<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-12
ETOYS INC.
-----------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
----------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------
</TABLE>
<PAGE>
[LOGO]
NOTICE OF 2000 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 12, 2000
------------------------
To our Stockholders:
The 2000 annual meeting of stockholders of eToys Inc. (the "Company") will
be held at 9:00 a.m. Pacific Daylight Time on Tuesday, September 12, 2000, in
the Arcadia B Room of The Loews Santa Monica Beach Hotel, 1700 Ocean Avenue,
Santa Monica, California 90401, for purposes of acting on the following matters:
1. Election of five directors to serve until their respective successors
are elected and qualified;
2. Approval of the issuance of common shares upon conversion of the
Company's Series D Convertible Preferred Shares, as dividends thereon and
upon exercise of the related warrants, if the issuance thereof would have
otherwise been limited by the rules of the Nasdaq National Market;
3. Ratification of the appointment of Ernst & Young LLP as the Company's
independent accountants for the year ending March 31, 2001; and
4. Any other matters that properly come before the Annual Meeting and any
adjournments or postponements thereof.
The Board of Directors has fixed July 17, 2000 as the record date for
determining stockholders entitled to receive notice of, and to vote at, the
annual meeting or any adjournment or postponement thereof. Only stockholders of
record at the close of business on that date will be entitled to notice of, and
to vote at, the annual meeting.
The Board of Directors recommends a vote "FOR" the election of the nominated
directors, "FOR" approval of the issuance of common shares upon conversion of
the Company's Series D Convertible Preferred Shares, as dividends thereon, upon
exercise of the related warrants, if the issuance thereof would have otherwise
been limited by the rules of the Nasdaq National Market, and "FOR" ratification
of the appointment of Ernst & Young LLP as the Company's independent accountants
for the fiscal year ending March 31, 2001.
If you plan to attend the annual meeting, please note that space limitations
make it necessary to limit attendance to our stockholders. Admission to the
meeting will be on a first-come, first-served basis. Registration will begin at
8:30 a.m., and seating will begin at 8:45 a.m. Each stockholder may be asked to
present valid picture identification, such as a driver's license or passport.
Stockholders holding stock in brokerage accounts ("street name" holders) will
need to bring a copy of a brokerage statement reflecting stock ownership as of
the record date. Cameras, recording devices and other electronic devices will
not be permitted at the annual meeting.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON, BUT
EVEN IF YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, YOU ARE REQUESTED TO
MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN
THE POSTAGE-PAID ENVELOPE PROVIDED TO ENSURE YOUR REPRESENTATION. ALTERNATIVELY,
YOU MAY VOTE VIA THE INTERNET OR BY TELEPHONE BY FOLLOWING THE INSTRUCTIONS SET
FORTH ON YOUR PROXY CARD. STOCKHOLDERS ATTENDING THE ANNUAL MEETING MAY VOTE IN
PERSON EVEN IF THEY HAVE PREVIOUSLY VOTED.
By Order of the Board of Directors
Steven J. Schoch
SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
AND SECRETARY
Santa Monica, California
August 7, 2000
<PAGE>
ETOYS INC.
3100 OCEAN PARK BOULEVARD, SUITE 300
SANTA MONICA, CALIFORNIA 90405
------------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON TUESDAY, SEPTEMBER 12, 2000
------------------------
GENERAL
The enclosed proxy is solicited by mail by the Board of Directors of
eToys Inc., a Delaware corporation (the "Company" or "eToys"), for use at the
annual meeting of Stockholders of the Company to be held at 9:00 a.m. Pacific
Daylight Time on Tuesday, September 12, 2000, in the Arcadia B Room of The Loews
Santa Monica Beach Hotel, 1700 Ocean Avenue, Santa Monica, California 90401, and
at any adjournment or postponement thereof.
At the annual meeting, stockholders will act upon the matters outlined in
the notice of meeting on the cover page of this proxy statement, including the
election of directors, the approval of the issuance of common shares upon
conversion of the Company's Series D Convertible Preferred Shares, as dividends
thereon and upon exercise of the related warrants, if the issuance thereof would
have otherwise been limited by the rules of the Nasdaq National Market, and the
ratification of the appointment of the Company's independent auditors for the
year ending March 31, 2001. In addition, the Company's management will report on
the performance of the Company during the year ended March 31, 2000 and respond
to questions from stockholders.
This proxy statement and the accompanying proxy card are being mailed to the
stockholders of the Company on or about August 1, 2000.
OUTSTANDING SECURITIES AND VOTING RIGHTS
Only holders of record of the Company's common stock, par value $0.0001 per
share, at the close of business on July 17, 2000 will be entitled to notice of,
and to vote at, the annual meeting. On that date, the Company had
shares of common stock outstanding. Each share of common stock is entitled to
one vote at the annual meeting.
All stockholders as of the record date, or their duly appointed proxies, may
attend the annual meeting. Seating, however, is limited. If you plan to attend
the annual meeting, please note that admission will be on a first-come,
first-served basis. Registration will begin at 8:30 a.m., and seating will begin
at 8:45 a.m. Each stockholder may be asked to present valid picture
identification, such as a driver's license or passport. Stockholders holding
stock in brokerage accounts ("street name" holders) will need to bring a copy of
a brokerage statement reflecting stock ownership as of the record date. Cameras,
recording devices and other electronic devices will not be permitted at the
annual meeting.
A majority of the outstanding shares of common stock present in person or
represented by proxy constitutes a quorum for the transaction of business at the
annual meeting. Abstentions and "broker nonvotes" will be included in
determining the presence of a quorum at the Annual Meeting for all purposes.
"Broker nonvotes" occur when a person holding shares through a bank or brokerage
account does not provide instructions as to how his or her shares should be
voted and the broker does not exercise discretion to vote those shares on a
particular matter.
The nominees for election to the Board of Directors who receive the greatest
number of votes cast for the election of directors by the shares present, in
person or by proxy, shall be elected directors. Accordingly, in the election of
the Directors, an abstention or broker nonvote will have no effect on the
outcome. Stockholders are not entitled to cumulate votes in connection with the
election of directors.
<PAGE>
For each other item voted upon at the annual meeting, the affirmative vote
of the holders of a majority of the shares represented in person or by proxy and
entitled to vote on the item will be required for approval. Accordingly,
abstentions and broker nonvotes will have the effect of negative votes with
respect to these items.
PROXY VOTING
Shares for which proxy cards are properly executed and returned, or properly
voted via the internet or telephonically, will be voted at the annual meeting in
accordance with the directions noted thereon or, in the absence of directions,
will be voted "FOR" the election of each of the Company's nominees to the Board
of Directors, "FOR" the approval of the issuance of common shares upon
conversion of the Company's Series D Convertible Preferred Shares, as dividends
thereon and upon exercise of the related warrants, if the issuance thereof would
have otherwise been limited by the rules of the National Nasdaq Market, and
"FOR" the ratification of the appointment of Ernst & Young LLP as the Company's
independent accountants for the year ending March 31, 2001. It is not expected
that any matters other than those referred to in this proxy statement will be
brought before the annual meeting. If, however, other matters are properly
presented, the persons named as proxies will vote as recommended by the Board of
Directors or, if no recommendation is given, in accordance with their discretion
with respect to such matters.
The manner in which your shares may be voted by proxy depends on how your
shares are held. If you own shares of record, meaning that your shares of common
stock are represented by certificates or book entries in your name so that you
appear as a stockholder on the records of our stock transfer agent, ChaseMellon
Shareholder Services, L.L.C., a proxy card for voting those shares will be
included with this proxy statement. You may vote those shares by completing,
signing and returning the proxy card in the enclosed envelope. Alternatively, by
following the instructions on your proxy card, you may vote those shares via the
internet at http://www.eproxy.com/etys or telephonically by calling
1-800-840-1208.
If you own shares through a bank or brokerage firm account, you may instead
receive a voting instruction form with this proxy statement, which you may use
to instruct how your shares should be voted. Just as with a proxy, you may vote
those shares by completing, signing and returning the voting instruction form in
the enclosed envelope. Many banks and brokerage firms have arranged for internet
or telephonic voting of shares and provide instructions for using those services
on the voting instruction form. If your bank or brokerage firm uses ADP Investor
Communication Services, you may vote your shares via the Internet at
www.proxyvote.com or by calling the toll-free number on your voting instruction
form.
ATTENDANCE AND VOTING AT THE ANNUAL MEETING
If you own shares of record, you may attend the annual meeting and vote in
person, regardless of whether you have previously voted on a proxy card, via the
Internet or telephonically. If you own shares through a bank or brokerage firm
account, you may attend the annual meeting, but in order to vote your shares at
the annual meeting, you must obtain a "legal proxy" from the bank or brokerage
firm that holds your shares. You should contact your account representative to
learn how to obtain a "legal proxy." We encourage you to vote your shares in
advance of the annual meeting date by one of the methods described above, even
if you plan on attending the annual meeting. You may change or revoke your proxy
at the Annual Meeting as described below even if you have already voted.
REVOCATION
Any stockholder holding shares of record may revoke a previously granted
proxy at any time before it is voted by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy card bearing a
later date or by attending the annual meeting and voting in person. Any
stockholder holding shares through a bank or brokerage firm may revoke a
previously granted proxy or
2
<PAGE>
change previously given voting instructions by contacting the bank or brokerage
firm, or by obtaining a legal proxy from the bank or brokerage firm and voting
at the annual meeting. Each nominee has consented to being named in this proxy
statement and has agreed to serve as a member of the Company's Board of
Directors if so elected.
PROPOSAL 1:
ELECTION OF DIRECTORS
In accordance with the Company's Bylaws, the number of directors
constituting the Board of Directors is fixed at seven. The Board of Directors
has proposed that the following five nominees be elected at the annual meeting:
Peter C. M. Hart, Tony A. Hung, Edward C. Lenk, Michael Moritz and Daniel J.
Nova. All of the nominees are currently members of the Board of Directors.
Under the Company's Amended and Restated Certificate of Incorporation (the
"Charter"), the Board of Directors may stagger the terms of the Company's
directors after completion of the first annual meeting of stockholders at which
the number of stockholders of the Company exceeded 800 as of the record date for
such meeting. Since the Company had more than 800 stockholders as of the record
date for the annual meeting, upon completion of the meeting, the Board of
Directors intends to divide the directors into three classes, designated
Class I, Class II and Class III and to assign Mr. Hart and one vacant position
to Class I, Mr. Nova and Mr. Hung to Class II, and Mr. Lenk, Mr. Moritz and one
vacant position to Class III. In accordance with the Company's Charter, (i) the
terms of any Class I directors shall expire at the Company's annual meeting of
stockholders in 2001 or any special meeting in lieu thereof and Class I
directors shall be elected at such annual meeting for a full term of three
years; (ii) the terms of any Class II directors shall expire at the Company's
annual meeting in 2002 or any special meeting in lieu thereof and Class II
directors shall be elected at such annual meeting for a full term of three
years; (iii) the terms of any Class III directors shall expire at the Company's
annual meeting of stockholders in 2003 or any special meeting in lieu thereof
and Class III directors shall be elected at such annual meeting for a full term
of three years; and (iv) at each succeeding annual meeting of stockholders
directors shall be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting. Accordingly,
assuming each nominee is elected at the annual meeting and after giving affect
to the foregoing, Mr. Hart will effectively have been elected for a one-year
term, Mr. Nova and Mr. Hung will effectively have been elected for two-year
terms, and Mr. Lenk and Mr. Moritz will effectively have been elected for three-
year terms.
Unless otherwise instructed, it is the intention of the persons named as
proxies on the accompanying proxy card to vote shares represented by properly
executed proxies for the election of the nominees set forth above. Although the
Board of Directors anticipates that the five nominees will be available to serve
as Directors of the Company, if any of them should be unwilling or unable to
serve, it is intended that the proxies will be voted for the election of such
substitute nominee or nominees as may be designated by the Board of Directors.
Proxies cannot be voted for a greater number of persons than the number of
nominees named. The Company is currently in the process of considering, but has
not yet decided upon, candidates for the two vacant positions on the Board of
Directors, so there are two fewer nominees than the number of directors fixed by
the Company's Bylaws.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH NOMINEE LISTED BELOW.
3
<PAGE>
NOMINEES FOR THE BOARD OF DIRECTORS
Biographical information regarding each of the nominees for the Board of
Directors is set forth below:
Peter C.M. Hart, age 49, 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. 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, age 33, has served as a Director of eToys since
December 1997. He has been a General Partner of DynaFund Ventures, a venture
capital partnership, since November 1999 and prior thereto a Vice President of
DynaFund Ventures since 1997. 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 the University of
California at Los Angeles. Mr. Hung is a member of the Audit Committee of the
Board of Directors.
Edward C. Lenk, age 38, founded eToys and has served as President, Chief
Executive Officer and a Director of eToys since June 1997. In December 1998, he
was appointed Chairman and 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.
Michael Moritz, age 45, 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 Agile Software, Saba Software, Webvan,
PlanetRx, 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, age 38, has served as a Director of eToys since June 1998.
Mr. Nova has been a general partner at Highland Capital Partners, a venture
capital firm, since August 1996, most recently in the capacity of Managing
General Partner, a position he has held since August 1999. 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.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for their services
as Directors or members of committees of the Board of Directors, but are
reimbursed for their reasonable expenses incurred in attending meetings of the
Board of Directors. In addition, under the Company's 1999 Directors' Stock
Option Plan, each person who becomes a nonemployee director of the Company will
be granted a nonstatutory stock option to purchase 60,000 shares of common stock
on the date on
4
<PAGE>
which the person first becomes a nonemployee director. In addition, on the date
of each annual meeting of stockholders, including the 2000 annual meeting, 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
the Board of Directors for at least six months. A total of 600,000 shares of
common stock have been reserved for issuance under the 1999 Directors' Stock
Option Plan. 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 the Board
of Directors terminates as a result of his or her death or disability, the
director or the director's estate will have the right to exercise an option for
12 months following such termination date. Options granted under the 1999
Directors' Stock Option Plan have a term of ten years.
In the event that the Company is acquired by another company, the awards
outstanding under the 1999 Directors' Stock Option Plan are expected to be
assumed or equivalent awards substituted by the 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.
As of the date hereof, no options to purchase shares of common stock have
been issued under the 1999 Directors' Stock Option Plan. However, on
September 12, 2000, each of Messrs. Hart, Hung, Moritz and Nova will be
automatically granted options to purchase 15,000 shares of common stock.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During fiscal 1999, there were eight meetings of the Board of Directors. All
directors attended at least 75% of the meetings of the Board of Directors and
the committees of which they were members.
The Board of Directors has established an Audit Committee, a Compensation
Committee and a Nominating Committee. Each of the Audit, the Compensation and
the Nominating Committees is responsible to the full Board of Directors. The
functions performed by these committees are summarized below:
AUDIT COMMITTEE. The Audit Committee makes recommendations to the Board of
Directors regarding the selection and retention of independent auditors, reviews
the scope and results of the audit and reports the results to the Board of
Directors. In addition, the Audit Committee reviews the adequacy of internal
accounting, financial and operating controls and reviews the Company's financial
reporting compliance procedures. The members of the Audit Committee are
Mr. Hart, Mr. Hung and Mr. Nova. The Audit Committee met two times in fiscal
1999.
COMPENSATION COMMITTEE. The Compensation Committee reviews and approves the
compensation of the Company's officers, reviews and administers the Company's
stock option plans for employees and makes recommendations to the Board of
Directors regarding such matters. The members of the Compensation Committee are
Mr. Moritz and Mr. Nova. The Compensation Committee met four times in fiscal
1999.
5
<PAGE>
NOMINATING COMMITTEE. The Nominating Committee is responsible for
soliciting recommendations for candidates for the Board of Directors, developing
and reviewing background information for candidates, making recommendations to
the Board regarding such candidates, and reviewing and making recommendations to
the Board with respect to candidates for directors proposed by stockholders. Any
stockholder wishing to propose a nominee should submit a recommendation in
writing to the Company's Secretary, indicating the nominee's qualifications and
other relevant biographical information and providing confirmation of the
nominee's consent to serve as a director. The members of the Nominating
Committee are Mr. Lenk and Mr. Moritz. The Nominating Committee was not formed
until January 25, 2000 and did not have an opportunity to meet prior to
March 31, 2000.
BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth certain information regarding the beneficial
ownership of the shares of common stock as of June 9, 2000 by the Company's
directors, executive officers listed in the Summary Compensation Table below and
holders of more than 5% of the Company's outstanding shares of common stock.
Beneficial ownership includes shares a director, officer or 5% stockholder has
the power to vote or transfer and stock options that are exercisable currently
or within 60 days. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
------------------------------------ ---------------- ----------------
<S> <C> <C>
idealab!.................................................... 14,921,109 12.27%
130 West Union Street
Pasadena, CA 91103
Entities affiliated with Highland Capital Partners(1)....... 7,846,709 6.45
Two International Place
Boston, MA 02110
Entities affiliated with Sequoia Capital Partners (2)....... 8,131,989 6.69
3000 Sand Hill Road, Bldg. 4, Suite 280
Menlo Park, CA 94025
Torrance, CA 90503
Intel Corporation........................................... 7,568,598 6.67
2200 Mission Blvd.
Santa Clara, CA 95052
Peter C.M. Hart (3)+........................................ 394,554 *
Tony Hung (4)+.............................................. 3,255,719 2.61
Michael Moritz (5)+......................................... 8,131,989 6.69
Daniel J. Nova (6)+......................................... 7,846,709 6.45
Edward C. Lenk (7)+......................................... 8,764,677 7.21
Janine Bousquette (8)+...................................... 559,952 *
John R. Hnanicek (9)+....................................... 532,562 *
Steven J. Schoch (10)+...................................... 754,315 *
Louis V. Zambello III (11)+................................. 737,300 *
All directors and named executive officers as a group
(12 persons) (12)......................................... 33,877,326 27.80
</TABLE>
------------------------
+ The address of each such person is c/o eToys Inc., 3100 Ocean Park
Boulevard, Suite 300, Santa Monica, California 90405.
* Less than 1% of the outstanding shares of common stock
6
<PAGE>
(1) Includes 6,572,842 shares held by Highland Capital Partners III Limited
Partnership, 273,868 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.
(2) 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.
(3) Includes 244,250 shares issuable upon exercise of options which are vested
or will be vested within 60 days of June 9, 2000.
(4) Includes 1,716,878 shares held by DynaFund International L.P. and 1,460,628
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. Mr. Hung is a general
partner 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.
(5) Includes the shares described in note 2 above. Mr. 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.
(6) Includes the shares described in note 1 above. Mr. Nova is a general partner
or managing member of the general partners 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.
(7) Includes 1,313,500 shares issuable upon exercise of options which are vested
or will be vested within 60 days of June 9, 2000.
(8) Includes 340,000 shares that are subject to a right of repurchase in the
Company's favor at cost in the event Ms. Bousquette ceases employment with
the Company.
(9) Includes 362,500 shares that are subject to a right of repurchase in the
Company's favor at cost in the event Mr. Hnanicek ceases employment with the
Company.
(10) Includes 468,750 shares that are subject to a right of repurchase in the
Company's favor at cost in the event Mr. Schoch ceases employment with the
Company.
(11) Includes 498,438 shares that are subject to a right of repurchase in the
Company's favor at cost in the event Mr. Zambello ceases employment with the
Company.
(12) Includes the shares described in Notes 3 through 11.
7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the fiscal year ended March 31, 2000,
March 31, 1999 and March 31, 1998, which we refer to as fiscal 1999, 1998 and
1997, respectively, the compensation received by (i) the Company's chief
executive officer and (ii) the Company's other four most highly compensated
executive officers based on salary and bonus for fiscal 1999 (the "named
executive officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------
OTHER ANNUAL SECURITIES
FISCAL SALARY ($) BONUS ($) COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR (1) (2) ($) OPTIONS (#) COMPENSATION ($)
--------------------------- -------- ---------- --------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Lenk............. 1999 105,000 -- -- 1,000(3) --
President and Chief 1998 105,000 -- -- 3,000,000(4) --
Executive Officer 1997 105,000 -- -- --
Janine Bousquette.......... 1999 132,553 75,000 -- 481,000(5) --
Senior Vice President 1998 -- -- -- -- --
Of Marketing 1997 -- -- -- -- --
John R. Hnanicek........... 1999 150,000 45,000 -- 1,000(3) --
Senior Vice President 1998 37,500 15,000 -- 600,000(5) --
And Chief Information 1997 -- -- -- -- --
Officer
Steven J. Schoch........... 1999 125,500 20,833 -- 1,000(3) --
Senior Vice President 1998 20,833 4,167 -- 750,000(5) --
And Chief Financial 1997 -- -- -- -- --
Officer
Louis V. Zambello III...... 1999 200,000 71,250 -- 1,000(3) --
Senior Vice President 1998 50,000 28,750 -- 825,000(5) --
Of Operations 1997 -- -- -- -- --
</TABLE>
------------------------
(1) Amounts shown for fiscal 1998 for Messrs. Hnanicek, Schoch and Zambello
represent base salaries paid after they commenced employment with the
Company in December 1998, January 1999 and December 1998, respectively.
Amount shown for fiscal 1999 for Ms. Bousquette represents a base salary
paid after she commenced employment with the Company in May 1999.
(2) Each bonus represents a signing bonus. The signing bonuses were subject to a
vesting requirement, and the portions reflected in fiscal 1998 and fiscal
1999 represent the amounts of the signing bonuses that vested during such
periods.
(3) Such options are fully vested and have an exercise price of $26.25 per
share.
(4) Such options were issued in October 1998 and become exercisable at a rate of
1/4(th) of the option shares on the first anniversary of issuance and
1/48(th) per month thereafter. The exercise price of such options is $0.143
per share.
(5) Such options are immediately exercisable but, if exercised, are subject to a
right of repurchase in the Company's favor at the exercise price for the
option. The Company's repurchase option lapses over four years at a rate of
1/4(th) of the option shares on the first anniversary of issuance and
1/48(th) per month thereafter. The options were issued in May 1999,
December 1998, January 1999 and
8
<PAGE>
December 1998, with exercise prices of $11.00, $1.667, $3.333 and $1.667 per
share, in the case of Ms. Bousquette, Mr. Hnanicek, Mr. Schoch and
Mr. Zambello, respectively. The options have a term of ten years from the
date of issuance.
OPTION GRANTS IN FISCAL 1999
The following table sets forth information concerning the grant of stock
options during fiscal 1999 to the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL RATES OF
TOTAL STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION
UNDERLYING EMPLOYEES PRICE TERM (2)
OPTIONS IN FISCAL ($/SHARE) EXPIRATION -----------------------------
NAME GRANTED(#) YEAR (%) (1) DATE 5% 10%
---- ----------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Lenk.............. 1,000(3) .01% $26.25 12/31/09 $ 16,508 $ 41,836
Janine Bousquette........... 480,000(4) 5.39% $11.00 5/17/09 $3,337,072 $8,456,796
1,000(3) .01% $26.25 12/31/09 $ 16,508 $ 41,836
John R. Hnanicek............ 1,000(3) .01% $26.25 12/31/09 $ 16,508 $ 41,836
Steven J. Schoch............ 1,000(3) .01% $26.25 12/31/09 $ 16,508 $ 41,836
Louis V. Zambello III....... 1,000(3) .01% $26.25 12/31/09 $ 16,508 $ 41,836
</TABLE>
------------------------
(1) Options were granted at an exercise price equal to the fair market value of
the common stock based on the closing price for the common stock as reported
on the Nasdaq National Market on the date of grant.
(2) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates required by applicable regulations of the Securities and
Exchange Commission and, therefore, are not intended to forecast possible
future appreciation, if any, of the common stock price. Assumes all options
are exercised at the end of their respective terms. Actual gains, if any, on
stock option exercises depend on the future performance of the common stock
and overall market conditions, as well as the optionee's continued
employment through the vesting period. The amounts reflected in this table
may not be achieved.
(3) The option is immediately exercisable.
(4) The option is immediately exercisable. However, if exercised, the underlying
shares are subject to a right of repurchase at cost in the Company's favor
which lapses at the rate of 1/4(th) of the total number of shares on
May 17, 2000 and 1/48(th) of the total number of shares monthly from and
after May 17, 2000.
9
<PAGE>
OPTION EXERCISES IN FISCAL 1999
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of stock
options during Fiscal 1999 by the named executive officers and their options
outstanding at fiscal year-end.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE
OPTIONS AT MONEY OPTIONS AT
SHARES VALUE FISCAL YEAR END FISCAL YEAR END (2)
ACQUIRED ON REALIZED --------------------------- ----------------------------
NAME EXERCISE (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Lenk (3)..... -- $ -- 1,063,500 1,937,500 $9,244,600 $16,857,800
Janine Bousquette
(4).................. -- -- 481,000 -- -- --
John R. Hnanicek (5)... 70,000 1,001,241 531,000 -- 3,803,704 --
Steven J. Schoch (6)... -- -- 751,000 -- 4,133,100 --
Louis V. Zambello III
(7).................. 129,000 1,653,129 697,000 -- 4,995,053 --
</TABLE>
------------------------
(1) "Value Realized" represents the fair value of the underlying securities on
the exercise date, minus the exercise price of such options.
(2) Amounts equal the closing price of the common stock on March 31, 2000
($8.844 per share), less the option exercise price, multiplied by the number
of shares exercisable or unexercisable.
(3) Mr. Lenk holds an immediately exercisable option to purchase 1,000 shares.
Mr. Lenk holds a second option to purchase 3,000,000 shares which becomes
exercisable at the rate of 1/4(th) of the total number of shares on
October 21, 1999 and 1/48(th) of the total number of shares monthly from and
after October 21, 1999.
(4) Ms. Bousquette holds an immediately exercisable option to purchase 1,000
shares. Ms. Bousquette holds a second option to purchase 480,000 shares that
is immediately exercisable. However, if exercised, the underlying shares of
the second option are subject to a right of repurchase at cost in the
Company's favor which lapses at the rate of 1/4(th) of the total number of
shares on May 17, 2000 and 1/48(th) of the total number of shares monthly
from and after May 17, 2000.
(5) Mr. Hnanicek holds an immediately exercisable option to purchase 1,000
shares. Mr. Hnanicek holds a second option to purchase 600,000 shares that
is immediately exercisable. However, if exercised, the underlying shares of
the second option are subject to a right of repurchase at cost in the
Company's favor which lapses at the rate of 1/4(th) of the total number of
shares on December 31, 1999 and 1/48(th) of the total number of shares
monthly from and after December 31, 1999.
(6) Mr. Schoch holds an immediately exercisable option to purchase 1,000 shares.
Mr. Schoch holds a second option to purchase 750,000 shares that is
immediately exercisable. However, if exercised, the underlying shares of the
second option are subject to a right of repurchase at cost in the Company's
favor which lapses at the rate of 1/4(th) of the total number of shares on
January 31, 2000 and 1/48(th) of the total number of shares monthly from and
after January 31, 2000.
(7) Mr. Zambello holds an immediately exercisable option to purchase 1,000
shares. Mr. Zambello holds a second option to purchase 825,000 shares that
is immediately exercisable. However, if exercised the underlying shares of
the second option are subject to a right of repurchase at cost in the
Company's favor which lapses at the rate of 1/4(th) of the total number of
shares on December 31, 1999 and 1/48(th) of the total number of shares
monthly from and after December 31, 1999.
10
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company offers compensation packages designed to attract and retain
outstanding employees and to encourage and reward the achievement of corporate
goals. This approach enables the Company to meet the requirements of the highly
competitive environment in which the Company operates. Through broad-based
employee ownership of the Company's common stock, the Company seeks to align
employee financial interests with long-term stockholder value.
Executive officers receive total compensation packages in line with their
responsibilities and expertise. The Company believes that the majority of an
executive's compensation should be closely tied to overall Company performance.
Accordingly, base salaries for executive officers in most cases are relatively
low, but are accompanied by significant stock option grants.
BASE SALARIES. Base salaries for the Company's executive officers are based
on the executive's contribution to Company performance, level of responsibility,
experience and breadth of knowledge. Base salaries for executive officers
generally are designed to be less than those paid for comparable positions in
non-Internet industries. These lower base salaries are combined with large stock
option grants, so that a major portion of the executive's pay is tied to Company
performance.
STOCK-BASED COMPENSATION. The Company seeks to align the long-term
interests of its executive officers with those of its stockholders. As a result,
each executive officer receives a significant stock option grant when he or she
joins the Company or is promoted to executive officer. Grant sizes are
determined based on various subjective factors, primarily related to the
individual's anticipated contributions to the Company's success. Stock options
relate a significant portion of long-term remuneration directly to stock price
appreciation realized by all of the Company's stockholders. The Company intends
to grant additional stock options to executive officers from time-to-time based
on performance and potential.
CHIEF EXECUTIVE OFFICER COMPENSATION. Mr. Lenk received $105,000 in cash
compensation from the Company during Fiscal 1999. Mr. Lenk's compensation was
considerably less than may have been paid to an individual with similar
responsibilities in a non-Internet company in a similar industry. Due to
Mr. Lenk's substantial ownership in the Company (approximately 7.21%), Mr. Lenk
requested not to receive additional compensation in Fiscal 1999.
ONGOING REVIEW. The Compensation Committee will evaluate the Company's
compensation policies on an ongoing basis to determine whether they enable the
Company to attract, retain and motivate key personnel. To meet these objectives,
the Company may from time to time increase salaries or bonuses, award additional
stock options or provide other short- and long-term incentive compensation to
executive officers.
The Compensation Committee
Michael Moritz
Daniel Nova
11
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The graph set forth below compares cumulative total return on the Common
Stock with the cumulative total return of the Nasdaq Stock Market (U.S.) Index
and a peer group index resulting from an initial assumed investment of $100 in
each and assuming the reinvestment of any dividends, for the period beginning on
the date of the Company's initial public offering of the Common Stock on
May 20, 1999 and ending on March 31, 2000.
The peer group represented in the graph includes Amazon.com, Inc.,
Ashford.com, Inc., Barnes and Noble.com, Inc., Buy.com, Inc., CD Now, Inc.,
Pets.com, Inc., PlanetRx.com, Inc., SmarterKids.com, Inc. and
Vitaminshoppe.com, Inc., each of which is engaged in the online retail industry.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5/20/99 5/99 6/99 7/99 8/99 9/99 10/99 11/99 12/99 1/00
ETOYS, INC. 100.00 303.44 203.75 199.69 217.50 332.81 298.75 313.13 131.25 73.13
PEER GROUP 100.00 90.95 94.94 77.10 93.82 119.54 106.41 126.90 110.78 94.74
NASDAQ STOCK MARKET (U.S.) 100.00 97.18 105.93 103.99 108.36 108.47 117.17 131.37 160.24 154.43
<CAPTION>
<S> <C> <C>
2/00 3/00
ETOYS, INC. 70.32 44.22
PEER GROUP 98.78 92.51
NASDAQ STOCK MARKET (U.S.) 183.76 179.94
</TABLE>
Note: Stock price performance shown in the Stock Price Performance Graph for
the Common Stock is historical and not necessarily indicative of future price
performance.
12
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND
CHANGE-OF-CONTROL ARRANGEMENTS
All of the Company's executive officers were at-will employees with no fixed
term of employment during fiscal 1999, except that (a) Ms. Bousquette,
Mr. Schoch and Mr. Zambello were entitled to severance benefits of $100,000,
$93,750 and $100,000, respectively, if her or his employment with the Company
was terminated without cause prior to June 2000, February 2000 and
January 2000, respectively, and (b) if the Company were to experience a change
of control prior to December 2000, August 2000 or January 2001, respectively,
then the Company's repurchase option described in note 5 to the "Summary
Compensation Table" would lapse with respect to 180,000, 281,250 and 412,500,
respectively, of the shares subject to the options referenced in such table held
by Ms. Bousquette, Mr. Schoch and Mr. Zambello, respectively.
In the event that the Company undergoes a change in control as defined in
the Company's 1999 Stock Plan and the Company's 1997 Stock Plan, and the
acquiror does not agree to assume or substitute awards granted under the
Company's 1999 Stock Plan or the Company's 1997 Stock Plan, the vesting of
outstanding options and stock issued pursuant to stock purchase rights will
accelerate in full prior to consummation of such a transaction. If the Company
is acquired pursuant to a transaction in which outstanding awards are assumed or
substituted by the 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.
In addition, under the Company's 1999 Employee Stock Purchase Plan, eligible
employees are permitted to purchase the Company's 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.
Upon a change of control of the Company, the 1999 Employee Stock Purchase Plan
provides that each right to purchase common stock thereunder will be assumed or
equivalent rights substituted by the 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.
13
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In June 1997, the Company 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, which was secured by 3,750,000 of
Mr. Lenk's shares, was repaid in full during Fiscal 1999. 3,750,000 of
Mr. Lenk's shares are subject to a repurchase option in the Company's favor. In
the event of the termination of his employment, the repurchase option enables
the Company to repurchase a specific number of Mr. Lenk's shares at $0.005 per
share. The repurchase option lapses over four years according to the following
schedule: 1/4th of such shares were released from the repurchase option on
December 1, 1997, and 1/48th of such total are released from the repurchase
option monthly from and after December 1, 1997 until December 1, 2000. In
addition, all shares are immediately released from the repurchase option upon a
change of control.
In June 1997, the Company 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, which was secured by 1,250,001 of
Mr. Han's shares, was repaid in full during Fiscal 1999. 1,250,001 of Mr. Han's
shares are subject to a repurchase option in the Company's favor. In the event
of the termination of his employment, the repurchase option enables the Company
to repurchase a specific number of Mr. Han's shares at $0.005 per share. The
repurchase option lapses over four years according to the following schedule:
1/4th of such shares were released from the repurchase option on February 1,
1998, and 1/48th of such total are released from the repurchase option monthly
from and after February 1, 1998 until February 1, 2001. In addition, all shares
are immediately released from the repurchase option upon a change of control.
In September 1997, the Company 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. From January 1998 to June 1998, Mr. Hart provided the
Company part-time consulting services. In connection with these services, in
February 1998 the Company 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.
The Company has entered into indemnification agreements with its officers
and directors which may require the Company, among other things, to indemnify
its 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.
PROPOSAL 2:
APPROVAL OF THE ISSUANCE OF COMMON SHARES UPON CONVERSION OF THE COMPANY'S
SERIES D CONVERTIBLE PREFERRED SHARES, AS DIVIDENDS THEREON AND UPON EXERCISE OF
THE RELATED WARRANTS, IF THE ISSUANCE THEREOF WOULD HAVE OTHERWISE BEEN LIMITED
BY THE RULES OF THE NASDAQ NATIONAL MARKET.
On June 12, 2000, the Company issued 10,000 shares of Series D Convertible
Preferred Shares, $10,000 stated value per share (the "Series D Preferred
Shares") in a private placement to institutional investors. The net proceeds of
the offering, after expenses, were approximately $97.5 million. The Company
intends to use such proceeds primarily for general corporate purposes, including
working capital.
In connection with the sale of the Series D Preferred Shares, the Company
issued warrants to purchase up to 5,018,296 shares of common stock. These
warrants expire on June 12, 2003 and have an
14
<PAGE>
exercise price of $7.17 per share. If all such warrants were exercised to
purchase 5,018,296 common shares, the Company would receive proceeds of
approximately $36.0 million. The exercise price and number of shares purchasable
upon exercise of the warrants are subject to adjustment upon the occurrence of
certain dilution events. The exercise price may also be lowered to the average
of the closing bid prices for the 10 trading days immediately preceding and
including June 12, 2001, if such average price is less than $7.17. The Company
intends to use the proceeds if the warrants are exercised primarily for general
corporate purposes, including working capital.
In accordance with Nasdaq Rule 4460, which generally requires stockholder
approval for the issuance of securities representing 20% or more of an issuer's
outstanding listed securities, and under the terms of the agreement pursuant to
which we sold the Series D Preferred Shares and related warrants, we must
solicit stockholder approval of the issuance of common shares upon conversion of
or in lieu of cash dividends on the Series D Preferred Shares and exercise of
the warrants, if the issuance thereof would have otherwise been limited by the
rules of the Nasdaq National Market. If we obtain stockholder approval, there is
no limit on the amount of shares that could be issued upon conversion of or in
lieu of cash dividends on the Series D Preferred Shares and such issuance of
common shares will no longer be subject to shareholder approval under Nasdaq
Rule 4460. If we do not obtain stockholder approval and are not obligated to
issue shares due to restrictions relating to Nasdaq Rule 4460, we may be
required to redeem all or a portion of the Series D Preferred Shares. If we fail
to redeem any Series D Preferred Shares as requested, the holders of at least
two-thirds of the outstanding Series D Preferred Shares have the right to
require that we voluntarily delist our shares of common stock from the Nasdaq
Stock Market. In that event, trading in our shares would likely decrease
substantially, and the price of our common shares may decline.
Subject to certain conditions, the Company may require the holders to
convert the Series D Preferred Shares into common shares. In addition, beginning
January 30, 2001 (or earlier under certain circumstances), the holders will have
the right to convert the Series D Preferred Shares into common shares subject to
certain conditions. Regardless of whether the holders elect to convert or the
Company requires conversion, the number of common shares to be issued upon
conversion of a Series D Preferred Share is determined by dividing the sum of
$10,000 (the amount paid for that share), plus accrued and unpaid dividends, by
the applicable conversion price. The applicable conversion price will be a
percentage of the lowest closing bid price of our common stock for the five
consecutive trading days ending on and including the conversion date, provided
that the conversion price will not exceed $25.00 per share, subject to
adjustment. The conversion percentage was equal to 100% on the date of issuance
of the Series D Preferred Shares and began decreasing permanently one percentage
point on the first day of every month following the issuance date. The
conversion percentage will never be less than 85%, unless we require conversion
after the announcement of a merger transaction. As a result, the lower the price
of our common stock at the time of conversion, the greater the number of shares
the holder will receive.
To the extent the Series D Preferred Shares are converted or dividends on
the Series D Preferred Shares are paid in common shares rather than cash, a
significant number of additional common shares may be sold into the market,
which could decrease the price of the common shares. In that case, the Company
could be required to issue an increasingly greater number of common shares upon
future conversions of the Series D Preferred Shares, sales of which could
further depress the price of the common shares.
If the sale of a large amount of common shares upon conversion of or the
payment of dividends in lieu of cash on the Series D Preferred Shares results in
a decline in the price of the common shares, this event could encourage short
sales by the holders or others. Short sales could place further downward
pressure on the price of the common shares.
15
<PAGE>
The conversion of and the payment of dividends in common shares in lieu of
cash on the Series D Preferred Shares may result in substantial dilution to the
interest of other holders of the common shares. Even though no holder may
convert its Series D Preferred Shares if upon such conversion such holder,
together with its affiliates, would have acquired a number of shares of common
stock during the 60-day period ending on the date of conversion which, when
added to the number of shares of common stock held at the beginning of such
60-day period, would exceed 9.99% of our then outstanding common stock
(excluding, for purposes of such determination, common shares issuable upon
conversion of Series D Preferred Shares which have not been converted and upon
exercise of warrants which have not been exercised), this restriction does not
prevent a holder from selling a substantial number of shares in the market. By
periodically selling shares into the market, an individual holder could
eventually sell more than 9.99% of the Company's common shares while never
holding more than 9.99% at any specific time.
The following table illustrates the number of common shares the Company
would be required to issue upon conversion of all 10,000 Series D Preferred
Shares currently outstanding at an assumed conversion price of $5.28125 per
common share as of June 22, 2000, and the resulting percentage of the Company's
total common shares outstanding after such a conversion. The table also
illustrates the number of common shares the Company would be required to issue
assuming (i) an increase of 25%, 50% and 75% in the assumed conversion price;
(ii) the fixed conversion price of $25.00, which is the maximum permitted
conversion price; and (iii) decreases of 25%, 50% and 75% in the assumed
conversion price.
<TABLE>
<CAPTION>
ASSUMED CONVERSION PRICE NUMBER OF SHARES OF COMMON STOCK PERCENTAGE OF COMMON
PER SHARE OF COMMON STOCK ISSUABLE UPON CONVERSION(1) STOCK AFTER CONVERSION(2)
------------------------- -------------------------------- -------------------------
<S> <C> <C>
$9.24219(+75%)............................. 10.8 million 8.1%
$7.92188(+50%)............................. 12.6 million 9.4
$6.60156(+25%)............................. 15.1 million 11.0
$5.28125................................... 18.9 million 13.4
$3.96094(-25%)............................. 25.2 million 17.1
$2.64063(-50%)............................. 37.9 million 23.7
$1.32031(-75%)............................. 75.7 million 38.3
$25.00 (Current Maximum)................... 4.0 million 3.2
</TABLE>
------------------------
(1) The number of shares of common stock issuable upon conversion and the
percentage of outstanding common stock after such conversion set forth above
do not take into account any shares of common stock that may be issuable as
dividends on the Series D Preferred Shares or upon exercise of the warrants
issued in connection with the sale of the Series D Preferred Shares. If the
dividends on Series D Preferred Shares had been paid in common stock for the
full $100.0 million stated value of the Series D Preferred Shares over the
three-year term thereof, assuming a constant dividend conversion price of
$5.237, and the related warrants had been fully exercised as of June 22,
2000, we would have been required to issue an additional 4.0 million shares
as payment for accrued dividends and an additional 5,018,296 shares upon the
exercise of the related warrants.
(2) Calculated based on 121,899,345 shares of common stock issued and
outstanding as of June 20, 2000.
The Series D Preferred Shares carry a dividend rate of 7% per annum, payable
semi-annually during the first year and quarterly thereafter or upon conversion
or redemption. At the Company's option, the dividend may be paid in cash or
common shares, subject to satisfaction of certain conditions. If the Company
chooses to pay dividends in common shares, the number of shares to be issued in
payment of the dividend on the Series D Preferred Shares will be equal to the
accrued dividends divided by the applicable conversion price. For purposes of
such calculation, the dividend
16
<PAGE>
conversion price will be equal to 95% of the average of the closing sale prices
of a share of our common stock during the five consecutive trading days
immediately preceding the dividend date.
If we elect to pay the dividends with common shares, the number of common
shares issuable upon conversion of our convertible notes will increase. For
example, assuming we paid all dividends on all outstanding shares of Series D
Preferred Stock over the three-year term of the securities and assuming a
constant dividend conversion price of $5.237, we would issue approximately
4.0 million common shares as dividends, and the common shares issuable upon
conversion in full of the convertible notes would increase by 66,600 from an
aggregate of 2,029,845 common shares to 2,096,445 common shares.
The Series D Preferred Shares mature on June 12, 2003, subject to extension
in certain circumstances, at which time the Series D Preferred Shares must be
redeemed or converted at the Company's option. If the Company elects to redeem
any Series D Preferred Shares outstanding on June 12, 2003, the amount required
to be paid will be equal to the liquidation preference of the Series D Preferred
Shares, which equals the price originally paid for such shares, plus accrued and
unpaid dividends. If the Company elects to convert any Series D Preferred Shares
outstanding on June 12, 2003, it will be required to issue common shares in an
amount determined as described above.
The Company also has the right, provided certain conditions are satisfied,
to redeem some or all of the Series D Preferred Shares for cash equal to a
percentage of the price paid for each Series D Preferred Share plus accrued
dividends. The redemption percentage was equal to 100% on the date of issuance
of the Series D Preferred Shares and began increasing permanently one percentage
point on the first day of every calendar month following the issuance date. The
redemption percentage will never be greater than 124%.
If a triggering event, as described in the Certificate of Designations,
Preferences and Rights relating to the Series D Preferred Shares (the
"Certificate of Designations") occurs, the holders of the Series D Preferred
Shares will have the right to require the Company to redeem all or a portion of
any outstanding Series D Preferred Shares for cash. The redemption price in such
a case is the greater of: (1) 125% of the price paid for the Series D Preferred
Shares plus accrued dividends; or (2) the product of the number of common shares
into which the Series D Preferred Stock is convertible multiplied by the closing
sale price of a share of our common stock on the day immediately before the
triggering event occurs.
At any time after the date the Company publicly announces a merger
transaction and subject to conditions on its ability to redeem the Series D
Preferred Shares as described above, the Company has the right to require that
all of the outstanding Series D Preferred Shares be redeemed at a price equal to
125% of the price paid for such shares plus accrued dividends. In addition, in
the event of a merger transaction, a hostile takeover or a sale of all or
substantially all of the Company's assets, each holder of the Series D Preferred
Shares at its option has the right to require the Company to redeem all or a
portion of such holder's preferred shares at a price equal to 125% of the price
paid for such shares plus accrued dividends, unless the Company has issued a
conversion notice in connection with a merger transaction, as described in the
next paragraph.
Alternatively, in the event of a merger transaction and subject to the
conditions on the Company's ability to require conversion of the Series D
Preferred Shares as described above, the Company has the right to require that
all of the outstanding Series D Preferred Shares be converted at the applicable
conversion price. In addition, each holder of the Series D Preferred Shares has
the right to convert all or a portion of its preferred shares after the
occurrence of a change of control or the announcement of a pending change of
control. In the event of a change of control, the applicable conversion price
will not be higher than the conversion price which would have been applicable on
the date of the public announcement of the change of control.
17
<PAGE>
In the event of the Company's liquidation, the holders of the Series D
Preferred Shares will be entitled to a liquidation preference before any amounts
are paid to the holders of common shares. The liquidation preference is equal to
the amount originally paid for the Series D Preferred Shares, or $10,000 per
share, plus accrued and unpaid dividends on any outstanding Series D Preferred
Shares.
Other than as required by law, the holders of the Series D Preferred Shares
have no voting rights except that the consent of holders of at least two-thirds
of the outstanding Series D Preferred Shares will be required to effect any
change in the Company's Certificate of Incorporation or Certificate of
Designations that would change any of the rights of the Series D Preferred
Shares or to issue any additional Series D Preferred Shares.
The terms of the Series D Preferred Shares and related warrants are complex
and only briefly summarized in this proxy statement. Stockholders wishing future
information concerning the rights, preferences and terms of the Series D
Preferred Shares and related warrants are referred to the full description
contained in the Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on June 13, 2000.
In connection with the Company's issuance of the Series D Preferred Shares
and the related warrants, the Company filed a registration statement on
Form S-3 with the Securities and Exchange Commission on June 23, 2000. That
registration statement covers the resale of the common shares that are issuable
upon conversion of or, in lieu of cash dividends on the Series D Preferred
Shares and upon exercise of the warrants that the holders acquired from the
Company in the private placement transaction.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE ISSUANCE OF
COMMON SHARES UPON CONVERSION OF THE COMPANY'S SERIES D CONVERTIBLE PREFERRED
SHARES, AS DIVIDENDS THEREON, UPON EXERCISE OF THE RELATED WARRANTS, IF THE
ISSUANCE THEREOF WOULD HAVE OTHERWISE BEEN LIMITED BY THE RULES OF THE NASDAQ
NATIONAL MARKET.
PROPOSAL 3:
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE YEAR ENDING MARCH 31, 2001
The Company has appointed Ernst & Young LLP as the Company's independent
accountants for the year ending March 31, 2001. Ernst & Young LLP has served as
the Company's independent accountants since 1997 and has been the Company's only
independent accountants. Services provided to the Company and its subsidiaries
by Ernst & Young LLP in Fiscal 1999 included the examination of the Company's
consolidated financial statements, reviews of quarterly reports and
consultations on various tax matters.
Representatives of Ernst & Young LLP are expected to attend the Annual
Meeting and will have an opportunity to make a statement or to respond to
appropriate questions from stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR
THE YEAR ENDING MARCH 31, 2001.
In the event stockholders do not ratify the appointment, the appointment
will be reconsidered by the Company's Audit Committee and the Board of
Directors.
18
<PAGE>
EXPENSES OF SOLICITATION
The accompanying proxy is solicited by, and on behalf of, the Board of
Directors, and the entire cost of such solicitation will be borne by the
Company. ChaseMellon Shareholder Services, L.L.C. will distribute proxy
materials to beneficial owners, and may solicit proxies by personal interview,
mail, telephone and telegram, and will request brokerage houses and other
custodians, nominees and fiduciaries to forward soliciting material to the
beneficial owners of the Common Stock held on the record date by such persons.
The Company will pay ChaseMellon Shareholder Services, L.L.C. approximately
$15,000 for its proxy solicitation services and will reimburse ChaseMellon
Stockholder Services, L.L.C. for payments made to brokers and other nominees for
their expenses in forwarding solicitation materials. Solicitation also may be by
personal interview, telephone and telegram by directors, officers and other
employees of the Company without special compensation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
reports (Forms 3, 4 and 5) of stock ownership and changes in ownership with the
Securities and Exchange Commission and the Nasdaq Stock Market. Officers,
directors and beneficial owners of more than ten percent of the Company's common
stock are required by Securities and Exchange Commission regulations to furnish
the Company with copies of all such forms that they file.
Based solely on the Company's review of the copies of such forms received by
it, and on written representations from certain reporting persons, the Company
believes that during fiscal 1999, all reports required by Section 16(a)
applicable to its directors, officers and ten percent stockholders were filed
with the Securities and Exchange Commission on a timely basis.
OTHER MATTERS
The Company knows of no other matters that are likely to be brought before
the annual meeting. If, however, other matters not now known or determined
properly come before the annual meeting, the persons named as proxies in the
enclosed proxy card or their substitutes will vote such proxy in accordance with
their discretion with respect to such matters.
PROPOSALS OF STOCKHOLDERS
Proposals which stockholders wish to be considered for inclusion in the
proxy statement and proxy card for the 2001 annual meeting of Stockholders must
be received by the Secretary of the Company by April 2, 2001 and must comply
with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934,
as amended.
In addition, the Company's Bylaws include advance notice provisions that
require stockholders desiring to bring nominations or other business before an
annual stockholders meeting to do so in accordance with the terms of the advance
notice provisions. These advance notice provisions require that, among other
things, stockholders give timely written notice to the Secretary of the Company
regarding such nominations or other business. To be timely, a notice must be
delivered to the Secretary at the principal executive offices of the Company not
more than 90, but not less than 20, days prior to the first anniversary of the
preceding year's annual meeting of stockholders, except that if the date of the
annual meeting is more than 30 days prior to or more than 60 days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the 90(th) day prior to such annual meeting and not later than
the close of business on the later of the 20(th) day prior to such annual
meeting or the 10(th) day following the day on which public announcement of the
date of such meeting is first made.
19
<PAGE>
Accordingly, assuming the 2001 annual meeting of stockholders is neither
more than 30 days prior to nor more than 60 days after September 12, 2001, a
stockholder who intends to present a nomination or proposal at the 2001 annual
meeting of stockholders without inclusion of the proposal in the Company's proxy
materials must provide written notice of the nominations or other business they
wish to propose to the Secretary no earlier than June 14, 2001 and no later than
August 23, 2001. The Company reserves the right to reject, rule out of order, or
take other appropriate action with respect to any proposal that does not comply
with these and other applicable requirements.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's combined annual report to stockholders and Annual
Report on Form 10-K for the year ended March 31, 2000 accompanies this proxy
statement. An additional copy will be furnished without charge to beneficial
stockholders or stockholders of record upon request to Investor Relations,
eToys Inc., 3100 Ocean Park Boulevard, Suite 300, Santa Monica, California 90405
or by calling 310-664-8356.
20
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2000 was filed with the Securities and Exchange Commission on June 2,
2000. The following portions of the Annual Report are incorporated in this proxy
statement by reference:
- Report of Independent Auditors
- Consolidated Balance Sheets
- Consolidated Statements of Operations
- Consolidated Statements of Stockholders' Equity (Deficit)
- Consolidated Statements of Cash Flow
- Notes to Consolidated Financial Statements
- Selected Financial Data
- Management's Discussion and Analysis of Financial Condition and
Results of Operation
- Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- Quantitative and Qualitative Disclosure About Market Risk
21
<PAGE>
PROXY
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 12, 2000
ETOYS INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned stockholder of eToys Inc., a Delaware corporation (the
"Company"), hereby appoints Edward C. Lenk, Steven J. Schoch, and Peter M.
Juzwiak, or any one of them, with full power of substitution in each, as proxies
to cast all votes which the undersigned stockholder is entitled to cast at the
Annual Meeting of Stockholders (the "Annual Meeting") to be held at 9:00 a.m.
Pacific Daylight Time on Tuesday, September 12, 2000, in the Arcadia B Room of
The Loews Santa Monica Beach Hotel, 1700 Ocean Avenue, Santa Monica, California
90401, or any adjournment or postponement thereof, with authority to vote upon
the matters set forth on the reverse side of this Proxy Card.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. UNLESS DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED:
- "FOR" THE ELECTION OF THE DIRECTOR NOMINEES LISTED IN THE ACCOMPANYING
PROXY STATEMENT.
- "FOR" THE APPROVAL OF THE ISSUANCE OF COMMON SHARES UPON CONVERSION OF THE
COMPANY'S SERIES D CONVERTIBLE PREFERRED SHARES, AS DIVIDENDS THEREON, UPON
EXERCISE OF THE RELATED WARRANTS, AND OTHERWISE IN ACCORDANCE WITH THE TERMS
THEREOF.
- "FOR" THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE YEAR ENDING MARCH 31, 2001.
- AND IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES AS TO OTHER MATTERS.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Stockholders and the Company's accompanying Proxy Statement and hereby
revokes any proxy or proxies previously given with respect to such shares.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
---------------------------------------------
- FOLD AND DETACH HERE -
YOUR VOTE IS IMPORTANT!
YOU CAN VOTE IN ONE OF THREE WAYS:
1. Vote by Internet at our Internet Address: http://www.eproxy.com/etys
<PAGE>
OR
2. Call toll-free 1-800-840-1208 on a Touch-Tone Telephone.
OR
3. By mail - by promptly returning your completed proxy card in the enclosed
envelope.
If you wish to access future Annual Reports and Proxy Statements electronically
via the Internet and no longer receive the printed materials, please provide
your consent with your proxy vote.
Please mark your votes as indicated in this example
/X/
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1, 2 AND 3.
Item 1 - Election of five directors, each to hold office until his or her
successor shall have been elected and qualified (which may consist of terms of
up to three years as more fully described under Proposal I of the Proxy
Statement).
NOMINEES:
01 Peter C.M. Hart
02 Tony A. Hung
03 Edward C. Lenk
04 Michael Moritz
05 Daniel J. Nova
FOR WITHHOLD AUTHORITY
the nominees listed (except as indicated below) to vote for all nominees
/ / / /
INSTRUCTION: To withhold authority to vote for any nominees write that nominee's
name in this space.
Item 2 - Approval of the issuance of common shares upon conversion of the
Company's Series D Convertible Preferred Shares, as dividends thereon, upon
exercise of the related warrants, and otherwise in accordance with the terms
thereof.
FOR AGAINST ABSTAIN
/ / / / / /
<PAGE>
Item 3 - Ratification of the appointment of Ernst & Young LLP as the Company's
independent accountants for the year ending March 31, 2001.
FOR AGAINST ABSTAIN
/ / / / / /
All of the proposals set forth above are proposals of the Company. None of
the proposals is related to or conditioned upon approval of any other proposal.
In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting or any adjournments or
postponements thereof.
By checking the box to the right, I consent to future access of the Annual
Report, Proxy Statements, Prospectuses and other communications electronically
via the Internet. I understand that the Company may no longer distribute printed
materials to me for any future stockholder meeting until such consent is
revoked. I understand that I may revoke my consent at any time by contacting the
Company's transfer agent, ChaseMellon Stockholder Services, L.L.C., Ridgefield
Park, New Jersey 07660. I also understand that costs normally associated with
electronic access, such as usage and telephone charges, will be my
responsibility.
Signature(s):_______________________________________Date:__________________
Please sign above exactly as your name appears on this Proxy Card. If shares are
registered in more than one name, the signatures of all such persons are
required. A corporation should sign in its full corporate name by a duly
authorized officer, stating his/her title. Trustees, guardians, executors and
administrators should sign in their official capacity, giving their full title
as such. If a partnership, please sign in the partnership name by authorized
person(s).
---------------------------------------------
- FOLD AND DETACH HERE AND READ THE REVERSE SIDE -
[PHONE GRAPHIC] YOUR VOTE IS IMPORTANT [COMPUTER GRAPHIC]
YOU CAN VOTE IN ONE OF THE THREE WAYS:
VOTE BY INTERNET
24 HOURS A DAY, 7 DAYS A WEEK
Follow the instructions at our Internet Address: http://www.eproxy.com/etys. You
will be asked to enter your 11-digit Control Number, which is located in the
lower right hand corner of this form. Follow the recorded instructions.
OR
VOTE BY PHONE
<PAGE>
HAVE YOUR PROXY CARD IN HAND.
Call toll-free 1-800-840-1208 on a touch tone telephone 24 hours a day, 7 days a
week. There is NO CHARGE to you for this call. You will be asked to enter your
11-digit Control Number, which is located in the lower right hand corner of this
form. Follow the recorded instructions.
OR
VOTE BY PROXY CARD
Mark, sign and date your proxy card and return promptly in the enclosed
envelope.
IF YOU WISH TO ACCESS FUTURE ANNUAL REPORTS AND PROXY STATEMENTS ELECTRONICALLY
VIA THE INTERNET AND NO LONGER RECEIVE THE PRINTED MATERIALS, PLEASE PROVIDE
YOUR CONSENT WITH YOUR PROXY VOTE.
NOTE: If you voted by Internet or telephone, THERE IS NO NEED TO MAIL BACK your
proxy card.
THANK YOU FOR VOTING.
