in the event Ms. Bousquette
ceases employment with us.
(17) Includes the shares described in Notes 7 through 16.
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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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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.
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
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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 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
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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 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
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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
(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
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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,
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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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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 September 30, 1999, we had approximately $9.5 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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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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- 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
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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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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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- - 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.
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
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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.
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
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- - 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.
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.
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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 September 30, 1999, there were 119,643,088 shares of common stock
outstanding, held of record by approximately 600 stockholders. In addition, as
of September 30, 1999, there were 20,099,513 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. For more details, see
the section "Dividend Policy". In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference of
any outstanding preferred stock. The common stock has no preemptive or
conversion rights, other subscription rights, or redemption or sinking fund
provisions. All outstanding shares of common stock are fully paid and
non-assessable.
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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 November 15, 1999, there were warrants outstanding to purchase a total
of (a) 11,412 shares of common stock at a price of $7.01 per share, and
(b) 2,500 shares of common stock at a price of $50.375 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 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
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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 at our first
annual meeting of stockholders following the date on which we have at least 800
stockholders, which is expected to be 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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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain Federal income tax considerations that
are anticipated to be material for original purchasers of the notes 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 tax payers 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
evidence 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 the section "Description of the Notes" under the heading "Conversion
Rights."
SALE OR DISPOSITION
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.
84
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth, as of , 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
OF NOTES PERCENT OF COMMON
BENEFICIALLY TOTAL COMMON STOCK STOCK TO BE
OWNED AND OUTSTANDING OWNED PRIOR TO REGISTERED
NAME OFFERED HEREBY NOTES THE NOTE OFFERING HEREBY (1)
- ---- --------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
</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.
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
December 1, 1999 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.
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
85
<PAGE>
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
securityholder 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 securityholder 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 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"
under the heading "You Cannot Be Sure That an Active Trading Market Will Develop
for the Notes."
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
86
<PAGE>
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, 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, 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.
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 financial
statements at March 31, 1998 and 1999, and for each of the two years in the
period ended March 31, 1999 and of BabyCenter, Inc. at September 30, 1997 and
1998 and March 31, 1999 and for the period from inception (February 11, 1997) to
September 30, 1997, the year ended September 30, 1998 and for the six months
ended March 31, 1999 as set forth in their report. We've included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
AVAILABLE 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.
eToys's common stock is listed on the Nasdaq Stock Market-National Market System
and such reports, proxy statements
87
<PAGE>
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.
88
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ETOYS INC.
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at March 31, 1998 and 1999 and
September 30, 1999 (unaudited)............................ F-3
Consolidated Statements of Operations for the years ended
March 31, 1998 and 1999 and six months ended September 30,
1998 and 1999 (unaudited)................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended March 31, 1998 and 1999 and six
months ended September 30, 1998 and 1999 (unaudited)...... F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1998 and 1999 and six months ended September 30,
1998 and 1999 (unaudited)................................. F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended March 31, 1999.............. F-20
Unaudited Pro Forma Condensed Combined Statement of
Operations for the six months ended September 30, 1999.... F-21
Unaudited Pro Forma Condensed Combined Balance Sheet at
March 31, 1999............................................ F-22
Notes to Unaudited Pro Forma Condensed Combined Financial
Information............................................... F-23
BABYCENTER, INC.
Report of Independent Auditors.............................. F-26
Balance Sheets at September 30, 1997 and 1998 and March 31,
1999...................................................... F-27
Statements of Operations for the period from inception
(February 11, 1997) to September 30, 1997, the year ended
September 30, 1998 and the six months ended March 31, 1998
(unaudited) and 1999...................................... F-28
Statements of Stockholders' Equity (Deficit) for the period
from inception (February 11, 1997) to September 30, 1997,
the year ended September 30, 1998 and six months ended
March 31, 1999............................................ F-29
Statements of Cash Flows for the period from inception
(February 11, 1997) to September 30, 1997, the year ended
September 30, 1998 and the six months ended March 31, 1998
(unaudited) and 1999...................................... F-30
Notes to Financial Statements............................... F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
eToys Inc.
We have audited the accompanying consolidated balance sheets of eToys Inc.
as of March 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of eToys Inc. as
of March 31, 1998 and 1999, and the consolidated results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Los Angeles, California
May 3, 1999
F-2
<PAGE>
ETOYS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1999 1999
---------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,552 $ 20,173 $140,601
Inventories............................................... 224 5,067 51,379
Prepaids and other current assets......................... 35 1,577 18,684
-------- -------- --------
Total current assets........................................ 1,811 26,817 210,664
Property and equipment:
Equipment................................................. 155 1,267 9,775
Purchased software........................................ -- 126 4,748
Furniture and fixtures.................................... 8 10 733
Leasehold improvements.................................... 15 371 874
Assets under capital lease................................ -- 731 7,235
-------- -------- --------
178 2,505 23,365
Accumulated depreciation and amortization................. (18) (369) (2,156)
-------- -------- --------
160 2,136 21,209
Goodwill (net of accumulated amortization of $319 and $9,930
at March 31, 1999 and September 30, 1999, respectively)... 956 637 180,066
Other assets................................................ -- 1,076 2,238
-------- -------- --------
Total assets................................................ $ 2,927 $ 30,666 $414,177
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 346 $ 4,236 $ 66,471
Accrued expenses.......................................... 9 530 6,798
Current portion of long-term notes payable and capital
lease obligations....................................... -- 230 3,083
-------- -------- --------
Total current liabilities................................... 355 4,996 76,352
Long-term notes payable and capital lease obligations....... -- 477 6,371
Redeemable Convertible Preferred Stock, 19,593,089 shares
authorized:
Series A Preferred Stock; $.0001 par value; 6,318,017,
7,023,645 and none shares issued and outstanding at
March 31, 1998 and 1999 and September 30, 1999,
respectively.......................................... 3,917 4,355 --
Series B Preferred Stock, $.0001 par value, 11,886,649
shares issued and outstanding at March 31, 1998 and
1999, respectively, and none issued or outstanding at
September 30, 1999.................................... -- 24,952 --
Series C Preferred Stock, $.0001 par value, 666,666
shares issued and outstanding at March 31, 1998 and
1999, respectively, and none issued or outstanding at
September 30, 1999.................................... -- 19,984 --
Commitments and contingencies...............................
Stockholders' equity:
Common Stock, $.0001 par value, 600,000,000 shares
authorized; 32,799,276, 34,535,415 and 119,643,088
shares issued and outstanding at March 31, 1998 and 1999
and September 30, 1999, respectively.................... 3 3 12
Additional paid-in capital................................ 1,003 45,837 474,886
Receivables from stockholders............................. (30) (138) (1,892)
Deferred compensation..................................... (53) (38,974) (44,997)
Accumulated other comprehensive loss...................... -- -- (2)
Accumulated deficit....................................... (2,268) (30,826) (96,553)
-------- -------- --------
Total stockholders' equity (deficit)........................ (1,345) (24,098) 331,454
-------- -------- --------
Total liabilities and stockholders' equity.................. $ 2,927 $ 30,666 $414,177
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ETOYS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
------------------- -------------------------
1998 1999 1998 1999
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales........................................ $ 687 $ 29,959 $ 989 $ 21,281
Cost of sales.................................... 568 24,246 807 17,209
------- -------- ------- --------
Gross profit..................................... 119 5,713 182 4,072
Operating expenses:
Marketing and sales............................ 1,290 20,719 3,742 31,585
Product development............................ 421 3,608 1,101 17,023
General and administrative..................... 676 4,352 893 7,254
Goodwill amortization.......................... -- 319 159 9,626
Deferred compensation amortization............. 2 5,814 113 7,096
------- -------- ------- --------
Total operating expenses..................... 2,389 34,812 6,008 72,584
------- -------- ------- --------
Operating loss................................... (2,270) (29,099) (5,826) (68,512)
Other income (expense):
Interest income................................ 18 589 316 2,966
Interest expense............................... (15) (47) (44) (180)
------- -------- ------- --------
Loss before provision for taxes.................. (2,267) (28,557) (5,554) (65,726)
Provision for taxes.............................. (1) (1) -- (1)
------- -------- ------- --------
Net loss......................................... $(2,268) $(28,558) $(5,554) $(65,727)
======= ======== ======= ========
Basic net loss per equivalent share.............. $ (0.09) $ (0.85) $ (0.17) $ (0.71)
======= ======== ======= ========
Pro forma basic net loss per equivalent share.... $ (0.08) $ (0.35) $ (0.07) $ (0.60)
======= ======== ======= ========
Shares used to compute basic net
loss per equivalent share...................... 25,130 33,428 32,866 92,960
======= ======== ======= ========
Shares used to compute pro forma basic net loss
per equivalent share........................... 30,233 81,923 74,645 108,784
======= ======== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
ETOYS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLES
----------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
----------- --------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1997.................. -- $ -- $ -- $ -- $ --
Issuance of Common Stock................ 26,569,275 3 917 -- --
Restricted stock issued................. 6,080,001 -- 30 (30) --
Exercise of stock options............... 150,000 -- 1 -- --
Deferred compensation................... -- -- 55 -- (55)
Amortization of deferred compensation... -- -- -- -- 2
Comprehensive loss:
Net loss.............................. -- -- -- -- --
Comprehensive loss......................
----------- ------ -------- -------- ---------
Balance at March 31, 1998................. 32,799,276 3 1,003 (30) (53)
Restricted stock issued................. 525,000 -- 35 (140) --
Exercise of stock options............... 1,211,139 -- 32 -- --
Issuance of warrants.................... -- -- 32 -- --
Deferred compensation................... -- -- 44,735 -- (44,735)
Amortization of deferred compensation... -- -- -- -- 5,814
Repayment of receivables from
stockholders.......................... -- -- -- 32 --
Comprehensive loss:
Net loss.............................. -- -- -- -- --
Comprehensive loss......................
----------- ------ -------- -------- ---------
Balance at March 31, 1999................. 34,535,415 $ 3 $ 45,837 $ (138) $ (38,974)
Proceeds from initial public offering,
net of $2,606 issuance costs.......... 9,568,000 1 175,836 -- --
Conversion of Redeemable Convertible
Preferred Stock into Common Stock..... 58,779,267 6 49,296 -- --
Exercise of stock options............... 757,311 -- 342 -- --
Common Stock issued for acquisition of
BabyCenter............................ 16,003,095 2 190,456 -- --
Deferred compensation, net.............. -- -- 13,119 -- (13,119)
Amortization of deferred compensation... -- -- -- -- 7,096
Assumption of receivables from
stockholders.......................... -- -- -- (1,862) --
Repayment of receivables from
stockholders.......................... -- -- -- 108 --
Comprehensive loss:
Net loss.............................. -- -- -- -- --
Foreign currency translation loss..... -- -- -- -- --
Comprehensive loss......................
----------- ------ -------- -------- ---------
Balance at September 30, 1999
(unaudited)............................. 119,643,088 $ 12 $474,886 $ (1,892) $ (44,997)
=========== ====== ======== ======== =========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
LOSS DEFICIT TOTAL
------------------ --------------- ---------
<S> <C> <C> <C>
Balance at April 1, 1997.................. $ -- $ -- $ --
Issuance of Common Stock................ -- -- 920
Restricted stock issued................. -- -- --
Exercise of stock options............... -- -- 1
Deferred compensation................... -- -- --
Amortization of deferred compensation... -- -- 2
Comprehensive loss:
Net loss.............................. -- (2,268) (2,268)
---------
Comprehensive loss...................... (2,268)
------ --------- ---------
Balance at March 31, 1998................. -- (2,268) (1,345)
Restricted stock issued................. -- -- (105)
Exercise of stock options............... -- -- 32
Issuance of warrants.................... -- -- 32
Deferred compensation................... -- -- --
Amortization of deferred compensation... -- -- 5,814
Repayment of receivables from
stockholders.......................... -- -- 32
Comprehensive loss:
Net loss.............................. -- (28,558) (28,558)
---------
Comprehensive loss...................... (28,558)
------ --------- ---------
Balance at March 31, 1999................. -- $ (30,826) $ (24,098)
Proceeds from initial public offering,
net of $2,606 issuance costs.......... -- -- 175,837
Conversion of Redeemable Convertible
Preferred Stock into Common Stock..... -- -- 49,302
Exercise of stock options............... -- -- 342
Common Stock issued for acquisition of
BabyCenter............................ -- -- 190,458
Deferred compensation, net.............. -- -- --
Amortization of deferred compensation... -- -- 7,096
Assumption of receivables from
stockholders.......................... -- -- (1,862)
Repayment of receivables from
stockholders.......................... -- -- 108
Comprehensive loss:
Net loss.............................. -- (65,727) (65,727)
Foreign currency translation loss..... (2) -- (2)
---------
Comprehensive loss...................... (65,729)
------ --------- ---------
Balance at September 30, 1999
(unaudited)............................. $ (2) $ (96,553) $ 331,454
====== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ETOYS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
------------------- ---------------------------
1998 1999 1998 1999
-------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(2,268) $(28,558) $(5,554) $(65,727)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash interest.......................................... 15 70 38 --
Nonemployee stock compensation............................ 33 -- -- --
Deferred compensation amortization related to stock
options................................................. 2 5,814 113 7,096
Depreciation.............................................. 18 411 109 1,373
Amortization of intangibles............................... -- 319 159 9,906
Loss on disposal of property and equipment................ -- 6 -- --
Other, net................................................ -- -- -- 71
Changes in operating assets and liabilities:
Inventories............................................. (198) (4,843) (1,667) (44,692)
Prepaids and other current assets....................... (35) (1,542) (2,892) (15,500)
Accounts payable........................................ 297 3,890 1,964 59,660
Accrued expenses........................................ 9 503 23 1,836
------- -------- ------- --------
Net cash used in operations................................. (2,127) (23,930) (7,707) (45,977)
INVESTING ACTIVITIES:
Capital expenditures for property and equipment............. (178) (2,119) (1,435) (10,024)
Proceeds from sale of property and equipment................ -- 475 -- --
Acquisition of Toys.com..................................... (270) -- -- --
Net cash received from acquisition of BabyCenter, net of
acquisition costs......................................... -- -- -- 2,571
Other, net.................................................. -- (1,076) (831) (1,389)
------- -------- ------- --------
Net cash used in investing activities....................... (448) (2,720) (2,266) (8,842)
FINANCING ACTIVITIES:
Proceeds from bridge loan................................... -- 5,000 5,000 --
Payments on bridge loan..................................... -- (2,238) (2,238) --
Proceeds from the issuance of Common Stock and exercise of
stock options............................................. 225 32 2 176,190
Proceeds from the issuance of Redeemable Convertible
Preferred Stock and exercise of warrants.................. 3,007 42,469 22,008 --
Proceeds from the issuance of convertible
notes..................................................... 895 -- -- --
Payments on notes payable and capital leases................ -- (24) (14) (1,051)
Proceeds from receivables from stockholders................. -- 32 13 108
------- -------- ------- --------
Net cash provided by financing activities................... 4,127 45,271 24,771 175,247
------- -------- ------- --------
Net increase in cash and cash equivalents................... 1,552 18,621 14,798 120,428
Cash and cash equivalents at beginning of period............ -- 1,552 1,552 20,173
------- -------- ------- --------
Cash and cash equivalents at end of period.................. $ 1,552 $ 20,173 $16,350 $140,601
======= ======== ======= ========
Supplemental disclosures:
Income taxes paid........................................... $ 1 $ 1 $ -- $ 1
Interest paid............................................... $ -- $ 9 $ 44 $ 180
Notes payable and capital lease obligations incurred........ $ -- $ 731 $ 75 $ 7,788
Acquisition of BabyCenter:
Fair value of assets acquired (including goodwill)........ $ -- $ -- $ -- $197,635
Liabilities assumed....................................... -- -- -- (9,017)
Stock issued.............................................. -- -- -- (189,988)
Assumption of stockholders' receivables................... -- -- -- 1,862
------- -------- ------- --------
Cash paid................................................. -- -- -- 492
Cash acquired............................................. -- -- -- (3,063)
------- -------- ------- --------
Net cash received from acquisition of BabyCenter.......... $ -- $ -- $ -- $ 2,571
======= ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
GENERAL
eToys Inc. (the Company) was incorporated in November 1996 in the state of
Delaware. Prior to June 1997, the Company had no operations or activities. In
June 1997, initial issuances of Common Stock occurred. The Company launched its
Web site in October 1997. The Company is a Web-based retailer focused
exclusively on children's products, including toys, video games, software,
videos and music.
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern. The Company has incurred
significant operating losses since inception of operations and has limited
working capital. Management believes that the proceeds raised through the sale
of equity securities, in addition to revenue generated from product sales, will
support the Company's operations through 1999. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the eventual outcome of this uncertainty.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ materially from those
estimates.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of September 30, 1999 and the statements
of operations and cash flows for the six months ended September 30, 1998 and
1999 and the statement of shareholders' equity for the six months ended
September 30, 1999 are unaudited. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the interim periods. The results of
operations for the six months ended September 30, 1998 and 1999 are not
necessarily indicative of operating results to be expected for a full fiscal
year.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
CASH EQUIVALENTS
The Company considers those investments which are highly liquid, readily
convertible to cash and which mature within three months from the date of
purchase as cash equivalents.
F-7
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (using the first in-first out
method) or market and consist primarily of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using the
straight-line method based upon estimated useful lives, which range from three
to five years. Leasehold improvements are recorded at cost. Amortization is
provided using the straight-line method over the shorter of the term of the
related lease or estimated useful lives of the assets.
GOODWILL
Goodwill represents the excess of the purchase price over the estimated fair
market value of net assets acquired in a business combination. Goodwill is
amortized on a straight-line basis over three to five years.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
No such impairment losses have been identified by the Company.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of Common Stock outstanding. Shares associated with stock options and the
Redeemable Convertible Preferred Stock are not included for the years ended
March 31, 1998 and 1999 because they are antidilutive. Effective upon the
closing of the Company's initial public offering in May 1999, the shares of the
Redeemable Convertible Preferred Stock automatically converted into common stock
and are included in the calculation of weighted average number of shares as of
that date.
F-8
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Redeemable Convertible Preferred Stock into shares
of the Company's Common Stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on April 1, 1997, or at
the date of original issuance, if later.
The following table sets forth the computation of basic and pro forma net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
-------------------------- ---------------------------
1998 1999 1998 1999
----------- ------------ ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
Net loss.......................... $(2,268,000) $(28,558,000) $(5,554,000) $(65,727,000)
Denominator:
Weighted average shares........... 25,129,888 33,427,908 32,866,065 92,960,327
----------- ------------ ----------- ------------
Denominator for basic
calculation..................... 25,129,888 33,427,908 32,866,065 92,960,327
Weighted average effect of pro
forma securities:
Series A Redeemable Convertible
Preferred Stock............... 5,103,014 19,195,678 18,962,027 5,684,908
Series B Redeemable Convertible
Preferred Stock............... -- 29,255,765 22,817,393 9,600,755
Series C Redeemable Convertible
Preferred Stock............... -- 43,836 -- 538,461
----------- ------------ ----------- ------------
Denominator for pro forma
calculation..................... 30,232,902 81,923,187 74,645,485 108,784,451
=========== ============ =========== ============
Net loss per share:
Basic............................. $ (0.09) $ (0.85) $ (0.17) $ (0.71)
=========== ============ =========== ============
Pro forma......................... $ (0.08) $ (0.35) $ (0.07) $ (0.60)
=========== ============ =========== ============
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to customers. Outbound shipping and handling
charges are included in net sales. The Company provides an allowance for sales
returns in the period of sale, based upon historical experience.
F-9
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. For the years ended
March 31, 1998 and 1999, the Company incurred advertising costs of $917,000 and
$10,745,000, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock
awards granted subsequent to January 1, 1995, be recognized as compensation
expense based on their fair value at the date of grant. Alternatively, a company
may use Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees," and disclose pro forma income amounts which would have
resulted from recognizing such awards at their fair value. The Company has
elected to account for stock-based compensation expense under APB No. 25 and
make the required pro forma disclosures for compensation (see Note 6).
SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended March 31, 1998:
Convertible notes in the amount of $895,000, plus accrued interest of
$15,000, were converted into Series A Redeemable Convertible Preferred
Stock.
The Company expensed approximately $33,000 for services rendered from
several vendors in exchange for Common Stock.
The Company issued stock in return for notes receivable totaling $30,000
from employees. Such notes have been classified in the equity section of the
balance sheet.
The Company issued 2,340,000 shares of Common Stock as part of the
acquisition of Toys.com. See Note 2.
During the year ended March 31, 1999:
The Company financed the purchase of fixed assets under capital leases in
the amount $731,000.
The Company issued notes receivable for Common Stock and Series B Redeemable
Convertible Preferred Stock in the amounts of $35,000 and $105,000,
respectively.
Convertible notes in the amount of $2,762,000, plus accrued interest of
$38,000, were converted into Series B Redeemable Convertible Preferred
Stock.
2. ACQUISITION OF TOYS.COM
In March 1998, the Company acquired certain assets and assumed certain
liabilities and obligations of one of its online competitors, Toys.com,
including $25,000 in toy inventories and assumed certain advertising liabilities
in the amount of $48,000, and the assumption of future contingent advertising
contracts. The acquisition was accounted for under the purchase method of
F-10
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
2. ACQUISITION OF TOYS.COM (CONTINUED)
accounting and included a cash payment of $270,000 and the issuance of 2,340,000
shares of Common Stock with an estimated deemed fair value of approximately
$663,000. Goodwill resulting from the acquisition was $956,000. Subsequent to
the acquisition, Toys.com ceased operations as a separate entity.
3. INCOME TAXES
As a result of the net operating losses, the provision for income taxes
consists solely of minimum state taxes. The following is a reconciliation of the
statutory federal income tax rate to the Company's effective income tax rate:
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Statutory federal income tax expense (benefit).............. (34)% (34)%
State income tax expense (benefit).......................... (6) (6)
Valuation allowance......................................... 40 24
Non-deductible stock compensation........................... -- 15
Non-deductible goodwill amortization........................ -- 1
--- ---
-- % -- %
=== ===
</TABLE>
The components of the deferred tax assets and related valuation allowance at
March 31, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1999
---------- -------------
<S> <C> <C>
Other............................................ $ -- $ 792,000
Net operating loss carryforwards................. 914,000 9,731,000
---------- -------------
Deferred tax assets.............................. 914,000 10,523,000
Valuation allowance.............................. (914,000) (10,523,000)
---------- -------------
$ -- $ --
========== =============
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
The Company has net operating losses for both federal and state tax purposes
of approximately $24,430,000 expiring beginning in the years 2012 for federal
and 2005 for state. The net operating losses can be carried forward to offset
future taxable income. Utilization of the above carryforwards may be subject to
utilization limitations, which may inhibit the Company's ability to use
carryforwards in the future.
F-11
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
4. CONVERTIBLE NOTES AND BRIDGE FINANCING
During the year ended March 31, 1998, the Company received $895,000 in
proceeds from the issuance of 6.07% convertible notes. The notes were
automatically converted into Series A Redeemable Convertible Preferred Stock due
to certain conditions as specified within the initial note agreement. As a
result of the conversion, the initial proceeds from the convertible notes of
$895,000, plus $15,000 of accrued interest, were converted into 1,468,018 shares
of Series A Redeemable Convertible Preferred Stock.
In conjunction with the issuance of the 6.07% convertible notes, the Company
issued to the purchasers of the 6.07% convertible notes, 721,757 stock warrants
for the purchase of Series A Redeemable Convertible Preferred Stock at $.62 per
share. As of March 31, 1999, 705,628 warrants have been exercised. The warrants
are immediately exercisable and expire on December 31, 2002, or on the closing
date of an initial public offering, if sooner. No value has been allocated to
the warrants as the amount is not deemed to be significant.
On May 6, 1998, the Company entered into a $5,000,000 bridge financing
agreement with a group of investors. The bridge financing was in the form of
Convertible Subordinated Promissory Notes (the Notes) which were payable on
demand after May 6, 1999 accruing interest at a rate of 8% per annum until paid
and compounded annually. In July 1998, $2.8 million of the Notes plus interest
were converted into 1,331,235 shares of Series B Redeemable Convertible
Preferred Stock. The remaining balance of the Notes of $2.2 million plus accrued
interest was repaid in cash to the investors in June 1998.
5. CAPITAL STRUCTURE
COMMON AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 19, 1999, the Company amended its Certificate of Incorporation to,
among other matters, increase the authorized number of shares of Preferred Stock
to 19,593,089.
In conjunction with this amendment, the Company authorized 666,666 shares of
Series C Redeemable Convertible Preferred Stock (Series C). In December 1997,
the issuance of Series A Redeemable Convertible Preferred Stock (Series A)
resulted in proceeds of $3,007,000, representing 4,849,999 shares issued and
outstanding at $0.62 per share. In conjunction with this offering, $895,000 of
convertible notes, plus related accrued interest of $15,000, were converted into
1,468,018 shares of Series A (see Note 4). In June 1998, the issuance of
Series B resulted in proceeds of $25,000,000 representing 11,886,649 shares
issued and outstanding at $2.1032 per share. In March 1999, the Company issued
Series C which resulted in proceeds of approximately
F-12
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
5. CAPITAL STRUCTURE (CONTINUED)
$20,000,000, representing 666,666 shares issued and outstanding at $30 per
share. The following summarizes the Series A, Series B and Series C activity:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997.................. -- $ -- -- $ -- -- $ --
Issuance of Series A...................... 6,318,017 3,917,000 -- -- -- --
--------- ---------- ---------- ----------- --------- -----------
Balance at March 31, 1998................. 6,318,017 3,917,000 -- -- -- --
Issuance of Series A...................... 705,628 438,000 -- -- -- --
Issuance of Series B...................... -- -- 11,886,649 24,952,000 -- --
Issuance of Series C...................... -- -- -- -- 666,666 19,984,000
--------- ---------- ---------- ----------- --------- -----------
Balance at March 31, 1999................. 7,023,645 $4,355,000 11,886,649 $24,952,000 666,666 $19,984,000
========= ========== ========== =========== ========= ===========
</TABLE>
The following table is presented to summarize the Common Stock authorized at
March 31, 1999:
<TABLE>
<CAPTION>
COMMON
SHARES ISSUED
DESCRIPTION OF INSTRUMENT OR RESERVED
- ------------------------------------------------------------ -------------
<S> <C>
Common Stock outstanding 34,535,415
Series A Redeemable Convertible Preferred Stock 21,070,935
Series B Redeemable Convertible Preferred Stock 35,659,947
Series C Redeemable Convertible Preferred Stock 1,999,998
1997 Employee Incentive Stock Option Plan 17,400,000
1999 Employee Incentive Stock Option Plan 21,600,000
1999 Employee Stock Purchase Plan 900,000
1999 Directors Stock Option Plan 600,000
Preferred and Common Stock warrants 209,799
-----------
Common Stock issued or reserved 133,976,094
-----------
Common Stock available 16,023,906
===========
</TABLE>
Each share of Redeemable Convertible Preferred Stock is convertible, at the
stockholder's option, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $0.62 in the case of Series A, $2.1032
in the case of Series B and $30 in the case of Series C by the Conversion Price,
as defined. In the event of a public offering of the Company's equity securities
resulting in gross proceeds to the Company of $20 million or greater, all
outstanding Redeemable Convertible Preferred Stock will automatically be
converted into Common Stock.
F-13
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
5. CAPITAL STRUCTURE (CONTINUED)
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A, Series B and Series C
are entitled to receive preference to the Common Stock holders to any
distribution of any assets of the Company in an amount per share equal to $0.62,
$2.1032 and $30 per share, respectively. After the initial distribution of
assets, the holders of Series A, Series B and Series C are entitled to
participate with the holders of the Common Stock on a pro rata basis until the
holders of Series A, Series B and Series C have received an aggregate of $1.86,
$6.31 and $90, respectively (as adjusted for any stock splits, stock dividends,
recapitalizations, or the like).
On or at any time after November 26, 2002, subject to the written consent of
66 2/3% of the then outstanding shares of Series A, Series B and Series C, the
Redeemable Convertible Preferred Stock may be redeemed for cash in whole or in
part for $0.62, $2.1032 and $30 per share (as adjusted for any stock dividends,
combinations or splits with respect to such share) plus all declared but unpaid
dividends, for Series A, Series B and Series C, respectively.
The voting rights of the Series A, Series B and Series C are equal to one
vote for each share of Common Stock into which such Redeemable Convertible
Preferred Stock may be converted. Each share of Series A, Series B and Series C
entitles the holder to receive dividends in cash at an annual rate of $0.043,
$0.1472 and $2.40 per share, respectively (as adjusted for any stock splits,
stock dividends, recapitalizations, or the like). Dividends are payable
quarterly when and if declared by the board of directors and are not cumulative.
RECEIVABLES FROM STOCKHOLDERS
Receivables from stockholders, totaling $30,000 and $138,000 at March 31,
1998 and 1999, respectively, represent interest bearing notes from certain
stockholders issued to finance the purchase of 6,605,001 and 50,000 shares of
the Company's Common and Series B, respectively. The notes bear interest rates
between 6.0% and 8.0% per year with interest due upon payment of the notes. The
notes are payable on different dates ranging from December 1, 1999 to July 27,
2002, or upon termination of employment or transfer of any of the purchased
shares.
DEFERRED COMPENSATION
The Company recorded deferred compensation of $55,000 and $44,735,000 for
the years ended March 31, 1998 and 1999, respectively. The amounts recorded
represent the difference between the grant price and the deemed fair value of
the Company's Common Stock for shares subject to options granted. The
amortization of deferred compensation will be charged to operations over the
vesting period of the options, which is typically four years. Total amortization
recognized was $2,000 and $5,814,000 for the years ended March 31, 1998 and
1999, respectively.
6. STOCK OPTION PLANS
In February 1999, the Board of Directors adopted the 1999 Stock Plan, the
1999 Directors' Stock Option Plan and the 1999 Employee Stock Purchase Plan. In
March 1999 the stockholders approved these plans. The 1999 Stock Plan provides
for 21,600,000 shares of Common Stock to be granted under terms similar to the
1997 Stock Plan. The 1999 Directors' Stock Option Plan reserves
F-14
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
6. STOCK OPTION PLANS (CONTINUED)
a total of 600,000 shares of Common Stock for grants of options to nonemployee
directors. The 1999 Employee Stock Purchase Plan reserves a total of 900,000
shares of Common Stock for limited purchases by employees through payroll
deductions, with a purchase price equal to 85% of the fair market value of the
Common Stock.
The Company adopted the 1997 Stock Plan, as amended June 1998 (the Plan),
which provides for the granting of options for purchases up to
17,400,000 shares of the Company's Common Stock. Under the terms of the Plan,
options may be granted to employees, nonemployees, directors or consultants at
prices not less than the fair value at the date of grant. Options granted to
nonemployees are recorded at the value of negotiated services received. Options
vest over four years, 25% for the first year and ratably over the remaining
three years and generally expire ten years from the date of grant.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
NUMBER OF PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
---------- ---------------- -----------------
<S> <C> <C> <C>
Outstanding at March 31,
1997......................... --
Granted...................... 4,407,000 $0.005 to $0.033 $0.010
Exercised.................... (150,000) 0.005 to 0.005 0.005
Canceled..................... -- --
----------
Outstanding at March 31,
1998......................... 4,257,000 0.005 to 0.033 0.010
Granted...................... 14,116,650 0.033 to 9.000 1.695
Exercised.................... (1,736,136) 0.005 to 3.333 0.037
Canceled..................... (1,709,838) 0.005 to 3.333 0.053
----------
Outstanding at March 31,
1999......................... 14,927,676 0.005 to 9.000 1.595
==========
</TABLE>
Options granted during the years ended March 31, 1998 and 1999 resulted in a
total compensation amount of $55,000 and $44,735,000, respectively, and were
recorded as deferred compensation in stockholders' equity. The deferred
compensation amount will be recognized as compensation expense over the vesting
period. During the years ended March 31, 1998 and 1999, such compensation
expense amounted to $2,000 and $5,814,000, respectively. Options outstanding at
March 31, 1998 and 1999 were exercisable for 321,000 and 535,944 shares of
Common Stock, respectively. Common Stock available for future grants at
March 31, 1998 and 1999 were 4,165,500 and 22,786,188 shares, respectively.
F-15
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
6. STOCK OPTION PLANS (CONTINUED)
Additional information with respect to the outstanding options as of
March 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED AVERAGE -----------------------------
WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE SHARES PRICE
---------- ---------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
RANGE OF EXERCISE
PRICES
$0.005 to $0.033... 2,773,626 $0.019 8.98 305,994 $0.016
$0.140 to $0.140... 702,000 0.014 9.60 -- --
$0.143 to $1.667... 8,095,500 0.494 9.85 52,500 1.667
$2.833 to $9.000 3,356,550 5.856 10.14 177,450 2.892
---------- -------
$0.005 to $9.000... 14,927,676 535,944
========== =======
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of the grant using the minimum value option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Risk-free interest rates.................................... 6.0% 5.14%
Expected lives (in years)................................... 5 4
Dividend yield.............................................. 0% 0%
Expected volatility......................................... 0% 0%
</TABLE>
The compensation cost associated with the stock-based compensation plans did
not result in a material difference from the reported net loss for the years
ended March 31, 1998 or 1999.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office and warehouse facilities under long-term
noncancelable operating leases. For the years ended March 31, 1998 and 1999,
total rent expense incurred related to these leases amounted to $52,000 and
$636,000, respectively.
F-16
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At March 31, 1999, future lease commitments under these agreements were as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- ---------
<S> <C> <C>
2000............................................... $ 2,404,000 $273,000
2001............................................... 3,040,000 273,000
2002............................................... 3,101,000 246,000
2003............................................... 3,916,000 --
2004............................................... 1,294,000 --
Thereafter......................................... 431,000 --
------------ --------
14,186,000 792,000
Less amounts representing interest................. -- (85,000)
------------ --------
$ 14,186,000 $707,000
============ ========
</TABLE>
EQUIPMENT FINANCING ARRANGEMENT
During December 1998, the Company entered into a line of credit arrangement
with a leasing institution that provides for sale and leaseback transactions of
capital equipment up to a maximum of $2,000,000. Under this agreement,
$1,344,000 was available for future financing transactions at March 31, 1999. In
addition, the agreement provides the leasing institution warrants, with value
equal to approximately $112,000 with the number of shares to be determined
pursuant to a formula, as defined, at the time of issuance. Such warrants were
issued on January 31, 1999.
ADVERTISING COMMITMENTS
During 1998 and the first part of 1999, the Company entered into a number of
commitments for online, print and broadcast advertising. At March 31, 1999, the
advertising commitments amounted to approximately $8,828,000 to be incurred
through March 2000.
PURCHASE COMMITMENTS
At March 31, 1999, the Company had approximately $30.5 million in
outstanding orders with certain suppliers for the purchase of inventory. Such
purchase commitments are expected to be fulfilled from April to December 1999.
LEGAL MATTERS
The Company is involved in litigation and other legal matters which have
arisen in the normal course of business. Although the ultimate outcome of these
matters is not currently determinable, management does not expect that they will
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
8. INITIAL PUBLIC OFFERING AND STOCK SPLIT
In February 1999, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its Common Stock to the public. Upon
completion of the Company's initial public offering,
F-17
<PAGE>
ETOYS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
8. INITIAL PUBLIC OFFERING AND STOCK SPLIT (CONTINUED)
the Series A, Series B and Series C Redeemable Convertible Preferred Stock will
convert into 58,730,880 shares of Common Stock.
In March 1999, the Company's Board of Directors declared a stock split of 3
shares for every 1 share of Common Stock then outstanding. The stock split will
become effective at the date the Company's public offering of Common Stock is
closed. Accordingly, the accompanying financial statements and footnotes have
been restated to reflect the stock split. The par value of the shares of Common
Stock to be issued in connection with the stock split was credited to Common
Stock and a like amount charged to additional paid-in capital.
9. SUBSEQUENT EVENTS (UNAUDITED)
In May 1999, the Company increased the number of shares eligible to be
granted under the 1999 Stock Plan to 24,800,000 and the number of shares
available for purchase under the 1999 Employee Stock Purchase Plan to 1,000,000.
On May 24, 1999, the Company completed its initial public offering of
9,568,000 shares of its Common Stock. Net proceeds to the Company aggregated
$175.8 million. As of the closing date of the offering, all of the convertible
preferred stock outstanding was converted into an aggregate of 58,779,267 shares
of Common Stock.
On July 1, 1999, the Company completed its acquisition of BabyCenter, Inc.
("BabyCenter") pursuant to a reorganization agreement executed in April 1999. As
consideration for the purchase, the Company issued to the stockholders of
BabyCenter approximately 16.0 million shares of the Company's Common Stock
valued at $190.0 million based upon the stock price as of the date that the
transaction was announced.
The acquisition has been accounted for as a purchase and the acquisition
costs of $190.0 million have been allocated to the assets acquired and the
liabilities assumed based upon estimates of their respective fair values. A
total of $189.0 million, representing the excess of the purchase price over the
fair value of the net tangible assets acquired, has been allocated to intangible
assets and is being amortized over five years. The Company's consolidated
results of operations as of September 30, 1999 incorporates BabyCenter's results
of operations commencing upon the July 1, 1999 acquisition date.
F-18
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
for the Company consists of the Unaudited Pro Forma Condensed Combined
Statements of Operations for the year ended March 31, 1999 and the six months
ended September 30, 1999 and the Unaudited Pro Forma Condensed Combined Balance
Sheet as of March 31, 1999.
On July 1, 1999, the Company completed its acquisition of BabyCenter, Inc.
('BabyCenter') pursuant to a reorganization agreement executed in April 1999. As
consideration for the purchase, the Company issued to the stockholders of
BabyCenter approximately 16.0 million shares of the Company's common stock
valued at $190.0 million based upon the stock price on the date that the
transaction was announced. The Unaudited Pro Forma Condensed Combined Statement
of Operations for the year ended March 31, 1999 gives effect to the BabyCenter
acquisition as if it had taken place on April 1, 1998. The Unaudited Pro Forma
Condensed Combined Statement of Operations for the six months ended September
30, 1999 gives effect to transaction as if it had taken place on April 1, 1999.
The Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 1999
gives effect to transaction as if it had taken place on March 31, 1999.
The acquisition has been accounted for as a purchase and the acquisition
costs of $190.0 million have been allocated to the assets acquired and the
liabilities assumed based upon estimates of their respective fair values. A
total of $189.0 million, representing the excess of the purchase price over the
fair value of the net tangible assets acquired, has been allocated to intangible
assets and is being amortized over five years. Had the acquisition been
completed on March 31, 1999, a total of $183.9 million, representing the excess
of the purchase price over the fair value of the net tangible assets acquired as
of March 31, 1999, would have been allocated to intangible assets and amortized
over five years.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended March 31, 1999 combines the Company's historical results for the year
ended March 31, 1999 with BabyCenter's historical results for the year ended
March 31, 1999. In addition, the Unaudited Pro Forma Condensed Combined
Statement of Operations for the year ended March 31, 1999 is based upon an
acquisition cost of $190.0 million and assumes that an estimated $183.9 million
excess of acquisition cost over the book value of BabyCenter's net tangible
assets as of March 31, 1999 is allocated to intangible assets with a useful life
of five years.
The Company's historical consolidated results of operations as of September
30, 1999 incorporate BabyCenter's results of operations commencing upon the July
1, 1999 acquisition date. Accordingly, the Unaudited Pro Forma Condensed
Combined Statement of Operations for the six months ended September 30, 1999
combines the Company's historical consolidated results of operations for the six
months ended September 30, 1999 and BabyCenter's historical results of
operations for the quarter ended June 30, 1999. Additionally, the Unaudited Pro
Forma Condensed Combined Statement of Operations for the six months ended
September 30, 1999 is based upon an acquisition cost of $190.0 million and
assumes that an estimated $189.0 million excess of acquisition cost over the
book value of BabyCenter's net tangible assets is allocated to intangible assets
with a useful life of five years.
The pro forma financial information has been prepared on the basis of the
assumptions described in the notes. The pro forma financial information is not
necessarily indicative of the results of operations of the combined company had
the acquisition occurred on April 1, 1998, March 31, 1999 or April 1, 1999, nor
is it necessarily indicative of future results.
F-19
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ETOYS BABYCENTER ADJUSTMENTS TOTAL
----- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net sales...................................... $ 29,959 $ 4,768 $ -- $ 34,727
Cost of sales.................................. 24,246 981 -- 25,227
-------- ------- -------- --------
Gross profit................................... 5,713 3,787 -- 9,500
Operating expenses:
Marketing and sales.......................... 20,719 2,461 -- 23,180
Product development.......................... 3,608 3,752 -- 7,360
General and administrative................... 4,352 1,802 -- 6,154
Goodwill amortization........................ 319 -- 36,788 (5) 37,107
Deferred compensation amortization........... 5,814 573 -- 6,387
-------- ------- -------- --------
Total operating expenses................... 34,812 8,588 36,788 80,188
-------- ------- -------- --------
Operating loss................................. (29,099) (4,801) (36,788) (70,688)
Other income (expense):
Interest income.............................. 589 280 -- 869
Interest expense............................. (47) (24) -- (71)
-------- ------- -------- --------
Loss before provision for taxes................ (28,557) (4,545) (36,788) (69,890)
Provision for taxes............................ (1) -- -- (1)
-------- ------- -------- --------
Net loss....................................... $(28,558) $(4,545) $(36,788) $(69,891)
======== ======= ======== ========
Basic net loss per equivalent share............ $ (0.85) $ (1.41)
======== ========
Pro forma for conversion of preferred stock
basic net loss per equivalent share.......... $ (0.35) $ (0.71)
======== ========
Shares used to compute basic net loss per
equivalent share............................. 33,428 16,003 49,431
======== ======== ========
Shares used to compute pro forma for conversion
of preferred stock basic net loss per
equivalent share............................. 81,923 16,003 97,926
======== ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
F-20
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ETOYS BABYCENTER ADJUSTMENTS TOTAL
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... $ 21,281 $ 2,052 $ -- $ 23,333
Cost of sales................................. 17,209 971 -- 18,180
-------- ------- -------- --------
Gross profit.................................. 4,072 1,081 -- 5,153
Operating expenses:
Marketing and sales......................... 31,585 1,839 -- 33,424
Product development......................... 17,023 926 -- 17,949
General and administrative.................. 7,254 4,401 -- 11,655
Goodwill amortization....................... 9,626 -- 9,452 (5) 19,078
Deferred compensation amortization.......... 7,096 1,149 -- 8,245
-------- ------- -------- --------
Total operating expenses.................. 72,584 8,315 9,452 90,351
-------- ------- -------- --------
Operating loss................................ (68,512) (7,234) (9,452) (85,198)
Other income (expense):
Interest income............................. 2,966 114 -- 3,080
Interest expense............................ (180) (45) -- (225)
-------- ------- -------- --------
Loss before provision for taxes............... (65,726) (7,165) (9,452) (82,343)
Provision for taxes........................... (1) (1) -- (2)
-------- ------- -------- --------
Net loss...................................... $(65,727) $(7,166) $ (9,452) $(82,345)
======== ======= ======== ========
Basic net loss per equivalent share........... $ (0.71) $ (0.82)
======== ========
Pro forma for conversion of preferred stock
basic net loss per equivalent share......... $ (0.60) $ (0.71)
======== ========
Shares used to compute basic net loss per
equivalent share............................ 92,960 8,002 (6) 100,962
======== ======== ========
Shares used to compute pro forma for
conversion of preferred stock basic net loss
per equivalent share........................ 108,784 8,002 (6) 116,786
======== ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
F-21
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ETOYS BABYCENTER ADJUSTMENTS TOTAL
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 20,173 $ 9,000 $ -- $ 29,173
Inventories................................. 5,067 201 -- 5,268
Prepaids and other current assets........... 1,577 750 -- 2,327
-------- ------- -------- --------
Total current assets.......................... 26,817 9,951 -- 36,768
Property and equipment........................ 2,505 1,582 (530)(3) 3,557
Accumulated depreciation and amortization..... (369) (278) -- (647)
-------- ------- -------- --------
2,136 1,304 (530) 2,910
Goodwill (net of accumulated amortization).... 637 -- 183,942 (2) 184,579
Other assets.................................. 1,076 40 -- 1,116
-------- ------- -------- --------
Total assets.................................. $ 30,666 $11,295 $183,412 $225,373
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 4,236 $ 693 $ 780 (3) $ 5,709
Deferred revenues........................... -- 713 -- 713
Accrued expenses............................ 530 605 1,879 (3) 3,014
Current portion of long-term notes payable
and capital lease obligations............. 230 118 -- 348
-------- ------- -------- --------
Total current liabilities..................... 4,996 2,129 2,659 9,784
Long-term notes payable and capital lease
obligations................................. 477 564 -- 1,041
Redeemable Convertible Preferred Stock........ 49,291 -- -- 49,291
Stockholders' equity (deficit)................ (24,098) 8,602 (632)(3) 165,257
(8,602)(4)
189,987 (4)
-------- ------- -------- --------
Total liabilities and stockholders' equity
(deficit)................................... $ 30,666 $11,295 $183,412 $225,373
======== ======= ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
F-22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The pro forma information gives effect to the Company's acquisition of
BabyCenter through a merger and exchange of shares. The Unaudited Pro Forma
Condensed Combined Statement of Operations for the year ended March 31, 1999
reflects this transaction as if it had taken place on April 1, 1998. The
Unaudited Pro Forma Condensed Combined Statement of Operations for the six
months ended September 30, 1999 reflects this transaction as if it had taken
place on April 1, 1999. The Unaudited Pro Forma Condensed Combined Balance Sheet
as of March 31, 1999 reflects this transaction as if it had taken place on
March 31, 1999.
The BabyCenter acquisition has been accounted for using the purchase method
of accounting. The pro forma financial information has been prepared on the
basis of assumptions described in the following notes and include assumptions
relating to the allocation of the consideration paid for the assets and
liabilities of BabyCenter based upon estimates of their fair value. In opinion
of the Company's management, all adjustments necessary to present fairly such
pro forma financial information have been based on the terms and structure of
the BabyCenter merger.
The pro forma financial information is not necessarily indicative of what
the actual financial results would have been had this transaction taken place on
April 1, 1998, March 31, 1999 or April 1, 1999 and does not purport to indicate
the results of future operations.
The pro forma financial information gives effect to the following pro forma
adjustments:
1. In accordance with the reorganization agreement for the BabyCenter
merger:
The BabyCenter merger has been accounted for using the purchase method of
accounting. The purchase price was based on $11.00 per share, which was the
mid-point of the Company's filing range at the announcement of the BabyCenter
merger.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
BABYCENTER FAIR VALUE
SHARES ETOYS SHARES (IN THOUSANDS)
---------- ------------ --------------
<S> <C> <C> <C>
Shares............................... 7,651,521 16,003,095 $176,034
Stock options........................ 1,299,027 2,716,905 13,953
---------- ----------- --------
Totals............................. 8,950,548 18,720,000 $189,987
========== =========== ========
</TABLE>
The BabyCenter shares were first converted to the Company's equivalent
shares by taking the number of BabyCenter shares multiplied by the exchange
ratio of approximately 2.09 shares of the Company for each BabyCenter share.
The fair value of "shares" was calculated by taking the fair value of the
stock ($11.00 per share) times the number of the Company's shares to be
exchanged.
With respect to stock options exchanged as part of the BabyCenter merger,
all vested and unvested BabyCenter options exchanged for the Company's options
are included as part of the purchase price based on their fair value.
The fair value of the stock was calculated by taking the vested and unvested
options to purchase the Company's shares (2,716,905 options) times the fair
value of the stock ($11.00 per share) less the proceeds which will be received
from the optionholders upon exercise.
F-23
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION (CONTINUED)
The pro forma financial information has been prepared on the basis of
assumptions described in these notes and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of
BabyCenter based upon estimates of their fair value.
The Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31,
1999 is based upon an acquisition price of $190.0 million and assumes that an
estimated $183.9 million excess of acquisition costs over the book value of
BabyCenter's net tangible assets as of March 31, 1999 is allocated to intangible
assets. The table below reflects the acquisition cost, purchase price allocation
and amortization of intangible assets acquired had the acquisition of BabyCenter
been completed on March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION OF
LIFE (IN YEARS) INTANGIBLES
--------------- ---------------
<S> <C> <C> <C>
ESTIMATED ACQUISITION COST:
Estimated purchase price............ $189,987
========
PURCHASE PRICE ALLOCATION:
Estimated fair value of net tangible
assets of BabyCenter at March 31,
1999.............................. $ 8,602
Purchase price adjustments to
acquired assets and liabilities... (2,557)
Intangible assets acquired:
Goodwill.......................... 183,942 5 $36,788
--------
$189,987
========
</TABLE>
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended March 31, 1999 is based upon an acquisition price of $190.0 million
and assumes that an estimated $183.9 million excess of acquisition costs over
the book value of BabyCenter's net tangible assets as of March 31, 1999 is
allocated to intangible assets with a useful life of five years.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
six months ended September 30, 1999 is based upon an acquisition price of $190.0
million and assumes that an estimated $189.0 million excess of acquisition costs
over the book value of BabyCenter's net tangible assets is allocated to
intangible assets with a useful life of five years. The table below
F-24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION (CONTINUED)
reflects the acquisition cost, purchase price allocation and annual amortization
of intangible assets acquired as of July 1, 1999 based upon the historical
amounts recorded (in thousands):
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION OF
LIFE (IN YEARS) INTANGIBLES
--------------- ---------------
<S> <C> <C> <C>
ESTIMATED ACQUISITION COST:
Estimated purchase price............ $189,987
========
PURCHASE PRICE ALLOCATION:
Estimated fair value of net tangible
assets of BabyCenter at July 1,
1999.............................. $ 2,745
Purchase price adjustments to
acquired assets and liabilities... (1,797)
Intangible assets acquired:
Goodwill.......................... 189,039 5 $37,808
--------
$189,987
========
</TABLE>
Tangible assets of BabyCenter acquired in the BabyCenter merger principally
include cash and fixed assets. Liabilities of BabyCenter assumed in the
BabyCenter merger principally include accounts payable, accrued payroll and
other current liabilities.
2. The pro forma adjustment is for goodwill allocation of $183.9 million.
3. The pro forma adjustments are for purchase price adjustments applied to
certain assets acquired and liabilities assumed in connection with the
BabyCenter merger aggregating to $2.6 million.
4. The pro forma adjustment to stockholders' equity reflects the
elimination of BabyCenter's stockholders' equity ($8.6 million) and the impact
of the issuance of the Company's common stock ($190.0 million) in connection
with the BabyCenter merger.
5. The pro forma adjustment is for goodwill amortization of $36.8 million
for the year ended March 31, 1999 and $9.5 million for the six months ended
September 30, 1999.
6. The pro forma adjustment is to adjust weighted average shares
outstanding for the six months ended September 30, 1999. As the acquisition of
BabyCenter was completed on July 1, 1999, the historical weighted average shares
outstanding only reflect the issuance of shares for the purchase of BabyCenter
from the original date of issuance on July 1, 1999, or three months.
Accordingly, the weighted average shares for basic net loss per equivalent share
and pro forma for conversion of preferred stock basic net loss per equivalent
share have been adjusted to give effect to the shares being issued and
outstanding for the six months ended September 30, 1999.
F-25
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BabyCenter, Inc.
We have audited the accompanying balance sheets of BabyCenter, Inc. as of
September 30, 1997 and 1998 and March 31, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the period from inception
(February 11, 1997) to September 30, 1997, for the year ended September 30,
1998, and for the six months ended March 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BabyCenter, Inc. at
September 30, 1997 and 1998 and March 31, 1999, and the results of its
operations and its cash flows for the period from inception (February 11, 1997)
to September 30, 1997, for the year ended September 30, 1998 and for the six
months ended March 31, 1999, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Palo Alto, California
April 30, 1999
F-26
<PAGE>
BABYCENTER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------ MARCH 31,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $1,795,941 $ 1,201,786 $ 8,999,635
Short-term investments............................. 972,713 -- --
Accounts receivable, net of allowance of $30,000 at
March 31, 1999................................... 11,500 706,136 669,388
Inventories........................................ -- -- 201,286
Other current assets............................... 18,913 69,367 80,149
---------- ----------- -----------
Total current assets................................. 2,799,067 1,977,289 9,950,458
Property and equipment, net.......................... 91,538 601,867 1,304,404
Other assets......................................... 29,906 36,892 40,025
---------- ----------- -----------
$2,920,511 $ 2,616,048 $11,294,887
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 34,004 $ 292,439 $ 693,418
Accrued liabilities................................ 6,206 25,202 604,930
Deferred revenue................................... 53,876 464,920 713,161
Current portion of capital lease obligations....... 33,421 124,135 117,659
---------- ----------- -----------
Total current liabilities............................ 127,507 906,696 2,129,168
Capital lease obligations, net of current portion.... 51,079 38,661 564,089
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value, 5,700,000 shares
authorized, issuable in series: 2,862,717,
2,895,930, and 4,895,930 convertible shares
issued and outstanding at September 30, 1997 and
1998 and March 31, 1999, respectively (aggregate
liquidation preference of $13,331,330 at
March 31, 1999).................................. 3,260,981 3,310,981 13,245,642
Common stock, $0.001 par value, 11,000,000 shares
authorized, 1,759,138 and 2,297,096 shares issued
and outstanding at September 30, 1997 and 1998
and March 31, 1999, respectively................. 1,759 1,759 1,104,606
Additional paid-in capital......................... -- -- 9,874,296
Notes receivable from officers..................... -- -- (1,102,000)
Deferred compensation.............................. -- -- (8,896,144)
Accumulated deficit................................ (520,815) (1,642,049) (5,624,770)
---------- ----------- -----------
Total stockholders' equity........................... 2,741,925 1,670,691 8,601,630
---------- ----------- -----------
$2,920,511 $ 2,616,048 $11,294,887
========== =========== ===========
</TABLE>
See accompanying notes.
F-27
<PAGE>
BABYCENTER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 11, SIX MONTHS ENDED
1997) TO YEAR ENDED MARCH 31,
SEPTEMBER 30, SEPTEMBER 30, -------------------------
1997 1998 1998 1999
-------------- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................ $ 7,624 $ 1,935,668 $ 250,869 $ 3,083,355
Costs and expenses:
Cost of revenues...................... -- 178,924 10,021 812,569
Technology and development............ 200,057 1,374,012 364,605 2,742,789
Marketing and sales................... 56,918 853,015 210,184 1,817,701
General and administrative............ 280,621 744,761 282,691 1,912,386
---------- ----------- --------- -----------
Total costs and expenses................ 537,596 3,150,712 867,501 7,285,445
---------- ----------- --------- -----------
Loss from operations.................... (529,972) (1,215,044) (616,632) (4,202,090)
Interest and other income, net.......... 9,157 93,810 57,201 219,369
---------- ----------- --------- -----------
Net loss................................ $ (520,815) $(1,121,234) $(559,431) $(3,982,721)
========== =========== ========= ===========
Basic and diluted net loss per share.... $ (1.17) $ (1.41) $ (0.82) $ (3.78)
========== =========== ========= ===========
Weighted-average shares used in per
share calculation..................... 446,340 792,778 683,374 1,053,685
========== =========== ========= ===========
</TABLE>
See accompanying notes.
F-28
<PAGE>
BABYCENTER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED NOTES
STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
----------------------- ---------------------- PAID-IN FROM STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICERS COMPENSATION
--------- ----------- --------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for cash and conversion
of debt................ -- $ -- 1,759,138 $ 1,759 $ -- $ -- $ --
Issuance of Series A
convertible preferred
stock for cash, net of
issuance costs of
$10,000................ 1,202,046 771,333 -- -- -- -- --
Issuance of Series B
convertible preferred
stock for cash, net of
issuance costs of
$10,350................ 1,660,671 2,489,648 -- -- -- -- --
Net loss................. -- -- -- -- -- -- --
--------- ----------- --------- ---------- ---------- ----------- -----------
Balance at September 30,
1997................... 2,862,717 3,260,981 1,759,138 1,759 -- -- --
Issuance of Series B
convertible preferred
stock for cash......... 33,213 50,000 -- -- -- -- --
Net loss................. -- -- -- -- -- -- --
--------- ----------- --------- ---------- ---------- ----------- -----------
Balance at September 30,
1998................... 2,895,930 3,310,981 1,759,138 1,759 -- -- --
Issuance of Series C
convertible preferred
stock for cash, net of
Issuance costs of
$65,339................ 2,000,000 9,934,661 -- -- -- -- --
Issuance of common stock
upon exercises of stock
options................ -- -- 537,958 1,102,847 -- (1,102,000) --
Issuance of warrant for
services............... -- -- -- -- 405,523 -- --
Deferred compensation.... -- -- -- -- 9,468,773 -- (9,468,773)
Amortization of deferred
compensation........... -- -- -- -- -- -- 572,629
Net loss................. -- -- -- -- -- -- --
--------- ----------- --------- ---------- ---------- ----------- -----------
Balance at March 31,
1999................... 4,895,930 $13,245,642 2,297,096 $1,104,606 $9,874,296 $(1,102,000) $(8,896,144)
========= =========== ========= ========== ========== =========== ===========
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- --------------
<S> <C> <C>
Issuance of common stock
for cash and conversion
of debt................ $ -- $ 1,759
Issuance of Series A
convertible preferred
stock for cash, net of
issuance costs of
$10,000................ -- 771,333
Issuance of Series B
convertible preferred
stock for cash, net of
issuance costs of
$10,350................ -- 2,489,648
Net loss................. (520,815) (520,815)
----------- -----------
Balance at September 30,
1997................... (520,815) 2,741,925
Issuance of Series B
convertible preferred
stock for cash......... -- 50,000
Net loss................. (1,121,234) (1,121,234)
----------- -----------
Balance at September 30,
1998................... (1,642,049) 1,670,691
Issuance of Series C
convertible preferred
stock for cash, net of
Issuance costs of
$65,339................ -- 9,934,661
Issuance of common stock
upon exercises of stock
options................ -- 847
Issuance of warrant for
services............... -- 405,523
Deferred compensation.... -- --
Amortization of deferred
compensation........... -- 572,629
Net loss................. (3,982,721) (3,982,721)
----------- -----------
Balance at March 31,
1999................... $(5,624,770) $ 8,601,630
=========== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE>
BABYCENTER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 11, SIX MONTHS ENDED
1997) TO YEAR ENDED MARCH 31,
SEPTEMBER 30, SEPTEMBER 30, --------------------------
1997 1998 1998 1999
-------------- -------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (520,815) $(1,121,234) $ (559,431) $ (3,982,721)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation.............................. 9,443 80,101 26,225 188,211
Issuance of warrant for services.......... -- -- -- 405,523
Amortization of deferred compensation..... -- -- -- 572,629
Changes in operating assets and
liabilities:
Accounts receivable..................... (11,500) (694,636) 3,000 36,748
Inventories............................. -- -- -- (201,286)
Other current assets.................... (18,913) (50,454) (162,041) (10,782)
Other assets............................ (29,906) (6,986) (8,329) (3,133)
Accounts payable........................ 34,004 258,435 29,526 400,979
Accrued liabilities..................... 6,206 18,996 5,051 579,728
Deferred revenue........................ 53,876 411,044 87,257 248,241
---------- ----------- ---------- ------------
Net cash used in operating activities....... (477,605) (1,104,734) (578,742) (1,765,863)
---------- ----------- ---------- ------------
INVESTING ACTIVITIES
Purchases of property and equipment......... -- (400,112) (2,900) (659,682)
Purchase of short-term investments.......... (972,713) -- -- --
Proceeds from maturity of short-term
investments............................... -- 972,713 972,713 --
---------- ----------- ---------- ------------
Net cash provided by (used in) investing
activities................................ (972,713) 572,601 969,813 (659,682)
---------- ----------- ---------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock... 3,260,981 50,000 -- 9,934,661
Proceeds from issuance of common stock...... 1,759 -- -- 847
Proceeds from lease financing of
equipment................................. -- -- -- 400,112
Repayments of principal on capital leases... (16,481) (112,022) (40,407) (112,226)
---------- ----------- ---------- ------------
Net cash provided by (used in) financing
activities................................ 3,246,259 (62,022) (40,407) 10,223,394
---------- ----------- ---------- ------------
Net increase (decrease) in cash and cash
equivalents............................... 1,795,941 (594,155) 350,664 7,797,849
Cash and cash equivalents at beginning of
period.................................... -- 1,795,941 1,795,941 1,201,786
---------- ----------- ---------- ------------
Cash and cash equivalents at end of
period.................................... $1,795,941 $ 1,201,786 $2,146,605 $ 8,999,635
========== =========== ========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid............................... $ -- $ 17,008 $ 5,234 $ 11,513
========== =========== ========== ============
Property and equipment acquired under lease
financing................................. $ 100,981 $ 190,318 $ 102,623 $ 231,066
========== =========== ========== ============
</TABLE>
See accompanying notes.
F-30
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
BabyCenter, Inc. (the "Company") is an Internet information and commerce
company serving new and expectant parents. BabyCenter, Inc. produces
BabyCenter.com, the Web's information source on preconception, pregnancy and
baby, and operates the BabyCenter Store, an online store with related products
and supplies. BabyCenter, Inc. also develops Internet information and marketing
products for healthcare companies. BabyCenter, Inc. was incorporated in Delaware
on February 11, 1997. BabyCenter, Inc. conducts its business within one industry
segment and all operations through September 30, 1998 were based in the United
States.
Since its incorporation, BabyCenter, Inc. has incurred cumulative losses
totaling approximately $5,625,000 and expects to incur additional losses for the
next several years. BabyCenter, Inc.'s current operating plan shows that
BabyCenter, Inc. will continue to require additional capital to fund its
operations and market its products. To date, BabyCenter, Inc. has financed its
operations with the net proceeds from private placements of its equity
securities, and capital equipment lease financing. BabyCenter, Inc. plans to
seek additional funding through public or private financing or other
arrangements with third parties. If the financing arrangements contemplated by
management are not consummated, BabyCenter, Inc. may have to seek other sources
of capital or reevaluate its operating plans.
INTERIM FINANCIAL STATEMENTS
The accompanying statements of operations and cash flows for the six months
ended March 31, 1998 are unaudited. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary for fair presentation of the results of operations and
cash flows for the interim period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ materially from these estimates.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
BabyCenter, Inc. considers all highly liquid investments with a maturity
from date of purchase of three months or less to be cash equivalents. Management
has designated these investments as available for sale. BabyCenter, Inc. invests
its excess cash in money market funds and corporate debt obligations of
financial institutions in the United States. The short-term investments at
September 30, 1997 were comprised of corporate debt obligations with maturities
of less than one year. These investments are reported at amortized cost which
approximates fair value. BabyCenter, Inc. had no short-term investments at
September 30, 1998 and March 31, 1999. The carrying amount reported on the
balance sheet for cash and cash equivalents approximates their fair value. Fair
values are estimated based on quoted market prices or pricing models using
current
F-31
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
market rates. Realized gains or losses for the period from inception
(February 11, 1997) to September 30, 1997 ("period ended September 30, 1997"),
the year ended September 30, 1998, and the six months ended March 31, 1998 and
1999 were not material.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject BabyCenter, Inc. to concentrations of
credit risk consist principally of cash investments and accounts receivable.
BabyCenter, Inc. invests cash which is not required for immediate operating
needs principally in deposits and money market funds, which bear minimal risk.
BabyCenter, Inc. has not experienced any significant losses on these
investments.
For the period ended September 30, 1997, 3 customers (Health Trac, Inc.,
Charles Schwab, Inc. and Palo Alto Medical Foundation) accounted for 41%, 41%,
and 18%, respectively, of total revenue. At September 30, 1997, 1 customer
represented 100% of the total balance of accounts receivable. For the year ended
September 30, 1998, 3 customers (The Procter and Gamble Distributing Company,
SmithKline Beecham, Inc. and Blue Shield of California) accounted for 31%, 18%,
and 16%, respectively, of total revenue. At September 30, 1998, 2 customers
represented 66% and 11% of the total balance of accounts receivable. For the six
months ended March 31, 1999, 3 customers (Blue Shield of California, The Procter
and Gamble Distributing Company and Johnson & Johnson Consumer Company, Inc.)
represented 36%, 13%, and 10%, respectively, of total revenue. At March 31,
1999, 2 customers represented 60% and 10% of the total balance of accounts
receivable. BabyCenter, Inc. performs ongoing credit evaluations of its
customers but does not require collateral. There have been no material losses on
individual customer receivables.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist primarily of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets, typically three to five
years. Assets acquired under lease and leasehold improvements are amortized
using the straight-line method over the shorter of the estimated life of the
asset or the remaining term of the lease.
REVENUE RECOGNITION
Revenues primarily consist of online and publishing services revenues.
Online revenues are derived principally from the sale of banner advertisements
and sponsorship advertising. In general, the sponsorship advertising contracts
have longer terms than standard banner advertising contracts and also involve
more integration, such as the placement of buttons which provide users with
direct links to the advertiser's website. Advertising revenues on each banner
and sponsorship contract are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable.
F-32
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company obligations typically include guarantees of a minimum number of
"impressions," or times that an advertisement appears in pages viewed by users
of BabyCenter, Inc.'s online properties. To the extent minimum guaranteed
impressions are not met, BabyCenter, Inc. defers recognition of the
corresponding revenues until the remaining guaranteed impression levels are
achieved.
BabyCenter, Inc. also earns revenue on sponsorship and Internet marketing
contracts which generally involve fees relating to the design, coordination,
editorial content, website hosting, and integration of the customer's content
and links into BabyCenter, Inc.'s online properties. These fees are generally
recognized as revenue as earned over the period in which related impressions or
services are delivered.
Publishing services revenue consists of developing customized print
products. Such revenue is recorded when earned, generally upon delivery of the
product. Payments received which are related to future performance are deferred
and recognized as revenue when earned.
Revenues from electronic commerce transactions, which consist primarily of
merchandise sold via the Internet, include outbound shipping and handling
charges and are recognized when the products are shipped. Revenues from
electronic commerce transactions from inception through September 30, 1998 were
not significant. Such revenues and cost of revenues were approximately $610,000
and $560,000 for the six months ended March 31, 1999.
COST OF REVENUES
Cost of online revenues consist of merchandise sold, inbound, and outbound
shipping costs and direct cost of order fulfillment. Cost of publishing services
revenue comprises direct printing and publishing cost. Such costs are expensed
as incurred.
TECHNOLOGY AND DEVELOPMENT
Technology and development expenses consist principally of payroll and
related expense for development, editorial, systems and telecommunications
operations personnel and consultants, systems and telecommunications
infrastructure, store management, and costs of acquired content. To date, all
such development costs have been expensed as incurred.
ADVERTISING COSTS
Advertising costs are accounted for as expenses in the period in which they
are incurred. Advertising expense for the period ended September 30, 1997 and
the year ended September 30, 1998 was approximately $14,500 and $260,000.
Advertising expense for the six months ended March 31, 1998 and 1999 was
approximately $60,450 and $609,000.
STOCK-BASED COMPENSATION
BabyCenter, Inc. grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
grant date. BabyCenter, Inc. accounts for stock option grants in accordance with
the provisions of the Accounting Principles Board's Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and, accordingly, recognizes no
F-33
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
compensation expense for stock options granted with exercise prices that are not
less than the fair value of BabyCenter, Inc.'s common stock on the date of
grant.
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period
less shares subject to repurchase. Had BabyCenter, Inc. been in a net income
position, diluted earnings per share would have included the shares used in the
computation of basic net income per share as well as the impact of outstanding
options and warrants to purchase common stock, using the treasury stock method,
to purchase an additional 281,895 shares for the period ended September 30,
1997, 677,320 shares for the year ended September 30, 1998 and 537,507 and
1,024,858 shares for the six months ended March 31, 1998 and 1999. Such shares
have been excluded because they are antidilutive for all periods presented.
Shares of convertible preferred stock have been excluded from the computation.
A reconciliation of shares used in the calculation of basic and diluted net
loss per share follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD ENDED YEAR ENDED MARCH 31,
SEPTEMBER 30, SEPTEMBER 30, -------------------------
1997 1998 1998 1999
-------------- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss............... $ (520,815) $(1,121,234) $ (559,431) $(3,982,721)
=========== =========== =========== ===========
Basic and diluted:
Weighted-average
shares of common
stock
outstanding........ 1,759,138 1,759,138 1,759,138 1,827,702
Less weighted-
average shares
subject to
repurchase......... (1,312,798) (966,360) (1,075,764) (774,017)
----------- ----------- ----------- -----------
Shares used in
computing basic and
diluted net loss
per share.......... 446,340 792,778 683,374 1,053,685
=========== =========== =========== ===========
Basic and diluted net
loss per share....... $ (1.17) $ (1.41) $ (0.82) $ (3.78)
=========== =========== =========== ===========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), and No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131") (collectively, the "Statements").
BabyCenter, Inc. adopted these Statements as of October 1, 1998.
F-34
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. The adoption of SFAS 130 had no impact on the
BabyCenter, Inc.'s results of operations or financial condition. SFAS 131
requires disclosure of certain information regarding operating segments,
products and services, geographic areas of operation, and major customers.
BabyCenter, Inc. operates as one reportable segment and has determined that the
specific additional information and disclosure requirements under SFAS 131 are
not material to BabyCenter, Inc. for the period ended March 31, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which will be effective for the year ending September 30, 2000.
This statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. BabyCenter, Inc. believes the adoption of SFAS 133
will not have a material effect on the financial statements, since it currently
does not invest in derivative instruments and engage in hedging activities.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize
certain costs related to internal use software once certain criteria have been
met. BabyCenter, Inc. is required to implement SOP 98-1 for the year ending
September 30, 2000. Adoption of SOP 98-1 is expected to have no material impact
on BabyCenter, Inc.'s financial condition or results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- MARCH 31,
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Furniture and equipment................... $ 98,593 $685,858 $1,458,850
Software.................................. 2,388 2,653 120,409
Leasehold improvements.................... -- 2,900 2,900
-------- -------- ----------
100,981 691,411 1,582,159
Less accumulated depreciation............. (9,443) (89,544) (277,755)
-------- -------- ----------
Property and equipment, net............... $ 91,538 $601,867 $1,304,404
======== ======== ==========
</TABLE>
Property and equipment includes certain furniture, computers, and equipment
financed under capital leases. The cost of such assets under capital leases was
$100,981 and $285,745 at September 30, 1997 and 1998, and $916,924 at March 31,
1999. Accumulated amortization for these assets was $9,443 and $88,748 at
September 30, 1997 and 1998 and $169,616 at March 31, 1999.
F-35
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
3. COMMITMENTS
OPERATING LEASE COMMITMENTS
BabyCenter, Inc. leases its facilities under noncancelable operating leases
expiring in May and July 1999. Rent expense for facilities under operating
leases was approximately $25,300 and $107,000 for the period ended September
1997 and for the year ended September 30, 1998. Rent expense was approximately
$65,600 and $141,600 for the six months ended March 31, 1998 and 1999. Future
minimum rental commitments under operating leases at March 31, 1999 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $121,328
2000........................................................ 125,818
--------
$247,146
========
</TABLE>
CAPITAL LEASE OBLIGATIONS
BabyCenter, Inc. leases certain furniture, computers and equipment under
noncancelable capital leases. Obligations under capital leases represent the
present value of future noncancelable rental payments under various lease
agreements.
Future minimum lease payments under capital leases are as follows at
March 31, 1999:
<TABLE>
<S> <C>
Fiscal year ended
1999...................................................... $ 144,166
2000...................................................... 259,018
2001...................................................... 170,032
2002...................................................... 160,166
2003...................................................... 39,272
2004 and thereafter....................................... 2,355
---------
Total minimum lease payments................................ 775,009
Less amount representing interest........................... (93,261)
---------
Present value of net minimum lease payments................. 681,748
Less current portion........................................ (117,659)
---------
Long-term portion........................................... $ 564,089
=========
</TABLE>
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
BabyCenter, Inc.'s Certificate of Incorporation provide for the issuance of
up to 5,700,000 shares of convertible preferred stock, 1,307,693 of which have
been designated as Series A, 1,860,672 as Series B, and 2,500,000 as Series C.
Shares outstanding at March 31, 1999 are 1,202,046 Series A, 1,693,884 Series B
and 2,000,000 Series C.
F-36
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Each share of Series A, B and C preferred stock is convertible, at the
option of the holder, into a share of common stock, on a one-for-one basis,
subject to certain adjustments for dilution, if any, resulting from future stock
issuances. Additionally, the preferred shares automatically convert into common
stock concurrent with the closing of an underwritten public offering of common
stock under the Securities Act of 1933 in which BabyCenter, Inc. receives at
least $15,000,000 in gross proceeds and the price per share is at least $10.00
(subject to adjustment for a recapitalization or certain other stock
adjustments).
Series A, B and C preferred stockholders are entitled to annual
noncumulative dividends, before and in preference to any dividends paid on
common stock, when and as declared by the board of directors. No dividends have
been declared through March 31, 1999.
The Series A, B and C preferred stockholders are entitled to receive, upon
liquidation or merger, a distribution of $0.65, $1.51 and $5.00 per share
(subject to adjustment for a recapitalization) plus all declared but unpaid
dividends. Thereafter, the remaining assets and funds, if any, shall be
distributed ratably on a per-share basis among the common stockholders and the
Series A, B and C preferred stockholders.
The Series A, B and C preferred stockholders have voting rights equal to the
common shares they would own upon conversion.
As of March 31, 1999, BabyCenter, Inc. has reserved 4,895,930 shares of
common stock for issuance upon conversion of its Series A, B and C preferred
stock.
COMMON STOCK
Since inception (February 11, 1997), BabyCenter, Inc. issued 2,277,397
shares of common stock to founders and officers for cash and notes receivable.
The common stock is subject to repurchase, at the Company's option, until
vested. Shares generally vest over a period of three to four years. At
March 31, 1999, approximately 928,113 shares were subject to repurchase. The
weighted-average fair value of unvested stock issued during the period since
inception (February 11, 1997) is $3.11 per share.
WARRANTS
In October 1998, BabyCenter, Inc. entered into an agreement with a vendor
for the supply goods and certain fulfillment services to support electronic
commerce transactions of BabyCenter, Inc. In connection with this agreement,
BabyCenter, Inc. granted the vendor a warrant to purchase up to 120,000 shares
of common stock of BabyCenter, Inc. at a price of $0.25 per share. The warrant
becomes exercisable ratably over the term of the agreement. At March 31, 1999,
warrants for 60,000 shares were not exercisable. The warrant expires in November
2003. The warrant has been accounted for as a variable award and as such during
the six months ended March 31, 1999, the Company recorded a charge of $405,523
related to the value of the warrants which became exercisable during the period.
This amount is included in marketing and sales expense in the accompanying
Statement of Operations.
F-37
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
In October 1998, BabyCenter, Inc. issued warrants to purchase up to 22,000
shares of Series C convertible preferred stock at $5.00 per share in connection
with an equipment lease financing arrangement. These warrants are immediately
exercisable and expire in October 2003 or earlier upon completion of the merger.
No amount was allocated to the value these warrants as such amounts were not
significant.
NOTES RECEIVABLE FROM OFFICERS
Notes receivable from officers, totaling $1,102,000 at March 31, 1999
represent interest bearing full recourse notes from certain officers issued to
finance the purchase of 527,000 shares of common stock of BabyCenter, Inc. The
notes bear interest at a rate of 4.77% per annum, with principal and interest
due and payable on various dates in March 2003.
1997 STOCK PLAN
In February 1997, the board of directors adopted the 1997 Stock Plan (the
"Plan") for issuance of options of common stock to eligible participants.
Options granted may be either incentive stock options or nonstatutory stock
options. Incentive stock options may be granted to employees with exercise
prices of no less than the fair value and nonstatutory options may be granted to
eligible participants at exercise prices of no less than 85% of the fair value
of the common stock on the grant date as determined by the board of directors.
Options generally vest at the rate of 25% after one year from the date of grant,
with the remaining balance vesting monthly over the next three years with a term
of 10 years. BabyCenter, Inc. has reserved 2,261,500 shares of common stock for
the grant of options under the Plan.
Pro forma information regarding net loss is required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and has been determined as if BabyCenter, Inc. had
accounted for its employee stock options under the fair value method as
specified by SFAS 123. The fair value of these options was estimated at the date
of grant using the minimum value method with the following weighted-average
assumptions: no dividends; an expected life of five years; and a risk-free
interest rate of approximately 6% for the period ended September 30, 1997, for
the year ended September 30, 1998 and for the six months ended March 31, 1998
and 1999.
The effect of applying the FASB statement's minimum value method to
BabyCenter, Inc.'s stock options granted did not result in pro forma net loss
amounts that are materially different from the reported historical amounts.
Therefore, such pro forma information is not separately presented herein. Future
pro forma net income (loss) results may be materially different from actual
amounts reported.
F-38
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of activity under BabyCenter, Inc.'s stock option plan was as
follows:
<TABLE>
<CAPTION>
SHARES UNDER WEIGHTED-
SHARES AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
---------------- ------------ --------------
<S> <C> <C> <C>
Shares authorized for issuance.... 559,440 -- --
Options granted................... (281,895) 281,895 $0.07
---------- --------
Balance at September 30, 1997..... 277,545 281,895 $0.07
Additional authorization.......... 602,060 -- --
Options granted................... (521,612) 521,612 $0.17
Options exercised................. -- -- --
Options forfeited................. 126,187 (126,187) $0.08
---------- --------
Balance at September 30, 1998..... 484,180 677,320 $0.14
Additional authorization.......... 1,100,000 -- --
Options granted................... (792,038) 792,038 $2.38
Options exercised................. -- (537,958) $2.05
Options forfeited................. 48,542 (48,542) $0.40
---------- --------
Balance at March 31, 1999......... 840,684 882,858 $1.34
========== ========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED- OPTIONS
OPTIONS AVERAGE WEIGHTED- EXERCISABLE AT WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE SEPTEMBER AVERAGE
EXERCISE PRICE SEPTEMBER 30, CONTRACTUAL EXERCISE 30, EXERCISE
RANGE 1998 LIFE PRICE 1998 PRICE
- -------------- -------------- ----------- --------- -------------- ---------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.07-$0.95 688,570 8.92 $0.31 215,208 $0.13
$2.00-$4.00 194,288 9.93 $3.50 7,750 $3.20
------- -------
$0.07-$4.00 882,858 9.25 $1.34 222,958 $0.47
======= =======
</TABLE>
The weighted-average fair value of options granted during the period ended
September 30, 1997, the year ended September 30, 1998 and the six months ended
March 31, 1999 was $0.04, $0.04 and $0.56.
DEFERRED COMPENSATION
BabyCenter, Inc. recorded deferred compensation of $9,469,000 for the six
months ended March 31, 1999. The amount recorded represents the difference
between the grant price and the deemed fair value of BabyCenter, Inc.'s common
stock subject to options granted. The amortization of deferred compensation is
being amortized to operations over the vesting period of the options, which is
typically four years. Total amortization recognized was $573,000 for the six
months ended March 31, 1999.
F-39
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
5. INCOME TAXES
As of March 31, 1999, BabyCenter, Inc. had federal net operating loss
carryforwards of approximately $4,800,000. The net operating loss and credit
carryforwards will expire at various dates beginning in 2012 through 2019, if
not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of September 30, 1997
and 1998, and March 31, 1999, BabyCenter, Inc. had deferred tax assets of
approximately $200,000, $600,000 and $2,000,000. The net deferred tax assets
relate primarily to net operating loss carryforwards and have been fully offset
by a valuation allowance.
6. YEAR 2000 ISSUE (UNAUDITED)
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries in order to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies will need to be upgraded to
comply with Year 2000 requirements. Significant uncertainty exists concerning
the potential effects associated with this issue. Although BabyCenter, Inc.
believes that its products and services are Year 2000 compliant, there can be no
assurance that Year 2000 errors or defects will not be discovered in
BabyCenter, Inc.'s current and future products or services. Any failure by
BabyCenter, Inc. to make its products Year 2000 compliant could result in a
decrease in revenue and an increase in the allocation of resources to address
Year 2000 problems without additional revenue commensurate with such dedication
of resources, or an increase in litigation costs relating to losses suffered by
BabyCenter, Inc.'s customers due to such Year 2000 problems.
BabyCenter is in the process of reviewing the year 2000 compliance of its
internally developed proprietary software. This review has included testing to
determine how its systems will function at and beyond the year 2000. BabyCenter
expects to complete these tests during the summer of 1999. Since inception,
BabyCenter has internally developed substantially all of the systems for the
operation of its Web site. These systems include the software used to provide
its Web site's search, customer interaction, and transaction-processing and
distribution functions, as well as monitoring and back-up capabilities. Based
upon its assessment to date, BabyCenter believes that its internally developed
proprietary software is year 2000 compliant.
BabyCenter is currently assessing the year 2000 readiness of its third-party
supplied software, computer technology and other services, which include
software for use in its accounting, database and security systems. The failure
of such software or systems to be year 2000 compliant could have a material
negative impact on BabyCenter's corporate accounting functions and the operation
of its Web site. As part of the assessment of the year 2000 compliance of these
systems, BabyCenter has sought assurances from these vendors that their
software, computer technology
F-40
<PAGE>
BABYCENTER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED MARCH 31, 1998 IS UNAUDITED)
6. YEAR 2000 ISSUE (UNAUDITED) (CONTINUED)
and other services are year 2000 compliant. BabyCenter has expensed amounts
incurred in connection with year 2000 assessment since its formation through
March 31, 1999. Such amounts have not been material. BabyCenter expects this
assessment process to be completed during the summer of 1999. Based upon the
results of this assessment, BabyCenter will develop and implement, if necessary,
a remediation plan with respect to third-party software, third-party vendors and
computer technology and services that may fail to be year 2000 compliant.
BabyCenter expects to complete any required remediation during the summer of
1999. At this time, the expenses associated with this assessment and potential
remediation plan that may be incurred in the future cannot be determined;
therefore, BabyCenter has not developed a budget for these expenses. The failure
of BabyCenter's software and computer systems and of its third-party suppliers
to be year 2000 compliant would have a material adverse effect on it.
The year 2000 readiness of the general infrastructure necessary to support
its operations is difficult to assess. For instance, BabyCenter depends on the
integrity and stability of the Internet to provide its services. BabyCenter also
depends on the year 2000 compliance of the computer systems and financial
services used by consumers. Thus, the infrastructure necessary to support its
operations consists of a network of computers and telecommunications systems
located throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
year 2000 issues that may impact the entire infrastructure. BabyCenter's ability
to assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based on
these sources, BabyCenter believes most entities and individuals that rely
significantly on the Internet are carefully reviewing and attempting to
remediate issues relating to year 2000 compliance, but it is not possible to
predict whether these efforts will be successful in reducing or eliminating the
potential negative impact of year 2000 issues. A significant disruption in the
ability of consumers to reliably access the Internet or portions of it or to use
their credit cards would have an adverse effect on demand for BabyCenter's
services and would have a material adverse effect on BabyCenter.
At this time, BabyCenter has not yet developed a contingency plan to address
situations that may result if BabyCenter or its vendors are unable to achieve
year 2000 compliance because BabyCenter currently does not believe that such a
plan is necessary. The cost of developing and implementing such a plan, if
necessary, could be material. Any failure of its material systems, BabyCenter's
vendors' material systems or the Internet to be year 2000 compliant could have
material adverse consequences for BabyCenter. Such consequences could include
difficulties in operating BabyCenter's Web site effectively, taking product
orders, making product deliveries or conducting other fundamental parts of
BabyCenter's business.
7. SUBSEQUENT EVENT
On April 18, 1999, BabyCenter, Inc. and eToys Inc. signed a definitive
agreement to merge BabyCenter, Inc. with eToys Inc. Consummation of the merger
is expected by the end of the quarter ended June 30, 1999 and is subject to
certain closing conditions, including governmental approvals and approval by the
stockholders of BabyCenter, Inc. Under the terms of agreement, eToys Inc. would
issue its shares to the stockholders of BabyCenter, Inc. The merger is to be
treated as a purchase by eToys Inc. for accounting purposes.
F-41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the notes offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Risk Factors......................... 2
Information Regarding Forward-Looking
Statements......................... 18
Use of Proceeds...................... 19
Price Range of Common Stock and
Dividend Policy.................... 19
Selected Financial Data.............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................. 33
Management........................... 49
Certain Transactions................. 61
Principal Stockholders............... 63
Description of the Notes............. 66
Description of Capital Stock......... 81
Certain Federal Income Tax
Considerations..................... 84
Selling Securityholders.............. 85
Plan of Distribution................. 85
Legal Matters........................ 87
Experts.............................. 87
Available Information................ 87
Index to Financial Statements........ F-1
</TABLE>
[LOGO]
6.25% Convertible
Subordinated Notes due
December 1, 2004
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by eToys in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 21,954
Printing and engraving expenses.............................
Legal fees and expenses..................................... 15,000
Accounting fees and expenses................................
Miscellaneous fees and expenses.............................
----------
Total................................................... $
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article VII of our current
Certificate of Incorporation 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 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our incorporation in November 1996, we have sold and issued the
following securities:
1. On June 27, 1997 we issued 11,680,002 shares of common stock to five
founders for an aggregate consideration of $58,400.01. On June 27, 1997 we also
issued 19,400,001 shares of common stock and a Note in the principal amount of
$100,000 to one investor for an aggregate consideration of $197,000.01.
2. On September 29, 1997, we issued one investor a warrant to purchase
150,000 shares of common stock in connection with the transfer of certain
intellectual property.
3. On August 15, 1997 and September 26, 1997, we issued Notes in the
principal amount of $895,000 and warrants to purchase 2,165,271 shares of
Series A preferred stock to 40 investors for an aggregate consideration of
$895,000. The Notes converted into 4,404,054 shares of Series A preferred stock.
4. On December 23, 1997, we issued 18,954,051 shares of Series A preferred
stock to fifty accredited investors for an aggregate consideration of
$3,917,170.54.
5. On March 11, 1998, we issued 2,340,000 shares of common stock to one
accredited investor in exchange for substantially all of the assets of a
business owned by the investor (less $270,000 cash).
6. On May 6, 1998, we issued Notes in the aggregate principal amount of
$2,530,679.61 to four accredited investors. The Notes converted into 3,609,756
shares of Series B preferred stock.
II-1
<PAGE>
7. On June 4, 1998, we issued 31,424,510 shares of Series B preferred stock
to twelve accredited investors for am aggregate consideration of $22,030,677.17.
8. On June 17, 1998, we issued 4,235,436 shares of Series B preferred stock
to sixteen accredited investors for an aggregate consideration of $2,969,322.97.
9. On January 31, 1999 we issued a warrant to purchase 11,412 shares of
common stock to a lessor in connection with an equipment financing.
10. On March 24, 1999 we issued an aggregate of 1,999,998 shares of
Series C preferred stock to two large institutional accredited investors for
aggregate consideration of $19,999,980.
11. On December 6, 1999, we issued Notes in the aggregate principal amount
of $150,000,000 to four qualified institutional buyers.
12. Since inception we have issued an aggregate of 18,522,900 options to
purchase common stock of eToys to a number of our employees, directors and
consultants.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances described in Item 12 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1* Form of Underwriting Agreement dated April , 1999.
2.1* Agreement and Plan of Reorganization by and among eToys,
BabyCenter, Inc. and, with respect to Article VII only,
Pat Kenealy as Shareholder Representative, dated as of
April 18, 1999.
3.1* Amended and Restated Certificate of Incorporation of eToys
(superseded by Exhibit 3.5).
3.2* Amended and Restated Certificate of Incorporation of eToys
(proposed) (superseded by Exhibit 3.6).
3.3* Amended and Restated Bylaws of eToys.
3.4* Amended and Restated Bylaws of eToys (proposed).
3.5* Amended and Restated Certificate of Incorporation of eToys.
3.6* Amended and Restated Certificate of Incorporation of eToys
(proposed).
4.1* Specimen Stock Certificate.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding the legality of the securities being
registered.**
10.1* Stock Purchase Agreement dated June 27, 1997 between eToys
and Edward C. Lenk.
10.2* Restricted Stock Purchase Agreement dated June 27, 1997
between eToys and Edward C. Lenk.
10.3* Stock Purchase Agreement dated June 27, 1997 between eToys
and Frank C. Han.
10.4* Restricted Stock Purchase Agreement dated June 27, 1997
between eToys and Frank C. Han.
10.5* Note and Stock Purchase Agreement dated June 27, 1997
between eToys and idealab!.
10.6*+ Interactive Marketing Agreement dated October 1, 1997
between eToys and America Online, Inc. (amended
January 1, 1998).
10.7* Series A Preferred Stock Purchase Agreement dated December
23, 1997 among eToys and certain investors.
10.8* Series B Preferred Stock Purchase Agreement dated June 4,
1998 among eToys and certain investors.
10.9* Amended and Restated Investors' Rights Agreement dated June
4, 1998, among eToys and certain investors (superseded by
Exhibit 10.24).
10.10* Amended and Restated Voting Agreement dated June 4, 1998,
among eToys and certain investors (superseded by
Exhibit 10.25).
10.11* Amended and Restated Right of First Refusal and Co-Sale
Agreement dated June 4, 1998, among eToys, Edward C.
Lenk, Frank C. Han and certain investors (superseded by
Exhibit 10.26).
10.12* Lease dated January 22, 1999 between eToys and Spieker
Properties, L.P.
10.13* Standard Industrial Lease Agreement dated June 26, 1998
between eToys and Newcrow (amended October 15, 1998).
10.14* Form of Indemnification Agreement between eToys and each of
its officers and directors.
10.15* 1997 Stock Plan (superseded by Exhibit 10.27).
10.16* 1999 Stock Plan (superseded by Exhibit 10.30).
10.17* 1999 Employee Stock Purchase Plan (superseded by Exhibit
10.31).
10.18* 1999 Directors' Stock Option Plan.
10.19* Offer Letter dated December 5, 1998 between eToys and John
R. Hnanicek.
10.20* Offer Letter dated December 28, 1998 between eToys and Louis
V. Zambello III.
10.21* Offer Letter dated January 12, 1999 between eToys and
Steven J. Schoch.
10.22* Equipment Lease Line dated December 24, 1998 between eToys
and Comdisco, Inc.
10.23* Series C Preferred Stock Purchase Agreement dated March 24,
1999 among eToys and certain investors.
10.24* Amended and Restated Investors' Rights Agreement dated
March 24, 1999 among eToys and certain investors.
10.25* Amended and Restated Voting Agreement dated March 24, 1999
among eToys and certain investors.
10.26* Amended and Restated Right of First Refusal and Co-Sale
Agreement dated March 24, 1999 among eToys and certain
investors.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
10.27* 1997 Stock Plan (as amended) (superseded by Exhibit 10.29).
10.28* Fulfillment Services Agreement by and between eToys and
Fingerhut Business Services, Inc. dated as of April 21,
1999.
10.29* 1997 Stock Plan (as amended).
10.30* 1999 Stock Plan (as amended).
10.31* 1999 Employee Stock Purchase Plan (as amended).
10.32* Offer Letter dated May 13, 1999 between eToys and
Janine Bousquette.
10.33* Deed of Lease, dated as of May 10, 1999, between eToys and
East Bowles, L.L.C.
10.34**+ Interactive Marketing Agreement dated August 10, 1999
between eToys and America Online, Inc.
23.1 Consent of Accountants.
23.2 Consent of Accountants
23.3 Consent of Attorneys (see Exhibit 5.1).
24.1* Power of Attorney.
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.**
99.1* Consent of Matthew N. Glickman.
</TABLE>
- ------------------------
* Previously filed by the registrant with the Commission.
** To be filed by subsequent amendment.
+ Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
ITEM 17
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-4
<PAGE>
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.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering
or throughout a continuous offering. Financial statements and information
otherwise required by Section 10(a)(3) of the Act need not be furnished,
PROVIDED, that the registrant includes in the prospectus, by means of a
post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by
Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Form F-3.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Monica, State of
California on February 7, 2000.
<TABLE>
<S> <C> <C>
ETOYS INC.
By: /s/ EDWARD C. LENK
-----------------------------------------
Edward C. Lenk
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
UNCLE OF THE BOARD
</TABLE>
Each person whose signature appears below hereby constitutes and appoints
Steven J. Schoch and Peter Juzwiak, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign in his name and on his behalf (i) any and all amendments
(including post-effective amendments), supplements and additions to this
Registration Statement and (ii) any and all Registration Statements relating to
an offering contemplated pursuant to Rule 415 under the Securities Act of 1933,
as amended, of the eToys Inc. 6.25% Convertible Subordinated Notes due December
1, 2004 and the eToys Inc. common stock into which such notes are convertible
and any and all amendments (including post-effective amendments), supplements
and additions thereto, and to file each of the same, with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission, and hereby grants to such attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or each of them or their or his
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Such attorneys-in-fact and agents shall have, and may exercise, all of the
powers hereby conferred.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ EDWARD C. LENK President, Chief
------------------------------------------- Executive Officer and February 7, 2000
Edward C. Lenk Uncle of the Board
/s/ STEVEN J. SCHOCH
------------------------------------------- Chief Financial Officer February 7, 2000
Steven J. Schoch
/s/ MATTHEW N. GLICKMAN
------------------------------------------- Director February 7, 2000
Matthew N. Glickman
/s/ PETER C.M. HART
------------------------------------------- Director February 7, 2000
Peter C.M. Hart
/s/ TONY HUNG
------------------------------------------- Director February 7, 2000
Tony Hung
/s/ MICHAEL MORITZ
------------------------------------------- Director February 7, 2000
Michael Moritz
/s/ DANIEL NOVA
------------------------------------------- Director February 7, 2000
Daniel Nova
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
eToys Inc.,
ISSUER
TO
U.S. Bank Trust National Association,
a national banking association
TRUSTEE
----------------
INDENTURE
Dated as of December 6, 1999
----------------
Up to U.S. $200,000,000
6.25% CONVERTIBLE SUBORDINATED NOTES DUE DECEMBER 1, 2004
- -------------------------------------------------------------------------------
<PAGE>
INDENTURE, dated as of December 6, 1999, between eToys
Inc., a corporation duly organized and existing under the laws of the State
of Delaware, having its principal office at 3100 Ocean Park Boulevard, Suite
300, Santa Monica, California 90405 (herein called the "Company"), and U.S.
Bank Trust National Association, a national banking association, as Trustee
hereunder (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of
its 6.25% Convertible Subordinated Notes due December 1, 2004 (herein called
the "Securities"), of substantially the tenor and amount hereinafter set
forth, and to provide therefor the Company has duly authorized the execution
and delivery of this Indenture.
All things necessary to make the Securities, when the
Securities are executed by the Company and authenticated and delivered
hereunder, the valid obligations of the Company, and to make this
Indenture a valid agreement of the Company, in accordance with their
and its terms, have been done. Further, all things necessary to duly
authorize the issuance of the Common Stock of the Company issuable upon
the conversion of the Securities, and to duly reserve for issuance the
number of shares of Common Stock issuable upon such conversion, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase
of the Securities by the Holders thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the
Securities, as follows:
-1-
<PAGE>
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 1.1 DEFINITIONS.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as
the singular;
(2) all accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with generally accepted
accounting principles in the United States, and, except as otherwise
herein expressly; and
(3) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to
any particular Article, Section or other subdivision.
"Act", when used with respect to any Holder of a Security, has
the meaning specified in SECTION 1.4.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control", when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agent Member" means any member of, or participant in, the
Depositary.
-2-
<PAGE>
"Applicable Procedures" means, with respect to any transfer
or transaction involving a Global Security or beneficial interest therein,
the rules and procedures of the Depositary for such Security, to the extent
applicable to such transaction and as in effect from time to time.
"Authenticating Agent" means any Person authorized pursuant
to SECTION 6.12 to act on behalf of the Trustee to authenticate Securities.
"Average Sales Price Per Share" means, with respect to the
Common Stock of the Company, for any day, (i) the average of the high and low
sales price per share regular way on a national securities exchange or, (ii)
if the Common Stock is not listed on a national securities exchange, the
average of the high and low sales price per share regular way on The Nasdaq
National Market, or (iii) if the Common Stock is not quoted on The Nasdaq
National Market or listed or admitted to trading on any national securities
exchange, the average of the high and low sales prices in the
over-the-counter market as furnished by any New York Stock Exchange member
firm selected from time to time by the Company for that purpose.
"Board of Directors" means either the board of directors of
the Company or any duly authorized committee of that board.
"Board Resolution" means a resolution duly adopted by the
Board of Directors, a copy of which, certified by the Secretary or an
Assistant Secretary of the Company to have been duly adopted by the Board of
Directors and to be in full force and effect on the date of such
certification, shall have been delivered to the Trustee.
"Business Day", when used with respect to any Place of
Payment, Place of Conversion or any other place, as the case may be, means
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on
which banking institutions in such Place of Payment, Place of Conversion or
other place, as the case may be, are authorized or obligated by law or
executive order to close; PROVIDED, HOWEVER, that a day on which banking
institutions in New York, New York are authorized or obligated by law or
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executive order to close shall not be a Business Day for purposes of SECTION
10.6 or SECTION 11.5.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States is pledged in support thereof) having maturities of not more
than six months from the date of acquisition, (ii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the
date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in excess of $500 million and a Thompson Bank
Watch Rating of "B" or better, (iii) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clause (i) above entered into with any financial institution meeting the
qualifications specified in clause (ii) above, (iv) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. or Standard
& Poor's Ratings Services and in each case maturing within six months after
the date of acquisition and (v) money market funds at least 95% of the assets
of which constitute Cash Equivalents of the kinds described in clauses (i)-(iv)
of this definition.
"Change in Control" has the meaning specified in
SECTION 13.4(b).
"Code" has the meaning specified in SECTION 2.1.
"Commission" means the United States Securities and
Exchange Commission, as from time to time constituted, created under the
Exchange Act, or, if at any time after the execution of this instrument such
Commission is not existing and performing the duties now assigned to it under
the Trust Indenture Act, then the body performing such duties at such time.
"Common Stock" means the shares of the class designated as
common stock of the Company at the date of
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this Indenture or as such stock may be reconstituted from time to time.
Subject to the provisions of SECTION 11.11, shares issuable on conversion or
repurchase of Securities shall include only shares of Common Stock or shares
of any class or classes of common stock resulting from any reclassification
or reclassifications thereof; PROVIDED, HOWEVER, that if at any time there
shall be more than one such resulting class, the shares so issuable on
conversion of Securities shall include shares of all such classes, and the
shares of each such class then so issuable shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassifications bears to the total number of shares of all such
classes resulting from all such reclassifications.
"Company" means the Person named as the "Company" in the
first paragraph of this instrument until a successor Person shall have become
such pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Notice" has the meaning specified in SECTION 13.3(a).
"Company Request" or "Company Order" means a written
request or order signed in the name of the Company by its Chairman or Uncle
of the Board, its Vice Chairman of the Board, its Chief Executive Officer,
its President or a Vice President, and by its principal financial officer,
Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary,
and delivered to the Trustee.
"Constituent Person" has the meaning specified in
SECTION 11.11.
"Conversion Agent" means any Person authorized by the
Company to convert Securities in accordance with ARTICLE ELEVEN. The Company
has initially appointed the Trustee as its Conversion Agent.
"Conversion Price" has the meaning specified in SECTION
13.4(c).
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"Conversion Rate" has the meaning specified in SECTION 11.1.
"Corporate Trust Office" means the office of the Trustee at
which at any particular time its corporate trust business shall be
principally administered (which at the date of this Indenture is located at
180 East Fifth Street, Suite 200, St. Paul, Minnesota 55101, Attn: Corporate
Trust).
"Corporation" means a corporation, company, association,
joint-stock company or business trust.
"Defaulted Interest" has the meaning specified in
SECTION 3.7.
"Depositary" means, with respect to any Registered
Securities, a clearing agency that is registered as such under the Exchange
Act and is designated by the Company to act as Depositary for such Registered
Securities (or any successor securities clearing agency so registered).
"Designated Senior Debt" means any particular Senior Debt
in which the instrument creating or evidencing the same or the assumption or
guarantee thereof (or related agreements or documents to which the Company is
a party) expressly provides that such indebtedness shall be "Designated
Senior Debt" for purposes of this Indenture (provided that such instrument,
agreement or other document may place limitations and conditions on the right
of such Senior Debt to exercise the rights of Designated Senior Debt).
"Dollar" or "U.S.$" means a dollar or other equivalent unit
in such coin or currency of the United States as at the time shall be legal
tender for the payment of public and private debts.
"DTC" means The Depository Trust Company, a New York
corporation.
"Event of Default" has the meaning specified in SECTION 5.1.
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"Exchange Act" means the United States Securities Exchange
Act of 1934 (or any successor statute), as amended from time to time.
"Global Security" means a Registered Security that is
registered in the Security Register in the name of a Depositary or a nominee
thereof.
"Holder" means the Person in whose name the Security is
registered in the Security Register.
"Indenture" means this instrument as originally executed or
as it may from time to time be supplemented or amended by one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof, including, for all purposes of this instrument and any
such supplemental indenture, the provisions of the Trust Indenture Act that
are deemed to be a part of and govern this instrument and any such
supplemental indenture, respectively.
"Initial Purchasers" means Goldman, Sachs & Co., Merrill
Lynch Pierce, Fenner & Smith Incorporated, BancBoston Robertson Stephens,
Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.
"Interest Payment Date" means the Stated Maturity of an
installment of interest on the Securities.
"Liquidated Damages" has the meaning specified in the
Registration Rights Agreement.
"Maturity", when used with respect to any Security, means
the date on which the principal of such Security becomes due and payable as
therein or herein provided, whether at the Stated Maturity or by declaration
of acceleration, call for redemption, exercise of the repurchase right set
forth in ARTICLE THIRTEEN or otherwise.
"Non-electing Share" has the meaning specified in
SECTION 11.11.
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"Notice of Default" has the meaning specified in SECTION 5.1.
"Officers' Certificate" means a certificate signed by the
Chairman or Uncle of the Board, a Vice Chairman of the Board, the Chief
Executive Officer, the President or a Vice President and by the principal
financial officer, the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel,
who may be counsel for or employed by the Company and who shall be acceptable
to the Trustee.
"Outstanding", when used with respect to Securities, means,
as of the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, EXCEPT:
(i) Securities theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation;
(ii) Securities for the payment or redemption of which
money in the necessary amount has been theretofore deposited
with the Trustee or any Paying Agent (other than the Company)
in trust or set aside and segregated in trust by the Company
(if the Company shall act as its own Paying Agent) for the
Holders of such Securities, PROVIDED that if such Securities
are to be redeemed, notice of such redemption has been duly
given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made; and
(iii) Securities which have been paid pursuant to SECTION
3.6 or in exchange for or in lieu of which other Securities
have been authenticated and delivered pursuant to this
Indenture, other than any such Securities in respect of which
there shall have been presented to the Trustee proof
satisfactory to it that such Securities are
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held by a bona fide purchaser in whose hands such Securities
are valid obligations of the Company;
PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities are present at a meeting of
Holders of Securities for quorum purposes or have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities
owned by the Company or any other obligor upon the Securities or any
Affiliate of the Company or such other obligor shall be disregarded and
deemed not to be Outstanding, except that, in determining whether the Trustee
shall be protected in relying upon any such determination as to the presence
of a quorum or upon any such request, demand, authorization, direction,
notice, consent or waiver, only Securities which a Responsible Officer of the
Trustee actually knows to be so owned shall be so disregarded. Securities so
owned which have been pledged in good faith may be regarded as Outstanding if
the pledgee establishes to the satisfaction of the Trustee the pledgee's
right so to act with respect to such Securities and that the pledgee is not
the Company or any other obligor upon the Securities or any Affiliate of the
Company or such other obligor.
"Paying Agent" means any Person authorized by the Company
to pay the principal of or interest on any Securities on behalf of the
Company and, except as otherwise specifically set forth herein, such term
shall include the Company if it shall act as its own Paying Agent. The
Company has initially appointed the Trustee as its Paying Agent.
"Person" means any individual, corporation, limited
liability company, partnership, joint venture, trust, estate, unincorporated
organization or government or any agency or political subdivision thereof.
"Place of Conversion" has the meaning specified in
SECTION 3.1.
"Place of Payment" has the meaning specified in SECTION 3.1.
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"Predecessor Security" of any particular Security means
every previous Security evidencing all or a portion of the same debt as that
evidenced by such particular Security; and, for the purposes of this
definition, any Security authenticated and delivered under SECTION 3.6 in
exchange for or in lieu of a mutilated, destroyed, lost or stolen Security
shall be deemed to evidence the same debt as the mutilated, destroyed, lost
or stolen Security.
"Purchase Agreement" means the Purchase Agreement, dated as
of December 1, 1999, between the Company and the Initial Purchasers, as such
agreement may be amended from time to time.
"Record Date" means any Regular Record Date or Special
Record Date.
"Record Date Period" means the period from the close of
business of any Regular Record Date next preceding any Interest Payment Date
to the opening of business on such Interest Payment Date.
"Redemption Date" when used with respect to any Security to
be redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security
to be redeemed, means the price at which it is to be redeemed pursuant to
this Indenture.
"Registered Securities" has the meaning specified in
SECTION 2.1.
"Registrable Securities" has the meaning specified in the
Registration Rights Agreement.
"Registration Default" has the meaning specified in the
Registration Rights Agreement.
"Registration Rights Agreement" has the meaning specified
in SECTION 2.2.
"Regular Record Date" for interest payable in respect of
any Registered Security on any Interest Payment
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Date means the fifteenth day of May or the fifteenth day of November (whether
or not a Business Day), as the case may be, next preceding such Interest
Payment Date.
"Representative" means (a) the indenture trustee or other
trustee, agent or representative for any Designated Senior Debt, or (b) with
respect to Designated Senior Debt that does not have any such trustee, agent
or other representative, (i) in the case of such Designated Senior Debt
issued pursuant to an agreement providing for voting arrangements as among
the holders or owners of such Designated Senior Debt, any holder or owner of
such Designated Senior Debt acting with the consent of the required Persons
necessary to bind such holders or owners of such Designated Senior Debt and
(ii) in the case of all other such Designated Senior Debt, the holder or
owner of such Designated Senior Debt.
"Repurchase Date" has the meaning specified in SECTION 13.1.
"Repurchase Price" has the meaning specified in SECTION 13.1.
"Responsible Officer", when used with respect to the
Trustee, means any officer within the Corporate Trust Office of the Trustee,
including, without limitation, any vice president, assistant vice president,
assistant treasurer, corporate trust officer or other employee of the Trustee
customarily performing functions similar to those performed by any of the
above designated officers, and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge and familiarity with the particular subject.
"Restricted Global Security" has the meaning specified in
SECTION 2.1.
"Restricted Securities Legend" means, collectively, the
legends substantially in the forms of the legends required in the form of
Security set forth in SECTION 2.2 to be placed upon each Security.
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"Rule 144A" means Rule 144A under the Securities Act (or
any successor provision), as it may be amended from time to time.
"Rule 144A Information" has the meaning specified in
SECTION 9.9.
"Securities" has the meaning ascribed to it in the first
paragraph under the caption "Recitals of the Company".
"Securities Act" means the United States Securities Act of
1933 (or any successor statute), as amended from time to time.
"Securities Act Legend" means a Restricted Securities Legend.
"Security Register" and "Security Registrar" have the
respective meanings specified in SECTION 3.5.
"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, due or to become due,
outstanding on the date of this Indenture or thereafter created, incurred or
assumed: (a) all indebtedness of the Company evidenced by credit or loan
agreements, notes, bonds, debentures, or other similar instruments, (b) all
obligations of the Company for money borrowed, (c) all obligations of the
Company as lessee under leases required to be capitalized on the balance
sheet of the lessee under generally accepted accounting principles, (d) all
obligations of the Company under interest rate and currency swaps, caps,
floors, collars, hedge agreements, forward contracts, or similar agreements
or arrangements including, without limitation, agreements and arrangements
intended to protect the Company against fluctuations in interest or currency
exchange rates or commodity prices, (e) all obligations of the Company with
respect to letters of
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credit, bank guarantees, bankers' acceptances and similar facilities issued
for the account of the Company and all reimbursement obligations of the
Company with respect to the foregoing, (f) all obligations of the Company
issued or assumed as the deferred purchase price of any business, property,
assets (including intangibles) or services (but excluding trade accounts
payable and accrued liabilities that constitute liabilities arising in the
ordinary course of business), (g) all obligations of the Company of the type
referred to in clauses (a) through (f) above of another Person and all
dividends of another Person, the payment of which, in either case, the
Company has assumed or guaranteed, or for which the Company is responsible or
liable, directly or indirectly, jointly or severally, as obligor, guarantor
or otherwise, or which is secured by a lien on property of the Company, and
(h) renewals, extensions, modifications, replacements, restatements and
refundings of, or any indebtedness or obligation issued in exchange for, any
such indebtedness or obligation described in clauses (a) through (g) of this
paragraph; PROVIDED, HOWEVER, that Senior Debt shall not include the
Securities or any such indebtedness or obligation if the terms of such
indebtedness or obligation (or the terms of the instrument under which, or
pursuant to which it is issued) expressly provides that such indebtedness or
obligation is not superior in right of payment to the Securities; PROVIDED,
FURTHER, that Senior Debt shall not include trade payables and any
indebtedness or obligation owed by the Company to any direct or indirect
Subsidiary.
"Shelf Registration Statement" has the meaning specified in
SECTION 2.2.
"Significant Subsidiary" means any Subsidiary that would be
a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation
S-X, promulgated pursuant to the Securities Act, as such regulation is in
effect on the date hereof.
"Special Record Date" for the payment of any Defaulted
Interest means a date fixed by the Company pursuant to SECTION 3.7.
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"Stated Maturity", when used with respect to any Security
or any installment of interest thereon, means the date specified in such
Security as the fixed date on which the principal of such Security or such
installment of interest is due and payable.
"Subsidiary" means a corporation more than 50% of the
outstanding voting stock of which is owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or
more other Subsidiaries. For the purposes of this definition, "voting stock"
means stock or other similar interests in the corporation which ordinarily
has or have voting power for the election of directors, or Persons performing
similar functions, whether at all times or only so long as no senior class of
stock or other interests has or have such voting power by reason of any
contingency.
"Successor Security" of any particular Security means every
Security issued after, and evidencing all or a portion of the same debt as
that evidenced by, such particular Security; and, for the purposes of this
definition, any Security authenticated and delivered under SECTION 3.6 in
exchange for or in lieu of a mutilated, destroyed, lost or stolen Security
shall be deemed to evidence the same debt as the mutilated, destroyed, lost
or stolen Security.
"Trading Days" means (i) if the Common Stock is listed or
admitted for trading on any national securities exchange, days on which such
national securities exchange is open for business; (ii) if the Common Stock
is quoted on The Nasdaq National Market or any other system of automated
dissemination of quotations of securities prices, days on which trades may be
effected through such system; or (iii) if the Common Stock is not listed or
admitted for trading on any national securities exchange or quoted on The
Nasdaq National Market or any other system of automated dissemination of
quotation of securities prices, days on which the Common Stock is traded
regular way in the over-the-counter market and for which a closing bid and a
closing asked price for the Common Stock are available.
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"Trust Indenture Act" means the Trust Indenture Act of 1939
as in force at the date as of which this instrument was executed; PROVIDED,
HOWEVER, that in the event the Trust Indenture Act of 1939 is amended after
such date, "Trust Indenture Act" means, to the extent required by any such
amendment, the Trust Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the
first paragraph of this instrument until a successor Trustee shall have
become such pursuant to the applicable provisions of this Indenture, and
thereafter "Trustee" shall mean such successor Trustee.
"United States" means the United States of America
(including the States and the District of Columbia), its territories, its
possessions and other areas subject to its jurisdiction (its "possessions"
including Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake
Island and the Northern Mariana Islands).
"Vice President", when used with respect to the Company,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "vice president".
SECTION 1.2 COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the
Trustee to take any action under any provision of this Indenture, the Company
shall furnish to the Trustee an Officers' Certificate stating that all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with and, if required by the Trust
Indenture Act, an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with,
except that in the case of any such application or request as to which the
furnishing of such documents is specifically required by any provision of
this Indenture relating to such particular application or request, no
additional certificate or opinion need be furnished.
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Every certificate or opinion with respect to compliance
with a condition or covenant provided for in this Indenture (including
certificates provided for in SECTION 9.8) shall include:
(1) a statement that each individual signing such certificate
or opinion has read such covenant or condition and the definitions
herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he
has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 1.3 FORM OF DOCUMENTS DELIVERED TO THE TRUSTEE.
In any case where several matters are required to be
certified by, or covered by an opinion of, any specified Person, it is not
necessary that all such matters be certified by, or covered by the opinion
of, only one such Person, or that they be so certified or covered by only one
document, but one such Person may certify or give an opinion with respect to
some matters and one or more other such Persons as to other matters, and any
such Person may certify or give an opinion as to such matters in one or
several documents.
Any certificate or opinion of an officer of the Company may
be based, insofar as it relates to legal matters, upon a certificate or
opinion of, or representations by, counsel, unless such officer knows, or in
the exercise of reasonable care should know, that the certificate or opinion
or representations with respect to the
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matters upon which such certificate or opinion is based are erroneous. Any
such certificate or opinion of counsel may be based, insofar as it relates to
factual matters, upon a certificate or opinion of, or representations by, an
officer or officers of the Company or any other Person stating that the
information with respect to such factual matters is in the possession of the
Company or such other Person, unless such counsel knows, or in the exercise
of reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two
or more applications, requests, consents, certificates, statements, opinions
or other instruments under this Indenture, they may, but need not, be
consolidated and form one instrument.
SECTION 1.4 ACTS OF HOLDERS OF SECURITIES.
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided or permitted by this Indenture to be
given or taken by Holders of Securities may be embodied in and evidenced by
one or more instruments of substantially similar tenor signed by such Holders
in person or by an agent or proxy duly appointed in writing by such Holders.
Such action shall become effective when such instrument or instruments record
is delivered to the Trustee and, where it is hereby expressly required, to
the Company. The Trustee shall promptly deliver to the Company copies of all
such instruments delivered to the Trustee. Such instrument or instruments
(and the action embodied therein and evidenced thereby) are herein sometimes
referred to as the "Act" of the Holders of Securities signing such instrument
or instruments. Proof of execution of any such instrument or of a writing
appointing any such agent or proxy, or of the holding by any Person of a
Security, shall be sufficient for any purpose of this Indenture and (subject
to SECTION 6.1) conclusive in favor of the Trustee and the Company if made in
the manner provided in this SECTION 1.4.
(b) The fact and date of the execution by any Person of any
such instrument or writing may be proved by
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the affidavit of a witness of such execution or by a certificate of a notary
public or other officer authorized by law to take acknowledgments of deeds,
certifying that the individual signing such instrument or writing
acknowledged to him the execution thereof. Where such execution is by a
signer acting in a capacity other than his individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority.
(c) The principal amount and serial number of any
Registered Security held by any Person, and the date of his holding the same,
shall be proved by the Security Register.
(d) The fact and date of execution of any such instrument
or writing and the authority of the Person executing the same may also be
proved in any other manner which the Trustee deems sufficient; and the
Trustee may in any instance require further proof with respect to any of the
matters referred to in this SECTION 1.4.
(e) The Company may set any day as the record date for the
purpose of determining the Holders entitled to give or take any request,
demand, authorization, direction, notice, consent, waiver or other action, or
to vote on any action, authorized or permitted by this Indenture to be given
or taken by Holders. Promptly and in any case not later than ten days after
setting a record date, the Company shall notify the Trustee and the Holders
of such record date. If not set by the Company prior to the first solicitation
of a Holder made by any Person in respect of any such action, or, in the case
of any such vote, prior to such vote, the record date for any such action or
vote shall be the thirtieth day (or, if later, the date of the most recent list
of Holders required to be provided pursuant to SECTION 14.1) prior to such
first solicitation or vote, as the case may be. With regard to any record date,
the Holders on such date (or their duly appointed agents or proxies), and only
such Persons, shall be entitled to give or take, or vote on, the relevant
action, whether or not such Holders remain Holders after such record date.
Notwithstanding the foregoing, the Company shall not set a record date for, and
the provisions of this
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paragraph shall not apply with respect to, any notice, declaration or
direction referred to in the next paragraph.
Upon receipt by the Trustee from any Holder of (i) any
notice of default or breach referred to in SECTION 5.1(4), if such default or
breach has occurred and is continuing and the Trustee shall not have given
such a notice to the Company, (ii) any declaration of acceleration referred
to in SECTION 5.2, if an Event of Default has occurred and is continuing and
the Trustee shall not have given such a declaration to the Company, or (iii)
any direction referred to in SECTION 5.12, if the Trustee shall not have
taken the action specified in such direction, then, with respect to clauses
(ii) and (iii), a record date shall automatically and without any action by
the Company or the Trustee be set for determining the Holders entitled to
join in such declaration or direction, which record date shall be the close
of business on the tenth day (or, if such day is not a Business Day, the
first Business Day thereafter) following the day on which the Trustee receives
such declaration or direction, and, with respect to clause (i), the Trustee
may set any day as a record date for the purpose of determining the Holders
entitled to join in such notice of default. Promptly after such receipt by the
Trustee of any such declaration or direction referred to in clause (ii) or
(iii), and promptly after setting any record date with respect to clause (i),
and as soon as practicable thereafter, the Trustee shall notify the Company
and the Holders of any such record date so fixed. The Holders on such record
date (or their duly appointed agents or proxies), and only such Persons, shall
be entitled to join in such notice, declaration or direction, whether or not
such Holders remain Holders after such record date; PROVIDED that, unless such
notice, declaration or direction shall have become effective by virtue of
Holders of the requisite principal amount of Securities on such record date
(or their duly appointed agents or proxies) having joined therein on or prior
to the ninetieth day after such record date, such notice, declaration or
direction shall automatically and without any action by any Person be
cancelled and of no further effect. Nothing in this paragraph shall be
construed to prevent a Holder (or a duly appointed agent or proxy thereof)
from giving, before or after the expiration of such 90-day period, a notice,
declaration or direction contrary to or different from, or, after the
expiration of such period, identical to, the notice, declaration or direction
to which such record date relates, in which event a new record date in respect
thereof shall be set pursuant to this paragraph. In addition, nothing in this
paragraph shall be construed to render ineffective any notice,
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declaration or direction contrary to or different from, or, after the
expiration of such period, identical to, the notice, declaration or direction
to which such record date relates, in which event a new record date in respect
thereof shall be set pursuant to this paragraph. In addition, nothing in this
paragraph shall be construed to render ineffective any notice, declaration or
direction of the type referred to in this paragraph given at any time to the
Trustee and the Company by Holders (or their duly appointed agents or proxies)
of the requisite principal amount of Securities on the date such notice,
declaration or direction is so given.
(f) Except as provided in SECTIONS 5.12 and 5.13, any
request, demand, authorization, direction, notice, consent, election, waiver
or other Act of the Holder of any Security shall bind every future Holder of
the same Security and the Holder of every Security issued upon the registration
of transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such
Security.
SECTION 1.5 NOTICES, ETC., TO TRUSTEE AND COMPANY.
Any request, demand, authorization, direction, notice,
consent, election, waiver or other Act of Holders of Securities or other
document provided or permitted by this Indenture to be made upon, given or
furnished to, or filed with,
(1) the Trustee by any Holder of Securities or by the Company
shall be sufficient for every purpose hereunder if made, given,
furnished or filed in writing to or with the Trustee and received at
its Corporate Trust Office, Attention: Corporate Trust Department, and
shall be deemed given when received.
(2) the Company by the Trustee or by any Holder of Securities
shall be sufficient for every purpose hereunder (unless otherwise
herein expressly provided) if in writing, mailed, first-class postage
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prepaid, or telecopied and confirmed by mail, first-class postage
prepaid, or delivered by hand or overnight courier, addressed to the
Company at 3100 Ocean Park Blvd., Suite 300, Santa Monica, California
90405, Attention: Chief Financial Officer (telecopy no.: (310)
664-8101), or at any other address previously furnished in writing to
the Trustee by the Company, and shall be deemed given when received.
Any request, demand, authorization, direction, notice,
consent, election or waiver required or permitted under this Indenture shall
be in the English language, except that any published notice may be in an
official language of the country of publication.
SECTION 1.6 NOTICE TO HOLDERS OF SECURITIES; WAIVER.
Except as otherwise expressly provided herein, where this
Indenture provides for notice to Holders of Securities of any event, such
notice shall be sufficiently given to Holders if in writing and mailed,
first-class postage prepaid, to each Holder of a Security affected by such
event, at the address of such Holder as it appears in the Security Register,
not earlier than the earliest date and not later than the latest date
prescribed for the giving of such notice.
Neither the failure to mail such notice, nor any defect in
any notice so mailed, to any particular Holder of a Registered Security shall
affect the sufficiency of such notice with respect to other Holders of
Registered Securities. In case by reason of the suspension of regular mail
service or by reason of any other cause it shall be impracticable to give
such notice by mail, then such notification to Holders of Registered Securities
as shall be made with the approval of the Trustee, which approval shall not be
unreasonably withheld or delayed, shall constitute a sufficient notification to
such Holders for every purpose hereunder.
Such notice shall be deemed to have been given when such
notice is mailed.
Where this Indenture provides for notice in any manner, such
notice may be waived in writing by the Person
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entitled to receive such notice, either before or after the event, and such
waiver shall be the equivalent of such notice. Waivers of notice by Holders
of Securities shall be filed with the Trustee, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.
In addition, all notices or communications addressed to
Holders of Securities shall be given by release made to Reuters Economic
Services and Bloomberg Business News. The foregoing notwithstanding, such
notices and communications given to Holders of Securities pursuant to the
Registration Rights Agreement do not have to be released to Reuters Economics
Services or Bloomberg Business News.
SECTION 1.7 EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction
hereof.
SECTION 1.8 SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the
Company and by the Trustee shall bind its successors and assigns, whether so
expressed or not.
SECTION 1.9 SEPARABILITY CLAUSE.
In case any provision in this Indenture or the Securities
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 1.10 BENEFITS OF INDENTURE.
Except as provided in the next sentence, nothing in this
Indenture or in the Securities, express or implied, shall give to any Person,
other than the parties hereto and their successors and assigns hereunder and
the Holders of Securities, any benefit or legal or equitable right, remedy or
claim under this Indenture. The provisions of ARTICLE
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TWELVE are intended to be for the benefit of, and shall be enforceable
directly by, the holders of Senior Debt.
SECTION 1.11 GOVERNING LAW.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, THE UNITED
STATES OF AMERICA, WITHOUT REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
SECTION 1.12 LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption
Date, Repurchase Date or Stated Maturity of any Security or the last day on
which a Holder of a Security has a right to convert his Security shall not be
a Business Day at a Place of Payment or Place of Conversion, as the case may
be, then (notwithstanding any other provision of this Indenture or of the
Securities) payment of principal of, premium, if any, or interest on, or the
payment of the Repurchase Price (whether the same is payable in cash or in
shares of Common Stock) with respect to, or delivery for conversion of, such
Security need not be made at such Place of Payment or Place of Conversion, as
the case may be, on or by such day, but may be made on or by the next
succeeding Business Day at such Place of Payment or Place of Conversion, as
the case may be, with the same force and effect as if made on the Interest
Payment Date, Redemption Date or Repurchase Date, or at the Stated Maturity
or by such last day for conversion; PROVIDED, HOWEVER, that in the case that
payment is made on such succeeding Business Day, no interest shall accrue on
the amount so payable for the period from and after such Interest Payment
Date, Redemption Date, Repurchase Date, Stated Maturity or last day for
conversion, as the case may be.
SECTION 1.13 CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with
a provision of the Trust Indenture Act that is required under such act to be
a part of and govern this Indenture, the latter provision shall control. If
any provision of this Indenture modifies or excludes any provision of the
Trust Indenture Act that may be so
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modified or excluded, the latter provision shall be deemed to apply to this
Indenture as so modified or to be excluded, as the case may be. Until such
time as this Indenture shall be qualified under the Trust Indenture Act, this
Indenture, the Company and the Trustee shall be deemed for all purposes hereof
to be subject to and governed by the Trust Indenture Act to the same extent as
would be the case if this Indenture were so qualified on the date
hereof.
ARTICLE TWO
SECURITY FORMS
SECTION 2.1 FORM GENERALLY.
The Securities shall be in substantially the form set forth
in this Article, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Indenture, and may
have such letters, numbers or other marks of identification and such legends
or endorsements placed thereon as may be required to comply with the rules of
any securities exchange or the Internal Revenue Code of 1986, as amended, and
regulations thereunder (the "Code"), or as may, consistently herewith, be
determined by the officers executing such Securities, as evidenced by their
execution thereof. All Securities shall be issued in registered form, as
opposed to bearer form, and shall sometimes be referred to as "Registered
Securities".
The Trustee's certificates of authentication shall be in
substantially the form set forth in SECTION 2.3.
Conversion notices shall be in substantially the form set
forth in SECTION 2.4.
Repurchase notices shall be substantially in the form set
forth in SECTION 2.2.
The Securities shall be printed, lithographed, typewritten
or engraved or produced by any combination of
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these methods on steel engraved borders if so required by any securities
exchange upon which the Securities may be listed, or may be produced in any
other manner permitted by the rules of any such securities exchange, or, if
the Securities are not listed on a securities exchange, in any other manner
approved by the Company, all as determined by the officers executing such
Securities, as evidenced by their execution thereof.
Upon their original issuance, Securities shall be issued in
the form of one or more Global Securities without interest coupons and shall
be registered in the name of DTC, as Depositary, or its nominee and deposited
with the Trustee, as custodian for DTC, for credit by DTC to the respective
accounts of beneficial owners of the Securities represented thereby (or such
other accounts as they may direct). Such Global Security, together with its
Successor Securities which are Global Securities, are collectively herein
called the "Restricted Global Security".
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<PAGE>
SECTION 2.2 FORM OF SECURITY.
[FORM OF FACE]
[THE FOLLOWING LEGEND SHALL APPEAR ON THE FACE OF EACH RESTRICTED SECURITY
OTHER THAN ANY RESTRICTED GLOBAL SECURITY:
THIS NOTE AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION
OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS NOTE MAY BE
RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT
PROVIDED BY RULE 144A THEREUNDER.
THIS NOTE AND ANY COMMON STOCK ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT
(A) (1) TO A PERSON WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT
ACQUIRING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144
THEREUNDER (IF AVAILABLE), (3) TO AN INSTITUTIONAL INVESTOR THAT IS AN
ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(A)(1), (2), (3) OR (7) OF
REGULATION D UNDER THE SECURITIES ACT PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT THAT PRIOR TO SUCH TRANSFER PROVIDES TO
THE TRUSTEE FOR THE NOTES A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS
AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE NOTES (THE
FORM OF THE LETTER CAN BE OBTAINED FROM THE TRUSTEE OF THE NOTES) AND, IF
SUCH TRANSFER IS FOR LESS THAN AN AGGREGATE PRINCIPAL AMOUNT OF $250,000, AN
OPINION OF COUNSEL ACCEPTABLE TO ETOYS INC. (THE "COMPANY"), IF REQUESTED BY
THE COMPANY, THAT THE TRANSFER IS EXEMPT FROM REGISTRATION, (4) PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, (IF AVAILABLE) (AND
BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (5) PURSUANT
TO AN
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EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND (B) IN
ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED
STATES AND OTHER JURISDICTIONS.
THIS NOTE, ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS
CONVERSION AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM
TIME TO TIME TO MODIFY THE RESTRICTIONS ON RESALES AND OTHER TRANSFERS OF
THIS NOTE AND ANY SUCH SHARES TO REFLECT ANY CHANGE IN APPLICABLE LAW OR
REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE
RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS
NOTE AND SUCH SHARES SHALL BE DEEMED BY THE ACCEPTANCE OF THIS NOTE AND ANY
SUCH SHARES TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT.]
[THE FOLLOWING LEGEND SHALL APPEAR ON THE FACE OF EACH RESTRICTED GLOBAL
SECURITY:
THE SECURITIES EVIDENCED BY THIS GLOBAL SECURITY AND ANY
COMMON STOCK ISSUABLE UPON THE CONVERSION OF THE SECURITIES HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY
BENEFICIAL INTEREST IN THE SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF
SUCH BENEFICIAL INTEREST IN THE SECURITIES MAY BE RELYING ON THE EXEMPTION
FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER.
EACH BENEFICIAL OWNER OF AN INTEREST IN ANY OF THE
SECURITIES EVIDENCED BY THIS GLOBAL SECURITY (INCLUDING ANY PARTICIPANT IN
THE DEPOSITARY HOLDING THE GLOBAL SECURITY THAT IS SHOWN AS HOLDING SUCH AN
INTEREST ON THE RECORDS OF SUCH DEPOSITARY AND EACH BENEFICIAL OWNER THAT
HOLDS THROUGH ANY SUCH PARTICIPANT) AGREES FOR THE BENEFIT OF ETOYS INC. (THE
"COMPANY") THAT (A) ANY BENEFICIAL INTEREST IN THE SECURITIES AND ANY SHARES
OF COMMON STOCK ISSUABLE UPON THEIR CONVERSION MAY BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED ONLY (I) TO A PERSON WHO THE SELLER REASONABLY BELIEVES
IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE
SECURITIES ACT ACQUIRING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF A QUALIFIED
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INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(II) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (III) TO AN INSTITUTIONAL
INVESTOR THAT IS AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(A)(1),
(2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT THAT PRIOR TO SUCH
TRANSFER PROVIDES TO THE TRUSTEE FOR THE NOTES A SIGNED LETTER CONTAINING
CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON
TRANSFER OF THE NOTES (THE FORM OF THE LETTER CAN BE OBTAINED FROM THE
TRUSTEE OF THE NOTES) AND, IF SUCH TRANSFER IS FOR LESS THAN AN AGGREGATE
PRINCIPAL AMOUNT OF $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO ETOYS INC.
(THE "COMPANY"), IF REQUESTED BY THE COMPANY, THAT THE TRANSFER IS EXEMPT
FROM REGISTRATION, (IV) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT, (IF AVAILABLE) (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE
TO THE COMPANY) OR (V) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT, AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS
OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS AND THAT (B) THE
BENEFICIAL OWNER WILL, AND EACH SUBSEQUENT BENEFICIAL OWNER OF AN INTEREST IN
ANY OF THE SECURITIES EVIDENCED BY THIS GLOBAL SECURITY OR ANY COMMON STOCK
ISSUABLE UPON CONVERSION THEREOF IS REQUIRED TO, NOTIFY ANY PURCHASER OF ANY
BENEFICIAL INTEREST IN THE SECURITIES OR SUCH COMMON STOCK ISSUABLE UPON ITS
CONVERSION FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
THIS SECURITY, ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS
CONVERSION AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM
TIME TO TIME TO MODIFY THE RESTRICTIONS ON RESALES AND OTHER TRANSFERS OF THIS
SECURITY AND ANY SUCH SHARES TO REFLECT ANY CHANGE IN APPLICABLE LAW OR
REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE
RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER AND BENEFICIAL
OWNERS OF AN INTEREST IN THIS SECURITY AND ANY SHARES OF COMMON STOCK ISSUABLE
UPON CONVERSION SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY AND THE
BENEFICIAL INTERESTS THEREIN AND ANY SUCH SHARES TO HAVE AGREED TO ANY SUCH
AMENDMENT OR SUPPLEMENT.]
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[THE FOLLOWING LEGEND SHALL APPEAR ON THE FACE OF EACH GLOBAL SECURITY:
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF
THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE
DEPOSITARY OR A NOMINEE OF THE DEPOSITARY, WHICH MAY BE TREATED BY THE
COMPANY, THE TRUSTEE AND ANY AGENT THEREOF AS OWNER AND HOLDER OF THIS
SECURITY FOR ALL PURPOSES.]
[THE FOLLOWING LEGEND SHALL APPEAR ON THE FACE OF EACH GLOBAL SECURITY FOR
WHICH THE DEPOSITORY TRUST COMPANY IS TO BE THE DEPOSITARY:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE,
OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE &
CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
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<PAGE>
eToys Inc.
6.25% CONVERTIBLE SUBORDINATED NOTES
DUE DECEMBER 1, 2004
No. _____________ U.S.$_____
CUSIP No._______
eToys Inc., a corporation duly organized and existing under
the laws of the State of Delaware (herein called the "Company", which term
includes any successor Person under the Indenture referred to on the reverse
hereof), for value received, hereby promises to pay to _______________, or
registered assigns, the principal sum of _____________ United States Dollars
(U.S.$ _____) [IF THIS SECURITY IS A GLOBAL SECURITY, THEN INSERT -- (which
principal amount may from time to time be increased or decreased to such other
principal amounts (which, taken together with the principal amounts of all
other Outstanding Securities, shall not exceed $150,000,000 in the aggregate
at any time, unless the Initial Purchasers exercise their over-allotment
rights, in which case the principal amount of the Outstanding Securities shall
not exceed U.S. $200,000,000) by adjustments made on the records of the Trustee
hereinafter referred to in accordance with the Indenture)] on December 1, 2004,
and to pay interest thereon, from December 6, 1999, or from the most recent
Interest Payment Date (as defined below) to which interest has been paid or
duly provided for, semi-annually in arrears on June 1 and December 1 in each
year (each, an "Interest Payment Date"), commencing June 1, 2000, at the rate
of 6.25% per annum, until the principal hereof is due, and at the rate then in
effect on any overdue principal and premium, if any, and, to the extent
permitted by law, on any overdue interest. The interest so payable, and
punctually paid or duly provided for, on any Interest Payment Date will, as
provided in the Indenture, be paid to the Person in whose name this Security
(or one or more Predecessor Securities) is registered at the close of business
on the Regular Record Date for such interest, which shall be the May 15 and
November 15 (whether or not a Business Day), as the case may be, next preceding
such Interest Payment Date. Except as otherwise provided in the
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Indenture, any such interest not so punctually paid or duly provided for will
forthwith cease to be payable to the Holder on such Regular Record Date and
may either be paid to the Person in whose name this Security (or one or more
Predecessor Securities) is registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest to be fixed by the
Company, notice whereof shall be given to Holders of Registered Securities
not less than ten days prior to such Special Record Date, or be paid at any
time in any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon such notice
as may be required by such exchange, all as more fully provided in the
Indenture. Payments of principal shall be made upon the surrender of this
Security at the option of the Holder at the Corporate Trust Office of the
Trustee, or at such other office or agency of the Company as may be designated
by it for such purpose in the Borough of Manhattan, The City of New York, in
such coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts, or at such
other offices or agencies as the Company may designate, by United States Dollar
check drawn on, or wire transfer to, a United States Dollar account (such a
wire transfer to be made only to a Holder of an aggregate principal amount of
Registered Securities in excess of U.S.$2,000,000, and only if such Holder
shall have furnished wire instructions in writing to the Trustee no later than
fifteen days prior to the relevant payment date) maintained by the payee with
a bank in the Borough of Manhattan, The City of New York. Payment of interest
on this Security may be made by United States Dollar check drawn on a bank in
the Borough of Manhattan, The City of New York mailed to the address of the
Person entitled thereto as such address shall appear in the Security Register,
or, upon written application by the Holder to the Security Registrar setting
forth wire instructions not later than the relevant Record Date, by wire
transfer to a United States Dollar account (such a wire transfer to be made
only to a Holder of an aggregate principal amount of Registered Securities in
excess of U.S.$2,000,000 and only if such Holder shall have furnished wire
instructions in writing to the Trustee no later than 15 days prior to the
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relevant payment date) maintained by the payee with a bank in the Borough of
Manhattan, The City of New York.
Except as specifically provided herein and in the Indenture,
the Company shall not be required to make any payment with respect to any tax,
assessment or other governmental charge imposed by any government or any
political subdivision or taxing authority thereof or therein.
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof or an
Authenticating Agent by the manual signature
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of one of their respective authorized signatories, this Security shall not be
entitled to any benefit under the Indenture or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this Security to
be duly executed under its corporate seal.
eToys Inc.
[Corporate Seal]
By:
-----------------------------------
Name:
Title:
Attest:
- -----------------------------------
Name:
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<PAGE>
[FORM OF REVERSE]
This Security is one of a duly authorized issue of
securities of the Company designated as its "6.25% Convertible Subordinated
Notes due December 1, 2004" (herein called the "Securities"), limited in
aggregate principal amount to U.S.$150,000,000(U.S.$200,000,000 if the
over-allotment is fully exercised), issued and to be issued under an
Indenture, dated as of December 6, 1999 (herein called the "Indenture"),
between the Company and U.S. Bank Trust National Association, a national
banking association, as Trustee (herein called the "Trustee", which term
includes any successor trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement
of the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the Trustee, the holders of Senior Debt and the
Holders of the Securities and of the terms upon which the Securities are, and
are to be, authenticated and delivered. As provided in the Indenture and
subject to certain limitations therein set forth, Registered Securities are
exchangeable for a like aggregate principal amount of Registered Securities
of any authorized denominations as requested by the Holder surrendering the
same upon surrender of the Registered Security or Registered Securities to be
exchanged, at the Corporate Trust Office of the Trustee. The Trustee upon
such surrender by the Holder will issue the new Registered Securities in the
requested denominations.
No sinking fund is provided for the Securities.
The Securities are subject to redemption at the option of
the Company at any time on or after December 1, 2002, in whole or in part,
upon not less than 30 nor more than 60 days' notice to the Holders prior to
the Redemption Date at the following Redemption Prices (expressed as
percentages of the principal amount) for the twelve-month period beginning on
December 1 of the following years:
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2002 ................ 102.500%
2003 ................ 101.250%
</TABLE>
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and, if applicable, at a Redemption Price equal to 100% of the principal amount
on and after December 1, 2004, together, in each case, with accrued interest to
the Redemption Date; PROVIDED, HOWEVER, that interest installments on
Securities whose Stated Maturity is on or prior to such Redemption Date will be
payable to the Holders of such Securities, or one or more Predecessor
Securities, of record at the close of business on the relevant Record Dates
referred to on the face hereof, all as provided in the Indenture.
In the event of a redemption of the Securities, the Company
will not be required (a) to register the transfer or exchange of Registered
Securities for a period of 15 days immediately preceding the date notice is
given identifying the serial numbers of the Securities called for such
redemption (it being understood that the Company will not be required to
identify the serial numbers of Outstanding Securities if all such Securities
are called for redemption) or (b) to register the transfer or exchange of any
Registered Security, or portion thereof, called for redemption.
Notice to the Holders will be given not less than 30 nor
more than 60 days prior to the Redemption Date as provided in the Indenture.
In any case where the due date for the payment of the
principal of, premium, if any, Liquidated Damages, if any, or interest on any
Security or the last day on which a Holder of a Security has a right to convert
his Security shall be, at any Place of Payment or Place of Conversion, as the
case may be, a day on which banking institutions at such Place of Payment or
Place of Conversion are authorized or obligated by law or executive order to
close, then payment of principal, premium, if any, Liquidated Damages, if any,
or interest or delivery for conversion of such Security need not be made on or
by such date at such place but may be made on or by the next succeeding day at
such place which is not a day on which banking institutions are authorized or
obligated by law or executive order to close, with the same force and effect as
if made on the date for such payment or the date fixed for redemption or
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repurchase, or by such last day for conversion, and no interest shall accrue
on the amount so payable for the period from and after such due date.
Subject to and upon compliance with the provisions of the
Indenture, the Holder of this Security is entitled, at his option, at any
time following the original issue date of the Securities and on or before the
close of business on December 1, 2004, or in case this Security or a portion
hereof is called for redemption or the Holder hereof has exercised his right
to require the Company to repurchase this Security or such portion hereof,
then in respect of this Security until and including, but (unless the Company
defaults in making the payment due upon redemption or repurchase, as the case
may be) not after, the close of business on the Business Day immediately
preceding the Redemption Date or the Repurchase Date, as the case may be, to
convert this Security (or any portion of the principal amount hereof that is
an integral multiple of U.S.$1,000, PROVIDED that the unconverted portion of
such principal amount is U.S.$1,000 or any integral multiple of U.S.$1,000 in
excess thereof) into fully paid and nonassessable shares of Common Stock of
the Company at an initial Conversion Rate of 13.5323 (or at the current
adjusted Conversion Rate if an adjustment has been made as provided in the
Indenture) by surrender of this Security, duly endorsed or assigned to the
Company or in blank and, in case such surrender shall be made during the
period from the close of business on any Regular Record Date next preceding
any Interest Payment Date to the opening of business on such Interest Payment
Date (except if this Security has been called for redemption on a Redemption
Date or is repurchasable on a Repurchase Date, with the consequence that the
conversion right of such Security would terminate between such Regular Record
Date and the close of business on such Interest Payment Date), also accompanied
by payment in New York Clearing House or other funds acceptable to the Company
of an amount equal to the interest payable on such Interest Payment Date on the
principal amount of this Security then being converted, and also the conversion
notice hereon duly executed, to the Company at the Corporate Trust Office of
the Trustee, or at such other office or agency of the Company, subject to any
laws or regulations applicable thereto and subject to the
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right of the Company to terminate the appointment of any Conversion Agent (as
defined below) as may be designated by it for such purpose in the Borough of
Manhattan, The City of New York, or at such other offices or agencies as the
Company may designate (each a "Conversion Agent"), PROVIDED, FURTHER, that in
case surrender of this Security for conversion shall be made during the period
from the close of business on any Regular Record Date next preceding any
Interest Payment Date to the opening of business on such Interest Payment Date
and if this Security or portion hereof has been called for redemption on a
Redemption Date or is repurchasable on a Repurchase Date, with the consequence
that the conversion right of such Security would terminate between such Regular
Record Date and the close of business on such Interest Payment Date, then the
Holder of this Security will be entitled to receive the interest accruing
hereon from the Interest Payment Date next preceding the date of such
conversion to such succeeding Interest Payment Date and shall not be required
to pay such interest upon surrender of this Security for conversion. Subject to
the provisions of the preceding sentence and, in the case of a conversion after
the close of business on the Regular Record Date next preceding any Interest
Payment Date and on or before the close of business on such Interest Payment
Date, to the right of the Holder of this Security (or any Predecessor Security
of record as of such Regular Record Date) to receive the related installment of
interest to the extent and under the circumstances provided in the Indenture,
no cash payment or adjustment is to be made on conversion for interest accrued
hereon from the Interest Payment Date next preceding the day of conversion, or
for dividends on the Common Stock issued on conversion hereof. The Company
shall thereafter deliver to the Holder the fixed number of shares of Common
Stock (together with any cash adjustment, as provided in the Indenture) into
which this Security is convertible and such delivery will be deemed to satisfy
the Company's obligation to pay the principal amount of this Security. No
fractions of shares or scrip representing fractions of shares will be issued
on conversion, but instead of any fractional interest (calculated to the
nearest 1/100th of a share) the Company shall pay a cash adjustment as provided
in the Indenture. The Conversion Rate is subject to adjustment as provided in
the Indenture. In addition, the
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Indenture provides that in case of certain consolidations or mergers to which
the Company is a party or the conveyance, transfer, sale or lease of all or
substantially all of the property and assets of the Company, the Indenture
shall be amended, without the consent of any Holders of Securities, so that
this Security, if then Outstanding, will be convertible thereafter, during
the period this Security shall be convertible as specified above, only into
the kind and amount of securities, cash and other property receivable upon
such consolidation, merger, conveyance, transfer, sale or lease by a holder
of the number of shares of Common Stock of the Company into which this Security
could have been converted immediately prior to such consolidation, merger,
conveyance, transfer, sale or lease (assuming such holder of Common Stock is
not a Constituent Person, failed to exercise any rights of election and
received per share the kind and amount received per share by a plurality of
Non-electing Shares). No adjustment in the Conversion Rate will be made until
such adjustment would require an increase or decrease of at least one percent
of such rate, PROVIDED that any adjustment that would otherwise be made will
be carried forward and taken into account in the computation of any subsequent
adjustment.
Subject to certain limitations in the Indenture, at any time
when the Company is not subject to Section 13 or 15(d) of the United States
Securities Exchange Act of 1934, as amended, upon the request of a Holder of a
Security or the holder of shares of Common Stock issued upon conversion
thereof, the Company will promptly furnish or cause to be furnished Rule 144A
Information (as defined below) to such Holder of Securities or such holder of
shares of Common Stock issued upon conversion of Securities, or to a
prospective purchaser of any such security designated by any such Holder or
holder, as the case may be, to the extent required to permit compliance by
such Holder or holder with Rule 144A under the Securities Act of 1933, as
amended (the "Securities Act"), in connection with the resale of any such
security. "Rule 144A Information" shall be such information as is specified
pursuant to Rule 144A(d)(4) under the Securities Act (or any successor
provision thereto).
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The Holder of this Security [if this Security is a Global
Security, then insert--(including any Person that has a beneficial interest
in this Security)] and the Common Stock issuable upon conversion hereof is
entitled to the benefits of a Registration Rights Agreement, dated as of
December 6, 1999 (the "Registration Rights Agreement"), executed by the
Company. Pursuant to the Registration Rights Agreement, the Company has agreed
for the benefit of the Holders from time to time of Registered Securities and
the Common Stock issuable upon conversion thereof, in each case, that are
Registrable Securities, at the Company's expense, (a) to file on or before 90
days after the first date of original issuance of the Securities, a shelf
registration statement (the "Shelf Registration Statement") with the Commission
with respect to resales of the Registrable Securities, (b) thereafter to use
its reasonable efforts to cause such Shelf Registration Statement to be
declared effective by the Commission on or before 180 days after the first date
of original issuance of the Securities, and (c) to use its reasonable efforts
to maintain such Shelf Registration Statement continuously effective under the
Securities Act until a period of the two years from the date of the
effectiveness of the Shelf Registration Statement or, if earlier, until there
are no outstanding Registrable Securities registered under the Shelf
Registration Statement. The Company is required to pay Liquidated Damages to
holders of Registrable Securities for failure to comply with the foregoing
registration obligations, all as more fully set forth in the Registration
Rights Agreement.
Whenever in this Security there is a reference, in any
context, to the payment of the principal of, premium, if any, or interest on,
or in respect of, any Security such mention shall be deemed to include mention
of the payment of Liquidated Damages payable as described in the Registration
Rights Agreement to the extent that, in such context, Liquidated Damages are,
were or would be payable in respect of this Security pursuant to the
Registration Rights Agreement, and an express mention of the payment of
Liquidated Damages (if applicable) in any provisions of this Security shall
not be construed as excluding Liquidated Damages in those provisions of this
Security where such express mention is not made.
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If the Holder of this Security [IF THIS SECURITY IS A GLOBAL
SECURITY, THEN INSERT-- (including any Person that has a beneficial interest in
this Security)] elects to sell this Security pursuant to the Shelf Registration
Statement then, by its acceptance hereof, such Holder of this Security agrees to
be bound by the terms of the Registration Rights Agreement relating to the
Registrable Securities which are the subject of such election.
If a Change in Control occurs, the Holder of this Security, at
the Holder's option, shall have the right, in accordance with the provisions of
the Indenture, to require the Company to repurchase this Security (or any
portion of the principal amount hereof that is equal to U.S.$1,000 or any
greater integral multiple of U.S.$1,000) for cash at a Repurchase Price equal to
100% of the principal amount thereof plus interest accrued to the Repurchase
Date. At the option of the Company, the Repurchase Price may be paid in cash or,
subject to the conditions provided in the Indenture, by delivery of shares of
Common Stock having a fair market value equal to the Repurchase Price. For
purposes of this paragraph, the fair market value of shares of Common Stock
shall be determined by the Company and shall be equal to 95% of the average of
the Average Sales Price Per Share for the five consecutive Trading Days
immediately preceding and including the third Trading Day prior to the
Repurchase Date. Whenever in this Security there is a reference, in any context,
to the principal of any Security as of any time, such reference shall be deemed
to include reference to the Repurchase Price payable in respect of such Security
to the extent that such Repurchase Price is, was or would be so payable at such
time, and express mention of the Repurchase Price in any provision of this
Security shall not be construed as excluding the Repurchase Price so payable in
those provisions of this Security when such express mention is not made;
PROVIDED, HOWEVER, that, for the purposes of the paragraph below concerning the
consequences of an Event of Default, such reference shall be deemed to include
reference to the Repurchase Price only to the extent the Repurchase Price is
payable in cash.
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[THE FOLLOWING PARAGRAPH SHALL APPEAR IN EACH REGISTERED
SECURITY THAT IS NOT A GLOBAL SECURITY:
In the event of redemption, repurchase or conversion of this
Security in part only, a new Registered Security or Registered Securities for
the unredeemed, unrepurchased or unconverted portion hereof will be issued in
the name of the Holder hereof.]
[THE FOLLOWING PARAGRAPH SHALL APPEAR IN EACH GLOBAL SECURITY:
In the event of a deposit or withdrawal of an interest in this
Security, including an exchange, transfer, redemption, repurchase or conversion
of this Security in part only, the Trustee, as custodian of the Depositary,
shall make an adjustment on its records to reflect such deposit or withdrawal in
accordance with the Applicable Procedures.]
The indebtedness evidenced by this Security is, to the extent
and in the manner provided in the Indenture, subordinate and subject in right of
payment to the prior payment in full in cash or Cash Equivalents of all Senior
Debt of the Company, and this Security is issued subject to such provisions of
the Indenture with respect thereto. Each Holder of this Security, by accepting
the same, (a) agrees to and shall be bound by such provisions, (b) authorizes
and directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination so provided and (c) appoints the
Trustee his attorney-in-fact for any and all such purposes.
If an Event of Default shall occur and be continuing, the
principal of all the Securities, together with accrued interest to the date of
declaration, may be declared due and payable in the manner and with the effect
provided in the Indenture. Upon payment (i) of the amount of principal so
declared due and payable, together with accrued interest to the date of
declaration, and (ii) of interest on any overdue principal and, to the extent
permitted by applicable law, overdue interest, all of the Company's obligations
in respect of the payment of the
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principal of and interest on the Securities shall terminate.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of the Securities under
the Indenture at any time by the Company and the Trustee with the written
consent of the Holders of a majority in principal amount of the Securities at
the time Outstanding. The Indenture also contains provisions permitting the
Holders of specified percentages in principal amount of the Securities at the
time Outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Security shall be conclusive and binding upon such
Holder and upon all future Holders of this Security and of any Security issued
in exchange herefor or in lieu hereof, whether or not notation of such consent
or waiver is made upon this Security or such other Security.
As provided in and subject to the provisions of the Indenture,
the Holder of this Security shall not have the right to institute any proceeding
with respect to the Indenture or for the appointment of a receiver or trustee or
for any other remedy thereunder, unless such Holder shall have previously given
the Trustee written notice of a continuing Event of Default, the Holders of not
less than 25% in principal amount of the Outstanding Securities shall have made
written request to the Trustee to institute proceedings in respect of such Event
of Default as Trustee and offered the Trustee reasonable indemnity, and shall
have failed to institute any such proceeding, for 60 days after receipt of such
notice, request and offer of indemnity. The foregoing shall not apply to any
suit instituted by the Holder of this Security for the enforcement of any
payment of principal hereof, premium, if any, Liquidated Damages, if any, or
interest hereon on or after the respective due dates expressed herein or for the
enforcement of the right to convert this Security as provided in the Indenture.
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No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, premium,
if any, Liquidated Damages, if any, and interest on this Security at the times,
places and rate, and in the coin or currency, herein prescribed or to convert
this Security as provided in the Indenture.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of Registered Securities is
registrable on the Security Register upon surrender of a Registered Security for
registration of transfer at the Corporate Trust Office of the Trustee or at such
other office or agency of the Company as may be designated by it for such
purpose in the Borough of Manhattan, The City of New York, or at such other
offices or agencies as the Company may designate, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder thereof or his
attorney duly authorized in writing, and thereupon one or more new Registered
Securities, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees by the
Registrar. No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to recover
any tax or other governmental charge payable in connection therewith.
Prior to due presentation of a Registered Security for
registration of transfer, the Company, the Trustee and any agent of the Company
or the Trustee may treat the Person in whose name such Registered Security is
registered as the owner thereof for all purposes, whether or not such Security
be overdue, and neither the Company, the Trustee nor any such agent shall be
affected by notice to the contrary.
Interest on the Securities shall be computed on the basis of a
360-day year of twelve 30-day months.
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THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF
AMERICA, WITHOUT REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
All terms used in this Security which are defined in the
Indenture shall have the meanings assigned to them in the Indenture.
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ELECTION OF HOLDER TO REQUIRE REPURCHASE
1. Pursuant to SECTION 13.1 of the Indenture, the undersigned
hereby elects to have this Security repurchased by the Company.
2. The undersigned hereby directs the Trustee or the Company
to pay it or __________________ an amount in cash equal to 100% of the principal
amount to be repurchased (as set forth below), plus interest accrued to the
Repurchase Date, or, at the Company's election, Common Stock, valued as set
forth in the Indenture.
Dated: ____________________________
____________________________
Signature
____________________________
Signature Guaranteed
Principal amount to be repurchased (must be equal to U.S. $1,000 or any greater
integral multiple of U.S.$1,000):
Remaining principal amount following such repurchase:
__________________________
NOTICE: The signature to the foregoing Election must correspond to the Name as
written upon the face of this Security in every particular, without alteration
or any change whatsoever.
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SECTION 2.3 FORM OF CERTIFICATE OF AUTHENTICATION.
The Trustee's certificates of authentication shall be in
substantially the following form:
Dated: [Date of Authentication]
This is one of the Securities referred to in the
within-mentioned Indenture.
______________________ _______________
as Trustee
By: _____________________________________
Authorized Signatory
SECTION 2.4 FORM OF CONVERSION NOTICE.
CONVERSION NOTICE
The undersigned Holder of this Security hereby irrevocably
exercises the option to convert this Security, or any portion of the principal
amount hereof (which is an integral multiple of U.S.$1,000) below designated,
into shares of Common Stock in accordance with the terms of the Indenture
referred to in this Security, and directs that such shares, together with a
check in payment for any fractional share and any Securities representing any
unconverted principal amount hereof, be delivered to and be registered in the
name of the undersigned unless a different name has been indicated below. If
shares of Common Stock or Securities are to be registered in the name of a
Person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto. Any amount required to be paid by the undersigned
on account of interest accompanies this Security.
Dated: ___________________ _________________________
Signature
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If shares or Registered Securities are to be If only a portion of the Securities
is to be registered in the name of a Person other than the Holder, please print
such Person's name and address:
_________________________________
Name
_________________________________
Address
_________________________________
Social Security or other Taxpayer
Identification Number, if any
If only a portion of the Securities is to be converted, please indicate:
1. Principal amount to be converted:
U.S. $_______ (any integral multiple of U.S. $1,000)
2. Principal amount and denomination
of Registered Securities representing
unconverted principal amount to be issued:
Amount: U.S. $ ___________
Denominations:
U.S. $______
(any integral multiple of U.S. $1,000)
___________________________ [Signature Guaranteed]
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ARTICLE THREE
THE SECURITIES
SECTION 3.1 TITLE AND TERMS.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to
U.S.$150,000,000(U.S.$200,000,000 if the over-allotment is fully exercised),
except for Securities authenticated and delivered in exchange for, or in lieu
of, other Securities pursuant to SECTION 3.4, 3.5, 3.6, 8.5, 10.8, 11.2 or
13.3(e).
The Securities shall be known and designated as the "6.25%
Convertible Subordinated Notes due December 1, 2004" of the Company. Their
Stated Maturity shall be December 1, 2004 and they shall bear interest on their
principal amount from December 6, 1999, payable semi-annually in arrears on June
1 and December 1 in each year, commencing June 15, 2000, at the rate of 6.25%
per annum until the principal thereof is due and at the rate then in effect on
any overdue principal and, to the extent permitted by law, on any overdue
interest; PROVIDED, HOWEVER, that payments shall only be made on Business Days
as provided in SECTION 1.12.
The principal of, premium, if any, and interest on the
Securities shall be payable as provided in the form of Securities set forth in
SECTION 2.2, and the Repurchase Price, whether payable in cash or in shares of
Common Stock, shall be payable at such places as are identified in the Company
Notice given pursuant to SECTION 13.3 (any city in which any Paying Agent is
located being herein called a "Place of Payment").
The Registrable Securities are entitled to the benefits of a
Registration Rights Agreement as provided by SECTIONS 2.2 and 9.11. The
Securities are entitled to the payment of Liquidated Damages as provided in the
Registration Rights Agreement.
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The Securities shall be redeemable at the option of the
Company, as provided in ARTICLE TEN and in the form of Securities set forth in
SECTION 2.2.
The Securities shall be convertible as provided in ARTICLE
ELEVEN (any city in which any Conversion Agent is located being herein called a
"Place of Conversion").
The Securities shall be subordinated in right of payment to
Senior Debt of the Company as provided in ARTICLE TWELVE.
The Securities shall be subject to repurchase by the Company
at the option of the Holders as provided in ARTICLE THIRTEEN.
SECTION 3.2 DENOMINATIONS.
The Securities shall be issuable only in registered form,
without coupons, in denominations of U.S.$1,000 and integral multiples thereof.
SECTION 3.3 EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Securities shall be executed on behalf of the Company by
its Chairman or Uncle of the Board, its Vice Chairman of the Board, its Chief
Executive Officer, its President, one of its Vice Presidents, its Chief
Financial Officer, its Treasurer or its Controller under a facsimile of its
corporate seal reproduced thereon attested by its Secretary or one of its
Assistant Secretaries. Any such signature may be manual or facsimile.
Securities bearing the manual or facsimile signature of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and
delivery of this Indenture, the Company may
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deliver Securities executed by the Company to the Trustee or to its order for
authentication, together with a Company Order for the authentication and
delivery of such Securities, and the Trustee in accordance with such Company
Order shall authenticate and make available for delivery such Securities as
in this Indenture provided and not otherwise.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose unless there appears on such
Security a certificate of authentication substantially in the form provided for
herein executed by the Trustee by manual signature of an authorized signatory,
and such certificate upon any Security shall be conclusive evidence, and the
only evidence, that such Security has been duly authenticated and delivered
hereunder.
SECTION 3.4 GLOBAL SECURITIES; NON-GLOBAL SECURITIES.
(A) GLOBAL SECURITIES
(a) Each Global Security authenticated under this Indenture
shall be registered in the name of the Depositary designated by the Company for
such Global Security or a nominee thereof and delivered to such Depositary or a
nominee thereof or custodian therefor, and each such Global Security shall
constitute a single Security for all purposes of this Indenture.
(b) Notwithstanding any other provision in this Indenture, no
Global Security may be exchanged in whole or in part for Securities registered,
and no transfer of a Global Security in whole or in part may be registered, in
the name of any Person other than the Depositary for such Global Security or a
nominee thereof unless (i) such Depositary (A) has notified the Company that it
is unwilling or unable to continue as Depositary for such Global Security or (B)
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
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so or (ii) there shall have occurred and be continuing an Event of Default
with respect to such Global Security.
(c) If any Global Security is to be exchanged for other
Securities or canceled in whole, it shall be surrendered by or on behalf of the
Depositary or its nominee to the Trustee, as Security Registrar, for exchange or
cancellation, as provided in this ARTICLE THREE. If any Global Security is to be
exchanged for other Securities or cancelled in part, or if another Security is
to be exchanged in whole or in part for a beneficial interest in any Global
Security, in each case, as provided in SECTION 3.5, then either (i) such Global
Security shall be so surrendered for exchange or cancellation, as provided in
this ARTICLE THREE, or (ii) the principal amount thereof shall be reduced or
increased by an amount equal to the portion thereof to be so exchanged or
cancelled, or equal to the principal amount of such other Security to be so
exchanged for a beneficial interest therein, as the case may be, by means of an
appropriate adjustment made on the records of the Trustee, as Security
Registrar, whereupon the Trustee, in accordance with the Applicable Procedures,
shall instruct the Depositary or its authorized representative to make a
corresponding adjustment to its records. Upon any such surrender or adjustment
of a Global Security, the Trustee shall, subject to SECTION 3.5(c) and as
otherwise provided in this ARTICLE THREE, authenticate and make available for
delivery any Securities issuable in exchange for such Global Security (or any
portion thereof) to or upon the order of, and registered in such names as may be
directed by, the Depositary or its authorized representative. Upon the request
of the Trustee in connection with the occurrence of any of the events specified
in the preceding paragraph, the Company shall promptly make available to the
Trustee a reasonable supply of Securities that are not in the form of Global
Securities. The Trustee shall be entitled to rely upon any order, direction or
request of the Depositary or its authorized representative which is given or
made pursuant to this ARTICLE THREE if such order, direction or request is given
or made in accordance with the Applicable Procedures.
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(d) Every Security authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, a Global Security
or any portion thereof, whether pursuant to this ARTICLE THREE or otherwise,
shall be authenticated and delivered in the form of, and shall be, a registered
Global Security, unless such Security is registered in the name of a Person
other than the Depositary for such Global Security or a nominee thereof, in
which case such Registered Security shall be authenticated and delivered in
definitive, fully registered form, without interest coupons.
(e) The Depositary or its nominee, as registered owner of a
Global Security, shall be the Holder of such Global Security for all purposes
under the Indenture and the Registered Securities, and owners of beneficial
interests in a Global Security shall hold such interests pursuant to the
Applicable Procedures. Accordingly, any such owner's beneficial interest in a
Global Security will be shown only on, and the transfer of such interest shall
be effected only through, records maintained by the Depositary or its nominee or
its Agent Members and such owners of beneficial interests in a Global Security
will not be considered the owners or holders thereof.
(B) NON-GLOBAL SECURITIES
Pending the preparation of definitive Securities, the Company
may execute, and upon Company Order the Trustee shall authenticate and make
available for delivery, temporary Securities which are printed, lithographed,
typewritten, mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Registered Securities in lieu of
which they are issued and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Registered
Securities may determine, as evidenced by their execution of such Securities.
If temporary Securities are issued, the Company will cause
definitive Securities to be prepared without unreasonable delay. After the
preparation of definitive Securities, the temporary Securities shall be
exchangeable for definitive Securities upon surrender of the temporary
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Securities at any office or agency of the Company designated pursuant to
SECTION 9.2, without charge to the Holder. Upon surrender for cancellation of
any one or more temporary Securities the Company shall execute and the
Trustee shall authenticate and make available for delivery in exchange
therefor a like principal amount of definitive Securities of authorized
denominations. Until so exchanged the temporary Securities shall in all
respects be entitled to the same benefits under this Indenture as definitive
Securities.
SECTION 3.5 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE;
RESTRICTIONS ON TRANSFER.
(a) The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office and in
any other office or agency of the Company designated pursuant to SECTION 9.2
being herein sometimes collectively referred to as the "Security Register") in
which, subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration of Registered Securities and of transfers of
Registered Securities. The Trustee is hereby appointed "Security Registrar" for
the purpose of registering Registered Securities and transfers and exchanges of
Registered Securities as herein provided.
Upon surrender for registration of transfer of any Security at
an office or agency of the Company designated pursuant to SECTION 9.2 for such
purpose, the Company shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Securities of any authorized denominations and of a like aggregate principal
amount and bearing such restrictive legends as may be required by this
Indenture.
At the option of the Holder, and subject to the other
provisions of this SECTION 3.5, Securities may be exchanged for other Securities
of any authorized denomination and of a like aggregate principal amount, upon
surrender of the Securities to be exchanged at any such office or agency.
Whenever any Securities are so surrendered for exchange, and subject to the
other
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provisions of this SECTION 3.5, the Company shall execute, and the Trustee
shall authenticate and make available for delivery, the Securities which the
Holder making the exchange is entitled to receive. Every Security presented or
surrendered for registration of transfer or for exchange shall (if so required
by the Company or the Security Registrar) be duly endorsed, or be accompanied by
a written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed, by the Holder thereof or his attorney duly
authorized in writing.
All Securities issued upon any registration of transfer or
exchange of Securities shall be the valid obligations of the Company, evidencing
the same debt, and subject to the other provisions of this SECTION 3.5, entitled
to the same benefits under this Indenture, as the Securities surrendered upon
such registration of transfer or exchange.
No service charge shall be made for any registration of
transfer or exchange of Securities except as provided in SECTION 3.6, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Securities, other than exchanges pursuant to SECTION
3.4, 8.5, 10.8, 11.2 or 13.3(e) (other than where the shares of Common Stock are
to be issued or delivered in a name other than that of the Holder of the
Security) not involving any transfer and other than any stamp and other duties,
if any, which may be imposed in connection with any such transfer or exchange by
the United States or any political subdivision thereof or therein, which shall
be paid by the Company.
In the event of a redemption of the Securities, the Company
will not be required (a) to register the transfer of or exchange Securities for
a period of 15 days immediately preceding the date notice is given identifying
the serial numbers of the Securities called for such redemption or (b) to
register the transfer of or exchange any Security, or portion thereof, called
for redemption.
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(b) SECURITIES ACT LEGENDS. All Securities shall bear the
applicable Restricted Securities Legend subject to the following:
(i) subject to the following clauses of this SECTION
3.5(b), a Security or any portion thereof which is exchanged, upon
transfer or otherwise, for a Global Security or any portion thereof
shall bear the Securities Act Legend borne by such Global Security
while represented thereby;
(ii) subject to the following clauses of this SECTION
3.5(b), a new Security which is not a Global Security and is issued in
exchange for another Security (including a Global Security) or any
portion thereof, upon transfer or otherwise, shall bear the Securities
Act Legend borne by such other Security;
(iii) any Securities which are sold or otherwise disposed
of pursuant to an effective registration statement under the Securities
Act (including the Shelf Registration Statement), together with their
Successor Securities shall not bear a Securities Act Legend; the
Company shall inform the Trustee in writing of the effective date of
any such registration statement registering the Securities under the
Securities Act and shall notify the Trustee at any time when
prospectuses may not be delivered with respect to Securities to be sold
pursuant to such registration statement. The Trustee shall not be
liable for any action taken or omitted to be taken by it in good faith
in accordance with the aforementioned registration statement;
(iv) at any time after the Securities may be freely
transferred without registration under the Securities Act or without
being subject to transfer restrictions pursuant to the Securities Act,
a new Security which does not bear a Securities Act Legend may be
issued in exchange for or in lieu of a Security (other than
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a Global Security) or any portion thereof which bears such a legend
if the Trustee has received an Unrestricted Securities Certificate,
satisfactory to the Trustee and duly executed by the Holder of such
legended Security or his attorney duly authorized in writing, and after
such date and receipt of such certificate, the Trustee shall
authenticate and make available for delivery such a new Security in
exchange for or in lieu of such other Security as provided in this
ARTICLE THREE;
(v) a new Security which does not bear a Securities Act
Legend may be issued in exchange for or in lieu of a Security (other
than a Global Security) or any portion thereof which bears such a
legend if, in the Company's judgment, placing such a legend upon such
new Security is not necessary to ensure compliance with the
registration requirements of the Securities Act, and the Trustee, at
the direction of the Company, shall authenticate and make available for
delivery such a new Security as provided in this ARTICLE THREE; and
(vi) notwithstanding the foregoing provisions of this
SECTION 3.5(b), a Successor Security of a Security that does not bear a
particular form of Securities Act Legend shall not bear such form of
legend unless the Company has reasonable cause to believe that such
Successor Security is a "restricted security" within the meaning of
Rule 144, in which case the Trustee, at the direction of the Company,
shall authenticate and make available for delivery a new Security
bearing a Restricted Securities Legend in exchange for such Successor
Security as provided in this ARTICLE THREE.
(c) Neither the Trustee, the Paying Agent nor any of their
agents shall (1) have any duty to monitor compliance with or with respect to any
federal or state or other securities or tax laws or (2) have any duty to obtain
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documentation on any transfers or exchanges other than as specifically
required hereunder.
SECTION 3.6 MUTILATED, DESTROYED, LOST OR STOLEN SECURITIES.
If any mutilated Security is surrendered to the Trustee, the
Company shall execute and the Trustee shall authenticate and make available for
delivery in exchange therefor a new Security of like tenor and principal amount
and bearing a number not contemporaneously outstanding.
If there be delivered to the Company and to the Trustee:
(1) evidence to their satisfaction of the destruction, loss
or theft of any Security, and
(2) such security or indemnity as may be satisfactory to the
Company and the Trustee to save each of them and any agent of either of
them harmless,
then, in the absence of actual notice to the Company or the Trustee that such
Security has been acquired by a bona fide purchaser, the Company shall execute
and the Trustee shall authenticate and make available for delivery, in lieu of
any such destroyed, lost or stolen Security, a new Security of like tenor and
principal amount and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, the Company in its discretion,
but subject to any conversion rights, may, instead of issuing a new Security,
pay such Security, upon satisfaction of the conditions set forth in the
preceding paragraph.
Upon the issuance of any new Security under this SECTION 3.6,
the Company may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto (other than
any stamp and other duties, if any, which may be imposed in connection therewith
by the United States or any political
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subdivision thereof or therein, which shall be paid by the Company) and any
other expenses (including the fees and expenses of the Trustee) connected
therewith.
Every new Security issued pursuant to this SECTION 3.6 in lieu
of any mutilated, destroyed, lost or stolen Security shall constitute an
original additional contractual obligation of the Company, whether or not the
mutilated, destroyed, lost or stolen Security shall be at any time enforceable
by anyone, and such new Security shall be entitled to all the benefits of this
Indenture equally and proportionately with any and all other Securities duly
issued hereunder.
The provisions of this SECTION 3.6 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies of any Holder with
respect to the replacement or payment of mutilated, destroyed, lost or stolen
Securities.
SECTION 3.7 PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Security which is payable, and is punctually
paid or duly provided for, on any Interest Payment Date shall be paid to the
Person in whose name that Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest.
Any interest on any Security which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities (or their
respective Predecessor Securities) are registered at the close of
business on a Special Record Date for the payment of such
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Defaulted Interest, which shall be fixed in the following manner.
Number, if any The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Security, the
date of the proposed payment and the Special Record Date, and at
the same time the Company shall deposit with the Trustee an amount
of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of
the proposed payment, such money when deposited to be held in trust
for the benefit of the Persons entitled to such Defaulted Interest
as in this clause provided. The Special Record Date for the payment
of such Defaulted Interest shall be not more than 15 days and not
less than 10 days prior to the date of the proposed payment and not
less than 10 days after the receipt by the Trustee of the notice of
the proposed payment. The Trustee, in the name and at the expense
of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefor to be
mailed, first-class postage prepaid, to each Holder at such
Holder's address as it appears in the Security Register, not less
than 10 days prior to such Special Record Date. Notice of the
proposed payment of such Defaulted Interest and the Special Record
Date therefor having been so mailed, such Defaulted Interest shall
be paid to the Persons in whose names the Securities (or their
respective Predecessor Securities) are registered at the close of
business on such Special Record Date and shall not longer be
payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon
such notice as may be required by such exchange, if, after notice given
by the Company to the Trustee of the proposed payment pursuant to this
clause, such manner of payment shall be deemed practicable by the
Trustee.
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Subject to the foregoing provisions of this SECTION 3.7 and
SECTION 3.5, each Security delivered under this Indenture upon registration of
transfer of or in exchange for or in lieu of any other Security shall carry the
rights to interest accrued and unpaid, and to accrue, which were carried by such
other Security.
Interest on any Security which is converted in accordance with
SECTION 11.2 during a Record Date Period shall be payable in accordance with the
provisions of SECTION 11.2.
SECTION 3.8 PERSONS DEEMED OWNERS.
Prior to due presentment of a Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Security is registered as the owner of
such Security for the purpose of receiving payment of principal of, premium, if
any, and (subject to SECTION 3.7) interest on such Security and for all other
purposes whatsoever, whether or not such Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
SECTION 3.9 CANCELLATION.
All Securities surrendered for payment, redemption,
repurchase, registration of transfer or exchange or conversion shall, if
surrendered to any Person other than the Trustee, be delivered to the Trustee.
All Securities so delivered to the Trustee shall be canceled promptly by the
Trustee. No Securities shall be authenticated in lieu of or in exchange for any
Securities canceled as provided in this SECTION 3.9. The Trustee shall dispose
of all canceled Securities in accordance with applicable law and its customary
practices in effect from time to time.
SECTION 3.10 COMPUTATION OF INTEREST.
Interest on the Securities shall be computed on the basis of a
360-day year of twelve 30-day months.
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SECTION 3.11 CUSIP NUMBERS.
The Company in issuing Securities may use "CUSIP" numbers (if
then generally in use) in addition to serial numbers; the Trustee shall use such
CUSIP numbers in addition to serial numbers in notices of redemption and
repurchase as a convenience to Holders; PROVIDED that any such notice may state
that no representation is made as to the correctness of such CUSIP numbers
either as printed on the Securities or as contained in any notice of a
redemption or repurchase and that reliance may be placed only on the serial or
other identification numbers printed on the Securities, and any such redemption
or repurchase shall not be affected by any defect in or omission of such CUSIP
numbers. The Company shall promptly notify the Trustee in writing of any change
in any such CUSIP number.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 4.1 SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall upon Company Request cease to be of
further effect (except as to any surviving rights of conversion, or registration
of transfer or exchange, or replacement of Securities herein expressly provided
for and any right to receive Liquidated Damages as provided in the form of
Securities set forth in SECTION 2.2 and the Company's obligations to the Trustee
pursuant to SECTION 6.7), and the Trustee, at the expense of the Company, shall
execute proper instruments in form and substance satisfactory to the Trustee
acknowledging satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered
(other than (i) Securities which have been destroyed, lost or
stolen and which have been replaced or paid as provided in
SECTION 3.6 and (ii) Securities for whose payment money has
theretofore been
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deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged
from such trust, as provided in SECTION 9.3) have
been delivered to the Trustee for cancellation; or
(B) all such Securities not theretofore delivered to the
Trustee or its agent for cancellation (other than Securities
referred to in clauses (i) and (ii) of clause (1)(A) above)
(i) have become due and payable, or
(ii) will have become due and payable at their
Stated Maturity 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 the name, and at the
expense, of the Company,
and the Company, in the case of clause (i), (ii) or (iii)
above, has deposited or caused to be deposited with the
Trustee as trust funds (immediately available to the Holders
in the case of clause (i) above) an amount sufficient to pay
and discharge the entire indebtedness on such Securities not
theretofore delivered to the Trustee for cancellation, for
principal, premium, if any, interest and Liquidated Damages,
if any, to the date of such deposit (in the case of Securities
which have become due and payable) or to the Stated Maturity
or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers'
Certificate stating that all conditions precedent herein provided for
relating to the satisfaction and discharge of this Indenture have been
complied with.
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Notwithstanding the satisfaction and discharge of this
Indenture, the obligations of the Company to the Trustee under SECTION 6.7, the
obligations of the Company to any Authenticating Agent under SECTION 6.12, the
obligation of the Company to pay Liquidated Damages, if money shall have been
deposited with the Trustee pursuant to clause (1)(B) of this SECTION 4.1, the
obligations of the Trustee under SECTION 4.2 and the last paragraph of SECTION
9.3 and the obligations of the Company and the Trustee under SECTION 3.5 and
ARTICLE ELEVEN shall survive. Funds held in trust pursuant to this SECTION 4.1
are not subject to the provisions of ARTICLE TWELVE.
SECTION 4.2 APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of SECTION
9.3, all money deposited with the Trustee pursuant to SECTION 4.1 shall be held
in trust and applied by it, in accordance with the provisions of the Securities
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent), to the Persons entitled
thereto, of the principal, premium, if any, Liquidated Damages, if any, and
interest for whose payment such money has been deposited with the Trustee.
All moneys deposited with the Trustee pursuant to SECTION 4.1
(and held by it or any Paying Agent) for the payment of Securities subsequently
converted shall be returned to the Company upon Company Request.
ARTICLE FIVE
REMEDIES
SECTION 5.1 EVENTS OF DEFAULT.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be occasioned by the provisions of ARTICLE TWELVE or be voluntary or
invol-
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untary or be effected by operation of law or pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any administrative
or governmental body):
(1) default in the payment of the principal of or premium, if
any, on any Security at its Maturity, whether or not the such payment
is prohibited by the subordination provisions of this Indenture; or
(2) default in the payment of any interest or Liquidated
Damages upon any Security when it becomes due and payable, and
continuance of such default for a period of 30 days, whether or not the
such payment is prohibited by the subordination provisions of this
Indenture; or
(3) failure by the Company to give the Company Notice in
accordance with SECTION 13.3; or
(4) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in the performance or breach of which is
specifically dealt with elsewhere in this SECTION 5.1), and continuance
of such default or breach for a period of 60 days after there has been
given, by registered or certified mail, to the Company by the Trustee
or to the Company and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Securities, a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder;
(5) a default in the payment when due of the principal of any
indebtedness under any bond, debenture, note or other evidence of
indebtedness for money borrowed by the Company or any Subsidiary or
under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any indebtedness
for money borrowed by the Company or any Subsidiary with a principal
amount then outstanding in excess of U.S. $25,000,000, whether such
indebtedness now exists or
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shall hereafter be created, if the indebtedness is not discharged,
or if such indebtedness has been accelerated, such acceleration is not
rescinded or annulled, within a period of 30 days after there shall
have been given, by registered or certified mail, to the Company by
the Trustee or to the Company and the Trustee by the Holders of at
least 25% in principal amount of the Outstanding Securities a written
notice specifying such default and requiring the Company to cause such
indebtedness to be discharged or such acceleration to be rescinded or
annulled and stating that such notice is a "Notice of Default"
hereunder; or
(6) the entry by a court having jurisdiction in the premises
of (A) a decree or order for relief in respect of the Company or any
Significant Subsidiary in an involuntary case or proceeding under any
applicable Federal or State bankruptcy, insolvency, reorganization or
other similar law or (B) a decree or order adjudging the Company or any
Significant Subsidiary a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company or any
Significant Subsidiary under any applicable Federal or State law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any
Significant Subsidiary or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order for relief or any such other
decree or order unstayed and in effect for a period of 60 consecutive
days; or
(7) the commencement by the Company or any Significant
Subsidiary of a voluntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other
similar law or of any other case or proceeding to be adjudicated a
bankrupt or insolvent, or the consent by it to the entry of a decree or
order for relief in respect of the Company or any Significant
Subsidiary in an involuntary case or proceeding under any
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applicable Federal or State bankruptcy, insolvency, reorganization
or other similar law or to the commencement of any bankruptcy or
insolvency case or proceeding against it, or the filing by it of a
petition or answer or consent seeking reorganization or similar relief
under any applicable Federal or State law, or the consent by it to the
filing of such petition or to the appointment of or taking possession
by a custodian, receiver, liquidator, assignee, trustee, sequestrator
or other similar official of the Company or any Significant Subsidiary
or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in
writing of its inability to pay its debts generally as they become due,
or the taking of corporate action by the Company or any Significant
Subsidiary in furtherance of any such action.
SECTION 5.2 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default (other than an Event of Default
specified in SECTION 5.1(6) or 5.1(7)) occurs and is continuing, then in every
such case the Trustee or the Holders of not less than 25% in principal amount of
the Outstanding Securities may declare the principal of all the Securities to be
due and payable immediately, by a notice in writing to the Company (and to the
Trustee if given by the Holders), and upon any such declaration such principal
and all accrued interest thereon shall become immediately due and payable. If an
Event of Default specified in SECTION 5.1(6) or 5.1(7) occurs, the principal of,
and accrued interest on, all the Securities shall IPSO FACTO become immediately
due and payable without any declaration or other Act of the Holder or any act on
the part of the Trustee.
At any time after such declaration of acceleration has been
made and before a judgment or decree for payment of the money due has been
obtained by the Trustee as hereinafter in this ARTICLE FIVE provided, the
Holders of a majority in principal amount of the Outstanding Securities, by
written notice to the Company
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and the Trustee, may rescind and annul such declaration and its consequences
if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue interest and Liquidated Damages, if any,
on all Securities,
(B) the principal of and premium, if any, on any
Securities which have become due otherwise than by such
declaration of acceleration and any interest thereon at the
rate borne by the Securities,
(C) to the extent permitted by applicable law, interest
upon overdue interest at the rate then in effect, and
(D) all sums paid or advanced by the Trustee hereunder and
the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and its counsel;
and
(2) all Events of Default, other than the nonpayment of the
principal of, and any premium and interest on, Securities which have
become due solely by such declaration of acceleration, have been cured
or waived as provided in SECTION 5.13.
No rescission or annulment referred to above shall affect any
subsequent default or impair any right consequent thereon.
SECTION 5.3 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Company covenants that if
(1) default is made in the payment of any interest or
Liquidated Damages on any Security when it
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becomes due and payable and such default continues for a period of
30 days, or
(2) default is made in the payment of the principal of or
premium, if any, on any Security at the Maturity thereof,
the Company will upon demand of the Trustee pay to it, for the benefit of the
Holders of such Securities the whole amount then due and payable on such
Securities for principal, premium, if any, Liquidated Damages, if any, and
interest on any overdue principal, premium, if any, Liquidated Damages, if any,
and, to the extent permitted by applicable law, on any overdue interest at the
rate then in effect, and in addition thereto, such further amount as shall be
sufficient to cover the reasonable costs and expenses of collection, including
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and its counsel.
If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may
institute a judicial proceeding for the collection of the sums so due and
unpaid, may prosecute such proceeding to judgment or final decree and may
enforce the same against the Company or any other obligor upon the Securities
and collect the moneys adjudged or decreed to be payable in the manner provided
by law out of the property of the Company or any other obligor upon the
Securities, wherever situated.
If an Event of Default occurs and is continuing, the Trustee
may in its discretion proceed to protect and enforce its rights and the rights
of the Holders of Securities by such appropriate judicial proceedings as the
Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted herein, or to enforce
any other proper remedy.
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SECTION 5.4 TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or the
creditors of either, the Trustee (irrespective of whether the principal of, and
any interest on, the Securities shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee
shall have made any demand on the Company for the payment of overdue principal
or interest) shall be entitled and empowered, by intervention in such proceeding
or otherwise,
(1) to file and prove a claim for the whole amount of
principal, premium, if any, Liquidated Damages, if any, and interest
owing and unpaid in respect of the Securities and take such other
actions, including participating as a member, voting or otherwise, of
any official committee of creditors appointed in such matter, and to
file such other papers or documents, in each of the foregoing cases, as
may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and its counsel)
and of the Holders of Securities allowed in such judicial proceeding,
and
(2) to collect and receive any moneys or other property
payable or deliverable on any such claim and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder of Securities to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders of Securities to pay to the Trustee any amount due to it for the
reasonable compensation, expenses, disbursements and advances of the
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Trustee, its agents and its counsel and any other amounts due the Trustee
under SECTION 6.7.
Nothing herein contained shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
of a Security any plan of reorganization, arrangement, adjustment or
composition affecting the Securities or the rights of any Holder thereof or
to authorize the Trustee to vote in respect of the claim of any Holder of a
Security in any such proceeding; PROVIDED, HOWEVER, that the Trustee may, on
behalf of such Holders, vote for the election of a trustee in bankruptcy or
similar official.
SECTION 5.5 TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES.
All rights of action and claims under this Indenture or the
Securities may be prosecuted and enforced by the Trustee without the
possession of any of the Securities or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the
Trustee shall be brought in its own name as trustee of an express trust, and
any recovery of judgment shall, after provision for the payment of the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and its counsel, be for the ratable benefit of the Holders of the
Securities in respect of which judgment has been recovered.
SECTION 5.6 APPLICATION OF MONEY COLLECTED.
Subject to ARTICLE TWELVE, any money collected by the
Trustee pursuant to this ARTICLE FIVE shall be applied in the following
order, at the date or dates fixed by the Trustee and, in case of the
distribution of such money on account of principal, premium, if any, or
interest, upon presentation of the Securities and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under
SECTION 6.7;
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SECOND: To the payment of the amounts then due and unpaid for
principal of, premium, if any, Liquidated Damages, if any, or interest
on, the Securities in respect of which or for the benefit of which such
money has been collected, ratably, without preference or priority of
any kind, according to the amounts due and payable on such Securities
for principal, premium, if any, Liquidated Damages, if any, and
interest, respectively; and
THIRD: Any remaining amounts shall be repaid to the Company.
SECTION 5.7 LIMITATION ON SUITS.
No Holder of any Security shall have any right to institute
any proceeding, judicial or otherwise, with respect to this Indenture, or for
the appointment of a receiver or trustee, or for any other remedy hereunder,
unless:
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of
the Outstanding Securities shall have made written request to the
Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request; and
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding;
it being understood and intended that no one or more of such Holders shall
have any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
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other of such Holders, or to obtain or seek to obtain priority or preference
over any other of such Holders or to enforce any right under this Indenture,
except in the manner herein provided and for the equal and ratable benefit of
all such Holders.
SECTION 5.8 UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL,
PREMIUM AND INTEREST AND TO CONVERT.
Notwithstanding any other provision in this Indenture, the
Holder of any Security shall have the right, which is absolute and
unconditional, to receive payment of the principal of, premium, if any,
Liquidated Damages, if any, and (subject to SECTION 3.7) interest on such
Security on the respective Stated Maturities expressed in such Security (or,
in the case of redemption or repurchase, on the Redemption Date or Repurchase
Date, as the case may be), and to convert such Security in accordance with
ARTICLE ELEVEN, and to institute suit for the enforcement of any such payment
and right to convert, and such rights shall not be impaired without the
consent of such Holder.
SECTION 5.9 RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder of a Security has instituted
any proceeding to enforce any right or remedy under this Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case, subject to any determination in such proceeding, the Company, the
Trustee and the Holders of Securities shall be restored severally and
respectively to their former positions hereunder and thereafter all rights
and remedies of the Trustee and such Holders shall continue as though no such
proceeding had been instituted.
SECTION 5.10 RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities in
the last paragraph of SECTION 3.6, no right or remedy herein conferred upon
or reserved to the Trustee or to the Holders of Securities is intended to be
exclusive of any other right or remedy, and every right and
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remedy shall, to the extent permitted by law, be cumulative and in addition
to every other right and remedy given hereunder or now or hereafter existing
at law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.11 DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any
Security to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such
Event of Default or any acquiescence therein. Every right and remedy given by
this ARTICLE FIVE or by law to the Trustee or to the Holders of Securities
may be exercised from time to time, and as often as may be deemed expedient,
by the Trustee or (subject to the limitations contained in this Indenture) by
the Holders of Securities as the case may be.
SECTION 5.12 CONTROL BY HOLDERS OF SECURITIES.
The Holders of a majority in principal amount of the
Outstanding Securities shall 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
(1) such direction shall not be in conflict with any rule of
law or with this Indenture, and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 5.13 WAIVER OF PAST DEFAULTS.
The Holders, either (a) through the written consent of not
less than a majority in principal amount of the Outstanding Securities, or
(b) by the adoption of a resolution, at a meeting of Holders of the
Outstanding Securities at which a quorum is present, by the Holders of at
least a majority in principal amount of the Outstanding
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Securities represented at such meeting, may on behalf of the Holders of all
the Securities waive any past default hereunder and its consequences, except
a default (1) in the payment of the principal of, premium, if any or interest
on any Security, or (2) in respect of a covenant or provision hereof which
under ARTICLE EIGHT cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.
SECTION 5.14 UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any
Security by his acceptance thereof shall be deemed to have agreed, that any
court may in its discretion require, in any suit for the enforcement of any
right or remedy under this Indenture, or in any suit against the Trustee for
any action taken, suffered or omitted by it as Trustee, the filing by any
party litigant in such suit of an undertaking to pay the costs of such suit,
and that such court may in its discretion assess reasonable costs, including
reasonable attorneys' fees and expenses, against any party litigant in such
suit, having due regard to the merits and good faith of the claims or
defenses made by such party litigant; but the provisions of this SECTION 5.14
shall not apply to any suit instituted by the Company, to any suit instituted
by the Trustee, to any suit instituted by any Holder, or group of Holders,
holding in the aggregate more than 10% in principal amount of the Outstanding
Securities, or to any suit instituted by any Holder of any Security for the
enforcement of the payment of the principal of, premium, if any, Liquidated
Damages, if any, or interest on any Security on or after the respective
Stated Maturity or Maturities expressed in such Security (or, in the case of
redemption or repurchase, on or after the Redemption Date or Repurchase Date,
as the case may be) or for the enforcement of the right to convert any
Security in accordance with ARTICLE ELEVEN.
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SECTION 5.15 WAIVER OF STAY, USURY OR EXTENSION LAWS.
The Company covenants (to the extent that it may lawfully
do so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, usury or
extension law wherever enacted, now or at any time hereafter in force, which
may affect the covenants or the performance of this Indenture; and the
Company (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law and covenants that it will not
hinder, delay or impede by reason of such law the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE SIX
THE TRUSTEE
SECTION 6.1 CERTAIN DUTIES AND RESPONSIBILITIES.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture, and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but in the case of any such certificates or opinions
which by any provision hereof are specifically required to be furnished
to the Trustee, the Trustee shall be under a duty to examine the same
to determine whether or not they
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conform to the requirements of this Indenture, but not to verify the
contents thereof.
(b) In case an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested
in it by this Indenture, and use the same degree of care and skill in their
exercise, as a prudent man would exercise or use under the circumstances in
the conduct of his own affairs.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its own
negligent failure to act, or its own willful misconduct, EXCEPT that
(1) this paragraph (c) shall not be construed to limit the
effect of paragraph (a) of this SECTION 6.1;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it shall be proved
that the Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount of the
Outstanding Securities relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture; and
(4) no provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to
it.
(d) Whether or not therein expressly so provided, every
provision of this Indenture relating to the
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conduct or affecting the liability of or affording protection to the Trustee
shall be subject to the provisions of this SECTION 6.1.
SECTION 6.2 NOTICE OF DEFAULTS.
Within 90 days after the occurrence of any default
hereunder as to which the Trustee has actually received written notice, the
Trustee shall give to all Holders of Securities, in the manner provided in
SECTION 1.6, notice of such default, unless such default shall have been
cured or waived; PROVIDED, HOWEVER, that, except in the case of a default in
the payment of the principal of, premium, if any, or interest on any Security
the Trustee shall be protected in withholding such notice if and so long as
the board of directors, the executive committee or a trust committee of
directors or Responsible Officers of the Trustee in good faith determine that
the withholding of such notice is in the interest of the Holders; and
PROVIDED, FURTHER, that in the case of any default of the character specified
in SECTION 5.1(4), no such notice to Holders of Securities shall be given
until at least 60 days after the occurrence thereof. For the purpose of this
SECTION 6.2, the term "default" means any event which is, or after notice or
lapse of time or both would become, an Event of Default.
SECTION 6.3 CERTAIN RIGHTS OF TRUSTEE.
Subject to the provisions of SECTION 6.1:
(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, Officers' Certificate,
other certificate, statement, instrument, opinion, report, notice,
request, direction, consent, order, bond, debenture, note, coupon,
other evidence of indebtedness or other paper or document believed by
it to be genuine and to have been signed or presented by the proper
party or parties;
(2) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of
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the Board of Directors shall be sufficiently evidenced by a Board
Resolution;
(3) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, rely upon an Officers'
Certificate;
(4) the Trustee may consult with counsel of its selection and
the advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(5) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders of Securities pursuant to this
Indenture, unless such Holders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such
request or direction;
(6) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, coupon, other evidence of
indebtedness or other paper or document, but the Trustee may make such
further inquiry or investigation into such facts or matters as it may
see fit, and, if the Trustee shall determine to make such further
inquiry or investigation, it shall be entitled to examine the books,
records and premises of the Company, personally or by agent or
attorney; and
(7) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any
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misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder.
SECTION 6.4 NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES.
The recitals contained herein and in the Securities (except
the Trustee's certificates of authentication) shall be taken as the
statements of the Company, and the Trustee assumes no responsibility for
their correctness. The Trustee makes no representations as to the validity or
sufficiency of this Indenture, of the Securities or of the Common Stock
issuable upon the conversion of the Securities. The Trustee shall not be
accountable for the use or application by the Company of Securities or the
proceeds thereof.
SECTION 6.5 MAY HOLD SECURITIES, ACT AS TRUSTEE UNDER OTHER INDENTURES.
The Trustee, any Authenticating Agent, any Paying Agent,
any Conversion Agent or any other agent of the Company or the Trustee, in its
individual or any other capacity, may become the owner or pledgee of
Securities and may otherwise deal with the Company with the same rights it
would have if it were not Trustee, Authenticating Agent, Paying Agent,
Conversion Agent or such other agent.
The Trustee may become and act as trustee under other
indentures under which other securities, or certificates of interest or
participation in other securities, of the Company are outstanding in the same
manner as if it were not Trustee hereunder.
SECTION 6.6 MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
shall be under no liability for interest on any money received by it hereunder
except as otherwise agreed in writing with the Company.
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SECTION 6.7 COMPENSATION AND REIMBURSEMENT.
The Company agrees
(1) to pay to the Trustee from time to time such reasonable
compensation as the Company and the Trustee shall from time to time
agree in writing for all services rendered by it hereunder (which
compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust);
(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the
reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance
as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee (and its directors, officers,
employees and agents) for, and to hold it harmless against, any and all
loss, damage, claim, liability or expense, including taxes (other than
taxes based on the income of the Trustee), incurred without negligence,
bad faith or willful misconduct on its part, arising out of or in
connection with the acceptance or administration of this trust,
including the reasonable costs, expenses and reasonable attorneys' fees
of defending itself against any claim or liability in connection with
the exercise or performance of any of its powers or duties hereunder.
When the Trustee incurs expenses or renders services in
connection with an Event of Default specified in SECTION 5.1(6) or SECTION
5.1(7) with respect to the Company, the expenses (including the reasonable
charges of its counsel) and the compensation for the services are intended to
constitute expenses of the administration under
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any applicable Federal or State bankruptcy, insolvency or other similar law.
The Trustee shall have a lien prior to the Securities as to
all property and funds held by it hereunder for any amount owing it or any
predecessor Trustee pursuant to this SECTION 6.7, except with respect to funds
held in trust for the benefit of the Holders of particular Securities.
The provisions of this SECTION 6.7 shall survive the
termination of this Indenture or the earlier resignation or removal of the
Trustee.
SECTION 6.8 CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall
be a Person that is eligible pursuant to the Trust Indenture Act to act as
such, having a combined capital and surplus (or for such purposes, the combined
capital and surplus of any parent holding company) of at least U.S.
$25,000,000, subject to supervision or examination by Federal or State
authority, in good standing and having an established place of business in the
Borough of Manhattan, The City of New York. If such corporation publishes
reports of condition at least annually, pursuant to law or to the requirements
of said supervising or examining authority, then for the purposes of this
SECTION 6.8, the combined capital and surplus of such corporation shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this SECTION 6.8, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article and a successor shall be appointed pursuant to SECTION 6.9.
SECTION 6.9 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of
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appointment by the successor Trustee in accordance with the applicable
requirements of SECTION 6.10.
(b) The Trustee may resign at any time by giving written
notice thereof to the Company. If the instrument of acceptance by a successor
Trustee required by Section 6.10 shall not have been delivered to the Trustee
within 30 days after the giving of such notice of resignation, the resigning
Trustee or the Company may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the
Holders of a majority in principal amount of the Outstanding Securities,
delivered to the Trustee and the Company. If the instrument of acceptance by a
successor Trustee required by SECTION 6.10 shall not have been delivered to the
Trustee within 30 days after the giving of such notice of removal, the removed
Trustee or the Company may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(d) If at any time:
(1) the Trustee shall cease to be eligible under SECTION 6.8
and shall fail to resign after written request therefor by the Company
or by any Holder of a Security who has been a bona fide Holder of a
Security for at least six months, or
(2) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, (i) in any such case the Company may remove the Trustee, or (ii) in the
case of d(1) above only and subject to SECTION 5.14, any Holder of a Security
who has been a bona fide Holder of a Security for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the
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removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, the Company shall promptly appoint a successor Trustee and shall
comply with the applicable requirements of this SECTION 6.9 and SECTION 6.10.
If, within one year after such resignation, removal or incapability, or
occurrence of such vacancy, a successor Trustee shall be appointed by Act of
the Holders of a majority in principal amount of the Outstanding Securities
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment in
accordance with the applicable requirements of SECTION 6.10, become the
successor Trustee and supersede the successor Trustee appointed by the Company.
If no successor Trustee shall have been so appointed by the Company or the
Holders of Securities and accepted appointment in the manner required by this
SECTION 6.9 and SECTION 6.10, any Holder of a Security who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(f) The successor Trustee shall give notice of each
resignation and each removal of the Trustee and each appointment of a successor
Trustee to all Holders of Securities in the manner provided in SECTION 1.6.
Each notice shall include the name of the successor Trustee and the address of
its Corporate Trust Office.
SECTION 6.10 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee. Such retiring
Trustee shall, upon payment of its charges, promptly execute and deliver an
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instrument transferring to such successor Trustee all the rights, powers and
trusts of the retiring Trustee and shall duly assign, transfer and deliver to
such successor Trustee all property and money held by such retiring Trustee
hereunder. Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be eligible under this
Article.
SECTION 6.11 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO
BUSINESS.
Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party, or any corporation succeeding to all or substantially all of the
corporate trust business of the Trustee, shall be the successor of the Trustee
hereunder, PROVIDED such corporation shall be otherwise eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated with the same
effect as if such successor Trustee had itself authenticated such Securities.
SECTION 6.12 AUTHENTICATING AGENTS.
The Trustee may, with the consent of the Company, appoint an
Authenticating Agent or Agents acceptable to the Company with respect to the
Securities which shall be authorized to act on behalf of the Trustee to
authenticate Securities issued upon exchange or substitution pursuant to this
Indenture.
Securities authenticated by an Authenticating Agent shall be
entitled to the benefits of this Indenture
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and shall be valid and obligatory for all purposes as if authenticated by the
Trustee hereunder, and every reference in this Indenture to the authentication
and delivery of Securities by the Trustee or the Trustee's certificate of
authentication shall be deemed to include authentication and delivery on behalf
of the Trustee by an Authenticating Agent and a certificate of authentication
executed on behalf of the Trustee by an Authenticating Agent. Each
Authenticating Agent shall be subject to acceptance by the Company and shall at
all times be a corporation organized and doing business under the laws of the
United States of America, any State thereof or the District of Columbia,
authorized under such laws to act as Authenticating Agent and subject to
supervision or examination by government or other fiscal authority. If at any
time an Authenticating Agent shall cease to be eligible in accordance with the
provisions of this SECTION 6.12, such Authenticating Agent shall resign
immediately in the manner and with the effect specified in this SECTION 6.12.
Any corporation into which an Authenticating Agent may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, conversion or consolidation to which such
Authenticating Agent shall be a party, or any corporation succeeding to the
corporate agency or corporate trust business of an Authenticating Agent, shall
continue to be an Authenticating Agent, PROVIDED such corporation shall be
otherwise eligible under this SECTION 6.12, without the execution or filing of
any paper or any further act on the part of the Trustee or the Authenticating
Agent.
An Authenticating Agent may resign at any time by giving
written notice thereof to the Trustee and to the Company. The Trustee may at
any time terminate the agency of an Authenticating Agent by giving written
notice thereof to such Authenticating Agent and to the Company. Upon receiving
such a notice of resignation or upon such a termination, or in case at any time
such Authenticating Agent shall cease to be eligible in accordance with the
provisions of this SECTION 6.12, the Trustee may appoint a successor
Authenticating Agent which shall be subject to acceptance by the Company. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall
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become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this SECTION 6.12.
The Company agrees to pay to each Authenticating Agent from
time to time reasonable compensation for its services under this SECTION 6.12.
If an Authenticating Agent is appointed with respect to the
Securities pursuant to this SECTION 6.12, the Securities may have endorsed
thereon, in addition to or in lieu of the Trustee's certification of
authentication, an alternative certificate of authentication in the following
form:
This is one of the Securities referred to in the
within-mentioned Indenture.
______________________________,
as Trustee
By [Authenticating Agent],
as Authenticating Agent
By ___________________________
Authorized Signature
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SECTION 6.13 DISQUALIFICATION; CONFLICTING INTERESTS.
If the Trustee has or shall acquire a conflicting interest
within the meaning of the Trust Indenture Act, the Trustee shall either
eliminate such interest or resign, to the extent and in the manner provided by,
and subject to the provisions of, the Trust Indenture Act and this Indenture.
SECTION 6.14 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
If and when the Trustee shall be or become a creditor of the
Company (or any other obligor upon the Securities), the Trustee shall be
subject to the provisions of the Trust Indenture Act regarding the collection
of claims against the Company (or any such other obligor).
ARTICLE SEVEN
CONSOLIDATION, MERGER, CONVEYANCE,
TRANSFER OR LEASE
SECTION 7.1 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Company shall not consolidate with or merge into any
other Person or convey, transfer or lease all its properties and assets
substantially as an entirety to any Person, unless:
(1) the Person formed by such consolidation or into which the
Company is merged, or the Person which acquires by conveyance or
transfer, or which leases the properties and assets of the Company
substantially as an entirety, shall be a corporation, limited liability
company, partnership or trust, shall be organized and validly existing
under the laws of the United States of America, any State thereof or
the District of Columbia and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee,
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the due and punctual payment of the principal of, premium, if any,
Liquidated Damages, if any, and interest on all of the Securities as
applicable, and the performance or observance of every covenant of
this Indenture on the part of the Company to be performed or observed
and shall have provided for conversion rights in accordance with
ARTICLE ELEVEN;
(2) immediately after giving effect to such 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 happened and be
continuing; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with this Article and that all
conditions precedent herein provided for relating to such transaction
have been complied with, together with any documents required under
SECTION 8.3.
SECTION 7.2 SUCCESSOR SUBSTITUTED.
Upon any consolidation of the Company with, or merger of the
Company into any other Person or any conveyance, transfer or lease of all or
substantially all the properties and assets of the Company in accordance with
SECTION 7.1, the successor Person formed by such consolidation or into or with
which the Company is merged or to which such conveyance, transfer or lease is
made shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Indenture with the same effect as if such
successor Person had been named as the Company herein, and thereafter, except
in the case of a lease, the predecessor Person shall be relieved of all
obligations and covenants under this Indenture and the Securities.
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ARTICLE EIGHT
SUPPLEMENTAL INDENTURES
SECTION 8.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS OF
SECURITIES.
Without the consent of any Holders of Securities, the
Company, when authorized by a Board Resolution, and the Trustee, at any time
and from time to time, may enter into one or more indentures supplemental
hereto for any of the following purposes:
(1) to evidence the succession of another Person to the
Company and the assumption by any such successor of the covenants and
obligations of the Company herein and in the Securities as permitted by
this Indenture; or
(2) to add to the covenants of the Company for the benefit of
the Holders of Securities or to surrender any right or power herein
conferred upon the Company; or
(3) to secure the Securities; or
(4) to make provision with respect to the conversion rights of
Holders of Securities pursuant to SECTION 11.11; or
(5) to make any changes or modifications to this Indenture
necessary in connection with the registration of any Registrable
Securities under the Securities Act as contemplated by the Registration
Rights Agreement, PROVIDED, such action pursuant to this clause (5)
shall not, in the judgment of the Company, adversely affect the
interests of the Holders of Securities in any material respect; or
(6) to comply with the requirements of the Trust Indenture Act
or the rules and regulations of the Commission thereunder in order to
effect or maintain the qualification of this Indenture under the Trust
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Indenture Act, as contemplated by this Indenture or otherwise; or
(7) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee; or
(8) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein or which is otherwise defective, or to make any other provisions
with respect to matters or questions arising under this Indenture as
the Company and the Trustee may deem necessary or desirable, PROVIDED
such action pursuant to this clause (8) shall not, in the judgment of
the Company, adversely affect the interests of the Holders of
Securities in any material respect.
Upon Company Request, accompanied by a Board Resolution
authorizing the execution of any such supplemental indenture, and subject to
and upon receipt by the Trustee of the documents described in SECTION 8.3
hereof, the Trustee shall join with the Company in the execution of any
supplemental indenture authorized or permitted by the terms of this Indenture
and to make any further appropriate agreements and stipulations which may be
therein contained.
SECTION 8.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS OF
SECURITIES.
With either (a) the written consent of the Holders of not
less than a majority in principal amount of the Outstanding Securities, by the
Act of said Holders delivered to the Company and the Trustee, or (b) by the
adoption of a resolution, at a meeting of Holders of the Outstanding Securities
at which a quorum is present, by the Holders of a majority in principal amount
of the Outstanding Securities represented at such meeting, the Company, when
authorized by a Board Resolution, and the Trustee may enter into an indenture
or indentures supplemental hereto for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of this
Indenture or of modifying in any
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manner the rights of the Holders of Securities under this Indenture; PROVIDED,
HOWEVER, that no such supplemental indenture shall, without the consent or
affirmative vote of the Holder of each Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal
amount or the rate of interest payable thereon, in a manner adverse to
the Holders, or change the coin or currency in which any Security or
the interest or any premium thereon or any other amount in respect
thereof is payable, or impair the right to institute suit for the
enforcement of any payment in respect of any Security on or after the
Stated Maturity thereof (or, in the case of redemption or any
repurchase, on or after the Redemption Date or Repurchase Date, as the
case may be) or, except as permitted by SECTION 11.11, adversely affect
the right to convert any Security as provided in Article Eleven, or
modify the provisions of this Indenture with respect to the
subordination of the Securities in a manner adverse to the Holders of
Securities; or
(2) reduce the percentage in principal amount of the
Outstanding Securities the consent of whose Holders is required for any
such supplemental indenture or the consent of whose Holders is required
for any waiver (of compliance with certain provisions of this Indenture
or certain defaults hereunder and their consequences) provided for in
this Indenture; or
(3) modify any of the provisions of this SECTION 8.2, except
to increase any percentage contained herein or therein or to provide
that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each Outstanding Security
affected thereby; or
(4) after the Holder's right to require the Company to
repurchase the Securities arises upon a Change in Control modify the
provisions of Article Thirteen in a manner adverse to the Holders.
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It shall not be necessary for any Act of Holders of
Securities under this SECTION 8.2 to approve the particular form of any
proposed supplemental indenture, but it shall be sufficient if such Act shall
approve the substance thereof.
The quorum at any meeting called to adopt a resolution will
be Holders representing a majority in aggregate principal amount of Securities
at the time Outstanding.
SECTION 8.3 EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by,
any supplemental indenture permitted by this Article or the modifications
thereby of the trusts created by this Indenture, the Trustee shall be entitled
to receive, and (subject to SECTIONS 6.1 AND 6.3) shall be fully protected in
relying upon, an Opinion of Counsel stating that the execution of such
supplemental indenture is authorized or permitted by this Indenture, and that
such supplemental indenture has been duly authorized, executed and delivered by
the Company and constitutes a valid and legally binding obligation of the
Company enforceable against the Company in accordance with its terms. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture which affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.
SECTION 8.4 EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this
Article, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes;
and every Holder of Securities theretofore or thereafter authenticated and
delivered hereunder appertaining thereto shall be bound thereby.
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SECTION 8.5 REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES.
Securities authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any
matter provided for in such supplemental indenture. If the Company shall so
determine, new Securities so modified as to conform, in the opinion of the
Company and the Trustee, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Securities.
SECTION 8.6 NOTICE OF SUPPLEMENTAL INDENTURES.
Promptly after the execution by the Company and the Trustee
of any supplemental indenture pursuant to the provisions of SECTION 8.2, the
Company shall give notice to all Holders of Securities of such fact, setting
forth in general terms the substance of such supplemental indenture, in the
manner provided in SECTION 1.6. Any failure of the Company to give such notice,
or any defect therein, shall not in any way impair or affect the validity of
any such supplemental indenture.
ARTICLE NINE
COVENANTS
SECTION 9.1 PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company covenants and agrees that it will duly and
punctually pay the principal of and premium, if any, and interest on the
Securities in accordance with the terms of the Securities and this Indenture.
The Company will deposit or cause to be deposited with the Trustee, no later
than 12:00 noon Eastern time on the date of the Stated Maturity of any Security
or no later than 12:00 noon Eastern time on the due date for any installment of
interest, all payments so due, which payments shall be in immediately available
funds on the date of such Stated Maturity or due date, as the case may be.
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SECTION 9.2 MAINTENANCE OF OFFICES OR AGENCIES.
The Company hereby appoints the Corporate Trust Office of the
Trustee or such other office or agency of the Trustee as its agent in the
Borough of Manhattan, The City of New York, where Securities may be presented
or surrendered for payment, where Securities may be surrendered for
registration of transfer or exchange, where Securities may be surrendered for
conversion, and where notices and demands to or upon the Company in respect of
the Securities and this Indenture may be served.
The Company may at any time and from time to time vary or
terminate the appointment of any such agent or appoint any additional agents
for any or all of such purposes; PROVIDED, HOWEVER, that until all of the
Securities have been delivered to the Trustee for cancellation, or moneys
sufficient to pay the principal of, premium, if any, and interest on the
Securities have been made available for payment and either paid or returned to
the Company pursuant to the provisions of SECTION 9.3, the Company will
maintain in the Borough of Manhattan, The City of New York, an office or agency
where Securities may be presented or surrendered for payment and conversion,
where Securities may be surrendered for registration of transfer or exchange
and where notices and demands to or upon the Company in respect of the
Securities and this Indenture may be served. The Company will give prompt
written notice to the Trustee, and notice to the Holders in accordance with
SECTION 1.6, of the appointment or termination of any such agents and of the
location and any change in the location of any such office or agency.
If at any time the Company shall fail to maintain any such
required office or agency, or shall fail to furnish the Trustee with the
address thereof, presentations and surrenders may be made and notices and
demands may be served on the Corporate Trust Office of the Trustee.
SECTION 9.3 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.
If the Company shall act as its own Paying Agent, it will, on
or before each due date of the principal of,
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premium, if any, or interest on any of the Securities, segregate and hold in
trust for the benefit of the Persons entitled thereto a sum sufficient to pay
the principal, premium, if any, or interest so becoming due until such sums
shall be paid to such Persons or otherwise disposed of as herein provided and
the Company will promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it
will, no later than 12:00 noon Eastern time on each due date of the principal
of, premium, if any, or interest on any Securities, deposit with the Trustee a
sum sufficient to pay the principal, premium, if any, or interest so becoming
due, such sum to be held for the benefit of the Persons entitled to such
principal, premium, if any, or interest, and (unless such Paying Agent is the
Trustee) the Company will promptly notify the Trustee of any failure so to act.
The Company will cause each Paying Agent other than the
Trustee to execute and deliver to the Trustee an instrument in which such
Paying Agent shall agree with the Trustee, subject to the provisions of this
SECTION 9.3, that such Paying Agent will:
(1) hold all sums held by it for the payment of the principal
of, premium, if any, or interest on Securities for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons
or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or
any other obligor upon the Securities) in the making of any payment of
principal, premium, if any, or interest; and
(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct
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any Paying Agent to pay, to the Trustee all sums held in trust by the Company
or such Paying Agent, such sums to be held by the Trustee upon the same trusts
as those upon which such sums were held by the Company or such Paying Agent;
and, upon such payment by any Paying Agent to the Trustee, such Paying Agent
shall be released from all further liability with respect to such money.
Anything contained herein to the contrary notwithstanding,
any money held by the Trustee or any Paying Agent in trust for the payment and
discharge of the principal of, premium, if any, or interest on any Security
which remains unclaimed for two (2) years after the date when each payment of
such principal, premium or interest has become payable shall be repaid within
sixty (60) days of such date by the Trustee to the Company as its absolute
property free from trust, and the Trustee shall thereupon be released and
discharged with respect thereto and the Holders shall look only to the Company
for the payment of the principal, premium or interest on such Security. The
Trustee shall not be liable to the Company or any Holder for interest on funds
held by it for the payment and discharge of the principal, premium or interest
on any of the Securities to any Holder. The Company shall not be liable for any
interest on the sums paid to it pursuant to this paragraph and shall not be
regarded as a trustee of such money.
SECTION 9.4 EXISTENCE.
Subject to ARTICLE SEVEN, the Company will do or cause to be
done all things necessary to preserve and keep in full force and effect its
existence, rights (charter and statutory) and franchises; PROVIDED, HOWEVER,
that the Company shall not be required to preserve any such right or franchise
if the Board of Directors shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and that the
loss thereof is not disadvantageous in any material respect to the Holders.
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SECTION 9.5 MAINTENANCE OF PROPERTIES.
The Company will cause all properties used or useful in the
conduct of its business or the business of any Subsidiary to be maintained and
kept in good condition, repair and working order and supplied with all
necessary equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; PROVIDED,
HOWEVER, that nothing in this SECTION 9.5 shall prevent the Company from
discontinuing the operation or maintenance of any of such properties if such
discontinuance is, in the judgment of the Company, desirable in the conduct of
its business or the business of any Subsidiary and not disadvantageous in any
material respect to the Holders.
SECTION 9.6 PAYMENT OF TAXES AND OTHER CLAIMS.
The Company will pay or discharge, or cause to be paid or
discharged, before the same may become delinquent, (1) all taxes, assessments
and governmental charges levied or imposed upon the Company or any Subsidiary
or upon the income, profits or property of the Company or any Subsidiary, (2)
all claims for labor, materials and supplies which, if unpaid, might by law
become a lien or charge upon the property of the Company or any Subsidiary, and
(3) all stamps and other duties, if any, which may be imposed by the United
States or any political subdivision thereof or therein in connection with the
issuance, transfer, exchange or conversion of any Securities or with respect to
this Indenture; PROVIDED, HOWEVER, that, in the case of clauses (1) and (2),
the Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim (a) if the failure to do
so will not, in the aggregate, have a material adverse impact on the Company,
or (b) if the amount, applicability or validity is being contested in good
faith by appropriate proceedings.
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SECTION 9.7 REGISTRATION AND LISTING.
Within a reasonable time after the issuance of the Global
Security, the Company (i) will effect all registrations with, and obtain all
approvals by, all governmental authorities that may be necessary under any
United States Federal or state law (including the Securities Act, the Exchange
Act and state securities and Blue Sky laws) before the shares of Common Stock
issuable upon conversion of Securities may be lawfully issued and delivered,
and qualified or listed as contemplated by clause (ii) (it being understood
that the Company shall not be required to register the Securities under the
Securities Act, except pursuant to the Registration Rights Agreement); and (ii)
will cause the shares of Common Stock required to be issued and delivered upon
conversion of Securities, prior to such issuance or delivery, to be approved
for quotation on The Nasdaq National Market or, if the Common Stock is not then
approved for quotation on The Nasdaq National Market, list the Common Stock or
qualify the Common Stock for quotation on each national securities exchange or
quotation system on which outstanding Common Stock is listed or quoted at the
time of such delivery. Nothing in this SECTION 9.7 will limit the application
of SECTION 9.11.
SECTION 9.8 STATEMENT BY OFFICERS AS TO DEFAULT.
The Company shall deliver to the Trustee, within 120 days
after the end of each fiscal year of the Company ending after the date hereof,
an Officers' Certificate (one of the signers of which shall be the Company's
principal executive, principal financial or principal accounting officer),
stating whether or not to the best knowledge of the signers thereof the Company
is in default in the performance and observance of any of the terms, provisions
and conditions of this Indenture (without regard to any period of grace or
requirement of notice provided hereunder) and, if the Company shall be in
default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
The Company will deliver to the Trustee, forthwith upon
becoming aware of any default in the
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performance or observance of any covenant, agreement or condition contained in
this Indenture, or any Event of Default, an Officers' Certificate specifying
with particularity such default or Event of Default and further stating what
action the Company has taken, is taking or proposes to take with respect
thereto.
Any notice required to be given under this SECTION 9.8 shall
be delivered to the Trustee at its Corporate Trust Office.
SECTION 9.9 DELIVERY OF CERTAIN INFORMATION.
At any time when the Company is not subject to Section 13 or
15(d) of the Exchange Act, upon the request of a Holder of a Security or the
holder of shares of Common Stock issued upon conversion thereof, the Company
will promptly furnish or cause to be furnished Rule 144A Information (as
defined below) to such Holder of Securities or such holder of shares of Common
Stock issued upon conversion of Securities, or to a prospective purchaser of
any such security designated by any such Holder or holder, as the case may be,
to the extent required to permit compliance by such Holder or holder with Rule
144A under the Securities Act (or any successor provision thereto) in
connection with the resale of any such security; PROVIDED, HOWEVER, that the
Company shall not be required to furnish such information in connection with
any request made on or after the date which is two years from the later of (i)
the date such a security (or any such predecessor security) was last acquired
from the Company or (ii) the date such a security (or any such predecessor
security) was last acquired from an "affiliate" of the Company within the
meaning of Rule 144 under the Securities Act (or any successor provision
thereto). "Rule 144A Information" shall be such information as is specified
pursuant to Rule 144A(d)(4) under the Securities Act (or any successor
provision thereto).
SECTION 9.10 RESALE OF CERTAIN SECURITIES; REPORTING ISSUER.
During the period beginning on the last date of original
issuance of the Securities and ending on the date
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that is two years from such date, the Company will not, and will not permit
any of its subsidiaries or other "affiliates" (as defined under Rule 144
under the Securities Act or any successor provision thereto) controlled by it
to, resell (x) any Securities which constitute "restricted securities" under
Rule 144 or (y) any securities into which the Securities have been converted
under this Indenture which constitute "restricted securities" under Rule 144,
that in either case have been reacquired by any of them. The Trustee shall
have no responsibility in respect of the Company's performance of its
agreement in the preceding sentence.
SECTION 9.11 INTENTIONALLY OMITTED .
SECTION 9.12 WAIVER OF CERTAIN COVENANTS.
The Company may omit in any particular instance to comply with
any covenant or conditions set forth in SECTIONS 9.5 and 9.6, inclusive (other
than a covenant or condition which under ARTICLE EIGHT cannot be modified or
amended without the consent of the Holder of each Outstanding Security
affected), if before the time for such compliance the Holders shall, through the
written consent of, not less than a majority in principal amount of the
Outstanding Securities, either waive such compliance in such instance or
generally waive compliance with such covenant or condition, but no such waiver
shall extend to or affect such covenant or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the obligations
of the Company and the duties of the Trustee or any Paying or Conversion Agent
in respect of any such covenant or condition shall remain in full force and
effect.
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ARTICLE TEN
REDEMPTION OF SECURITIES
SECTION 10.1 RIGHT OF REDEMPTION.
The Securities may be redeemed in accordance with the
provisions of the form of Securities set forth in SECTION 2.2.
SECTION 10.2 APPLICABILITY OF ARTICLE.
Redemption of Securities at the election of the Company or
otherwise, as permitted or required by any provision of the Securities or this
Indenture, shall be made in accordance with such provision and this ARTICLE TEN.
SECTION 10.3 ELECTION TO REDEEM; NOTICE TO TRUSTEE.
In case of any redemption at the election of the Company of
any of the Securities, the Company shall, at least 45 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the Trustee in writing of such Redemption
Date.
SECTION 10.4 SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED.
If less than all the Securities are to be redeemed, the
particular Securities to be redeemed shall be selected by the Trustee within
three Business Days after it receives the notice described in SECTION 10.3, from
the Outstanding Securities not previously called for redemption, by such method
as the Trustee may deem fair and appropriate.
If any Registered Security selected for partial redemption is
converted in part before termination of the conversion right with respect to the
portion of the Security so selected, the converted portion of such Security
shall be deemed (so far as may be) to be the portion selected for redemption.
Securities which have
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been converted during a selection of Securities to be redeemed may be treated
by the Trustee as Outstanding for the purpose of such selection.
The Trustee shall promptly notify the Company and each
Security Registrar in writing of the Securities selected for redemption and, in
the case of any Securities selected for partial redemption, the principal amount
and certificate numbers thereof to be redeemed.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to the redemption of Securities
shall relate, in the case of any Securities redeemed or to be redeemed only in
part, to the portion of the principal amount of such Securities which has been
or is to be redeemed.
SECTION 10.5 NOTICE OF REDEMPTION.
Notice of redemption shall be given in the manner provided in
SECTION 1.6 to the Holders of Securities to be redeemed not less than 30 nor
more than 60 days prior to the Redemption Date, and such notice shall be
irrevocable.
All notices of redemption shall identify the Securities to be
redeemed (including CUSIP numbers) and shall state:
(1) the Redemption Date,
(2) the Redemption Price, and accrued interest, if any,
(3) if less than all Outstanding Securities are to be
redeemed, the aggregate principal amount of Securities to be redeemed,
(4) that on the Redemption Date the Redemption Price, and
accrued interest, if any, will become due and payable upon each such
Security to be redeemed, and that interest thereon shall cease to
accrue on and after said date,
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(5) the Conversion Rate, the date on which the right to
convert the Securities to be redeemed will terminate and the places
where such Securities may be surrendered for conversion, and
(6) the place or places where such Securities are to be
surrendered for payment of the Redemption Price and accrued interest,
if any.
Notice of redemption of Securities to be redeemed at the
election of the Company shall be given by the Company or, at the Company's
written request, by the Trustee in the name of and at the expense of the
Company. Notice of redemption of Securities to be redeemed at the election of
the Company received by the Trustee shall be given by the Trustee to each Paying
Agent in the name of and at the expense of the Company.
SECTION 10.6 DEPOSIT OF REDEMPTION PRICE.
Not less than one Business Day prior to any Redemption Date,
the Company shall deposit with the Trustee (or, if the Company is acting as its
own Paying Agent, segregate and hold in trust as provided in SECTION 9.3) an
amount of money (which shall be in immediately available funds on such
Redemption Date) sufficient to pay the Redemption Price of, and (except if the
Redemption Date shall be an Interest Payment Date) accrued interest on, all the
Securities which are to be redeemed on that date other than any Securities
called for redemption on that date which have been converted prior to the date
of such deposit.
If any Security called for redemption is converted, any money
deposited with the Trustee or so segregated and held in trust for the redemption
of such Security shall (subject to any right of the Holder of such Security or
any Predecessor Security to receive interest as provided in the last paragraph
of SECTION 3.7) be paid to the Company on Company Request or, if then held by
the Company, shall be discharged from such trust.
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SECTION 10.7 SECURITIES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the
Securities so to be redeemed shall, on the Redemption Date, become due and
payable at the Redemption Price therein specified and from and after such date
(unless the Company shall default in the payment of the Redemption Price,
including accrued interest) such Securities shall cease to bear interest. Upon
surrender of any Security for redemption in accordance with said notice such
Security shall be paid by the Company at the Redemption Price together with
accrued and unpaid interest to the Redemption Date; PROVIDED, HOWEVER, that
installments of interest on Securities whose Stated Maturity is on or prior to
the Redemption Date shall be payable to the Holders of such Securities, or one
or more Predecessor Securities, registered as such on the relevant Record Date
according to their terms and the provisions of SECTION 3.7.
If any Security called for redemption shall not be so paid
upon surrender thereof for redemption, the principal amount of, premium, if any,
and, to the extent permitted by applicable law, accrued interest on such
Security shall, until paid, bear interest from the Redemption Date at the rate
then in effect and such Security shall remain convertible until the principal of
such Security (or portion thereof, as the case may be) shall have been paid or
duly provided for.
SECTION 10.8 SECURITIES REDEEMED IN PART.
Any Security which is to be redeemed only in part shall be
surrendered at an office or agency of the Company designated for that purpose
pursuant to SECTION 9.2 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and make available for delivery to the Holder of such
Security without service charge, a new Registered Security or Securities, of any
authorized denomination as requested by such Holder, in aggregate principal
amount equal to and in exchange for the
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unredeemed portion of the principal of the Security so surrendered.
SECTION 10.9 CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION.
In connection with any redemption of the Securities, the
Company may arrange for the purchase and conversion of any Securities by an
agreement with one or more investment bankers or other purchasers (the
"Purchasers") to purchase such Securities by paying to the Trustee in trust for
the Holders, on or before the Redemption Date, an amount not less than the
applicable Redemption Price, together with interest accrued and unpaid to the
Redemption Date, of such Securities. Notwithstanding anything to the contrary
contained in this ARTICLE TEN, the obligation of the Company to pay the
Redemption Price, together with interest accrued and unpaid to the Redemption
Date, shall be deemed to be satisfied and discharged to the extent such amount
is so paid by such Purchasers. If such an agreement is entered into (a copy of
which shall be filed with the Trustee prior to the close of business on the
second Business Day immediately prior to the Redemption Date), any Securities
called for redemption that are not duly surrendered for conversion by the
Holders thereof may, at the option of the Company, be deemed, to the fullest
extent permitted by law, and consistent with any agreement or agreements with
such Purchasers, to be acquired by such Purchasers from such Holders and
(notwithstanding anything to the contrary contained in this ARTICLE TEN)
surrendered by such Purchasers for conversion, all as of immediately prior to
the close of business on the Redemption Date (and the right to convert any such
Securities shall be extended through such time), subject to payment of the above
amount as aforesaid. At the direction of the Company, the Trustee shall hold and
dispose of any such amount paid to it by the Purchasers to the Holders in the
same manner as it would monies deposited with it by the Company for the
redemption of Securities. Without the Trustee's prior written consent, no
arrangement between the Company and such Purchasers for the purchase and
conversion of any Securities shall increase or otherwise affect any of the
powers, duties, responsibilities or obligations of the Trustee as set forth in
this Indenture, and the Company agrees to indemnify the Trustee from, and hold
it harmless against, any loss, liability or expense arising out of or in
connection with
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any such arrangement for the purchase and conversion of any Securities
between the Company and such Purchasers, including the costs and expenses,
including reasonable legal fees, incurred by the Trustee in the defense of
any claim or liability arising out of or in connection with the exercise or
performance of any of its powers, duties, responsibilities or obligations
under this Indenture.
ARTICLE ELEVEN
CONVERSION OF SECURITIES
SECTION 11.1 CONVERSION PRIVILEGE AND CONVERSION RATE.
Subject to and upon compliance with the provisions of this
Article, at the option of the Holder thereof, any Security or any portion of the
principal amount thereof that is U.S.$1,000 or an integral multiple of
U.S.$1,000 may be converted into fully paid and nonassessable shares (calculated
as to each conversion to the nearest 1/100th of a share) of Common Stock of the
Company at the Conversion Rate, determined as hereinafter provided, in effect at
the time of conversion. Such conversion right shall commence upon the original
issuance of the Securities and expire at the close of business on December 1,
2004, subject, in the case of conversion of any Global Security, to any
Applicable Procedures. In case a Security or portion thereof is called for
redemption at the election of the Company or the Holder thereof exercises his
right to require the Company to repurchase the Security, such conversion right
in respect of the Security, or portion thereof so called, shall expire at the
close of business on the Business Day immediately preceding the Redemption Date
or the Repurchase Date, as the case may be, unless the Company defaults in
making the payment due upon redemption or repurchase, as the case may be (in
each case subject as aforesaid to any Applicable Procedures with respect to any
Global Security).
The rate at which shares of Common Stock shall be delivered
upon conversion (herein called the "Conversion Rate") shall be initially 13.5323
shares of Common Stock for each U.S.$1,000 principal amount of Securities. The
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Conversion Rate shall be adjusted in certain instances as provided in this
ARTICLE ELEVEN.
SECTION 11.2 EXERCISE OF CONVERSION PRIVILEGE.
In order to exercise the conversion privilege, the Holder of
any Security to be converted shall surrender such Security, duly endorsed or
assigned to the Company or in blank, at any office or agency of the Company
maintained for that purpose pursuant to SECTION 9.2, accompanied by a duly
signed conversion notice substantially in the form set forth in SECTION 2.4
stating that the Holder elects to convert such Security or, if less than the
entire principal amount thereof is to be converted, the portion thereof to be
converted. Each Security surrendered for conversion (in whole or in part) during
the period from the close of business on any Regular Record Date next preceding
any Interest Payment Date to the opening of business on such Interest Payment
Date shall (except in the case of any Security or portion thereof which has been
called for redemption on a Redemption Date, or is to be repurchased on a
Repurchase Date, with the consequence that the conversion right of such Security
would terminate between such Regular Record Date and the close of business on
such Interest Payment Date) be accompanied by payment in New York Clearing House
funds or other funds acceptable to the Company of an amount equal to the
interest payable on such Interest Payment Date on the principal amount of such
Security (or part thereof, as the case may be) being surrendered for conversion.
The interest so payable on such Interest Payment Date with respect to any
Security (or portion thereof, if applicable) which is surrendered for conversion
during the period from the close of business on any Record Date next preceding
any Interest Payment Date to the opening of business on such Interest Payment
Date and which Security has been called for redemption on a Redemption Date, or
is repurchasable on a Repurchase Date, with the consequence that the conversion
right of such Security would terminate between such Regular Record Date and the
close of business on such Interest Payment Date, shall be paid to the Holder of
such Security being converted in an amount equal to the interest that would have
been payable on such Security if such Security had been converted as of the
close of business on such Interest
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Payment Date. The interest so payable on such Interest Payment Date in
respect of any Security (or portion thereof, as the case may be) which has
not been called for redemption on a Redemption Date, or is not eligible for
repurchase on a Repurchase Date, with the consequence of termination of the
conversion right as aforesaid, which Security (or portion thereof, as the
case may be) is surrendered for conversion during the period from the close
of business on any Record Date next preceding any Interest Payment Date to
the opening of business on such Interest Payment Date, shall be paid to the
Holder of such Security as of such Regular Record Date. Interest payable in
respect of any Security surrendered for conversion on or after an Interest
Payment Date shall be paid to the Holder of such Security as of the next
preceding Regular Record Date, notwithstanding the exercise of the right of
conversion. Except as provided in this paragraph and subject to the last
paragraph of SECTION 3.7, no cash payment or adjustment shall be made upon
any conversion on account of any interest accrued from the Interest Payment
Date next preceding the conversion date, in respect of any Security (or part
thereof, as the case may be) surrendered for conversion, or on account of any
dividends on the Common Stock issued upon conversion. The Company's delivery
to the Holder of the number of shares of Common Stock (and cash in lieu of
fractions thereof, as provided in this Indenture) into which a Security is
convertible will be deemed to satisfy the Company's obligation to pay the
principal amount of the Security.
Securities shall be deemed to have been converted on the day
of surrender of such Securities for conversion in accordance with the foregoing
provisions, and at such time the rights of the Holders of such Securities as
Holders shall cease, and the Person or Persons entitled to receive the Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such Common Stock at such time. As promptly as practicable
on or after the conversion date, the Company shall issue and deliver to the
Trustee, for delivery to the Holder, 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, as provided in SECTION 11.3.
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All shares of Common Stock delivered upon such conversion of
Securities shall bear restrictive legends substantially in the form of the
legends required to be set forth on the Securities pursuant to SECTION 3.5 and
shall be subject to the restrictions on transfer provided in such legends.
Neither the Trustee nor any agent maintained for the purpose of such conversion
shall have any responsibility for the inclusion or content of any such
restrictive legends on such Common Stock; provided, HOWEVER, that the Trustee or
any agent maintained for the purpose of such conversion shall have provided to
the Company or to the Company's transfer agent for such Common Stock, prior to
or concurrently with a request to the Company to deliver such Common Stock,
written notice that the Securities delivered for conversion are Securities.
In the case of any Security which is converted in part only,
upon such conversion the Company shall execute and the Trustee shall
authenticate and make available for delivery to the Holder thereof, at the
expense of the Company, a new Registered Security or Securities of authorized
denominations in an aggregate principal amount equal to the unconverted portion
of the principal amount of such Security. A Security may be converted in part,
but only if the principal amount of such Security to be converted is any
integral multiple of U.S.$1,000 and the principal amount of such security to
remain Outstanding after such conversion is equal to U.S.$1,000 or any integral
multiple of U.S.$1,000 in excess thereof.
SECTION 11.3 FRACTIONS OF SHARES.
No fractional shares of Common Stock shall be issued upon
conversion of any Security or Securities. If more than one Security shall be
surrendered for conversion at one time by the same Holder, the number of full
shares which shall be issuable upon conversion thereof shall be computed on the
basis of the aggregate principal amount of the Securities (or specified portions
thereof) so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issuable upon conversion of any Security or Securities (or
specified portions thereof), the Company shall calculate and pay a cash
adjustment in
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respect of such fraction (calculated to the nearest 1/100th of a share) in an
amount equal to the same fraction of the Average Sales Price Per Share at the
close of business on the day of conversion.
SECTION 11.4 ADJUSTMENT OF CONVERSION RATE.
The Conversion Rate shall be subject to adjustments from time
to time as follows:
(1) In case the Company shall pay or make a dividend or
other distribution on any class of capital stock of the Company payable in
shares of Common Stock, the Conversion Rate in effect at the opening of
business on the day following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
increased by dividing such Conversion Rate by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination and the denominator shall be
the sum of such number of shares and the total number of shares constituting
such dividend or other distribution, such increase to become effective (subject
to paragraph (12) of this SECTION 11.4) immediately after the opening of
business on the day following the date fixed for such determination. For the
purposes of this paragraph (1), the number of shares of Common Stock at any
time outstanding shall not include shares held in the treasury of the Company
but shall include shares issuable in respect of scrip certificates issued in
lieu of fractions of shares of Common Stock. The Company will not pay any
dividend or make any distribution on shares of Common Stock held in the
treasury of the Company.
(2) In case the Company shall issue rights, options or
warrants to all holders of its Common Stock entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than the current
market price per share (determined as provided in paragraph (8) of this SECTION
11.4) of the Common Stock on the date fixed for the determination of
stockholders entitled to receive such rights, options or warrants (other than
any rights, options or warrants (a) that by their terms will
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also be issued to any Holder upon conversion of a Security into shares of
Common Stock without any action required by the Company or any other Person or
(b) that are only exercisable upon the occurrence of specified triggering event
and such triggering event has not occurred), the Conversion Rate in effect at
the opening of business on the day following the date fixed for such
determination shall be increased by dividing such Conversion Rate by a fraction
of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such determination
plus the number of shares of Common Stock which the aggregate of the offering
price of the total number of shares of Common Stock so offered for subscription
or purchase would purchase at such current market price and the denominator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination plus the number of shares of
Common Stock so offered for subscription or purchase, such increase to become
effective (subject to paragraph (12)of this SECTION 11.4) immediately after the
opening of business on the day following the date fixed for such determination.
For the purposes of this paragraph (2), the number of shares of Common Stock at
any time outstanding shall not include shares held in the treasury of the
Company but shall include shares issuable in respect of scrip certificates
issued in lieu of fractions of shares of Common Stock. The Company will not
issue any rights, options or warrants in respect of shares of Common Stock held
in the treasury of the Company.
(3) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Rate
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately increased, and,
conversely, in case outstanding shares of Common Stock shall each be combined
into a smaller number of shares of Common Stock, the Conversion Rate in effect
at the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately reduced, such increase
or reduction, as the case may be, to become effective immediately after the
opening of business on the day following the day upon which such subdivision or
combination becomes effective.
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(4) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its indebtedness,
shares of any class of capital stock, or other property (including cash or
assets or securities, but excluding (i) any rights, options or warrants
referred to in paragraph (2) of this SECTION 11.4, (ii) any dividend or
distribution paid in cash, except as set forth in paragraphs (5) and (6) of
this SECTION 11.4, (iii) any dividend or distribution referred to in paragraph
(1) of this SECTION 11.4 and (iv) any merger or consolidation to which SECTION
11.11 applies), the Conversion Rate shall be adjusted so that the same shall
equal the rate determined by dividing the Conversion Rate in effect immediately
prior to the close of business on the date fixed for the determination of
stockholders entitled to receive such distribution by a fraction of which the
numerator shall be the current market price per share (determined as provided
in paragraph (8) of this SECTION 11.4) of the Common Stock on the date fixed
for such determination less the then fair market value (as determined by the
Board of Directors, whose determination shall be conclusive and described in a
Board Resolution) of the portion of the assets, shares or evidences of
indebtedness so distributed applicable to one share of Common Stock and the
denominator shall be such current market price per share of the Common Stock,
such adjustment to become effective (subject to paragraph (12) of this SECTION
11.4) immediately prior to the opening of business on the day following the
date fixed for the determination of stockholders entitled to receive such
distribution.
(5) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock cash (excluding any cash that is
distributed upon a merger or consolidation to which SECTION 11.11 applies) in
an aggregate amount that, combined together with (I) the aggregate amount of
any other cash distributions to all holders of its Common Stock made
exclusively in cash within the 365-day period preceding the date of payment of
such distribution and in respect of which no adjustment pursuant to this
paragraph (5) has been made and (II) the aggregate of any cash plus the fair
market value (as determined by the Board of Directors, whose determination
shall be
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conclusive and described in a Board Resolution) of consideration payable in
respect of any tender offer by the Company or any of its subsidiaries for all
or any portion of the Common Stock concluded within the 365-day period
preceding the date of payment of such distribution and in respect of which no
adjustment pursuant to paragraph (6) of this SECTION 11.4 has been made (the
"combined cash and tender amount") exceeds 10% of the product of the current
market price per share (determined as provided in paragraph (8) of this SECTION
11.4) of the Common Stock on the date for the determination of holders of
shares of Common Stock entitled to receive such distribution times the number
of shares of Common Stock outstanding on such date (the "aggregate current
market price"), then, and in each such case, immediately after the close of
business on such date for determination, subject to paragraph (12) of SECTION
11.4, the Conversion Rate shall be adjusted so that the same shall equal the
rate determined by dividing the Conversion Rate in effect immediately prior to
the close of business on the date fixed for determination of the stockholders
entitled to receive such distribution by a fraction (i) the numerator of which
shall be equal to the current market price per share (determined as provided in
paragraph (8) of this SECTION 11.4) of the Common Stock on the date fixed for
such determination less an amount equal to the quotient of (x) the excess of
such combined cash and tender amount over 10% of such aggregate current market
price divided by (y) the number of shares of Common Stock outstanding on such
date fixed for determination and (ii) the denominator of which shall be equal
to the current market price per share (determined as provided in paragraph (8)
of this SECTION 11.4) of the Common Stock on such date fixed for determination.
(6) In case a tender offer made by the Company or any
Subsidiary for all or any portion of the Common Stock shall be completed for an
aggregate consideration consisting of cash and/or property having a fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) that combined together with (I)
the aggregate of the cash plus the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive and described in a
Board Resolution), of
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consideration payable in respect of any other tender offer by the Company or
any Subsidiary for all or any portion of the Common Stock concluded within the
365-day period preceding the completion of such tender offer and in respect of
which no adjustment pursuant to this paragraph (6) has been made and (II) the
aggregate amount of any distributions to all holders of the Company's Common
Stock made exclusively in cash within the 365-day period preceding the
completion of such tender offer and in respect of which no adjustment pursuant
to paragraph (5) of this SECTION 11.4 has been made (the "combined tender and
cash amount") exceeds 10% of the product of the current market price per share
of the Common Stock (determined as provided in paragraph (8) of this SECTION
11.4) as of the completion of such tender offer (the "Completion Date") times
the number of shares of Common Stock outstanding (including any tendered
shares) as of the Completion Date, then, and in each such case, immediately
prior to the opening of business on the day after the date of the Completion
Date, the Conversion Rate shall be adjusted so that the same shall equal the
rate determined by dividing the Conversion Rate immediately prior to close of
business on the Completion Date by a fraction (i) the numerator of which shall
be equal to (A) the product of (I) the current market price per share of the
Common Stock (determined as provided in paragraph (8) of this SECTION 11.4) on
the Completion Date multiplied by (II) the number of shares of Common Stock
outstanding (including any tendered shares) on the Completion Date less (B) the
combined tender and cash amount, and (ii) the denominator of which shall be
equal to the product of (A) the current market price per share of the Common
Stock (determined as provided in paragraph (8) of this SECTION 11.4) as of the
Completion Date multiplied by (B) the number of shares of Common Stock
outstanding (including any tendered shares) as of the Completion Date less the
number of all shares validly tendered and not withdrawn as of the Completion
Date(the shares deemed so accepted up to any such maximum, being referred to as
the "Purchased Shares").
(7) The reclassification of Common Stock into securities
including other than Common Stock (other than any reclassification upon a
consolidation or merger to which SECTION 11.11 applies) shall be deemed to
involve (a)
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a distribution of such securities other than Common Stock to all holders of
Common Stock (and the effective date of such reclassification shall be deemed
to be "the date fixed for the determination of stockholders entitled to receive
such distribution" and "the date fixed for such determination" within the
meaning of paragraph (4) of this SECTION 11.4), and (b) a subdivision or
combination, as the case may be, of the number of shares of Common Stock
outstanding immediately prior to such reclassification into the number of
shares of Common Stock outstanding immediately thereafter (and the effective
date of such reclassification shall be deemed to be "the day upon which such
subdivision becomes effective" or "the day upon which such combination becomes
effective", as the case may be, and "the day upon which such subdivision or
combination becomes effective" within the meaning of paragraph (3) of this
SECTION 11.4).
(8) For the purpose of any computation under paragraphs (2),
(4), (5) or (6) of this SECTION 11.4, the current market price per share of
Common Stock on any date shall be calculated by the Company and be deemed to be
the average of the daily Average Sales Prices Per Share for the five
consecutive Trading Days selected by the Company commencing not more than 10
Trading Days before, and ending not later than, the earlier of the day in
question and the day before the "ex" date with respect to the issuance or
distribution requiring such computation. For purposes of this paragraph, the
term "ex date", when used with respect to any issuance or distribution, means
the first date on which the Common Stock trades regular way in the applicable
securities market or on the applicable securities exchange without the right to
receive such issuance or distribution.
(9) No adjustment in the Conversion Rate shall be required
unless such adjustment (plus any adjustments not previously made by reason of
this paragraph (9)) would require an increase or decrease of at least one
percent in such rate; PROVIDED, HOWEVER, that any adjustments which by reason
of this paragraph (9) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Article shall be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be.
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(10) The Company may make such increases in the Conversion
Rate, for the remaining term of the Securities or any shorter term, in addition
to those required by paragraphs (1), (2), (3), (4), (5) and (6) of this SECTION
11.4, as it considers to be advisable in order to avoid or diminish any income
tax liability to any holders of shares of Common Stock resulting from any
dividend or distribution of Common Stock or issuance of rights or warrants to
purchase or subscribe for Common Stock or from any event treated as such for
income tax purposes.
To the extent permitted by applicable law, the Company from
time to time may increase the Conversion Rate by any amount for any period of
time if the period is at least twenty (20) days and the Board of Directors
shall have made a determination that such increase would be in the best
interests of the Company, which determination shall be conclusive; PROVIDED,
HOWEVER, that such increase shall not be taken into account for purposes of
determining whether the Average Sales Price Per Share of the Common Stock
exceeds the Conversion Price by 105% in connection with an event which would
otherwise be a Change in Control. Whenever the Conversion Rate is increased
pursuant to the preceding sentence, the Company shall give notice of the
increase to the Holders of Securities in the manner provided in Section 1.6 at
least fifteen (15) days prior to the date the increased Conversion Rate takes
effect, and such notice shall state the increased Conversion Rate and the
period during which it will be in effect.
(11) Notwithstanding the foregoing provisions of this SECTION
11.4, no adjustment of the Conversion Rate shall be required to be made (a)
upon the issuance of shares of Common Stock pursuant to any present or future
plan for the reinvestment of dividends, (b) because of a tender or exchange
offer of the character described in Rule 13e-4(h)(5) under the Exchange Act or
any successor rule thereto or (c) as a result of a rights plan or poison pill
implemented by the Company.
(12) In any case in which this SECTION 11.4 shall require
that an adjustment be made immediately following a record date, the Company may
elect to defer the
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effectiveness of such adjustment (but in no event until a date later than the
effective time of the event giving rise to such adjustment), in which case the
Company shall, with respect to any Security converted after such record date
and on and before such adjustment shall have become effective (i) defer paying
any cash payment pursuant to SECTION 11.3 hereof or issuing to the Holder of
such Security the number of shares of Common Stock issuable upon such
conversion in excess of the number of shares of Common Stock issuable thereupon
only on the basis of the Conversion Rate prior to adjustment, and (ii) not
later than five Business Days after such adjustment shall have become
effective, pay to such Holder the appropriate cash payment pursuant to SECTION
11.3 hereof and issue to such Holder the additional shares of Common Stock
issuable on such conversion. Notwithstanding the foregoing, no adjustment of
the Conversion Rate shall be made if the event giving rise to such adjustment
does not occur.
SECTION 11.5 NOTICE OF ADJUSTMENTS OF CONVERSION RATE.
Whenever the Conversion Rate is adjusted as herein provided:
(1) the Company shall compute the adjusted Conversion Rate in
accordance with SECTION 11.4 and shall prepare a certificate signed by
the Chief Financial Officer of the Company setting forth the adjusted
Conversion Rate and showing in reasonable detail the facts upon which
such adjustment is based, and such certificate shall promptly be filed
with the Trustee and with the Conversion Agent; and
(2) upon each such adjustment, a notice stating that the
Conversion Rate has been adjusted and setting forth the adjusted
Conversion Rate shall be required, and as soon as practicable after it
is required, such notice shall be provided by the Company to all
Holders in accordance with SECTION 1.6.
Neither the Trustee nor the Conversion Agent shall be under any duty or
responsibility with respect to any such certificate or the information and
calculations contained therein, except to exhibit the same to any Holder of
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Securities desiring inspection thereof at its office during normal business
hours.
SECTION 11.6 NOTICE OF CERTAIN CORPORATE ACTION.
In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable (i) otherwise than
exclusively in cash or (ii) exclusively in cash in an amount that would
require any adjustment pursuant to SECTION 11.4; or
(b) the Company shall authorize the granting to the holders
of its Common Stock of rights, options or warrants to subscribe for or
purchase any shares of capital stock of any class or of any other
rights; or
(c) of any reclassification of the Common Stock of the
Company, or of any consolidation, merger or share exchange to which the
Company is a party and for which approval of any stockholders of the
Company is required, or of the conveyance, sale, transfer or lease of
all or substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Securities pursuant to SECTION 9.2, and shall
cause to be provided to all Holders in accordance with SECTION 1.6, at least 20
days (or 10 days in any case specified in clause (a) or (b) above) prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, rights, options or warrants, or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
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such dividend, distribution, rights, options or warrants are to be determined
or (y) the date on which such reclassification, consolidation, merger,
conveyance, transfer, sale, lease, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, conveyance, transfer, sale, lease,
dissolution, liquidation or winding up. Neither the failure to give such notice
or the notice referred to in the following paragraph nor any defect therein
shall affect the legality or validity of the proceedings described in clauses
(a) through (d) of this SECTION 11.6. If at the time the Trustee shall not be
the Conversion Agent, a copy of such notice shall also forthwith be filed by
the Company with the Trustee.
The Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Securities pursuant to SECTION 9.2,
and shall cause to be provided to all Holders in accordance with SECTION 1.6,
notice of any tender offer by the Company or any Subsidiary for all or any
portion of the Common Stock at or about the time that such notice of tender
offer is provided to the public generally.
SECTION 11.7 COMPANY TO RESERVE COMMON STOCK.
The Company shall at all times reserve and keep available,
free from preemptive rights, out of its authorized but unissued Common Stock,
for the purpose of effecting the conversion of Securities, the full number of
shares of Common Stock then issuable upon the conversion of all Outstanding
Securities.
SECTION 11.8 TAXES ON CONVERSIONS.
Except as provided in the next sentence, the Company will pay
any and all taxes and duties that may be payable in respect of the issue or
delivery of shares of Common Stock on conversion of Securities pursuant hereto.
The Company shall not, however, be required to pay any tax or duty which may be
payable in respect of any transfer
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involved in the issue and delivery of shares of Common Stock in a name other
than that of the Holder of the Security or Securities to be converted, and no
such issue or delivery shall be made unless and until the Person requesting
such issue has paid to the Company the amount of any such tax or duty, or has
established to the satisfaction of the Company that such tax or duty has been
paid.
SECTION 11.9 COVENANT AS TO COMMON STOCK.
The Company agrees that all shares of Common Stock which may
be delivered upon conversion of Securities, upon such delivery, will be newly
issued shares and will have been duly authorized and validly issued and will be
fully paid and nonassessable and, except as provided in SECTION 11.8, the
Company will pay all taxes, liens and charges with respect to the issue thereof.
SECTION 11.10 CANCELLATION OF CONVERTED SECURITIES.
All Securities delivered for conversion shall be delivered to
the Trustee or its agent to be canceled by or at the direction of the Trustee,
which shall dispose of the same as provided in SECTION 3.9.
SECTION 11.11 PROVISION IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS.
In case of any consolidation or merger of the Company with or
into any other Person, any merger of another Person with or into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the Company)
or any conveyance, sale, transfer or lease of all or substantially all of the
assets of the Company, the Person formed by such consolidation or resulting from
such merger or which acquires such assets, as the case may be, shall execute and
deliver to the Trustee a supplemental indenture providing that the Holder of
each Security then Outstanding shall have the right thereafter, during the
period such Security shall be convertible as specified in SECTION 11.1, to
convert such Security only into the kind and amount of securities, cash
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and other property receivable upon such consolidation, merger, conveyance,
sale, transfer or lease by a holder of the number of shares of Common Stock
of the Company into which such Security might have been converted immediately
prior to such consolidation, merger, conveyance, sale, transfer or lease,
assuming such holder of Common Stock of the Company (i) is not a Person with
which the Company consolidated or merged with or into or which merged into or
with the Company or to which such conveyance, sale, transfer or lease was
made, as the case may be ("Constituent Person"), or an Affiliate of a
Constituent Person and (ii) failed to exercise his rights of election, if
any, as to the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, conveyance, sale, transfer or
lease (PROVIDED that if the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, conveyance, sale,
transfer, or lease is not the same for each share of Common Stock of the
Company held immediately prior to such consolidation, merger, conveyance,
sale, transfer or lease by others than a Constituent Person or an Affiliate
thereof and in respect of which such rights of election shall not have been
exercised ("Non-electing Share"), then for the purpose of this SECTION 11.11
the kind and amount of securities, cash and other property receivable upon
such consolidation, merger, conveyance, sale, transfer or lease by the
holders of each Non-electing Share shall be deemed to be the kind and amount
so receivable per share by a plurality of the Non-electing Shares). Such
supplemental indenture shall provide for adjustments which, for events
subsequent to the effective date of such supplemental indenture, shall be as
nearly equivalent as may be practicable to the adjustments provided for in
this Article. The above provisions of this SECTION 11.11 shall similarly
apply to successive consolidations, mergers, conveyances, sales, transfers or
leases. Notice of the execution of such a supplemental indenture shall be
given by the Company to the Holder of each Security as provided in SECTION
1.6 promptly upon such execution.
Neither the Trustee nor the Conversion Agent shall be under
any responsibility to determine the correctness of any provisions contained in
any such supplemental indenture relating either to the kind or
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amount of shares of stock or other securities or property or cash receivable
by Holders of Securities upon the conversion of their Securities after any
such consolidation, merger, conveyance, transfer, sale or lease or to any
such adjustment, but may accept as conclusive evidence of the correctness of
any such provisions, and shall be protected in relying upon, an Officers
Certificate or an Opinion of Counsel with respect thereto, which the Company
shall cause to be furnished to the Trustee upon request.
SECTION 11.12 RESPONSIBILITY OF TRUSTEE FOR CONVERSION PROVISIONS.
The Trustee, subject to the provisions of SECTION 6.1, and any
Conversion Agent shall not at any time be under any duty or responsibility to
any Holder of Securities to determine whether any facts exist which may require
any adjustment of the Conversion Rate, or with respect to the nature or extent
of any such adjustment when made, or with respect to the method employed, or
herein or in any supplemental indenture provided to be employed, in making the
same, or whether a supplemental indenture need be entered into. Neither the
Trustee, subject to the provisions of SECTION 6.1, nor any Conversion Agent
shall be accountable with respect to the validity or value (or the kind or
amount) of any Common Stock, or of any other securities or property or cash,
which may at any time be issued or delivered upon the conversion of any
Security; and it or they do not make any representation with respect thereto.
Neither the Trustee, subject to the provisions of SECTION 6.1, nor any
Conversion Agent shall be responsible for any failure of the Company to make or
calculate any cash payment or to issue, transfer or deliver any shares of Common
Stock or share certificates or other securities or property or cash upon the
surrender of any Security for the purpose of conversion; and the Trustee,
subject to the provisions of SECTION 6.1, and any Conversion Agent shall not be
responsible for any failure of the Company to comply with any of the covenants
of the Company contained in this Article.
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ARTICLE TWELVE
SUBORDINATION OF SECURITIES
SECTION 12.1 SECURITIES SUBORDINATE TO SENIOR DEBT.
The Company covenants and agrees, and each Holder of a
Security, by his acceptance thereof, likewise covenants and agrees, that, to the
extent and in the manner hereinafter set forth in this Article (subject to the
provisions of Article Four), the indebtedness represented by the Securities and
the payment of the principal of (and premium, if any) and interest on, and any
payment of the Repurchase Price with respect to, each and all of the Securities
are hereby expressly made subordinate and subject in right of payment to the
prior payment in full in cash or Cash Equivalents of all Senior Debt.
SECTION 12.2 NO PAYMENTS IN CERTAIN CIRCUMSTANCES; PAYMENT OVER OF
PROCEEDS UPON DISSOLUTION, ETC.
No payment on account of principal of, premium, if any, or
interest (and Liquidated Damages, if any) on, or redemption or repurchase of,
the Securities shall be made if, at the time of such payment: (i) a default in
the payment of principal, premium, if any, or interest or other amounts due on
any Senior Debt, including any default under any redemption or repurchase
obligation, occurs and is continuing (or, in the case of Senior Debt for which
there is a period of grace, in the event of such a default that continues beyond
the period of grace, if any, specified in the instrument or lease evidencing
such Senior Debt), unless and until such default shall have been cured or waived
or shall have ceased to exist; or (ii) a default, other than a payment default,
on Designated Senior Debt occurs and is continuing that then permits holders of
such Designated Senior Debt to accelerate its maturity and the Trustee receives
a notice of the default (a "Payment Blockage Notice") from a Representative.
Notwithstanding the foregoing, the Company may make, and the Trustee may receive
and shall apply, any payment in respect of the Securities (for principal,
premium, if any, or interest
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(and Liquidated Damages, if any) or repurchase) if such payment was made
prior to the occurrence of any of the contingencies specified in clauses (i)
and (ii) above.
If the Trustee receives any Payment Blockage Notice pursuant
to clause (ii) above, no subsequent Payment Blockage Notice shall be effective
for purposes of this SECTION 12.2 unless and until (A) at least 365 days shall
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice, and (B) all scheduled payments of principal, premium, if any, and
interest on the Securities that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
The Company may and shall resume payments on and distributions
in respect of the Securities (including missed payments, if any) upon the
earlier of: (i) the date upon which the default is cured or waived, or (ii) in
the case of a default referred to in clause (ii) of the second preceding
paragraph, 179 days after notice is received if the maturity of such Designated
Senior Debt has not been accelerated, unless this Article otherwise prohibits
the payment or distribution at the time of such payment or distribution.
Upon (i) any acceleration of the principal amount due on the
Securities or (ii) any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, to creditors upon
any dissolution, winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary, or in bankruptcy, insolvency,
receivership or other proceedings, all principal of, premium, if any, sinking
fund and interest or other amounts due or to become due upon all Senior Debt
shall first be paid in full in cash or Cash Equivalents, or payment thereof
provided for in cash or Cash Equivalents in accordance with its terms, before
any payment is made on account of the principal of, premium, if any, or interest
(and Liquidated Damages, if any) on, or repurchase of, the indebtedness
evidenced by the Securities, and upon any such dissolution or winding up
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or liquidation or reorganization any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
which the Holders of the Securities or the Trustee under this Indenture would
be entitled, except for the provisions hereof, shall be paid by the Company
or by any receiver, trustee in bankruptcy, liquidating trustee, agent or
other Person making such payment or distribution, or by the Holders of the
Securities or by the Trustee under this Indenture if received by them or it,
as the case may be, directly to the holders of Senior Debt (pro rata to each
such holder on the basis of the respective amounts of Senior Debt held by
such holder) or their representatives, to the extent necessary to pay all
Senior Debt in full, in cash or Cash Equivalents, after giving effect to any
concurrent payment or distribution to or for the holders of Senior Debt,
before any payment or distribution is made to the Holders of the Securities
or to the Trustee under this Indenture.
In the event that, contrary to the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities (other than junior securities, as defined in SECTION
12.11), shall be received by the Trustee or the Holders of the Securities before
all Senior Debt is paid in full in cash or Cash Equivalents or provision made
for such payment, in accordance with its terms, such payment or distribution
shall be paid over or delivered to, the holders of such Senior Debt or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any of such Senior Debt
have been issued, as their respective interests may appear, for application to
the payment of all Senior Debt remaining unpaid to the extent necessary to pay
all such Senior Debt in full in cash or Cash Equivalents in accordance with its
terms, after giving effect to any concurrent payment or distribution to or for
the holders of such Senior Debt.
Subject to the payment in full in cash or Cash Equivalents of
all Senior Debt, the Holders of the Securities (together with the holders of any
other indebtedness of the Company which is subordinated in right
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of payment to the payment in full of all Senior Debt, which is not
subordinated in right of payment to the Securities and which by its terms
grants such right of subrogation to the holders thereof) shall be subrogated
to the rights of the holders of Senior Debt to receive payments or
distribution of assets of the Company made on the Senior Debt until the
principal of, premium, if any, and interest on, or amounts payable upon
repurchase of, the Securities shall be paid in full; and, for the purposes of
such subrogation, no payments or distributions to the holders of Senior Debt
of any cash, property or securities to which the Holders of the Securities or
the Trustee would be entitled except for the provisions of this Article, and
no payment over pursuant to the provisions of this Article to the holders of
Senior Debt by the Holders of the Securities or the Trustee, shall, as
between the Company, its creditors other than the holders of Senior Debt, and
the Holders of Securities, be deemed to be a payment by the Company to the
holders of or on account of Senior Debt, it being understood that the
provisions of this Article are and are intended solely for the purpose of
defining the relative rights of the Holders of the Securities, on the one
hand, and the holders of Senior Debt, on the other hand.
SECTION 12.3 TRUSTEE TO EFFECTUATE SUBORDINATION.
Each Holder of a Security by his acceptance thereof authorizes
and directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article and
appoints the Trustee his attorney-in-fact for any and all such purposes.
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SECTION 12.4 NO WAIVER OF SUBORDINATION PROVISIONS.
No right of any present or future holder of any Senior Debt to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder of any Senior
Debt, or by any non-compliance by the Company with the terms, provisions and
covenants of this Indenture, regardless of any knowledge thereof any such holder
may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Debt may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article or
the obligations hereunder of the Holders of the Securities to the holders of
Senior Debt, do any one or more of the following: (i) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, Senior
Debt, or otherwise amend or supplement in any manner Senior Debt or any
instrument evidencing the same or any agreement under which Senior Debt is
outstanding; (ii) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Debt; (iii) release any Person
liable in any manner for the collection of Senior Debt; and (iv) exercise or
refrain from exercising any rights against the Company and any other Person.
SECTION 12.5 NOTICE TO TRUSTEE.
The Company shall give prompt written notice to the Trustee of
any fact known to the Company which would prohibit the making of any payment to
or by the Trustee in respect of the Securities. Notwithstanding the provisions
of this Article or any other provision of this Indenture, the Trustee shall not
be charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice thereof from the
Company or a
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holder of Senior Debt or from any trustee, agent or representative therefor;
and, prior to the receipt of any such written notice, the Trustee, subject to
the provisions of SECTION 6.1, shall be entitled in all respects to assume
that no such facts exist; PROVIDED, HOWEVER, that if the Trustee shall not
have received the notice provided for in this SECTION 12.5 prior to the date
upon which by the terms hereof any money may become payable for any purpose
(including, without limitation, the payment of the principal of (and premium,
if any) or interest on any Security), then, anything herein contained to the
contrary notwithstanding, the Trustee shall have full power and authority to
receive such money and to apply the same to the purpose for which such money
was received and shall not be affected by any notice to the contrary which
may be received by it within two Business Days prior to such date.
Subject to the provisions of SECTION 6.1, the Trustee shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Debt (or a trustee, agent or
representative therefor) to establish that such notice has been given by a
holder of Senior Debt (or a trustee, agent or representative therefor). In the
event that the Trustee determines in good faith that further evidence is
required with respect to the right of any Person as a holder of Senior Debt to
participate in any payment or distribution pursuant to this Article, the Trustee
may request such Person to furnish evidence to the reasonable satisfaction of
the Trustee as to the amount of Senior Debt held by such Person, the extent to
which such Person is entitled to participate in such payment or distribution and
any other facts pertinent to the rights of such Person under this Article, and
if such evidence is not furnished, the Trustee may defer any payment to such
Person pending judicial determination as to the right of such Person to receive
such payment.
SECTION 12.6 RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING
AGENT.
Upon any payment or distribution of assets of the Company
referred to in this Article, the Trustee, subject to the provisions of SECTION
6.1, and the Holders of the
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Securities shall be entitled to rely upon any order or decree entered by any
court of competent jurisdiction in which such insolvency, bankruptcy,
receivership, liquidation, reorganization, dissolution, winding up or similar
case or proceeding is pending, or a certificate of the trustee in bankruptcy,
receiver, liquidating trustee, custodian, assignee for the benefit of
creditors, agent or other Person making such payment or distribution,
delivered to the Trustee or to the Holders of Securities, for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article.
SECTION 12.7 TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR DEBT.
The Trustee shall not be deemed to owe any fiduciary duty to
the holders of Senior Debt and shall not be liable to any such holders if it
shall in good faith mistakenly pay over or distribute to Holders of Securities
or to the Company or to any other Person cash, property or securities to which
any holders of Senior Debt shall be entitled by virtue of this Article or
otherwise. With respect to the holders of Senior Debt, the Trustee undertakes to
perform or to observe only such of its covenants or obligations as are
specifically set forth in this ARTICLE TWELVE, and no implied covenants or
obligations with respect to holders of Senior Debt shall be read into this
Indenture against the Trustee.
SECTION 12.8 RELIANCE BY HOLDERS OF SENIOR DEBT ON SUBORDINATION
PROVISIONS.
Each Holder by accepting a Security acknowledges and agrees
that the foregoing subordination provisions are, and are intended to be, an
inducement and a consideration to each holder of any Senior Debt, whether such
Senior Debt was created or acquired before or after the issuance of the
Securities, to acquire and continue to hold, or to continue to hold, such Senior
Debt and such holder of Senior Debt shall be deemed conclusively to have relied
on such
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subordination provisions in acquiring and continuing to hold, or in
continuing to hold, such Senior Debt.
SECTION 12.9 RIGHTS OF TRUSTEE AS HOLDER OF SENIOR DEBT; PRESERVATION OF
TRUSTEE'S RIGHTS.
The Trustee in its individual capacity shall be entitled to
all the rights set forth in this Article with respect to any Senior Debt which
may at any time be held by it, to the same extent as any other holder of Senior
Debt, and nothing in this Indenture shall deprive the Trustee of any of its
rights as such holder.
Nothing in this Article shall apply to claims of, or payments
to, the Trustee under or pursuant to SECTION 6.7.
SECTION 12.10 ARTICLE APPLICABLE TO PAYING AGENTS.
In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article shall in such case (unless the context
otherwise requires) be construed as extending to and including such Paying Agent
within its meaning as fully for all intents and purposes as if such Paying Agent
were named in this Article in addition to or in place of the Trustee; PROVIDED,
HOWEVER, that SECTION 12.9 shall not apply to the Company or any Affiliate of
the Company if it or such Affiliate acts as Paying Agent.
SECTION 12.11 CERTAIN CONVERSIONS AND REPURCHASES DEEMED PAYMENT.
For the purposes of this Article only, (1) the issuance and
delivery of junior securities upon conversion of Securities in accordance with
ARTICLE ELEVEN or upon the repurchase of Securities in accordance with ARTICLE
THIRTEEN shall not be deemed to constitute a payment or distribution on account
of the principal of or premium or interest or Liquidated Damages on Securities
or on account of the purchase or other acquisition of Securities, and (2) the
payment, issuance or delivery of cash, property or securities (other than junior
securities) upon conversion
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of a Security shall be deemed to constitute payment on account of the
principal of such Security. For the purposes of this SECTION 12.11, the term
"junior securities" means (a) shares of any stock of any class of the Company
and any cash, property or securities into which the Securities are
convertible pursuant to ARTICLE ELEVEN and (b) securities of the Company
which are subordinated in right of payment to all Senior Debt which may be
outstanding at the time of issuance or delivery of such securities to
substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article. Nothing contained in this
ARTICLE TWELVE or elsewhere in this Indenture or in the Securities is
intended to or shall impair, as among the Company, its creditors other than
holders of Senior Debt and the Holders of the Securities, the right, which is
absolute and unconditional, of the Holder of any Security to convert such
Security in accordance with ARTICLE ELEVEN or to exchange such Security for
Common Stock in accordance with ARTICLE THIRTEEN if the Company elects to
satisfy the obligations under ARTICLE THIRTEEN by the delivery of Common
Stock.
ARTICLE THIRTEEN
REPURCHASE OF SECURITIES AT THE OPTION
OF THE HOLDER UPON A CHANGE IN CONTROL
SECTION 13.1 RIGHT TO REQUIRE REPURCHASE.
In the event that a Change in Control (as hereinafter defined)
shall occur, then each Holder shall have the right, at the Holder's option, but
subject to the provisions of SECTION 13.2, to require the Company to repurchase,
and upon the exercise of such right the Company shall repurchase, all of such
Holder's Securities not theretofore called for redemption, or any portion of the
principal amount thereof that is equal to U.S.$1,000 or any greater integral
multiple of U.S.$1,000, on the date (the "Repurchase Date") that is no later
than 75 days after the occurrence of the Change in Control at a cash purchase
price equal to 100% of the principal amount of the Securities to be repurchased
plus interest accrued to the
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Repurchase Date (the "Repurchase Price"); PROVIDED, HOWEVER, that
installments of interest on Securities whose Stated Maturity is on or prior
to the Repurchase Date shall be payable to the Holders of such Securities, or
one or more Predecessor Securities, registered as such on the relevant Record
Date according to their terms and the provisions of SECTION 3.7. Such right
to require the repurchase of the Securities shall not continue after a
discharge of the Company from its obligations with respect to the Securities
in accordance with ARTICLE FOUR, unless a Change in Control shall have
occurred prior to such discharge. At the option of the Company, the
Repurchase Price may be paid in cash or, subject to the fulfillment by the
Company of the conditions set forth SECTION 13.2, by delivery of shares of
Common Stock having a fair market value equal to the Repurchase Price.
Whenever in this Indenture (including SECTIONS 2.2, 3.1, 5.1(1) and 5.8)
there is a reference, in any context, to the principal of any Security as of
any time, such reference shall be deemed to include reference to the
Repurchase Price payable in respect of such Security to the extent that such
Repurchase Price is, was or would be so payable at such time, and express
mention of the Repurchase Price in any provision of this Indenture shall not
be construed as excluding the Repurchase Price in those provisions of this
Indenture when such express mention is not made; PROVIDED, HOWEVER, that for
the purposes of ARTICLE TWELVE such reference shall be deemed to include
reference to the Repurchase Price only to the extent the Repurchase Price is
payable in cash.
For purposes of this SECTION 13.1, the fair market value of
shares of Common Stock shall be determined by the Company and shall be equal to
95% of the average of the Average Sales Price Per Share for the five consecutive
Trading Days immediately preceding and including the third Trading Day prior to
the Repurchase Date;
SECTION 13.2 CONDITIONS TO THE COMPANY'S ELECTION TO PAY THE REPURCHASE
PRICE IN COMMON STOCK.
The Company may elect to pay the Repurchase Price by delivery of shares
of Common Stock pursuant to SECTION 13.1 if and only if the following conditions
shall have been satisfied:
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(a) As to each Holder, the Repurchase Price shall be paid only
in cash in the event any shares of Common Stock to be issued to such Holder upon
repurchase of Securities hereunder (i) require registration under any federal
securities law before such shares may be freely transferable without being
subject to any transfer restrictions under the Securities Act upon repurchase
and if such registration is not completed or does not become effective prior to
the Repurchase Date, and/or (ii) require registration with or approval of any
governmental authority under any state law or any other federal law before such
shares may be validly issued or delivered upon repurchase and if such
registration is not completed or does not become effective or such approval is
not obtained prior to the Repurchase Date;
(b) Payment of the Repurchase Price may not be made in Common
Stock unless such stock is, or shall have been, approved for quotation on The
Nasdaq National Market or listed or quoted on a national securities exchange or
other quotation system, in either case, prior to the Repurchase Date; and
(c) All shares of Common Stock which may be issued upon
repurchase of Securities will be issued out of the Company's authorized but
unissued Common Stock and, will upon issue, be duly and validly issued and fully
paid and non-assessable and free of any preemptive rights.
If all of the conditions set forth in this SECTION 13.2 are
not satisfied in accordance with the terms thereof, the Repurchase Price shall
be paid by the Company only in cash.
SECTION 13.3 NOTICES; METHOD OF EXERCISING REPURCHASE RIGHT, ETC.
(a) Unless the Company shall have theretofore called for
redemption all of the Outstanding Securities, on or before the thirtieth day
after the occurrence of a Change in Control, the Company or, at the request and
expense of the Company on or before the thirtieth day after such occurrence, the
Trustee, shall give to all Holders of
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Securities, in the manner provided in SECTION 1.6, notice (the "Company
Notice") of the occurrence of the Change in Control and of the repurchase
right set forth herein arising as a result thereof. The Company shall also
deliver a copy of such notice of a repurchase right to the Trustee.
Each notice of a repurchase right shall state:
(1) the Repurchase Date,
(2) the date by which the repurchase right must be exercised,
(3) the Repurchase Price, and whether the Repurchase Price
shall be paid by the Company in cash or by delivery of shares of Common
Stock,
(4) a description of the procedure which a Holder must follow
to exercise a repurchase right, and the place or places where such
Securities, are to be surrendered for payment of the Repurchase Price
and accrued interest, if any,
(5) that on the Repurchase Date the Repurchase Price, and
accrued interest, if any, will become due and payable upon each such
Security designated by the Holder to be repurchased, and that interest
thereon shall cease to accrue on and after said date,
(6) the Conversion Rate then in effect, the date on which the
right to convert the principal amount of the Securities to be
repurchased will terminate and the place or places where such
Securities may be surrendered for conversion,
(7) the place or places that the Notice of Election of Holder
to Require Repurchase as provided in SECTION 2.2, shall be delivered,
and the form of such notice, and
(8) the Cusip number or numbers of such Securities.
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No failure of the Company to give the foregoing notices or
defect therein shall limit any Holder's right to exercise a repurchase right or
affect the validity of the proceedings for the repurchase of Securities.
If any of the foregoing provisions or other provisions of this
ARTICLE THIRTEEN are inconsistent with applicable law, such law shall govern.
(b) To exercise a repurchase right, a Holder shall deliver to
the Trustee on or before the thirtieth day after the date of the Company Notice
(i) written notice of the Holder's exercise of such right, which notice shall
set forth the name of the Holder, the principal amount of the Securities to be
repurchased (and, if any Security is to repurchased in part, the serial number
thereof, the portion of the principal amount thereof to be repurchased and the
name of the Person in which the portion thereof to remain Outstanding after such
repurchase is to be registered) and a statement that an election to exercise the
repurchase right is being made thereby, and, in the event that the Repurchase
Price shall be paid in shares of Common Stock, the name or names (with
addresses) in which the certificate or certificates for shares of Common Stock
shall be issued, and (ii) the Securities with respect to which the repurchase
right is being exercised. Such written notice shall be irrevocable, except that
the right of the Holder to convert the Securities with respect to which the
repurchase right is being exercised shall continue until the close of business
on the Business Day immediately preceding the Repurchase Date.
(c) In the event a repurchase right shall be exercised in
accordance with the terms hereof, the Company shall pay or cause to be paid to
the Trustee the Repurchase Price in cash or shares of Common Stock, as provided
above, for payment to the Holder on the Repurchase Date or, if shares of Common
Stock are to be paid, as promptly after the Repurchase Date as practicable,
together with accrued and unpaid interest to the Repurchase Date payable with
respect to the Securities as to which the purchase right has been exercised;
PROVIDED, HOWEVER, that installments of interest that mature on or prior to the
Repurchase Date shall be payable in cash to the Holders of such Securities,
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or one or more Predecessor Securities, registered as such at the close of
business on the relevant Regular Record Date.
(d) If any Security (or portion thereof) surrendered for
repurchase shall not be so paid on the Repurchase Date, the principal amount of
such Security (or portion thereof, as the case may be) shall, until paid, bear
interest to the extent permitted by applicable law from the Repurchase Date at
the rate then in effect per annum, and each Security shall remain convertible
into Common Stock until the principal of such Security (or portion thereof, as
the case may be) shall have been paid or duly provided for.
(e) Any Security which is to be repurchased only in part shall
be surrendered to the Trustee (with, if the Company or the Trustee so requires,
due endorsement by, or a written instrument of transfer in form satisfactory to
the Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and make available for delivery to the Holder of such
Security without service charge, a new Security or Securities, containing
identical terms and conditions, each in an authorized denomination in aggregate
principal amount equal to and in exchange for the unrepurchased portion of the
principal of the Security so surrendered.
(f) Any issuance of shares of Common Stock in respect of the
Repurchase Price shall be deemed to have been effected immediately prior to the
close of business on the Repurchase Date and the Person or Persons in whose name
or names any certificate or certificates for shares of Common Stock shall be
issuable upon such repurchase shall be deemed to have become on the Repurchase
Date the holder or holders of record of the shares represented thereby;
PROVIDED, HOWEVER, that any surrender for repurchase on a date when the stock
transfer books of the Company shall be closed shall constitute the Person or
Persons in whose name or names the certificate or certificates for such shares
are to be issued as the record holder or holders thereof for all purposes at the
opening of business on the next succeeding day on which such stock transfer
books are open.
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No payment or adjustment shall be made for dividends or distributions on any
Common Stock issued upon repurchase of any Security declared prior to the
Repurchase Date.
(g) No fractions of shares shall be issued upon repurchase of
Securities. If more than one Security shall be repurchased from the same Holder
and the Repurchase Price shall be payable in shares of Common Stock, the number
of full shares which shall be issuable upon such repurchase shall be computed on
the basis of the aggregate principal amount of the Securities so repurchased.
Instead of any fractional share of Common Stock which would otherwise be
issuable on the repurchase of any Security or Securities, the Company will
deliver to the applicable Holder its check for the current market value of such
fractional share. The current market value of a fraction of a share is
determined by multiplying the current market price of a full share by the
fraction, and rounding the result to the nearest cent. For purposes of this
SECTION 13.3, the current market price of a share of Common Stock is the average
of the high and low sales price per Share of the Common Stock on the Trading Day
immediately preceding the Repurchase Date.
(h) Any issuance and delivery of certificates for shares of
Common Stock on repurchase of Securities shall be made without charge to the
Holder of Securities being repurchased for such certificates or for any tax or
duty in respect of the issuance or delivery of such certificates or the
securities represented thereby; PROVIDED, HOWEVER, that the Company shall not be
required to pay any tax or duty which may be payable in respect of (i) income of
the Holder or (ii) any transfer involved in the issuance or delivery of
certificates for shares of Common Stock in a name other than that of the Holder
of the Securities being repurchased, and no such issuance or delivery shall be
made unless and until the Person requesting such issuance or delivery has paid
to the Company the amount of any such tax or duty or has established, to the
satisfaction of the Company, that such tax or duty has been paid.
(i) All Securities delivered for repurchase shall be delivered
to the Trustee to be canceled at the
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direction of the Trustee, which shall dispose of the same as provided in
SECTION 3.9.
SECTION 13.4 CERTAIN DEFINITIONS.
For purposes of this ARTICLE THIRTEEN,
(a) the term "beneficial owner" shall mean, with respect to
any security of the Company, any Person who, directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise has or shares:
(1) voting power, which includes the power to vote, or to direct the voting of,
such security; and/or (2) investment power, which includes the power to dispose,
or to direct the disposition of, such security. Any Person who, directly or
indirectly, creates or uses a trust, proxy, power of attorney, pooling
arrangement or any other contract, arrangement or device with the purpose or
effect of divesting such Person of beneficial ownership of a security of the
Company or preventing the vesting of such beneficial ownership as part of a plan
or scheme to evade the reporting requirements of Section 13(d) or 13(g) of the
Exchange Act (or the successor provisions to such sections of the Exchange Act),
shall be deemed the "beneficial owner" of such security. A Person shall be
deemed the "beneficial owner" of a security of the Company if such Person has
the right to acquire beneficial ownership of such security within sixty (60)
days and any security of the Company not outstanding which is subject to an
option, warrant, right or conversion privilege exercisable within sixty (60)
days shall be deemed outstanding and beneficially owned by the Person holding
such option, warrant, right or conversion privilege (however, such security
shall not be deemed beneficially owned by the Person holding the option,
warrant, right or conversion privilege relating thereto, for purposes of
determining under the Change in Control definition the percentage ownership of
the total voting power of all shares of capital stock or other ownership
interests held by other Persons). A member of a national securities exchange
shall not be deemed to be a beneficial owner of a security of the Company that
it holds directly or indirectly on behalf of another Person solely because such
member is the record holder of such security and, pursuant to the rules of such
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exchange, may direct the vote of such security, without instruction, on other
than contested matters or matters that may affect substantially the rights or
privileges of the holder of such security, but is otherwise precluded by the
rules of such exchange from voting without instruction. A Person engaged in
business as an underwriter of securities who acquires a security of the Company
through participation in good faith in a firm commitment underwriting registered
under the Securities Act shall not be deemed a "beneficial owner" of such
security until forty (40) days after the date of such acquisition. A Person who
in the ordinary course of business is a pledgee of a security of the Company
under a written pledge agreement shall not be deemed to be the "beneficial
owner" of such security until such Person takes all formal steps needed to
declare a default and determines that the power to vote or to direct to vote or
to dispose or to direct the disposition of such security will be exercised,
provided that (i) the pledge agreement is bona fide and was not entered into
with the purpose nor with the effect of changing or influencing the control of
the Company, nor in connection with any transaction having such purpose or
effect; (ii) such Person is a person described in Rule 13d-1(b)(1)(ii),
promulgated by the Commission pursuant to the Exchange Act (as amended from time
to time during the term hereof), (iii) the pledge agreement, prior to default,
does not grant such Person (A) the power to vote or to direct the vote of such
security, or (B) the power to dispose or to direct the disposition of such
security, other than the grant of such power(s) pursuant to a pledge agreement
under which credit is extended subject to Regulation T and in which such Person
is a broker or dealer registered under Section 15 of the Exchange Act.
(b) a "Change in Control" shall be deemed to have occurred at
the time, after the original issuance of the Securities, of:
(i) the acquisition by any Person of beneficial
ownership, directly or indirectly, through a
purchase, merger or other acquisition
transaction or series of transactions, of
shares of capital stock of the Company
entitling
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such Person to exercise more than 50% of
the total voting power of all shares of
capital stock of the Company entitled to
vote generally in the elections of
directors, other than any such
acquisition by the Company, any
Subsidiary or any employee benefit plan
of the Company; or
(ii) any consolidation or merger of the Company
with or into any other Person, or any merger
of another Person with or into the Company
(other than (a) any such transaction (x)
which does not result in any
reclassification, conversion, exchange or
cancellation of outstanding shares of Common
Stock and (y) pursuant to which holders of
Common Stock immediately prior to such
transaction have the entitlement to
exercise, directly or indirectly, more than
50% of the total voting power of all shares
of capital stock or other ownership
interests entitled to vote generally in the
election of directors of the continuing or
surviving Person immediately after such
transaction and (b) any merger which is
effected solely to change the jurisdiction
of incorporation of the Company and results
in a reclassification, conversion or
exchange of outstanding shares of Common
Stock into solely shares of common stock of
the Company or another Person); or
(iii) any conveyance, transfer, sale, lease or
similar disposition of all or substantially
all of the Company's assets to another
Person, other than any such transaction
pursuant to which holders of Common Stock
immediately prior to such transaction have
the entitlement to exercise, directly or
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indirectly, more than 50% of the total
voting power of all shares of capital stock
or other ownership interest entitled to vote
generally in the election of directors of
the transferee Person immediately after such
transaction;
PROVIDED, HOWEVER, that a Change in Control shall not be deemed to have occurred
if the Average Sales Price Per Share on any five Trading Days within the (A)
period of 10 consecutive Trading Days ending immediately after the later of the
date of the Change in Control or the date of the public announcement of the
Change in Control (in the case of a Change in Control under clause (i) above but
not clause (ii) or (iii) above) or (B) the period of 10 consecutive Trading Days
ending immediately prior to the date of the Change in Control (in the case of a
Change in Control under Clause (ii) or (iii) above) shall, in either case, equal
or exceed 105% of the Conversion Price of the Securities in effect on each such
Trading Day;
(c) the term "Conversion Price" shall equal U.S. $1,000
divided by the Conversion Rate; and
(d) for purposes of SECTION 13.4(b)(i), the term "Person"
shall include any syndicate or group which would be deemed to be a "person"
under Section 13(d)(3) of the Exchange Act, as in effect on the date of the
original execution of this Indenture.
ARTICLE FOURTEEN
HOLDERS LISTS AND REPORTS
BY TRUSTEE AND COMPANY; NON-RECOURSE
SECTION 14.1 COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.
The Company will furnish or cause to be furnished to the
Trustee:
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(a) semi-annually, not more than 15 days after the Regular
Record Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders of Securities as of
such Regular Record Date, and
(b) at such other times as the Trustee may reasonably request
in writing, within 30 days after the receipt by the Company of any such
request, a list of similar form and content as of a date not more than
15 days prior to the time such list is furnished;
EXCLUDING from any such list names and addresses received by the Trustee in its
capacity as Security Registrar.
SECTION 14.2 PRESERVATION OF INFORMATION.
(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in the
most recent list furnished to the Trustee as provided in SECTION 14.1 and the
names and addresses of Holders received by the Trustee in its capacity as
Security Registrar. The Trustee may destroy any list furnished to it as
provided in SECTION 14.1 upon receipt of a new list so furnished.
(b) After this Indenture has been qualified under the Trust
Indenture Act, the rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, shall be as provided by the
Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding
the same, agrees with the Company and the Trustee that neither the Company
nor the Trustee nor any agent of either of them shall be held accountable by
reason of any disclosure of information as to names and addresses of Holders
made pursuant to the Trust Indenture Act.
SECTION 14.3 NO RECOURSE AGAINST OTHERS.
An incorporator or any past, present or future director,
officer, employee or stockholder, as such, of the
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Company shall not have any liability for any obligations of the Company under
the Securities or this Indenture or for any claim based on, in respect of or
by reason of such obligations or their creation. By accepting a Security,
each Holder shall waive and release all such liability. Such waiver and
release shall be part of the consideration for the issue of the Securities.
SECTION 14.4 REPORTS BY TRUSTEE.
(a) After this Indenture has been qualified under the Trust
Indenture Act, the Trustee shall transmit to Holders such reports concerning
the Trustee and its actions under this Indenture as may be required pursuant
to the Trust Indenture Act at the times and in the manner provided pursuant
thereto. If required by Section 313(a) of the Trust Indenture Act, the
Trustee shall, within sixty days after each May 15 following the date of this
Indenture, deliver to Holders a brief report, dated as of such May 15, which
complies with the provisions of such SECTION 313(a).
(b) After this Indenture has been qualified under the Trust
Indenture Act, a copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange
upon which the Securities are listed, with the Commission and with the
Company. The Company will promptly notify the Trustee when the Securities are
listed on any stock exchange.
SECTION 14.5 REPORTS BY COMPANY.
After this Indenture has been qualified under the Trust
Indenture Act, the Company shall file with the Trustee and the Commission,
and transmit to Holders, such information, documents and other reports, and
such summaries thereof, as may be required pursuant to the Trust Indenture
Act at the times and in the manner provided pursuant to such Act; PROVIDED
that any such information, documents or reports required to be filed with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed
with the Trustee within 15 days after the same is so required to be filed
with the Commission.
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Delivery of such reports, information and documents to the
Trustee is for informational purposes only and the Trustee's receipt thereof
shall not constitute constructive notice of any information contained therein
or determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
---------------------
This instrument may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, all as of the day and year first above written.
eToys Inc.
By
-------------------------------------
Name:
Title:
U.S. Bank Trust National Association, a
national banking association, Trustee
By
-------------------------------------
Name:
Title:
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TABLE OF CONTENTS
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RECITALS........................................................................................1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.1 Definitions............................................................................2
Act.............................................................................................2
Affiliate.......................................................................................2
Agent Member....................................................................................2
Applicable Procedures...........................................................................3
Authenticating Agent............................................................................3
Average Sales Price Per Share...................................................................3
Board of Directors..............................................................................3
Board Resolution................................................................................3
Business Day....................................................................................3
Change in Control...............................................................................4
Code............................................................................................4
Commission......................................................................................4
Common Stock....................................................................................4
Company.........................................................................................5
Company Notice..................................................................................5
Company Request or Company Order................................................................5
Constituent Person..............................................................................5
Conversion Agent................................................................................5
Conversion Price................................................................................5
Conversion Rate.................................................................................6
Corporate Trust Office..........................................................................6
Corporation.....................................................................................6
Defaulted Interest..............................................................................6
Depositary......................................................................................6
Designated Senior Debt..........................................................................6
Dollar or U.S.$.................................................................................6
DTC ..........................................................................................6
Event of Default................................................................................6
Exchange Act....................................................................................7
Global Security.................................................................................7
Holder..........................................................................................7
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Indenture.......................................................................................7
Initial Purchasers..............................................................................7
Interest Payment Date...........................................................................7
Liquidated Damages..............................................................................7
Maturity........................................................................................7
Non-electing Share..............................................................................7
Notice of Default...............................................................................8
Officers' Certificate...........................................................................8
Opinion of Counsel..............................................................................8
Outstanding.....................................................................................8
Paying Agent....................................................................................9
Person..........................................................................................9
Place of Conversion.............................................................................9
Place of Payment................................................................................9
Predecessor Security...........................................................................10
Purchase Agreement.............................................................................10
Record Date....................................................................................10
Record Date Period.............................................................................10
Redemption Date................................................................................10
Redemption Price...............................................................................10
Registered Securities..........................................................................10
Registrable Securities.........................................................................10
Registration Default...........................................................................10
Registration Rights Agreement..................................................................10
Regular Record Date............................................................................10
Repurchase Date................................................................................11
Repurchase Price...............................................................................11
Responsible Officer............................................................................11
Restricted Global Security.....................................................................11
Restricted Securities Legend...................................................................11
Rule 144A......................................................................................12
Rule 144A Information..........................................................................12
Securities.....................................................................................12
Securities Act.................................................................................12
Securities Act Legend..........................................................................12
Security Register and Security Registrar.......................................................12
Senior Debt....................................................................................12
Note: This table of contents shall not, for any pupose, be deemed to be a part
of the Indenture.
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Shelf Registration Statement...................................................................13
Special Record Date............................................................................13
Stated Maturity................................................................................14
Subsidiary.....................................................................................14
Successor Security.............................................................................14
Trading Days...................................................................................14
Trust Indenture Act............................................................................15
Trustee........................................................................................15
United States..................................................................................15
Vice President.................................................................................15
SECTION 1.2 Compliance Certificates and Opinions.........................................15
SECTION 1.3 Form of Documents Delivered to the Trustee...................................16
SECTION 1.4 Acts of Holders of Securities................................................17
SECTION 1.5 Notices, Etc., to Trustee and Company........................................20
SECTION 1.6 Notice to Holders of Securities; Waiver......................................21
SECTION 1.7 Effect of Headings and Table of Contents.....................................22
SECTION 1.8 Successors and Assigns.......................................................22
SECTION 1.9 Separability Clause..........................................................22
SECTION 1.10 Benefits of Indenture........................................................22
SECTION 1.11 Governing Law................................................................23
SECTION 1.12 Legal Holidays...............................................................23
SECTION 1.13 Conflict with Trust Indenture Act............................................23
ARTICLE TWO
SECURITY FORMS
SECTION 2.1 Form Generally...............................................................24
SECTION 2.2 Form of Security............................................................26
SECTION 2.3 Form of Certificate of Authentication.......................................46
SECTION 2.4 Form of Conversion Notice....................................................46
ARTICLE THREE
THE SECURITIES
Note: This table of contents shall not, for any pupose, be deemed to be a part
of the Indenture.
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SECTION 3.1 Title and Terms..............................................................48
SECTION 3.2 Denominations................................................................49
SECTION 3.3 Execution, Authentication, Delivery and Dating...............................49
SECTION 3.4 Global Securities; Non-Global Securities.....................................50
SECTION 3.5 Registration, Registration of Transfer and Exchange; Restrictions on
Transfer.....................................................................53
SECTION 3.6 Mutilated, Destroyed, Lost or Stolen Securities..............................57
SECTION 3.7 Payment of Interest; Interest Rights Preserved...............................58
SECTION 3.8 Persons Deemed Owners........................................................60
SECTION 3.9 Cancellation.................................................................60
SECTION 3.10 Computation of Interest......................................................60
SECTION 3.11 CUSIP Numbers................................................................61
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 4.1 Satisfaction and Discharge of Indenture......................................61
SECTION 4.2 Application of Trust Money...................................................63
ARTICLE FIVE
REMEDIES
SECTION 5.1 Events of Default............................................................63
SECTION 5.2 Acceleration of Maturity; Rescission and Annulment...........................66
SECTION 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee..............67
SECTION 5.4 Trustee May File Proofs of Claim.............................................69
SECTION 5.5 Trustee May Enforce Claims Without Possession of Securities..................70
SECTION 5.6 Application of Money Collected...............................................70
SECTION 5.7 Limitation on Suits..........................................................71
Note: This table of contents shall not, for any pupose, be deemed to be a part
of the Indenture.
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SECTION 5.8 Unconditional Right of Holders to Receive Principal, Premium and Interest
and to `Convert..............................................................72
SECTION 5.9 Restoration of Rights and Remedies...........................................72
SECTION 5.10 Rights and Remedies Cumulative...............................................72
SECTION 5.11 Delay or Omission Not Waiver.................................................73
SECTION 5.12 Control by Holders of Securities.............................................73
SECTION 5.13 Waiver of Past Defaults......................................................73
SECTION 5.14 Undertaking for Costs........................................................74
SECTION 5.15 Waiver of Stay, Usury or Extension Laws......................................75
ARTICLE SIX
THE TRUSTEE
SECTION 6.1 Certain Duties and Responsibilities..........................................75
SECTION 6.2 Notice of Defaults...........................................................77
SECTION 6.3 Certain Rights of Trustee....................................................77
SECTION 6.4 Not Responsible for Recitals or Issuance of Securities.......................79
SECTION 6.5 May Hold Securities, Act as Trustee Under Other Indentures...................79
SECTION 6.6 Money Held in Trust..........................................................79
SECTION 6.7 Compensation and Reimbursement...............................................80
SECTION 6.8 Corporate Trustee Required; Eligibility......................................81
SECTION 6.9 Resignation and Removal; Appointment of Successor............................81
SECTION 6.10 Acceptance of Appointment by Successor.......................................83
SECTION 6.11 Merger, Conversion, Consolidation or Succession to Business..................84
SECTION 6.12 Authenticating Agents........................................................84
SECTION 6.13 Disqualification; Conflicting Interests......................................87
SECTION 6.14 Preferential Collection of Claims Against Company............................87
ARTICLE SEVEN
Note: This table of contents shall not, for any pupose, be deemed to be a part
of the Indenture.
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CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 7.1 Company May Consolidate, Etc., Only on Certain Terms.........................87
SECTION 7.2 Successor Substituted........................................................88
ARTICLE EIGHT
SUPPLEMENTAL INDENTURES
SECTION 8.1 Supplemental Indentures Without Consent of Holders of Securities.............89
SECTION 8.2 Supplemental Indentures with Consent of Holders of Securities................90
SECTION 8.3 Execution of Supplemental Indentures.........................................92
SECTION 8.4 Effect of Supplemental Indentures............................................92
SECTION 8.5 Reference in Securities to Supplemental Indentures...........................93
SECTION 8.6 Notice of Supplemental Indentures............................................93
ARTICLE NINE
COVENANTS
SECTION 9.1 Payment of Principal, Premium and Interest...................................93
SECTION 9.2 Maintenance of Offices or Agencies...........................................94
SECTION 9.3 Money for Security Payments To Be Held in Trust..............................94
SECTION 9.4 Existence....................................................................96
SECTION 9.5 Maintenance of Properties....................................................97
SECTION 9.6 Payment of Taxes and Other Claims............................................97
SECTION 9.7 Registration and Listing.....................................................98
SECTION 9.8 Statement by Officers as to Default..........................................98
SECTION 9.9 Delivery of Certain Information..............................................99
SECTION 9.10 Resale of Certain Securities; Reporting Issuer...............................99
SECTION 9.11 INTENTIONALLY OMITTED.......................................................100
Note: This table of contents shall not, for any pupose, be deemed to be a part
of the Indenture.
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SECTION 9.12 Waiver of Certain Covenants.................................................100
ARTICLE TEN
REDEMPTION OF SECURITIES
SECTION 10.1 Right of Redemption.........................................................101
SECTION 10.2 Applicability of Article....................................................101
SECTION 10.3 Election to Redeem; Notice to Trustee.......................................101
SECTION 10.4 Selection by Trustee of Securities To Be Redeemed...........................101
SECTION 10.5 Notice of Redemption........................................................102
SECTION 10.6 Deposit of Redemption Price.................................................103
SECTION 10.7 Securities Payable on Redemption Date.......................................104
SECTION 10.8 Securities Redeemed in Part.................................................104
SECTION 10.9 Conversion Arrangement on Call for Redemption...............................105
ARTICLE ELEVEN
CONVERSION OF SECURITIES
SECTION 11.1 Conversion Privilege and Conversion Rate....................................106
SECTION 11.2 Exercise of Conversion Privilege............................................107
SECTION 11.3 Fractions of Shares.........................................................109
SECTION 11.4 Adjustment of Conversion Rate...............................................110
SECTION 11.5 Notice of Adjustments of Conversion Rate....................................117
SECTION 11.6 Notice of Certain Corporate Action..........................................118
SECTION 11.7 Company to Reserve Common Stock.............................................119
SECTION 11.8 Taxes on Conversions........................................................119
SECTION 11.9 Covenant as to Common Stock.................................................120
SECTION 11.10 Cancellation of Converted Securities........................................120
SECTION 11.11 Provision in Case of Consolidation, Merger or Sale of Assets................120
SECTION 11.12 Responsibility of Trustee for Conversion Provisions.........................122
Note: This table of contents shall not, for any pupose, be deemed to be a part
of the Indenture.
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ARTICLE TWELVE
SUBORDINATION OF SECURITIES
SECTION 12.1 Securities Subordinate to Senior Debt.......................................123
SECTION 12.2 No Payments in Certain Circumstances;
Payment Over of Proceeds Upon Dissolution, Etc..............................123
SECTION 12.3 Trustee to Effectuate Subordination.........................................126
SECTION 12.4 No Waiver of Subordination Provisions.......................................127
SECTION 12.5 Notice to Trustee...........................................................127
SECTION 12.6 Reliance on Judicial Order or Certificate of Liquidating Agent..............128
SECTION 12.7 Trustee Not Fiduciary for Holders of Senior Debt............................129
SECTION 12.8 Reliance by Holders of Senior Debt on Subordination Provisions..............129
SECTION 12.9 Rights of Trustee as Holder of Senior Debt;
Preservation of Trustee's Rights............................................130
SECTION 12.10 Article Applicable to Paying Agents.........................................130
SECTION 12.11 Certain Conversions and Repurchases Deemed Payment..........................130
ARTICLE THIRTEEN
REPURCHASE OF SECURITIES AT THE OPTION OF THE HOLDER UPON A CHANGE IN CONTROL
SECTION 13.1 Right to Require Repurchase.................................................131
SECTION 13.2 Conditions to the Company's Election to Pay the Repurchase Price in
Common Stock................................................................132
SECTION 13.3 Notices; Method of Exercising Repurchase Right, Etc.........................133
SECTION 13.4 Certain Definitions.........................................................138
ARTICLE FOURTEEN
Note: This table of contents shall not, for any pupose, be deemed to be a part
of the Indenture.
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HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY; NON-RECOURSE
SECTION 14.1 Company to Furnish Trustee Names and ..........................................
Addresses of Holders........................................................141
SECTION 14.2 Preservation of Information.................................................142
SECTION 14.3 No Recourse Against Others..................................................142
SECTION 14.4 Reports by Trustee..........................................................143
SECTION 14.5 Reports by Company..........................................................143
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Note: This table of contents shall not, for any pupose, be deemed to be a part
of the Indenture.
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EXHIBIT 4.3
ETOYS INC.
6.25% CONVERTIBLE SUBORDINATED NOTES DUE DECEMBER 1, 2004
REGISTRATION RIGHTS AGREEMENT
December 1, 1999
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
BancBoston Robertson Stephens Inc.
Donaldson Lufkin & Jenrette Securities Corporation
c/o Goldman, Sachs & Co.
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
eToys Inc., a Delaware corporation (the "Company"), proposes to issue and
sell to the Purchasers (as defined herein) upon the terms set forth in the
Purchase Agreement (as defined herein) its 6.25% Convertible Subordinated Notes
due December 1, 2004 (the "Securities"). As an inducement to the Purchasers to
enter into the Purchase Agreement and in satisfaction of a condition to the
obligations of the Purchasers thereunder, the Company agrees with the Purchasers
for the benefit of holders (as defined herein) from time to time of the
Registrable Securities (as defined herein) as follows:
1 DEFINITIONS.
(a) Capitalized terms used herein without definition shall have the
meanings ascribed thereto in the Purchase Agreement. As used in this Agreement,
the following defined terms shall have the following meanings:
"ACT" OR "SECURITIES ACT" means the United States Securities Act of 1933,
as amended.
"AFFILIATE" of any specified person means any other person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with such specified person. For purposes of this definition, control of
a person means the power, direct or indirect, to direct or cause the direction
of the management and policies of such person whether by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
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"COMMISSION" means the United States Securities and Exchange Commission,
or any other federal agency at the time administering the Exchange Act or the
Securities Act, whichever is the relevant statute for the particular purpose.
"COMMON STOCK" means the Company's common stock, par value $0.0001 per
share.
"DTC" means The Depository Trust Company.
"EFFECTIVENESS PERIOD" has the meaning assigned thereto in Section2(b)(i)
hereof.
"EFFECTIVE TIME" means the date on which the Commission declares the
Shelf Registration Statement effective or on which the Shelf Registration
Statement otherwise becomes effective.
"ELECTING HOLDER" has the meaning assigned thereto in Section 3(a)(iii)
hereof.
"EXCHANGE ACT" means the United States Securities Exchange Act of 1934,
as amended.
The term "HOLDER" means, when used with respect to any Security, the
Holder (as defined in the Indenture) and, with respect to any Common Stock, the
record holder of such Common Stock.
"INDENTURE" means the Indenture, dated as of December 1, 1999, between
the Company and U.S. Bank Trust National Association, as amended and
supplemented from time to time in accordance with its terms.
"MANAGING UNDERWRITERS" means the investment banker or investment bankers
and manager or managers that shall administer an underwritten offering, if any,
conducted pursuant to Section 7 hereof.
"NASD RULES" means the Rules of the National Association of Securities
Dealers, Inc., as amended from time to time.
"NOTICE AND QUESTIONNAIRE" means a Notice of Registration Statement and
Selling Securityholder Questionnaire substantially in the form of Exhibit A
hereto.
The term "PERSON" means an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"PROSPECTUS" means the prospectus (including, without limitation, any
preliminary prospectus, any final prospectus and any prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act) included in the
Shelf Registration Statement, as amended or supplemented by any prospectus
supplement with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Shelf Registration Statement and by all
other amendments and supplements to such prospectus, including all material
incorporated by
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reference in such prospectus and all documents filed after the date of such
prospectus by the Company under the Exchange Act and incorporated by reference
therein.
"PURCHASE AGREEMENT" means the Purchase Agreement, dated as of December
1, 1999, between the Company and the Purchasers.
"PURCHASERS" means the Purchasers named in Schedule I to the Purchase
Agreement.
"REGISTRABLE SECURITIES" means all or any portion of the Securities
issued from time to time under the Indenture in registered form and the shares
of Common Stock issuable upon conversion of such Securities; PROVIDED, HOWEVER,
that a security ceases to be a Registrable Security when it is no longer a
Restricted Security.
"RESTRICTED SECURITY" means any Security or share of Common Stock
issuable upon conversion thereof except any such Security or share of Common
Stock which (i) has been effectively registered under the Securities Act and
sold in a manner contemplated by the Shelf Registration Statement, (ii) has been
transferred in compliance with Rule 144 under the Securities Act (or any
successor provision thereto) or is transferable pursuant to paragraph (k) of
such Rule 144 (or any successor provision thereto), or (iii) has otherwise been
transferred and a new Security or share of Common Stock not subject to transfer
restrictions under the Securities Act has been delivered by or on behalf of the
Company in accordance with Section 3.5 of the Indenture.
"RULES AND REGULATIONS" means the published rules and regulations of the
Commission promulgated under the Securities Act or the Exchange Act, as in
effect at any relevant time.
"SHELF REGISTRATION" means a registration effected pursuant to Section 2
hereof.
"SHELF REGISTRATION STATEMENT" means a "shelf" registration statement
filed under the Securities Act providing for the registration of, and the sale
on a continuous or delayed basis by the holders of, all of the Registrable
Securities pursuant to Rule 415 under the Securities Act and/or any similar rule
that may be adopted by the Commission, filed by the Company pursuant to the
provisions of Section 2 of this Agreement, including the Prospectus contained
therein, any amendments and supplements to such registration statement,
including post-effective amendments, and all exhibits and all material
incorporated by reference in such registration statement.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939, or any
successor thereto, and the rules, regulations and forms promulgated thereunder,
as the same shall be amended from time to time.
The term "UNDERWRITER" means any underwriter of Registrable Securities in
connection with an offering thereof under a Shelf Registration Statement.
(b) Wherever there is a reference in this Agreement to a percentage of
the "principal amount" of Registrable Securities or to a percentage of
Registrable Securities, Common Stock
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shall be treated as representing the principal amount of Securities which was
surrendered for conversion or exchange in order to receive such number of shares
of Common Stock.
2. SHELF REGISTRATION.
(a) The Company shall, on or prior to 90 calendar days after the first
Time of Delivery (as defined in the Purchase Agreement), file with the
Commission a Shelf Registration Statement relating to the offer and sale of the
Registrable Securities and, thereafter, shall use its reasonable efforts to
cause such Shelf Registration Statement to be declared effective under the Act
on or prior to 180 calendar days after the First Time of Delivery; PROVIDED,
HOWEVER, that no holder shall be entitled to be named as a selling
securityholder in the Shelf Registration Statement or to use the Prospectus
forming a part thereof for resales of Registrable Securities unless such holder
is an Electing Holder.
(b) The Company shall use its reasonable efforts:
(i) To keep the Shelf Registration Statement continuously
effective in order to permit the Prospectus forming part thereof to be
usable by holders for resales of Registrable Securities for a period of
two years from the Effective Time of the Shelf Registration Statement, or
such shorter period that will terminate when there are no Registrable
Securities outstanding (such period being referred to herein as the
"Effectiveness Period");
(ii) After the Effective Time of the Shelf Registration
Statement, promptly upon the request of any holder of Registrable
Securities that is not then an Electing Holder, to take any action
reasonably necessary to enable such holder to use the Prospectus forming
a part thereof for resales of Registrable Securities, including, without
limitation, any action necessary to identify such holder as a selling
securityholder in the Shelf Registration Statement; PROVIDED, HOWEVER,
that nothing in this subparagraph shall relieve such holder of the
obligation to return a completed and signed Notice and Questionnaire to
the Company in accordance with Section 3(a)(ii) hereof; and
(iii) If at any time the Securities, pursuant to Article
Eleven of the Indenture, are convertible into securities other than
Common Stock, the Company shall, or shall cause any successor under the
Indenture to, cause such securities to be included in the Shelf
Registration Statement no later than the date on which the Securities may
then be convertible into such securities.
3. REGISTRATION PROCEDURES. In connection with the Shelf Registration
Statement, the following provisions shall apply:
(a)(i) Not less than 30 calendar days prior to the Effective Time
of the Shelf Registration Statement, the Company shall mail the Notice
and Questionnaire to the holders of Registrable Securities. No holder
shall be entitled to be named as a selling securityholder in the Shelf
Registration Statement as of the Effective Time, and no holder shall be
entitled to use the Prospectus forming a part thereof for resales of
Registrable
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Securities at any time, unless such holder has returned a completed and
signed Notice and Questionnaire to the Company by the deadline for
response set forth therein; PROVIDED, HOWEVER, holders of Registrable
Securities shall have at least 20 calendar days from the date on which
the Notice and Questionnaire is first mailed to such holders to return a
completed and signed Notice and Questionnaire to the Company.
(ii) After the Effective Time of the Shelf Registration
Statement, the Company shall, upon the request of any holder of
Registrable Securities that is not then an Electing Holder, promptly send
a Notice and Questionnaire to such holder. The Company shall not be
required to take any action to name such holder as a selling
securityholder in the Shelf Registration Statement or to enable such
holder to use the Prospectus forming a part thereof for resales of
Registrable Securities until such holder has returned a completed and
signed Notice and Questionnaire to the Company.
(iii) The term "Electing Holder" shall mean any holder of
Registrable Securities that has returned a completed and signed Notice
and Questionnaire to the Company in accordance with Section 3(a)(i) or
3(a)(ii) hereof.
(b) The Company shall furnish to each Electing Holder, prior to
the Effective Time, a copy of the Shelf Registration Statement initially filed
with the Commission, and shall furnish to such holders copies of each amendment
thereto and each amendment or supplement, if any, to the Prospectus included
therein, and shall use its reasonable efforts to reflect in each such document,
at the Effective Time or when so filed with the Commission, as the case may be,
such comments as such holders and their respective counsel reasonably may
propose.
(c) The Company shall (subject to paragraph (j) below) promptly
take such action as may be necessary so that (i) each of the Shelf Registration
Statement and any amendment thereto and the Prospectus forming part thereof and
any amendment or supplement thereto (and each report or other document
incorporated therein by reference in each case) complies in all material
respects with the Securities Act and the Exchange Act and the respective rules
and regulations thereunder, (ii) each of the Shelf Registration Statement and
any amendment thereto does not, when it becomes effective, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (iii) each of the
Prospectus forming part of the Shelf Registration Statement, and any amendment
or supplement to such Prospectus, does not at any time during the Effectiveness
Period include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(d) The Company shall promptly advise each Electing Holder, and
shall confirm such advice in writing if so requested by any such holder (which
notice pursuant to clauses (ii) through (iv) hereof shall be accompanied by an
instruction to suspend the use of the Prospectus until the requisite changes
have been made):
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(i) when the Shelf Registration Statement and any amendment
thereto has been filed with the Commission and when the Shelf
Registration Statement or any post-effective amendment thereto has become
effective;
(ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Shelf Registration Statement or the
initiation of any proceedings for such purpose;
(iii) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the securities included
in the Shelf Registration Statement for sale in any jurisdiction or the
initiation of any proceeding for such purpose; and
(iv) if changes in the Shelf Registration Statement or the
Prospectus included therein are required in order that such Shelf
Registration Statement and Prospectus do not contain an untrue statement
of a material fact and do not omit to state a material fact required to
be stated therein or necessary to make the statements therein (in the
case of the Prospectus, in light of the circumstances under which they
were made) not misleading.
(e) The Company shall use its reasonable efforts to prevent the
issuance, and if issued to obtain the withdrawal, of any order suspending the
effectiveness of the Shelf Registration Statement at the earliest possible time.
(f) The Company shall furnish to each requesting Electing Holder,
without charge, at least one copy of the Shelf Registration Statement and all
post-effective amendments thereto, including financial statements and schedules,
and, if such holder so requests in writing, all reports, other documents and
exhibits that are filed with or incorporated by reference in the Shelf
Registration Statement.
(g) The Company shall, during the Effectiveness Period, deliver to
each Electing Holder, without charge, as many copies of the Prospectus
(including each preliminary Prospectus) included in the Shelf Registration
Statement and any amendment or supplement thereto as such Electing Holder may
reasonably request; and the Company consents (except during the continuance of
any event described in Section 3(d)(v) above) to the use of the Prospectus and
any amendment or supplement thereto by each of the Electing Holders in
connection with the offering and sale of the Registrable Securities covered by
the Prospectus and any amendment or supplement thereto during the Effectiveness
Period.
(h) Prior to any offering of Registrable Securities pursuant to
the Shelf Registration Statement, the Company shall (i) register or qualify or
cooperate with the Electing Holders and a single counsel for the Electing
Holders in connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or "blue sky" laws of such
jurisdictions within the United States as any Electing Holder may reasonably
request, (ii) keep such registrations or qualifications in effect and comply
with such laws so as to permit the continuance of offers and sales in such
jurisdictions for so long as may be necessary to enable
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any Electing Holder or underwriter, if any, to complete its distribution of
Registrable Securities pursuant to the Shelf Registration Statement, and (iii)
take any and all other actions necessary or advisable to enable the disposition
in such jurisdictions of such Registrable Securities; PROVIDED, HOWEVER, that in
no event shall the Company be obligated to (A) qualify as a foreign corporation
or as a dealer in securities in any jurisdiction where it would not otherwise be
required to so qualify but for this Section 3(h) or (B) file any general consent
to service of process in any jurisdiction where it is not as of the date hereof
so subject.
(i) Unless any Registrable Securities shall be in book-entry only
form, the Company shall cooperate with the Electing Holders to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold pursuant to the Shelf Registration Statement, which
certificates, if so required by any securities exchange upon which any
Registrable Securities are listed, shall be penned, lithographed or engraved, or
produced by any combination of such methods, on steel engraved borders, and
which certificates shall be free of any restrictive legends and in such
permitted denominations and registered in such names as Electing Holders may
request in connection with the sale of Registrable Securities pursuant to the
Shelf Registration Statement.
(j) Upon the occurrence of any fact or event contemplated by
paragraph 3(d)(v) above, the Company shall (subject to the next sentence)
promptly prepare a post-effective amendment or supplement to the Shelf
Registration Statement or the Prospectus, or any document incorporated therein
by reference, or file any other required document so that, as thereafter
delivered to purchasers of the Registrable Securities included therein, the
Prospectus will not include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading. If the Company
notifies the Electing Holders in accordance with clauses (ii) through (iv) of
paragraph (d) above to suspend the use of the Prospectus until the requisite
changes to the Prospectus have been made, then each Electing Holder shall
suspend the use of the Prospectus and keep the notification provided pursuant to
paragraph (d) above confidential until (i) such Electing Holder has received
copies of the supplemented or amended Prospectus contemplated by the preceding
sentence, or (ii) such Electing Holder is advised in writing by the Company that
the use of the Prospectus may be resumed, and has received copies of any
additional or supplemental filings that are incorporated by reference in the
Prospectus. Notwithstanding the foregoing, but subject to Section 7 hereof, the
Company shall not be required to amend or supplement the Shelf Registration
Statement, any related Prospectus or any document incorporated by reference for
a period not to exceed 45 days, whether or not consecutive, during any 90-day
period, and in any event not to exceed an aggregate of 90 days in any 365-day
period if the Company is in possession of material non-public information the
disclosure of which would have a material adverse effect on the business,
operations, prospects, condition (financial or otherwise) of the Company and its
subsidiaries, taken as a whole.
(k) Not later than the Effective Time of the Shelf Registration
Statement, the Company shall provide a CUSIP number for the Registrable
Securities that are debt securities.
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(l) The Company shall use its reasonable efforts to comply with
all applicable Rules and Regulations, and to make generally available to its
securityholders as soon as practicable, but in any event not later than eighteen
months after (i) the effective date (as defined in Rule 158(c) under the
Securities Act) of the Shelf Registration Statement, (ii) the effective date of
each post-effective amendment to the Shelf Registration Statement, and (iii) the
date of each filing by the Company with the Commission of an Annual Report on
Form 10-K that is incorporated by reference in the Shelf Registration Statement,
an earnings statement of the Company and its subsidiaries complying with Section
11(a) of the Securities Act and the Rules and Regulations of the Commission
thereunder (including, at the option of the Company, Rule 158).
(m) Not later than the Effective Time of the Shelf Registration
Statement, the Company shall cause the Indenture to be qualified under the Trust
Indenture Act; in connection with such qualification, the Company shall
cooperate with the Trustee under the Indenture and the Holders (as defined in
the Indenture) to effect such changes to the Indenture as may be required for
such Indenture to be so qualified in accordance with the terms of the Trust
Indenture Act; and the Company shall execute, and shall use all reasonable
efforts to cause the Trustee to execute, all documents that may be required to
effect such changes and all other forms and documents required to be filed with
the Commission to enable such Indenture to be so qualified in a timely manner.
In the event that any such amendment or modification referred to in this Section
3(m) involves the appointment of a new trustee under the Indenture, the Company
shall appoint a new trustee thereunder pursuant to the applicable provisions of
the Indenture.
(n) In the event of an underwritten offering conducted pursuant to
Section 7 hereof, the Company shall (subject to paragraph (j) above), if
requested, promptly include or incorporate in a Prospectus supplement or
post-effective amendment to the Shelf Registration Statement such information as
the Managing Underwriters reasonably agree should be included therein and to
which the Company does not reasonably object and shall (subject to paragraph (j)
above) make all required filings of such Prospectus supplement or post-effective
amendment as soon as practicable after it is notified of the matters to be
included or incorporated in such Prospectus supplement or post-effective
amendment.
(o) The Company shall enter into such customary agreements
(including an underwriting agreement in customary form in the event of an
underwritten offering conducted pursuant to Section 7 hereof) and take all other
appropriate action in order to expedite and facilitate the registration and
disposition of the Registrable Securities, and in connection therewith, if an
underwriting agreement is entered into, cause the same to contain
indemnification provisions and procedures substantially identical to those set
forth in Section 5 hereof with respect to all parties to be indemnified pursuant
to Section 5 hereof.
(p) The Company shall:
(i)(A) make reasonably available for inspection by requesting
Electing Holders, any underwriter participating in any disposition
pursuant to the Shelf Registration Statement, and any attorney,
accountant or other agent retained by such holders or any
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<PAGE>
such underwriter all relevant financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries,
and (B) cause the Company's officers, directors and employees to supply
all information reasonably requested by such holders or any such
underwriter, attorney, accountant or agent in connection with the Shelf
Registration Statement, in each case, as is customary for similar due
diligence examinations; PROVIDED, HOWEVER, that all records, information
and documents that are designated in writing by the Company, in good
faith, as confidential shall be kept confidential by such holders and any
such underwriter, attorney, accountant or agent, unless such disclosure
is made in connection with a court proceeding or required by law, or such
records, information or documents become available to the public
generally or through a third party without an accompanying obligation of
confidentiality; and PROVIDED FURTHER that, if the foregoing inspection
and information gathering would otherwise disrupt the Company's conduct
of its business, such inspection and information gathering shall, to the
greatest extent possible, be coordinated on behalf of the requesting
Electing Holders and the other parties entitled thereto by one counsel
designated by and on behalf of Electing Holders and other parties;
(ii) in connection with any underwritten offering conducted
pursuant to Section 7 hereof, make such representations and warranties to
the holders participating in such underwritten offering and to the
Managing Underwriters, in form, substance and scope as are customarily
made by the Company to underwriters in primary underwritten offerings of
equity and convertible debt securities;
(iii) in connection with any underwritten offering conducted
pursuant to Section 7 hereof, obtain opinions of counsel to the Company
(which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the Managing Underwriters) addressed to each
requesting Electing Holder, covering such matters as are customarily
covered in opinions requested in primary underwritten offerings of equity
and convertible debt securities and such other matters as may be
reasonably requested by such Electing Holders and underwriters (it being
agreed that the matters to be covered by such opinions shall include,
without limitation, as of the date of the opinion and as of the Effective
Time of the Shelf Registration Statement or most recent post-effective
amendment thereto, as the case may be, the absence from the Shelf
Registration Statement and the Prospectus, including the documents
incorporated by reference therein, of an untrue statement of a material
fact or the omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of the Prospectus,
in light of the circumstances under which they were made) not
misleading);
(iv) in connection with any underwritten offering conducted
pursuant to Section 7 hereof, obtain "cold comfort" letters and updates
thereof from the independent public accountants of the Company (and, if
necessary, from the independent public accountants of any subsidiary of
the Company or of any business acquired by the Company for which
financial statements and financial data are, or are required to be,
included in the Shelf Registration Statement), addressed to each
requesting Electing Holder (if such Electing Holder has provided such
letter, representations or
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<PAGE>
documentation, if any, required for such cold comfort letter to be so
addressed) and the underwriters, in customary form and covering matters
of the type customarily covered in "cold comfort" letters in connection
with primary underwritten offerings;
(v) in connection with any underwritten offering conducted
pursuant to Section 7 hereof, deliver such documents and certificates as
may be reasonably requested by any Electing Holders and the Managing
Underwriters, if any, including, without limitation, certificates to
evidence compliance with Section 3(j) hereof and with any conditions
contained in the underwriting agreement or other agreements entered into
by the Company.
(q) The Company will use its reasonable efforts to cause the
Common Stock issuable upon conversion of the Securities to be listed for
quotation on the National Association of Securities Dealers Automated Quotations
National Market System or other stock exchange or trading system, if any, on
which the Common Stock primarily trades on or prior to the Effective Time of the
Shelf Registration Statement hereunder.
(r) The Company shall use its reasonable efforts to take all other
steps necessary to effect the registration, offering and sale of the Registrable
Securities covered by the Shelf Registration Statement contemplated hereby.
4. REGISTRATION EXPENSES. The Company shall bear all fees and
expenses incurred in connection with the performance of its obligations under
Sections 2, 3 and 7 hereof. In addition, in the event of an underwritten
offering of Registrable Securities conducted pursuant to Section 7 hereof, or if
in any other event the Company requires that inspection and information
gathering be coordinated by counsel for the Electing Holders as provided in
Section 3(p)(i) hereof, the Company shall pay the reasonable fees and expenses
of a single counsel selected by the Electing Holders of not less a majority of
the Registrable Securities to be included in such underwritten offering (or, in
any such other event, included in the Shelf Registration Statement) to represent
them. The Electing Holders participating in such offering (or, in any such other
event, participating in such inspection and information gathering) shall be
responsible, on a pro rata basis based on the respective amount of their
Registrable Securities included in such offering for all fees and expenses of
such counsel in excess of $100,000.
5. INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. Upon the registration of the
Registrable Securities pursuant to Section 2 hereof, the Company shall indemnify
and hold harmless each Electing Holder and each underwriter, selling agent or
other securities professional, if any, which facilitates the disposition of
Registrable Securities, and each of their respective officers and directors and
each person who controls such Electing Holder, underwriter, selling agent or
other securities professional within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act (each such person being sometimes referred
to as an "Indemnified Person") against any losses, claims, damages or
liabilities, joint or several, to which such Indemnified Person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an
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untrue statement or alleged untrue statement of a material fact contained in any
Shelf Registration Statement under which such Registrable Securities are to be
registered under the Securities Act, or any Prospectus contained therein or
furnished by the Company to any Indemnified Person, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, and the Company hereby agrees to reimburse such
Indemnified Person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such action or claim as such
expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable
to any such Indemnified Person in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such Shelf Registration Statement or Prospectus, or amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of such Indemnified Person expressly for use therein;
PROVIDED, FURTHER, HOWEVER, that the foregoing indemnity agreement with respect
to any preliminary Prospectus shall not inure to the benefit of any Indemnified
Person who failed to deliver a final Prospectus (as then amended or
supplemented, provided by the Company to the several Indemnified Persons in the
requisite quantity and on a timely basis to permit proper delivery on or prior
to the relevant transaction date) to the person asserting any losses, claims,
damages and liabilities and judgments caused by any untrue statement or alleged
untrue statement of a material fact contained in any preliminary Prospectus, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, if such
material misstatement or omission or alleged material misstatement or omission
was cured in the final Prospectus.
(b) INDEMNIFICATION BY THE HOLDERS AND ANY AGENTS AND UNDERWRITERS.
Each Electing Holder agrees, as a consequence of the inclusion of any of such
holder's Registrable Securities in such Shelf Registration Statement, and each
underwriter, selling agent or other securities professional, if any, which
facilitates the disposition of Registrable Securities shall agree, as a
consequence of facilitating such disposition of Registrable Securities,
severally and not jointly, to (i) indemnify and hold harmless the Company, its
directors, officers who sign any Shelf Registration Statement and each person,
if any, who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, against any losses, claims,
damages or liabilities to which the Company or such other persons may become
subject, under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in such Shelf Registration Statement or Prospectus, or any amendment
or supplement, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such holder, underwriter, selling agent or other securities professional
expressly for use therein, and (ii) reimburse the Company for any legal or other
expenses reasonably incurred
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by the Company in connection with investigating or defending any such action or
claim as such expenses are incurred.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
indemnified party under subsection (a) or (b) above of notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against an indemnifying party under this Section 5, notify
such indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under this Section 5.
In case any such action shall be brought against any indemnified party and it
shall notify an indemnifying party of the commencement thereof, such
indemnifying party shall be entitled to participate therein and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and, after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, such indemnifying party shall not be liable to such indemnified
party under this Section 5 for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of the
indemnified party, which consent will not be unreasonably withheld, effect the
settlement or compromise of, or consent to the entry of any judgment with
respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to, or an admission of, fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) CONTRIBUTION. If the indemnification provided for in this
Section 5 is unavailable to or insufficient to hold harmless an indemnified
party under subsection (a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to therein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and the indemnified party in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such indemnifying party or by such indemnified party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 5(d) were determined by
pro rata allocation (even if the Electing Holders or any underwriters, selling
agents or other securities professionals or all of them were treated as one
entity for such purpose) or by any other method of allocation which
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does not take account of the equitable considerations referred to in this
Section 5(d). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The obligations of the Electing Holders and any
underwriters, selling agents or other securities professionals in this Section
5(d) to contribute shall be several in proportion to the percentage of principal
amount of Registrable Securities registered or underwritten, as the case may be,
by them and not joint.
(e) Notwithstanding any other provision of this Section 5, in no
event will any (i) Electing Holder be required to undertake liability to any
person under this Section 5 for any amounts in excess of the dollar amount of
the proceeds to be received by such holder from the sale of such holder's
Registrable Securities (after deducting any fees, discounts and commissions
applicable thereto) pursuant to any Shelf Registration Statement under which
such Registrable Securities are to be registered under the Securities Act and
(ii) underwriter, selling agent or other securities professional be required to
undertake liability to any person hereunder for any amounts in excess of the
discount, commission or other compensation payable to such underwriter, selling
agent or other securities professional with respect to the Registrable
Securities underwritten by it and distributed to the public.
(f) The obligations of the Company under this Section 5 shall be
in addition to any liability which the Company may otherwise have to any
Indemnified Person and the obligations of any Indemnified Person under this
Section 5 shall be in addition to any liability which such Indemnified Person
may otherwise have to the Company. The remedies provided in this Section 5 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to an indemnified party at law or in equity.
6. Liquidated Damages. If (i) on or prior to 90 days after the
date of original issuance of the Registrable Securities, a Shelf Registration
Statement has not been filed with the Commission, or (ii) on or prior to the one
hundred eightieth day after the date of original issuance of the Registrable
Securities, such Shelf Registration Statement is not declared effective (each, a
"Registration Default"), liquidated damages ("Liquidated Damages") will accrue
on the Registrable Securities from and including the day following such
Registration Default to but excluding the day on which such Registration Default
has been cured or, if earlier, the last day upon which the Shelf Registration
Statement is required to be kept effective. Liquidated Damages will be paid
semi-annually in arrears, with the first semi-annual payment due on the first
Interest Payment Date in respect of the Registrable Securities following the
date on which such Liquidated Damages begin to accrue, and will accrue at a rate
equal to $0.05 per week per $1,000 principal amount of Registrable Securities to
and including the ninetieth day following such Registration Default and at a
rate equal to $0.05 per week per $1,000 principal amount of Registrable
Securities with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum of $0.25 per week per $1,000 principal
amount of Registrable Securities. In the event that the Shelf Registration
Statement ceases to
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be effective during the Effectiveness Period for a period in excess of 45
days, whether or not consecutive, during any 90-day period, or more than 90
days in any 365-day period, then Liquidated Damages will accrue (subject to
the limitations set forth above) at a rate per annum equal to $0.05 per week
per $1,000 principal amount of Registrable Securities on the 46th day of the
applicable 90-day period or the 91st day of the applicable 365-day period
such Shelf Registration Statement ceases to be effective but excluding the
day on which such Shelf Registration Statement again becomes effective or, if
earlier, the last day upon which the Shelf Registration Statement is required
to be kept effective.
7. UNDERWRITTEN OFFERING. Any holder of Registrable Securities
who desires to do so may sell Registrable Securities (in whole or in part) in an
underwritten offering; PROVIDED that (i) the Electing Holders of at least
$50,000,000 in aggregate principal amount of the Registrable Securities then
covered by the Shelf Registration Statement shall request such an offering and
(ii) at least such aggregate principal amount of such Registrable Securities
shall be included in such offering; and PROVIDED FURTHER that the Company shall
not be obligated to cooperate with more than one underwritten offering during
the Effectiveness Period. Upon receipt of such a request, the Company shall
provide all holders of Registrable Securities written notice of the request,
which notice shall inform such holders that they have the opportunity to
participate in the offering. In any such underwritten offering, the investment
banker or bankers and manager or managers that will administer the offering will
be selected by, and the underwriting arrangements with respect thereto
(including the size of the offering) will be approved by, the holders of a
majority of the Registrable Securities to be included in such offering;
PROVIDED, HOWEVER, that such investment bankers and managers and underwriting
arrangements must be reasonably satisfactory to the Company. No holder may
participate in any underwritten offering contemplated hereby unless (a) such
holder agrees to sell such holder's Registrable Securities to be included in the
underwritten offering in accordance with any approved underwriting arrangements,
(b) such holder completes and executes all reasonable questionnaires, powers of
attorney, indemnities, underwriting agreements, lock-up letters and other
documents required under the terms of such approved underwriting arrangements,
and (c) if such holder is not then an Electing Holder, such holder returns a
completed and signed Notice and Questionnaire to the Company in accordance with
Section 3(a)(ii) hereof within a reasonable amount of time before such
underwritten offering. The holders participating in any underwritten offering
shall be responsible for any underwriting discounts and commissions and fees
and, subject to Section 4 hereof, expenses of their own counsel. The Company
shall pay all expenses customarily borne by issuers, including but not limited
to filing fees, the fees and disbursements of its counsel and independent public
accountants and any printing expenses incurred in connection with such
underwritten offering. Notwithstanding the foregoing or the provisions of
Section 3(n) hereof, upon receipt of a request from the Managing Underwriter or
a representative of holders of a majority of the Registrable Securities to be
included in an underwritten offering to prepare and file an amendment or
supplement to the Shelf Registration Statement and Prospectus in connection with
an underwritten offering, the Company may delay the filing of any such amendment
or supplement for up to 90 days if the Company is in possession of material
non-public information the disclosure of which would have a material adverse
effect on the business,
14
<PAGE>
operations, prospects, condition (financial or otherwise) of the Company and its
subsidiaries, taken as a whole.
8. MISCELLANEOUS.
(a) OTHER REGISTRATION RIGHTS. The Company may grant registration
rights that would permit any person that is a third party the right to
piggy-back on any Shelf Registration Statement.
(b) AMENDMENTS AND WAIVERS. This Agreement, including this Section
8(b), may be amended, and waivers or consents to departures from the provisions
hereof may be given, only by a written instrument duly executed by the Company
and the holders of a majority in aggregate principal amount of Registrable
Securities then outstanding. Each holder of Registrable Securities outstanding
at the time of any such amendment, waiver or consent or thereafter shall be
bound by any amendment, waiver or consent effected pursuant to this Section
8(b), whether or not any notice, writing or marking indicating such amendment,
waiver or consent appears on the Registrable Securities or is delivered to such
holder.
(c) NOTICES. All notices and other communications provided for or
permitted hereunder shall be given as provided in the Indenture.
(d) PARTIES IN INTEREST. The parties to this Agreement intend that
all holders of Registrable Securities shall be entitled to receive the benefits
of this Agreement and that any Electing Holder shall be bound by the terms and
provisions of this Agreement by reason of such election with respect to the
Registrable Securities which are included in a Shelf Registration Statement. All
the terms and provisions of this Agreement shall be binding upon, shall inure to
the benefit of and shall be enforceable by the respective successors and assigns
of the parties hereto and any holder from time to time of the Registrable
Securities to the aforesaid extent. In the event that any transferee of any
holder of Registrable Securities shall acquire Registrable Securities, in any
manner, whether by gift, bequest, purchase, operation of law or otherwise, such
transferee shall, without any further writing or action of any kind, be entitled
to receive the benefits of and, if an Electing Holder, be conclusively deemed to
have agreed to be bound by and to perform all of the terms and provisions of
this Agreement to the aforesaid extent.
(e) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
(h) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in
15
<PAGE>
any respect for any reason, the validity, legality and enforceability of any
such provision in every other respect and of the remaining provisions hereof
shall not be in any way impaired or affected thereby, it being intended that all
of the rights and privileges of the parties hereto shall be enforceable to the
fullest extent permitted by law.
(i) SURVIVAL. The respective indemnities, agreements,
representations, warranties and other provisions set forth in this Agreement or
made pursuant hereto shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Electing Holder, any director, officer or partner of such holder, any
agent or underwriter, any director, officer or partner of such agent or
underwriter, or any controlling person of any of the foregoing, and shall
survive the transfer and registration of the Registrable Securities of such
holder.
16
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.
Very truly yours,
eToys Inc.
By:
-------------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
BancBoston Robertson Stephens Inc.
Donaldson Lufkin & Jenrette Securities Corporation
- ---------------------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Purchasers
17
<PAGE>
EXHIBIT A
ETOYS INC.
INSTRUCTION TO DTC PARTICIPANTS
(DATE OF MAILING)
URGENT - IMMEDIATE ATTENTION REQUESTED
DEADLINE FOR RESPONSE: [DATE]
The Depository Trust Company ("DTC") has identified you as a DTC
Participant through which beneficial interests in the eToys Inc. (the "Company")
6.25% Convertible Subordinated Notes due December 1, 2004 (the "Securities") are
held.
The Company is in the process of registering the Securities under the
Securities Act of 1933 for resale by the beneficial owners thereof. In order to
have their Securities included in the registration statement, beneficial owners
must complete and return the enclosed Notice of Registration Statement and
Selling Securityholder Questionnaire.
IT IS IMPORTANT THAT BENEFICIAL OWNERS OF THE SECURITIES RECEIVE A COPY
OF THE ENCLOSED MATERIALS AS SOON AS POSSIBLE as their rights to have the
Securities included in the registration statement depend upon their returning
the Notice and Questionnaire by [DEADLINE FOR RESPONSE]. Please forward a copy
of the enclosed documents to each beneficial owner that holds interests in the
Securities through you. If you require more copies of the enclosed materials or
have any questions pertaining to this matter, please contact [NAME, ADDRESS AND
TELEPHONE NUMBER OF CONTACT AT THE ISSUER].
<PAGE>
ETOYS INC.
Notice of Registration Statement
and
SELLING SECURITYHOLDER QUESTIONNAIRE
(Date)
Reference is hereby made to the Registration Rights Agreement (the
"Registration Rights Agreement") between eToys Inc. (the "Company") and the
Purchasers named therein. Pursuant to the Registration Rights Agreement, the
Company has filed with the United States Securities and Exchange Commission (the
"Commission") a registration statement on Form S-_ (the "Shelf Registration
Statement") for the registration and resale under Rule 415 of the Securities Act
of 1933, as amended (the "Securities Act"), of the Company's 6.25% Convertible
Subordinated Notes due December 1, 2004 (the "Securities") and the shares of
common stock, par value $0.0001 per share (the "Common Stock"), issuable upon
conversion thereof. A copy of the Registration Rights Agreement is attached
hereto. All capitalized terms not otherwise defined herein shall have the
meanings ascribed thereto in the Registration Rights Agreement.
Each beneficial owner of Registrable Securities (as defined below) is
entitled to have the Registrable Securities beneficially owned by it included in
the Shelf Registration Statement. In order to have Registrable Securities
included in the Shelf Registration Statement, this Notice of Registration
Statement and Selling Securityholder Questionnaire ("Notice and Questionnaire")
must be completed, executed and delivered to the Company's counsel at the
address set forth herein for receipt ON OR BEFORE [DEADLINE FOR RESPONSE].
Beneficial owners of Registrable Securities who do not complete, execute and
return this Notice and Questionnaire by such date (i) will not be named as
selling securityholders in the Shelf Registration Statement and (ii) may not use
the Prospectus forming a part thereof for resales of Registrable Securities.
Certain legal consequences arise from being named as a selling
securityholder in the Shelf Registration Statement and related Prospectus.
Accordingly, holders and beneficial owners of Registrable Securities are advised
to consult their own securities law counsel regarding the consequences of being
named or not being named as a selling securityholder in the Shelf Registration
Statement and related Prospectus.
<PAGE>
The term "REGISTRABLE SECURITIES" is defined in the Registration Rights
Agreement to mean all or any portion of the Securities issued from time to time
under the Indenture in registered form and the shares of Common Stock issuable
upon conversion of such Securities; PROVIDED, HOWEVER, that a security ceases to
be a Registrable Security when it is no longer a Restricted Security.
The term "RESTRICTED SECURITY" is defined in the Registration Rights
Agreement to mean any Security or share of Common Stock issuable upon conversion
thereof except any such Security or share of Common Stock which (i) has been
effectively registered under the Securities Act and sold in a manner
contemplated by the Shelf Registration Statement, (ii) has been transferred in
compliance with Rule 144 under the Securities Act (or any successor provision
thereto) or is transferable pursuant to paragraph (k) of such Rule 144 (or any
successor provision thereto), or (iii) has otherwise been transferred and a new
Security or share of Common Stock not subject to transfer restrictions under the
Securities Act has been delivered by or on behalf of the Company in accordance
with Section 3.5 of the Indenture.
ELECTION
The undersigned holder (the "Selling Securityholder") of Registrable
Securities hereby elects to include in the Shelf Registration Statement the
Registrable Securities beneficially owned by it and listed below in Item (3).
The undersigned, by signing and returning this Notice and Questionnaire, agrees
to be bound with respect to such Registrable Securities by the terms and
conditions of this Notice and Questionnaire and the Registration Rights
Agreement, including, without limitation, Section 5 of the Registration Rights
Agreement, as if the undersigned Selling Securityholder were an original party
thereto.
Upon any sale of Registrable Securities pursuant to the Shelf
Registration Statement, the Selling Securityholder will be required to deliver
to the Company and Trustee the Notice of Transfer set forth in Exhibit B to the
Registration Rights Agreement.
The Selling Securityholder hereby provides the following information to
the Company and represents and warrants that such information is accurate and
complete:
<PAGE>
QUESTIONNAIRE
Certain capitalized terms used in this Questionnaire are defined in Appendix I
attached hereto. Capitalized terms used in this Questionnaire but not defined in
Appendix I have the meanings given to them in the accompanying letter.
(1)(a) Full Legal Name of Selling Securityholder:
------------------------------------------------------------------------
(i) Is such Selling Securityholder a:
[ ] Corporation [ ] General Partnership
[ ] Individual [ ] Limited Partnership
[ ] Other (please specify:__________________)
(ii) In what state is such Selling Securityholder organized or
domiciled?
--------------------------
(b) Full Legal Name of Registered Holder (if not the same as in (a) above)
of Registrable Securities Listed in Item (4) below:
----------------------------------------------------------------------
(c) Full Legal Name of DTC Participant (if applicable and if not the
same as (b) above) Through Which Registrable Securities Listed in
Item (4) below are Held:
----------------------------------------------------------------------
(2) Address for Notices to Selling Securityholder:
----------------------------------
----------------------------------
----------------------------------
Telephone: ----------------------------------
Fax: ----------------------------------
Contact Person: ----------------------------------
(3) Beneficial Ownership of Securities by Another Entity or Individual:
(a) Is another entity or individual the Beneficial Owner of any Securities
or shares of Common Stock issued upon conversion of any Securities?
[ ] No (skip questions (b)-(e) below)
[ ] Yes (answer questions (b)-(e) below)
<PAGE>
(b) What is the full legal name of such Beneficial Owner?
-------------------------------------------------
(c) Is such Beneficial Owner a:
[ ] Corporation [ ] General Partnership
[ ] Individual [ ] Limited Partnership
[ ] Other (please specify:__________________)
(d) In what state is such Beneficial Owner organized or domiciled?
-------------------------------------------------
(e) Please provide the name, address and telephone number of a contact
person for such Beneficial Owner.
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
(4) Beneficial Ownership of Securities:
EXCEPT AS SET FORTH BELOW IN THIS ITEM (4), THE UNDERSIGNED IS NOT
A BENEFICIAL OWNER OF ANY SECURITIES OR SHARES OF COMMON STOCK
ISSUED UPON CONVERSION OF ANY SECURITIES.
(a) Principal amount of Registrable Securities (as defined in the
Registration Rights Agreement) Beneficially Owned:
-------------------
CUSIP No(s). of such Registrable Securities:
------------------------
Number of shares of Common Stock (if any) issued upon conversion of
such Registrable Securities:
-----------------------------------------
(b) Principal amount of Securities other than Registrable Securities
Beneficially Owned:
---------------------------------------------------------------------
CUSIP No(s). of such other Securities:
--------------------------------
Number of shares of Common Stock (if any) issued upon conversion of
such other Securities:
----------------------------------------------
<PAGE>
(c) Principal amount of Registrable Securities which the undersigned
wishes to be included in the Shelf Registration Statement:
---------------------------------------------------------------------
CUSIP No(s). of such Registrable Securities to be included in the
Shelf Registration Statement:
----------------------------------------
Number of shares of Common Stock (if any) issued upon conversion of
Registrable Securities which are to be included in the Shelf
Registration Statement:
----------------------------------------------
(5) Beneficial Ownership of Other Securities of the Company:
EXCEPT AS SET FORTH BELOW IN THIS ITEM (5), THE UNDERSIGNED SELLING
SECURITYHOLDER IS NOT A BENEFICIAL OWNER OF ANY SHARES OF COMMON STOCK OR
ANY OTHER SECURITIES OF THE COMPANY, OTHER THAN THE SECURITIES AND SHARES
OF COMMON STOCK LISTED ABOVE IN ITEM (4).
State any exceptions here:
(6) Relationships with the Company:
EXCEPT AS SET FORTH BELOW, NEITHER THE SELLING SECURITYHOLDER NOR ANY OF
ITS AFFILIATES, OFFICERS, DIRECTORS OR PRINCIPAL EQUITY HOLDERS (5% OR
MORE) HAS HELD ANY POSITION OR OFFICE OR HAS HAD ANY OTHER MATERIAL
RELATIONSHIP WITH THE COMPANY (OR ITS PREDECESSORS OR AFFILIATES) DURING
THE PAST THREE YEARS.
State any exceptions here:
(7) Plan of Distribution:
EXCEPT AS SET FORTH BELOW, THE UNDERSIGNED SELLING SECURITYHOLDER INTENDS
TO DISTRIBUTE THE REGISTRABLE SECURITIES LISTED ABOVE IN ITEM (4) ONLY AS
FOLLOWS (IF AT ALL): SUCH REGISTRABLE SECURITIES MAY BE SOLD FROM TIME TO
TIME DIRECTLY BY THE UNDERSIGNED SELLING SECURITYHOLDER OR,
ALTERNATIVELY, THROUGH UNDERWRITERS, BROKER-DEALERS OR AGENTS. SUCH
REGISTRABLE SECURITIES MAY BE SOLD IN ONE OR MORE TRANSACTIONS AT FIXED
PRICES, AT PREVAILING MARKET PRICES AT THE TIME OF SALE, AT VARYING
PRICES DETERMINED AT THE TIME OF SALE, OR AT NEGOTIATED PRICES. SUCH
SALES MAY BE EFFECTED IN TRANSACTIONS (WHICH MAY INVOLVE CROSSES OR BLOCK
TRANSACTIONS) (I) ON ANY NATIONAL SECURITIES EXCHANGE OR QUOTATION
SERVICE ON WHICH THE REGISTERED SECURITIES MAY BE LISTED OR QUOTED AT THE
TIME OF SALE, (II) IN THE OVER-THE-COUNTER MARKET, (III) IN TRANSACTIONS
OTHERWISE THAN ON SUCH EXCHANGES OR SERVICES OR IN THE OVER-THE-COUNTER
MARKET, OR (IV) THROUGH THE WRITING OF OPTIONS. IN CONNECTION WITH SALES
OF THE REGISTRABLE SECURITIES OR OTHERWISE, THE SELLING SECURITYHOLDER
MAY ENTER INTO HEDGING TRANSACTIONS WITH BROKER-DEALERS, WHICH MAY IN
TURN ENGAGE IN SHORT SALES OF THE REGISTRABLE SECURITIES IN THE COURSE OF
HEDGING THE POSITIONS THEY ASSUME. THE SELLING SECURITYHOLDER MAY ALSO
SELL REGISTRABLE SECURITIES SHORT AND DELIVER REGISTRABLE SECURITIES TO
CLOSE OUT SUCH SHORT
<PAGE>
POSITIONS, OR LOAN OR PLEDGE REGISTRABLE SECURITIES TO BROKER-DEALERS
THAT IN TURN MAY SELL SUCH SECURITIES.
State any exceptions here:
(8) Are you a Member, an affiliate of a Member, or a person associated with a
Member, of the National Association of Securities Dealers, Inc. (the
"NASD")?
Yes No
------- --------
If the answer to Question 8 is "yes", state (a) the name of any such NASD
Member, (b) the nature of your affiliation or association with such NASD
Member, (c) information as to such NASD Member's participation in any
capacity in the Offering or the original placement of the Securities, (d)
the number of shares of equity securities or face value of debt
securities of the Company owned by you, (e) the date such securities were
acquired and (f) the price paid for such securities.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------------.
(9) If you answered "yes" to Question 8 above, please fill out the following
table with respect to any purchases from the Company or any of its
Affiliates in a private placement within twelve months prior to the date
hereof (excluding your purchase of the Shares).
<TABLE>
<CAPTION>
==================================================================================================
Amount and Name of Price or Other
Date of Purchase Seller Securities Consideration
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
==================================================================================================
</TABLE>
Note: In no event may such method(s) of distribution take the form of an
underwritten offering of the Registrable Securities without the prior agreement
of the Company.
By signing below, the Selling Securityholder acknowledges that
it understands its obligation to comply, and agrees that it will comply, with
the provisions of the Exchange Act and
<PAGE>
the rules and regulations thereunder, particularly Regulation M. The Selling
Securityholder also acknowledges that it understands that the answers to this
Questionnaire are furnished for use in connection with the Registration
Statement and any amendments or supplements thereto filed with the SEC pursuant
to the Securities Act of 1933, as amended.
In the event that the Selling Securityholder transfers all or any portion
of the Registrable Securities listed in Item (3) above after the date on which
such information is provided to the Company, the Selling Securityholder agrees
to notify the transferee(s) at the time of the transfer of its rights and
obligations under this Notice and Questionnaire and the Registration Rights
Agreement.
By signing below, the Selling Securityholder consents to the disclosure
of the information contained herein in its answers to Items (1) through (9)
above and the inclusion of such information in the Shelf Registration Statement
and related Prospectus. The Selling Securityholder understands that such
information will be relied upon by the Company in connection with the
preparation of the Shelf Registration Statement and related Prospectus.
The Selling Securityholder acknowledges that material misstatements and
omissions of material facts in the Registration Statement and any amendments or
supplement thereto may give rise to civil and criminal liabilities to the
Company and to each officer and director of the Company signing the Registration
Statement and to other persons signing such document. As a result, in accordance
with the Selling Securityholder's obligation under Section 3(a) of the
Registration Rights Agreement to provide such information as may be required by
law for inclusion in the Shelf Registration Statement, the Selling
Securityholder agrees to promptly notify the Company of any inaccuracies or
changes in the information provided herein which may occur subsequent to the
date hereof at any time while the Shelf Registration Statement remains in
effect. All notices hereunder and pursuant to the Registration Rights Agreement
shall be made in writing, by hand-delivery, first-class mail, or air courier
guaranteeing overnight delivery as follows:
(i) To the Company:
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
(ii) With a copy to:
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
<PAGE>
Once this Notice and Questionnaire is executed by the Selling
Securityholder and received by the Company's counsel, the terms of this Notice
and Questionnaire, and the representations and warranties contained herein,
shall be binding on, shall inure to the benefit of and shall be enforceable by
the respective successors, heirs, personal representatives, and assigns of the
Company and the Selling Securityholder (with respect to the Registrable
Securities Beneficially Owned by such Selling Securityholder and listed in Item
(3) above. This Agreement shall be governed in all respects by the laws of the
State of New York.
<PAGE>
I confirm that, to the best of my knowledge and belief, the foregoing statements
(including, without limitation, the answers to this Questionnaire) are correct.
IN WITNESS WHEREOF, the undersigned, by authority duly given, has caused
this Notice and Questionnaire to be executed and delivered either in person or
by its duly authorized agent.
Dated:
------------------------------------
-------------------------------------------------------------
Selling Securityholder
(Print/type full legal name of beneficial owner of Registrable
Securities)
By:
----------------------------------------------------------
Name:
Title:
PLEASE RETURN THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE FOR RECEIPT ON
OR BEFORE [DEADLINE FOR RESPONSE] TO THE COMPANY'S COUNSEL AT:
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
<PAGE>
APPENDIX I
DEFINITIONS
For the purpose of this Questionnaire, the following definitions apply:
1. AFFILIATE. As used in Questions 1 - 7 and Question 9, a
person is an "Affiliate" of a person if such person controls, is controlled by,
or is under common control with, another person. Please assume that an
"Affiliate" of the Company includes, without limitation, any 5% stockholder of
the Company (including any person who owns, controls, or holds, or holds an
option to acquire, and has the power to vote, 5% or more of the Company's
outstanding voting Securities). "Control" is the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of an entity, whether through the ownership of voting securities, by
contract, or otherwise.
As used in Question 8 of this questionnaire, an "affiliate" of
an NASD member has the following meaning:
(1) a company which controls, is controlled by or is under
common control with a member;
(2) the term affiliate is presumed to include, but is not
limited to, the following:
(a) a company will be presumed to control a member if
the company beneficially owns 10% or more of the outstanding
voting securities of a member which is a corporation, or
beneficially owns a partnership interest in 10% or more of the
distributable profits or losses of a member which is a
partnership;
(b) a member will be presumed to control a company if
the member and persons associated with the member beneficially own
(i) 10% or more of the outstanding subordinated debt of a company,
(ii) 10% or more of the outstanding voting securities of a company
which is a corporation, or (iii) a partnership interest in 10% or
more of the distributable profits or losses of a company which is
a partnership;
(c) a company will be presumed to be under common
control with a member if:
i) the same natural person or company
controls both the member and company by beneficially owning
10% or more of the outstanding voting securities of a
member or company which is a corporation, or by
beneficially owning a partnership interest in 10% or more
of the distributable profits or losses of a member or
company which is a partnership; or
ii) a person having the power to direct or
cause the direction of the management or policies of the
member or the company also has the
<PAGE>
power to direct or cause the direction of the management or
policies of the other entity in question.
2. BENEFICIAL OWNER. A "Beneficial Owner" of a security
includes any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has or shares voting
power and/or investment power with respect to such security. Voting power
includes "the power to vote, or to direct the voting, of such security" and
investment power includes "the power to dispose, or to direct the disposition,
of such security."
A person is also a Beneficial Owner of a security if he has
the right to acquire beneficial ownership of such security, at any time within
sixty days, including but not limited to, any right to acquire through: (a) the
exercise of an option, warrant or right, (b) the conversion of a convertible
security, (c) the power to revoke a trust, discretionary account or similar
arrangement, or (d) the automatic termination of a trust, discretionary account
or similar arrangement; provided, however, that if the acquisition of an option,
warrant, right, convertible security or power described in (a), (b) or (c) is
for the purpose of maintaining or obtaining control over the issuer of the
security, the holder of the option, warrant, right, convertible security or
power shall, immediately upon such acquisition and regardless of when it is
exercisable, be deemed a beneficial owner of the underlying securities.
The possession of the legal power to vote and/or direct the
disposition of securities, absent unusual circumstances, will be sufficient to
confer beneficial ownership. Such power may be held directly, or indirectly,
through one or more controlled entities.
3. MATERIAL RELATIONSHIP. The term "material relationship" has
not been defined by the Securities and Exchange Commission (the "SEC"). The SEC,
however, is likely to construe as material any relationship which tends to
impact arm's length bargaining in dealings with a company, whether arising from
a close business connection, family relationship, a relationship of control or
otherwise. For example, you should conclude that you have such a relationship
with any organization of which you own, directly or indirectly, 10% more of the
outstanding voting stock, or in which you have some other substantial interest,
and with any person or organization with whom you have, or with whom any
relative (or any other person or organization as to which you have any of the
foregoing other relationships) has, a contractual relationship.
4. MEMBER. Rule 0120 of the NASD's Rules of Fair Practice
defines the term "member" to mean any individual, partnership, corporation or
other legal entity admitted to membership in the NASD, and Article I of the
NASD's By-Laws defines the term "person associated with a member" to mean every
sole proprietor, partner, officer, director, or branch manager of any member, or
any natural person occupying a similar status or performing similar functions,
or any natural person engaged in the investment banking or securities business
who is directly or indirectly controlling or controlled by such member (for
example, any employee), whether or not such person is registered or exempt from
registration with the NASD.
<PAGE>
EXHIBIT B
NOTICE OF TRANSFER PURSUANT TO REGISTRATION STATEMENT
U.S. Bank Trust National Association
eToys Inc.
c/o U.S. Bank Trust National Association
[Address of Trustee]
Attention: [Corporate Trust Services]
Re: eToys Inc. (the "Company")
6.25% Convertible Subordinated Notes due
December 1, 2004 (the "Notes")
Dear Sirs:
Please be advised that _____________________ has transferred $___________
aggregate principal amount of the above-referenced Notes pursuant to an
effective Registration Statement on Form S-__ (File No. 333-____) filed by the
Company.
We hereby certify that the prospectus delivery requirements, if any, of
the Securities Act of 1933, as amended, have been satisfied and that the
above-named beneficial owner of the Notes is named as a "Selling Holder" in the
Prospectus dated [DATE], or in supplements thereto, and that the aggregate
principal amount of the Notes transferred are the Notes listed in such
Prospectus opposite such owner's name.
Dated:
Very truly yours,
------------------------------
(Name)
By: ------------------------------
(Authorized Signature)
<PAGE>
EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 3, 1999, in the Registration Statement (Form
S-1) and related Prospectus of eToys Inc. for the registration of 2,029,845
shares of its common stock.
/s/ Ernst & Young LLP
Los Angeles, California
February 1, 2000
<PAGE>
EXHIBIT 23.2
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 30, 1999, in the Registration Statement (Form
S-1) and related Prospectus of eToys Inc. for the registration of 2,029,845
shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
February 1, 2000
