-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W0b2cMSK4kkBxUA0fFv5nUHUzDSs7KWtqkRw8dBDrYcNKoJJTLjaY2QVuleVF3ca Ci+Dntcasr/xetg2TYAZDw== 0001047469-99-006332.txt : 19990218 0001047469-99-006332.hdr.sgml : 19990218 ACCESSION NUMBER: 0001047469-99-006332 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19990217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ETOYS INC CENTRAL INDEX KEY: 0001052245 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954633006 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-72469 FILM NUMBER: 99543841 BUSINESS ADDRESS: STREET 1: 2850 OCEAN PARK BLVD CITY: SANTA MONICA STATE: CA ZIP: 90405 BUSINESS PHONE: 3106648100 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ETOYS INC. (Exact Name of Registrant as Specified in Its Charter) ------------------------------ DELAWARE 5945 95-4633006 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Classification Code Number) Identification Organization) Number)
2850 OCEAN PARK BLVD., SUITE 225 SANTA MONICA, CA 90405 (310) 664-8100 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------------------------ EDWARD C. LENK, PRESIDENT AND CEO ETOYS INC. 2850 OCEAN PARK BLVD., SUITE 225 SANTA MONICA, CA 90405 (310) 664-8100 (Name, Address Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) ------------------------------ COPIES TO: GLEN R. VAN LIGTEN ROBERT V. GUNDERSON, JR. AMY E. PAYE JEFFREY P. HIGGINS MITCHELL S. ZUKLIE WILLIAM E. GROWNEY JR. KRISTEN A. LAMB KIRIL M. DOBROVOLSKY VENTURE LAW GROUP GUNDERSON DETTMER STOUGH A PROFESSIONAL CORPORATION VILLENEUVE FRANKLIN & 2800 SAND HILL ROAD HACHIGIAN, LLP MENLO PARK, CA 94025 155 CONSTITUTION AVENUE (650) 854-4488 MENLO PARK, CA 94025 (650) 321-2400 ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. ------------------------------ If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE Common Stock, par value $0.0001 $115,000,000.00 $31,970.00
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION. DATED , 1999. The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not or sale is not permitted. Shares [LOGO] ETOYS INC. Common Stock ------------------ This is an initial public offering of shares of Common Stock of eToys Inc. All of the shares of Common Stock are being sold by eToys. Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price per share will be between $ and $ . eToys intends to list the Common Stock on the Nasdaq National Market under the symbol "ETYS". SEE "RISK FACTORS" BEGINNING ON PAGE TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
Per Share Total ----------- --------- Initial public offering price................................... $ $ Underwriting discount........................................... $ $ Proceeds, before expenses, to eToys............................. $ $
The underwriters may, under certain circumstances, purchase up to an additional shares from eToys at the initial public offering price, less the underwriting discount. ------------------------ The underwriters expect to deliver the shares against payment in New York, New York on , 1999. GOLDMAN, SACHS & CO. BANCBOSTON ROBERTSON STEPHENS DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO. ------------------------ Prospectus dated , 1999. [INSIDE FRONT COVER] [COLOR ARTWORK] [DESCRIPTION TO BE FILED BY AMENDMENT] ------------------------ eToys-Registered Trademark- is a registered trademark of eToys. Toysearch-TM- and "We bring the toy store to you"-TM- are trademarks of eToys. All other brand names or trademarks appearing in this prospectus are the property of their respective holders. PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING ETOYS AND THE FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THIS PROSPECTUS (I) ASSUMES THE AUTOMATIC CONVERSION OF OUR OUTSTANDING REDEEMABLE CONVERTIBLE PREFERRED STOCK INTO COMMON STOCK UPON CLOSING OF THE OFFERING AND (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. OUR FISCAL YEAR ENDS ON MARCH 31ST OF EACH YEAR AND IS NAMED FOR THE CALENDAR YEAR JUST ENDED. FOR EXAMPLE, OUR FISCAL YEAR ENDED MARCH 31, 1998 IS CALLED "FISCAL 1997". ETOYS INC. OUR BUSINESS We are the leading Web-based retailer focused exclusively on children's products, including toys, video games, software, videos and music. By combining our expertise in children's products and our commitment to excellent customer service with the benefits of Internet retailing, we are able to deliver a unique value proposition to consumers. Our online store offers an extensive selection of competitively priced children's products, with over 8,500 SKUs representing more than 700 brands. Our Web site features detailed product information, value-added services and innovative merchandising through an intuitive and easy-to-use interface. In addition, we offer customers the convenience and flexibility of shopping 24 hours a day, seven days a week, with reliable and timely product delivery and excellent customer service. Since launching our Web site in October 1997, we have sold children's products to over 320,000 customers. Our net sales for the quarter ended December 31, 1998 totaled $22.9 million as compared to $0.5 million for the quarter ended December 31, 1997. OUR MARKET OPPORTUNITY We believe that traditional store-based retailers face a number of challenges in providing a satisfying shopping experience for consumers of children's products. As a result, we believe that many consumers find the toy shopping experience, especially at traditional mass market retail outlets, to be time-consuming, inconvenient and unpleasant due to factors such as location, store layout, product selection, level of customer service and the challenges of shopping with children. Our online store was created to provide consumers with a compelling and enjoyable shopping experience in a Web-based retail environment. Key components of our solution include: - - CONVENIENT SHOPPING EXPERIENCE. Our online store is available 24 hours a day, seven days a week, may be reached from the shopper's home or office and features sophisticated browsing and search technology. - - EXTENSIVE PRODUCT SELECTION AND INNOVATIVE MERCHANDISING. We offer a broad array of children's products, which we believe includes the largest selection of toys available on the Internet. In addition, we are the only retailer to provide a comprehensive selection of both traditional, well-known brands (e.g., Mattel, Hasbro and LEGO) and specialty brands (e.g., BRIO, PLAYMOBIL and Learning Curve). - - VALUE-ADDED SERVICES. To assist our customers, who are generally adults purchasing for children, we offer product reviews, recommendations, gift suggestions and personalized services such as birthday reminders and wish lists. Many of these services are also designed to inform and involve children in the shopping experience. - - EXCELLENT CUSTOMER SERVICE. We are committed to providing the highest level of customer service and we offer free pre- and post-sales support via telephone and e-mail, online order tracking and helpful online shopping hints. 3 OUR STRATEGY Our objective is to be one of the world's leading retailers of children's products. Key elements of our strategy are: - - FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS. We intend to become the ultimate shopping destination for purchasers of children's products by enhancing our current product offerings and expanding into additional categories. - - BUILD STRONG BRAND RECOGNITION. We use online and offline marketing strategies to enhance our brand recognition and we focus our efforts primarily towards mothers, who we believe are the principal decision-makers for purchases of children's products. - - PURSUE INCREMENTAL REVENUE OPPORTUNITIES. We intend to leverage our brand, operating infrastructure and customer base by opening new departments, increasing product selection, adding more value-added services, pursuing international opportunities and acquiring complementary businesses, products or technologies. - - PROMOTE REPEAT PURCHASES. We intend to maximize the lifetime value of our customer relationships by targeting existing customers through direct marketing techniques, building superior personalization features and enhancing our customer service. - - MAINTAIN OUR TECHNOLOGY FOCUS AND EXPERTISE. We intend to enhance our service offerings to take advantage of the unique characteristics of online retailing, and plan to increase the automation and efficiency of our supply chain and fulfillment activities. CORPORATE INFORMATION We were incorporated as Toys.com in Delaware in November 1996. In May 1997, we changed our name to eToys.com Inc., and in June 1997, we changed our name to eToys Inc. Our executive offices are located at 2850 Ocean Park Blvd., Suite 225, Santa Monica, CA 90405. Our telephone number at that location is (310) 664-8100. Information contained on our Web site does not constitute part of this prospectus. 4 THE OFFERING The following information assumes that the underwriters do not exercise the option granted by us to purchase additional shares in the offering. See "Underwriting". Shares offered by eToys...................... shares Shares to be outstanding after the shares(1) offering................................... Use of proceeds.............................. For general corporate purposes, principally working capital and capital expenditures. See "Use of Proceeds". Proposed Nasdaq National Market symbol....... "ETYS"
SUMMARY FINANCIAL INFORMATION
NINE MONTHS FISCAL ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------- 1998 1997 1998 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales...................................................... $ 687 $ 530 $ 23,900 Gross profit................................................... 119 92 4,892 Operating expenses: Marketing and sales.......................................... 1,290 632 14,354 Product development.......................................... 421 206 2,006 General and administrative(2)................................ 678 366 4,228 ------------ ------------ ------------ Operating loss................................................. (2,270) (1,112) (15,696) Net loss....................................................... $ (2,268) $ (1,127) $ (15,258) Pro forma basic net loss per share(3).......................... $ (0.23) $ (0.14) $ (0.58) Shares used to compute pro forma basic net loss per share(3)... 10,077,634 7,959,833 26,429,153
DECEMBER 31, 1998 -------------------------------- ACTUAL AS ADJUSTED(4) --------- --------------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........................................................... $ 18,545 $ Working capital..................................................................... 10,117 Total assets........................................................................ 27,199 Long-term capital lease obligations, less current portion........................... 35 Total stockholders' equity (deficit)................................................ (15,528)
- ------------------------------ (1) Based on shares outstanding as of December 31, 1998. Includes an aggregate of 723,371 shares issuable upon the exercise of warrants outstanding as of December 31, 1998, substantially all of which are expected to be exercised prior to the completion of this offering. Excludes shares issuable upon exercise of a warrant we are obligated to issue to an equipment lessor prior to this offering. Also excludes 13,123,813 shares of Common Stock reserved for issuance under our stock option and stock purchase plans, of which 4,254,200 shares were subject to outstanding options as of December 31, 1998 with a weighted average exercise price of $0.996 per share. See "Management--Stock Plans" and Notes 6 and 8 of Notes to Financial Statements. (2) Included in general and administrative expenses related to the amortization expense of deferred compensation is $2,000 for the fiscal year ended March 31, 1998 and $1.6 million for the nine months ended December 31, 1998. (3) See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares and share equivalents used in computing pro forma per share amounts. (4) "As adjusted" reflects the application of the net proceeds from the sale of shares of Common Stock offered by us at an assumed initial public offering price of $ per share, after deducting the underwriting discount and estimated offering expenses. It also reflects conversion of all outstanding shares of Redeemable Convertible Preferred Stock into Common Stock upon the closing of this offering. See "Use of Proceeds" and "Capitalization". 5 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN SHARES OF OUR COMMON STOCK. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT. THIS PROSPECTUS ALSO CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS REFER TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS" AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS. WE HAVE A LIMITED OPERATING HISTORY We were incorporated in November 1996. We began selling products on our Web site in October 1997. Accordingly, we have a limited operating history. An investor in our Common Stock must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets. These risks include our: - - evolving business model; - - competition; - - need for increased customer acceptance of the online purchase of children's products; - - ability to maintain and expand our customer base; - - ability to manage inventory levels and product return risks; - - need to manage growth and changing operations, including our recent implementation of a new accounting and financial reporting system; - - need to continue to develop and upgrade our Web site, transaction-processing systems and network infrastructure; - - ability to scale our systems and fulfillment capabilities to accommodate the growth of our business; - - ability to access additional capital when required; - - ability to develop and renew strategic relationships; - - dependence upon key personnel; and - - dependence on the reliability and growing use of the Internet for commerce and communication and on general economic conditions. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW Since inception, we have incurred significant losses, and as of December 31, 1998, we had an accumulated deficit of $17.5 million. We incurred net losses of $2.3 million for the fiscal year ended March 31, 1998 and $15.3 million for the nine months ended December 31, 1998. We expect operating losses and negative cash flow to continue for the foreseeable future. We anticipate our losses will increase significantly from current levels because we expect to incur additional costs and expenses related to: - - brand development, marketing and other promotional activities; - - the expansion of our inventory management and order fulfillment infrastructure; - - the continued development of our Web site, transaction-processing systems and network infrastructure; 6 - - the expansion of our product offerings and Web site content; and - - strategic relationship development. Our ability to become profitable depends on our ability to generate and sustain substantially higher net sales while maintaining reasonable expense levels. If we do achieve profitability, we cannot be certain that we would be able to sustain or increase profitability on a quarterly or annual basis in the future. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". OUR FUTURE OPERATING RESULTS ARE UNPREDICTABLE As a result of our limited operating history, it is difficult to accurately forecast our net sales and we have limited meaningful historical financial data upon which to base planned operating expenses. We base our current and future expense levels on our operating plans and estimates of future net sales, and our expenses are to a large extent fixed. Sales and operating results are difficult to forecast because they generally depend on the volume and timing of the orders we receive. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall. We may also be unable to increase our spending and expand our operations in a timely manner to adequately meet customer demand to the extent it exceeds our expectations. Our annual and quarterly operating results may be affected and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. Factors that may harm our business or cause our operating results to fluctuate include the following: - - our inability to obtain new customers at reasonable cost, retain existing customers, or encourage repeat purchases; - - decreases in the number of visitors to our Web site or our inability to convert visitors to our Web site into customers; - - the mix of toys, video games, software, videos and music sold by us; - - seasonality; - - our inability to manage inventory levels; - - our inability to manage fulfillment operations; - - our inability to adequately maintain, upgrade and develop our Web site, transaction-processing systems or network infrastructure; - - the ability of our competitors to offer new or enhanced Web sites, services or products; - - price competition; - - an increase in the level of our product returns; - - fluctuations in the demand for children's products associated with movies, television and other entertainment events; - - our inability to obtain popular children's toys, video games, software, videos and music from our vendors; - - fluctuations in the amount of consumer spending on children's toys, video games, software, videos and music; - - the termination of existing, or failure to develop new, strategic marketing relationships pursuant to which we receive exposure to traffic on third-party Web sites; - - the extent to which we are not able to participate in advertising campaigns such as those conducted by Visa; - - increases in the cost of online or offline advertising; - - our inability to attract new personnel in a timely and effective manner or retain existing personnel; - - the amount and timing of operating costs and capital expenditures relating to expansion of our operations; - - unexpected increases in shipping costs or delivery times, particularly during the holiday season; - - technical difficulties, system downtime or Internet brownouts; - - government regulations related to use of the Internet for commerce or for sales and 7 distribution of toys, video games, software, videos and music; - - general economic conditions and economic conditions specific to the Internet, online commerce and the children's toy, video game, software, video and music industries. A number of factors will cause our gross margins to fluctuate in future periods, including the mix of toys, video games, software, videos and music sold by us, inventory management, inbound and outbound shipping and handling costs, the level of product returns and the level of discount pricing and promotional coupon usage. Any change in one or more of these factors could materially and adversely affect our gross margins and operating results in future periods. Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarter our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our Common Stock may fall significantly. OUR MARKET IS HIGHLY SEASONAL The market for children's toys, video games, software, videos and music is highly seasonal. According to industry sources, approximately 52% of retail sales in this market occurred in the fourth calendar quarter of each of 1997 and 1998. Accordingly, we have historically experienced and expect to continue to experience seasonal fluctuations in our net sales. In particular, a disproportionate amount of our net sales have been realized during the fourth calendar quarter and we expect this trend to continue in the future. Due to our limited operating history, it is difficult to predict the seasonal pattern of our sales and the impact of such seasonality on our business and financial results. In the future, our seasonal sales patterns may become more pronounced, may strain our personnel and fulfillment activities and may cause a shortfall in net sales as compared to expenses in a given period. In anticipation of increased sales activity during the fourth calendar quarter, we hire a significant number of temporary employees to bolster our permanent staff and we significantly increase our inventory levels. If for any reason our sales were below seasonal norms during this quarter, our annual operating results would be adversely affected. Historically, net sales during the first three calendar quarters of the year are lower than in the fourth calendar quarter, and we expect this trend to continue. These seasonal patterns will cause quarterly fluctuations in our operating results and could adversely affect our financial performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". CONSUMER TRENDS CHANGE AND WE FACE SIGNIFICANT INVENTORY RISK The market for children's toys, video games, software, videos and music is subject to rapidly changing trends in consumer tastes. It is critical to our success that we accurately predict these trends and stock sufficient amounts of popular toys and other products on a timely basis and not overstock unpopular products. Since we derive a majority of our net sales in the fourth calendar quarter of each year, our failure to sufficiently stock popular toys and other products in advance of such fourth calendar quarter would adversely affect our operating results for the entire fiscal year. We carry a significant level of inventory. As a result, the changing trends in the market for children's toys, video games, software, videos and music subject us to significant inventory risks. The demand for certain products can change between the time the products are ordered and the date of receipt. In the event that one or more products do not achieve widespread consumer acceptance, we may be required to take significant inventory markdowns, which would adversely affect our business. This risk may be greatest in the first calendar quarter of each year, after we have significantly increased inventory levels for the holiday season. We believe that this risk will increase as we open new departments or enter new product categories due to our lack of experience in purchasing products for these 8 categories. In addition, to the extent that demand for our products increases over time, we may be forced to increase inventory levels. Any such increase would subject us to additional inventory risks. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business". WE RELY ON KEY TOY VENDORS AND KEY DISTRIBUTORS Our success depends on our ability to purchase products in sufficient quantities at competitive prices, particularly for the holiday shopping season. Additionally, vendors from time to time offer exclusive allocations of product to certain retailers for limited periods of time. If we are not able to offer our customers sufficient quantities of toys or offer products in a timely manner, our business will be adversely affected. According to industry sources, sales of Mattel and Hasbro products represented approximately 31% of traditional domestic toy sales during 1997. As a result, we derive a significant percentage of our net sales from sales of Mattel and Hasbro products. We also derive a significant percentage of our net sales from the sale of video game products that are primarily supplied to us by a single distributor. As is common in the industry, we do not have long-term or exclusive arrangements with any vendor or distributor that guarantee the availability of toys or other children's products for resale. Therefore, we do not have a predictable or certain supply of toys or other products. From time to time, we have experienced difficulty in obtaining sufficient product allocation from certain key vendors. If we were unable to obtain sufficient quantities of products from Mattel, Hasbro or our video game distributor, our business would be adversely affected. In addition, such vendors have, and may continue to expand, their own online retailing efforts, which may impact our ability to get sufficient product allocations from such vendors. WE NEED TO MANAGE GROWTH IN OPERATIONS Our ability to successfully offer products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. We continue to increase the scope of our operations and have grown our headcount substantially. Excluding part-time employees that we hire during the fourth calendar quarter of each year, at December 31, 1997, we had a total of 13 employees and at December 31, 1998, we had a total of 235 employees. This growth has placed, and our anticipated future operations will continue to place, a significant strain on our management, information systems and resources. Furthermore, our current fulfillment operations are not adequate to accommodate significant increases in customer demand that may occur during the fourth calendar quarter of 1999. As a result, during 1999, we intend to open a second fulfillment facility that will be located outside of the greater Los Angeles area. We are not experienced in coordinating and managing fulfillment operations in geographically distant locations. This task will place a further strain on our management, information systems and resources. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures. We recently installed a new accounting and financial reporting system and we are currently in the process of integrating such system with certain of our other information systems. A failure to successfully implement and integrate these systems would adversely affect our business. In addition, we will need to continue to expand, train and manage our workforce. Furthermore, we expect that we will be required to manage multiple relationships with various vendors and other third parties. WE FACE RISKS ASSOCIATED WITH OUR ACCOUNTING AND FINANCIAL REPORTING SYSTEMS We have recently implemented new accounting and financial reporting software. In connection with the implementation, we have encountered difficulties integrating this new 9 software with certain of our other information systems. Additionally, we are in the process of upgrading certain of our other information systems and internal controls, including those related to the purchase and receipt of inventory. If we grow rapidly, we will face additional challenges in upgrading and maintaining such systems. If we fail to successfully implement and integrate these new financial reporting and information systems or we are not able to scale these systems with our growth, we may not have adequate, accurate and timely financial information. Failure to have adequate, accurate and/or timely financial information would harm our business and could lead to volatility in our stock price. OUR MARKETS ARE HIGHLY COMPETITIVE The online commerce market is new, rapidly evolving and intensely competitive. We expect competition to intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new Web sites at a relatively low cost. In particular, the children's toy, video game, software, video and music retailing industries are intensely competitive. We currently or potentially compete with a variety of other companies, including: - - traditional store-based toy and children's product retailers such as Toys R Us, FAO Schwarz, Zany Brainy and Noodle Kidoodle; - - major discount retailers such as Wal-Mart, Kmart and Target; - - online efforts of these traditional retailers, including the online stores operated by Toys R Us, Wal-Mart and FAO Schwarz; - - physical and online stores of entertainment entities that sell and license children's products, such as The Walt Disney Company and Warner Bros.; - - catalog retailers of children's products; - - vendors or manufacturers of children's products that currently sell certain of their products directly online, such as Mattel and Hasbro; - - other online retailers that include certain children's products as part of their product offerings, such as Amazon.com, Barnesandnoble.com, CDnow, Beyond.com and Reel.com; - - Internet portals and online service providers that feature shopping services, such as AOL, Yahoo!, Excite and Lycos; and - - various smaller online retailers of children's products, such as BrainPlay.com, Red Rocket and Toysmart.com. Many of our current and potential traditional store-based and online competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Many of these current and potential competitors can devote substantially more resources to Web site and systems development than we can. In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with online competitors or children's toy, video game, software, video and music publishers or suppliers as the use of the Internet and other online services increases. Certain of our competitors may be able to secure products from vendors on more favorable terms, fulfill customer orders more efficiently and adopt more aggressive pricing or inventory availability policies than we can. Traditional store-based retailers also enable customers to see and feel products in a manner that is not possible over the Internet. Some of our competitors such as Toys R Us and Wal-Mart have significantly greater experience in selling children's toys, video games, software, videos and music products. Our online competitors are particularly able to use the Internet as a marketing medium to reach significant numbers of potential customers. Finally, new technologies and the expansion of existing technologies, such as price comparison programs that select specific titles from a variety of Web sites and may direct customers to other online toy, video game, software, video and music retailers, may increase competition. If we face increased competition, our operating results may be adversely affected. 10 WE MAY ENTER NEW BUSINESS CATEGORIES We may choose to expand our operations by developing new departments or product categories, promoting new or complementary products or sales formats, expanding the breadth and depth of products and services offered or expanding our market presence through relationships with third parties. In addition, we may pursue the acquisition of new or complementary businesses, products or technologies, although we have no present understandings, commitments or agreements with respect to any material acquisitions or investments. We may not be successful in our efforts to expand our operations, and potential customers may not react favorably to these efforts. Furthermore, any new department or product category that is launched by us but not favorably received by consumers could damage our brand or reputation. An expansion of our business in this manner would also require significant additional expenses, expose us to additional inventory risk and development, operations and editorial resources and would strain our management, financial and operational resources and subject us to increased inventory risk. WE FACE FULFILLMENT OPERATIONS RISKS Our success depends on our ability to rapidly scale our fulfillment operations in order to accommodate a significant increase in customer orders. Our current fulfillment operations are not adequate to accommodate significant increases in customer demand that may occur during the fourth calendar quarter of 1999. We must also be able to rapidly scale our fulfillment operations and information systems to accommodate significant increases in demand, which may require us to automate tasks that are currently performed manually. If we do not successfully scale our fulfillment operations to accommodate demand generally and, in particular, increased demand during the fourth calendar quarter of each year, due to the seasonal nature of our business, our business will be adversely affected. During 1999, we intend to open a second fulfillment facility that will be located outside of the greater Los Angeles area. We are not experienced in coordinating and managing fulfillment operations in geographically distant locations. This planned expansion may cause disruptions that adversely affect our business. Further, we rely upon third-party carriers for product shipments, including shipments to and from our fulfillment facility. We are therefore subject to the risks, including employee strikes and inclement weather, associated with such carriers' ability to provide delivery services to meet our shipping needs. In addition, failure to deliver products to our customers in a timely manner would adversely affect our reputation and brand. We also depend upon temporary employees to adequately staff our fulfillment facility, particularly during the holiday shopping season. If we do not have sufficient sources of temporary employees, our business will be adversely affected. WE HAVE CAPACITY CONSTRAINT AND SYSTEM DEVELOPMENT RISKS Our success, in particular our ability to successfully receive and fulfill orders and provide high quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems. Our success also depends on our ability to rapidly expand our Web site, transaction-processing systems and network infrastructure without any systems interruptions in order to accommodate significant increases in visitors to our Web site and significant increases in customer orders. Many of our software systems are custom-developed and we rely on our employees and certain third-party contractors to develop and maintain these systems. If certain of these employees or contractors become unavailable to us, we may experience difficulty in improving and maintaining such systems. Although we are continually enhancing and expanding our Web site, transaction-processing systems and network infrastructure, we have experienced periodic systems interruptions, which we believe will continue to occur. Due to the seasonal nature of our business, it is particularly important that we are able to expand our Web site, transaction-processing systems and network infrastructure as necessary in preparation for the fourth 11 calendar quarter and that we operate during that quarter without systems interruptions. Our failure to achieve or maintain high capacity data transmission without system downtime, particularly during the fourth calendar quarter, would adversely affect our business. WE FACE THE RISKS OF SYSTEM FAILURES Substantially all of our product development and information management systems, as well as inventory, are in facilities we lease in Southern California. Substantially all of our computer and communications hardware systems are located at a third-party facility in Sunnyvale, California. Our systems and operations, including our fulfillment operations, are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. We have no formal disaster recovery plan and our business interruption insurance may not adequately compensate us for losses that may occur. The occurrence of a natural disaster or unanticipated problems at our leased facilities in Southern California or at the third-party facility in Sunnyvale, California could cause interruptions or delays in our business, loss of data or render us unable to accept and fulfill customer orders. In additional, the failure by the third-party facility to provide the data communications capacity required by us, as a result of human error, natural disaster or other operational disruptions, could result in interruptions in our service. The occurrence of any or all of the events could adversely affect our reputation and brand and business. WE ARE EXPOSED TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY AND CREDIT CARD FRAUD Consumer concerns over the security of transactions conducted on the Internet or the privacy of users may inhibit the growth of the Internet and online commerce. To securely transmit confidential information, such as customer credit card numbers, we rely on encryption and authentication technology that we license from third parties. We cannot predict whether events or developments will result in a compromise or breach of the algorithms we use to protect customer transaction data. Furthermore, our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any breaches. Our business may be adversely affected if our security measures do not prevent security breaches and we cannot assure that we can prevent all security breaches. To date, we have suffered losses as a result of orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, a merchant is liable for fraudulent credit card transactions where, as is the case with the transactions we process, that merchant does not obtain a cardholder's signature. A failure to adequately control fraudulent credit card transactions would adversely affect our business. WE WILL NEED ADDITIONAL CAPITAL We require substantial working capital to fund our business. Since our inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations for the foreseeable future. We currently anticipate that the net proceeds of this offering, together with our available funds, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. We may need to raise additional funds prior to the expiration of such period. If we raise additional funds through the issuance of equity, equity-related or debt securities, such securities may have rights, preferences or privileges senior to those of the rights of our Common Stock and our stockholders may experience additional dilution. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. 12 OUR COMMON STOCK PRICE MAY BE VOLATILE The market price for our Common Stock is likely to be highly volatile and subject to wide fluctuations in response to factors including the following: - - actual or anticipated variations in our quarterly operating results; - - announcements of technological innovations or new products or services by us or our competitors; - - changes in financial estimates by securities analysts; - - conditions or trends in the Internet and/or online commerce industries; - - changes in the economic performance and/or market valuations of other Internet, online commerce or retail companies; - - announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; - - additions or departures of key personnel; - - release of lock-up or other transfer restrictions on our outstanding shares of Common Stock or sales of additional shares of Common Stock; and - - potential litigation. The market prices of the securities of Internet-related and online commerce companies have been especially volatile. Broad market and industry factors may adversely affect the market price of our Common Stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If we were sued in a securities class action, it could result in substantial costs and a diversion of management's attention and resources and would adversely affect our stock price. WE DEPEND ON THE INTERNET AND THE DEVELOPMENT OF THE INTERNET INFRASTRUCTURE Our success will depend in large part on continued growth in, and the use of, the Internet, particularly for commerce. There are critical issues concerning the commercial use of the Internet which remain unresolved. The issues concerning the commercial use of the Internet which we expect to affect the development of the market for our services include: - - security; - - reliability; - - cost; - - ease of access; - - quality of service; and - - increases in bandwidth availability. If the Internet develops more slowly than we expect, as a commercial or business medium, it will adversely affect our business. In addition, companies that control access to Internet transactions through network access or Web browsers could promote our competitors or charge us a substantial fee for inclusion in their product or service offerings. Either of these developments could adversely affect our business. RAPID TECHNOLOGICAL CHANGE MAY ADVERSELY AFFECT US To remain competitive, we must continue to enhance and improve the functionality and features of our online store. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing Web site and proprietary technology and systems may become obsolete. Our future success will depend on our ability to do the following: - - both license and internally develop leading technologies useful in our business; - - enhance our existing services; 13 - - develop new services and technologies that address the increasingly sophisticated and varied needs of our prospective customers; and - - respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. To develop our Web site and other proprietary technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our Web site, transaction-processing systems and network infrastructure to customer requirements or emerging industry standards. If we face material delays in introducing new services, products and enhancements, our customers may forego the use of our services and use those of our competitors. INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF SIGNIFICANT RIGHTS Other parties may assert infringement or unfair competition claims against us. In the past, other parties have sent us notice of claims of infringement of proprietary rights, and we expect to receive other notices in the future. We cannot predict whether third parties will assert claims of infringement against us, or whether any past or future assertions or prosecutions will adversely affect our business. If we are forced to defend against any such claims, whether they are with or without merit or are determined in our favor, then we may face costly litigation, diversion of technical and management personnel, or product shipment delays. As a result of such a dispute, we may have to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, or at all. If there is a successful claim of product infringement against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, it could adversely affect our business. PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS UNCERTAIN We regard our copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. In September 1998, the United States Patent and Trademark Office granted us a registered trademark for "eToys" for online retail services for toys and games. We have filed a trademark application for "eToys" for toys, games and playthings and for sales of toys, games and playthings. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which we sell our products and services online. Therefore, the steps we take to protect our proprietary rights may be inadequate. PROTECTION OF DOMAIN NAME IS UNCERTAIN We currently hold various Web domain names relating to our brand, including the "eToys.com" domain name. The acquisition and maintenance of domain names generally is regulated by governmental agencies and their designees. For example, in the United States, the National Science Foundation has appointed Network Solutions, Inc. as the current exclusive registrar for the ".com", ".net" and ".org" generic top-level domains. The regulation of domain names in the United States and in foreign countries is subject to change in the near future. Such changes in the United States are expected to include a transition from the current system to a system which is controlled by a non-profit corporation and the creation of additional top-level domains. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, the relationship between regulations governing domain names and laws 14 protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The United States Congress recently enacted Internet laws regarding children's privacy, copyrights, taxation and the transmission of sexually explicit material. The European Union recently enacted its own privacy regulations. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet. In addition, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online. The adoption or modification of laws or regulations relating to the Internet could adversely affect our business. WE MAY BE LIABLE FOR INTERNET CONTENT We believe that our future success will depend in part upon our ability to deliver original and compelling descriptive content about the children's toys, video games, software, videos and music that we sell on the Internet. As a publisher of online content, we face potential liability for defamation, negligence, copyright, patent or trademark infringement, or other claims based on the nature and content of materials that we publish or distribute. In the past, plaintiffs have brought such claims and sometimes successfully litigated them against online services. Although we carry general liability insurance, our insurance may not cover claims of these types or may be inadequate to indemnify us for all liability that may be imposed on us. If we face liability, particularly liability that is not covered by our insurance or is in excess of our insurance coverage, then our reputation and our business may suffer. WE MAY BE SUBJECT TO SALES AND OTHER TAXES We do not currently collect sales or other similar taxes for physical shipments of goods into states other than California. However, one or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us. In addition, any new operation in states outside California could subject our shipments in such states to state sales taxes under current or future laws. If one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of our products, it could adversely affect our business. WE DEPEND ON KEY PERSONNEL We depend on the continued services and performance of our senior management and other key personnel, particularly Edward C. Lenk, our President, Chief Executive Officer and Uncle of the Board. Our future success also depends upon the continued service of our executive officers and other key sales, marketing and support personnel. The majority of our senior management joined us in the last two months, including our Chief Financial Officer, Chief Information Officer and Senior Vice President of Operations. Our future success depends on these officers effectively working together with our original management team. None of our officers or key employees is bound by an employment agreement for any specific term. Our relationships with these officers and key employees are at will. We do not have "key person" life insurance policies covering any of our employees. WE FACE YEAR 2000 RISKS Many existing computer programs use only two digits to identify a year. These programs were designed and developed without addressing the impact of the upcoming 15 change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. We use software, computer technology and other services internally developed and provided by third-party vendors that may fail due to the year 2000 phenomenon. For example, we are dependent on the financial institutions involved in processing our customers' credit card payments for Internet services and a third party that hosts our servers. We are also dependent on telecommunications vendors to maintain our network and the United States Postal Service and other third-party carriers to deliver orders to customers. We have reviewed the year 2000 compliance of our internally developed proprietary software. Since inception, we have internally developed substantially all of the systems for the operation of our Web site. These systems include the software used to provide our Web site's search, customer interaction, and transaction-processing and fulfillment functions, as well as firewall, security, monitoring and back-up capabilities. Based upon our assessment to date, we believe that our internally developed proprietary software is year 2000 compliant. We are currently assessing the year 2000 readiness of our third-party supplied software, computer technology and other services and of our vendors. Based upon the results of this assessment, we will develop and implement, if necessary, a remediation plan with respect to third-party suppliers, third-party vendors and computer technology and services that may fail to be year 2000 compliant. At this time, the expenses associated with this assessment and potential remediation plan cannot be determined. The failure of our software and computer systems and of our third-party suppliers to be year 2000 complaint would have a material adverse effect on us. The year 2000 readiness of the general infrastructure necessary to support our operations is difficult to assess. For instance, we depend on the integrity and stability of the Internet to provide our services. We also depend on the year 2000 compliance of the computer systems and financial services used by consumers. A significant disruption in the ability of consumers to reliably access the Internet or portions of it or to use their credit cards would have an adverse effect on demand for our services and would have a material adverse effect on us. THERE ARE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS If we are presented with appropriate opportunities, we intend to make investments in complementary companies, products or technologies. We may not realize the anticipated benefits of any acquisition or investment. If we buy a company, we could have difficulty in assimilating that company's personnel and operations. In addition, the key personnel of the acquired company may decide not to work for us. If we make other types of acquisitions, we could have difficulty in assimilating the acquired technology or products into our operations. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Furthermore, we may have to incur debt or issue equity securities to pay for any future acquisitions or investments, the issuance of which could be dilutive to us or our existing stockholders. WE HAVE DISCRETION AS TO USE OF PROCEEDS Our management can spend the proceeds from this offering in ways with which the stockholders may not agree. We cannot predict that the proceeds will be invested to yield a favorable return. See "Use of Proceeds". CONTROL BY OFFICERS AND DIRECTORS Executive officers, directors and entities affiliated with them will, in the aggregate, beneficially own approximately % of our outstanding Common Stock following the completion of this offering. These stockholders, if acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors 16 and the approval of mergers or other business combination transactions. See "Principal Stockholders". ANTITAKEOVER PROVISIONS Provisions of our Amended and Restated Certificate of Incorporation, Bylaws, and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. See "Description of Capital Stock". SHARES ELIGIBLE FOR FUTURE SALE If our stockholders sell substantial amounts of our Common Stock (including shares issued upon the exercise of outstanding options and warrants) in the public market following this offering, the market price of our Common Stock could fall. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Upon completion of this offering, we will have outstanding shares of Common Stock (based upon 29,512,331 shares outstanding as of December 31, 1998), assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants after December 31, 1998. Of these shares, the shares sold in this offering are freely tradable. This leaves 29,512,331 remaining shares, all of which will be eligible for sale in the public market beginning 180 days after the date of this prospectus. See "Management--Stock Plans", "Shares Eligible for Future Sale" and "Underwriting". WE DO NOT INTEND TO PAY DIVIDENDS We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any dividends in the foreseeable future. See "Dividend Policy". 17 USE OF PROCEEDS The net proceeds to us from the sale of the shares being offered hereby at an assumed public offering price of $ per share are estimated to be $ million, after deducting the underwriting discount and estimated offering expenses payable by us, ($ million if the underwriters' over-allotment option is exercised in full). We expect to use the net proceeds of this offering for the payment of marketing and sales expenses, including payments associated with advertising, capital expenditures associated with technology and systems upgrades, the expansion of our fulfillment operations and executive offices and general corporate purposes including working capital. In addition, we may use a portion of the net proceeds to acquire complementary technologies or businesses; however, we currently have no commitments or agreements and are not involved in any negotiations with respect to any such transactions. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment grade securities. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. 18 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1998 (i) on an actual basis, (ii) on a pro forma basis to reflect the automatic conversion of all outstanding shares of Redeemable Convertible Preferred Stock into shares of Common Stock upon the closing of this offering and (iii) on an as adjusted basis as to give effect to the receipt of the estimated net proceeds from the sale by us of shares of Common Stock at an assumed initial public offering price of $ per share.
DECEMBER 31, 1998 --------------------------------- AS ACTUAL PRO FORMA ADJUSTED --------- ---------- ---------- (IN THOUSANDS) Long-term capital lease obligations, less current portion............................................... $ 35 $ 35 $ Redeemable Convertible Preferred Stock, 18,926,423 shares authorized: Series A Preferred Stock; $.0001 par value; 6,366,403 shares issued and outstanding, actual; no shares authorized, pro forma and as adjusted, none issued and outstanding..................................... 3,947 -- Series B Preferred Stock; $.0001 par value; 11,886,649 shares issued and outstanding, actual; no shares authorized, pro forma and as adjusted, none issued and outstanding..................................... 24,952 -- Stockholders' equity (deficit): Preferred Stock: $0.0001 par value, 5,000,000 shares authorized, none issued or outstanding actual, pro forma and as adjusted............................... -- -- Common Stock: $0.0001 par value, 50,000,000 shares authorized, 11,259,279 shares issued and outstanding actual; 200,000,000 shares authorized, 29,512,331 issued and outstanding, pro forma; shares issued and outstanding as adjusted(1)............... 1 3 Additional paid-in capital.............................. 32,202 61,099 Receivables from stockholders........................... (147) (147) Deferred compensation(2)................................ (30,058) (30,058) Accumulated deficit..................................... (17,526) (17,526) --------- ---------- ---------- Total stockholders' equity (deficit)................ (15,528) 13,371 --------- ---------- ---------- Total capitalization............................ $ 13,406 $ 13,406 $ --------- ---------- ---------- --------- ---------- ----------
- ------------------------ (1) Includes an aggregate of 723,371 shares issuable upon the exercise of warrants outstanding as of December 31, 1998, substantially all of which are expected to be exercised prior to the completion of this offering. Excludes shares issuable upon exercise of a warrant we are obligated to issue to an equipment lessor prior to this offering. Also excludes 13,123,813 shares reserved for issuance under our stock option and stock purchase plans, of which 4,254,200 were subject to outstanding options as of December 31, 1998. See "Management-- Stock Plans" and Notes 6 and 8 of Notes to Financial Statements. (2) We recorded deferred compensation of $31.6 million for the nine months ended December 31, 1998. See Note 5 of Notes to Financial Statements. 19 DILUTION Our pro forma net tangible book value as of December 31, 1998 was approximately $ million or $ per share. Net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of Common Stock outstanding after giving effect to the automatic conversion of the Redeemable Convertible Preferred Stock. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in this offering and the net tangible book value per share of Common Stock immediately after the completion of this offering. After giving effect to the sale of the shares of Common Stock offered by us at an assumed initial public offering price of $ per share, and after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma net tangible book value at December 31, 1998 would have been approximately $ million or $ per share of Common Stock. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors of Common Stock. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share....................... $ Pro forma net tangible book value per share before the offering..... $ Increase per share attributable to new investors.................... --------- Pro forma net tangible book value per share after the offering (as adjusted)........................................................... --------- Dilution per share to new investors................................... $ --------- ---------
The following table summarizes on a pro forma basis after giving effect to the offering, as of December 31, 1998, the differences between the existing stockholders and new investors with respect to the number of shares of Common Stock purchased from us, the total consideration paid to us and the average price per share paid.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- ------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE --------- --------- -------------- --------- ----------- Existing stockholders............................... % $ % $ New investors....................................... --------- --------- -------------- --------- Totals.............................................. 100.0% $ 100.0% --------- --------- -------------- --------- --------- --------- -------------- ---------
The preceding tables include an aggregate of 723,371 shares of Common Stock issuable upon the exercise of warrants outstanding as of December 31, 1998, substantially all of which are expected to be exercised prior to the completion of this offering. The preceding tables also exclude 13,123,813 shares of Common Stock reserved for issuance under our stock option and stock purchase plans, of which 4,254,200 were subject to outstanding options as of December 31, 1998 at a weighted average exercise price of $0.996 per share, and shares of Common Stock issuable upon exercise of a warrant we are obligated to issue to an equipment lessor prior to this offering. 20 SELECTED FINANCIAL DATA You should read the selected financial and operating data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes included elsewhere in this prospectus. The statement of operations data set forth below for the fiscal year ended March 31, 1998 and for the nine months ended December 31, 1998, and the selected balance sheet data as of March 31, 1998 and December 31, 1998 have been derived from our audited financial statements appearing elsewhere in this prospectus. The financial data for the nine months ended December 31, 1997 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for these periods. The historical results are not necessarily indicative of results to be expected for any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
NINE MONTHS ENDED FISCAL YEAR ENDED DECEMBER 31, MARCH 31, --------------------------- 1998 1997 1998 ------------------ ------------ ------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales........................................................ $ 687 $ 530 $ 23,900 Cost of sales.................................................... 568 438 19,008 ------------------ ------------ ------------- Gross profit..................................................... 119 92 4,892 Operating expenses: Marketing and sales............................................ 1,290 632 14,354 Product development............................................ 421 206 2,006 General and administrative(1).................................. 678 366 4,228 ------------------ ------------ ------------- Total operating expenses................................. 2,389 1,204 20,588 ------------------ ------------ ------------- Operating loss................................................... (2,270) (1,112) (15,696) Interest income (expense), net................................... 3 (15) 439 ------------------ ------------ ------------- Loss before income taxes......................................... (2,267) (1,127) (15,257) Provision for income taxes....................................... 1 -- 1 ------------------ ------------ ------------- Net loss......................................................... $ (2,268) $ (1,127) $ (15,258) ------------------ ------------ ------------- ------------------ ------------ ------------- Pro forma basic net loss per share(2)............................ $ (0.23) $ (0.14) $ (0.58) ------------------ ------------ ------------- ------------------ ------------ ------------- Shares used to compute pro forma basic net loss per share(2)..... 10,077,634 7,959,833 26,429,153 ------------------ ------------ ------------- ------------------ ------------ -------------
MARCH 31, DECEMBER 31, 1998 1998 ----------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............................................................. $ 1,552 $ 18,545 Working capital....................................................................... 1,456 10,117 Total assets.......................................................................... 2,459 27,199 Long-term capital lease obligations, less current portion............................. -- 35 Total stockholders' equity (deficit).................................................. (1,813) (15,528)
- -------------------------- (1) Included in general and administrative expenses related to the amortization expense of deferred compensation is $2,000 for the fiscal year ended March 31, 1998 and $1.6 million for the nine months ended December 31, 1998. (2) See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares and share equivalents used in computing pro forma per share amounts. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS REFER TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS" AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS DISCUSSED IN THE SECTION TITLED "RISK FACTORS" IN THIS PROSPECTUS. OVERVIEW We are the leading Web-based retailer focused exclusively on children's products, including toys, video games, software, videos and music. We currently offer an extensive selection of competitively priced children's products consisting of over 8,500 stock keeping units ("SKUs") representing more than 700 brands. Since launching our Web site in October 1997, we have sold children's products to over 320,000 customers. We were incorporated in November 1996 and began offering products for sale on our Web site and entered into a marketing agreement with AOL on October 1, 1997. For the period from inception through October 1, 1997, we had no sales and our operating activities related primarily to the development of the necessary computer infrastructure and initial planning and development of our Web site and operations. Since launching our online store, we have continued these operating activities and have also focused on building sales momentum, expanding our product offerings, establishing vendor relationships, promoting our brand name and establishing fulfillment and customer service operations. Our cost of sales and operating expenses have increased significantly since inception. This trend reflects the costs associated with our formation as well as increased efforts to promote our brand, build market awareness, attract new customers, recruit personnel, build operating infrastructure and develop our Web site and associated transaction-processing systems. We have grown rapidly since launching our online store in October 1997. During the fall of 1998, we launched our redesigned Web site and added video game, software, video and music departments to our online store. Our net sales increased to $22.9 million for the quarter ended December 31, 1998 from $0.5 million for the quarter ended December 31, 1997. The market for children's toys, video games, software, videos and music is highly seasonal. A disproportionate amount of our net sales have been realized during the fourth calendar quarter and we expect this trend to continue in future periods. In addition, since a disproportionate amount of our net sales are realized during the fourth calendar quarter, we significantly increase our purchases of inventory during such quarter. Accordingly, our accounts payable are at their highest levels during the fourth calendar quarter. Our gross margin was 20.6% for the quarter ended December 31, 1998. Our gross margin will fluctuate in future periods based on factors such as product mix, inventory management, inbound and outbound shipping costs, the level of product returns, and the level of discount pricing and promotional coupon usage. Since 1997, we have significantly increased the depth of our management team to help implement our growth strategy. To facilitate our growth, we have recently expanded our senior management team to include a Chief Financial Officer, Chief Information Officer and Senior Vice President of Operations. Since inception, we have incurred significant losses and, as of December 31, 1998, had an accumulated deficit of $17.5 million. We expect operating losses and negative cash flow to continue for the foreseeable future. We anticipate our losses 22 will increase significantly from current levels because we expect to incur additional costs and expenses related to brand development, marketing and other promotional activities; the expansion of our inventory management and order fulfillment infrastructure; the continued development of our Web site, transaction-processing systems and network infrastructure; the expansion of our product offerings and Web site content; and strategic relationship development. We have a limited operating history on which to base an evaluation of our business and prospects. You must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as online commerce. Such risks for us include, but are not limited to, an evolving and unpredictable business model and management of growth. To address these risks, we must, among other things, maintain and expand our customer base, implement and successfully execute our business and marketing strategy, continue to develop and upgrade our technology and transaction-processing systems, improve our Web site, provide superior customer service and order fulfillment, respond to competitive developments and attract, retain and motivate qualified personnel. We cannot assure that we will be successful in addressing such risks, and our failure to do so could have a material adverse effect on our business, prospects, financial condition and results of operations. In connection with this offering of shares of our Common Stock, certain options granted in the fiscal years ended March 31, 1997 and 1998 have been considered to be compensatory. Deferred compensation associated with such options for the nine months ended December 31, 1998 amounted to $31.6 million. Of this amount, $1.6 million was charged to operations for the nine months ended December 31, 1998 and $30.0 million will be amortized over the vesting periods of the applicable options through the fiscal year ending March 31, 2003. RESULTS OF OPERATIONS The following table sets forth statement of operations data as a percentage of net sales for the periods indicated:
FISCAL YEAR NINE MONTHS ENDED ENDED DECEMBER 31, MARCH 31, ------------------------ 1998 1997 1998 ------------- ----------- ----------- Net sales.................................................................. 100.0 % 100.0% 100.0% Cost of sales.............................................................. 82.7 82.6 79.5 ------ ----------- ----------- Gross profit............................................................... 17.3 17.4 20.5 Operating expenses: Marketing and sales...................................................... 187.7 119.2 60.1 Product development...................................................... 61.3 38.9 8.4 General and administrative............................................... 98.7 69.1 17.7 ------ ----------- ----------- Total operating expenses............................................. 347.7 227.2 86.2 ------ ----------- ----------- Operating loss............................................................. (330.4) (209.8) (65.7) Interest income (expense), net............................................. 0.4 (2.8) 1.8 Provision for income taxes................................................. 0.1 -- -- ------ ----------- ----------- Net loss................................................................... (330.1)% (212.6)% (63.9)% ------ ----------- ----------- ------ ----------- -----------
23 QUARTERS ENDED DECEMBER 31, 1997 AND 1998 NET SALES Net sales consist of product sales to customers and charges to customers for outbound shipping and handling and gift wrapping and are net of product returns, promotional discounts and coupons. Net sales increased to $22.9 million for the quarter ended December 31, 1998 from $0.5 million for the quarter ended December 31, 1997 as a result of the significant growth of our customer base and an increase in repeat purchases from our existing customers, reflecting the relaunch of our Web site and the addition of new departments to our online store during the fall of 1998. COST OF SALES Cost of sales consists primarily of the costs of products sold to customers, outbound and inbound shipping and handling costs, and gift wrapping costs. Cost of sales increased to $18.2 million for the quarter ended December 31, 1998 from $0.4 million for the quarter ended December 31, 1997. This $17.8 million increase was primarily attributable to our increased sales volume and the addition of new departments to our online store during the fall of 1998. Our gross profit margin increased to 20.6% of net sales for the quarter ended December 31, 1998 from 17.4% of net sales for the quarter ended December 31, 1997. This increase was primarily due to greater sales of higher margin products as a percentage of our overall net sales. OPERATING EXPENSES MARKETING AND SALES. Marketing and sales expenses consist primarily of advertising and promotional expenditures, fulfillment facility expenses, including equipment and supplies, and payroll and related expenses for personnel engaged in marketing, customer service and fulfillment activities. Marketing and sales expenses increased to $10.6 million for the quarter ended December 31, 1998 from $0.4 million for the quarter ended December 31, 1997. This $10.2 million increase was primarily attributable to the expansion of our online and offline advertising, including a comprehensive print and television advertising campaign, as well as to increased personnel and related expenses required to implement our marketing strategy. In addition, due to a significant increase in our sales volume, we experienced higher fulfillment and customer service expenses, including an increased level of temporary staffing during the holiday season. Marketing and sales expenses as a percentage of net sales decreased to 46.3% for the quarter ended December 31, 1998 from 83.8% for the quarter ended December 31, 1997. Such expenses decreased significantly as a percentage of net sales during the quarter ended December 31, 1998 due to the significant increase in net sales during such period. We intend to continue to pursue an aggressive branding and marketing campaign and, therefore, expect marketing and sales expenses to increase significantly in absolute dollars in future periods. In addition, to the extent that our sales volume increases in future periods, we expect marketing and sales expenses to increase in absolute dollars as we expand our fulfillment facilities to accommodate such increases in sales volume. PRODUCT DEVELOPMENT. Product development expenses consist primarily of payroll and related expenses for merchandising, Web site development and information technology personnel, Internet access and hosting charges and Web content and design expenses. Product development expenses increased to $0.9 million for the quarter ended December 31, 1998 from $0.1 million for the quarter ended December 31, 1997. This $0.8 million increase was primarily attributable to increased staffing and associated costs related to enhancing the features, content and functionality of our online store and increasing the capacity of our transaction-processing systems. Product development expenses as a percentage of net sales decreased to 4.0% for the quarter ended December 31, 1998 from 27.4% for the quarter ended December 31, 1997. Such expenses decreased significantly as a percentage of net sales during the quarter ended December 31, 1998 due to the significant increase in net 24 sales during such period. We believe that continued investment in product development is critical to attaining our strategic objectives and, as a result, expect product development expenses to increase significantly in absolute dollars. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of payroll and related expenses for executive and administrative personnel, facilities expenses, professional services expenses, travel and other general corporate expenses. General and administrative expenses increased to $3.1 million for the quarter ended December 31, 1998 from $0.2 million for the quarter ended December 31, 1997. This $2.9 million increase was primarily attributable to increased headcount and related expenses associated with the hiring of additional personnel, and increased professional services expenses. General and administrative expenses as a percentage of net sales decreased to 13.7% for the quarter ended December 31, 1998 from 44.2% for the quarter ended December 31, 1997. Such expenses decreased significantly as a percentage of net sales during the quarter ended December 31, 1998 due to the significant increase in net sales during such period. We expect general and administrative expenses to increase in absolute dollars as we expand our staff and incur additional costs related to the growth of our business and being a public company. In the quarter ended December 31, 1998, we recorded total deferred stock compensation of $30.4 million in connection with stock options granted during the period, including approximately $0.3 million which represents the fair value of options granted to certain non-employees during this period. Such amount is amortized to expense over the vesting periods of the applicable options, resulting in $1.5 million for the quarter ended December 31, 1998, which is included in general and administrative expenses. These amounts represent the difference between the exercise price of certain stock option grants and the deemed fair value of our Common Stock at the time of such grants. INTEREST INCOME (EXPENSE), NET Interest income (expense), net consists of earnings on our cash and cash equivalents, net of interest expense attributable to convertible notes in the approximate principal amount of $895,000. These convertible notes were subsequently converted into shares of Series A Preferred Stock in December 1997. Net interest income increased to $0.2 million for the quarter ended December 31, 1998 from net interest expense of $15,000 for the quarter ended December 31, 1997. This $0.2 million increase was primarily attributable to earnings on higher average cash and cash equivalent balances during the quarter ended December 31, 1998. INCOME TAXES As of December 31, 1998, we had $15.4 million of net operating loss carryforwards for federal income tax purposes, which expire beginning in 2012. We have provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its realizability. Certain changes in the ownership of our Common Stock, as defined in the Internal Revenue Code of 1986, as amended, may restrict the utilization of such carryforwards. See Note 3 of Notes to Financial Statements. NINE MONTHS ENDED DECEMBER 31, 1997 AND 1998 Our fiscal year runs from April 1 through March 31. We commenced offering products for sale on our Web site on October 1, 1997, and, accordingly, the nine months ended December 31, 1997 only include a period of three months during which we were generating net sales and incurring certain expenses. Consequently, our net sales and expenses for the nine months ended December 31, 1998 have increased due to a full nine months of net sales generated and expenses incurred during such period as compared to three months of net sales and expenses during the nine months ended December 31, 1997. 25 NET SALES Net sales increased to $23.9 million for the nine months ended December 31, 1998 from $0.5 million for the nine months ended December 31, 1997 as a result of the significant growth of our customer base and an increase in repeat purchases from our existing customers, reflecting the relaunch of our Web site and the addition of new departments to our online store during the fall of 1998. COST OF SALES Cost of sales increased to $19.0 million for the nine months ended December 31, 1998 from $0.4 million for the nine months ended December 31, 1997. This $18.6 million increase was primarily attributable to our increased sales volume and the addition of new departments to our online store during such period. Our gross profit margin increased to 20.5% of net sales for the nine months ended December 31, 1998 from 17.4% of net sales for the nine months ended December 31, 1997. This increase was primarily due to greater sales of higher margin products as a percentage of our overall net sales. OPERATING EXPENSES MARKETING AND SALES. Marketing and sales expenses increased to $14.4 million for the nine months ended December 31, 1998 from $0.6 million for the nine months ended December 31, 1997. This $13.8 million increase was primarily attributable to the expansion of our online and offline advertising, including a comprehensive print and television advertising campaign, as well as to increased personnel and related expenses required to implement our marketing strategy. In addition, due to a significant increase in our sales volume, we experienced higher fulfillment and customer service expenses, including an increased level of temporary staffing during the holiday season. Marketing and sales expenses as a percentage of net sales decreased to 60.1% for the nine months ended December 31, 1998 from 119.2% for the nine months ended December 31, 1997. Such expenses decreased significantly as a percentage of net sales during the nine months ended December 31, 1998 due to the significant increase in net sales during such period. PRODUCT DEVELOPMENT. Product development expenses increased to $2.0 million for the nine months ended December 31, 1998 from $0.2 million for the nine months ended December 31, 1997. This $1.8 million increase was primarily attributable to increased staffing and associated costs related to enhancing the features, content and functionality of our online store and transaction-processing systems. Product development expenses as a percentage of net sales decreased to 8.4% for the nine months ended December 31, 1998 from 38.9% for the nine months ended December 31, 1997. Such expenses decreased significantly as a percentage of net sales during the nine months ended December 31, 1998 due to the significant increase in net sales during such period. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to $4.2 million for the nine months ended December 31, 1998 from $0.4 million for the nine months ended December 31, 1997. This $3.8 million increase was primarily attributable to increased headcount and related expenses associated with the hiring of additional personnel, and increased professional services expenses. General and administrative expenses as a percentage of net sales decreased to 17.7% for the nine months ended December 31, 1998 from 69.1% for the nine months ended December 31, 1997. Such expenses decreased significantly as a percentage of net sales during the nine months ended December 31, 1998 due to the significant increase in net sales during such period. In the nine months ended December 31, 1998, we recorded total deferred stock compensation of $31.6 million in connection with stock options granted during the period, including approximately $0.3 million which represents the fair value of options granted to certain non-employees during this period. Such amount is amortized to expense over the vesting periods of the applicable options, 26 resulting in $1.6 million for the nine months ended December 31, 1998, which is included in general and administrative expenses. These amounts represent the difference between the exercise price of certain stock option grants and the deemed fair value of our Common Stock at the time of such grants. INTEREST INCOME (EXPENSE), NET Interest income (expense), net increased to $0.4 million for the nine months ended December 31, 1998 from $3,000 for the nine months ended December 31, 1997. This $0.4 million increase was primarily attributable to earnings on higher average cash and cash equivalent balances during the nine months ended December 31, 1998. INCOME TAXES As of December 31, 1998, we had $15.4 million of net operating loss carryforwards for federal income tax purposes, which expire beginning in 2012. We have provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its realizability. Certain changes in the ownership of our Common Stock, as defined in the Internal Revenue Code of 1986, as amended, may restrict the utilization of such carryforwards. See Note 3 of Notes to Financial Statements. 27 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly statement of operations data for the five quarters ended December 31, 1998. This unaudited quarterly information has been derived from our unaudited financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods covered. The quarterly data should be read in conjunction with our financial statements and related notes. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
QUARTER ENDED ---------------------------------------------------------------- DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1998 1998 1998 1998 ----------- ------------ ----------- ----------- ----------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales............................................ $ 530 $ 157 $ 381 $ 608 $ 22,910 Cost of sales........................................ 438 130 311 496 18,201 ----------- ------------ ----------- ----------- ----------- Gross profit......................................... 92 27 70 112 4,709 Operating expenses: Marketing and sales................................ 444 658 1,370 2,372 10,611 Product development................................ 145 215 404 697 905 General and administrative(1)...................... 234 312 423 664 3,141 ----------- ------------ ----------- ----------- ----------- Total operating expenses....................... 823 1,185 2,197 3,733 14,657 ----------- ------------ ----------- ----------- ----------- Operating loss....................................... (731) (1,158) (2,127) (3,621) (9,948) Interest income (expense), net....................... (15) 18 (5) 277 166 Provision for income taxes........................... -- 1 -- -- 1 ----------- ------------ ----------- ----------- ----------- Net loss............................................. $ (746) $ (1,141) $ (2,132) $ (3,344) $ (9,783) ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- AS A PERCENTAGE OF NET SALES: Net sales............................................ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales........................................ 82.6 82.8 81.6 81.6 79.4 ----------- ------------ ----------- ----------- ----------- Gross profit......................................... 17.4 17.2 18.4 18.4 20.6 Operating expenses: Marketing and sales................................ 83.8 419.1 359.6 390.1 46.3 Product development................................ 27.4 136.9 106.0 114.6 4.0 General and administrative(1)...................... 44.2 198.7 111.0 109.2 13.7 ----------- ------------ ----------- ----------- ----------- Total operating expenses......................... 155.3 754.8 576.6 614.0 64.0 ----------- ------------ ----------- ----------- ----------- Operating loss....................................... (137.9) (737.6) (558.3) (595.6) (43.4) Interest income (expense), net....................... (2.8) 11.5 (1.3) 45.6 0.7 Provision for income taxes........................... -- 0.6 -- -- -- ----------- ------------ ----------- ----------- ----------- Net loss............................................. (140.8)% (726.8)% (559.6)% (550.0)% (42.7)% ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- -----------
- ------------------------------ (1) Included in general and administrative expenses are $2,000, $52,000, $74,000 and $1.49 million related to the amortization expense of deferred compensation for the quarters ended March 31, 1998, June 30, 1998, September 30, 1998 and December 31, 1998, respectively. 28 Our quarterly operating results may be affected and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. Factors that may harm our business or cause our operating results to fluctuate include the following: our inability to obtain new customers at reasonable cost, retain existing customers, or encourage repeat purchases; decreases in the number of visitors to our Web site or our inability to convert visitors to our Web site into customers; the mix of toys, video games, software, videos and music sold by us; seasonality; our inability to manage inventory levels; our inability to manage fulfillment operations; our inability to adequately maintain, upgrade and develop our Web site, transaction-processing systems or network infrastructure; the ability of our competitors to offer new or enhanced Web sites, services or products; price competition; an increase in the level of our product returns; fluctuations in the demand for children's products associated with movies, television and other entertainment events; our inability to obtain popular children's toys, video games, software, videos and music from our vendors; fluctuations in the amount of consumer spending on children's toys, video games, software, videos and music; the termination of existing, or failure to develop new, strategic marketing relationships pursuant to which we receive exposure to traffic on third-party Web sites; the extent to which we are not able to participate in advertising campaigns such as those conducted by Visa; increases in the cost of online or offline advertising; our inability to attract new personnel in a timely and effective manner or retain existing personnel; the amount and timing of operating costs and capital expenditures relating to expansion of our operations; unexpected increases in shipping costs or delivery times, particularly during the holiday season; technical difficulties, system downtime or Internet brownouts; government regulations related to use of the Internet for commerce or for sales and distribution of toys, video games, software, videos and music; and general economic conditions and economic conditions specific to the Internet, online commerce and the children's toy, video game, software, video and music industries. Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarter our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our Common Stock may fall significantly. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through private sales of Redeemable Convertible Preferred Stock which through December 31, 1998, totaled $28.7 million. Net cash used in operating activities was $4.9 million in the nine months ended December 31, 1998, and $1.0 million in the nine months ended December 31, 1997. Net cash used in operating activities for each of these periods primarily consisted of net losses as well as increases in inventories and prepaid expenses, partially offset by increases in accounts payable, accrued expenses and depreciation and amortization. The significant increase in working capital during the nine months ended December 31, 1998 was primarily due to significant growth in our operations. Net cash used in investing activities was $2.9 million in the nine months ended December 31, 1998, and $0.1 million in the nine months ended December 31, 1997. Net cash used in investing activities for each of these periods primarily consisted of leasehold improvements and purchases of equipment and systems, including computer equipment and fixtures and furniture. Net cash provided by financing activities was $24.9 million in the nine months ended December 31, 1998, and $4.1 million in the nine months ended December 31, 1997. Net cash provided by financing activities during the nine months ended December 31, 1998 primarily consisted of proceeds of $24.8 million 29 from the issuance of Redeemable Convertible Preferred Stock. As of December 31, 1998 we had $18.5 million of cash and cash equivalents. As of that date, our principal commitments consisted of obligations outstanding under operating leases. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures and lease commitments consistent with anticipated growth in operations, infrastructure and personnel. We plan to open an additional fulfillment facility during fiscal 1999, which may require us to purchase real estate or commit to additional lease obligations and to purchase equipment and install leasehold improvements. We entered into a marketing agreement with AOL, the leading Internet online service provider, in October 1997. This agreement established us as a preferred AOL provider of children's toy products through an eToys content area on the AOL Network and AOL's Web site, aol.com, (the "AOL Online Area"). In addition, AOL agreed to promote and advertise eToys on a preferred basis in certain online areas controlled by AOL and to deliver a specified number of annual page views to the online areas promoting eToys. Over the 26-month term of the agreement, we are obligated to make minimum payments totaling $3.1 million to AOL, of which $1.4 million remained to be paid as of December 31, 1998. We have also agreed to deliver content through the AOL Online Area, provide children's toy products that are competitive in price and performance and manage, operate and support such content and children's toy products. The agreement with AOL expires on December 31, 1999; however, AOL may terminate the agreement earlier in the event we materially breach the agreement or in the event of bankruptcy or insolvency or certain similar adverse financial events. During the fiscal year ended March 31, 1998, we entered into a number of commitments for online and traditional offline advertising. As of December 31, 1998, our remaining commitments were $6.9 million, excluding amounts due under our agreement with AOL, which will be paid by December 31, 1999. We currently anticipate that the net proceeds of this offering, together with our available funds, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. We may need to raise additional funds prior to the expiration of such period. If we raise additional funds through the issuance of equity, equity-related or debt securities, such securities may have rights, preferences or privileges senior to those of the rights of our Common Stock and our stockholders may experience additional dilution. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. YEAR 2000 Many existing computer programs use only two digits to identify a year. These programs were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. We use software, computer technology and other services internally developed and provided by third-party vendors that may fail due to the year 2000 phenomenon. For example, we are dependent on the financial institutions involved in processing our customers' credit card payments for Internet services and a third party that hosts our servers. We are also dependent on telecommunications vendors to maintain our network and the United States Postal Service and other third-party carriers to deliver orders to customers. We have reviewed the year 2000 compliance of our internally developed proprietary software. Since inception, we have internally developed substantially all of the systems for the operation of our Web site. These systems include the software used to provide our Web site's search, customer interaction, and transaction-processing and 30 fulfillment functions, as well as firewall, security, monitoring and back-up capabilities. Based upon our assessment to date, we believe that our internally developed proprietary software is year 2000 compliant. We are currently assessing the year 2000 readiness of our third-party supplied software, computer technology and other services and of our vendors. Based upon the results of this assessment, we will develop and implement, if necessary, a remediation plan with respect to third-party software, third-party vendors and computer technology and services that may fail to be year 2000 compliant. At this time, the expenses associated with this assessment and potential remediation plan cannot be determined. The failure of our software and computer systems and of our third-party suppliers to be year 2000 complaint would have a material adverse effect on us. The year 2000 readiness of the general infrastructure necessary to support our operations is difficult to assess. For instance, we depend on the integrity and stability of the Internet to provide our services. We also depend on the year 2000 compliance of the computer systems and financial services used by consumers. A significant disruption in the ability of consumers to reliably access the Internet or portions of it or to use their credit cards would have an adverse effect on demand for our services and would have a material adverse effect on us. 31 BUSINESS ETOYS We are the leading Web-based retailer focused exclusively on children's products, including toys, video games, software, videos and music. By combining our expertise in children's products and our commitment to excellent customer service with the benefits of Internet retailing, we are able to deliver a unique value proposition to consumers. Our online store offers an extensive selection of competitively priced children's products, with over 8,500 SKUs representing more than 700 brands. Our Web site features detailed product information, value-added services and innovative merchandising through an intuitive and easy-to-use interface. In addition, we offer customers the convenience and flexibility of shopping 24 hours a day, seven days a week, with reliable and timely product delivery and excellent customer service. Since launching our Web site in October 1997, we have sold children's products to over 320,000 customers. Our net sales for the quarter ended December 31, 1998 totaled $22.9 million as compared to $0.5 million for the quarter ended December 31, 1997. INDUSTRY OVERVIEW ELECTRONIC COMMERCE The Internet is an increasingly significant medium for communication, information and commerce. International Data Corporation estimates that there were 97 million Web users worldwide at the end of 1998 and anticipates this number will grow to approximately 320 million users by the end of 2002. We believe that growth in Internet usage and online commerce is being fueled by a number of factors including: - - a large and growing installed base of personal computers in the workplace and home; - - advances in the performance and speed of personal computers and modems; - - improvements in network security, infrastructure and bandwidth; - - easier and cheaper access to the Internet; and - - the rapidly expanding availability of online content and commerce sites. The unique characteristics of the Internet provide a number of advantages for online retailers. Online retailers are able to "display" a larger number of products than traditional store-based or catalog retailers at a lower cost. In addition, online retailers are able to frequently adjust their featured selections, editorial content, shopping interfaces and pricing, providing significant merchandising flexibility. The minimal cost to publish on the Web, the ability to reach and serve a large and global group of customers electronically from a central location, and the potential for personalized low-cost customer interaction provide additional economic benefits for online retailers. Unlike traditional retail channels, online retailers do not have the burdensome costs of managing and maintaining a retail store infrastructure or the significant printing and mailing costs of catalogs. Online retailers can also easily obtain demographic and behavioral data about customers, increasing opportunities for direct marketing and personalized services. TRADITIONAL CHILDREN'S PRODUCTS RETAIL INDUSTRY The market for children's products includes many categories, from traditional toys and books to video games and educational software. Toy Manufacturers of America, Inc. estimates that the domestic toy category alone had retail sales of approximately $23 billion in 1997. We believe that product categories such as children's video games, software, videos and music also represent significant market opportunities. Traditional store-based toy retailers include mass market retailers such as Toys R 32 Us, Wal-Mart, Kmart and Target, as well as specialty chains such as Zany Brainy and Noodle Kidoodle. Mass market retailers tend to carry a deep selection of well-known brand name toys from leading vendors such as Mattel, Hasbro and LEGO. Specialty retailers generally carry a broader selection of specialty toy brands such as BRIO, PLAYMOBIL and Learning Curve but do not typically have a significant selection of well-known brand name toys. As a result, we believe that no traditional store-based retailer currently offers an extensive product selection of both popular, well-known brand name toys and diverse, harder-to-find, specialty toys. We believe that traditional store-based retailers face a number of challenges in providing a satisfying shopping experience for consumers of children's products: - - The number of SKUs and the amount of product inventory that a traditional store-based retailer can carry in any one store is constrained by the physical space available in the store, thereby limiting selection for consumers. - - Limited shelf space and store layout constraints limit the merchandising flexibility of traditional store-based retailers. As a result, traditional retailers generally display products by brand, category (e.g., games, plush toys or dolls) or packaging and can not easily adjust or blend these merchandising strategies. - - Due to the significant cost of carrying inventory in multiple store locations, traditional store-based retailers focus their product selection on the most popular products that produce the highest inventory turns, thereby further limiting consumer selection. - - Traditional store-based retailers can only serve those customers who have convenient access to their stores. Traditional store-based retailers must open new stores to serve additional geographic areas, resulting in significant investments in inventory, leasehold improvements and the hiring and training of store personnel. - - Traditional store-based retailers face challenges in hiring, training and maintaining knowledgeable sales staff, thereby limiting the level of customer service available to consumers. In addition, we believe that many consumers find the toy shopping experience, especially at traditional mass market retail outlets, to be time-consuming, inconvenient and unpleasant due to factors such as location, store layout, product selection, level of customer service and the challenges of shopping with children. THE ETOYS SOLUTION We are the leading Web-based retailer focused exclusively on children's products. Our online store is designed to provide consumers with a compelling and enjoyable shopping experience offering all of the benefits of a Web-based retail environment. Our exclusive focus on children's products and commitment to value-added services and customer service enable us to uniquely address the needs and desires of our customers. The key components of our solution include: CONVENIENT SHOPPING EXPERIENCE. Our online store provides customers with an intuitive, easy-to-use shopping interface that is available 24 hours a day, seven days a week and may be reached from the shopper's home or office. Our online store enables us to deliver a broad selection of products to customers in rural or other locations that do not have convenient access to physical stores. We also make the shopping experience convenient by categorizing our products into easy-to-shop departments, including toys, video games, software, videos and music. Our advanced search technology makes it easy for consumers to locate products efficiently based on pre-selected criteria depending upon the department. For example, by using a quick keyword search or a sophisticated product search in our toy department, a customer can search by any combination of age, category, keyword or price. 33 EXTENSIVE PRODUCT SELECTION AND INNOVATIVE MERCHANDISING. We offer a broad selection of children's products that would be economically or physically impractical to stock in a traditional store. We believe that we offer the largest selection of toys available on the Internet and are the only retailer to provide a comprehensive selection of both traditional, well-known brands (e.g., Mattel, Hasbro and LEGO) and specialty toy brands (e.g., BRIO, PLAYMOBIL and Learning Curve). In addition we offer a broad selection of children's video games, software, videos and music. We focus exclusively on children's products and many of our brand name and specialty products are individually selected and tested to provide our customers with the highest quality products. In addition, the unique environment of the Internet enables us to dynamically adjust our merchandising strategy and product mix to respond to changing customer demand. VALUE-ADDED SERVICES. Through our online store, we offer value-added services to assist our customers, who are generally adults purchasing for children. Many of these services are also designed to inform and involve children in the shopping experience. Our services include: - - PRODUCT REVIEWS AND RECOMMENDATIONS. To assist customers in selecting appropriate products, we provide regularly updated product recommendations through our PICKS OF THE MONTH, FAVORITES BY AGE, TOY BOX ESSENTIALS and our TWENTY UNDER $20 recommended list of affordable toys. In addition to our merchant recommendations, we feature product reviews and lists of award-winning products from prominent parenting and family publications as well as from organizations solely dedicated to children's products, including the OPPENHEIM TOY PORTFOLIO, FAMILY FUN magazine, PARENTING magazine and DR. TOY. - - GIFT CENTER. We simplify gift shopping through our Gift Center, where consumers can obtain gift recommendations by age and get information on a variety of child-appropriate gift wrap styles and personalized message cards to accompany the gift. We also sell electronic gift certificates through our Gift Center. - - MY ETOYS. Through My eToys, we personalize the customer's shopping experience by offering the following services: - BIRTHDAY REMINDERS, in which we notify shoppers of a child's birthday three weeks in advance via e-mail and proactively offer age-appropriate gift recommendations; - WISH LISTS, in which parents and children can e-mail friends and family a list of a child's most desired toys, video games, software, videos and music; and - ADDRESS BOOK, in which we record the addresses of people to whom our customers send gifts so they do not need to re-enter the same addresses multiple times. - - IN-STOCK NOTIFICATION. If a product is out of stock, our customers can request that we e-mail them when the product is back in stock. We believe this service helps customers avoid extended store-to-store searches for hard-to-find products. - - PRODUCT NEWS. Our free monthly e-mail newsletter, THE ETOYS NEWS, delivers updates about new products and services and special offers to our customers. EXCELLENT CUSTOMER SERVICE. We provide free pre- and post-sales support via both e-mail and toll-free telephone service during extended business hours. Once an order is made, customers can view order-tracking information on our Web site or contact our customer service department to obtain the status of their orders and, when necessary, resolve order and product questions. Furthermore, the customer service area of our Web site contains extensive information for first-time and repeat visitors including helpful hints in searching for, shopping for, ordering and returning our products. 34 BUSINESS STRATEGY Our objective is to be one of the world's leading retailers of children's products. Key elements of our strategy are: FOCUS ON ONLINE RETAILING OF CHILDREN'S PRODUCTS. We intend to become the ultimate shopping destination for consumers of children's products. Our online store is exclusively focused on children's products and offers an extensive selection of toys, video games, software, videos and music not currently available at any single traditional retailer. We intend to enhance our product offerings by expanding into additional children's product categories in order to leverage our customer base, brand name, merchandising expertise and fulfillment capabilities. BUILD BRAND RECOGNITION. Through our advertising and promotional activities, we target purchasers of children's products, with a primary focus on mothers. We believe that mothers are the principal decision-makers for purchases of children's products and strongly influence the purchasing decisions of family and friends. We use offline and online marketing strategies to maximize customer awareness and enhance our brand recognition: - - OFFLINE ADVERTISING. We use offline advertising to promote both our brand name and specific merchandising opportunities. Our traditional advertising efforts have included print advertising in FAMILY FUN, FAMILY PC, PARENTING, PARENTS and CHILD publications, and radio and television advertising in major markets. In October 1998, we initiated television advertising, including a national advertising campaign begun in November in which Visa co-promoted eToys in a holiday commercial. We plan to increase our use of traditional offline advertising in order to continue building our brand recognition. - - ONLINE ADVERTISING. We partner with major online portals and Internet service providers, parenting-related Web sites and children-oriented companies. Accordingly, we have entered into relationships with AOL, Children's Television Workshop and Moms Online. In addition, we advertise on the sites of major online portals and Internet service providers, including Yahoo!, Excite, Infoseek, Microsoft Network and Lycos. - - DIRECT ONLINE MARKETING. As our customer base grows, we continue to collect significant data about our customers' buying preferences and habits and to develop one-to-one relationships with our customers. We intend to leverage this information by delivering valuable information, special offers and inducements to our customers via e-mail and other means. In addition, we use our in-house newsletter, THE ETOYS NEWS, to alert customers to important developments and merchandising initiatives. We intend to continue to use the unique resources of the Internet as a low-cost means of personalized marketing in an effort to drive traffic and repeat purchases. PURSUE INCREMENTAL REVENUE OPPORTUNITIES. We intend to leverage our brand, operating infrastructure and customer base to develop additional revenue opportunities. For example, we believe significant incremental revenue opportunities exist through: - - opening new departments on our Web site to expand into new and related children's product categories; - - increasing product selection in our existing departments; - - adding more value-added services to My eToys to further personalize the customer experience; - - pursuing international market opportunities; and - - acquiring complementary businesses, products or technologies. PROMOTE REPEAT PURCHASES. We are focused on promoting customer loyalty, building repeat purchase relationships with our customers, leveraging our customer acquisition costs and maximizing the lifetime value of our customer relationships. To accomplish this strategy, we intend to effectively use direct marketing techniques targeted at existing customers, build superior personalization 35 features and continually strive to enhance our customer service. MAINTAIN OUR TECHNOLOGY FOCUS AND EXPERTISE. We intend to leverage our scaleable commerce platform to enhance our service offerings and take advantage of the unique characteristics of online retailing. To date, we have developed technologies and implemented systems to support secure and reliable online retailing in an intuitive, easy-to-navigate format. Among other technology objectives, we intend to develop personalization features and programs, to enhance our user interface and continuously increase the automation and efficiency of our supply chain and fulfillment activities. THE ETOYS ONLINE RETAIL STORE We designed our online retail store to be the ultimate shopping destination for children's products. We believe our attractive, easy-to-use, online store offers consumers a unique value proposition and an enjoyable shopping experience as compared to traditional store-based retailers. Our user interface is simple, the look-and-feel is playful and entertaining, and navigation is consistent throughout the site. A consumer shopping on our Web site can, in addition to ordering products, browse the different departments of our store, conduct targeted searches, view recommended products, visit our Gift Center, participate in promotions and check order status. In contrast to a traditional retail store, the consumer can shop in the comfort and convenience of his or her home or office. Set forth below is a graphic illustration of our homepage: [GRAPHICAL PICTURE OF THE HOMEPAGE OF ETOYS] 36 OUR STORE DEPARTMENTS We categorize products into different departments, including toys, video games, software, videos and music. Within each department, products are organized by brand (e.g., Mattel and Hasbro), category (e.g., games, plush toys and dolls) and our recommendations (e.g., bestsellers and favorites). The following is a summary of each of these departments: TOYS. Since inception, we have focused on becoming the premier online retailer of quality children's toys. We believe that we offer the largest selection of toys available on the Internet. Through our toy department, we offer an extensive selection of toys, and we believe we are the only retailer of children's products to provide a comprehensive selection of both traditional, well-known brands (e.g., Mattel, Hasbro and LEGO) and specialty toy brands (e.g., BRIO, PLAYMOBIL and Learning Curve). We select and test many of our toys before adding them to our online store collection. VIDEO GAMES. Through our video game department, we offer an extensive selection of game titles, including bestsellers and new releases, for the popular Sony PlayStation, Nintendo 64 and Game Boy platforms. We provide our own ratings for each video game with respect to content, language and level of violence. In addition, we sell video game hardware and recommended accessories. SOFTWARE. Through our children's software department, we offer a wide selection of software with an emphasis on educational titles. We organize our software into easy-to-use and understandable categories and feature a variety of well-known classic and currently popular brands including Broderbund, Disney Interactive, Microsoft's Magic School Bus and Jumpstart. VIDEOS. Through our children's video department, we offer videos for children that are organized into easy-to-shop categories. We feature a variety of well-known titles from popular television series, including Barney, Blue's Clues, Dr. Seuss, Magic School Bus, Muppets, Peanuts, Rugrats, Teletubbies and Winnie the Pooh as well as award-winning independent releases. MUSIC. Through our children's music department, we offer an extensive assortment of children's music in both cassette and CD format. Unlike most retailers, we organize our children's music into different categories by subject. We feature a variety of popular children's music categories, including books on tape, Disney, educational, holiday, lullabies and bedtime, rock for kids, soundtracks, storytelling and Sesame Street. We also carry music from artists associated with independent labels. We listen to many of our music products in order to create helpful product descriptions and recommendations. SHOPPING AT OUR STORE We believe that the sale of children's products over the Web can offer attractive benefits to consumers, including enhanced selection, convenience, ease-of-use, depth of content and information, personalization and competitive pricing. The following highlights some of the key features of our online store: BROWSING. Our Web site offers visitors a variety of highlighted subject areas and special features arranged in a simple, easy-to-use format intended to enhance product search, selection and discovery. By clicking on the permanently displayed department names, the consumer moves directly to the home page of the desired department and can quickly view promotions and featured products. Customers can use a quick keyword search in order to locate a specific product or execute more sophisticated searches based on pre-selected criteria depending upon the department. In addition, customers can browse our online store by hot-linking to specially designed pages dedicated to products from certain key national and specialty brands. Customers can also hot-link to pages featuring certain key product categories such as construction toys, just-for-girls software and movie soundtrack music. GETTING ANSWERS. One of the unique advantages of an Internet retail store is the ability to interweave product information and 37 editorial content. On our Web site customers can find detailed product information, including product descriptions, manufacturers' and merchants' age recommendations, product packaging, battery requirements, a list of accessories and related products that are available and product awards. We provide editorial content for our customers through regularly updated product recommendations, including TOYBOX ESSENTIALS, FAVORITES BY AGE, PICKS OF THE MONTH and TWENTY UNDER $20. Furthermore, on our Web site we highlight award-winning products from prominent parenting and family publications as well as from organizations solely dedicated to children's products. FINDING A GIFT. In our Gift Center, consumers can obtain gift recommendations by age and get information on a variety of child-appropriate gift wrap styles and personalized message cards to accompany the gift. In addition, we offer a birthday reminder service, in which we notify shoppers of a child's birthday three weeks in advance via e-mail and proactively offer age-appropriate recommendations to help our busy shoppers. We also provide a children's wish list service, in which parents and children can e-mail friends and family a list of a child's most desired gifts. Furthermore, we sell electronic gift certificates through our Gift Center. SELECTING A PRODUCT AND CHECKING OUT. To purchase products, customers simply click on the "order now" button to add products to their virtual shopping cart. Customers can add and subtract products from their shopping cart as they browse around our store, prior to making a final purchase decision, just as in a physical store. Because we maintain a fully-integrated inventory system and stock each item we sell, we are able to notify customers in real-time whether a selected product is currently in stock. To execute orders, customers click on the "checkout" button and, depending upon whether the customer has previously shopped with us, are prompted to supply shipping details online. We also offer customers a variety of gift wrapping and shipping options during the checkout process. Prior to finalizing an order by clicking the "submit order" button, customers are shown their total charges along with the various options chosen at which point customers still have the ability to change their order or cancel it entirely. PAYING. To pay for orders, a customer must use a credit card, which is authorized during the checkout process, but which is charged when we ship the customer's items from our fulfillment center. Our Web site uses an encryption technology that works with the most common Internet browsers and makes it virtually impossible for unauthorized parties to read information sent by our customers. Our system automatically confirms receipt of each order via e-mail within minutes and notifies the customer when we ship the order, which is typically within one to two business days for in-stock items. We also offer our customers a money-back return policy. GETTING HELP. From every page of our Web site, a customer can click on a "help" button to go to our customer service area. The customer service area of our Web site contains extensive information for first-time and repeat visitors. In this area, we assist customers in searching for, shopping for, ordering and returning our products as well as provide information on our low price guarantee, shipping charges and other policies. In addition, we provide customers with answers to the most frequently asked questions and encourage our visitors to send us feedback and suggestions via e-mail. Furthermore, customer service agents are available to answer questions about products and the shopping process during extended business hours via our toll-free number, which is displayed in the customer service area of our Web site. MERCHANDISING We believe that the breadth and depth of our product selection, together with the flexibility of our online store and our range of value-added services, enable us to pursue a unique merchandising strategy. We provide an extensive selection of children's products, including traditional mass market toys, specialty toys and a broad selection of related 38 children's products, including video games, software, videos and music, that would be economically impractical to stock in a traditional store. We focus exclusively on children's products and we individually select and test many of the products in our online store to ensure quality. In addition, this level of product evaluation enables us to deliver valuable additional product information to our shoppers. For example, we are able to develop detailed and helpful descriptions and our own recommendations by age for many of the products in our online store. Unlike store-based retail formats, our online store provides us significant flexibility with regard to the organization and presentation of our product selection. Our intuitive, easy-to-use interface allows customers to browse our product selection by brand, age, product category and price, as well as by combinations of these attributes. For example, a customer can easily search for science-oriented toys designed for eight-year-old children or view all Barbie dolls and related accessories without consulting store personnel or walking multiple aisles within one or more traditional stores. Our online store enables us to dynamically adjust our product mix to respond to changing customer demand. In addition, our online store gives us flexibility in featuring or promoting certain toys without having to alter the physical layout of a store. To encourage purchases, we feature various promotions on a rotating basis throughout the store and continually update our online recommendations. We also actively create and maintain pages that are artistically designed to highlight certain of the most prominent product brands we sell in our different departments. We believe this strategy provides us with an excellent opportunity to cross-sell a brand across our departments and promote impulse purchases by customers. Finally, our range of value-added services such as our Gift Center, our recommendations and our TWENTY UNDER $20 feature enable us to display and promote our product selection in a flexible and targeted manner. We believe that our merchandising strategy provides a unique value proposition for our vendors. We are able to offer all our vendors access to purchasers of children's products regardless of the size or influence of the individual vendor. MARKETING AND PROMOTION Our marketing and promotion strategy is designed to: - - build brand recognition; - - increase consumer traffic to our store; - - add new customers; - - build strong customer loyalty; - - maximize repeat purchases; and - - develop incremental revenue opportunities. Through our advertising and promotions, we target adult purchasers of children's products, with a focus on mothers. We believe that mothers are the principal decision-makers in purchases of children's products and strongly influence children's products purchases by family and friends. Our advertising campaigns are designed to identify with a mother's toy shopping experience. We use offline and online marketing strategies to maximize customer awareness and enhance brand recognition. To accomplish this strategy, we have entered into relationships with AOL, Children's Television Workshop and Moms Online. Our marketing agreements generally provide for us to be the preferred online toy retailer on certain of the sites of these providers, with the right to place banner advertisements and integrated links to our store on certain children-related or other specified pages or through keyword searches. In addition, we advertise on the sites of major online portal and Internet service providers, including Yahoo!, Excite, Infoseek, Microsoft Network and Lycos. We entered into a marketing agreement with AOL, the leading Internet online service provider, in October 1997. This agreement established us as a preferred AOL provider of children's toy products through an eToys content area on the AOL Network and AOL's Web site, aol.com, (the "AOL Online Area"). In addition, AOL agreed to promote and advertise eToys on a preferred basis in certain online 39 areas controlled by AOL and to deliver a specified number of annual page views to the online areas promoting eToys. Over the 26-month term of the agreement, we are obligated to make minimum payments totaling $3.1 million to AOL, of which $1.4 million remained to be paid as of December 31, 1998. We have also agreed to deliver content through the AOL Online Area, provide children's toy products that are competitive in price and performance and to manage, operate and support such content and children's toy products. The agreement with AOL expires on December 31, 1999; however, AOL may terminate the agreement earlier in the event we materially breach the agreement or in the event of bankruptcy or insolvency or certain similar adverse financial events. We use traditional offline advertising, including print advertising in FAMILY FUN, FAMILY PC, PARENTING, PARENTS and CHILD publications, and radio and television advertising in major markets. In October 1998, we initiated television advertising, including a national advertising campaign begun in November in which Visa co-promoted eToys in a holiday commercial. To direct traffic to our Web site, we have created inbound links that connect directly to our Web site from other sites. Potential customers can simply click on these links to become connected to our Web site from search engines and community and affinity sites. In addition, in order to increase exposure on the Internet and directly generate sales, we have an affiliates program pursuant to which we pay one of our registered affiliates a referral fee for any sale generated via their link to our Web site. FULFILLMENT OPERATIONS We obtain products from a network of large and small vendors, manufacturers and distributors. We carry inventory of the products available for sale on our Web site. We currently conduct our fulfillment operations in an approximately 60,000 square-foot facility located in Commerce, California. Both the facility and the operations within it are operated solely by us. We send orders from our Web site to our fulfillment center over a secure frame relay connection and a proprietary warehouse management system ("WMS") optimizes the pick, pack and ship process. Our proprietary WMS provides the Web site with data on inventory receiving, shipping, inventory quantities and inventory location, which enables us to display information about the availability of the products on our Web site. Our proprietary WMS also enables us to offer a variety of gift wrap choices, custom gift cards and custom to/from labels for each individual gift. In addition, we offer an order tracking system for our customers on our Web site. We offer three levels of shipping service: next day delivery, three-day delivery, and ground delivery. We have developed relationships with both United Parcel Service and the United States Postal Service to maximize our overall service level to all 50 states. Priority orders are flagged and expedited through our fulfillment processes. These capabilities are required due to the time-sensitive nature of the gifts that we deliver to our customers. CUSTOMER SERVICE We believe that a high level of customer service and support is critical to retaining and expanding our customer base. Our customer service representatives are available from 6:00 a.m. to 11:00 p.m. Pacific Time, seven days a week to provide assistance via e-mail or telephone. We strive to answer all customer inquiries within 24 hours. Our customer service representatives handle questions about orders, assist customers in finding desired products and register customers' credit card information over the telephone. Our customer service representatives are a valuable source of feedback regarding user satisfaction. We also use BizRate, an online market research company, to obtain monthly customer feedback. Our Web site also contains a customer service page that outlines store policies and provides answers to frequently asked questions. 40 OPERATIONS AND TECHNOLOGY We have implemented a broad array of scaleable site management, search, customer interaction, transaction-processing and fulfillment services and systems. These services and systems use a combination of our own proprietary technologies and commercially available, licensed technologies. Our transaction-processing systems are integrated with our accounting and financial systems. We focus our internal development efforts on creating and enhancing the specialized, proprietary software that is unique to our business. We use a set of applications for: - - accepting and validating customer orders; - - organizing, placing and managing orders with suppliers; - - receiving product and assigning it to customer orders; and - - managing shipment of products to customers based on various ordering criteria. Our systems have been designed based on industry standard architectures and have been designed to reduce downtime in the event of outages or catastrophic occurrences. Our systems provide 24-hour-a-day, seven-day-a-week availability. Our system hardware is hosted at a third-party facility in Sunnyvale, California, which provides redundant communications lines and emergency power backup. We have implemented load balancing systems and our own redundant servers to provide for fault tolerance. We incurred product development expenses of $0.4 million in the fiscal year ended March 31, 1998 and $2.0 million in the nine months ended December 31, 1998. We anticipate that we will continue to devote significant resources to product development in the future as we add new features and functionality to our Web site. The market in which we compete is characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing customer demands. Accordingly, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our service in response to competitive service and product offerings and evolving demands of the marketplace. Our failure to adapt to such changes would have a material adverse effect on our business, results of operations and financial condition. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require substantial expenditures by us to modify or adapt our services or infrastructure which could have a material adverse effect on our business, results of operations and financial condition. GOVERNMENT REGULATION We are not currently subject to direct federal, state or local regulation, and laws or regulations applicable to access to or commerce on the Internet, other than regulations applicable to businesses generally. However, due to the increasing popularity and use of the Internet and other online services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or other online services covering issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. The nature of such legislation and the manner in which it may be interpreted and enforced cannot be fully determined and, therefore, such legislation could subject us and/or our customers to potential liability, which in turn could have an adverse effect on our business, results of operations and financial condition. The adoption of any such laws or regulations might also decrease the rate of growth of Internet use, which in turn could decrease the demand for our service or increase the cost of doing business or in some other manner have a material adverse effect on 41 our business, results of operations and financial condition. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. The vast majority of such laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Several states have also proposed legislation that would limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission has also initiated action against at least one online service regarding the manner in which personal information is collected from users and provided to third parties. Changes to existing laws or the passage of new laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace that could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs, or could in some other manner have a material adverse effect on our business, results of operations and financial condition. In addition, because our services are accessible throughout the United States, other jurisdictions may claim that we are required to qualify to do business as a foreign corporation in a particular state. We are qualified to do business in California, and our failure to qualify as a foreign corporation in a jurisdiction where it is required to do so could subject us to taxes and penalties for the failure to qualify and could result in our inability to enforce contracts in such jurisdictions. Any such new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have a material adverse effect on our business, results of operations and financial condition. COMPETITION The online commerce market is new, rapidly evolving and intensely competitive. We expect competition to intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new Web sites at a relatively low cost. In particular, the children's toy, video game, software, video and music retailing industries are intensely competitive. We currently or potentially compete with a variety of other companies, including: - - traditional store-based toy and children's product retailers such as Toys R Us, FAO Schwarz, Zany Brainy and Noodle Kidoodle; - - major discount retailers such as Wal-Mart, Kmart and Target; - - online efforts of these traditional retailers, including the online stores operated by Toys R Us, Wal-Mart and FAO Schwarz; - - physical and online stores of entertainment entities that sell and license children's products, such as The Walt Disney Company and Warner Bros.; - - catalog retailers of children's products; - - vendors of children's products that currently sell certain of their products directly online, such as Mattel and Hasbro; - - other online retailers that include certain children's products as part of their product offerings, such as Amazon.com, Barnesandnoble.com, CDnow, Beyond.com and Reel.com; - - Internet portals and online service providers that feature shopping services, such as AOL, Yahoo!, Excite and Lycos; and - - various smaller online retailers of children's products, such as BrainPlay.com, Red Rocket and Toysmart.com. We believe that the following are principal competitive factors in our market: - - brand recognition; - - selection; - - convenience; - - price; - - speed and accessibility; 42 - - customer service; - - quality of site content; and - - reliability and speed of fulfillment. Many of our current and potential traditional store-based and online competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Many of these current and potential competitors can devote substantially more resources to Web site and systems development than we can. In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with online competitors or children's toy, video game, software, video and music publishers or suppliers as the use of the Internet and other online services increases. Certain of our competitors may be able to secure products from vendors on more favorable terms, fulfill customer orders more efficiently and adopt more aggressive pricing or inventory availability policies than we can. Traditional store-based retailers also enable customers to see and feel products in a manner that is not possible over the Internet. Some of our competitors such as Toys R Us and Wal-Mart have significantly greater experience in selling children's toys, video games, software, videos and music products. Our online competitors are particularly able to use the Internet as a marketing medium to reach significant numbers of potential customers. Finally, new technologies and the expansion of existing technologies, such as price comparison programs that select specific titles from a variety of Web sites and may direct customers to other online toy, video game, software, video and music retailers, may increase competition. If we face increased competition, our operating results may be adversely affected. LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a materially adverse effect on us. INTELLECTUAL PROPERTY We regard the protection of our copyrights, service marks, trademarks, trade dress and trade secrets as critical to our future success and relies on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect our proprietary rights in products and services. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with our suppliers and strategic partners in order to limit access to and disclosure of our proprietary information. There can be no assurance that these contractual arrangements or the other steps taken by us to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. We pursue the registration of our trademarks and service marks in the U.S. and internationally. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available online. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of the eToys brand is maintained by such licensees, there can be no assurance that such licensees will not take actions that might materially adversely affect the value of our proprietary rights or reputation, which could have a material adverse effect on our business, results of operations and financial condition. We also rely on certain technologies that we license from third parties, including the suppliers of the operating systems and financial and reporting system for our business. There can be no assurance that these third-party technology licenses will 43 continue to be available to us on commercially reasonable terms. The loss of such technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could materially adversely affect our business, results of operations and financial condition. To date, we have not been notified that our technologies infringe the proprietary rights of third parties. There can be no assurance that third parties will not claim infringement by us with respect to past, current or future technologies. We expect that participants in our markets will be increasingly subject to infringement claims as the number of services and competitors in our industry segment grows. Any such claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all. As a result, any such claim could have a material adverse effect upon our business, results of operations and financial condition. EMPLOYEES As of December 31, 1998, we had 235 full-time employees. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good. Our future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel, none of whom are bound by an employment agreement requiring service for any defined period of time. The loss of services of one or more of our key employees could have a material adverse effect on our business, financial condition and results of operations. Our future success also depends in part upon our continued ability to attract, hire, train and retain highly qualified technical, sales and managerial personnel. Competition of such personnel is intense and there can be no assurance that we can retain our key personnel in the future. FACILITIES Our executive offices are located in Santa Monica, California, where we lease approximately 60,000 square feet under a lease that expires in July 2003. In addition, we lease approximately 60,000 square feet in Commerce, California for our fulfillment operations under a lease that expires in August 2003. 44 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding our executive officers and directors as of January 31, 1999:
NAME AGE POSITION(S) - ---------------------------- --- ----------------------------------------------------- Edward C. Lenk.............. 37 President, Chief Executive Officer and Uncle of the Board Steven J. Schoch............ 40 Senior Vice President and Chief Financial Officer John R. Hnanicek............ 35 Senior Vice President and Chief Information Officer Frank C. Han................ 35 Senior Vice President of Product Development Louis V. Zambello III....... 41 Senior Vice President of Operations Peter C.M. Hart(1).......... 48 Director Tony A. Hung(1)............. 31 Director Michael Moritz(2)........... 44 Director Daniel J. Nova(2)........... 37 Director
- ------------------------ (1) Member of Audit Committee (2) Member of Compensation Committee EDWARD C. LENK founded eToys and has served as our President, Chief Executive Officer and a Director since June 1997. In December 1998, he was appointed Uncle of the Board. Prior to founding eToys, from May 1994 to July 1996 Mr. Lenk was employed as Director of Strategic Planning at The Walt Disney Company, where he was responsible for strategic planning and new business development of Worldwide Attractions and Resorts. From May 1991 to May 1994, he was a Vice President of Strategic Planning at The Walt Disney Company. Mr. Lenk received a Bachelor of Arts SUMMA CUM LAUDE from Bowdoin College and a Masters in Business Administration, with distinction, from Harvard Business School. STEVEN J. SCHOCH has served as our Chief Financial Officer since January 1999. Prior to joining us, from December 1995 to January 1999, Mr. Schoch was Vice President and Treasurer of Times Mirror Company, a newspaper and magazine publishing company. He also served as Chief Executive Officer and President of a wholly owned subsidiary of Times Mirror Company dedicated to the reduction and containment of costs of the parent company. From March 1991 to October 1995, Mr. Schoch worked at The Walt Disney Company, most recently as Vice President, Treasurer--Euro Disney S.C.A. Mr. Schoch serves as a director of VDI Media. Mr. Schoch received a Bachelor of Science from Tufts University and a Masters in Business Administration from the Amos Tuck School of Business Administration at Dartmouth College. JOHN R. HNANICEK has served as our Chief Information Officer since December 1998. Prior to joining us, from October 1996 to December 1998, he was employed as Senior Vice President of Information Systems for Hollywood Entertainment, Inc., a nationwide retail video chain. From January 1996 to October 1996, Mr. Hnanicek served as Chief Information Officer for Homeplace, Inc., a home furnishings chain. From 1990 to 1995, he served as Senior Vice President of Information Systems and Logistics at OfficeMax, Inc., a retail office supply outlet. Mr. Hnanicek holds a Bachelor of Science in Computer Science and Accounting from Cleveland State University. FRANK C. HAN has served as our Senior Vice President of Product Development since January 1999. From February 1997 to January 1999, Mr. Han was our Chief Operating Officer and Vice President of Finance. Prior to joining us, Mr. Han worked at Union Bank of California, serving as Vice President of Interactive Markets from January 1995 to February 1997 and as Director of 45 Strategic Planning from 1993 to 1995. Mr. Han received a Bachelor of Science CUM LAUDE from Yale University and a Masters in Business Administration from the Stanford Graduate School of Business. LOUIS V. ZAMBELLO III has served as our Senior Vice President of Operations since December 1998. Prior to joining us, from 1984 to 1998, he held a variety of positions at L.L. Bean, Inc., an outdoor retailer. Most recently, Mr. Zambello served as Senior Vice President of Operations and Creative from June 1998 to December 1998, as Senior Vice President of Operations from December 1993 to June 1998, as Vice President of Merchandise Services and Manufacturing from December 1991 to August 1993 and in a variety of other positions since 1984. Mr. Zambello received a Bachelor of Arts MAGNA CUM LAUDE from Cornell University and a Masters in Business Administration from Harvard Business School. PETER C.M. HART has served as a Director of eToys since October 1997. Since January 1999, Mr. Hart has been a Managing Partner of Wildkin LLC, a distributor of toys. Since November 1997, he has served as a business advisor to EdUsa, a company that provides language instruction over the Internet. From 1983 to 1997, he held a variety of positions at Ross Stores, Inc., an apparel retailer, most recently as a Senior Vice President managing warehousing, distribution and MIS operations. Previously, Mr. Hart was a Business Systems Analyst at Joseph Magnin Department Store in San Francisco and at Rediffusion in Buckinghamshire, England. TONY A. HUNG has served as a Director of eToys since December 1997. Since 1997, he has been a Vice President of DynaFund Ventures, a venture capital partnership. Previously, Mr. Hung held a variety of positions at The Walt Disney Company, serving as Manager of Corporate Strategic Planning from 1996 to 1997, as Manager of Television and Telecommunications from 1995 to 1996, and as Senior Analyst in the Corporate Treasury department from 1992 to 1995. Mr. Hung serves on the boards of directors of a number of private companies. Mr. Hung holds a Bachelor of Arts from Harvard University and a Masters in Business Administration from The Anderson School at University of California at Los Angeles. MICHAEL MORITZ has served as a Director of eToys since June 1998. He has been a general partner of Sequoia Capital, a venture capital firm, since 1986. Sequoia Capital provided the original venture capital financing to companies such as Cisco Systems Inc., LSI Logic Corporation, Linear Technology Corporation, Microchip Technology Inc. and International Network Services. Mr. Moritz serves as a director of Yahoo! Inc. and Flextronics International Ltd., as well as several private companies. Mr. Moritz received a Master of Arts degree from Oxford University and a Masters in Business Administration from the Wharton School at the University of Pennsylvania. DANIEL J. NOVA has served as a Director of eToys since June 1998. Since August 1996, Mr. Nova has served as a general partner of Highland Capital Partners, a venture capital firm. Previously, he was a general partner of CMG@Ventures from January 1995 to August 1996 and a Senior Associate at Summit Partners from June 1991 to January 1995. Mr. Nova is a director of Lycos, Inc., an online portal, and several private companies. Mr. Nova received a Bachelor of Science in Computer Science and Marketing with honors from Boston College and a Masters in Business Administration from Harvard Business School. Our Board of Directors currently consists of five members. Each director is elected for a period of one year at our annual meeting of stockholders and serves until the next annual meeting or until his successor is duly elected and qualified. Our executive officers serve at the discretion of the Board of Directors. There are no family relationships among any of our directors or executive officers. BOARD COMMITTEES Our Board of Directors established the Compensation Committee in December 1998 and the Audit Committee in February 1999. 46 The Compensation Committee reviews and recommends to the Board of Directors the compensation and benefits of all our officers and establishes and reviews general policies relating to compensation and benefits of our employees. The Audit Committee reviews our internal accounting procedures and consults with and reviews the services provided by our independent accountants. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of our Compensation Committee of the Board of Directors are currently Mr. Moritz and Mr. Nova, neither of whom has ever been an officer or employee of eToys. Prior to establishing the Compensation Committee in December 1998, the Board of Directors as a whole performed the functions delegated to the Compensation Committee. DIRECTOR COMPENSATION Our directors do not currently receive any cash compensation from us for their service as members of the Board of Directors, although they are reimbursed for certain expenses in connection with attendance at Board and Committee meetings. Under our 1997 Stock Plan, nonemployee directors are eligible to receive stock option grants and stock purchase rights at the discretion of the Board of Directors or other administrator of the plan. Under our 1999 Directors' Stock Option Plan, non-employee directors are eligible to receive automatic stock option grants upon their initial appointment and at each of our annual stockholders meetings. See "--Stock Plans". In September 1997 the Board of Directors granted Mr. Hart an option to purchase 100,000 shares of Common Stock at $0.015 per share in connection with his appointment as a member of the Board of Directors. 1/4th of the shares vested upon June 15, 1998 and 1/48th of the total number of shares vest monthly from and after June 15, 1998. From January 1998 to June 1998, Mr. Hart provided us consulting services. In connection with these services, Mr. Hart received aggregate payments of $39,000, reimbursement of his expenses and an option to purchase 21,000 shares of Common Stock at $0.10 per share. This option, which vested at the rate of 1/6th per month commencing upon February 1, 1998, is fully vested. EXECUTIVE COMPENSATION The following table sets forth the compensation received for services rendered to eToys during the fiscal year ended March 31, 1998 by Edward C. Lenk, the Chief Executive Officer. No other executive officer earned more than $100,000 during the fiscal year ended March 31, 1998. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------------- ----------------------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION(1) SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) - --------------------------------- ----------- --------------- ----------------------- ------------------- --------------------- Edward C. Lenk(2) ............... $ 80,000 -- -- -- -- President and Chief Executive Officer
- -------------------------- (1) Mr. Lenk will be compensated at an annual base salary of $105,000 during the fiscal year ended March 31, 1999. John R. Hnanicek, who became Chief Information Officer in December 1998, will be compensated at an annual base salary of $150,000 during the fiscal year ended March 31, 1999 and was paid a bonus of $60,000 in December 1998, which bonus vests monthly over his first year of employment. Louis V. Zambello III, who became Senior Vice President of Operations in December 1998, will be compensated at an annual base salary of $200,000 during the fiscal year ended March 31, 1999 and has the right to receive a signing bonus of $115,000 before January 31, 2000. (2) Mr. Lenk commenced employment with us in December 1996. 47 OPTION GRANTS No stock options were granted to the Chief Executive Officer during the fiscal year ended March 31, 1998. OPTION EXERCISES AND HOLDINGS No options were held or exercised in the fiscal year ended March 31, 1998 by the Chief Executive Officer or any executive officer. We did not pay any compensation intended to serve as incentive for performance to occur over a period longer than one year pursuant to a long-term incentive plan in the fiscal year ended March 31, 1998 to the Chief Executive Officer or any executive officer. We do not have any defined benefit or actuarial plan with respect to the Chief Executive Officer or any executive officer under which benefits are determined primarily by final compensation and years of service. STOCK PLANS 1999 STOCK PLAN. The Board of Directors adopted our 1999 Stock Plan in February 1999 and it is expected to be approved by the stockholders in March 1999. We have reserved a total of 7,200,000 shares of Common Stock for issuance under the 1999 Stock Plan, plus an automatic annual increase on the first day of our fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 1,500,000 shares, 3.0% of our outstanding Common Stock on the last day of the immediately preceding fiscal year or such lesser number of shares as the Board of Directors determines. As of the date of this offering, no options have been granted under this plan. The purposes of the 1999 Stock Plan are to attract and retain the best available personnel, to provide additional incentives to our employees and consultants and to promote the success of our business. The 1999 Stock Plan provides for the granting to employees, including officers and directors, of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the granting to employees and consultants, including nonemployee directors, of stock purchase rights and nonstatutory stock options. If an optionee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value (under all of our plans and determined for each share as of the date the option to purchase the shares was granted) in excess of $100,000, any such excess options shall be treated as nonstatutory stock options. Unless terminated earlier, the 1999 Stock Plan will terminate in February 2009. The 1999 Stock Plan may be administered by the Board of Directors or a committee of the Board, each known as the "Administrator". The Board of Directors currently administers the 1999 Stock Plan. The Administrator determines the terms of options and stock purchase rights granted under the 1999 Stock Plan, including the number of shares subject to an option or stock purchase right, the exercise or purchase price, and the term and exercisability of options. The Administrator may grant an individual employee options or stock purchase rights under the 1999 Stock Plan during any one fiscal year to purchase a maximum of 3,000,000 shares. The exercise price of all incentive stock options granted under the 1999 Stock Plan must be at least equal to the fair market value of our Common Stock on the date of grant. The exercise price of any incentive stock option granted to an optionee who owns stock representing more than 10% of the total combined voting power of all classes of our outstanding capital stock or any parent or subsidiary corporation (a "10% Stockholder") must equal at least 110% of the fair market value of the Common Stock on the date of grant. After the effective date of this offering, the exercise price of nonstatutory stock options and the purchase price of stock purchase rights granted under the 1999 Stock Plan shall be such price as is determined by the Administrator. However, the exercise price of any nonstatutory stock option and the purchase price of stock purchase rights granted to our Chief Executive Officer or our four other most highly compensated officers will generally equal at least 100% of the fair 48 market value of the Common Stock on the date of grant. Payment of the purchase price of options and stock purchase rights may be made in cash or other consideration as determined by the Administrator. The Administrator determines the term of options, which may not exceed 10 years. The term is five years in the case of an incentive stock option granted to a 10% Stockholder. An optionee cannot transfer any option other than by will or the laws of descent or distribution. However, the Administrator may grant nonstatutory stock options with limited transferability rights in certain circumstances. Generally, each option may be exercised during the lifetime of the optionee only by such optionee. The Administrator determines when options vest and become exercisable. Stock issued pursuant to stock purchase rights granted under the 1999 Stock Plan will generally be subject to a repurchase right exercisable upon the voluntary or involuntary termination of the holder's employment or consulting relationship with us for any reason (including death or disability). We expect that options and stock purchase rights granted under the 1999 Stock Plan generally will vest, or any repurchase right will generally lapse, at the rate of 1/4th of the total number of shares subject to the options or stock purchase rights 12 months after the date of grant, and 1/48th of the total number of shares subject to the options each month thereafter. The Board has the authority to amend or terminate the 1999 Stock Plan as long as such action does not materially and adversely affect any outstanding option and provided that stockholder approval for any amendments to the 1999 Stock Plan shall be obtained to the extent required by applicable law. 1997 STOCK PLAN. The Board of Directors adopted and our stockholders approved our 1997 Stock Plan in March 1997. We have reserved a total of 5,800,000 shares of Common Stock for issuance under the 1997 Stock Plan. As of December 31, 1998, options to purchase 376,187 shares of Common Stock with a weighted average exercise price of $0.107 had been exercised and options to purchase a total of 4,254,200 shares at a weighted average exercise price of $0.996 per share were outstanding. As of December 31, 1998, 1,169,613 shares remained available for future issuance under the 1997 Stock Plan. However, the Board has determined that all future grants to employees and consultants will take place under our 1999 Stock Plan and therefore any shares remaining available for issuance under the 1997 Stock Plan as of the date of this offering will be returned to our authorized but unissued capital stock and will not be available for future grant. Shares returning to the 1997 Stock Plan upon cancellation of outstanding options may be made subject to future grant after the date of this offering. Unless terminated earlier, the 1997 Stock Plan shall terminate in March 2007. The terms of options and stock purchase rights issued under the 1997 Stock Plan are generally the same as those which may be issued under the 1999 Stock Plan, except with respect to the following features. The 1997 Stock Plan does not impose an annual limitation on the number of shares subject to options or stock purchase rights which may be issued to any individual employee. In addition, nonstatutory stock options or stock purchase rights granted under the 1997 Stock Plan are nontransferable in all cases and must be granted with an exercise price or purchase price equal to at least 85% of the fair market value of the Common Stock on the date of grant, unless granted to a 10% Stockholder, in which case the exercise price of options must be at least 110%, and the purchase price of stock purchase rights must be at least 100%, of the fair market value on the date of grant. 1999 DIRECTORS' STOCK OPTION PLAN. The Board of Directors adopted our 1999 Directors' Stock Option Plan in February 1999 and it is expected to be approved by the stockholders in March 1999. We have reserved a total of 200,000 shares of Common Stock for issuance under the 1999 Directors' Stock Option Plan. The 1999 Directors' Stock Option Plan becomes effective upon the effective date of this offering. As of the date of this offering, no options to purchase shares of Common Stock have been issued under the 1999 Directors' Stock Option Plan. The 1999 Directors' Stock 49 Option Plan provides for the grant of nonstatutory stock options to nonemployee directors. The 1999 Directors' Stock Option Plan is designed to work automatically without administration; however, to the extent administration is necessary, it will be performed by the Board of Directors. To the extent they arise, we expect that conflicts of interest will be addressed by abstention of any interested director from both deliberations and voting regarding matters in which such director has a personal interest. Unless terminated earlier, the 1999 Directors' Stock Option Plan will terminate in February 2009. The 1999 Directors' Stock Option Plan provides that each person who becomes a nonemployee director after the date of this offering will be granted a nonstatutory stock option to purchase 20,000 shares of Common Stock on the date on which the optionee first becomes a nonemployee director. In addition, on the date of each annual meeting of stockholders, we will grant to each nonemployee director an additional option to purchase 5,000 shares of Common Stock if, on such date, he or she has served on our Board of Directors for at least six months. All options granted under the 1999 Directors' Stock Option Plan shall have an exercise price equal to 100% of the fair market value of the Common Stock as of the date of grant and will be exercisable in full immediately upon grant. The 1999 Directors' Stock Option Plan sets neither a maximum nor a minimum number of shares for which options may be granted to any one nonemployee director, but does specify the number of shares that may be included in any grant and the method of making a grant. The optionee cannot transfer any option granted under the 1999 Directors' Stock Option Plan other than by will or the laws of descent or distribution or pursuant to a qualified domestic relations order. Each option is exercisable, during the lifetime of the optionee, only by such optionee. If a nonemployee director ceases to serve as a director for any reason other than death or disability, he or she has 90 days after the date he or she ceases to be a director to exercise options granted under the 1999 Directors' Stock Option Plan. To the extent that he or she does not exercise an option within such 90 day period, such option shall terminate. If a director's service on our Board of Directors terminates as a result of his or her death or disability, the director or the director's estate will have the right to exercise any option granted under the 1999 Directors' Stock Option Plan for 12 months following such termination date. Options granted under the 1999 Directors' Stock Option Plan have a term of ten years. The Board of Directors may amend or terminate the 1999 Directors' Stock Option Plan at any time. However, no such action may adversely affect any outstanding option. Stockholder approval for any amendments to the 1999 Directors' Stock Option Plan shall be obtained to the extent required by applicable law. 1999 EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors adopted our 1999 Employee Stock Purchase Plan in February 1999 and it is expected to be approved by the stockholders in March 1999. We have reserved a total of 300,000 shares of Common Stock for issuance under the 1999 Employee Stock Purchase Plan, plus an automatic annual increase on the first day of each of our fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 180,000 shares, 0.5% of our outstanding Common Stock on the last day of the immediately preceding fiscal year, or such lesser number of shares as the Board of Directors shall determine. The 1999 Employee Stock Purchase Plan becomes effective upon the date of this offering. Unless terminated earlier by the Board of Directors, the 1999 Employee Stock Purchase Plan shall terminate in February 2019. 50 The 1999 Employee Stock Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code. This plan will be implemented by a series of overlapping offering periods of 24 months' duration, with new offering periods (other than the first offering period) commencing on May 1 and November 1 of each year. Each offering period will consist of four consecutive purchase periods of six months' duration, at the end of which an automatic purchase will be made for participants. The initial offering period is expected to commence on the date of this offering and end on April 30, 2001; the initial purchase period is expected to begin on the date of this offering and end on October 31, 1999. The Board of Directors or a committee appointed by the Board of Directors will administer the 1999 Employee Stock Purchase Plan. Our employees, including officers and employee directors, or employees of any majority-owned subsidiary designated by the Board of Directors, are eligible to participate in the 1999 Employee Stock Purchase Plan if they are employed by us or any such subsidiary for at least 20 hours per week and more than five months per year. The 1999 Employee Stock Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 15% of an employee's compensation. The purchase price is equal to the lower of 85% of the fair market value of the Common Stock at the beginning of each offering period or at the end of each purchase period. In certain circumstances, the purchase price may be adjusted during an offering period to avoid our incurring adverse accounting charges. The Board of Directors shall have the discretion to increase, before the beginning of an offering period, the percentage of participants' compensation that may be withheld through the 1999 Employee Stock Purchase Plan, but such percentage may not exceed 20%. Employees may end their participation in the 1999 Employee Stock Purchase Plan at any time during an offering period, and participation ends automatically on termination of employment. An employee cannot be granted an option under the 1999 Employee Stock Purchase Plan if immediately after the grant such employee would own stock and/or hold outstanding options to purchase stock equaling 5% or more of the total voting power or value of all classes of our stock or stock of our subsidiaries. An employee cannot be granted an option to purchase stock under all of our or our subsidiaries' employee stock purchase plans that accrues at a rate that exceeds $25,000 of fair market value of such stock for each calendar year in which the option is outstanding. In addition, no employee may purchase more than 3,000 shares of Common Stock under the 1999 Employee Stock Purchase Plan in any one purchase period. If the fair market value of the Common Stock on a purchase date is less than the fair market value at the beginning of the offering period, each participant in the 1999 Employee Stock Purchase Plan shall automatically be withdrawn from the offering period as of the end of the purchase date and re-enrolled in the new 24-month offering period beginning on the first business day following the purchase date. If we merge or consolidate with or into another corporation or sell all or substantially all of our assets, each right to purchase stock under the 1999 Employee Stock Purchase Plan will be assumed or an equivalent right substituted by the successor corporation. However, the Board of Directors may shorten any ongoing offering period so that employees' rights to purchase stock under the 1999 Employee Stock Purchase Plan are exercised before the transaction. The Board of Directors has the power to amend or terminate the 1999 Employee Stock Purchase Plan and to change or terminate offering periods as long as such action does not adversely affect any outstanding rights to purchase stock thereunder. However, the Board of Directors may amend or terminate the 1999 Employee Stock Purchase Plan or an offering period even if it would adversely affect outstanding options in order to avoid our incurring adverse accounting charges. 51 LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Our Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for (i) any breach of their duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful payments of dividends or unlawful stock repurchases or redemptions, or (iv) any transaction from which the director derived an improper personal benefit. Such limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our Certificate of Incorporation and Bylaws provide that we shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our Bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our Bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the Bylaws would permit indemnification. We have entered into agreements to indemnify our directors and executive officers, in addition to indemnification provided for in our Bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of eToys, arising out of such person's services as a director or executive officer of eToys, any subsidiary of eToys or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. At present, we are not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 52 CERTAIN TRANSACTIONS In June 1997, we sold 2,500,000 shares of Common Stock to Edward C. Lenk at $0.015 per share in exchange for $18,750 in cash and a promissory note in the principal amount of $18,750. The note is full recourse and secured by 1,250,000 of Mr. Lenk's shares. 1,250,000 of Mr. Lenk's shares are subject to a repurchase option in favor of us which lapses according to the following schedule: 1/4th of such shares vested on December 1, 1997, and 1/48th of such total have vested monthly from and after December 1, 1997. In addition, all shares immediately vest upon a change of control. In October 1998, we issued Mr. Lenk an option to purchase 1,000,000 shares of Common Stock at $0.43 per share. The option vests according to the following schedule: 1/4th of the shares vest on October 21, 1999 and 1/48th of the total number of shares vest monthly thereafter. In June 1997, we sold 833,334 shares of Common Stock to Frank C. Han at $0.015 per share in exchange for $6,250 in cash and a promissory note in the principal amount of $6,250. The note is full recourse and secured by 416,667 of Mr. Han's shares. 466,667 of Mr. Han's shares are subject to a repurchase option in favor of us which lapses according to the following schedule: 1/4th of such shares vested on February 1, 1998, and 1/48th of such total have vested monthly from and after February 1, 1998. In addition, all shares immediately vest upon a change of control. In October 1998, we issued Mr. Han an option to purchase 275,000 shares of Common Stock at $0.43 per share. The option vests according to the following schedule: 1/4th of the shares vest on October 21, 1999 and 1/48th of the total number of shares vest monthly from and after October 21, 1999. In September 1997 we issued Peter C.M. Hart a stock option to purchase 100,000 shares of Common Stock at $0.015 per share. 1/4th of the shares subject to the option vested on June 15, 1998 and 1/48th of the total have vested monthly from and after June 15, 1998. Mr. Hart was appointed a Director in October 1997. In December 1997, we sold Mr. Hart 32,939 shares of Series A Preferred Stock at $0.62 per share. From January 1998 to June 1998, Mr. Hart provided us part-time consulting services. In connection with these services, in February 1998 we issued Mr. Hart a stock option to purchase 21,000 shares of Common Stock at $0.10 per share. 1/6th of the shares subject to this option vested monthly from and after February 1, 1998. In December 1998, we entered into an Offer Letter with John R. Hnanicek, our Chief Information Officer. The agreement entitles Mr. Hnanicek to a salary of $150,000 per year and a signing bonus of $60,000 which vests monthly over the first year of his employment. In December 1998, we granted Mr. Hnanicek an option to purchase 200,000 shares of Common Stock at $5.00 per share. The option is immediately exercisable and the shares subject to the option are subject to a right of repurchase in our favor which lapses according to the following schedule: 1/4th of the shares vest on December 31, 1999 and 1/48th of the total number of shares vest monthly from and after December 31, 1999. If Mr. Hnanicek is terminated without cause during the first six months of his employment, an additional 1/8th of such shares shall vest. If Mr. Hnanicek is terminated without cause during his first six to 12 months of employment, an additional 1/48th of such shares shall vest per each month of completed employment. In December 1998, we entered into an Offer Letter with Louis V. Zambello III, our Senior Vice President of Operations. The agreement entitles Mr. Zambello to a salary of $200,000 per year, a signing bonus of $115,000 which vests monthly over the first year of his employment and severance benefits equal to $100,000 if he is terminated without cause during the first 12 months of his employment with us. In December 1998, we granted Mr. Zambello an option to purchase 275,000 shares of Common Stock at $5.00 per share. The option is immediately exercisable 53 and the shares subject to the option are subject to a right of repurchase in our favor which lapses according to the following schedule: 1/4th of the shares vest on December 31, 1999 and 1/48th of the total number of shares vest monthly from and after December 31, 1999. If Mr. Zambello is terminated without cause during the first six months of his employment, an additional 1/8th of such shares shall vest. If Mr. Zambello is terminated without cause during his first six to twelve months of employment, an additional 1/48th of such shares shall vest per each month of completed employment. Furthermore, if we experience a change of control within two years following his commencement of employment, a total of 137,500 of such shares shall immediately vest. In January 1999, we entered into an Offer Letter with Steven J. Schoch, our Chief Financial Officer. The agreement entitles Mr. Schoch to a salary of $125,000 per year, a signing bonus of $25,000 which vests monthly over the first year of his employment and severance benefits equal to $93,750 if he is terminated without cause during the first 12 months of his employment with us. In January 1999, we granted Mr. Schoch an option to purchase 250,000 shares of Common Stock at $10.00 per share. The option is immediately exercisable and the shares subject to the option are subject to a right of repurchase in our favor which lapses according to the following schedule: 1/4th of the shares vest on January 31, 2000 and 1/48th of the total number of shares vest monthly from and after January 31, 2000. If Mr. Schoch is terminated without cause during the first six months of his employment, an additional 1/8th of such shares shall vest. If Mr. Schoch is terminated without cause during his first six to twelve months of employment, an additional 1/48th of such shares shall vest per each month of completed employment. Furthermore, if we experience a change of control within 18 months following his commencement of employment, a total of 93,750 of such shares shall immediately vest. In June 1997, we sold 6,466,667 shares of Common Stock at $0.015 per share and issued a note in the principal amount of $100,000 to idealab!. Pursuant to a Letter Agreement dated November 5, 1997, idealab! returned shares of Common Stock to us in the form of a capital contribution such that idealab!'s ownership was reduced to 6,106,666 shares of Common Stock. Pursuant to a second Letter Agreement dated November 5, 1997, idealab! forgave our indebtedness in the amount of $100,000 in consideration for idealab!'s right to purchase additional shares of Preferred Stock in a subsequent round of financing. We have entered into indemnification agreements with our officers and directors containing provisions which may require us, among other things, to indemnify our officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. See "Management--Limitation of Liability and Indemnification Matters". 54 The following table summarizes the shares of Common Stock and Preferred Stock purchased by our directors and 5% stockholders and persons and entities associated with them in private placement transactions. Each share of Redeemable Convertible Preferred Stock automatically converts into one share of Common Stock upon the closing of this offering. The shares of Common Stock were sold at $0.015 per share, the shares of Series A Preferred Stock were sold at $0.62 per share and the shares of Series B Preferred Stock were sold at $2.1032 per share. See "Principal Stockholders".
COMMON SERIES A SERIES B ENTITIES AFFILIATED WITH DIRECTORS STOCK PREFERRED PREFERRED - ------------------------------------------------------------------------- ----------- ----------- ----------- Entities affiliated with Highland Capital Partners (Daniel Nova)(1)...... -- -- 3,803,728 Entities affiliated with DynaFund Ventures (Tony Hung)(2)................ -- 1,612,903 950,932 Entities affiliated with Sequoia Capital (Michael Moritz)(3)............. -- -- 2,377,330 Peter C.M. Hart.......................................................... -- 32,939 -- OTHER 5% STOCKHOLDERS - ------------------------------------------------------------------------- Entities affiliated with idealab!(4)..................................... 6,466,667 1,612,903 713,198 Intel Corporation........................................................ -- 1,612,903 950,931
- ------------------------ (1) Includes shares held by Highland Capital Partners III Limited Partnership and Highland Entrepreneurs' Fund III. (2) Includes shares held by DynaFund L.P. and DynaFund International L.P. (3) Includes shares held by Sequoia Capital VII, Sequoia International Technology Partners VIII (Q), CMS Partners LLC, Sequoia International Technology Partners VIII and Sequoia 1997. (4) Includes shares held by idealab!, idealab! Capital Partners I-A, LP and idealab! Capital Partners 1-B, LP. In November 1997, idealab! returned shares of Common Stock to us in the form of a capital contribution such that idealab!'s ownership was reduced to 6,106,666 shares of Common Stock. idealab! Capital Partners I-A, LP and idealab! Capital Partners I-B, LP disclaim ownership of the shares held by idealab! except to the extent of their respective proportionate interest therein. 55 PRINCIPAL STOCKHOLDERS The following table sets forth information known to us with respect to the beneficial ownership of our Common Stock as of December 31, 1998, as adjusted to reflect the sale of the Common Stock offered hereby under this prospectus and conversion of all outstanding shares of Preferred Stock into shares of Common Stock, by (i) each stockholder known by us to own beneficially more than 5% of the Common Stock, (ii) each director, (iii) the Chief Executive Officer and named executive officers and (iv) all directors and executive officers as a group.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING(1) AFTER OFFERING(1) ------------------------- ------------------------- NUMBER PERCENTAGE(2) NUMBER PERCENTAGE(2) ---------- ------------- ---------- ------------- Entities affiliated with idealab!(3) ...... 8,432,767 28.57% 8,432,767 % 130 West Union Street Pasadena, CA 91103 Entities affiliated with Highland Capital Partners(4) ............................. 3,803,728 12.89 3,803,728 Two International Place Boston, MA 02110 Entities affiliated with DynaFund Ventures(5) ............................. 2,563,835 8.68 2,563,835 21311 Hawthorne Blvd., Suite 300 Torrance, CA 90503 Intel Corporation ......................... 2,563,834 8.68 2,563,834 2200 Mission Blvd. Santa Clara, CA 95052 Entities affiliated with Sequoia Capital Partners(6) ............................. 2,377,330 8.06 2,377,330 3000 Sand Hill Road, Bldg. 4, Suite 280 Menlo Park, CA 94025 Daniel J. Nova(7) ......................... 3,803,728 12.89 3,803,728 Tony Hung(8) .............................. 2,563,835 8.68 2,563,835 Edward C. Lenk ............................ 2,500,000 8.47 2,500,000 Michael Moritz(9) ......................... 2,377,330 8.06 2,377,330 Peter C.M. Hart(10) ....................... 111,734 * 111,734 * Louis V. Zambello III(11) ................. 275,000 * 275,000 * John R. Hnanicek(12) ...................... 200,000 * 200,000 * All directors and executive officers as a group (9 persons)(13) ................... 12,914,961 42.60% 12,914,961
- ------------------------ * Less than 1% of the outstanding shares of Common Stock. (1) Assumes no exercise of the Underwriters' over-allotment option. Except pursuant to applicable community property laws or as indicated in the footnotes to this table, to our knowledge, each stockholder identified in the table possesses sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such stockholder. (2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of Common Stock subject to options or warrants held by that person that are currently exercisable or will become exercisable 56 within 60 days after December 31, 1998 are deemed outstanding, while such shares are not deemed outstanding for computing percentage ownership of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable. (3) Includes 6,106,666 shares held by idealab!, 2,187,453 shares held by idealab! Capital Partners I-A, LP and 138,648 shares held by idealab! Capital Partners I-B, LP. idealab! Capital Partners I-A, LP and idealab! Capital Partners I-B, LP disclaim beneficial ownership of the shares held by idealab! except to the extent of their respective proportionate interest therein. (4) Includes 3,651,579 shares held by Highland Capital Partners III Limited Partnership and 152,149 shares held by Highland Entrepreneurs' Fund III Limited Partnership. (5) Includes 1,385,298 shares held by DynaFund International L.P. and 1,178,537 shares held by DynaFund L.P. (6) Includes 2,154,579 shares held by Sequoia Capital VII, 142,640 shares held by Sequoia International Technology Partners VIII (Q), 47,547 shares held by CMS Partners LLC, 27,339 shares held by Sequoia International Technology Partners VIII and 5,230 shares held by Sequoia 1997. (7) Includes 3,651,579 shares held by Highland Capital Partners III Limited Partnership and 152,149 shares held by Highland Entrepreneurs' Fund III Limited Partnership. Daniel Nova is a general partner of the general partner of the Highland entities and is a Director of eToys. He disclaims beneficial ownership of the shares held by the entities except to the extent of his proportionate interest therein. (8) Includes 1,385,298 shares held by DynaFund International L.P. and 1,178,537 shares held by DynaFund L.P. Tony Hung is a vice president of the general partners of the DynaFund entities and is a Director of eToys. He disclaims beneficial ownership of the shares held by the entities except to the extent of his proportionate interest therein. (9) Includes 2,154,574 shares held by Sequoia Capital VII, 142,640 shares held by Sequoia International Technology Partners VIII (Q), 47,547 shares held by CMS Partners LLC, 27,339 shares held by Sequoia International Technology Partners VIII and 5,230 shares held by Sequoia 1997. Michael Moritz is a general partner of the general partners of the Sequoia entities and is a Director of eToys. He disclaims beneficial ownership of the shares held by the entities except to the extent of his proportionate interest therein. (10) Includes 16,129 shares issuable upon exercise of a warrant that will expire upon this offering and 62,666 shares issuable upon exercise of options which will be vested within 60 days of December 31, 1998. (11) Includes 275,000 shares issuable upon exercise of an option which will be exercisable within 60 days of December 31, 1998, but which are subject to a right of repurchase in our favor at cost in the event Mr. Zambello ceases employment with us. (12) Includes 200,000 shares issuable upon exercise of an option which will be exercisable within 60 days of December 31, 1998, but which are subject to a right of repurchase in our favor at cost in the event Mr. Hnanicek ceases employment with us. (13) Includes the shares described in Notes 7 through 12, 833,334 shares held by an executive officer not named in this table, and 250,000 shares issuable upon exercise of an option held by an executive officer not named in this table which will be exercisable within 60 days of December 31, 1998, but which are subject to a right of repurchase in our favor at cost in the event such officer ceases employment with us. 57 DESCRIPTION OF CAPITAL STOCK Upon the completion of this offering, we will be authorized to issue 200,000,000 shares of Common Stock, $0.0001 par value, and 5,000,000 shares of undesignated Preferred Stock, $0.0001 par value. All currently outstanding shares of Preferred Stock will be converted into Common Stock upon the closing of this offering. The following description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by our Certificate of Incorporation and Bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law. COMMON STOCK As of December 31, 1998 there were 29,512,331 shares of Common Stock outstanding (as adjusted to reflect the conversion of all outstanding shares of Series A Preferred Stock and Series B Preferred Stock into Common Stock), held of record by 82 stockholders. In addition, as of December 31, 1998, there were options to purchase an aggregate of 4,254,200 shares of Common Stock and warrants to purchase an aggregate of 50,000 shares of Common Stock outstanding. After giving effect to the sale of the shares offered by us in this offering, there will be shares of Common Stock outstanding (assuming no exercise of the underwriter's overallotment option or exercise of outstanding options under our stock option plans and warrants after December 31, 1998). The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available for that purpose. See "Dividend Policy". In the event of our liquidation, dissolution or winding up, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the prior distribution rights of any outstanding Preferred Stock. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. The outstanding shares of Common Stock are, and the shares of Common Stock to be issued upon completion of this offering will be, fully paid and non-assessable. PREFERRED STOCK Upon the closing of the offering, all outstanding shares of Redeemable Convertible Preferred Stock will be converted into 18,926,423 shares of Common Stock (assuming full exercise of warrants to purchase 673,371 shares of Series A Preferred Stock outstanding as of December 31, 1998) and automatically retired. Thereafter, the Board of Directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to designate the rights, preferences, privileges and restrictions of each such series, any or all of which may be greater than the rights of the Common Stock. It is not possible to state the actual effect of the issuance of any share of Preferred Stock upon the rights of the holders of the Common Stock until the Board of Directors determines the specific rights of the holders of such Preferred Stock. However, the effects might include, among other things, restricting dividends on the Common Stock, diluting the voting power of the Common Stock, impairing the liquidation rights of the Common Stock and delaying or preventing our change in control without further action by the stockholders. We have no present plans to issue any shares of Preferred Stock. WARRANTS As of December 31, 1998 there were warrants outstanding to purchase a total of 50,000 shares of Common Stock at a price of $0.01 per share and 673,371 shares of Series A Preferred Stock at a price of $0.62 58 per share. All such warrants not exercised will expire upon the closing of this offering. In addition, we are obligated to issue a warrant to purchase shares of Common Stock to an equipment lessor prior to this offering. REGISTRATION RIGHTS The holders of 21,586,386 shares of Common Stock, options to purchase 1,275,000 shares of Common Stock and warrants to purchase 673,371 shares of Common Stock (the "registrable securities") or their permitted transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of an agreement between eToys and the holders of the registrable securities. Subject to certain limitations in the agreement, the holders of at least 25% of the then outstanding registrable securities may require, on two occasions beginning 180 days after the date of this prospectus, that we use our best efforts to register the registrable securities for public resale. We are obligated to register these shares if the shares to be registered constitute at least 25% of the then outstanding registrable securities or have an anticipated public offering price of at least $5,000,000 (net of underwriting discounts and commissions). If we register any Common Stock, either for our own account or for the account of other security holders, the holders of registrable securities are entitled to include their shares of Common Stock in such registration, subject to the ability of the underwriters to limit the number of shares included in the offering in view of market conditions. Subject to certain limitations, the holders of at least 25% of the then outstanding registrable securities (or a lesser percentage if the aggregate offering price is at least $5,000,000) may also require us on three occasions to register all or a portion of their registrable securities on Form S-3 when use of such form becomes available to us, provided, among other limitations, that the proposed aggregate selling price (net of any underwriters' discounts or commissions) is at least $2,000,000. Subject to certain limitations, we will bear all registration expenses other than underwriting discounts and commissions. All registration rights will terminate on the date five years following the closing of this offering, or, with respect to each holder of registrable securities, at such time as the holder is entitled to sell all of its shares in any three month period under Rule 144 of the Securities Act. EFFECT OF CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS Certain provisions of Delaware law and our Certificate of Incorporation and Bylaws could make more difficult our acquisition by means of a tender offer, a proxy contest or otherwise and the removal of our incumbent officers and directors. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of eToys to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior to the determination of interested stockholder status, did own) 15% or more of a corporation's voting stock. The existence of this provision would be expected 59 to have an anti-takeover effect with respect to transactions not approved in advance by the Board of Directors, including discouraging attempts that might result in a premium over the market price for the shares of Common Stock held by stockholders. Our Certificate of Incorporation eliminates the right of stockholders to act by written consent without a meeting. The Certificate of Incorporation and Bylaws of eToys do not provide for cumulative voting in the election of directors. The authorization of undesignated Preferred Stock makes it possible for the Board of Directors to issue Preferred Stock with voting or other rights or preferences that could impede the success of any attempt to change our control. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in our control or management. The amendment of any of these provisions would require approval by holders of at least 66 2/3% of the outstanding Common Stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. The transfer agent's address and telephone number is 400 South Hope Street, 4th Floor, Los Angeles, California 90071 and (213) 553-9730. 60 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale (as described below), sales of substantial amounts of our Common Stock in the public market after the restrictions lapse could adversely affect the prevailing market price and impair eToys' ability to raise equity capital in the future. Upon completion of the offering, we will have outstanding shares of Common Stock. Of these shares, the shares sold in the offering (plus any shares issued upon exercise of the underwriters' over-allotment option) will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act (generally, officers, directors or 10% stockholders). The remaining 29,512,331 shares outstanding are "restricted securities" within the meaning of Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of the Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. Our directors, officers and securityholders have entered into lock-up agreements in connection with this offering generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our Common Stock or any securities exercisable for or convertible into our Common Stock owned by them for a period of 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be salable until such agreements expire or are waived by the designated underwriters' representative. Taking into account the lock-up agreements, and assuming Goldman, Sachs & Co. does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: - - Beginning on the effective date of this prospectus, only the shares sold in the offering will be immediately available for sale in the public market. - - Beginning 180 days after the effective date, approximately 3,659,521 shares will be eligible for sale pursuant to Rule 701, approximately 1,995,079 additional shares will be eligible for sale pursuant to Rule 144(k), and approximately 23,857,731 additional shares will be eligible for sale pursuant to Rule 144. All but 8,968,398 of such shares are held by affiliates. In general, under Rule 144 as currently in effect, and beginning after the expiration of the lock-up agreements (180 days after the date of this prospectus) of a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (which will equal approximately shares immediately after the offering); or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Under 61 Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701, as currently in effect, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any of our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 144. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirement of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. In addition, we intend to file registration statements under the Securities Act as promptly as possible after the effective date to register shares to be issued pursuant to our employee benefit plans. As a result, any options or rights exercised under the 1997 Stock Plan, the 1999 Stock Plan, the 1999 Employee Stock Purchase Plan, the 1999 Directors' Stock Option Plan or any other benefit plan after the effectiveness of such registration statement will also be freely tradable in the public market, except that shares held by affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144 unless otherwise resalable under Rule 701. As of December 31, 1998 there were outstanding options for the purchase of 4,254,200 shares, of which options to purchase 239,240 shares were exercisable. See "Risk Factors--Shares Eligible for Future Sale", "Management--Stock Plans" and "Description of Capital Stock--Registration Rights". 62 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for eToys by Venture Law Group, A Professional Corporation, Menlo Park, California. Glen R. Van Ligten, a director of Venture Law Group, serves as our Assistant Secretary. Certain legal matters in connection with this offering will be passed upon for the underwriters by Gunderson, Dettmer, Stough, Villeneuve, Franklin & Hachigian, LLP. As of the date of this prospectus, a certain director of Venture Law Group and an investment partnership affiliated with Venture Law Group own an aggregate of 13,924 shares of Common Stock. EXPERTS The financial statements of eToys Inc. as of March 31, 1998, and December 31, 1998 and the related statements of operations, stockholders' equity (deficit) and cash flows for the year ended March 31, 1998 and the nine months ended December 31, 1998, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the Common Stock offered in this offering. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedule thereto. For further information with respect to eToys and the Common Stock offered in this offering, reference is made to the registration statement and to the attached exhibits and schedules. Statements made in this prospectus concerning the contents of any document referred to herein are not necessarily complete. With respect to each such document filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved. The registration statement and the attached exhibits and schedules may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of prescribed fees. Reports, proxy and information statements and other information regarding registrants that file electronically with the Commission may also be inspected without charge at a Web site maintained by the Securities and Exchange Commission at http://www.sec.gov. 63 INDEX TO FINANCIAL STATEMENTS CONTENTS Report of Independent Auditors....................................................... F-2 Balance Sheets at March 31, 1998 and December 31, 1998............................... F-3 Statements of Operations for the year ended March 31, 1998 and the nine months ended December 31, 1997 (unaudited) and 1998............................................. F-4 Statements of Stockholders' Equity (Deficit) for the year ended March 31, 1998 and the nine months ended December 31, 1998............................................ F-5 Statements of Cash Flows for the year ended March 31, 1998 and the nine months ended December 31, 1997 (unaudited) and 1998............................................. F-6 Notes to Financial Statements........................................................ F-7
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders eToys Inc. We have audited the accompanying balance sheets of eToys Inc. as of March 31, 1998 and December 31, 1998, and the related statements of operations, stockholders' equity (deficit), and cash flows for the year ended March 31, 1998 and the nine months ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of eToys Inc. as of March 31, 1998 and December 31, 1998, and the results of its operations and its cash flows for the year ended March 31, 1998 and the nine months ended December 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP February 15, 1999 F-2 ETOYS INC. BALANCE SHEETS
PRO FORMA STOCKHOLDERS' EQUITY AT MARCH 31, DECEMBER 31, DECEMBER 31, 1998 1998 1998 ------------- --------------- --------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents..................................... $ 1,552,000 $ 18,545,000 Inventories................................................... 224,000 4,971,000 Prepaid expenses and other current assets..................... 35,000 394,000 ------------- --------------- Total current assets............................................ 1,811,000 23,910,000 Property and equipment: Equipment..................................................... 155,000 1,749,000 Furniture and fixtures........................................ 8,000 10,000 Leasehold improvements........................................ 15,000 331,000 Assets under capital lease.................................... -- 75,000 ------------- --------------- 178,000 2,165,000 Accumulated depreciation and amortization..................... (18,000) (264,000) ------------- --------------- 160,000 1,901,000 Goodwill (net of accumulated amortization of $122,000 at December 31, 1998)............................................ 488,000 366,000 Other assets.................................................... -- 1,022,000 ------------- --------------- Total assets.................................................... $ 2,459,000 $ 27,199,000 ------------- --------------- ------------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.............................................. $ 346,000 $ 12,314,000 Accrued expenses.............................................. 9,000 1,455,000 Current portion of capital lease obligations.................. 24,000 ------------- --------------- Total current liabilities....................................... 355,000 13,793,000 Long-term capital lease obligations............................. -- 35,000 Redeemable Convertible Preferred Stock, 18,926,423 shares authorized: Series A Preferred Stock; $.0001 par value; 6,318,017 and 6,366,403 shares issued and outstanding at March 31, 1998 and December 31, 1998, respectively....................... 3,917,000 3,947,000 -- Series B Preferred Stock, $.0001 par value, 11,886,649 shares issued and outstanding............................. -- 24,952,000 -- Commitments and contingencies................................... -- -- Stockholders' equity: Common Stock, $.0001 par value, 50,000,000 shares authorized; 10,933,092 and 11,259,279 shares issued and outstanding at March 31, 1998 and December 31, 1998, respectively.......... 1,000 1,000 3,000 Additional paid-in capital.................................... 537,000 32,202,000 61,099,000 Receivables from stockholders................................. (30,000) (147,000) (147,000) Deferred compensation......................................... (53,000) (30,058,000) (30,058,000) Accumulated deficit........................................... (2,268,000) (17,526,000) (17,526,000) ------------- --------------- --------------- Total stockholders' equity (deficit)............................ (1,813,000) (15,528,000) $ 13,371,000 ------------- --------------- --------------- --------------- Total liabilities and stockholders' equity (deficit)............ $ 2,459,000 $ 27,199,000 ------------- --------------- ------------- ---------------
See accompanying notes. F-3 ETOYS INC. STATEMENTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED -------------------------------- MARCH 31, 1998 1998 --------------- 1997 ---------------- -------------- (UNAUDITED) Net sales...................................................... $ 687,000 $ 530,000 $ 23,900,000 Cost of sales.................................................. 568,000 438,000 19,008,000 --------------- -------------- ---------------- Gross profit................................................... 119,000 92,000 4,892,000 Operating expenses: Marketing and sales.......................................... 1,290,000 632,000 14,354,000 Product development.......................................... 421,000 206,000 2,006,000 General and administrative................................... 678,000 366,000 4,228,000 --------------- -------------- ---------------- 2,389,000 1,204,000 20,588,000 --------------- -------------- ---------------- Operating loss................................................. (2,270,000) (1,112,000) (15,696,000) Other income (expense): Interest income.............................................. 18,000 -- 485,000 Interest expense............................................. (15,000) (15,000) (46,000) --------------- -------------- ---------------- Loss before provision for income taxes......................... (2,267,000) (1,127,000) (15,257,000) Provision for income taxes..................................... 1,000 -- 1,000 --------------- -------------- ---------------- Net loss....................................................... $ (2,268,000) $ (1,127,000) $ (15,258,000) --------------- -------------- ---------------- --------------- -------------- ---------------- Basic net loss per equivalent share............................ $ (0.27) $ (0.14) $ (1.38) --------------- -------------- ---------------- --------------- -------------- ---------------- Pro forma basic net loss per equivalent share.................. $ (0.23) $ (0.14) $ (0.58) --------------- -------------- ---------------- --------------- -------------- ---------------- Shares used to compute basic net loss per equivalent share.................................... 8,376,629 7,775,365 11,052,345 --------------- -------------- ---------------- --------------- -------------- ---------------- Shares used to compute pro forma basic net loss per equivalent share........................................................ 10,077,634 7,959,833 26,429,153 --------------- -------------- ---------------- --------------- -------------- ----------------
See accompanying notes. F-4 ETOYS INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL RECEIVABLES ----------------------- PAID-IN FROM DEFERRED ACCUMULATED SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT TOTAL ---------- ----------- ----------- ------------- -------------- ------------- ------------- Balance at April 1, 1997........ -- $ -- $ -- $ -- $ -- $ -- $ -- Issuance of Common Stock...... 8,856,425 1,000 451,000 -- -- -- 452,000 Restricted stock issued....... 2,026,667 -- 30,000 (30,000) -- -- -- Exercise of stock options..... 50,000 -- 1,000 -- -- -- 1,000 Deferred compensation......... -- -- 55,000 -- (55,000) -- -- Amortization of deferred compensation................ -- -- -- -- 2,000 -- 2,000 Net loss...................... -- -- -- -- -- (2,268,000) (2,268,000) ---------- ----------- ----------- ------------- -------------- ------------- ------------- Balance at March 31, 1998....... 10,933,092 1,000 537,000 (30,000) (53,000) (2,268,000) (1,813,000) Restricted stock issued....... 175,000 -- 35,000 (117,000) (82,000) Exercise of stock options..... 151,187 -- 4,000 4,000 Deferred compensation......... 31,626,000 (31,626,000) -- Amortization of deferred compensation................ 1,621,000 1,621,000 Net loss...................... (15,258,000) (15,258,000) ---------- ----------- ----------- ------------- -------------- ------------- ------------- Balance at December 31, 1998.... 11,259,279 $ 1,000 $32,202,000 $ (147,000) $(30,058,000) $(17,526,000) $ (15,528,000) ---------- ----------- ----------- ------------- -------------- ------------- ------------- ---------- ----------- ----------- ------------- -------------- ------------- -------------
See accompanying notes. F-5 ETOYS INC. STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------- 1998 1998 ------------ 1997 -------------- ------------ (UNAUDITED) OPERATING ACTIVITIES: Net loss............................................................. $ (2,268,000) $ (1,127,000) $ (15,258,000) Adjustments to reconcile net loss to net cash used in operating activities: Noncash interest................................................... 15,000 15,000 38,000 Nonemployee stock compensation..................................... 33,000 -- -- Amortization of deferred compensation.............................. 2,000 -- 1,621,000 Depreciation....................................................... 18,000 7,000 246,000 Amortization....................................................... -- -- 122,000 Changes in operating assets and liabilities: Inventories...................................................... (198,000) (105,000) (4,747,000) Prepaid expenses and other current assets........................ (35,000) (147,000) (359,000) Accounts payable................................................. 297,000 387,000 11,968,000 Accrued expenses................................................. 9,000 6,000 1,446,000 ------------ ------------ -------------- Net cash used in operations.......................................... (2,127,000) (964,000) (4,923,000) INVESTING ACTIVITIES: Capital expenditures for property and equipment...................... (178,000) (102,000) (1,913,000) Acquisition of Toys.com.............................................. (270,000) -- -- Other assets......................................................... -- -- (1,022,000) ------------ ------------ -------------- Net cash used in investing activities................................ (448,000) (102,000) (2,935,000) FINANCING ACTIVITIES: Proceeds from bridge loan............................................ -- -- 5,000,000 Payments on bridge loan.............................................. -- -- (2,238,000) Proceeds from the issuance of Common Stock........................... 224,000 224,000 4,000 Exercise of stock options............................................ 1,000 1,000 -- Proceeds from the issuance of Redeemable Convertible Preferred Stock.............................................................. 3,007,000 3,007,000 22,047,000 Proceeds from the issuance of convertible notes.............................................................. 895,000 895,000 -- Payments on capital leases........................................... -- -- (15,000) Proceeds from receivables from stockholders.......................... -- -- 23,000 Proceeds from exercise of warrants................................... -- -- 30,000 ------------ ------------ -------------- Net cash provided by financing activities............................ 4,127,000 4,127,000 24,851,000 ------------ ------------ -------------- Net increase in cash and cash equivalents............................ 1,552,000 3,061,000 16,993,000 Cash and cash equivalents at beginning of period..................... -- -- 1,552,000 ------------ ------------ -------------- Cash and cash equivalents at end of period........................... $ 1,552,000 $ 3,061,000 $ 18,545,000 ------------ ------------ -------------- ------------ ------------ -------------- Supplemental disclosures: Income taxes paid.................................................... $ 1,000 $ -- $ 1,000 Interest paid........................................................ $ -- $ -- $ 8,000
See accompanying notes. F-6 ETOYS INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1. SIGNIFICANT ACCOUNTING POLICIES GENERAL eToys Inc. (the Company) was incorporated in November 1996 in the state of Delaware. In June 1997, initial issuances of Common Stock occurred. The Company launched its Web site in October 1997. The Company is a Web-based retailer focused exclusively on children's products, including toys, video games, software, videos and music. The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. The Company has incurred significant operating losses since inception of operations and has limited working capital. Management believes that the proceeds raised through the sale of equity securities, in addition to revenue generated from product sales, will support the Company's operations through 1999. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the eventual outcome of this uncertainty. INTERIM FINANCIAL STATEMENTS The accompanying statements of operations and cash flows for the nine months ended December 31, 1997 are unaudited. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations and cash flows for the interim period. ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ materially from those estimates. CASH EQUIVALENTS The Company considers those investments which are highly liquid, readily convertible to cash and which mature within three months from the date of purchase as cash equivalents. INVENTORIES Inventories are stated at the lower of cost (using the first in-first out method) or market and consist primarily of finished goods. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is provided using the straight-line method based upon estimated useful lives, which range from three to five years. Leasehold improvements are recorded at cost. Amortization is provided using the straight-line method over the shorter of the term of the related lease or estimated useful lives of the assets. F-7 ETOYS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL Goodwill represents the excess of the purchase price over the estimated fair market value of net assets acquired in a business combination. Goodwill is amortized on a straight-line basis over three years. LONG-LIVED ASSETS The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. No such impairment losses have been identified by the Company. INCOME TAXES Income taxes are accounted for under Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. NET LOSS PER SHARE Net loss per share is computed using the weighted average number of shares of common stock outstanding. Shares associated with stock options and the Redeemable Convertible Preferred Stock are not included because they are antidilutive. PRO FORMA NET LOSS PER SHARE (UNAUDITED) Pro forma net loss per share is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of the Company's Redeemable Convertible Preferred Stock into shares of the Company's Common Stock effective upon the closing of the Company's initial public offering as if such conversion occurred on April 1, 1997, or at the date of original issuance, if later. F-8 ETOYS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table sets forth the computation of basic and pro forma net loss per share for the periods indicated:
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED ------------------------------- MARCH 31, 1998 1997 1998 -------------- -------------- --------------- Numerator: Net loss....................................................... $ (2,268,000) $ (1,127,000) $ (15,258,000) Denominator: Weighted average shares........................................ 8,376,629 7,775,365 11,052,345 -------------- -------------- --------------- Denominator for basic calculation.............................. 8,376,629 7,775,365 11,052,345 Weighted average effect of pro forma securities: Series A Redeemable Convertible Preferred Stock.............. 1,701,005 184,468 6,333,587 Series B Redeemable Convertible Preferred Stock.............. -- -- 9,043,222 -------------- -------------- --------------- Denominator for pro forma calculation.......................... 10,077,634 7,959,833 26,429,153 -------------- -------------- --------------- -------------- -------------- --------------- Net loss per share: Basic.......................................................... $ (0.27) $ (0.14) $ (1.38) -------------- -------------- --------------- -------------- -------------- --------------- Pro forma...................................................... $ (0.23) $ (0.14) $ (0.58) -------------- -------------- --------------- -------------- -------------- ---------------
REVENUE RECOGNITION The Company recognizes revenue from product sales, net of any discounts, when the products are shipped to customers. Outbound shipping and handling charges are included in net sales. The Company provides an allowance for sales returns, which to date have not been significant, based on historical experience. ADVERTISING COSTS The Company expenses advertising costs as incurred. For the year ended March 31, 1998 and the nine months ended December 31, 1997 and 1998, the Company incurred advertising costs of $917,000, $299,000 and $7,747,000, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock awards granted subsequent to January 1, 1995, be recognized as compensation expense based on their fair value at the date of grant. Alternatively, a company may use Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and disclose pro forma income amounts which would have resulted from recognizing such awards at their fair value. The Company has elected to account for stock-based compensation expense under APB No. 25 and make the required pro forma disclosures for compensation (see Note 6). SUPPLEMENTAL CASH FLOW INFORMATION During the year ended March 31, 1998: F-9 ETOYS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Convertible notes in the amount $895,000, plus accrued interest of $15,000, were converted into Series A Redeemable Convertible Preferred Stock. The Company expensed approximately $33,000 for services rendered from several vendors in exchange for Common Stock. The Company issued stock in return for notes receivable totaling $30,000 from employees. Such notes have been classified in the equity section of the balance sheet. The Company issued 780,000 shares of Common Stock as part of the acquisition of Toys.com. See Note 2. During the nine months ended December 31, 1998: The Company financed the purchase of fixed assets under capital leases in the amount $75,000. The Company issued notes receivable for Common Stock and Series B Redeemable Convertible Preferred Stock in the amounts of $35,000 and $105,000, respectively. Convertible notes in the amount of $2,762,000, plus $38,000 in accrued interest, were converted into Series B Redeemable Convertible Preferred Stock. 2. ACQUISITION OF TOYS.COM In March 1998, the Company acquired the operations of one of its online competitors, Toys.com, including $25,000 in toy inventories and assumed certain advertising liabilities in the amount of $49,000, and the assumption of future contingent advertising commitments. The acquisition was accounted for under the purchase method of accounting and included a cash payment of $270,000 and the issuance of 780,000 shares of Common Stock. Goodwill resulting from the acquisition was $488,000. Subsequent to the acquisition, Toys.com ceased operations as a separate entity. 3. INCOME TAXES As a result of the net operating losses, the provision for income taxes consists solely of minimum state taxes. The components of the deferred tax assets and related valuation allowance at March 31, 1998 and December 31, 1998, are as follows:
MARCH 31, DECEMBER 31, 1998 1998 ------------ --------------- Other............................................................................. $ -- $ 161,000 Net operating loss carryforwards.................................................. 914,000 6,121,000 ------------ --------------- Deferred tax assets............................................................... 914,000 6,282,000 Valuation allowance............................................................... (914,000) (6,282,000) ------------ --------------- $ -- $ -- ------------ --------------- ------------ ---------------
F-10 ETOYS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INCOME TAXES (CONTINUED) Due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets. The Company has net operating losses for both federal and state tax purposes of approximately $15,366,000 expiring beginning in the years 2012 for federal and 2005 for state. The net operating losses can be carried forward to offset future taxable income. Utilization of the above carryforwards may be subject to utilization limitations, which may inhibit the Company's ability to use carryforwards in the future. 4. CONVERTIBLE NOTES AND BRIDGE FINANCING During the year ended March 31, 1998, the Company received $895,000 in proceeds from the issuance of 6.07% convertible notes. The notes were automatically converted into Series A Redeemable Convertible Preferred Stock due to certain conditions as specified within the initial note agreement. As a result of the conversion, the initial proceeds from the convertible notes of $895,000, plus $15,000 of accrued interest, were converted into 1,468,018 shares of Series A Redeemable Convertible Preferred Stock. In conjunction with the issuance of the 6.07% convertible notes, the Company issued to the purchasers of the 6.07% convertible notes, 721,757 stock warrants for the purchase of Series A Redeemable Convertible Preferred Stock at $.62 per share. As of December 31, 1998, 48,386 warrants have been exercised. The warrants are immediately exercisable and expire on December 31, 2002, or on the closing date of an initial public offering, if sooner. No value has been allocated to the warrants as the amount is not deemed to be significant. On May 6, 1998, the Company entered into a $5,000,000 bridge financing agreement with a group of investors. The bridge financing was in the form of Convertible Subordinated Promissory Notes (the Notes) which were payable on demand after May 6, 1999 accruing interest at a rate of 8% per annum until paid and compounded annually. In July 1998, $2.8 million of the Notes plus interest were converted into 1,331,235 shares of Series B Redeemable Convertible Preferred Stock. The remaining balance of the Notes of $2.2 million plus accrued interest was repaid in cash to the investors in June 1998. 5. CAPITAL STRUCTURE COMMON AND REDEEMABLE CONVERTIBLE PREFERRED STOCK On June 2, 1998, the Company amended its Certificate of Incorporation to, among other matters, increase the authorized number of shares of Common and Preferred Stock to 50,000,000 and 18,926,423, respectively. In conjunction with this amendment, the Company authorized 11,886,649 shares of Series B Redeemable Convertible Preferred Stock (Series B). In December 1997, the issuance of Series A Redeemable Convertible Preferred Stock (Series A) resulted in proceeds of $3,007,000, representing 4,849,999 shares issued and outstanding at $0.62 per share. In conjunction with this offering, $895,000 of convertible notes, plus related accrued interest of $15,000, were converted into 1,468,018 shares of Series A Redeemable Convertible Preferred Stock (see Note 4). In June F-11 ETOYS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. CAPITAL STRUCTURE (CONTINUED) 1998, the issuance of Series B resulted in proceeds of $25,000,000 representing 11,886,649 shares issued and outstanding at $2.1032 per share. The following summarizes the Series A and Series B activity:
SERIES A SERIES B SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------- -------------- Balance at April 1, 1997............................ -- $ -- -- $ -- Issuance of Series A................................ 6,318,017 3,917,000 -- -- ------------- ------------- ------------- -------------- Balance at March 31, 1998........................... 6,318,017 3,917,000 -- -- Issuance of Series A................................ 48,386 30,000 -- -- Issuance of Series B................................ -- -- 11,886,649 24,952,000 ------------- ------------- ------------- -------------- Balance at December 31, 1998........................ 6,366,403 $ 3,947,000 11,886,649 $ 24,952,000 ------------- ------------- ------------- -------------- ------------- ------------- ------------- --------------
The following table is presented to summarize the Common Stock authorized at December 31, 1998:
COMMON SHARES ISSUED DESCRIPTION OF INSTRUMENT OR RESERVED - -------------------------------------------------------------------------------------------------- -------------- Common Stock outstanding 11,259,279 Series A Redeemable Convertible Preferred Stock 6,366,403 Series B Redeemable Convertible Preferred Stock 11,886,649 Employee Incentive Stock Option Plan 5,800,000 Preferred and Common Stock warrants 723,371 -------------- Common Stock issued or reserved 36,035,702 -------------- Common Stock available 13,964,298 -------------- --------------
Each share of Redeemable Convertible Preferred Stock is convertible, at the stockholder's option, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $0.62 in the case of Series A and $2.1032 in the case of Series B by the Conversion Price, as defined. In the event of a public offering of the Company's equity securities resulting in gross proceeds to the Company of $20 million or greater, all outstanding Redeemable Convertible Preferred Stock will automatically be converted into Common Stock. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series A and Series B are entitled to receive preference to the Common Stock holders to any distribution of any assets of the Company in an amount per share equal to $0.62 and $2.1032 per share, respectively. On or at any time after November 26, 2002, subject to the written consent of 66 2/3% of the then outstanding shares of Series A and Series B, the Redeemable Convertible Preferred Stock may be redeemed for cash in whole or in part for $0.62 and $2.1032 per share (as adjusted for any stock dividends, combinations or splits with respect to such share) plus all declared but unpaid dividends, for Series A and Series B, respectively. F-12 ETOYS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. CAPITAL STRUCTURE (CONTINUED) The voting rights of the Series A and Series B are equal to one vote for each share of Common Stock into which such Redeemable Convertible Preferred Stock may be converted. Each share of Series A and Series B entitles the holder to receive dividends in cash at an annual rate of $0.043 and $0.1472 per share, respectively (as adjusted for any stock splits, stock dividends, recapitalizations, or the like). Dividends are payable quarterly when and if declared by the board of directors and are not cumulative. RECEIVABLES FROM STOCKHOLDERS Receivables from stockholders, totaling $30,000 and $147,000 at March 31, 1998 and December 31, 1998, respectively, represent interest bearing notes from certain stockholders issued to finance the purchase of 2,201,667 and 50,000 shares of the Company's Common and Series B, respectively. The notes bear interest rates between 6.0% and 8.0% per year with interest due upon payment of the notes. The notes are payable on different dates ranging from December 1, 1999 to July 27, 2002, or upon termination of employment or transfer of any of the purchased shares. DEFERRED COMPENSATION The Company recorded deferred compensation of $55,000, $0 and $31,626,000 for the year ended March 31, 1998, and the nine months ended December 31, 1997 and 1998, respectively. The amounts recorded represent the difference between the grant price and the deemed fair value of the Company's Common Stock for shares subject to options granted. The amortization of deferred compensation will be charged to operations over the vesting period of the options, which is typically four years. Total amortization recognized was $2,000, $0 and $1,621,000 for the year ended March 31, 1998 and the nine months ended December 31, 1997 and 1998, respectively. 6. STOCK OPTION PLANS The Company adopted the 1997 Stock Plan, as amended June 1998, (the Plan) which provides for the granting of options for purchases up to 5,800,000 shares of the Company's Common Stock. Under the terms of the Plan, options may be granted to employees, nonemployees, directors or consultants at prices not less than the fair value at the date of grant. Options granted to nonemployees are recorded at the value of negotiated services received. Options vest over four years, 25% for the first year and ratably over the remaining three years and generally expire ten years from the date of grant. F-13 ETOYS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. STOCK OPTION PLANS (CONTINUED) The following table summarizes the Company's stock option activity:
NUMBER OF PRICE WEIGHTED AVERAGE SHARES PER SHARE EXERCISE PRICE ----------- ------------------- ------------------ Outstanding at March 31, 1997............ -- Granted................................ 1,469,000 $ 0.015 to $0.100 $ 0.029 Exercised.............................. (50,000) 0.015 to 0.015 0.015 Canceled............................... -- -- ----------- Outstanding at March 31, 1998............ 1,419,000 0.015 to 0.100 0.029 Granted................................ 3,582,200 0.100 to 5.000 1.196 Exercised.............................. (326,187) 0.015 to 0.420 0.121 Canceled............................... (420,813) 0.015 to 0.420 0.079 ----------- Outstanding at December 31, 1998......... 4,254,200 0.100 to 5.000 0.996 ----------- -----------
Options granted during the year ended March 31, 1998 and the nine months ended December 31, 1998 resulted in a total compensation amount of $55,000 and $31,626,000, respectively, and were recorded as deferred compensation in stockholders equity. The deferred compensation amount will be recognized as compensation expense over the vesting period. During the year ended March 31, 1998 and the nine months ended December 31, 1998, such compensation expense amounted to $2,000 and $1,621,000, respectively. Options outstanding at March 31, 1998 and December 31, 1998 were exercisable for 107,000 and 302,242 shares of Common Stock, respectively. Common Stock available for future grants at March 31, 1998 and December 31, 1998 were 1,388,500 and 1,169,613 shares, respectively. Additional information with respect to the outstanding options as of December 31, 1998 is as follows:
OPTIONS OUTSTANDING ------------------------------------------------------- OPTIONS EXERCISABLE WEIGHTED AVERAGE ------------------------------- NUMBER OF WEIGHTED AVERAGE REMAINING NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE ------------ ------------------ --------------------- ----------- ------------------ RANGE OF EXERCISE PRICES $0.015 to $0.100........ 1,147,500 $ 0.048 8.91 279,542 $ 0.024 0.200 to 0.420........ 442,200 0.420 9.53 3,200 0.420 0.430 to 5.000........ 2,664,500 1.506 9.85 19,500 4.531 ------------ ----------- 0.015 to 5.000........ 4,254,200 302,242 ------------ ----------- ------------ -----------
F-14 ETOYS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. STOCK OPTION PLANS (CONTINUED) The Company calculated the minimum fair value of each option grant on the date of the grant using the minimum value option pricing model as prescribed by SFAS No. 123 using the following assumptions:
YEAR ENDED NINE MONTHS ENDED MARCH 31, 1998 DECEMBER 31, 1998 ------------------- --------------------- Risk-free interest rates............................... 6.0% 5.14% Expected lives (in years).............................. 5 4 Dividend yield......................................... 0% 0% Expected volatility.................................... 0% 0%
The compensation cost associated with the stock-based compensation plans did not result in a material difference from the reported net income for the nine months ended December 31, 1998 or the year ended March 31, 1998. 7. COMMITMENTS AND CONTINGENCIES LEASES The Company leases its office and warehouse facilities under long-term noncancelable operating leases. For the year ended March 31, 1998 and the nine months ended December 31, 1997 and 1998, total rent expense incurred related to these leases amounted to $52,000, $26,000 and $405,000, respectively. At December 31, 1998, future lease commitments under these agreements were as follows:
OPERATING CAPITAL LEASES LEASES ------------- --------- 1999............................................................... $ 699,000 $ 27,000 2000............................................................... 718,000 27,000 2001............................................................... 739,000 10,000 2002............................................................... 759,000 -- 2003............................................................... 462,000 -- ------------- --------- 3,377,000 64,000 Less amounts representing interest................................. -- (5,000) ------------- --------- $ 3,377,000 $ 59,000 ------------- --------- ------------- ---------
EQUIPMENT FINANCING ARRANGEMENT During December 1998, the Company entered into a line of credit arrangement with a leasing institution that provides for sale and leaseback transactions of capital equipment up to a maximum of $2,000,000. Under this agreement, $2,000,000 was available for future financing transactions at December 31, 1998. In addition, the agreement provides the leasing institution warrants, with value equal to approximately $80,000 with the number of shares to be determined pursuant to a formula, as defined, at the time of issuance. F-15 ETOYS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) ADVERTISING COMMITMENTS During 1998, the Company entered into a number of commitments for online, print and broadcast advertising. At December 31, 1998, the advertising commitments amounted to:
TOTAL YEARS ENDING DECEMBER 31, COMMITMENTS - ------------------------------------------------------------------------------ -------------- 1999.......................................................................... $ 8,291,000 2000.......................................................................... 171,000 -------------- $ 8,462,000 -------------- --------------
PURCHASE COMMITMENTS At December 31, 1998, the Company had approximately $8.7 million in outstanding orders with certain suppliers for the purchase of inventory. Such purchase commitments are expected to be fulfilled from April to September 1999. 8. SUBSEQUENT EVENTS In February 1999, the Company adopted the 1999 Stock Plan, the 1999 Directors' Stock Option Plan and the 1999 Employee Stock Purchase Plan. Collectively under these plans 7,700,000 shares of Common Stock have been reserved for future issuance. In February 1999, the Company's Board of Directors authorized management to file a registration statement with the Securities and Exchange Commission to permit the Company to sell shares of its Common Stock to the public. Upon completion of the Company's initial public offering, the Redeemable Convertible Preferred Stock will convert into 18,253,052 shares of Common Stock. Unaudited pro forma stockholders' equity reflects the assumed conversion of the Redeemable Convertible Preferred Stock as of December 31, 1998. F-16 UNDERWRITING eToys and the Underwriters named below (the "underwriters") have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated are the representatives of the underwriters.
Number of Underwriters Shares - ------------------------------------------------------------------------------- ----------- Goldman, Sachs & Co............................................................ BancBoston Robertson Stephens Inc.............................................. Donaldson, Lufkin & Jenrette Securities Corporation............................ Merrill Lynch, Pierce, Fenner & Smith Incorporated............................. ----------- Total...................................................................... ----------- -----------
------------------------ The underwriters are committed to take and pay for all of the shares indicated in the table above, if any are taken. If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional shares from eToys to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by eToys. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares. Paid by eToys
No Exercise Full Exercise ------------- --------------- Per Share....... $ $ Total........... $ $
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per shares from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. eToys and its directors, officers, employees and other securityholders have agreed with the underwriters not to dispose of or hedge any of their Common Stock or securities convertible into or exchangeable for shares of Common Stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives. See "Shares Eligible for Future Sale" for a discussion of certain transfer restrictions. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock has been negotiated among eToys and the representatives of the underwriters. Among the factors considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, were eToys' U-1 historical performance, estimates of eToys' business potential and earnings prospects, an assessment of eToys' management and the consideration of the above factors in relation to market valuation of companies in related businesses. eToys has applied to have the Common Stock listed on the Nasdaq National Market under the symbol "ETYS". In connection with the offering, the underwriters may purchase and sell shares of Common Stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the Common Stock while the offering is in progress. The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short-sale covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the Common Stock. As a result, the price of the Common Stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. The underwriters have reserved for sale, at the initial public offering price, up to % of the Common Stock offered hereby for certain individuals designated by eToys who have expressed an interest in purchasing such shares of Common Stock in the offering. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as other shares offered hereby. eToys estimates that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . eToys has agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933. U-2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------ TABLE OF CONTENTS
Page --------- Prospectus Summary................... 3 Risk Factors......................... 6 Use of Proceeds...................... 18 Dividend Policy...................... 18 Capitalization....................... 19 Dilution............................. 20 Selected Financial Data.............. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22 Business............................. 32 Management........................... 45 Certain Transactions................. 53 Principal Stockholders............... 56 Description of Capital Stock......... 58 Shares Eligible for Future Sale...... 61 Legal Matters........................ 63 Experts.............................. 63 Additional Information............... 63 Index to Financial Statements........ F-1 Underwriting......................... U-1
------------------ Through and including , 1999 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. Shares ETOYS INC. Common Stock ------------- [LOGO] ------------- GOLDMAN, SACHS & CO. BANCBOSTON ROBERTSON STEPHENS DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO. Representatives of the Underwriters - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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.
AMOUNT TO BE PAID ----------- SEC registration fee............................................................ $ 31,970 NASD filing fee................................................................. 12,000 Nasdaq National Market listing fee.............................................. 95,000 Printing and engraving expenses................................................. * Legal fees and expenses......................................................... * Accounting fees and expenses.................................................... * Blue Sky qualification fees and expenses........................................ * Transfer Agent and Registrar fees............................................... * Miscellaneous fees and expenses................................................. * ----------- Total....................................................................... * ----------- -----------
* To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933. Article VII of our current Certificate of Incorporation (Exhibit 3.1 hereto) and Article VI of our current Bylaws (Exhibit 3.3 hereto) provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by Delaware law. In addition, we have entered into Indemnification Agreements (Exhibit 10.14 hereto) with our officers and directors. The Underwriting Agreement (Exhibit 1.1) also provides for cross-indemnification among eToys and the Underwriters with respect to certain matters, including matters arising under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since our incorporation in November 1996, we have sold and issued the following securities: 1. On June 27, 1997 we issued 3,893,334 shares of Common Stock to five founders for an aggregate consideration of $58,400.01. On June 27, 1997 we also issued 6,466,667 shares of Common Stock and a Note in the principal amount of $100,000 to one investor for an aggregate consideration of $197,000.01. 2. On September 29, 1997, we issued one investor a warrant to purchase 50,000 shares of Common Stock in connection with the transfer of certain intellectual property. 3. On August 15, 1997 and September 26, 1997, we issued Notes in the principal amount of $895,000 and warrants to purchase 721,757 shares of Series A Preferred Stock to 40 investors for II-1 an aggregate consideration of $895,000. The Notes converted into 1,468,018 shares of Series A Preferred Stock. 4. On December 23, 1997, we issued 6,318,017 shares of Series A Preferred Stock to fifty accredited investors for an aggregate consideration of $3,917,170.54. 5. On March 11, 1998, we issued 780,000 shares of Common Stock to one accredited investor in exchange for substantially all of the assets of a business owned by the investor (less $270,000 cash). 6. On May 6, 1998, we issued Notes in the aggregate principal amount of $2,530,679.61 to four accredited investors. The Notes converted into 1,203,252 shares of Series B Preferred Stock. 7. On June 4, 1998, we issued 10,474,837 shares of Series B Preferred Stock to twelve accredited investors for am aggregate consideration of $22,030,677.17. 8. On June 17, 1998, we issued 1,411,812 shares of Series B Preferred Stock to sixteen accredited investors for an aggregate consideration of $2,969,322.97. 9. Since inception we have issued an aggregate of 5,051,200 options to purchase Common Stock of eToys to a number of our employees, directors and consultants. The issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of such Securities Act as transactions by an issuer not involving any public offering. In addition, certain issuances described in Item 9 were deemed exempt from registration under the Securities Act in reliance upon Rule 701 promulgated under the Securities Act. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION - ----------- ---------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement dated , 1999. 3.1 Amended and Restated Certificate of Incorporation of eToys. 3.2 Amended and Restated Certificate of Incorporation of eToys (proposed). 3.3 Amended and Restated Bylaws of eToys. 3.4 Amended and Restated Bylaws of eToys (proposed). 4.1 Specimen Stock Certificate. 5.1 Opinion of Venture Law Group regarding the legality of the Common Stock being registered. 10.1 Stock Purchase Agreement dated June 27, 1997 between eToys and Edward C. Lenk. 10.2 Restricted Stock Purchase Agreement dated June 27, 1997 between eToys and Edward C. Lenk. 10.3 Stock Purchase Agreement dated June 27, 1997 between eToys and Frank C. Han. 10.4 Restricted Stock Purchase Agreement dated June 27, 1997 between eToys and Frank C. Han. 10.5 Note and Stock Purchase Agreement dated June 27, 1997 between eToys and idealab!.
II-2
NUMBER DESCRIPTION - ----------- ---------------------------------------------------------------------------------- 10.6+ Interactive Marketing Agreement dated October 1, 1997 between eToys and America Online, Inc. (amended January 1, 1998). 10.7 Series A Preferred Stock Purchase Agreement dated December 23, 1997 among eToys and certain investors. 10.8 Series B Preferred Stock Purchase Agreement dated June 4, 1998 among eToys and certain investors. 10.9 Amended and Restated Investors' Rights Agreement dated June 4, 1998, among eToys and certain investors. 10.10 Amended and Restated Voting Agreement dated June 4, 1998, among eToys and certain investors. 10.11 Amended and Restated Right of First Refusal and Co-Sale Agreement dated June 4, 1998, among eToys, Edward C. Lenk, Frank C. Han and certain investors. 10.12 Lease dated January 22, 1999 between eToys and Spieker Properties, L.P. 10.13 Standard Industrial Lease Agreement dated June 26, 1998 between eToys and Newcrow (amended October 15, 1998). 10.14 Form of Indemnification Agreement between eToys and each of its officers and directors. 10.15* 1997 Stock Plan. 10.16* 1999 Stock Plan. 10.17* 1999 Employee Stock Purchase Plan. 10.18* 1999 Directors' Stock Option Plan. 10.19 Offer Letter dated December 5, 1998 between eToys and John R. Hnanicek. 10.20 Offer Letter dated December 28, 1998 between eToys and Louis V. Zambello III. 10.21 Offer Letter dated January 12, 1999 between eToys and Steven J. Schoch. 10.22 Equipment Lease Line dated December 24, 1998 between eToys and Comdisco, Inc. 23.1 Consent of Accountants. 23.2 Consent of Attorneys (see Exhibit 5.1). 24.1 Power of Attorney (see page II-5).
- ------------------------ * To be filed by amendment. + Confidential treatment requested as to certain portions of this Exhibit. (b) Financial Statement Schedules Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such II-3 liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Monica, State of California on February 17, 1999. ETOYS INC. By: /s/ EDWARD C. LENK ----------------------------------------- Edward C. Lenk PRESIDENT, CHIEF EXECUTIVE OFFICER AND UNCLE OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Edward C. Lenk and Steven J. Schoch, and each of them, as his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments), and any and all registration statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the offering contemplated by this registration statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said registration statement. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ EDWARD C. LENK President, Chief Executive - ------------------------------ Officer and Uncle of the February 17, 1999 Edward C. Lenk Board of Directors /s/ STEVEN J. SCHOCH - ------------------------------ Chief Financial Officer February 17, 1999 Steven J. Schoch /s/ PETER C.M. HART - ------------------------------ Director February 17, 1999 Peter C.M. Hart /s/ TONY HUNG - ------------------------------ Director February 17, 1999 Tony Hung /s/ MICHAEL MORITZ - ------------------------------ Director February 17, 1999 Michael Moritz /s/ DANIEL NOVA - ------------------------------ Director February 17, 1999 Daniel Nova
II-5 EX-3.1 2 EXHIBIT 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ETOYS INC. The undersigned, Edward C. Lenk and Frank C. Han hereby certify that: 1. They are the duly elected and acting President and Secretary, respectively, of eToys Inc., a Delaware corporation. 2. The Certificate of Incorporation of this corporation was originally filed with the Secretary of State of Delaware on November 8, 1996 under the name of TOYS.COM INC. 3. The Certificate of Incorporation of this corporation shall be amended and restated to read in full as follows: ARTICLE I "The name of this corporation is eToys Inc. (the "CORPORATION"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 15 East North Street, Dover, County of Kent, Delaware 19901. The name of its registered agent at such address is Incorporating Services, Ltd. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. ARTICLE IV (A) CLASSES OF STOCK. The Corporation is authorized to issue two classes of stock to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK." The total number of shares which the Corporation is authorized to issue is Sixty-Eight Million Nine Hundred Twenty-Six Thousand Four Hundred Twenty-Three (68,926,423) shares, each with a par value of $0.0001 per share. Fifty Million (50,000,000) shares shall be Common Stock and Eighteen Million Nine Hundred Twenty-Six Thousand Four Hundred Twenty-Three (18,926,423) shares shall be Preferred Stock. (B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The Preferred Stock authorized by this Second Amended and Restated Certificate of Incorporation may be issued from time to time in one or more series. The first series of Preferred Stock shall be designated "SERIES A PREFERRED STOCK" and shall consist of Seven Million Thirty-Nine Thousand Seven Hundred Seventy-Four (7,039,774) shares. The second series of Preferred Stock shall be designated "Series B Preferred Stock" and shall consist of Eleven Million Eight Hundred Eighty Six Thousand Six Hundred Forty Nine (11,886,649) shares. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A and Series B Preferred Stock are as set forth below in this Article IV(B). 1. DIVIDEND PROVISIONS. (a) Subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of shares of Series A or Series B Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, at the rate of (a) $0.043 per share per annum on each outstanding share of Series A Preferred Stock (as adjusted for any stock splits, stock dividends, recapitalizations or the like) and (b) $0.1472 per share per annum on each outstanding share of Series B Preferred Stock (as adjusted for any stock splits, stock dividends, recapitalizations or the like) or, if greater (as determined on a per annum basis and on an as converted basis for the Series A Preferred Stock and Series B Preferred Stock), an amount equal to that paid on any other outstanding shares of this Corporation, payable quarterly when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. (b) After payment of such dividends, any additional dividends shall be distributed among all holders of Common Stock and all holders of Series A Preferred Stock and Series B Preferred Stock in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Series A Preferred Stock and Series B Preferred Stock were converted to Common Stock at the then effective conversion rate. 2. LIQUIDATION. (a) PREFERENCE. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of the Series A and Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to (i) $0.62 per share (as adjusted for any stock splits, stock dividends, recapitalizations or the like) for each share of Series A Preferred Stock then held by them and (ii) $2.1032 per share (as adjusted for any stock splits, stock dividends, recapitalizations or the like) for each share of Series B Preferred Stock then held by them (as adjusted for any stock splits, recapitalizations or the like), plus an amount equal to all declared but unpaid dividends on the Series A Preferred Stock and Series B Preferred Stock, respectively. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A and Series B Preferred Stock shall be insufficient to permit the payment to such -2- holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock that may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A and Series B Preferred Stock in proportion to the preferential amount each such holder would otherwise have been entitled to receive if the preferential amounts payable in respect to the Series A and Series B Preferred Stock had been paid in full. (b) REMAINING ASSETS. Upon the completion of the distribution required by Section 2(a) above and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of the Series A and Series B Preferred Stock and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series A and Series B Preferred Stock) until (i) with respect to the holders of Series A Preferred Stock, such holders shall have received an aggregate of $1.86 per share of Series A Preferred Stock (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (including amounts paid pursuant to Section 2(a) above) and (ii) with respect to the holders of Series B Preferred Stock, such holders shall have received an aggregate of $6.31 per share of Series B Preferred Stock (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (including amounts paid pursuant to Section 2(a) above); thereafter, subject to the rights of series of Preferred Stock that may from time to time come into existence, if assets remain in the Corporation, the holders of the Common Stock of the Corporation shall receive all of the remaining assets of the Corporation pro rata based on the number of shares of Common Stock held by each. (c) CERTAIN ACQUISITIONS. (i) DEEMED LIQUIDATION. For purposes of this Section 2, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation); (B) a sale of all or substantially all of the assets of the Corporation, UNLESS the Corporation's stockholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity in approximately the same relative percentages after such acquisition or sale as before such acquisition or sale; or (C) any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of. (ii) VALUATION OF CONSIDERATION. In the event of a deemed liquidation as described in Section 2(c)(i) above, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: -3- (A) Securities not subject to investment letter or other similar restrictions on free marketability: (1) If traded on a securities exchange or The Nasdaq Stock Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty-day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day period ending three (3) days prior to the closing; and (3) If there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors of the Corporation. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in Section 2(c)(ii)(A) to reflect the approximate fair market value thereof, as determined in good faith by the Board of Directors of the Corporation. (iii) NOTICE OF TRANSACTION. The Corporation shall give each holder of record of Series A or Series B Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than twenty (20) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (iv) EFFECT OF NONCOMPLIANCE. In the event the requirements of this Section 2(c) are not complied with, the Corporation shall forthwith either cause the closing of the transaction to be postponed until such requirements have been complied with, or cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series A and Series B Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in Section 2(c)(iii) hereof. -4- 3. REDEMPTION. (a) Subject to the rights of series of any Preferred Stock which may from time to time come into existence, on or at any time after the date November 26, 2002, this Corporation shall, upon receipt by this Corporation from the holders of 66 2/3% of the then outstanding shares of Series A and Series B Preferred Stock of their written consent to redemption hereunder of their respective shares (the "REDEMPTION NOTICE"), at such time and to the extent that it may lawfully do so, redeem in whole or in part the (i) Series A Preferred Stock by paying in cash therefor a sum equal to $0.62 per share (as adjusted for any stock dividends, combinations or splits with respect to such share) plus all declared but unpaid dividends on such share (the "SERIES A REDEMPTION PRICE") and (ii) Series B Preferred Stock by paying in cash therefor a sum equal to $2.1032 per share (as adjusted for any stock dividends, combinations or splits with respect to such share) plus all declared but unpaid dividends on such share (the "SERIES B REDEMPTION PRICE"). Any such redemption shall occur on the date forty-five (45) days after the receipt of the Redemption Notice or as soon thereafter as the Company may lawfully conduct such redemption under the terms of this Section 3. (b) As used herein and in subsection (3)(c) below, the term "REDEMPTION DATE" shall refer to November 26, 2002, and the term "REDEMPTION PRICE" shall refer to each of the "SERIES A REDEMPTION PRICE" and "SERIES B REDEMPTION PRICE." Subject to the rights of series of Preferred Stock which may from time to time come into existence, at least fifteen (15) but no more than thirty (30) days prior to the Redemption Date, if the holders of Series A and Series B Preferred Stock exercise their right of redemption pursuant to subsection 3(a) above, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A and Series B Preferred Stock to be redeemed, at the address last shown on the records of this Corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to this Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares to be redeemed (the "REDEMPTION NOTICE"). Except as provided in subsection (3)(c) on or after the Redemption Date, each holder of Series A and Series B Preferred Stock to be redeemed shall surrender to this Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Series A and Series B Preferred Stock designated for redemption in the Redemption Notice as holders of Series A and Series B Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, -5- and such shares shall not thereafter be transferred on the books of this Corporation or be deemed to be outstanding for any purpose whatsoever. Subject to the rights of series of Preferred Stock which may from time to time come into existence, if the funds of this Corporation legally available for redemption of shares of Series A and Series B Preferred Stock on the Redemption Date are insufficient to redeem the total number of shares of Series A and Series B Preferred Stock to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed in proportion to the amounts which the Series A Preferred Stock and Series B Preferred Stock would otherwise had been entitled to receive if all amounts payable on or with respect to such Series A and Series B Preferred Stock in such redemption had been paid in full. The shares of Series A and Series B Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. Subject to the rights of series of Preferred Stock which may from time to time come into existence, at any time thereafter when additional funds of this Corporation are legally available for the redemption of shares of Series A and Series B Preferred Stock, such funds will immediately be used to redeem the balance of the shares of Series A and Series B Preferred Stock which this Corporation has not redeemed. (d) Three (3) days prior to the Redemption Date, this Corporation shall deposit the Redemption Price of all outstanding shares of Series A and Series B Preferred Stock designated for redemption in the Redemption Notice, and not yet redeemed or converted, with a bank or trust company having aggregate capital and surplus in excess of $50,000,000 as a trust fund for the benefit of the respective holders of the shares designated for redemption and not yet redeemed, Simultaneously, this Corporation shall deposit irrevocable instruction and authority to such bank or trust company to publish the notice of redemption thereof (or to complete such publication if theretofore commenced) and to pay, on and after the date fixed for redemption or prior thereto, the Redemption Price of the Series A and Series B Preferred Stock to the holders thereof upon surrender of their certificates. Any monies deposited by this Corporation pursuant to this subsection 3(d) for the redemption of shares which are thereafter converted into shares of Common Stock pursuant to Section 4 hereof no later than the close of business on the Redemption Date shall be returned to this Corporation forthwith upon such conversion. The balance of any monies deposited by this Corporation pursuant to this subsection 3(d) remaining unclaimed at the expiration of two (2) years following the Redemption Date shall thereafter be returned to this Corporation, provided that the stockholder to which such money would be payable hereunder shall be entitled, upon proof of its ownership of the Series A and Series B Preferred Stock and payment of any bond requested by the Company, to receive such monies but without interest from the Redemption Date. 4. CONVERSION. The holders of the Series A and Series B Preferred Stock shall have conversion rights as follows (the "CONVERSION RIGHTS"): (a) RIGHT TO CONVERT. Subject to Section 4(c), each share of Series A and Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and on or prior to the close of business on the day prior to the Redemption Date, if any, as may be specified in the Redemption Notice with respect to the Series A and Series B Preferred Stock, at the office of the Corporation or any transfer agent for -6- such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) $0.62 in the case of Series A Preferred Stock and (ii) $2.1032 in the case of Series B Preferred Stock by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share shall be $0.62 for shares of Series A Preferred Stock and $2.1032 for shares of Series B Preferred Stock. Such initial Conversion Price shall be subject to adjustment as set forth in Section 4(d) below. (b) AUTOMATIC CONVERSION. Each share of Series A or Series B Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such share immediately upon, except as provided below in Section 4(c), the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended (the "SECURITIES ACT"), which results in aggregate gross cash proceeds to the Corporation of at least $20,000,000 (an "IPO"). (c) MECHANICS OF CONVERSION. Before any holder of Series A or Series B Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such series of Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of such series of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act the conversion may, at the option of any holder tendering such Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive Common Stock upon conversion of such Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN DILUTIVE ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price of the Series A and Series B Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) ISSUANCE OF ADDITIONAL STOCK BELOW PURCHASE PRICE. If the Corporation shall issue, after the date upon which any shares of Series A or Series B Preferred Stock were first issued (the "PURCHASE DATE"), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for the -7- Series A Preferred Stock or the Series B Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for the Series A Preferred Stock or the Series B Preferred Stock in effect immediately prior to each such issuance shall automatically (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance, plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance, plus the number of shares of such Additional Stock. (B) NO FRACTIONAL ADJUSTMENTS. No adjustment of the Conversion Price for the Series A or Series B Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in Sections 4(d)(i)(E)(3) and 4(d)(i)(E)(4), no adjustment of such Conversion Price pursuant to this Section 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) DETERMINATION OF CONSIDERATION. In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors irrespective of any accounting treatment. (E) DEEMED ISSUANCES OF COMMON STOCK. In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 4(d)(i) and Section 4(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for -8- a consideration equal to the consideration (determined in the manner provided in Sections 4(d)(i)(C) and 4(d)(i)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 4(d)(i)(C) and 4(d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A or Series B Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A or Series B Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Sections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Section 4(d)(i)(E)(3) or (4). -9- (ii) "ADDITIONAL STOCK" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 4(d)(i)(E)) by the Corporation after the Purchase Date) other than: (A) Common Stock issued pursuant to a transaction described in Section 4(d)(iii) hereof, (B) Up to 5,800,000 shares of Common Stock issuable or issued to employees, consultants or directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Corporation, (C) Capital stock, or options or warrants to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, which issuances are primarily for other than equity financing purposes, and provided that the aggregate of such issuance and similar issuances in the preceding twelve months period do not exceed 1% of the then outstanding Common Stock of the Company (assuming full conversion and exercise of all outstanding convertible and exercisable securities), (D) Shares of Common Stock or Preferred Stock issuable upon exercise of warrants outstanding as of the date of this Amended and Restated Certificate of Incorporation, (E) Capital stock or warrants or options to purchase capital stock issued in connection with bona fide acquisitions, mergers or similar transactions, the terms of which are approved by the Board of Directors of the Corporation, (F) Shares of Common Stock issued or issuable upon conversion of the Preferred Stock, (G) Shares of Common Stock issued or issuable in a public offering, and (H) Warrants exercisable for up to 721,757 shares of Series A Preferred Stock. (iii)In the event the Corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of -10- the Series A and Series B Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series A and Series B Preferred Stock shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Section 4(d)(i)(E). (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A and Series B Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 4(d)(iii), then, in each such case for the purpose of this Section 4(e), the holders of Series A and Series B Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (f) RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Series A and Series B Preferred Stock shall thereafter be entitled to receive upon conversion of such Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of such Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of such Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (g) NO IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. -11- (h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series A and Series B Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A or Series B Preferred Stock pursuant to this Section 4, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of such Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A or Series B Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of such series of Preferred Stock. (i) NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series A or Series B Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A and Series B Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of such series of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of such series of Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate of Incorporation. -12- (k) NOTICES. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A or Series B Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. 5. VOTING RIGHTS. Except as provided below with respect to the election of directors, the holder of each share of Series A or Series B Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. In addition, as long as twenty-five percent (25%) of the number of shares of Series A Preferred Stock issued by the Corporation on the date the Series A Preferred Stock was originally issued remain outstanding, the holders of the Series A Preferred Stock shall be entitled, voting together as a separate class, to elect one (1) director of this Corporation at each annual election of directors. As long as twenty-five percent (25%) of the number of shares of Series B Preferred Stock issued by the Corporation on the date the Series B Preferred Stock was originally issued remain outstanding, the holders of the Series B Preferred Stock shall be entitled, voting together as a separate class, to elect two (2) directors of this Corporation at each annual election of directors. The holders of Common Stock shall be entitled, voting together as a separate class, to elect two (2) directors of this Corporation at each annual meeting of directors. The holders of Preferred Stock and Common Stock voting together as a single class shall have the right to elect any remaining directors. 6. PROTECTIVE PROVISIONS. So long as any shares of Series A or Series B Preferred Stock are outstanding (as adjusted for stock splits, stock dividends or recapitalizations or the like), the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least 66-2/3% of the then outstanding shares of Series A and Series B Preferred Stock, voting together as a class: (a) liquidate, dissolve, sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of, PROVIDED that this Section 6(a) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Corporation; (b) alter or change the rights, preferences or privileges of the shares of the Series A or Series B Preferred Stock so as to affect adversely the shares of such series; (c) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A or Series B Preferred Stock; -13- (d) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series A or Series B Preferred Stock with respect to voting, redemption, conversion, dividends or upon liquidation; (e) redeem, purchase or otherwise acquire (or pay into or set funds aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock; PROVIDED, HOWEVER, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Corporation or any subsidiary pursuant to agreements under which the Corporation has the option to repurchase such shares at cost or at cost upon the occurrence of certain events, such as the termination of employment; (f) increase the authorized number of directors of the Corporation; or (g) pay any dividend on the Common Stock other than dividends on the Common Stock solely in the form of additional shares of Common Stock. 7. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares of Preferred Stock shall be redeemed or converted pursuant to Section 3 or Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by the Corporation. The Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (C) COMMON STOCK. 1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be distributed as provided in Section 2 of Division (B) of this Article IV. 3. REDEMPTION. The Common Stock is not redeemable. 4. VOTING RIGHTS. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. -14- ARTICLE V The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE VI Elections of directors need not be by written ballot unless otherwise provided in the Bylaws of the Corporation. ARTICLE VII (A) To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (B) The Corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the Corporation or any predecessor of the Corporation, or serves or served at any other enterprise as a director or officer at the request of the Corporation or any predecessor to the Corporation. (C) Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision." ARTICLE VIII To the fullest extent permitted by applicable law, this Corporation is authorized to provide indemnification of (and advancement of expenses to) agents of this Corporation (and any other persons to which Delaware law permits this Corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to this Corporation, its stockholders, and others. * * * -15- The foregoing Second Amended and Restated Certificate of Incorporation has been duly adopted by this corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 228, 242 and 245 of the General Corporation Law of the State of Delaware. Executed at Santa Monica, California, on the 2nd day of June, 1998. /s/ Edward C. Lenk --------------------------------- Edward C. Lenk, President /s/ Frank C. Han --------------------------------- Frank C. Han, Secretary SIGNATURE PAGE TO eTOYS INC. SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EX-3.2 3 EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ETOYS INC. The undersigned, Edward C. Lenk and Frank C. Han, hereby certify that: 1. They are the duly elected and acting President and Secretary, respectively, of eToys Inc., a Delaware corporation. 2. The Certificate of Incorporation of this corporation was originally filed with the Secretary of State of Delaware on November 8, 1996 under the name of TOYS.COM INC. 3. The Certificate of Incorporation of this corporation shall be amended and restated to read in full as follows: "ARTICLE I The name of this corporation is eToys Inc. (the "CORPORATION"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 15 East North Street, Dover, County of Kent, Delaware 19901. The name of its registered agent at such address is Incorporating Services, Ltd. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV Upon the effective date of the filing of this Certificate of Incorporation, each share of the corporation's outstanding capital stock shall be converted and reconstituted into _____ shares of capital stock (the "STOCK SPLIT"). No further adjustment of any preference or price set forth in this Article IV shall be made as a result of the Stock Split, as all share amounts, amounts per share and per share numbers set forth in this Certificate of Incorporation have been appropriately adjusted to reflect the Stock Split. (A) CLASSES OF STOCK. The Corporation is authorized to issue two classes of stock to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK." The total number of shares which the Corporation is authorized to issue is Two Hundred Five Million (205,000,000) shares, each with a par value of $0.0001 per share. Two Hundred Million (200,000,000) shares shall be Common Stock and Five Million (5,000,000) shares shall be Preferred Stock. (B) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in this Certificate of Incorporation, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors. ARTICLE VI In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until the vacancy is filled. Vacancies in the Board of Directors and newly created directorships resulting from any increase in the authorized number of directors shall be filled by a vote of the majority of the directors then in office, though less than a quorum, or by a sole remaining director. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. ARTICLE VII In the election of directors, each holder of shares of any class or series of capital stock of the Corporation shall be entitled to one vote for each share held. No stockholder will be permitted to cumulate votes at any election of directors. ARTICLE VIII No action shall be taken by the stockholders of the Corporation other than at an annual or special meeting of the stockholders, upon due notice and in accordance with the provisions of the Corporation's bylaws. ARTICLE IX The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. -2- ARTICLE X The Board of Directors of the Corporation is expressly authorized to make, alter or repeal bylaws of the Corporation. ARTICLE XI Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of the Corporation. ARTICLE XII The Corporation shall have perpetual existence. ARTICLE XIII (A) To the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law of Delaware is hereafter amended to authorize, with the approval of a corporation's stockholders, further reductions in the liability of a corporation's directors for breach of fiduciary duty, then a director of the Corporation shall not be liable for any such breach to the fullest extent permitted by the General Corporation Law of Delaware, as so amended. (B) Any repeal or modification of the foregoing provisions of this Article XIII shall not adversely affect any right or protection of a director of the Corporation with respect to any acts or omissions of such director occurring prior to such repeal or modification. ARTICLE XIV (A) To the fullest extent permitted by applicable law, the Corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits the Corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law of Delaware, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to a corporation, its stockholders, and others. (B) Any repeal or modification of any of the foregoing provisions of this Article XIV shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of the Corporation with respect to -3- any acts or omissions of such director, officer or agent occurring prior to such repeal or modification." * * * -4- The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by this Corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 228, 242 and 245 of the General Corporation Law of the State of Delaware. Executed at Santa Monica, California, on the ____ day of ___________, 1999. ---------------------------------------- Edward C. Lenk, President ---------------------------------------- Frank C. Han, Secretary EX-3.3 4 EXHIBIT 3.3 BYLAWS OF ETOYS INC. TABLE OF CONTENTS
PAGE ---- ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 REGISTERED OFFICE. . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II - MEETINGS OF SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . 1 2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 NOTICE OF SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . 2 2.6 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.7 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . 3 2.8 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 3 2.9 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.10 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . 4 2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.12 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS. . . 4 2.13 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.14 LIST OF SHAREHOLDERS ENTITLED TO VOTE. . . . . . . . . . . . . . 5 2.15 ADVANCE NOTICE OF SHAREHOLDERS NOMINEES AND SHAREHOLDER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . 7 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. . . . . 7 3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . 7 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . 8 3.7 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . 9 3.8 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . 9 3.9 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.11 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . .10 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . .10 3.13 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . .10 3.14 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . . . . .10 -i- PAGE ---- 3.15 REMOVAL OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . .11 ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . .11 4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . .11 4.2 COMMITTEE MINUTES. . . . . . . . . . . . . . . . . . . . . . . .12 4.3 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . .12 ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 5.2 APPOINTMENT OF OFFICERS. . . . . . . . . . . . . . . . . . . . .12 5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . .13 5.4 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . .13 5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . .13 5.6 UNCLE OF THE BOARD. . . .. . . . . . . . . . . . . . . . . . . .13 5.7 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .13 5.8 VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . . .14 5.9 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . .14 5.10 CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . . . . .14 5.11 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . . . . .15 5.12 ASSISTANT TREASURER. . . . . . . . . . . . . . . . . . . . . . .15 5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . .15 5.14 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . .15 ARTICLE VI - INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . .15 6.1 THIRD PARTY ACTIONS. . . . . . . . . . . . . . . . . . . . . . .16 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. . . . . . . . . .16 6.3 SUCCESSFUL DEFENSE . . . . . . . . . . . . . . . . . . . . . . .16 6.4 DETERMINATION OF CONDUCT . . . . . . . . . . . . . . . . . . . .17 6.5 PAYMENT OF EXPENSES IN ADVANCE . . . . . . . . . . . . . . . . .17 6.6 INDEMNITY NOT EXCLUSIVE. . . . . . . . . . . . . . . . . . . . .17 6.7 INSURANCE INDEMNIFICATION. . . . . . . . . . . . . . . . . . . .17 6.8 THE CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . .18 6.9 EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . .18 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. . .18 -ii- PAGE ---- ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . .18 7.1 MAINTENANCE AND INSPECTION OF RECORDS. . . . . . . . . . . . . .18 7.2 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . .19 7.3 ANNUAL STATEMENT TO SHAREHOLDERS . . . . . . . . . . . . . . . .19 ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . .20 8.1 CHECKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS . . . . . . . .20 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES . . . . . . . . . . . . .20 8.4 SPECIAL DESIGNATION ON CERTIFICATES. . . . . . . . . . . . . . .21 8.5 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . .21 8.6 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . .21 8.7 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . .21 8.8 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . .22 8.9 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 8.10 TRANSFER OF STOCK. . . . . . . . . . . . . . . . . . . . . . . .22 8.11 STOCK TRANSFER AGREEMENTS. . . . . . . . . . . . . . . . . . . .22 8.12 REGISTERED SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . .22 ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .23
-iii- BYLAWS OF ETOYS INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Dover, County of Kent, State of Delaware. The name of the registered agent of the corporation at such location is Incorporating Services, Ltd. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 PLACE OF MEETINGS Meetings of Shareholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, Shareholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of Shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation the annual meeting of Shareholders shall be held on the third Tuesday of April of each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding business day. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the Shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more Shareholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the Shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than ten (10) nor more than sixty (60) days after the receipt of the request. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of Shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS All notices of meetings with Shareholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each Shareholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of Shareholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the Shareholder at such Shareholder's address as it appears on the records of the corporation. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the Shareholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the Shareholders, then either (i) the Chairman of the meeting or (ii) the Shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or -2- represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Shareholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS The chairman of any meeting of Shareholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. 2.9 VOTING The Shareholders entitled to vote at any meeting of Shareholders shall be determined in accordance with the provisions of Section 2.12 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation or as may be otherwise required by applicable law, each Shareholder shall be entitled to one vote for each share of capital stock held by such Shareholder. Except as may be otherwise provided in the certificate of incorporation or these bylaws, or as may be otherwise required by applicable law: (i) in all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the Shareholders; (ii) directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors; and (iii) where a separate vote by a class or classes or series is required, the affirmative vote of the majority of shares of such class or classes or series present in person or represented by proxy at the meeting shall be the act of such class or classes or series. -3- 2.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Shareholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of Shareholders of a corporation, or any action that may be taken at any annual or special meeting of such Shareholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those Shareholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by Shareholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of Shareholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.12 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the Shareholders entitled to notice of or to vote at any meeting of Shareholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining Shareholders entitled to notice of or to vote at a meeting of Shareholders shall be at the close of business on the day next preceding the day on which -4- notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining Shareholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (iii) The record date for determining Shareholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of Shareholders of record entitled to notice of or to vote at a meeting of Shareholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.13 PROXIES Each Shareholder entitled to vote at a meeting of Shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for the Shareholder by a written proxy, signed by the Shareholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the Shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Shareholder or the Shareholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.14 LIST OF SHAREHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of Shareholders, a complete list of the Shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each Shareholder and the number of shares registered in the name of each Shareholder. Such list shall be open to the examination of any Shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Shareholder who is present. Such list shall presumptively determine the identity of the Shareholders entitled to vote at the meeting and the number of shares held by each of them. 2.15 ADVANCE NOTICE OF SHAREHOLDERS NOMINEES AND SHAREHOLDER BUSINESS -5- To be properly brought before an annual meeting or special meeting, nominations for the election of director or other business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a Shareholder. For such nominations or other business to be considered properly brought before the meeting by a Shareholder, such Shareholder must have given timely notice and in proper form of his intent to bring such business before such meeting. To be timely, such Shareholder's notice must be delivered to or mailed and received by the secretary of the corporation not less than 90 days prior to the meeting; provided, however, that in the event that less than 100 days notice or prior public disclosure of the date of the meeting is given or made to Shareholders, notice by the Shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. To be in proper form, a Shareholder's notice to the secretary shall set forth: (i) the name and address of the Shareholder who intends to make the nominations, propose the business, and, as the case may be, the name and address of the person or persons to be nominated or the nature of the business to be proposed; (ii) a representation that the Shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or introduce the business specified in the notice; (iii) if applicable, a description of all arrangements or understandings between the Shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the Shareholder; (iv) such other information regarding each nominee or each matter of business to be proposed by such Shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (v) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. ARTICLE III -6- DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the Shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be five (5). The exact number of directors shall be five (5) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the stockholders. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of Shareholders to hold office until the next annual meeting. Directors need not be Shareholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until the director's earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. -7- Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the Shareholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any Shareholder or an executor, administrator, trustee or guardian of a Shareholder, or other fiduciary entrusted with like responsibility for the person or estate of a Shareholder, may call a special meeting of Shareholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any Shareholder or Shareholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 FIRST MEETINGS -8- The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the Shareholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the Shareholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the Shareholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.7 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.8 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or a majority of the directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.9 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. -9- A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.10 ADJOURNED MEETING; NOTICE If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.11 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.13 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. 3.14 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares -10- of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.15 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the Shareholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the Shareholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the -11- bylaws of the corporation: and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws. Section 3.5 (place of meetings and meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.11 (waiver of notice), and Section 3.12 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, an uncle of the board, one or more vice presidents, one or more assistant vice secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. -12- 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 UNCLE OF THE BOARD The uncle of the board, if such an officer be elected, shall, if present, preside at meetings of the bond of directors and exercise and perform such other powers and duties as may from time to time be assigned to him or her by the board of directors or as may be prescribed by these bylaws. If there is no chief executive officer and no president, then the uncle of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT The president shall preside at all meetings of the Shareholders and, in the absence or nonexistence of an uncle of the board and a chief executive officer, at all meetings of the board of directors. The president shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. If there is no chief executive officer, then the president shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. -13- 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the uncle of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and Shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at Shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all Shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the Shareholders and of the board of directors required to be given by law or by these bylaws. The secretary shall keep the seal, of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. The chief financial officer shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall -14- have other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. The chief financial officer shall be the treasurer of the corporation. 5.11 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the Shareholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these bylaws. 5.12 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the Shareholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the chief financial officer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the chief financial officer and shall perform such other duties and have such other powers as may be prescribed by the board of directors or these bylaws. 5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The uncle of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 5.14 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the Shareholders. ARTICLE VI INDEMNITY -15- 6.1 THIRD PARTY ACTIONS The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) and amounts paid in settlement (if such settlement is approved in advance by the corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if the person acted in good faith and in manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding any other provision of this Article VI, no person shall be indemnified hereunder for any expenses or amounts paid in settlement with respect to any action to recover short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended. 6.3 SUCCESSFUL DEFENSE To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sec- -16- tions 6.1 and 6.2, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection therewith. 6.4 DETERMINATION OF CONDUCT Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that the indemnification of the director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the Shareholders. Notwithstanding the foregoing, a director, officer, employee or agent of the Corporation shall be entitled to contest any determination that the director, officer, employee or agent has not met the applicable standard of conduct set forth in Sections 6.1 and 6.2 by petitioning a court of competent jurisdiction. 6.5 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending a civil or criminal action, suit or proceeding, by an individual who may be entitled to indemnification pursuant to Section 6.1 or 6.2, shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that the individual is not entitled to be indemnified by the corporation as authorized in this Article VI. 6.6 INDEMNITY NOT EXCLUSIVE The indemnification and advancement of expenses provided by or granted pursuant to the other sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of Shareholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office. 6.7 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in any such capacity or arising out of the person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Article VI. -17- 6.8 THE CORPORATION For purposes of this Article VI, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as the person would have with respect to such constituent corporation if its separate existence had continued. 6.9 EMPLOYEE BENEFIT PLANS For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article VI. 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive officer or at such place or places as designated by the board of directors, keep a record of its Shareholders listing their names and -18- addresses and the number and class of shares held by each Shareholder, a copy of these bylaws as amended to date, accounting books, and other records. Any Shareholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its Shareholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a Shareholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent so to act on behalf of the Shareholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of Shareholders, a complete list of the Shareholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of each Shareholder and the number of shares registered in the name of each Shareholder. Such list shall be open to the examination of any Shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Shareholder who is present. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its Shareholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO SHAREHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the Shareholders when called for by vote of the Shareholders, a full and clear statement of the business and condition of the corporation. -19- ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if the person were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend -20- on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each Shareholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision. the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. -21- The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which shall be adopted and which may be altered by the board of directors, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of Shareholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such Shareholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED SHAREHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. -22- ARTICLE IX AMENDMENTS The bylaws of the corporation may be adopted, amended or repealed by the Shareholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the Shareholders of the power, nor limit their power to adopt, amend or repeal bylaws. -23- EX-3.4 5 EXHIBIT 3.4 BYLAWS OF ETOYS INC. (AS AMENDED AND RESTATED ON ____________, 1999) TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Registered Office . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2 Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . .1 ARTICLE II - MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . .1 2.1 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . .1 2.2 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . .1 2.3 Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.4 Notice of Stockholder's Meeting; Affidavit of Notice. . . . . . . .3 2.5 Advance Notice of Stockholder Nominees. . . . . . . . . . . . . . .3 2.6 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.7 Adjourned Meeting; Notice . . . . . . . . . . . . . . . . . . . . .4 2.8 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . .4 2.9 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 2.10 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . .5 2.11 Record Date for Stockholder Notice; Voting . . . . . . . . . . . .5 2.12 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . .6 3.1 Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 3.2 Number of Directors . . . . . . . . . . . . . . . . . . . . . . . .6 3.3 Election, Qualification and Term of Office of Directors . . . . . .6 3.4 Resignation and Vacancies . . . . . . . . . . . . . . . . . . . . .7 3.5 Place of Meetings; Meetings by Telephone. . . . . . . . . . . . . .7 3.6 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . . .8 3.7 Special Meetings; Notice. . . . . . . . . . . . . . . . . . . . . .8 3.8 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 3.9 Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . . . . .9 3.10 Board Action by Written Consent without a Meeting. . . . . . . . .9 3.11 Fees and Compensation of Directors . . . . . . . . . . . . . . . .9 3.12 Approval of Loans to Officers. . . . . . . . . . . . . . . . . . .9 3.13 Removal of Directors . . . . . . . . . . . . . . . . . . . . . . .9 3.14 Uncle of the Board of Directors . .. . . . . . . . . . . . . . . 10 ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.1 Committees of Directors . . . . . . . . . . . . . . . . . . . . . 10 4.2 Committee Minutes . . . . . . . . . . . . . . . . . . . . . . . . 12 4.3 Meetings and Action of Committees . . . . . . . . . . . . . . . . 12 ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.1 Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.2 Appointment of Officers . . . . . . . . . . . . . . . . . . . . . 12 5.3 Subordinate Officers. . . . . . . . . . . . . . . . . . . . . . . 12 5.4 Removal and Resignation of Officers . . . . . . . . . . . . . . . 13 5.5 Vacancies in Offices. . . . . . . . . . . . . . . . . . . . . . . 13 5.6 Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . 13
-i- TABLE OF CONTENTS (CONTINUED) 5.7 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.8 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.9 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.10 Chief Financial Officer. . . . . . . . . . . . . . . . . . . . . 14 5.11 Representation of Shares of Other Corporations . . . . . . . . . 15 5.12 Authority and Duties of Officers . . . . . . . . . . . . . . . . 15 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS. . . . . . . . . . . . . . . . . . . . . . . . . 15 6.1 Indemnification of Directors and Officers . . . . . . . . . . . . 15 6.2 Indemnification of Others . . . . . . . . . . . . . . . . . . . . 15 6.3 Payment of Expenses in Advance. . . . . . . . . . . . . . . . . . 16 6.4 Indemnity Not Exclusive . . . . . . . . . . . . . . . . . . . . . 16 6.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.6 Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . 17 7.1 Maintenance and Inspection of Records . . . . . . . . . . . . . . 17 7.2 Inspection by Directors . . . . . . . . . . . . . . . . . . . . . 17 7.3 Annual Statement to Stockholders. . . . . . . . . . . . . . . . . 17 ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . 18 8.1 Checks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 8.2 Execution of Corporate Contracts and Instruments. . . . . . . . . 18 8.3 Stock Certificates; Partly Paid Shares. . . . . . . . . . . . . . 18 8.4 Special Designation on Certificates . . . . . . . . . . . . . . . 19 8.5 Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . 19 8.6 Construction; Definitions . . . . . . . . . . . . . . . . . . . . 19 8.7 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.8 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.9 Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.10 Transfer of Stock. . . . . . . . . . . . . . . . . . . . . . . . 20 8.11 Stock Transfer Agreements. . . . . . . . . . . . . . . . . . . . 20 8.12 Registered Stockholders. . . . . . . . . . . . . . . . . . . . . 20 ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 20
-ii- BYLAWS OF ETOYS INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE. The address of the Corporation's registered office in the State of Delaware is 15 East North Street, Dover, County of Kent, Delaware 19901. The name of its registered agent at such address is Incorporating Services, Ltd. 1.2 OTHER OFFICES. The Board of Directors may at any time establish other offices at any place or places where the Corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the Corporation. 2.2 ANNUAL MEETING. (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted. (b) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice with respect to such meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 2.2, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section 2.2. (c) In addition to the requirements of Section 2.5, for nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of this Section 2.2, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such business must be a proper matter for stockholder action under the General Corporation Law of Delaware. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Corporation not less than 20 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting is more than 30 days prior to or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 20th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (A) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (d) Only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.2. The chairman of the meeting shall determine whether a nomination or any business proposed to be transacted by the stockholders has been properly brought before the meeting and, if any proposed nomination or business has not been properly brought before the meeting, the chairman shall declare that such proposed business or nomination shall not be presented for stockholder action at the meeting. (e) For purposes of this Section 2.2, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service. (f) Nothing in this Section 2.2 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 2.3 SPECIAL MEETING. (a) A special meeting of the stockholders may be called at any time by the Board of Directors, or by the chairman of the board, or by the president. (b) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to such notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in Section 2.5, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in Section 2.5. 2.4 NOTICE OF STOCKHOLDER'S MEETINGS; AFFIDAVIT OF NOTICE. All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with this Section 2.4 of these Bylaws not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting (or such longer or shorter time as is required by Section 2.5 of these Bylaws, if applicable). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES. Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 2.6 QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE. When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the manner of voting and the conduct of business. 2.9 VOTING. (a) The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). (b) Except as may be otherwise provided in the Certificate of Incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these Bylaws. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. If the Board of Directors does not so fix a record date: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2.12 PROXIES. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the Corporation, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. ARTICLE III DIRECTORS 3.1 POWERS. Subject to the provisions of the General Corporation Law of Delaware and any limitations in the Certificate of Incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 NUMBER OF DIRECTORS. The number of directors constituting the entire Board of Directors shall be five. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the Certificate of Incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES. Any director may resign at any time upon written notice to the attention of the secretary of the Corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. A vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the quorum. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the Certificate of Incorporation or these Bylaws: (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the Certificate of Incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole Board of Directors (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. 3.7 SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the Corporation. If the notice is mailed, it shall be deposited in the United States mail at least four days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least 48 hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the Corporation. 3.8 QUORUM. At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these Bylaws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.11 FEES AND COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 3.12 APPROVAL OF LOANS TO OFFICERS. The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiary, including any officer or employee who is a director of the Corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing in this Section 3.2 contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute. 3.13 REMOVAL OF DIRECTORS. Unless otherwise restricted by statute, by the Certificate of Incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the Corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 UNCLE OF THE BOARD OF DIRECTORS. The Corporation may also have, at the discretion of the Board of Directors, an uncle of the Board of Directors who shall not be considered an officer of the Corporation. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, with each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the Corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (a) amend the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (b) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, (d) recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or (e) amend the Bylaws of the Corporation; and, unless the board resolution establishing the committee, the Bylaws or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS 5.1 OFFICERS. The officers of the Corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The Corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS. The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the Board of Directors or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the secretary of the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. 5.6 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the uncle of the board, if any, the chief executive officer of the Corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the Corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of an uncle of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the uncle of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the Corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 VICE PRESIDENTS. In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office of the Corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the Corporation or at the office of the Corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the Corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.10 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the Corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The uncle of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this Corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this Corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 AUTHORITY AND DUTIES OF OFFICERS. In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board of Directors or the stockholders. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 6.1, a "director" or "officer" of the Corporation includes any person (a) who is or was a director or officer of the Corporation, (b) who is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a Corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS. The Corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the Corporation. For purposes of this Section 6.2, an "employee" or "agent" of the Corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the Corporation, (b) who is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was an employee or agent of a corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the Corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Certificate of Incorporation 6.5 INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.6 CONFLICTS. No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the Certificate of Incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS. The Corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS. Any director shall have the right to examine the Corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the Corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS. From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the Corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation by the chairman or vice-chairman of the Board of Directors, or the chief executive officer or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of the Corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The Corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the Corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the Corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES. If the Corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Corporation and canceled at the same time. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS. The directors of the Corporation, subject to any restrictions contained in (a) the General Corporation Law of Delaware or (b) the Certificate of Incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock. The directors of the Corporation may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the Corporation, and meeting contingencies. 8.8 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. 8.9 SEAL. The Corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS. The Corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The Bylaws of the Corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the Corporation may, in its Certificate of Incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. EX-4.1 6 EXHIBIT 4.1 Exhibit 4.1 NUMBER CS-"CERTIFICATENUMBER" *"NUMBEROFSHARES"*SHARES ETOYS INC. A DELAWARE CORPORATION THIS CERTIFIES THAT "StockholderName" is the record holder of "SharesWrittenOut" ("NumberOfShares") shares of Common Stock of eToys Inc., a Delaware corporation, transferable only on the share register of said corporation by the holder, in person or by duly authorized attorney, upon surrender of this certificate properly endorsed or assigned. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Certificate of Incorporation and the Bylaws of said corporation and any amendments thereto, to all of which the holder of this certificate, by acceptance hereof, assents. A statement of all of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights may be obtained by any stockholder upon request and without charge, at the principal office of the corporation, and the corporation will furnish any stockholder, upon request and without charge, a copy of such statement. WITNESS the Seal of the corporation and the signatures of its duly authorized officers this "Day" day of "Month", "Year". - ------------------------------ ------------------------------------ , Secretary , President - ---------- -------------------- FOR VALUE RECEIVED _____________________________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO__________________________________________________________________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ____________________________________ ATTORNEY TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. DATED ____________, ______ IN PRESENCE OF _______________________________________________________________ ______________________________________________________________________________ NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER. ----------------------------- (Stockholder) EX-5.1 7 EXHIBIT 5.1 EXHIBIT 5.1 February 17, 1999 eToys Inc. 2850 Ocean Park Blvd., Suite 225 Santa Monica, CA 90405 REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 (the "REGISTRATION STATEMENT") to be filed by you with the Securities and Exchange Commission on February 17, 1999, in connection with the registration under the Securities Act of 1933 of shares of your Common Stock (the "SHARES"). As your legal counsel in connection with this transaction, we have examined the proceedings taken and we are familiar with the proceedings proposed to be taken by you in connection with the sale and issuance of the Shares. It is our opinion that upon completion of the proceedings being taken in order to permit such transactions to be carried out in accordance with the securities laws of the various states where required, the Shares, when issued and sold in the manner described in the Registration Statement, will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever it appears in the Registration Statement and in any amendment to it. Sincerely, VENTURE LAW GROUP A Professional Corporation /s/ VENTURE LAW GROUP EX-10.1 8 EXHIBIT 10.1 ETOYS INC. STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement") is made as of the 27th day of June, 1997 by and between eToys Inc., a Delaware corporation (the "Company"), and Edward C. Lenk (the "Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Company and Purchaser agree as follows: 1. PURCHASE. Subject to the terms and conditions of this Agreement, the Company hereby agrees to issue to Purchaser and Purchaser agrees to acquire from the Company on the Closing Date (as defined below), 1,250,000 shares of the Company's Common Stock (the "Stock") at a price of $0.015 per share, for the aggregate purchase price of $18,750 (the "Purchase Price"). The Purchase Price for the Stock shall be paid by check or wire transfer. 2. CLOSING. The purchase and sale of the Stock shall occur at a Closing to be held at such time and place (the "Closing Date"), as designated by the Company no less than two business days prior to the Closing Date. The Closing will take place at the principal office of the Company or at such other place as shall be designated by the Company. At the Closing, Purchaser shall deliver to the Company the consideration to be paid for the Stock, and the Company will issue the Stock registered in the name of Purchaser. 3. COMPANY'S REPRESENTATIONS AND WARRANTIES. Except as set forth on Exhibit A attached hereto, the Company represents and warrants to Purchaser as follows: (a) The Company is a Corporation duly organized and validly existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is not presently qualified to do business as a foreign corporation in any jurisdiction, and the failure to be so qualified will not have a material adverse affect on the Company's business as now conducted or as now proposed to be conducted. (b) The Company will have at the Closing all requisite legal and corporate power and authority to execute and deliver this Agreement, to sell and issue the Stock hereunder and to carry out and perform its obligations under the terms of this Agreement. (c) The authorized capital stock of the Company consists or will, upon the filing of the Certificate, consist of 50,000,000 shares of Common Stock and 25,000,000 shares of undesignated Preferred Stock. Immediately prior to the Closing, no shares of common or capital stock will be outstanding. The Stock, when issued pursuant to the terms of this Agreement, will be duly authorized, validly issued, fully paid and nonassessable. (d) All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution, delivery and performance of the Agreement by the Company, the authorization, sale, issuance and delivery of the Stock and the performance of all of the Company's obligations under this Agreement has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company, enforceable in accordance with its terms. (e) The Company is not in violation or default of any term of its Certificate or Bylaws, or in any material respect of any term or provision of any material mortgage, indebtedness, indenture, contract, agreement, instrument, judgment, order or decree, and to its knowledge is not in violation of any statute, rule or regulation applicable to the Company where such violation would materially and adversely affect the Company. (f) The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by the Company, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. 4. PURCHASER'S REPRESENTATIONS AND WARRANTIES. In connection with the purchase of the Stock, Purchaser hereby represents and warrants to the Company: (a) Purchaser has substantial experience in investing in newly-formed technology companies or in evaluating and investing in private placement transactions, so Purchaser is capable of evaluating the merits and risks of Purchaser's investment in the Company. Purchaser, by reason of Purchaser's business or financial experience or the business or financial experience of Purchaser's professional advisors who are unaffiliated with the Company or any affiliate or selling agent of the Company, directly or indirectly, has the capacity to protect Purchaser's own interests in connection with the purchase of the Stock. (b) Purchaser is acquiring or will be acquiring the Stock for investment for Purchaser's own account, not as a nominee or agent and not with the view to, or for resale in connection with, any distribution thereof Purchaser understands that the Stock have not been, and will not be, registered under the Securities Act of 1933 (the "Securities Act") by reason of a specific exemption from the registration provisions of the Securities Act that depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Purchaser's representations as expressed herein. Purchaser has not been formed for the specific purpose of acquiring the Stock. Purchaser further understands that the Company shall have no obligation to register the Stock under the Securities Act on behalf of Purchaser. -2- (c) Purchaser acknowledges that the Stock must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act, which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including (except as limited by Rule 144(k)), among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations. (d) Purchaser understands that no public market now exists for any of the securities issued by the Company, that the Company has made no assurances that a public market will ever exist for the Stock and that, even if such a public market exists at some future time, the Company may not then be satisfying the current public information requirements of Rule 144. (e) Purchaser and Purchaser's representatives have had the opportunity to ask questions of, and receive answers from, representatives of the Company concerning the Company and the terms and conditions of this transaction as well as to obtain any information requested by Purchaser. Any questions raised by Purchaser or Purchaser's representatives concerning the transaction have been answered to the satisfaction of Purchaser and Purchaser's representatives. Purchaser's decision to enter into the transactions contemplated hereby is based in part on the answers to such questions as Purchaser and Purchaser's representatives have raised concerning the transaction and on Purchaser's own evaluation of the risks and merits of the purchase and the Company's proposed business activities. (f) All corporate or partnership action, if applicable, on the part of Purchaser, its directors, partners and its stockholders necessary for the authorization, execution, delivery and performance of this Agreement by Purchaser has been taken. This Agreement, when executed and delivered by Purchaser, will constitute a valid and legally binding obligation of Purchaser, enforceable in accordance with its terms. (g) Purchaser has not incurred, and will not incur, directly or indirectly, as a result of any action taken by such Purchaser, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. (h) Purchaser has reviewed with its own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents and understands that Purchaser (and not the Company) shall be responsible for Purchaser's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. -3- 5. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL (a) Before any shares of Stock registered in the name of Purchaser may be sold or transferred (including transfer by operation of law), such shares shall first be offered to the Company. (i) Purchaser shall deliver a notice ("Notice") to the Company stating (A) Purchaser's bona fide intention to sell or transfer such shares, (B) the number of such shares to be sold or transferred, (C) the price for which he proposes to sell or transfer such shares, and (D) the name of the proposed purchaser or transferee. (ii) Within 30 days after receipt of the Notice, the Company or its assignee may elect to purchase all (but not less than all) shares to which the Notice refers, at the price per share specified in the Notice. Full payment for all the shares to which the Notice refers shall be made by the Company or its assignee to Purchaser by cash. (iii) If the shares to which the Notice refers are not elected to be purchased, as provided in subparagraph 5(a)(ii), Purchaser may sell the shares to any person named/in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within 60 days of the date of said Notice to the Company, and provided, further, that any such sale is in accordance with all the terms and conditions hereof. Any sale or transfer after such 60 day period or on terms more favorable to the proposed purchaser or transferee then described in the Notice shall be subject again to this subparagraph 5(a). (iv) The provisions of this subparagraph 5(a) shall terminate on the earlier of (A) the effective date of a registration statement filed by the Company under the Securities Act, with respect to an underwritten public offering of Common Stock of the Company (an "Initial Public Offering") or (B) the closing date of a sale of assets or merger of the Company pursuant to which stockholders of this Company receive securities of a buyer whose shares are publicly traded. The provisions of this subparagraph 5(a) shall not apply to a transfer of any shares of Stock by Purchaser, either during its lifetime or on death by will or intestacy to its other ancestors, descendants or spouse, or any custodian or trustee for the account of Purchaser or Purchaser's ancestors, descendants or spouse; provided, in each such case a transferee shall receive and hold such shares subject to the provisions of this paragraph 5 and there shall be no further transfer of such shares except in accordance herewith. (b) Purchaser agrees in connection with the Company's Initial Public Offering, not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of any shares of Stock without the prior written consent of Company or its underwriters, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. -4- (c) The Company shall not be required (i) to transfer on its books any shares of Stock which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement. or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 6. LEGENDS. All certificates representing any of the shares of Stock subject to the provisions of this Agreement shall have endorsed thereon legends substantially in the following form: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS CERTIFICATE MUST BE SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE SALE, PLEDGE OR OTHER TRANSFER OF ANY INTEREST IN ANY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE." (b) "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN STOCK PURCHASE AGREEMENT CONTAINING A RIGHT OF FIRST REFUSAL, COPIES OF WHICH MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY." (c) Any legend required to be placed thereon by the California Commissioner of Corporations, or required by applicable blue sky laws of any state. 7. MISCELLANEOUS. (a) The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (b) Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by regular or certified mail with postage and fees prepaid, addressed to Purchaser at its address shown on the Company's records and to the Company at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by ten days' advance written notice to the other party hereto. (c) The Company may assign its rights and delegate its duties under this Agreement. If any such assignment or delegation requires consent of the California Commissioner -5- of Corporations, the parties agree to cooperate in requesting such consent. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Purchaser, its heirs, executors, administrators, successors and assigns. (d) Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Stock as to which the right of first refusal has been exercised from Purchaser to the Company. (e) This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California. 8. ARBITRATION. At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by arbitration by the American Arbitration Association in accordance with the commercial rules and regulations of that Association. The arbitrators shall be selected as follows: In the event the Company and Purchaser agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and Purchaser do not so agree, the Company and Purchaser shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. Arbitration shall take place in Pasadena, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only of the Company or Purchaser and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. The arbitrator, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. -6- IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of the day and year first above written. PURCHASER COMPANY Edward C. Lenk eToys Inc., a Delaware corporation /s/ Edward C. Lenk By: /s/ Edward C. Lenk - ------------------------- ----------------------- Address: Name: Edward C. Lenk -------------------- 1325 Grant Avenue Title: President Santa Monica, CA 90405 -------------------- -7- EXHIBIT A SCHEDULE OF EXCEPTIONS TO THE COMPANY'S REPRESENTATIONS AND WARRANTIES On June 27, 1997, the Company intends to sell and issue: (i) 6,466,667 shares of Common Stock being issued under a Stock and Note Purchase Agreement; (ii) 1,866,667 shares of Common Stock to certain founders and employees of the Company pursuant to Stock Purchase Agreements; and (iii) 2,026,667 shares of Common Stock to certain founders and employees of the Company pursuant to Restricted Stock Purchase Agreements. EX-10.2 9 EXHIBIT 10.2 ETOYS INC. RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made this 27th day of June 1997 between eToys Inc., a Delaware corporation (the "Company"), and Edward C. Lenk (the "Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Company and the Purchaser agree as follows: 1. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 1,250,000 shares of the Company's Common Stock (the "Shares"), at the price of $0.015 per Share for an aggregate purchase price of $18,750. 2. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares shall be paid by delivery to the Company at the time of execution of this Agreement of (a) a check in the amount of the purchase price or (b) a promissory note and pledge agreement in the form attached hereto as EXHIBIT A. 3. LIMITATIONS ON TRANSFER. In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, encumber or dispose of any interest in the Shares while the Shares are subject to the Company's repurchase option and right of first refusal except in compliance with the provisions of this Section 3. (a) REPURCHASE OPTION. In the event of the voluntary or involuntary termination of employment of Purchaser with the Company for any reason, with or without cause (including death or disability) (a "Termination"), the Company shall, upon the date of such termination, have an irrevocable, exclusive option (the "Repurchase Option") for a period of 180 days from such date to repurchase from Purchaser, at the original purchase price per Share (the "Repurchase Price"), all or any portion of the Shares held by Purchaser as of such date, to the extent such Shares have not yet been released from the Company's Repurchase Option. The Repurchase Option shall be exercised by the Company by written notice to Purchaser or his executor and, at the Company's option, (i) by delivery to the Purchaser or his executor, with such Notice, of a check in the amount of the purchase price for the Shares being repurchased, or (ii) in the event the Purchaser is indebted to the Company, by cancellation by the Company of an amount of such indebtedness equal to the Repurchase Price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such Repurchase Price. Upon delivery of such notice and payment of the Repurchase Price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased by the Company, without further action by Purchaser. If a Termination occurs at any time after the date hereof and prior to the last day of the twelfth full calendar month December 1, 1996 (the "Initial Period"), the Repurchase Option shall apply to 100% of the Shares. On the last day of the Initial Period, 12/48ths of the Shares shall be released from the Repurchase Option and 1/48th of the Shares shall be released from the Repurchase Option on the last day of each calendar month thereafter, provided in each case the Purchaser is an employee of the Company on the date of each said release. Fractional shares shall be rounded to the nearest whole share. Notwithstanding the foregoing, all Shares shall be released from the Company's Repurchase Option under Section 3 immediately upon a merger or consolidation of the Company with or into any other corporation or other entity, or a sale of all or substantially all of the assets of the Company, unless the stockholders of the Company immediately prior to such transaction hold at least 50% of the outstanding equity securities of the equity surviving such merger or consolidation or the entity purchasing such assets, or the sale or transfer of more than 50% of the Company's Common Stock to a person or persons acting as a group, who is or are not controlled directly or indirectly by the Company, in a single transaction or series of related transactions. (b) RIGHT OF FIRST REFUSAL. Before any Shares may be sold or transferred (including transfer by operation of law), such Shares shall first be offered to the Company (the "Right of First Refusal"). (i) In the event the Purchaser wishes to sell the Shares, Purchaser shall deliver a notice ("Notice") to the Company stating (A) his bona fide intention to sell or transfer such Shares, (B) the number of such Shares to be sold or transferred, (C) the price for which he proposes to sell or transfer such Shares, and (D) the name of the proposed purchaser or transferee. (ii) Within thirty (30) days after receipt of the Notice, the Company or its assignee may elect to purchase all or none of the Shares to which the Notice refers, at the price per Share specified in the Notice. The purchase of the Shares in either such event shall occur at a closing held at the Company's principal office at a mutually agreed upon time which in no event shall be more than thirty (30) days following the end of the time period in which the Company had to elect to purchase such Shares. (iii) If all of the Shares to which the Notice refers are not elected to be purchased, as provided in Section 3(b) hereof, Purchaser may sell the Shares to any person named in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within sixty (60) days of the date of said Notice to the Company, and provided, further, that any such sale is in accordance with all the terms and conditions hereof. (c) TERMINATION OF RESTRICTIONS. Notwithstanding the provisions of Section 3(b) above, the Company's Right of First Refusal shall terminate immediately as to all Shares upon the occurrence of the first to occur of the following events: -2- (i) the acquisition of the Company by another entity by means of the merger or consolidation of the Company with or into another corporation in which the stockholders of the Company own less that 50% of the voting securities of the surviving entity, (ii) the sale of all or substantially all of the assets of the Company, or (iii) the date upon which a public market exists for the Company's capital stock (or any other stock issued to purchasers in exchange for the Shares purchased under this Agreement). For the purpose of this Agreement, a "Public Market" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Securities Exchange Act of 1934) or (ii) such stock is traded on the over-the-counter market and prices are published daily on business days in a recognized financial journal. (d) ASSIGNMENT. Whenever the Company shall have the right to purchase Shares under this Section 3, the Company may designate and assign one or more employees, officers, directors or stockholders of the Company or other persons or organizations to exercise all of the Company's purchase rights under this Agreement and purchase all of such Shares; provided that if the fair market value of the Shares to be purchased on the date of such designation or assignment (the "Repurchase FMV") exceeds the purchase price of the Shares (determined as described hereinabove) to be purchased, then each such designee or assignee shall pay the Company cash equal to the difference between the Repurchase FMV and the purchase price of the Shares which such designee or assignee shall have the right to purchase. (e) EXEMPT TRANSFERS. The provisions of this Section 3 shall not apply to a transfer of any Shares by Purchaser, either during his lifetime or on death by will or intestacy to his ancestors, descendants or spouse, or any custodian or trustee for the account of Purchaser or Purchaser's ancestors, descendants or spouse; provided, in each such case that the transferee shall receive and hold such Shares subject to all of the provisions of this Section 3 and there shall be no further transfer of such Shares except in accordance herewith. 4. STANDOFF AGREEMENT. Purchaser agrees, in connection with the Company's initial public offering of its equity securities, not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of any Shares (other than those included in the registration, if any) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. 5. NO TRANSFER EXCEPT IN COMPLIANCE WITH THE RESTRICTIONS HEREIN. The Company shall not be required (i) to transfer on its books any Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares shall have been so transferred. Purchaser shall not sell, transfer, pledge, hypothecate or -3- otherwise dispose of any shares which remain subject to the restrictions on transfer set forth in Section 3 hereof. 6. LEGENDS. All certificates representing any of the Shares subject to the provisions of this Agreement shall have endorsed thereon the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER, RIGHTS OF FIRST REFUSAL AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." (b) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." (c) Any legend required to be placed thereon by the applicable blue sky laws of any state. 7. ESCROW. (a) The Shares issued under this Agreement shall be held by an escrow holder designated by the Company (the "Escrow Holder"), along with a stock assignment executed by the Purchaser in blank, until the expiration of the Company's options and right of first refusal with respect to such Shares as set forth above. (b) The Escrow Holder is hereby directed to permit transfer of the Shares only in accordance with this Agreement or instructions signed by both parties. In the event further instructions are desired by the Escrow Holder, he shall be entitled to rely upon directions executed by a majority of the authorized number of the Company's Board of Directors. The Escrow Holder shall have no liability for any act or omission hereunder while acting in good faith in the exercise of his own judgment. (c) If the Company or any assignee exercises its Repurchase Option or Right of First Refusal hereunder, the Escrow Holder, upon receipt of written notice of such exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the Repurchase Option or Right of First Refusal have been exercised or expire unexercised or a portion of the Shares has been released from the provisions of Section 3 hereof, upon Purchaser's request the Escrow Holder shall promptly cause a new certificate to be issued for such released Shares and shall deliver such certificate to the Purchaser. -4- (e) Subject to the terms hereof, the Purchaser shall have all the rights of a stockholder with respect to such Shares while they are held in escrow, including without limitation, the right to vote the Shares and receive any cash dividends declared thereon. If, from time to time during the term of the provisions of Section 3, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of his ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Company's Repurchase Option or Right of First Refusal. 8. INVESTMENT REPRESENTATIONS. In connection with the purchase of the Shares, the Purchaser shall, concurrently with the purchase of the Shares, deliver to the Company his Investment Representation Statement attached hereto as Exhibit B. 9. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 10. TAX CONSEQUENCES. The Purchaser has reviewed with the Purchaser's own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement (including any tax consequences that may result under recently enacted tax legislation). The Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. The Purchaser understands that Section 83 of the Internal Revenue Code, as amended (the "Code"), taxes as ordinary income both (i) the difference between the fair market value of the Shares when the Company granted the Purchaser the right to purchase the Shares and the fair market value of the Shares on the date of this Agreement and (ii) the difference between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" includes the right of the Company to buy back the Shares pursuant to certain of its rights under Section 3. THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PURCHASER'S BEHALF. 11. TERMINATION OF EMPLOYMENT. Purchaser understands and acknowledges that Purchaser's employment relationship with the Company is at the will of either party and that nothing in this Agreement, shall confer any right upon Purchaser with respect to continuation of employment by the Company, nor shall it interfere in any way with his right or the Company's right to terminate -5- his employment at any time, with or without cause. This Agreement does not constitute an express or implied promise of continued employment for any period. 12. GENERAL PROVISIONS. (a) GOVERNING LAW. This Agreement shall be governed by the laws of the State of California. This Agreement represents the entire agreement between the parties with respect to the purchase of Common Stock by the Purchaser and may only be modified or amended in writing signed by both parties. (b) NOTICES. Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party not sending the notice. (c) ASSIGNMENT. The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) WAIVER. Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances. (e) ADDITIONAL ACTIONS. The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) ARBITRATION. At the option of either party, any and all disputes or controversies, whether of law or in equity, and of any nature whatsoever arising from or respecting this Agreement, unless otherwise expressly provided herein, shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association. (i) The arbitrators shall be selected as follows: In the event the Company and Purchaser agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and Purchaser do not so agree, the Company and Purchaser shall each select one independent, qualified arbitrator and these two arbitrators shall select a third arbitrator. The -6- Company reserves the right to reject any individual arbitrator who shall be employed by or affiliated with a competing organization. (ii) Arbitration shall take place in Pasadena, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in secrecy. In such case all documents, testimony, and records shall be received, heard, and maintained by the arbitrators in secrecy under seal, available for inspection only by the Company and the Purchaser and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. The arbitrators, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary or a permanent injunction, or both, and shall also be able to award damages (with or without an accounting), costs, and reasonable attorneys' fees. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. (iii) Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or their authorized representatives shall have the right to attend and participate in all the arbitration hearings to the extent and in such manner as the law shall require. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above. ETOYS INC. PURCHASER: a Delaware corporation By: /s/ Edward C. Lenk /s/ Edward C. Lenk ---------------------- -------------------------- Title: President Edward C. Lenk ---------------------- -7- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, Edward C. Lenk, hereby sell, assign and transfer unto_____________________(__________________) shares of the Common Stock of eToys Inc. standing in my name of the books of said corporation represented by Certificate No. __________ herewith and do hereby irrevocably constitute and appoint ________________________, attorney, to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement between eToys Inc. and the undersigned dated June 27, 1997. Dated: Signature: /s/ Edward C. Lenk -------------------------- ----------------------------- Name: Edward C. Lenk ----------------------------- EXHIBIT A PLEDGE AGREEMENT This Agreement is entered into as of June 27, 1997, by and between ETOYS INC., a Delaware corporation (the "Company") and Edward C. Lenk ("Pledgor"). WHEREAS, in exchange for Pledgor's Full Recourse Promissory Note dated of even date herewith (the "Note"), the Company has issued and sold to Pledgor 1,250,000 shares of its Common Stock evidenced by the Company's Common Stock Certificate No. 6 (the "Shares") pursuant to the terms and conditions of that certain Common Stock Purchase Agreement ("Stock Purchase Agreement") entered into by the Company and Pledgor of even date herewith; WHEREAS, Pledgor has agreed that repayment of the Note will be secured by the pledge of the Shares; NOW, THEREFORE, the parties agree as follows: 1. CREATION OF SECURITY INTEREST. Pursuant to the provisions of the California Commercial Code, Pledgor hereby grants to the Company, and the Company hereby accepts, a present security interest in the Shares as collateral to secure the payment of Pledgor's obligation to the Company under the Note. Pledgor herewith delivers to the Company Common Stock Certificate No. 6, representing a total of 1,250,000 shares of the Company's Common Stock, together with one stock power for each certificate in the form attached as an Exhibit to the Stock Purchase Agreement, duly executed (with the date and number of shares left blank) by Pledgor and Pledgor's spouse, if any. For purposes of this Agreement, the Shares pledged hereby shall hereinafter be collectively referred to as the "Collateral". 2. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants to the Company that Pledgor has good title (both of record and beneficially) to the Collateral, free and clear of all claims, pledges and liens or encumbrances of every nature whatsoever, and that Pledgor has the right to pledge the Collateral as provided herein. Pledgor further agrees not to grant or create, nor attempt to grant or create, any security interest, claim, lien, pledge or other encumbrance with respect to the Collateral until the entire principal sum and accrued interest due under the Note has been paid in full. 3. RIGHTS ON DEFAULT. In the event of default by Pledgor under the Note, the Company and its assigns shall have full power to sell, assign and deliver the whole or any part of the Collateral at any broker's exchange or elsewhere, at public or private sale, at the option of the Company or its assigns, in order to satisfy any part of the obligations of Pledgor now existing or hereinafter arising under the Note should payment of such obligations be in default. On any such public sale, the Company and its assigns may purchase all or any part of the Collateral. In addition, at its sole option, the Company may elect to retain the Collateral in satisfaction of Pledgor's obligation under the Note, in accordance with the provisions and procedures set forth in the California Commercial Code. 4. ADDITIONAL REMEDIES. The rights and remedies granted to the Company herein upon default shall be in addition to all the rights, powers and remedies of the Company under the California Commercial Code and applicable law and such rights, powers and remedies shall be exercisable by the Company with respect to all of the Collateral. The Company's reasonable expenses of holding the Collateral, preparing it for resale or other disposition, and selling or otherwise disposing of the Collateral, including attorneys' fees and other legal expenses, will be deducted from the proceeds of any sale or other disposition and will be included in the amounts Pledgor must tender to redeem the Collateral. All rights, powers and remedies of the Company shall be cumulative and not alternative. Any forbearance or failure or delay by the Company in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of any such right, power or remedy and any single or partial exercise of any such right, power or remedy hereunder shall not preclude the further exercise thereof. 5. DIVIDENDS; VOTING. All dividends hereinafter declared on or payable with respect to the Collateral during the term of this pledge (excluding only ordinary cash dividends, which shall be payable to Pledgor so long as Pledgor is not in default under this Note) shall be immediately delivered to the Company to be held in pledge hereunder. Pledgor shall be entitled to receive cash dividends so long as Pledgor is not in default under the Note. Notwithstanding anything to the contrary contained in this Agreement, Pledgor shall be entitled to vote any shares comprising the Collateral, subject to any proxies granted by Pledgor. 6. ADJUSTMENTS. In the event that during the term of this pledge, any stock dividend, reclassification, readjustment, stock split or other change is declared or made with respect to the Collateral, or if warrants or any other rights or options are issued in connection with the Collateral, all new, substituted and/or additional shares or other securities issued by reason of such change or by reason of the exercise of such warrants, rights or options, shall be immediately pledged to the Company to be held under the terms of this Agreement in the same manner as the Collateral is held hereunder. 7. RULE 144 HOLDING PERIOD. PLEDGOR UNDERSTANDS THAT THE HOLDING PERIOD SPECIFIED UNDER RULE 144(d) WILL NOT BEGIN TO RUN WITH RESPECT TO THE PURCHASED SHARES UNTIL EITHER (A) THE NOTE IS PAID IN FULL OR (B) THE NOTE IS SECURED BY COLLATERAL, OTHER THAN THE PURCHASED SHARES, HAVING A FAIR MARKET VALUE AT LEAST EQUAL TO THE AMOUNT OF PLEDGOR'S THEN OUTSTANDING OBLIGATION UNDER THE NOTE (INCLUDING ACCRUED INTEREST). 8. REDELIVERY OF COLLATERAL. Upon payment in full of the entire principal sum and accrued interest due under the Note, and subject to the terms and conditions of the Stock Purchase Agreement, the Company shall immediately redeliver the Collateral pledged hereunder to Pledgor, duly endorsed, and this Agreement shall terminate; provided, however, that all rights of the Company to retain possession of the Shares pursuant to the Stock Purchase Agreement shall survive termination of this Agreement. 9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of the respective heirs, personal representatives, successors and assigns of the parties hereto. 10. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by the construed in accordance with the laws of the State of California, excluding that body of law relating to conflicts of law. Should one or more of the provisions of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions nevertheless shall remain effective and shall be enforceable. 11. MODIFICATION. This Agreement shall not be amended without the written consent of both parties hereto. 12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings related to such subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. ETOYS INC. PLEDGOR By: /s/ Edward C. Lenk /s/ Edward C. Lenk -------------------------- --------------------------- Title: President (signature) ----------------------- Edward C. Lenk --------------------------- (print or type name) FULL RECOURSE PROMISSORY NOTE Pasadena, California $18,750.00 June 27, 1997 1. OBLIGATION. In exchange for 1,250,000 shares (the "Shares") of the Common Stock of ETOYS INC., a Delaware corporation (the "Company"), represented by Common Stock Certificate No. 6, receipt of which is hereby acknowledged, the undersigned hereby promises to pay to the order of the Company on or before June 27, 2002, or upon termination of employment for any reason, whichever occurs earlier, at the Company's office at 790 E. Colorado Blvd., Suite 200, Pasadena, CA 91101, or at such other place as the Company may direct, the principal sum of Eighteen Thousand Seven Hundred Fifty Dollars ($18,750.00) together with interest on unpaid principal at the rate of 6.80% per annum from the date hereof until paid. 2. ACCELERATION OF OBLIGATION. The principal sum of this Note, together with all interest accrued thereon, shall immediately become due and payable in full upon any transfer of any of the Shares. 3. REMEDIES ON DEFAULT. Payment of this Note is secured by shares of the Company's Common Stock pursuant to a Pledge Agreement dated as of even date herewith between the Company and the undersigned. Upon any default of the undersigned under this Note, the Company shall have, in addition to its rights and remedies under the Pledge Agreement, full recourse against any real, personal, tangible or intangible assets of the undersigned, and may pursue any legal or equitable remedies that are available to it. 4. GOVERNING LAW; WAIVER. The validity, construction and performance of this Note shall be governed by the laws of the State of California, excluding that body of law pertaining to conflicts of law. The undersigned waives presentment, notice of nonpayment, notice of dishonor, protest, demand and diligence. 5. ATTORNEYS' FEES. If suit is brought for collection of this Note, the undersigned agrees to pay all reasonable expenses, including attorneys' fees, incurred by the holder in connection therewith whether or not such suit is prosecuted to judgment. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as of the date and year first above written. /s/ Edward C. Lenk ----------------------- Edward C. Lenk EXHIBIT B INVESTMENT REPRESENTATION STATEMENT PURCHASER: EDWARD C. LENK COMPANY : ETOYS INC. SECURITY : COMMON STOCK AMOUNT : 1,250,000 SHARES In connection with the purchase of the above-listed Securities, I, the Purchaser, represent to the Company the following: (a) I am sufficiently aware of the Company's business affairs and financial condition to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"). (b) I understand that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) I further understand that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available (such as Rule 144 or the resale provisions of Rule 701 under the Securities Act). Moreover, I understand that the Company is under no obligation to register the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (d) I am familiar with the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permits limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, including, among other things: (1) the availability of certain public information about the Company; (2) the resale occurring not less than one year after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than two years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker, as said term is defined under the Securities Exchange Act of 1934 (the "Exchange Act") and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. The Purchaser further understands that the resale provisions of Rule 701 will not apply until 90 days after the Company becomes subject to the reporting obligations under the Exchange Act (typically upon the effective date of a company's initial public offerings). There can be no assurances that the requirements of Rule 144 or Rule 701 will be met, or that the Securities will ever be saleable. (e) I further understand that at the time I wish to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144, and that, in such event, I would be precluded from selling the Securities under Rule 144 even if the one-year minimum holding period had been satisfied. (f) I further understand that in the event all of the applicable requirements of Rule 144 are not satisfied, or that the resale provisions of Rule 701 are not available, registration under the Securities Act, compliance with Regulation A, compliance with some other registration exemption or the notification to the Company of the proposed disposition by me and the furnishing to the Company of (i) detailed information regarding the disposition, and (ii) and opinion of my counsel to the effect that such disposition will not require registration (I understand such counsel's opinion shall concur with the opinion by counsel for the Company and I shall have been informed of such compliance) will be required and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Signature of Purchaser: /s/ Edward C. Lenk ------------------------------ Edward C. Lenk Date: June 27, 1997 EX-10.3 10 EXHIBIT 10.3 ETOYS INC. STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement") is made as of the 27th day of June, 1997 by and between eToys Inc., a Delaware corporation (the "Company"), and Frank C. Han (the "Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Company and Purchaser agree as follows: 1. PURCHASE. Subject to the terms and conditions of this Agreement, the Company hereby agrees to issue to Purchaser and Purchaser agrees to acquire from the Company on the Closing Date (as defined below), 416,667 shares of the Company's Common Stock (the "Stock") at a price of $0.015 per share, for the aggregate purchase price of $6,250 (the "Purchase Price"). The Purchase Price for the Stock shall be paid by check or wire transfer. 2. CLOSING. The purchase and sale of the Stock shall occur at a Closing to be held at such time and place (the "Closing Date"), as designated by the Company no less than two business days prior to the Closing Date. The Closing will take place at the principal office of the Company or at such other place as shall be designated by the Company. At the Closing, Purchaser shall deliver to the Company the consideration to be paid for the Stock, and the Company will issue the Stock registered in the name of Purchaser. 3. COMPANY'S REPRESENTATIONS AND WARRANTIES. Except as set forth on Exhibit A attached hereto, the Company represents and warrants to Purchaser as follows: (a) The Company is a Corporation duly organized and validly existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is not presently qualified to do business as a foreign corporation in any jurisdiction, and the failure to be so qualified will not have a material adverse affect on the Company's business as now conducted or as now proposed to be conducted. (b) The Company will have at the Closing all requisite legal and corporate power and authority to execute and deliver this Agreement, to sell and issue the Stock hereunder and to carry out and perform its obligations under the terms of this Agreement. (c) The authorized capital stock of the Company consists or will, upon the filing of the Certificate, consist of 50,000,000 shares of Common Stock and 25,000,000 shares of undesignated Preferred Stock. Immediately prior to the Closing, no shares of common or capital stock will be outstanding. The Stock, when issued pursuant to the terms of this Agreement, will be duly authorized, validly issued, fully paid and nonassessable. (d) All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution, delivery and performance of the Agreement by the Company, the authorization, sale, issuance and delivery of the Stock and the performance of all of the Company's obligations under this Agreement has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company, enforceable in accordance with its terms. (e) The Company is not in violation or default of any term of its Certificate or Bylaws, or in any material respect of any term or provision of any material mortgage, indebtedness, indenture, contract, agreement, instrument, judgment, order or decree, and to its knowledge is not in violation of any statute, rule or regulation applicable to the Company where such violation would materially and adversely affect the Company. (f) The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by the Company, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. 4. PURCHASER'S REPRESENTATIONS AND WARRANTIES. In connection with the purchase of the Stock, Purchaser hereby represents and warrants to the Company: (a) Purchaser has substantial experience in investing in newly-formed technology companies or in evaluating and investing in private placement transactions, so Purchaser is capable of evaluating the merits and risks of Purchaser's investment in the Company. Purchaser, by reason of Purchaser's business or financial experience or the business or financial experience of Purchaser's professional advisors who are unaffiliated with the Company or any affiliate or selling agent of the Company, directly or indirectly, has the capacity to protect Purchaser's own interests in connection with the purchase of the Stock. (b) Purchaser is acquiring or will be acquiring the Stock for investment for Purchaser's own account, not as a nominee or agent and not with the view to, or for resale in connection with, any distribution thereof Purchaser understands that the Stock have not been, and will not be, registered under the Securities Act of 1933 (the "Securities Act") by reason of a specific exemption from the registration provisions of the Securities Act that depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Purchaser's representations as expressed herein. Purchaser has not been formed for the specific purpose of acquiring the Stock. Purchaser further understands that the Company shall have no obligation to register the Stock under the Securities Act on behalf of Purchaser. -2- (c) Purchaser acknowledges that the Stock must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act, which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including (except as limited by Rule 144(k)), among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations. (d) Purchaser understands that no public market now exists for any of the securities issued by the Company, that the Company has made no assurances that a public market will ever exist for the Stock and that, even if such a public market exists at some future time, the Company may not then be satisfying the current public information requirements of Rule 144. (e) Purchaser and Purchaser's representatives have had the opportunity to ask questions of, and receive answers from, representatives of the Company concerning the Company and the terms and conditions of this transaction as well as to obtain any information requested by Purchaser. Any questions raised by Purchaser or Purchaser's representatives concerning the transaction have been answered to the satisfaction of Purchaser and Purchaser's representatives. Purchaser's decision to enter into the transactions contemplated hereby is based in part on the answers to such questions as Purchaser and Purchaser's representatives have raised concerning the transaction and on Purchaser's own evaluation of the risks and merits of the purchase and the Company's proposed business activities. (f) All corporate or partnership action, if applicable, on the part of Purchaser, its directors, partners and its stockholders necessary for the authorization, execution, delivery and performance of this Agreement by Purchaser has been taken. This Agreement, when executed and delivered by Purchaser, will constitute a valid and legally binding obligation of Purchaser, enforceable in accordance with its terms. (g) Purchaser has not incurred, and will not incur, directly or indirectly, as a result of any action taken by such Purchaser, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. (h) Purchaser has reviewed with its own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents and understands that Purchaser (and not the Company) shall be responsible for Purchaser's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. -3- 5. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL (a) Before any shares of Stock registered in the name of Purchaser may be sold or transferred (including transfer by operation of law), such shares shall first be offered to the Company. (i) Purchaser shall deliver a notice ("Notice") to the Company stating (A) Purchaser's bona fide intention to sell or transfer such shares, (B) the number of such shares to be sold or transferred, (C) the price for which he proposes to sell or transfer such shares, and (D) the name of the proposed purchaser or transferee. (ii) Within 30 days after receipt of the Notice, the Company or its assignee may elect to purchase all (but not less than all) shares to which the Notice refers, at the price per share specified in the Notice. Full payment for all the shares to which the Notice refers shall be made by the Company or its assignee to Purchaser by cash. (iii) If the shares to which the Notice refers are not elected to be purchased, as provided in subparagraph 5(a)(ii), Purchaser may sell the shares to any person named/in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within 60 days of the date of said Notice to the Company, and provided, further, that any such sale is in accordance with all the terms and conditions hereof. Any sale or transfer after such 60 day period or on terms more favorable to the proposed purchaser or transferee then described in the Notice shall be subject again to this subparagraph 5(a). (iv) The provisions of this subparagraph 5(a) shall terminate on the earlier of (A) the effective date of a registration statement filed by the Company under the Securities Act, with respect to an underwritten public offering of Common Stock of the Company (an "Initial Public Offering") or (B) the closing date of a sale of assets or merger of the Company pursuant to which stockholders of this Company receive securities of a buyer whose shares are publicly traded. The provisions of this subparagraph 5(a) shall not apply to a transfer of any shares of Stock by Purchaser, either during its lifetime or on death by will or intestacy to its other ancestors, descendants or spouse, or any custodian or trustee for the account of Purchaser or Purchaser's ancestors, descendants or spouse; provided, in each such case a transferee shall receive and hold such shares subject to the provisions of this paragraph 5 and there shall be no further transfer of such shares except in accordance herewith. (b) Purchaser agrees in connection with the Company's Initial Public Offering, not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of any shares of Stock without the prior written consent of Company or its underwriters, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. -4- (c) The Company shall not be required (i) to transfer on its books any shares of Stock which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 6. LEGENDS. All certificates representing any of the shares of Stock subject to the provisions of this Agreement shall have endorsed thereon legends substantially in the following form: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS CERTIFICATE MUST BE SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE SALE, PLEDGE OR OTHER TRANSFER OF ANY INTEREST IN ANY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE." (b) "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN STOCK PURCHASE AGREEMENT CONTAINING A RIGHT OF FIRST REFUSAL, COPIES OF WHICH MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY." (c) Any legend required to be placed thereon by the California Commissioner of Corporations, or required by applicable blue sky laws of any state. 7. MISCELLANEOUS. (a) The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (b) Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by regular or certified mail with postage and fees prepaid, addressed to Purchaser at its address shown on the Company's records and to the Company at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by ten days' advance written notice to the other party hereto. (c) The Company may assign its rights and delegate its duties under this Agreement. If any such assignment or delegation requires consent of the California Commissioner -5- of Corporations, the parties agree to cooperate in requesting such consent. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Purchaser, its heirs, executors, administrators, successors and assigns. (d) Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Stock as to which the right of first refusal has been exercised from Purchaser to the Company. (e) This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California. 8. ARBITRATION. At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by arbitration by the American Arbitration Association in accordance with the commercial rules and regulations of that Association. The arbitrators shall be selected as follows: In the event the Company and Purchaser agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and Purchaser do not so agree, the Company and Purchaser shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. Arbitration shall take place in Pasadena, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only of the Company or Purchaser and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. The arbitrator, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. -6- IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of the day and year first above written. PURCHASER COMPANY Frank C. Han eToys Inc., a Delaware corporation /s/ Frank C. Han By: /s/ Edward C. Lenk - --------------------- ---------------------- Name: Edward C. Lenk -------------------- Title: President Address: ------------------- 1015 Diamond Avenue S. Pasadena, CA 91030 -7- EXHIBIT A SCHEDULE OF EXCEPTIONS TO THE COMPANY'S REPRESENTATIONS AND WARRANTIES On June 27, 1997, the Company intends to sell and issue: (i) 6,466,667 shares of Common Stock being issued under a Stock and Note Purchase Agreement; (ii) 1,866,667 shares of Common Stock to certain founders and employees of the Company pursuant to Stock Purchase Agreements; and (iii) 2,026,667 shares of Common Stock to certain founders and employees of the Company pursuant to Restricted Stock Purchase Agreements. EX-10.4 11 EXHIBIT 10.4 ETOYS INC. RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made this 27th day of June 1997 between eToys Inc., a Delaware corporation (the "Company"), and Frank C. Han (the "Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Company and the Purchaser agree as follows: 1. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 416,667 shares of the Company's Common Stock (the "Shares"), at the price of $0.015 per Share for an aggregate purchase price of $6,250. 2. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares shall be paid by delivery to the Company at the time of execution of this Agreement of (a) a check in the amount of the purchase price or (b) a promissory note and pledge agreement in the form attached hereto as EXHIBIT A. 3. LIMITATIONS ON TRANSFER. In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, encumber or dispose of any interest in the Shares while the Shares are subject to the Company's repurchase option and right of first refusal except in compliance with the provisions of this Section 3. (a) REPURCHASE OPTION. In the event of the voluntary or involuntary termination of employment of Purchaser with the Company for any reason, with or without cause (including death or disability) (a "Termination"), the Company shall, upon the date of such termination, have an irrevocable, exclusive option (the "Repurchase Option") for a period of 180 days from such date to repurchase from Purchaser, at the original purchase price per Share (the "Repurchase Price"), all or any portion of the Shares held by Purchaser as of such date, to the extent such Shares have not yet been released from the Company's Repurchase Option. The Repurchase Option shall be exercised by the Company by written notice to Purchaser or his executor and, at the Company's option, (i) by delivery to the Purchaser or his executor, with such Notice, of a check in the amount of the purchase price for the Shares being repurchased, or (ii) in the event the Purchaser is indebted to the Company, by cancellation by the Company of an amount of such indebtedness equal to the Repurchase Price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such Repurchase Price. Upon delivery of such notice and payment of the Repurchase Price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased by the Company, without further action by Purchaser. If a Termination occurs at any time after the date hereof and prior to the last day of the twelfth full calendar month February 1, 1997 (the "Initial Period"), the Repurchase Option shall apply to 100% of the Shares. On the last day of the Initial Period, 12/48ths of the Shares shall be released from the Repurchase Option and 1/48th of the Shares shall be released from the Repurchase Option on the last day of each calendar month thereafter, provided in each case the Purchaser is an employee of the Company on the date of each said release. Fractional shares shall be rounded to the nearest whole share. Notwithstanding the foregoing, all Shares shall be released from the Company's Repurchase Option under Section 3 immediately upon a merger or consolidation of the Company with or into any other corporation or other entity, or a sale of all or substantially all of the assets of the Company, unless the stockholders of the Company immediately prior to such transaction hold at least 50% of the outstanding equity securities of the equity surviving such merger or consolidation or the entity purchasing such assets, or the sale or transfer of more than 50% of the Company's Common Stock to a person or persons acting as a group, who is or are not controlled directly or indirectly by the Company, in a single transaction or series of related transactions. (b) RIGHT OF FIRST REFUSAL. Before any Shares may be sold or transferred (including transfer by operation of law), such Shares shall first be offered to the Company (the "Right of First Refusal"). (i) In the event the Purchaser wishes to sell the Shares, Purchaser shall deliver a notice ("Notice") to the Company stating (A) his bona fide intention to sell or transfer such Shares, (B) the number of such Shares to be sold or transferred, (c) the price for which he proposes to sell or transfer such Shares, and (D) the name of the proposed purchaser or transferee. (ii) Within thirty (30) days after receipt of the Notice, the Company or its assignee may elect to purchase all or none of the Shares to which the Notice refers, at the price per Share specified in the Notice. The purchase of the Shares in either such event shall occur at a closing held at the Company's principal office at a mutually agreed upon time which in no event shall be more than thirty (30) days following the end of the time period in which the Company had to elect to purchase such Shares. (iii) If all of the Shares to which the Notice refers are not elected to be purchased, as provided in Section 3(b) hereof, Purchaser may sell the Shares to any person named in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within sixty (60) days of the date of said Notice to the Company, and provided, further, that any such sale is in accordance with all the terms and conditions hereof. (c) TERMINATION OF RESTRICTIONS. Notwithstanding the provisions of Section 3(b) above, the Company's Right of First Refusal shall terminate immediately as to all Shares upon the occurrence of the first to occur of the following events: -2- (i) the acquisition of the Company by another entity by means of the merger or consolidation of the Company with or into another corporation in which the stockholders of the Company own less that 50% of the voting securities of the surviving entity, (ii) the sale of all or substantially all of the assets of the Company, or (iii) the date upon which a public market exists for the Company's capital stock (or any other stock issued to purchasers in exchange for the Shares purchased under this Agreement). For the purpose of this Agreement, a "Public Market" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Securities Exchange Act of 1934) or (ii) such stock is traded on the over-the-counter market and prices are published daily on business days in a recognized financial journal. (d) ASSIGNMENT. Whenever the Company shall have the right to purchase Shares under this Section 3, the Company may designate and assign one or more employees, officers, directors or stockholders of the Company or other persons or organizations to exercise all of the Company's purchase rights under this Agreement and purchase all of such Shares; provided that if the fair market value of the Shares to be purchased on the date of such designation or assignment (the "Repurchase FMV") exceeds the purchase price of the Shares (determined as described hereinabove) to be purchased, then each such designee or assignee shall pay the Company cash equal to the difference between the Repurchase FMV and the purchase price of the Shares which such designee or assignee shall have the right to purchase. (e) EXEMPT TRANSFERS. The provisions of this Section 3 shall not apply to a transfer of any Shares by Purchaser, either during his lifetime or on death by will or intestacy to his ancestors, descendants or spouse, or any custodian or trustee for the account of Purchaser or Purchaser's ancestors, descendants or spouse; provided, in each such case that the transferee shall receive and hold such Shares subject to all of the provisions of this Section 3 and there shall be no further transfer of such Shares except in accordance herewith. 4. STANDOFF AGREEMENT. Purchaser agrees, in connection with the Company's initial public offering of its equity securities, not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of any Shares (other than those included in the registration, if any) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. 5. NO TRANSFER EXCEPT IN COMPLIANCE WITH THE RESTRICTIONS HEREIN. The Company shall not be required (i) to transfer on its books any Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares shall have been so transferred. Purchaser shall not sell, transfer, pledge, hypothecate or -3- otherwise dispose of any shares which remain subject to the restrictions on transfer set forth in Section 3 hereof. 6. LEGENDS. All certificates representing any of the Shares subject to the provisions of this Agreement shall have endorsed thereon the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER, RIGHTS OF FIRST REFUSAL AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." (b) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." (c) Any legend required to be placed thereon by the applicable blue sky laws of any state. 7. ESCROW. (a) The Shares issued under this Agreement shall be held by an escrow holder designated by the Company (the "Escrow Holder"), along with a stock assignment executed by the Purchaser in blank, until the expiration of the Company's options and right of first refusal with respect to such Shares as set forth above. (b) The Escrow Holder is hereby directed to permit transfer of the Shares only in accordance with this Agreement or instructions signed by both parties. In the event further instructions are desired by the Escrow Holder, he shall be entitled to rely upon directions executed by a majority of the authorized number of the Company's Board of Directors. The Escrow Holder shall have no liability for any act or omission hereunder while acting in good faith in the exercise of his own judgment. (c) If the Company or any assignee exercises its Repurchase Option or Right of First Refusal hereunder, the Escrow Holder, upon receipt of written notice of such exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the Repurchase Option or Right of First Refusal have been exercised or expire unexercised or a portion of the Shares has been released from the provisions of Section 3 hereof, upon Purchaser's request the Escrow Holder shall promptly cause a new certificate to be issued for such released Shares and shall deliver such certificate to the Purchaser. -4- (e) Subject to the terms hereof, the Purchaser shall have all the rights of a stockholder with respect to such Shares while they are held in escrow, including without limitation, the right to vote the Shares and receive any cash dividends declared thereon. If, from time to time during the term of the provisions of Section 3, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of his ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Company's Repurchase Option or Right of First Refusal. 8. INVESTMENT REPRESENTATIONS. In connection with the purchase of the Shares, the Purchaser shall, concurrently with the purchase of the Shares, deliver to the Company his Investment Representation Statement attached hereto as Exhibit B. 9. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 10. TAX CONSEQUENCES. The Purchaser has reviewed with the Purchaser's own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement (including any tax consequences that may result under recently enacted tax legislation). The Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. The Purchaser understands that Section 83 of the Internal Revenue Code, as amended (the "Code"), taxes as ordinary income both (i) the difference between the fair market value of the Shares when the Company granted the Purchaser the right to purchase the Shares and the fair market value of the Shares on the date of this Agreement and (ii) the difference between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" includes the right of the Company to buy back the Shares pursuant to certain of its rights under Section 3. THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PURCHASER'S BEHALF. 11. TERMINATION OF EMPLOYMENT. Purchaser understands and acknowledges that Purchaser's employment relationship with the Company is at the will of either party and that nothing in this Agreement, shall confer any right upon Purchaser with respect to continuation of employment by the Company, nor shall it interfere in any way with his right or the Company's right to terminate -5- his employment at any time, with or without cause. This Agreement does not constitute an express or implied promise of continued employment for any period. 12. GENERAL PROVISIONS. (a) GOVERNING LAW. This Agreement shall be governed by the laws of the State of California. This Agreement represents the entire agreement between the parties with respect to the purchase of Common Stock by the Purchaser and may only be modified or amended in writing signed by both parties. (b) NOTICES. Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party not sending the notice. (c) ASSIGNMENT. The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) WAIVER. Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances. (e) ADDITIONAL ACTIONS. The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) ARBITRATION. At the option of either party, any and all disputes or controversies, whether of law or in equity, and of any nature whatsoever arising from or respecting this Agreement, unless otherwise expressly provided herein, shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association. (i) The arbitrators shall be selected as follows: In the event the Company and Purchaser agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and Purchaser do not so agree, the Company and Purchaser shall each select one independent, qualified arbitrator and these two arbitrators shall select a third arbitrator. The -6- Company reserves the right to reject any individual arbitrator who shall be employed by or affiliated with a competing organization. (ii) Arbitration shall take place in Pasadena, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in secrecy. In such case all documents, testimony, and records shall be received, heard, and maintained by the arbitrators in secrecy under seal, available for inspection only by the Company and the Purchaser and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. The arbitrators, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary or a permanent injunction, or both, and shall also be able to award damages (with or without an accounting), costs, and reasonable attorneys' fees. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. (iii) Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or their authorized representatives shall have the right to attend and participate in all the arbitration hearings to the extent and in such manner as the law shall require. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above. ETOYS INC. PURCHASER: a Delaware corporation By: /s/ Edward C. Lenk /s/ Frank C. Han ------------------------------- ------------------------------- Title: President Frank C. Han ---------------------------- -7- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, Frank C. Han, hereby sell, assign and transfer unto __________________________(___________) shares of the Common Stock of eToys Inc. standing in my name of the books of said corporation represented by Certificate No. __________ herewith and do hereby irrevocably constitute and appoint ____________________, attorney, to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement between eToys Inc. and the undersigned dated June 27, 1997. Dated: Signature: /s/ Frank C. Han ------------------------ -------------------------- Name: Frank C. Han ------------------------------- EXHIBIT A PLEDGE AGREEMENT This Agreement is entered into as of June 27, 1997, by and between ETOYS INC., a Delaware corporation (the "Company") and Frank C. Han ("Pledgor"). WHEREAS, in exchange for Pledgor's Full Recourse Promissory Note dated of even date herewith (the "Note"), the Company has issued and sold to Pledgor 416,667 shares of its Common Stock evidenced by the Company's Common Stock Certificate No. 7 (the "Shares") pursuant to the terms and conditions of that certain Common Stock Purchase Agreement ("Stock Purchase Agreement") entered into by the Company and Pledgor of even date herewith; WHEREAS, Pledgor has agreed that repayment of the Note will be secured by the pledge of the Shares; NOW, THEREFORE, the parties agree as follows: 1. CREATION OF SECURITY INTEREST. Pursuant to the provisions of the California Commercial Code, Pledgor hereby grants to the Company, and the Company hereby accepts, a present security interest in the Shares as collateral to secure the payment of Pledgor's obligation to the Company under the Note. Pledgor herewith delivers to the Company Common Stock Certificate No. 6, representing a total of 416,667 shares of the Company's Common Stock, together with one stock power for each certificate in the form attached as an Exhibit to the Stock Purchase Agreement, duly executed (with the date and number of shares left blank) by Pledgor and Pledgor's spouse, if any. For purposes of this Agreement, the Shares pledged hereby shall hereinafter be collectively referred to as the "Collateral". 2. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants to the Company that Pledgor has good title (both of record and beneficially) to the Collateral, free and clear of all claims, pledges and liens or encumbrances of every nature whatsoever, and that Pledgor has the right to pledge the Collateral as provided herein. Pledgor further agrees not to grant or create, nor attempt to grant or create, any security interest, claim, lien, pledge or other encumbrance with respect to the Collateral until the entire principal sum and accrued interest due under the Note has been paid in full. 3. RIGHTS ON DEFAULT. In the event of default by Pledgor under the Note, the Company and its assigns shall have full power to sell, assign and deliver the whole or any part of the Collateral at any broker's exchange or elsewhere, at public or private sale, at the option of the Company or its assigns, in order to satisfy any part of the obligations of Pledgor now existing or hereinafter arising under the Note should payment of such obligations be in default. On any such public sale, the Company and its assigns may purchase all or any part of the Collateral. In addition, at its sole option, the Company may elect to retain the Collateral in satisfaction of Pledgor's obligation under the Note, in accordance with the provisions and procedures set forth in the California Commercial Code. 4. ADDITIONAL REMEDIES. The rights and remedies granted to the Company herein upon default shall be in addition to all the rights, powers and remedies of the Company under the California Commercial Code and applicable law and such rights, powers and remedies shall be exercisable by the Company with respect to all of the Collateral. The Company's reasonable expenses of holding the Collateral, preparing it for resale or other disposition, and selling or otherwise disposing of the Collateral, including attorneys' fees and other legal expenses, will be deducted from the proceeds of any sale or other disposition and will be included in the amounts Pledgor must tender to redeem the Collateral. All rights, powers and remedies of the Company shall be cumulative and not alternative. Any forbearance or failure or delay by the Company in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of any such right, power or remedy and any single or partial exercise of any such right, power or remedy hereunder shall not preclude the further exercise thereof. 5. DIVIDENDS; VOTING. All dividends hereinafter declared on or payable with respect to the Collateral during the term of this pledge (excluding only ordinary cash dividends, which shall be payable to Pledgor so long as Pledgor is not in default under this Note) shall be immediately delivered to the Company to be held in pledge hereunder. Pledgor shall be entitled to receive cash dividends so long as Pledgor is not in default under the Note. Notwithstanding anything to the contrary contained in this Agreement, Pledgor shall be entitled to vote any shares comprising the Collateral, subject to any proxies granted by Pledgor. 6. ADJUSTMENTS. In the event that during the term of this pledge, any stock dividend, reclassification, readjustment, stock split or other change is declared or made with respect to the Collateral, or if warrants or any other rights or options are issued in connection with the Collateral, all new, substituted and/or additional shares or other securities issued by reason of such change or by reason of the exercise of such warrants, rights or options, shall be immediately pledged to the Company to be held under the terms of this Agreement in the same manner as the Collateral is held hereunder. 7. RULE 144 HOLDING PERIOD. PLEDGOR UNDERSTANDS THAT THE HOLDING PERIOD SPECIFIED UNDER RULE 144(d) WILL NOT BEGIN TO RUN WITH RESPECT TO THE PURCHASED SHARES UNTIL EITHER (A) THE NOTE IS PAID IN FULL OR (B) THE NOTE IS SECURED BY COLLATERAL, OTHER THAN THE PURCHASED SHARES, HAVING A FAIR MARKET VALUE AT LEAST EQUAL TO THE AMOUNT OF PLEDGOR'S THEN OUTSTANDING OBLIGATION UNDER THE NOTE (INCLUDING ACCRUED INTEREST). 8. REDELIVERY OF COLLATERAL. Upon payment in full of the entire principal sum and accrued interest due under the Note, and subject to the terms and conditions of the Stock Purchase Agreement, the Company shall immediately redeliver the Collateral pledged hereunder to Pledgor, duly endorsed, and this Agreement shall terminate; provided, however, that all rights of the Company to retain possession of the Shares pursuant to the Stock Purchase Agreement shall survive termination of this Agreement. 9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of the respective heirs, personal representatives, successors and assigns of the parties hereto. 10. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by the construed in accordance with the laws of the State of California, excluding that body of law relating to conflicts of law. Should one or more of the provisions of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions nevertheless shall remain effective and shall be enforceable. 11. MODIFICATION. This Agreement shall not be amended without the written consent of both parties hereto. 12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings related to such subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. ETOYS INC. PLEDGOR By: /s/ Edward C. Lenk /s/ Frank C. Han ---------------------------- ----------------------------- (signature) Title: President -------------------- Frank C. Han ----------------------------- (print or type name) FULL RECOURSE PROMISSORY NOTE Pasadena, California $6,250.00 June 27, 1997 1. OBLIGATION. In exchange for 416,667 shares (the "Shares") of the Common Stock of ETOYS INC., a Delaware corporation (the "Company"), represented by Common Stock Certificate No. 7, receipt of which is hereby acknowledged, the undersigned hereby promises to pay to the order of the Company on or before June 27, 2002, or upon termination of employment for any reason, whichever occurs earlier, at the Company's office at 790 E. Colorado Blvd., Suite 200, Pasadena, CA 91101, or at such other place as the Company may direct, the principal sum of Six Thousand Two Hundred Fifty Dollars ($6,250.00) together with interest on unpaid principal at the rate of 6.80% per annum from the date hereof until paid. 2. ACCELERATION OF OBLIGATION. The principal sum of this Note, together with all interest accrued thereon, shall immediately become due and payable in full upon any transfer of any of the Shares. 3. REMEDIES ON DEFAULT. Payment of this Note is secured by shares of the Company's Common Stock pursuant to a Pledge Agreement dated as of even date herewith between the Company and the undersigned. Upon any default of the undersigned under this Note, the Company shall have, in addition to its rights and remedies under the Pledge Agreement, full recourse against any real, personal, tangible or intangible assets of the undersigned, and may pursue any legal or equitable remedies that are available to it. 4. GOVERNING LAW; WAIVER. The validity, construction and performance of this Note shall be governed by the laws of the State of California, excluding that body of law pertaining to conflicts of law. The undersigned waives presentment, notice of nonpayment, notice of dishonor, protest, demand and diligence. 5. ATTORNEYS' FEES. If suit is brought for collection of this Note, the undersigned agrees to pay all reasonable expenses, including attorneys' fees, incurred by the holder in connection therewith whether or not such suit is prosecuted to judgment. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as of the date and year first above written. /s/ Frank C. Han ---------------------- Frank C. Han EXHIBIT B INVESTMENT REPRESENTATION STATEMENT PURCHASER: FRANK C. HAN COMPANY: ETOYS INC. SECURITY: COMMON STOCK AMOUNT: 416,667 SHARES In connection with the purchase of the above-listed Securities, I, the Purchaser, represent to the Company the following: (a) I am sufficiently aware of the Company's business affairs and financial condition to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"). (b) I understand that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) I further understand that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available (such as Rule 144 or the resale provisions of Rule 701 under the Securities Act). Moreover, I understand that the Company is under no obligation to register the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (d) I am familiar with the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permits limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, including, among other things: (1) the availability of certain public information about the Company; (2) the resale occurring not less than one year after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than two years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker, as said term is defined under the Securities Exchange Act of 1934 (the "Exchange Act") and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. The Purchaser further understands that the resale provisions of Rule 701 will not apply until 90 days after the Company becomes subject to the reporting obligations under the Exchange Act (typically upon the effective date of a company's initial public offerings). There can be no assurances that the requirements of Rule 144 or Rule 701 will be met, or that the Securities will ever be saleable. (e) I further understand that at the time I wish to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144, and that, in such event, I would be precluded from selling the Securities under Rule 144 even if the one-year minimum holding period had been satisfied. (f) I further understand that in the event all of the applicable requirements of Rule 144 are not satisfied, or that the resale provisions of Rule 701 are not available, registration under the Securities Act, compliance with Regulation A, compliance with some other registration exemption or the notification to the Company of the proposed disposition by me and the furnishing to the Company of (i) detailed information regarding the disposition, and (ii) and opinion of my counsel to the effect that such disposition will not require registration (I understand such counsel's opinion shall concur with the opinion by counsel for the Company and I shall have been informed of such compliance) will be required and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Signature of Purchaser: /s/ Frank C. Han ---------------------------------- Frank C. Han Date: June 27,1997 -2- EX-10.5 12 EXHIBIT 10.5 EXHIBIT 10.5 ETOYS INC. STOCK AND NOTE PURCHASE AGREEMENT This Stock and Note Purchase Agreement (the "Agreement") is made as of the 27th day of June, 1997 by and between eToys Inc., a Delaware corporation (the "Company"), and idealab!, a Delaware corporation (the "Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Company and Purchaser agree as follows: 1. PURCHASE. Subject to the terms and conditions of this Agreement, the Company hereby agrees to issue to Purchaser and Purchaser agrees to acquire from the Company on the Closing Date (as defined below), (i) 6,467,000 shares of the Company's Common Stock (the "Stock") at a price of $0.015 per share, for the aggregate purchase price of $97,015 (the "Purchase Price") and (ii) Convertible Promissory Notes in substantially the form attached hereto as Exhibit A (the "Note" or collectively the "Notes") which may be issued in one or more Notes for up to an aggregate principal amount of $100,000. The Purchase Price for the Stock and the principal amounts of the Notes shall be paid by check or wire transfer or the cancellation of existing indebtedness or a combination thereof. 2. CLOSING. The purchase and sale of the Stock and Notes shall occur at a Closing or Closings to be held at such times and places (the "Closing Dates"), as designated by the Company no less than two business days prior to such Closing Date. The Closings will take place at the principal office of the Company or at such other place as shall be designated by the Company. At the Closing on June 27, 1997 (the "Initial Closing"), the Company will issue the Stock registered in the name of Purchaser and the Company acknowledges receipt of $97,000 in payment of the Purchase Price for the Stock prior to the date of this Agreement. At subsequent Closings at times to be determined by the Company and the Purchaser, Purchaser shall deliver to the Company the consideration to be paid for the Note or Notes and the Company will deliver to Purchaser a Note or Notes in the principal amounts(s) equal to the consideration paid by Purchaser for such Note or Notes. 3. COMPANY'S REPRESENTATIONS AND WARRANTIES. Except as set forth on Exhibit B attached hereto, the Company represents and warrants to Purchaser as follows: (a) The Company is a Corporation duly organized and validly existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is not presently qualified to do business as a foreign corporation in any jurisdiction, and the failure to be so qualified will not have a material adverse affect on the Company's business as now conducted or as now proposed to be conducted. (b) The Company will have at the Closing all requisite legal and corporate power and authority to execute and deliver this Agreement, to sell and issue the Stock and the Note hereunder and to carry out and perform its obligations under the terms of this Agreement. (c) The authorized capital stock of the Company consists or will, upon the filing of the Certificate, consist of 50,000,000 shares of Common Stock and 25,000,000 shares of undesignated Preferred Stock. Immediately prior to the Closing, no shares of common or capital stock will be outstanding. The Stock, when issued pursuant to the terms of this Agreement, will be duly authorized, validly issued, fully paid and nonassessable. (d) All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution, delivery and performance of the Agreement by the Company, the authorization, sale, issuance and delivery of the Stock and the Note and the performance of all of the Company's obligations under this Agreement has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company, enforceable in accordance with its terms. (e) The Company is not in violation or default of any term of its Certificate or Bylaws, or in any material respect of any term or provision of any material mortgage, indebtedness, indenture, contract, agreement, instrument, judgement, order or decree, and to its knowledge is not in violation of any statute, rule or regulation applicable to the Company where such violation would materially and adversely affect the Company. (f) The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by the Company, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. 4. PURCHASER'S REPRESENTATIONS AND WARRANTIES. In connection with the purchase of the Stock and the Note, Purchaser hereby represents and warrants to the Company: (a) Purchaser has substantial experience in investing in newly-formed technology companies or in evaluating and investing in private placement transactions, so Purchaser is capable of evaluating the merits and risks of Purchaser's investment in the Company. Purchaser, by reason of Purchaser's business or financial experience or the business or financial experience of Purchaser's professional advisors who are unaffiliated with the Company or any affiliate or selling agent of the Company, directly or indirectly, has the capacity to protect Purchaser's own interests in connection with the purchase of the Stock, the Note and the common stock issuable upon conversion of the Note (the "Securities"). -2- (b) Purchaser is acquiring or will be acquiring the Stock and the Note for investment for Purchaser's own account, not as a nominee or agent and not with the view to, or for resale in connection with, any distribution thereof Purchaser understands that the Stock and the Note have not been, and will not be, registered under the Securities Act of 1933 (the "Securities Act") by reason of a specific exemption from the registration provisions of the Securities Act that depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Purchaser's representations as expressed herein. Purchaser has not been formed for the specific purpose of acquiring the Stock and the Note. Purchaser further understands that the Company shall have no obligation to register the Stock or the Securities issuable upon conversion of the Note under the Securities Act on behalf of Purchaser. (c) Purchaser acknowledges that the Stock and the Securities issuable upon conversion of the Note must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act, which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including (except as limited by Rule 144(k)), among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations. (d) Purchaser understands that no public market now exists for any of the securities issued by the Company, that the Company has made no assurances that a public market will ever exist for the Stock or the Securities issuable upon conversion of the Note and that, even if such a public market exists at some future time, the Company may not then be satisfying the current public information requirements of Rule 144. (e) Purchaser and Purchaser's representatives have had the opportunity to ask questions of, and receive answers from, representatives of the Company concerning the Company and the terms and conditions of this transaction as well as to obtain any information requested by Purchaser. Any questions raised by Purchaser or Purchaser's representatives concerning the transaction have been answered to the satisfaction of Purchaser and Purchaser's representatives. Purchaser's decision to enter into the transactions contemplated hereby is based in part on the answers to such questions as Purchaser and Purchaser's representatives have raised concerning the transaction and on Purchaser's own evaluation of the risks and merits of the purchase and the Company's proposed business activities. (f) All corporate or partnership action, if applicable, on the part of Purchaser, its directors, partners and its stockholders necessary for the authorization, execution, delivery and performance of this Agreement by Purchaser has been taken. This Agreement, when executed and -3- delivered by Purchaser, will constitute a valid and legally binding obligation of Purchaser, enforceable in accordance with its terms. (g) Purchaser has not incurred, and will not incur, directly or indirectly, as a result of any action taken by such Purchaser, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. (h) Purchaser has reviewed with its own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents and understands that Purchaser (and not the Company) shall be responsible for Purchaser's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 5. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL (a) Before any shares of Stock registered in the name of Purchaser may be sold or transferred (including transfer by operation of law), such shares shall first be offered to the Company. (i) Purchaser shall deliver a notice ("Notice") to the Company stating (A) Purchaser's bona fide intention to sell or transfer such shares, (B) the number of such shares to be sold or transferred, (C) the price for which he proposes to sell or transfer such shares, and (D) the name of the proposed purchaser or transferee. (ii) Within 30 days after receipt of the Notice, the Company or its assignee may elect to purchase all (but not less than all) shares to which the Notice refers, at the price per share specified in the Notice. Full payment for all the shares to which the Notice refers shall be made by the Company or its assignee to Purchaser by cash. (iii) If the shares to which the Notice refers are not elected to be purchased, as provided in subparagraph 5(a)(ii), Purchaser may sell the shares to any person named/in the Notice at the price specified in the Notice or at a higher price, provided that such sale or transfer is consummated within 60 days of the date of said Notice to the Company, and provided, further, that any such sale is in accordance with all the terms and conditions hereof. Any sale or transfer after such 60 day period or on terms more favorable to the proposed purchaser or transferee then described in the Notice shall be subject again to this subparagraph 5(a). (iv) The provisions of this subparagraph 5(a) shall terminate on the earlier of (A) the effective date of a registration statement filed by the Company under the Securities Act, with respect to an underwritten public offering of Common Stock of the Company (an "Initial Public Offering") or (B) the closing date of a sale of assets or merger of the Company pursuant to which -4- stockholders of this Company received securities of a buyer whose shares are publicly traded. The provisions of this subparagraph 5(a) shall not apply to a transfer of any shares of Stock by Purchaser, either during its lifetime or on death by will or intestacy to its other ancestors, descendents or spouse, or any custodian or trustee for the account of Purchaser or Purchaser's ancestors, descendents or spouse; provided, in each such case a transferee shall receive and hold such shares subject to the provisions of this paragraph 5 and there shall be no further transfer of such shares except in accordance herewith. (b) Purchaser agrees in connection with the Company's Initial Public Offering, not to sell, make any short sale of, loan, grant any option for the purchase of or otherwise dispose of any shares of Stock without the prior written consent of Company or its underwriters, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such underwriters; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. (c) The Company shall not be required (i) to transfer on its books any shares of Stock which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to which such shares shall have been so transferred. 6. LEGENDS. All certificates representing any of the shares of Stock subject to the provisions of this Agreement shall have endorsed thereon legends substantially in the following form: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS CERTIFICATE MUST BE SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE SALE, PLEDGE OR OTHER TRANSFER OF ANY INTEREST IN ANY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE." (b) "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN STOCK PURCHASE AGREEMENT CONTAINING A RIGHT OF FIRST REFUSAL, COPIES OF WHICH MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY." (c) Any legend required to be placed thereon by the California Commissioner of Corporations, or required by applicable blue sky laws of any state. -5- 7. MISCELLANEOUS (a) The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (b) Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by regular or certified mail with postage and fees prepaid, addressed to Purchaser at its address shown on the Company's records and to the Company at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by ten days' advance written notice to the other party hereto. (c) The Company may assign its rights and delegate its duties under this Agreement. If any such assignment or delegation requires consent of the California Commissioner of Corporations, the parties agree to cooperate in requesting such consent. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Purchaser, its heirs, executors, administrators, successors and assigns. (d) Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Stock as to which the right of first refusal has been exercised from Purchaser to the Company. (e) This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California. 8. ARBITRATION. At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by arbitration by the American Arbitration Association in accordance with the commercial rules and regulations of that Association. The arbitrators shall be selected as follows: In the event the Company and Purchaser agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and Purchaser do not so agree, the Company and Purchaser shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. Arbitration shall take place in Pasadena, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and -6- maintained by the arbitrators in secrecy under seal, available for the inspection only of the Company or Purchaser and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. The arbitrator, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. IN WITNESS THEREOF, the parties hereto have executed this Stock Purchase Agreement as of the day and year first above written. PURCHASER COMPANY Bill Gross' idealab! eToys Inc., a California corporation a Delaware corporation By: /s/ Bill Gross By: /s/ Edward C. Lenk ---------------------- --------------------------- Name: Bill Gross Name: Edward C. Lenk -------------------- ------------------------- Title: Chairman Title: President ------------------- ------------------------ Address: 790 E. Colorado Blvd --------------------- Pasadena, CA 91101 --------------------- -7- EXHIBIT A THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. INTEREST BEARING CONVERTIBLE PROMISSORY NOTE $________ _________, 1997 Pasadena, California FOR VALUE RECEIVED, eToys, Inc., a Delaware corporation (the "Company"), hereby promises to pay to idealab! ("Lender") the principal sum of ____________________________ dollars ($___________) on _________________,1998 (the "Maturity Date") at the offices of the Company, or at such other address as Lender may specify in writing. 1. Interest shall accrue on the unpaid principal amount of this Note at a rate of eight percent (8%) per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. 2. In the event that the Company, at any time after the date of this Note and prior to the Maturity Date, shall issue and sell shares of its Common Stock or Series A Preferred Stock to any investors (the "Investors") for aggregate proceeds to the Company of at least One Million Dollars ($1,000,000), excluding the principal and accrued interest of this Note and any similar notes which the holders have elected to convert into the Securities, (the "Financing"), then the entire unpaid principal amount of this Note (the "Unpaid Principal") and, at the option of Lender, the accrued and unpaid interest on this Note, if any (the "Accrued Interest"), shall at the closing of such Financing and at the option of Lender be either (i) repaid in full in cash or (ii) converted into shares of the Company's Common Stock (the "Securities"); PROVIDED, HOWEVER, that if the price per share of the securities sold in the Financing is $0.25 or greater, then this Note shall be repaid in full in cash upon the closing of such Financing and Lender shall not have the option to convert this Notes into Securities. 3. The number of shares of Securities issuable to Lender upon conversion of the Unpaid Principal, and Accrued Interest, if any, shall equal that number of shares as is obtained by dividing the amount of Unpaid Principal and Accrued Interest, if any, to be converted by the price per share of $0.20. 4. The Unpaid Principal amount of this Note, together with Accrued Interest to date, shall become immediately due and payable upon _________, 1998. 5. Any conversion by Lender of the Note into the Securities shall be pursuant to a stock purchase agreement (the "Stock Agreement") which shall contain customary terms and conditions. Lender shall provide the Company with written notice of its election to exercise its conversion right hereunder and the Company shall immediately thereafter undertake all necessary action to enable such conversion to occur, but the Note shall remain outstanding until such time as the Securities are actually issued to Lender. 6. Acceptance by Lender of any partial payment shall not be deemed to constitute a waiver by Lender to require prompt payment of the Note upon demand. 7. In the event of any action to enforce payment of this Note, in addition to all other relief, the prevailing party in such action shall be entitled to reasonable attorneys' fees and expenses. -8- 8. The Company hereby waives presentment, protest and demand, notice of protest, demand, nonpayment or dishonor. 9. This Note is to be governed by and construed in accordance with the laws of the State of California. eToys Inc. By:__________________________________ Title:_______________________________ -9- EXHIBIT B SCHEDULE OF EXCEPTIONS TO THE COMPANIES REPRESENTATIONS AND WARRANTIES In addition to the 6,466,667 shares of Common Stock being issued under this Stock and Note Purchase Agreement, the Company has agreed to issue 1,866,667 shares of Common Stock to certain founders and employees of the Company pursuant to Stock Purchase Agreements and 2,026,667 shares of Common Stock to certain founders and employees of the Company pursuant to Restricted Stock Purchase Agreements and such shares shall be issued as of the same date of this Stock and Note Purchase Agreement. Forms of such Stock Purchase Agreements and Restricted Stock Purchase Agreements have been previously provided to counsel for idealab! EX-10.6 13 EXHIBIT 10.6 EXHIBIT 10.6 CONFIDENTIAL INTERACTIVE MARKETING AGREEMENT This Interactive Marketing Agreement (the "Agreement"), dated as of October 1, 1997 (the "Effective Date"), is between America Online, Inc. ("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles, Virginia 20166, and eToys Inc. ("eToys"), a private corporation, with offices at 1640 5th Street, Suite 124, Santa Monica, CA 90401. AOL and eToys may be referred to individually as a "Party" and collectively as "Parties." INTRODUCTION AOL and eToys each desires to enter into an interactive marketing relationship whereby AOL will promote an interactive site referred to (and further defined) herein as the Affiliated eToys Site. This relationship is further described below and is subject to the terms and conditions set forth in this Agreement. Defined terms used but not defined in the body of the Agreement will be as defined on Exhibit B attached hereto. TERMS 1. PROMOTION, DISTRIBUTION AND MARKETING. 1.1. AOL PROMOTION OF AFFILIATED eTOYS SITE. AOL will provide eToys with the promotions for the Affiliated eToys Site described on Exhibit A (the "Promotions"). Screen shots indicating the current design for the applicable screens within the shopping channels on each of the AOL Service and AOL.com are attached hereto. Subject to eToys's reasonable approval, AOL will have the right to fulfill its promotional commitments with respect to any of the foregoing by providing eToys comparable promotional placements in alternative areas of the AOL Network. AOL reserves the right to redesign or modify the organization, structure, "look and feel," navigation and other elements of the AOL services at any time. In the event such modifications materially and adversely affect any specific Promotion, AOL will work with eToys to provide eToys, as its sole remedy, a comparable promotional placement. In the event that modifications materially and adversely affect the aggregate promotional value to be received hereunder by eToys (including, without limitation, the promotional value of the placements reflected through the attached screen shots) and AOL and eToys cannot reach agreement regarding substitute promotional placements reasonably satisfactory to eToys (notwithstanding both Parties' good faith efforts to reach agreement for a period of thirty days), then eToys will be entitled to terminate this Agreement with fifteen days prior written notice to AOL. In the event of such an early termination, eToys will be responsible for the pro-rata portion of the payments provided for herein. This pro-rata portion will represent the average of the percentages of value delivered with respect to each component of Promotions described on Exhibit A. For the impressions-based Promotions, the percentage of value will be determined with reference to the percentage of impressions which were delivered prior to the effectiveness of the termination. For the other Promotions, the percentage of value will be determined with reference to the percentage of days of the term of the agreement which precede the effectiveness of such termination. With respect to the impressions targets specified on Exhibit A, AOL will not be obligated to provide in excess of any of such target amounts in any year. Any shortfall in impressions at the end of a year will not be deemed a breach of the Agreement by AOL. In the event there is a shortfall in impressions as of the end of either year during the Initial Term (a "Shortfall"), AOL will provide eToys with advertising placements in mutually 1 CONFIDENTIAL agreed upon areas of the AOL Network which have a total value, based on rates comparable to those set forth in Exhibit A, equal to the value of the Shortfall (determined by multiplying the percentage of impressions that were not delivered by the total guaranteed payment provided for below) and which will be delivered during the first four months following the end of the year in question. [*] 1.2. CONTENT OF PROMOTIONS. The specific eToys Content (e.g., eToys's logo) to be contained within the Promotions will be determined by eToys, subject to AOL technical limitations and AOL's then-applicable policies relating to advertising and promotions. Except to the extent described herein, the specific form, placement, duration and nature of the Promotions will be as determined by AOL in its reasonable editorial discretion (consistent with the editorial composition of the applicable screens). 1.3. eTOYS PROMOTION OF AFFILIATED eTOYS SITE AND AOL. As set forth in fuller detail in Exhibit C, eToys will promote the availability of the Affiliated eToys Site through the AOL Network. 2. AFFILIATED eTOYS SITE. 2.1. CONTENT. eToys will make available through the Affiliated eToys Site [*]. eToys will ensure that the Affiliated eToys Site does not in any respect promote, advertise, market or distribute the products, services or content of any Interactive Service through the linked pages of the Affiliated eToys Site. The linked pages of the Affiliated eToys Site will not contain advertisements, promotions, links, sponsorships or other Content (i) [*] or (ii) otherwise in conflict with AOL's standard advertising policies (except as expressly approved by writing by AOL). 2.2. PRODUCTION WORK. eToys will be responsible for all production work associated with the Affiliated eToys Site, including all related costs and expenses. 2.3. TECHNOLOGY. eToys shall take reasonable steps necessary to conform its promotion and sale of Products through the Affiliated eToys Site to the then-existing technologies identified by AOL which are optimized for the AOL Service. AOL reserves the right to review and test the Affiliated eToys Site from time to time to determine whether the site is compatible with AOL's then-available client and host software and the AOL Network. 2.4. PRODUCT OFFERING. eToys will ensure that the Affiliated eToys Site includes all of the Products and other Content (including, without limitation, any features, offers, contests, functionality or technology) that are then made available by or on behalf of eToys through 2 * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL the "General eToys Site" (i.e., the publicly available site at www.etoys.com to which an unregistered user would have access); provided, however, that (a) such inclusion will not be required where it is commercially or technically impractical to either Party (i.e., inclusion would cause either Party to incur substantial incremental costs); and (b) eToys will notify AOL of the material, specific changes in scope, nature and/or offerings required by such inclusion. 2.5. PRICING AND TERMS. [*] 2.6. SPECIAL OFFERS. [*] 2.7. OPERATING STANDARDS. eToys will ensure that the Affiliated eToys Site complies with the operating standards set forth in Exhibit D. 2.8. TRAFFIC FLOW. eToys will take reasonable efforts to ensure that AOL traffic is either kept within the Affiliated eToys Site or channeled back into the AOL Network (with the exception of advertising links sold and implemented pursuant to the Agreement). The Parties will work together on mutually acceptable links back to the AOL Service. 3. AOL EXCLUSIVITY OBLIGATIONS. [*] Notwithstanding anything to contrary in this Section 3, no provision of this Agreement will limit AOL's ability (on or off the AOL Network) to undertake activities or perform duties pursuant to existing arrangements with third parties. 4. PAYMENTS. 4.1. PAYMENTS. eToys will pay AOL an amount of Three Million Dollars (US$3,000,000), to be paid in: [*] 3 * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL As indicated elsewhere herein, this Agreement supersedes eToys prior agreements with AOL related to advertising and placement in the AOL shopping channel (the "Prior Agreements"). In that regard, (i) eToys has no further payment obligations under the Prior Agreements (except to invoices which have been received by eToys as of its execution of this Agreement) and (ii) any impressions delivered to eToys beginning as of the Effective Date will count towards the impressions commitments contained herein. 4.2. WIRED PAYMENTS; LATE PAYMENTS. All payments required under this Section 4 will be paid in immediately available, non-refundable funds either by way of check or as wired to AOL's account. All amounts owed hereunder not paid when due and payable will bear interest from the date such amounts are due and payable at the rate of 10% per year. 5. TERM; RENEWAL; TERMINATION. 5.1 TERM. Unless earlier terminated as set forth herein, the initial term of this Agreement will be from the Effective Date through December 31, 1999 (the "Initial Term"). 5.2. TERMINATION FOR BREACH. Except as expressly provided elsewhere in this Agreement, either Party may terminate this Agreement at any time in the event of a material breach of the Agreement by the other Party which remains uncured after thirty (30) days written notice thereof to the other Party (or such shorter period as may be specified elsewhere in this Agreement). Notwithstanding the foregoing, in the event of a material breach of a provision that expressly requires action to be completed within an express period shorter than 30 days, either Party may terminate this Agreement if the breach remains uncured after written notice thereof to the other Party. 5.3 TERMINATION FOR BANKRUPTCY/INSOLVENCY. Either Party may terminate this Agreement immediately following written notice to the other Party if the other Party (i) ceases to do business in the normal course, (ii) becomes or is declared insolvent or bankrupt, (iii) is the subject of any proceeding related to its liquidation or insolvency (whether voluntary or involuntary) which is not dismissed within ninety (90) calendar days or (iv) makes an assignment for the benefit of creditors. 6. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set forth on Exhibit E attached hereto and Standard Legal Terms & Conditions set forth on Exhibit F attached hereto are each hereby made a part of this Agreement. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the Effective Date. AMERICA ONLINE, INC. ETOYS INC. By: /s/ David M. [ILLEGIBLE] By: /s/ Toby Lenk ------------------------------ ------------------------------- Print Name: David M. [ILLEGIBLE] Print Name: /s/ Toby Lenk ---------------------- ---------------------- Title: Sr. V.P. Title: CEO --------------------------- ---------------------------- 4 * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL EXHIBIT A PLACEMENT/PROMOTION PLAN AOL SERVICE SHOPPING CHANNEL [*] AOL.COM SHOPPING CHANNEL [*] ADDITIONAL ADVERTISING [*] Should eToys wish to increase or decrease its impression levels within any of the impressions-based, additional advertising categories described above (the "Impressions-based Ads"), AOL will work in good faith with eToys to accommodate any such requests, subject to availability and provided that eToys will continue to be required to pay AOL the full amounts specified under this Agreement and eToys will not, 5 * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL through any adjustment, be entitled to value in excess of that allocable to the Impressions-based Ads (taking into account the relative values of the impressions involved in any such adjustments). In delivering the impressions called for under the Impressions-based Ads, AOL will use all commercially reasonable efforts to deliver [*] of the annual impressions for the following categories during the fourth calendar quarter: [*]; provided that, in the event AOL believes that it will not be able to deliver the requisite impressions in any specific category, eToys will cooperate in good faith with AOL to designate comparable, substitute inventory for delivery of such impressions during such period. The Parties will use commercially reasonable efforts to spread the remaining impressions on a relatively even basis during the remaining three quarters of each year (or on such other basis as the Parties may reasonably agree); provided that, in the event that the impressions are not spread on that basis due to eToys role in the process, then AOL shall not be responsible for any penalties or timing restrictions with respect to shortfalls of impressions which may otherwise be called for hereunder. * For purposes of these promotions, the first year shall be deemed to end December 31, 1998 6 * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL EXHIBIT B DEFINITIONS The following definitions will apply to this Agreement: ADDITIONAL eTOYS CHANNEL. Any third-party distribution channel (e.g., an Interactive Service) through which the Affiliated eToys Site is made available. AFFILIATED eTOYS SITE. The specific area to be promoted and distributed by AOL hereunder in which eToys can market and complete transactions regarding its Products. AOL.COM. AOL's primary Internet-based Interactive Site marketed under the "AOL.COM" brand, specifically excluding (a) the AOL Service, (b) any international versions of AOL.com, (c) "Driveway," "AOL Instant Messenger" or any similar product or service offered by or through such site or any other AOL Interactive Site, (d) "Digital Cities," "WorldPlay," "Entertainment Asylum," the "Hub," or any similar "sub-service" offered by or through such site or any other AOL Interactive Site and (e) any programming or content area offered by or through such site or any other AOL Interactive Site which is provided and operationally controlled by a third-party content provider and not by AOL (or any successor to or substitute for any of the foregoing properties in clauses (a) through (e)). AOL LOOK AND FEEL. The elements of graphics, design, organization, presentation, layout, user interface, navigation and stylistic convention (including the digital implementations thereof) which are generally associated with Interactive Sites within the AOL Service or AOL.com. AOL MEMBER. Any authorized user of the AOL Network, including any sub-accounts using the AOL Network under an authorized master account. AOL NETWORK. (i) The AOL Service and (ii) any other product or service owned, operated, distributed or authorized to be distributed by or through AOL or its Affiliates worldwide through which such party elects to offer the Licensed Content. AOL SERVICE. The U.S. version of the America Online-Registered TradeMark- brand service, specifically excluding (a) AOL.com or any other AOL Interactive Site, (b) the international versions of the AOL Service (e.g., AOL Japan), (c) "Driveway," "NetFind," AOL Instant Messenger" or any similar product or service offered by or through the U.S. version of the America Online-Registered TradeMark- brand service, (d) "Digital Cities," "WorldPlay," "Entertainment Asylum," the "Hub," or any similar "sub-service" offered by or through the U.S. version of the America Online-Regestered Trademark- brand service and (e) any programming or content area offered by or through the U.S. version of the America Online-Registered TradeMark- brand service which is provided and operationally controlled by a third-party content provider and not by AOL (or any successor to or substitute for any of the foregoing properties in clauses (a) through (e)). CONFIDENTIAL INFORMATION. Any information relating to or disclosed in the course of the Agreement, which is or should be reasonably understood to be confidential or proprietary to the disclosing Party, including, but not limited to, the material terms of this Agreement, information about AOL Members and eToys customers, technical processes and formulas, source codes, product designs, sales, cost and other unpublished financial information, product and business plans, projections, and marketing data. "Confidential Information" will not include information (a) already lawfully known to or independently developed by the receiving Party, (b) disclosed in published materials, (c) generally known to the public, or (d) lawfully obtained from any third party. 7 CONFIDENTIAL CONTENT. Information, materials, features, Products, advertisements, promotions, links, pointers and software, including any modifications, upgrades, updates, enhancements and related documentation. eTOYS COMPETITORS. [*] IMPRESSION. Any access by a user to the file representing the page containing the applicable Promotion. INTERACTIVE SERVICE. Any entity that offers online or Internet connectivity (or any successor form of connectivity), aggregates and/or distributes a broad selection of third-party interactive Content, or provides interactive navigational services (including, without limitation, any online service providers, Internet service providers, @Home or other broadband providers, search or directory providers, "push" product providers such as the Pointcast Network or providers of interactive environments such as Microsoft's "Active Desktop"). INTERACTIVE SITE. Any interactive site or area (other than the Affiliated eToys Site) which is managed. maintained or owned by eToys or its agents, including, by way of example and without limitation, (i) an eToys site on the World Wide Web portion of the internet or (ii) a channel or area delivered through a "push" product such as the Pointcast Network or interactive environment such as Microsoft's proposed "Active Desktop." LICENSED CONTENT. All Content offered through the Affiliated eToys Site pursuant to this Agreement, including any modifications, upgrades, updates, enhancements, and related documentation. PRODUCT. Any product, good or service which eToys offers, sells or licenses to AOL Members through (i) the Affiliated eToys Site (including through any Interactive Site linked thereto) or (ii) an "offline" means (e.g., toll-free number) for receiving orders related to specific offers within the Affiliated eToys Site requiring purchasers to reference a specific promotional identifier or tracking code, including, without limitation, products sold through surcharged downloads (to the extent expressly permitted hereunder). TOYS. Childrens toy products. 8 * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL EXHIBIT C eTOYS CROSS-PROMOTION ONLINE In each eToys Interactive Site, eToys will include: - - - - [*] OFFLINE In eToys' television, radio and print advertisements and in any publications, programs, features or other forms of media over which eToys exercises at least partial editorial control, eToys will make reasonable efforts to include on a periodic basis: - - [*] Subject to the requirements of Section 1 of Exhibit F, eToys will be entitled to issue a press release regarding this Agreement. - --------------------------- [*] 9 * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL EXHIBIT D OPERATING STANDARDS GENERAL. [*] HOSTING; CAPACITY. eToys will provide all computer servers, routers, switches and associated hardware in an amount reasonably necessary to meet anticipated traffic demands, adequate power supply (including generator back-up) and HVAC, adequate insurance, adequate service contracts and all necessary equipment racks, floor space, network cabling, and power distribution to support the Affiliated eToys Site (collectively, "Hosting Infrastructure"). In the event eToys fails to satisfy this requirement AOL will have the right (in addition to any other remedies available to AOL hereunder) to regulate the promotions it provides to eToys hereunder to the extent necessary to minimize user delays until such time as eToys corrects its infrastructure deficiencies. SPEED; ACCESSIBILITY. eToys will ensure that the performance and availability of the Affiliated eToys Site (a) is monitored on a continuous, 24/7 basis and (b) remains competitive in all material respects with the performance and availability of other similar sites based on similar form technology. eToys will use commercially reasonable efforts to ensure that: (a) the functionality and features within the Affiliated eToys Site are optimized for the AOL client software then in use by AOL Members; and (b) the Affiliated eToys Site is designed and populated in a manner that minimizes delays when AOL Members and AOL Users attempt to access such site. USER INTERFACE. eToys will maintain a graphical user interface within the Affiliated eToys Site that is competitive in all material respects with interfaces of other similar sites based on similar form technology. AOL reserves the right to conduct focus group testing to assess eToys' competitiveness in this regard. MONITORING. AOL Network Operations Center (NOC) will work with a eToys-designated technical contact in the event of any performance malfunction or other emergency related to the Affiliated eToys Site and will either assist or work in parallel with eToys' contact using eToys tools and procedures, as applicable. The Parties will develop a process to monitor performance and member behavior with respect to access, capacity, security and related issues both during normal operations and during special promotions/events. TELECOMMUNICATIONS. The Parties agree to explore encryption methodology to secure data communications between the Parties' data centers. The network between the Parties will be configured such that no single component failure will significantly impact AOL Users. The network will be sized such that no single line runs at more than 70% average utilization for a five minute peak in a daily period. SECURITY REVIEW. eToys and AOL will work together to perform an initial security review of, and to perform tests of, the eToys system, network, and service security in order to evaluate the security risks and provide recommendations to eToys, including periodic follow-up reviews as reasonably required by eToys or AOL. TECHNICAL PERFORMANCE. eToys will perform the following technical obligations (and any reasonable updates thereto from time to time by AOL): 1. eToys will design the Affiliated eToys Site to support the Windows version of the Microsoft Internet Explorer 4.0 browser, and make commercially reasonable effects to support all other AOL browsers listed at: http://webmaster.info.aol.com/BrowTable.html. 10 * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL 2. eToys will configure the server from which it serves the site to examine the HTTP User-Agent field in order to identify the AOL Member-Agents listed at: http://webmaster.info.aol.com/Brow2Text.html (the "AOL Member-Agents"). 3. eToys will design its site to support HTTP 1.0 or later protocol as defined in RFC 1945 (available at http://ds.internic.net/rfc/rfc1945.text) and to adhere to AOL's parameters for refreshing cached information listed at http://webmaster.info.aol.com/CacheText.html. eToys will provide continuous navigational ability for AOL Users to return to an agreed-upon point on the AOL Network (for which AOL will supply the proper address) from the Affiliated eToys Site. 11 CONFIDENTIAL EXHIBIT E STANDARD ONLINE COMMERCE TERMS & CONDITIONS 1. AOL NETWORK DISTRIBUTION. eToys will not authorize or permit any third party to distribute or promote the Affiliated eToys Site through the AOL Network absent AOL's prior written approval. AOL shall be entitled to require reasonable changes to the Content (including, without limitations features and functionality) within any linked pages of the Affiliated eToys Site to the extent AOL reasonably believes that such Content will adversely affect AOL's operation of the AOL Network. 2. PROVISION OF OTHER CONTENT. In the event that AOL notifies eToys that (i) as reasonably determined by AOL, any Content within the Affiliated eToys Site violates AOL's then-standard Terms of Service (as set forth on the America Online-Registered Trademark- brand service), the terms of this Agreement or any other standard, written AOL policy or (ii) AOL reasonably objects to the inclusion of any Content within the Affiliated eToys Site (other than any specific items of Content which may be expressly identified in this Agreement), then eToys shall take commercially reasonable steps to block access by AOL Members to such Content using eToys's then-available technology. In the event that eToys cannot, through its commercially reasonable efforts, block access by AOL Members to the Content in question, then eToys shall provide AOL prompt written notice of such fact. AOL may then, at its option, restrict access from the AOL Network to the Content in question using technology available to AOL. eToys will cooperate with AOL's reasonable requests to the extent AOL elects to implement any such access restrictions. 3. CONTESTS. eToys will take all steps necessary to ensure that any contest, sweepstakes or similar promotion conducted or promoted through the Affiliated eToys Site (a "Contest") complies with all applicable federal, state and local laws and requisitions. 4. DISCLAIMERS. Upon AOL's request, eToys agrees to include within the Rainman Screens a product disclaimer (the specific form and substance to be mutually agreed upon by the Parties) indicating that transactions are solely between eToys and AOL Users purchasing products from eToys. 5. OWNERSHIP. eToys acknowledges and agrees that AOL will own all right, title and interest in and to the elements of graphics, design, organization, presentation, layout, user interface, navigation and stylistic convention (including the digital implementations thereof) (collectively the "Look and Feel") which are generally associated with online areas contained within the AOL Network (the AOL Look and Feel, as previously defined), subject to eToys' ownership rights in any eToys trademarks or copyrighted material within the Affiliated eToys Site. AOL acknowledges and agrees that eToys will own all right, title and interest in and to the Look and Feel which is generally associated with the Affiliated eToys Site, subject to AOL's ownership rights in any AOL trademarks or copyrighted material and the AOL Look and Feel. 6. 7. MANAGEMENT OF THE AFFILIATED eTOYS SITE. eToys will manage, review, delete, edit, create, update and otherwise manage all Products available on or through the Affiliated eToys Site, in a timely and professional manner and in accordance with the terms of this Agreement. eToys will ensure that each Affiliated eToys Site is current, accurate and well-organized at all times. eToys warrants that the Affiliated eToys Site, including all Products and Contents available therein: (i) will not infringe on or violate any copyright, trademark, U.S. patent or any other third party right, including without limitation, any music performance or other music-related rights; and (ii) will not contain any Product which violates any applicable law or regulation, including those relating to contests, sweepstakes or similar promotions. AOL will have no obligations with respect to the Products available on or through the Affiliated eToys Site, including, but not limited to, any duty to review or monitor any such Products. 8. DUTY TO INFORM. eToys will promptly inform AOL of any information related to the eToys Service or Affiliated eToys Site which could reasonably lead to a claim, demand, or liability of or against AOL and/or its affiliates by any third party. 9. CUSTOMER SERVICE. It is the sole responsibility of eToys to provide customer service to persons or entities purchasing Products through the AOL Network ("Customers"). eToys will bear full responsibility for all customer service, including without limitation, order processing, billing, fulfillment, shipment, collection and other customer service associated with any Products offered, sold or licensed through the Affiliated eToys Site, and AOL will have no obligations whatsoever with respect thereto. eToys will receive all emails from Customers via a computer available to eToys' customer service staff and generally respond to such emails within one business day of receipt. eToys will receive all orders electronically and generally process all orders within one business day of receipt, provided Products ordered are not advance order 12 CONFIDENTIAL items. eToys will ensure that all orders of Products are received, processed, fulfilled and delivered on a timely and professional basis. eToys will offer AOL Users who purchase Products through such Affiliated eToys Site a money back satisfaction guarantee. eToys will bear all responsibility for compliance with federal, state and local laws in the event that Products are out of stock or are no longer available at the time an order is received. eToys will also comply with the requirements of any federal, state or local consumer protection or disclosure law. Payment for Products will be collected by eToys directly from customers. eToys' order fulfillment operation will be subject to AOL's reasonable review. 10. PRODUCTION WORK. In the event that eToys requests AOL's production assistance in connection with any matter, eToys will work with AOL to develop a detailed production plan for the requested production assistance (the "Production Plan"). Following receipt of the final Production Plan, AOL will notify eToys of (i) AOL's availability to perform the requested production work, (ii) the proposed fee or fee structure for the requested production and maintenance work and (iii) the estimated development schedule for such work. To the extent the Parties reach agreement regarding implementation of agreed-upon Production Plan, such agreement will be reflected in a separate work order signed by the Parties. To the extent eToys elects to retain a third party provider to perform any such production work, work produced by such third party provider must generally conform to AOL's production Standards & Practices (a copy of which will be supplied by AOL to eToys upon request). The specific production resources which AOL allocates to any production work to be performed on behalf of eToys will be as determined by AOL in its sole discretion. 11. MERCHANT CERTIFICATION PROGRAM. eToys will participate in any generally applicable "Certified Merchant" program operated by AOL or its authorized agents or contractors. Such program may require merchant participants on an ongoing basis to meet certain reasonable standards relating to provision of electronic commerce through the AOL Network and may also require the payment of certain reasonable certification fees to the applicable entity operating the program. 13 CONFIDENTIAL EXHIBIT F STANDARD LEGAL TERMS & CONDITIONS 1. PROMOTIONAL MATERIALS/PRESS RELEASES. Each Party will submit to the other Party, for its prior written approval, which will not be unreasonably withheld or delayed, any marketing, advertising, press releases, and all other promotional materials related to the Affiliated eToys Site and/or referencing the other Party and/or its trade names, trademarks, and service marks (the "Materials"); provided, however, that either Party's use of screen shots of the Affiliated eToys Site for promotional purposes will not require the approval of the other Party so long as the AOL Network is clearly identified as the source of such screen shots. Each Party will solicit and reasonably consider the views of the other Party in designing and implementing such Materials. Once approved, the Materials may be used by a Party and its affiliates for the purpose of promoting the Affiliated eToys Site and the content contained therein and reused for such purpose until such approval is withdrawn with reasonable prior notice. In the event such approval is withdrawn, existing inventories of Materials may be depleted. Notwithstanding the foregoing, either Party may issue press releases and other disclosures as required by law or as reasonably advised by legal counsel without the consent of the other Party and in such event, prompt notice thereof will be provided to the other Party. 2. LICENSE. eToys hereby grants AOL a non-exclusive worldwide license to market, license, distribute, reproduce, display, perform, transmit and promote the Affiliated eToys Site and the Products contained therein (or any portion thereof) through such areas or features of the AOL Network as AOL deems appropriate. AOL Users will have the right to access and use the Affiliate eToys Site. 3. TRADEMARK LICENSE. In designing and implementing the Materials and subject to the other provisions contained herein, eToys will be entitled to use the following trade names, trademarks, and service marks of AOL: the "America Online-Registered Trademark-" brand service, "AOL" service/software and AOL's triangle logo; and AOL and its Affiliates will be entitled to use the trade names, trademarks, and service marks of eToys (collectively, together with the AOL marks listed above, the "Marks"); provided that each Party: (i) does not create a unitary composite mark involving a Mark of the other Party without the prior written approval of such other Party; and (ii) displays symbols and notices clearly and sufficiently indicating the trademark status and ownership of the other Party's Marks in accordance with applicable trademark law and practice. 4. OWNERSHIP OF TRADEMARKS. Each Party acknowledges the ownership of the other Party in the Marks of the other Party and agrees that all use of the other Party's Marks will inure to the benefit, and be on behalf, of the other Party. Each Party acknowledges that its utilization of the other Party's Marks will not create in it, nor will it represent it has, any right, title, or interest in or to such Marks other than the licenses expressly granted herein. Each Party agrees not to do anything contesting or impairing the trademark rights of the other Party. 5. QUALITY STANDARDS. Each Party agrees that the nature and quality of its products and services supplied in connection with the other Party's Marks will conform to quality standards set by the other Party. Each Party agrees to supply the other Party, upon request, with a reasonable number of samples of any Materials publicly disseminated by such Party which utilize the other Party's Marks. Each Party will comply with all applicable laws, regulations, and customs and obtain any required government approvals pertaining to use of the other Party's marks. 6. INFRINGEMENT PROCEEDINGS. Each Party agrees to promptly notify the other Party of any unauthorized use of the other Party's Marks of which it has actual knowledge. Each Party will have the sole right and discretion to bring proceedings alleging infringement of its Marks or unfair competition related thereto; provided, however, that each Party agrees to provide the other Party with its reasonable cooperation and assistance with respect to any such infringement proceedings. 7. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants to the other Party that: (i) such Party has the full corporate right, power and authority to enter into this Agreement and to perform the acts required of it hereunder; (ii) the execution of this Agreement by such Party, and the performance by such Party of its obligations and duties hereunder, do not and will not violate any agreement to which such Party is a party or by which it is otherwise bound; (iii) when executed and delivered by such Party, this Agreement will constitute the legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its terms; and (iv) such Party acknowledges that the other Party makes no representations, warranties or agreements related to the subject matter hereof that are not expressly provided for in this Agreement. 8. CONFIDENTIALITY. Each Party acknowledges that Confidential Information may be disclosed to the other Party during the course of this Agreement. Each Party agrees that it will take reasonable steps, at least substantially equivalent to the steps it takes to protect its own proprietary information, during the term of this Agreement, and for a 14 CONFIDENTIAL period of three years following expiration or termination of this Agreement, to prevent the duplication or disclosure of Confidential Information of the other Party, other than by or to its employees or agents who must have access to such Confidential Information to perform such Party's obligations hereunder, who will each agree to comply with this section. Notwithstanding the foregoing, either Party may issue a press release or other disclosure containing Confidential Information without the consent of the other Party, to the extent such disclosure is required by law, rule, regulation or government or court order. In such event, the disclosing Party will provide at least five (5) business days prior written notice of such proposed disclosure to the other Party. Further, in the event such disclosure is required of either Party under the laws, rules or regulations of the Securities and Exchange Commission or any other applicable governing body, such Party will (i) redact mutually agreed-upon portions of this Agreement to the fullest extent permitted under applicable laws, rules and regulations and (ii) submit a request to such governing body that such portions and other provisions of this Agreement receive confidential treatment under the laws, rules and regulations of the Securities and Exchange Commission or otherwise be held in the strictest confidence to the fullest extent permitted under the laws, rules or regulations of any other applicable governing body. 9. LIMITATION OF LIABILITY; DISCLAIMER INDEMNIFICATION. 9.1. LIABILITY. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM BREACH OF THE AGREEMENT, THE SALE OF PRODUCTS, THE USE OR INABILITY TO USE THE AOL NETWORK, THE AOL SERVICE, AOL.COM OR THE AFFILIATED eToys SITE, OR ARISING FROM ANY OTHER PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS (COLLECTIVELY, "DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY WILL REMAIN LIABLE TO THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES ARE CLAIMED BY A THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT TO SECTION 9.3 OF THIS EXHIBIT F. EXCEPT AS PROVIDED IN SECTION 9.3 OF THIS EXHIBIT F, NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR MORE THAN $1,000,000; PROVIDED THAT EACH PARTY WILL REMAIN LIABLE FOR THE AGGREGATE AMOUNT OF ANY PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY PURSUANT TO SECTION 4 OF THE AGREEMENT. 9.2. NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE AOL NETWORK, THE AOL SERVICE, AOL.COM OR THE AFFILIATED eToys SITE, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING THE PROFITABILITY OF THE AFFILIATED ETOYS SITE. 9.3. INDEMNITY. Either Party will defend, indemnify, save and hold harmless the other Party and the officers, directors, agents, affiliates, distributors, franchisees and employees of the other Party from any and all third party claims, demands, liabilities, costs or expenses, including reasonable attorneys' fees ("Liabilities"), resulting from the indemnifying Party's material breach of any duty, representation, or warranty of this Agreement, except where Liabilities result from the gross negligence or knowing and willful misconduct of the other Party. 9.4. CLAIMS. Each Party agrees to (i) promptly notify the other Party in writing of any indemnifiable claim and give the other Party the opportunity to defend or negotiate a settlement of any such claim at such other Party's expense, and (ii) cooperate fully with the other Party, at that other Party's expense, in defending or settling such claim. AOL reserves the right, at its own expense, to assume the exclusive defense and control of any matter otherwise subject to indemnification by eToys hereunder, and in such event, eToys will have no further obligation to provide indemnification for such matter hereunder. 9.5. ACKNOWLEDGMENT. AOL and eToys each acknowledges that the provisions of this Agreement were negotiated to reflect an informed, voluntary allocation between them of all risks (both known and unknown) associated with the transactions contemplated hereunder. The limitations and disclaimers related to warranties and liability contained in this Agreement are intended to limit the circumstances and extent of liability. The provisions of this Section 6 will be enforceable independent of and severable from any other enforceable or unenforceable provision of this Agreement. 10. SOLICITATION OF AOL USERS. During the term of this Agreement, and for the two-year period following the expiration or termination of this Agreement, neither eToys nor its agents will use the AOL Network to (i) solicit, or 15 CONFIDENTIAL participate in the solicitation of AOL Users when that solicitation is for the benefit of any entity (including eToys) which could reasonably be construed to be or become in competition with AOL or (ii) promote any services which could reasonably be construed to be in competition with AOL, including, but not limited to, services available through the Internet. In addition, eToys may not send AOL Users e-mail communications promoting eToys' Products through the AOL Network without a "Prior Business Relationship." For purposes of this Agreement, a "Prior Business Relationship" will mean that the AOL User has either (i) engaged in a transaction with eToys through the AOL Network or (ii) voluntarily provided information to eToys through a contest, registration, or other communication, which included notice to the AOL User that the information provided by the AOL User could result in an e-mail being sent to that AOL User by eToys or its agents. A Prior Business Relationship does not exist by virtue of an AOL User's visit to an Affiliated eToys Site (absent the elements above). More generally, eToys will be subject to any standard policies regarding e-mail distribution through the AOL Network which AOL may implement. 11. COLLECTION OF USER INFORMATION. eToys is prohibited from collecting AOL Member screennames from public or private areas of the AOL Network, except as specifically provided below. eToys will ensure that any survey, questionnaire or other means of collecting AOL Member screennames or AOL User email addresses, names, addresses or other identifying information ("User Information"), including, without limitation, requests directed to specific AOL Member screennames and automated methods of collecting screennames (an "Information Request") complies with (i) all applicable laws and regulations and (ii) any privacy policies which have been issued by AOL in writing during the Term (the "AOL Privacy Policies"). Each Information Request will clearly and conspicuously specify to the AOL Users at issue the purpose for which User Information collected through the Information Request will be used (the "Specified Purpose"). 12. USE OF USER INFORMATION. eToys will restrict use of the User Information collected through an Information Request to the Specified Purpose. In no event will eToys (i) provide User Information to any third party (except to the extent specifically (a) permitted under the AOL Privacy Policies or (b) authorized by the members in question), (ii) rent, sell or barter User Information, (iii) identify, promote or otherwise disclose such User Information in a manner that identifies AOL Users as end-users of the AOL Service, AOL.com or the AOL Network or (iv) otherwise use any User Information in contravention of Section 10 above. Notwithstanding the foregoing, in the case of AOL Users who purchase Products from eToys, eToys will be entitled to use User Information from such AOL Users as part of eToy's aggregate list of Customers; provided that eToys's use does not in any way identify, promote or otherwise disclose such User Information in a manner that identifies AOL Users as end-users of the AOL Service. AOL.com or the AOL Network. In addition, eToys will not use any User Information for any purpose (including any Specified Purpose) not directly related to the business purpose of the Affiliated eToys Site. 13. EXCUSE. Neither Party will be liable for, or be considered in breach of or default under this Agreement on account of, any delay or failure to perform as required by this Agreement as a result of any causes or conditions which are beyond such Party's reasonable control and which such Party is unable to overcome by the exercise of reasonable diligence. 14. INDEPENDENT CONTRACTORS. The Parties to this Agreement are independent contractors. Neither Party is an agent, representative or partner of the other Party. Neither Party will have any right, power or authority to enter into any agreement for or on behalf of, or incur any obligation or liability of, or to otherwise bind, the other Party. This Agreement will not be interpreted or construed to create an association, agency, joint venture or partnership between the Parties or to impose any liability attributable to such a relationship upon either Party. 15. NOTICE. Any notice, approval, request, authorization, direction or other communication under this Agreement will be given in writing and will be deemed to have been delivered and given for all purposes on the delivery date if delivered by electronic mail on the AOL Network or (i) on the delivery date if delivered personally to the Party to whom the same is directed; (ii) one business day after deposit with a commercial overnight carrier, with written verification of receipt, or (iii) five business days after the mailing date, whether or not actually received, if sent by U.S. mail, return receipt requested, postage and charges prepaid, or any other means of rapid mail delivery for which a receipt is available, to the person(s) specified below at the address of the Party set forth in the first paragraph of this Agreement. 16. NO WAIVER. The failure of either Party to insist upon or enforce strict performance by the other Party of any provision of this Agreement or to exercise any right under this Agreement will not be construed as a waiver or relinquishment to any extent of such Party's right to assert or rely upon any such provision or right in that or any other instance; rather, the same will be and remain in full force and effect. 17. RETURN OF INFORMATION. Upon the expiration or termination of this Agreement, each Party will, upon the written request of the other Party, return or destroy (at the option of the Party receiving the request) all confidential information, documents, manuals and other materials specified the other Party. 16 CONFIDENTIAL 18. SURVIVAL. Sections 9 through 12 of this Exhibit F, will survive the completion, expiration, termination or cancellation of this Agreement. 19. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and supersedes any and all prior agreements of the Parties with respect to the transactions set forth herein. Neither Party will be bound by, and each Party specifically objects to, any term, condition or other provision which is different from or in addition to the provisions of this Agreement (whether or not it would materially alter this Agreement) and which is proffered by the other Party in any correspondence or other document, unless the Party to be bound thereby specifically agrees to such provision in writing. 20. AMENDMENT. No change, amendment or modification of any provision of this Agreement will be valid unless set forth in a written instrument signed by the Party subject to enforcement of such amendment, and in the case of AOL, by an executive of at least the same standing to the executive who signed the Agreement. 21. FURTHER ASSURANCES. Each Party will take such action (including, but not limited to, the execution, acknowledgment and delivery of documents) as may reasonably be requested by any other Party of the implementation or continuing performance of this Agreement. 22. ASSIGNMENT. eToys will not assign this Agreement or any right, interest or benefit under this Agreement without the prior written consent of AOL. Subject to the foregoing, this Agreement will be fully binding upon, inure to the benefit of and be enforceable by the Parties hereto and their respective successors and assigns. 23. CONSTRUCTION; SEVERABILITY. In the event that any provision of this Agreement conflicts with the law under which this Agreement is to be construed or if any such provision is held invalid by a court with jurisdiction over the Parties to this Agreement, (i) such provision will be deemed to be restated to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law, and (ii) the remaining terms, provisions, covenants and restrictions of this Agreement will remain in full force and effect. 24. REMEDIES. Except where otherwise specified, the rights and remedies granted to a Party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the Party may possess at law or in equity; provided that, in connection with any dispute hereunder, eToys will be not entitled to offset any amounts that it claims to be due and payable from AOL against amounts otherwise payable by eToys to AOL. 25. APPLICABLE LAW; JURISDICTION. This Agreement will be interpreted, construed and enforced in all respects in accordance with the laws of the Commonwealth of Virginia except for its conflicts of laws principles. Each Party irrevocably consents to the exclusive jurisdiction of the courts of the Commonwealth of Virginia and the federal courts situated in the Commonwealth of Virginia. In connection with any action to enforce the provisions of this Agreement, to recover damages or other relief for breach or default under this Agreement, or otherwise arising under or by reason of this Agreement. 26. EXPORT CONTROLS. Both Parties will adhere to all applicable laws, regulations and rules relating to the export of technical data and will not export or re-export any technical data, any products received from the other Party or the direct product of such technical data to any proscribed country listed in such applicable laws, regulations and rules unless properly authorized. 27. HEADINGS. The captions and headings used in this Agreement are inserted for convenience only and will not affect the meaning or interpretation of this Agreement. 28. COUNTERPARTS. This Agreement may be executed in counterparts, each of which will be deemed an original and all of which together will constitute one and the same document. 17 ADDENDUM TO INTERACTIVE MARKETING AGREEMENT This Addendum, dated January 1, 1998 (the "Revised Effective Date"), is to that certain Interactive Marketing Agreement dated October 1, 1997 by and between America Online, Inc. ("AOL"), and eToys Inc. ("eToys") (the "Agreement"). Defined terms that are used but not defined herein shall be as defined in the Agreement. The parties wish to amend the Agreement as follows: 1. PARAGRAPH 4.1, PAYMENTS. This clause shall be deleted in its entirety, and replaced with the following: "PAYMENTS. eToys will pay AOL an amount of Three Million One Hundred Thousand Dollars (US$3,100,000), to be paid as follows: [*] As indicated elsewhere herein, this Agreement supersedes eToys prior agreements with AOL related to advertising and placement in the AOL shopping channel (the "Prior Agreements"). In that regard, (i) eToys has no further payment obligations under the Prior Agreements (except with respect to invoices which have been received by eToys as of its execution of this Agreement) and (ii) any impressions delivered to eToys beginning as of the Effective Date will count towards the impressions commitments contained herein." 2. EXHIBIT A, PLACEMENT/PROMOTION PLAN. The paragraph titled: 'AOL Service Shopping Channel' shall be deleted in its entirety and replaced with the following: "AOL SERVICE SHOPPING CHANNEL [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. - * - 3. ORDER OF PRECEDENCE; STANDARD TERMS. This Addendum is supplementary to and modifies the Agreement. This Addendum supersedes provisions in the Agreement only to the extent that the terms of this Addendum expressly conflict with the provisions of the Agreement or such provisions are otherwise expressly invalidated by reference herein. 4. COUNTERPARTS. This Addendum may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of the date first written above. AMERICA ONLINE, INC. eTOYS INC. By: /s/ illegible By: /s/ Philip Polishook 2/16/98 ------------------------------- Name: illegible Name: Philip Polishook ----------------------------- Title: Title: Vice President Marketing ---------------------------- * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.7 14 EXHIBIT 10.7 ETOYS INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT DECEMBER 23, 1997 ETOYS INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT This Series A Preferred Stock Purchase Agreement (the "AGREEMENT") is made as of the 23rd day of December, 1997, by and between eToys Inc., a Delaware corporation (the "COMPANY") and the investors listed on EXHIBIT A attached hereto (each a "PURCHASER" and together the "PURCHASERS"). The parties hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED STOCK. 1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK. (a) The Company shall adopt and file with the Secretary of State of the State of Delaware on or before the Closing (as defined below) the First Amended and Restated Certificate of Incorporation in the form attached hereto as EXHIBIT B (the "RESTATED CERTIFICATE"). (b) Subject to the terms and conditions of this Agreement, each Purchaser agrees to purchase at the Closing and the Company agrees to sell and issue to each Purchaser at the Closing that number of shares of Series A Preferred Stock set forth opposite each such Purchaser's name on EXHIBIT A attached hereto at a purchase price of $0.62 per share. The shares of Series A Preferred Stock issued to the Purchaser pursuant to this Agreement shall be hereinafter referred to as the "STOCK." 1.2 CLOSING; DELIVERY. (a) The purchase and sale of the Stock shall take place at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California, at 12:00 p.m., on December 23, 1997, or at such other time and place as the Company and the Purchasers purchasing a majority of the shares of Stock mutually agree upon, orally or in writing (which time and place are designated as the "CLOSING"). (b) At the Closing, the Company shall deliver to each Purchaser a certificate representing the Stock being purchased thereby against payment of the purchase price therefor by check payable to the Company, wire transfer to the Company's bank account, cancellation of indebtedness, or any combination thereof. In the event that payment by a Purchaser is made, in whole or in part, by cancellation of indebtedness, then such Investor shall surrender to the Company for cancellation at the Closing any evidence of such indebtedness or shall executed an instrument of cancellation in form and substance acceptable to the Company. (c) If the full number of the authorized shares of Series A Preferred Stock of the Company is not sold at the Closing, the Company shall have the right, at any time prior to January 15, 1998, to sell the remaining authorized but unissued shares of Series A Preferred Stock to one or more additional purchasers as determined by the Company, or to any Purchaser hereunder who wishes to acquire additional shares of Series A Preferred Stock at the price and on the terms set forth herein, provided that any such additional purchaser shall be required to execute an Addendum Agreement substantially in the form attached hereto as EXHIBIT H. Any additional purchaser so acquiring shares of Series A Preferred Stock shall be considered a "Purchaser" for purposes of this Agreement, and any Series A Preferred Stock so acquired by such additional purchaser shall be considered "Stock" for purposes of this Agreement and all other agreements contemplated hereby. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Purchaser that, except as set forth on a Schedule of Exceptions attached hereto as EXHIBIT C, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION. The authorized capital of the Company consists, or will consist, immediately prior to the Closing, of: (a) Seven Million Thirty-Six Thousand Three Hundred (7,036,300) shares of Preferred Stock, all of which have been designated Series A Preferred Stock, none of which are issued and outstanding immediately prior to the Closing. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Certificate. (b) Fifty Million (50,000,000) shares of Common Stock, Ten Million Fifty Thousand (10,050,000) shares of which are issued and outstanding immediately prior to the Closing. All of the outstanding shares of Common Stock have been duly authorized, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. The Company has reserved Seven Million Thirty-Six Thousand Three Hundred (7,036,300) shares of Common Stock for issuance upon conversion of the Series A Preferred Stock. (c) The Company has reserved Two Million Nine Hundred Fifty Thousand (2,950,000) shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its 1997 Stock Option Plan duly adopted by the Board of Directors and approved by the Company stockholders (the "STOCK PLAN"). Of such reserved shares of Common Stock, options to purchase 1,276,093 shares have been granted and are currently outstanding, and 1,573,907 shares of Common Stock remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. (d) Except for currently outstanding options issued pursuant to the Stock Plan and warrants to purchase 50,000 shares of Common Stock, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or -2- similar rights) or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which effects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. 2.3 SUBSIDIARIES. The Company does not currently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement, in the form attached hereto as EXHIBIT D (the "INVESTORS' RIGHTS AGREEMENT"), the Right of First Refusal and Co-Sale Agreement in the form attached hereto as EXHIBIT E (the "CO-SALE AGREEMENT"), the Voting Agreement in the form attached hereto as EXHIBIT F (the "VOTING AGREEMENT" and the Letter Agreement between Intel Corporation and the other parties thereto in the form attached hereto as EXHIBIT I (the "INTEL LETTER AGREEMENT") and collectively with this Agreement, the Investors' Rights Agreement, the Co-Sale Agreement and the Voting Agreement (the "AGREEMENTS"), the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance and delivery of the Stock and the Common Stock issuable upon conversion of the Stock (together, the "SECURITIES") has been taken or will be taken prior to the Closing, and the Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally, as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued to the Purchasers hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable state and federal securities laws. Based in part upon the representations of the Purchasers in this Agreement and subject to the provisions of Section 2.7 below, the Stock will be issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Stock has been duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Restated Certificate, shall be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable federal and state securities laws and will be issued in compliance with all applicable federal and state securities laws. -3- 2.6 OFFERING. Subject in part to the truth and accuracy of each Purchaser's representations set forth in Section 3 of the Agreement, the offer, sale and issuance of the Series A Preferred Stock as contemplated by this Agreement are exempt from the registration requirements of any applicable stock and federal securities laws, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.7 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for filings pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder, other applicable state securities laws and Regulation D of the Securities Act of 1933, as amended (the "SECURITIES ACT"). 2.8 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company or any of its subsidiaries that questions the validity of the Agreements or the right of the Company to enter into them, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition or affairs of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. Neither the Company nor any of its subsidiaries is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its subsidiaries currently pending or which the Company or any of its subsidiaries intends to initiate. 2.9 PATENTS AND TRADEMARKS. To its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, tradenames, copyrights, trade secrets, licenses, information and proprietary rights and processes and, to its knowledge, all patent rights necessary for its business without any conflict with, or infringement of, the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, servicemarks, tradenames, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed to be conducted in the Business Plan, would violate any of the patents, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights or processes of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interest of the Company or that would conflict with the Company's business as proposed to be conducted in the Business Plan. Neither the execution or delivery of this Agreement or the agreements, nor the carrying on of the Company's business by the employees -4- of the Company, nor the conduct of the Company's business as proposed in the Business Plan, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of (i) idealab! and (ii) any of the Company's employees or people it currently intends to hire made prior to or outside the scope of their employment by the Company. No employee of idealab! has developed any technology which constitutes a material portion of any of the Company's products. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. As of the date of the Closing, the Company is not in violation or default of any provisions of its Restated Certificate or Bylaws or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance of the Agreements and the consummation of the transactions contemplated hereby or thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any material permit, license, authorization applicable to the Company, its business or operations or any of its assets or properties, which suspension, revocation, impairment, forfeiture or nonrenewal will have a material adverse effect on the Company's business and operations. 2.11 AGREEMENTS; ACTION. (a) There are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company or any of its subsidiaries is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company or any of its subsidiaries in excess of, $10,000, (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company or any of its subsidiaries, (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products, or (iv) indemnification by the Company with respect to infringements of proprietary rights. (c) Neither the Company nor any of its subsidiaries has (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $10,000 or in excess of $25,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, -5- or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, the indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity shall be aggregated for the purpose of meeting the individual minimum dollar amounts with such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or, at the time of Closing, subject to any restriction under its Restated Certificate or Bylaws, that adversely affects its business, its properties or its financial condition. 2.12 DISCLOSURE. The Company has fully provided the Purchasers with all the information that the Purchasers have requested for deciding whether to acquire the Stock and all information that the Company believes is reasonably necessary to enable the Purchasers to make such a decision, including certain of the Company's projections describing its proposed business (collectively, the "BUSINESS PLAN"). To the Company's knowledge, no representation or warranty of the Company contained in this Agreement and the exhibits attached hereto, any certificate furnished or to be furnished to Purchasers at the Closing, or the Business Plan (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. To the extent the Business Plan was prepared by management of the Company, the Business Plan and the financial and other projections contained in the Business Plan were prepared in good faith; however, the Company does not warrant that it will achieve such projections. 2.13 NO CONFLICT OF INTEREST. The Company is not indebted, directly or indirectly, to any (i) of its officers or directors or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees and (ii) affiliate of the Company. To the Company's knowledge, none of the Company's officers or directors, or any members of their immediate families, or any affiliate of the Company, are, directly or indirectly, indebted to the Company (other than in connection with purchases of the Company's stock) or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company except that officers, directors and/or stockholders of the Company may own stock in (but not exceeding two percent of the outstanding capital stock of) any publicly traded companies that may compete with the Company. To the Company's knowledge, none of the Company's officers or directors or any members of their immediate families, or any affiliate of the Company, are, directly or indirectly, interested in any material contract with the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.14 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated in the Investors' Rights Agreement, the Company has not granted or agreed to grant any -6- registration rights, including piggyback rights, to any person or entity. To the Company's knowledge, except as contemplated in the Voting Agreement, no stockholder of the Company has entered into any agreements with respect to the voting of capital shares of the Company. 2.15 PRIVATE PLACEMENT. Subject in part to the truth and accuracy of the Purchasers' representations set forth in this Agreement, the offer, sale and issuance of the Securities as contemplated by this Agreement is exempt from the registration requirements of the Securities Act. 2.16 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.17 FINANCIAL STATEMENTS. The Company has made available to each Purchaser its unaudited financial statements (including balance sheet and profit and loss statement) as of September 30, 1997 (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated, except that the unaudited Financial Statements may not contain all footnotes required by generally accepted accounting principles. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to September 30, 1997 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate are not material to the financial condition or operating results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnity of any indebtedness of any other person, firm or corporation. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.18 CHANGES. Since September 30, 1997, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the business, properties, prospects, or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted in the Business Plan); -7- (c) any waiver or compromise by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the business, properties, prospects or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted); (e) any material change to a material contract or agreement by which the Company or any of its assets is bound or subject; (f) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder; (g) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (h) any resignation or termination of employment of any officer or key employee of the Company; and the Company does not know of any impending resignation or termination of employment of any such officer or key employee; (i) receipt of notice that there has been a loss of, or material order cancellation by, any major customer of the Company; (j) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (k) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; (l) any declaration, setting aside or payment or other distribution in respect to any of the Company's capital stock, or any direct or indirect redemption, purchase, or other acquisition of any of such stock by the Company; (m) to the best of the Company's knowledge, any other event or condition of any character that might materially and adversely affect the business, properties, prospects or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted in the Business Plan); or (n) any arrangement or commitment by the Company to do any of the things described in this Section 2.18. 2.19 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. -8- 2.20 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax returns and reports (including information returns and reports) as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, except those contested by it in good faith that are listed in the Schedule of Exceptions. The provision for taxes of the Company as shown in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended (the "CODE"), to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns have ever been audited by governmental authorities. Since the date of the Financial Statements, the Company has not incurred any taxes, assessments or governmental charges other than in the ordinary course of business and the Company has made adequate provisions on its books or accounts for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. 2.21 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed; and the Company has insurance against other hazards, risks and liabilities to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated. 2.22 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company, nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have any present intention to terminate the employment of any of the foregoing. The employment of each officer and employee of the Company is terminable at the will of the Company. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity laws and with other laws related to -9- employment. The Company is not a party to or bound to any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. 2.23 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENTS. Each former and current employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms delivered to the counsel for the Purchasers. The Company is not aware that any of its former and current employees or consultants is in violation thereof, and the Company will use its best efforts to prevent any such violation. All consultants to or vendors of the Company with access to confidential information of the Company are parties to a written agreement substantially in the form or forms provided to counsel for the Purchasers under which, among other things, each such consultant or vendor is obligated to maintain the confidentiality of confidential information of the Company. The Company is not aware that any of its consultants or vendors are in violation thereof, and the Company will use its best efforts to prevent any such violation. 2.24 PERMITS. The Company and each of its subsidiaries has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.25 CORPORATE DOCUMENTS. The Restated Certificate and Bylaws of the Company are in the form provided to counsel for the Purchasers. The copy of the minute books of the Company provided to the Purchasers' counsel contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and reflects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes accurately in all material respects. 2.26 SECTION 83(b) ELECTIONS. To the best of the Company's knowledge, all individuals who have purchased unvested shares of the Company's Common Stock have timely filed elections under Section 83(b) of the Code. 2.27 SIGNIFICANT CUSTOMERS AND SUPPLIERS. No major customer or supplier as of the date the Financial Statements has materially reduced or threatened to terminate or materially reduce its purchases from or provision of products or services to the Company, as the case may be. 2.28 QUALIFIED SMALL BUSINESS STOCK. As of the Closing, (i) the Company will be an eligible corporation as defined in Section 1202(e)(4) of the Code, (ii) the Company will not have made any purchases of its own stock during the one-year period proceeding the Closing having an aggregate value exceeding five percent (5%) of the aggregate value of all its stock as of the beginning of such period and (iii) the Company's aggregate gross assets, as defined by Code Section 1202(d)(2), at no time since incorporation and through the Closing have exceeded -10- or will exceed $50 million, taking into account the assets of any corporations required to be aggregated with the Company in accordance with the Code Section 1202(d)(3). 2.29 REAL PROPERTY HOLDING COMPANY. The Company is not a real property holding company within the meaning of Section 897 of the Code. 2.30 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted rights to manufacture, produce, assemble, lease, market or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute market or sell its products. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents and warrants to the Company that: 3.1 AUTHORIZATION. The Agreements, when executed and delivered by the Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies, or (b) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Purchaser in reliance upon the Purchaser's representation to the Company, which by the Purchaser's execution of this Agreement, the Purchaser hereby confirms, that the Securities to be acquired by the Purchaser will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Purchaser represents that it has full power and authority to enter into this Agreement. The Purchaser has not been formed for the specific purpose of acquiring the Securities. 3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity to discuss the Company's business, management, financial affairs and the terms and conditions of the offering of the Stock with the Company's management and has had an opportunity to review the Company's facilities. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Purchasers to rely thereon. 3.4 RESTRICTED SECURITIES. The Purchaser understands that the Securities have not been registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona -11- fide nature of the investment intent and the accuracy of the Purchaser's representations as expressed herein. The Purchaser understands that the Securities are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Securities for resale except as set forth in the Investors' Rights Agreement. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. 3.5 NO PUBLIC MARKET. The Purchaser understands that no public market now exists for any of the securities issued by the Company, and that the Company has made no assurances that a public market will ever exist for the Securities. 3.6 LEGENDS. The Purchaser understands that the Securities and any securities issued in respect of or exchange for the Securities, may bear one or all of the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (b) Any legend set forth in the other Agreements. (c) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended. 3.7 ACCREDITED INVESTOR. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Act. 3.8 FOREIGN INVESTORS. If the Purchaser is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended), such Purchaser hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Stock or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Stock, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Stock. Such Purchaser's subscription and payment for and continued beneficial ownership -12- of the Stock, will not violate any applicable securities or other laws of the Purchaser's jurisdiction. 4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to the Purchasers at the Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating that there shall have been no adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Financial Statements. 4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Purchasers' special counsel, and they shall have received all such counterpart and certified or other copies of such documents as they may reasonably request. 4.6 OPINION OF COMPANY COUNSEL. The Purchasers shall have received from Venture Law Group, A Professional Corporation, counsel for the Company, an opinion, dated as of the Closing, in substantially the form of EXHIBIT G. 4.7 BOARD OF DIRECTORS. As of the Closing, the holders of a majority of the outstanding Series A Preferred Stock will have the right to designate one (1) board seat, which designee shall initially be a representative of DynaFund, increasing the current size of the Board to four members which includes Edward C. Lenk, William Gross, Tony Hung and Peter Hart. 4.8 INVESTORS' RIGHTS AGREEMENT. The Company, each Purchaser and each Founder shall have executed and delivered the Investors' Rights Agreement in substantially the form attached as EXHIBIT D. -13- 4.9 CO-SALE AGREEMENT. The Company, each Purchaser, and each Founder shall have executed and delivered the Co-Sale Agreement in substantially the form attached as EXHIBIT E. 4.10 VOTING AGREEMENT. The Company and each Purchaser shall have executed and delivered the Voting Agreement in substantially the form attached as EXHIBIT F. 4.11 RESTATED CERTIFICATE. The Company shall have filed the Restated Certificate with the Secretary of State of Delaware on or prior to the Closing Date, which shall continue to be in full force and effect as of the Closing Date. 4.12 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. The Company and each of its employees shall have entered into the Company's standard form Confidential Information and Invention Assignment Agreement, in substantially the form provided to the Purchasers. 4.13 INTEL LETTER AGREEMENT. The Company, Edward C. Lenk, Frank C. Han and each Purchaser shall have executed and delivered the Intel Letter Agreement in substantially the form attached as EXHIBIT I. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Purchaser contained in Section 3 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed by the Purchasers on or prior to the Closing shall have been performed or complied with in all material respects. 5.3 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 6. MISCELLANEOUS. 6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this Agreement, the warranties, representations and covenants of the Company and the Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Purchasers or the Company. -14- 6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 6.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 6.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 6.6 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth below or on EXHIBIT A hereto, or as subsequently modified by written notice, and (a) if to the Company, with a copy to Venture Law Group, A Professional Corporation, 2800 Sand Hill Road, Menlo Park, California 94025, Attention: Glen R. Van Ligten or (b) if to DynaFund L.P. and DynaFund International L.P., with a copy to Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park, California 94025, Attention: Bennett L. Yee. 6.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which each Purchaser or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.8 FEES AND EXPENSES. The Company shall pay at Closing the reasonable fees and expenses of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, the counsel for DynaFund L.P. and DynaFund International L.P., incurred with respect to this Agreement, the documents referred to herein and the transactions contemplated hereby and thereby, provided such fees and expenses do not exceed $12,500. -15- 6.9 ATTORNEY'S FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended with the written consent of the Company and the holders of at least 66 2/3% of the Common Stock issued or issuable upon conversion of the Stock. Any amendment or waiver effected in accordance with this Section 6.10 shall be binding upon the Purchasers and each transferee of the Stock (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company. 6.11 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 6.13 ENTIRE AGREEMENT. This Agreement, the documents referred to herein and certain side letter agreements between the Company and Intel Corporation and the Company and the DynaFund entities concerning Board visitation rights constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements relating to the subject matter hereof existing between the parties hereto are expressly canceled. 6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY -16- SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT. 6.15 CONFIDENTIALITY. Each party hereto agrees that, except with the prior written permission of the other party, it shall at all times keep confidential and not divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other parties to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of Stock purchased hereunder. Without granting any right or license, each party agrees that the foregoing clauses shall not apply with respect to any information after five (5) years following the disclosure thereof or any information that the other party can document (i) is or becomes (through no improper action or inaction by such party or any affiliate, agent, consultant or employee) generally available to the public, (ii) was in its possession known by it prior to receipt from the other party, or (iii) was rightfully disclosed to it by a third party without restriction. The provisions of this Section 6.15 shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby, including, without limitation, the Intel Letter Agreement. 6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Securities. 6.17 WAIVER OF CONFLICTS. Each party to this Agreement acknowledges that Venture Law Group, counsel for the Company, has in the past performed and may continue to perform legal services for certain of the Purchasers in matters unrelated to the transactions described in this Agreement, including the representation of such Purchasers in venture capital financings and other matters. Accordingly, each party to this Agreement hereby (a) acknowledges that they have had an opportunity to ask for information relevant to this disclosure; and (b) gives its informed consent to Venture Law Group's representation of certain of the Purchasers in such unrelated matters and to Venture Law Group's representation of the Company in connection with this Agreement and the transactions contemplated hereby. [Signature Pages Follow] -17- The parties have executed this Series A Preferred Stock Purchase Agreement as of the date first written above. COMPANY: eTOYS INC. By: /s/ Edward C. Lenk ------------------------------------- Edward C. Lenk President and Chief Executive officer Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 SIGNATURE PAGE TO PURCHASE AGREEMENT PURCHASERS: DYNAFUND LP By: /s/ Denny R.S. Ko ------------------------------------------ Name: Denny Ko ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: 21311 Howtherne Blvd, Suite 30 ------------------------------------- Tarronne, CA 70503 ------------------------------------- DYNAFUND INTERNATIONAL LP By: /s/ Denny R.S. Ko ------------------------------------------ Name: Denny Ko ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: 21311 Howtherne Blvd, Suite 30 ------------------------------------- Tarronne, CA 70503 ------------------------------------- SIGNATURE PAGE TO PURCHASE AGREEMENT PURCHASER: INTEL CORPORATION By: /s/ illedgible ------------------------------------------ Name: ---------------------------------------- (print) Title: --------------------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052 Attn: Treasurer Fax: (408) 765-6038 SIGNATURE PAGE TO eTOYS INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: /s/ William S. Elkus --------------------------------------------- William S. Elkus Address: 231 Alma Real Drive Pacific Palisades, CA 90272 MOORE GLOBAL INVESTMENTS, LTD. A BVI Corporation By: Moore Capital Management, Inc. By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas ------------------------------------- NY NY 10020 ------------------------------------- REMINGTON INVESTMENT STRATEGIES, L.P. A Delaware Partnership By: Moore Capital Advisors L.L.C. By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas ------------------------------------- NY 10020 ------------------------------------- SIGNATURE PAGE TO PURCHASE AGREEMENT PURCHASERS: MULTI STRATEGIES FUND, L.P. A Delaware Partnership By: Moore Capital Management, Inc. By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas ------------------------------------- NY NY 10020 ------------------------------------- MULTI STRATEGIES FUND, LTD. A Bahamian IBC By: Moore Capital Management, Inc. By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas ------------------------------------- NY NY 10020 ------------------------------------- SIGNATURE PAGE TO PURCHASE AGREEMENT PURCHASERS: /s/ Glen R. Van Ligten --------------------------------------------- Glen R. Van Ligten Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 /s/ James L. Brock --------------------------------------------- James L. Brock Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 SIGNATURE PAGE TO PURCHASE AGREEMENT PURCHASER: By: /s/ Kenneth M. Deemer ------------------------------------------ Name: Kenneth M. Deemer ---------------------------------------- (print) Title: --------------------------------------- Address: 2401 Pine Ave ------------------------------------- Manhattan Beach, CA 902 ------------------------------------- PURCHASER: By: /s/ Thomas Elden ------------------------------------------ Name: Thomas Elden ---------------------------------------- (print) Title: --------------------------------------- Address: c/o Grosverner Capital Management ------------------------------------- 333 W. Wacker Drive, Suite 1600 ------------------------------------- Chicago, IL 60606 ------------------------------------- PURCHASER: By: /s/ Brett Fisher ------------------------------------------ Name: Brett Fisher ---------------------------------------- (print) Title: --------------------------------------- Address: 1290 Sharon Park Dr #51 ------------------------------------- Menlo Park, CA 94025 ------------------------------------- PURCHASER: By: /s/ Andrew J. Greenebaum ------------------------------------------ Name: Andrew J. Greenebaum ---------------------------------------- (print) Title: --------------------------------------- Address: CD Radio Inc. ------------------------------------- 730 Fifth Avenue, 9th Floor ------------------------------------- New York, NY 10019 ------------------------------------- PURCHASER: By: /s/ Peter C.M. Hart ------------------------------------------ Name: Peter C.M. Hart ---------------------------------------- (print) Title: illeible --------------------------------------- Address: illeible ------------------------------------- ------------------------------------- PURCHASER: By: /s/ David Hodess ------------------------------------------ Name: David Hodess ---------------------------------------- (print) Title: --------------------------------------- Address: 9925 Robbin Dr ------------------------------------- illeible ------------------------------------- PURCHASER: By: /s/ Mark Kozin ------------------------------------------ Name: Mark Kozin ---------------------------------------- (print) Title: --------------------------------------- Address: illeible ------------------------------------- ------------------------------------- PURCHASER: By: /s/ Edward C. Lenk ------------------------------------------ Name: Edward C. Lenk ---------------------------------------- (print) Title: --------------------------------------- Address: 15 Saddler Lane ------------------------------------- illegible ------------------------------------- PURCHASER: By: /s/ Richard D. Nanula ------------------------------------------ Name: Richard D. Nanula ---------------------------------------- (print) Title: --------------------------------------- Address: 3348 Clerendon Rd ------------------------------------- Beverly Hills, CA 90210 ------------------------------------- PURCHASER: By: /s/ Robert Sheriff ------------------------------------------ Name: Robert Sheriff ---------------------------------------- (print) Title: --------------------------------------- Address: 211 East 70th Street ------------------------------------- New York, NY 10021 ------------------------------------- PURCHASER: By: /s/ Allan R. Sheriff/Karen A. Sheriff ------------------------------------------ Name: Allan R. Sheriff/Karen A. Sheriff ---------------------------------------- (print) Title: --------------------------------------- Address: 29 Weatherfield Dr. ------------------------------------- Newton, CA 18940 ------------------------------------- PURCHASER: By: /s/ Thomas O. Staggs ------------------------------------------ Name: Thomas O. Staggs ---------------------------------------- (print) Title: --------------------------------------- Address: ------------------------------------- ------------------------------------- PURCHASER: By: /s/ Arnold Whitman ------------------------------------------ Name: Arnold Whitman ---------------------------------------- (print) Title: President Chief --------------------------------------- Address: 2 Ravinia Dr. Suite 1850 ------------------------------------- Atlanta GA. 30396 ------------------------------------- PURCHASER: By: /s/ Kenneth Wong ------------------------------------------ Name: Kenneth Wong ---------------------------------------- (print) Title: an individual --------------------------------------- Address: 1305 Circle Drive ------------------------------------- San Marino CA 91108 ------------------------------------- PURCHASER: By: /s/ Richard Bock ------------------------------------------ Name: Richard Bock ---------------------------------------- (print) Title: --------------------------------------- Address: 625 21st Place ------------------------------------- San Monica, CA 90402 ------------------------------------- PURCHASER: By: /s/ John T. Cahill ------------------------------------------ Name: John T. Cahill ---------------------------------------- (print) Title: --------------------------------------- Address: 420 Davis Ave ------------------------------------- Greenwich, CA 06830 ------------------------------------- PURCHASER: By: /s/ Jeff Colin ------------------------------------------ Name: Jeff Colin ---------------------------------------- (print) Title: --------------------------------------- Address: 18 Cuffalen Park ------------------------------------- San Rafod, CA 94901 ------------------------------------- Fax: 415 834-7822 ------------------------------------- PURCHASER: By: /s/ Stephen de Kanter ------------------------------------------ Name: Stephen de Kanter ---------------------------------------- (print) Title: President Latin America --------------------------------------- Address: 1 Albambra Plaza ------------------------------------- Coral Galdes, FL 33134 ------------------------------------- PURCHASER: By: /s/ Cristina Fernandez-Carol ------------------------------------------ Name: Cristina Fernandez-Carol ---------------------------------------- (print) Title: --------------------------------------- Address: 1327 Pacific St. ------------------------------------- Santa Monica, CA 90805 ------------------------------------- PURCHASER: By: /s/ Geoffrey P.M. Goodman ------------------------------------------ Name: Geoffrey P.M. Goodman ---------------------------------------- (print) Title: --------------------------------------- Address: P.O. Box 675887 ------------------------------------- Rancho Santa Fe, CA 92067 ------------------------------------- PURCHASER: By: /s/ Wesley Hein ------------------------------------------ Name: Wesley Hein ---------------------------------------- (print) Title: --------------------------------------- Address: 779 Latimer Road ------------------------------------- Santa Monica, CA 90402 ------------------------------------- PURCHASER: By: /s/ Bruce Hendricks ------------------------------------------ Name: Bruce Hendricks ---------------------------------------- (print) Title: Principal --------------------------------------- Address: 11844 Beekman Place ------------------------------------- Potomac, Maryland, 20854 ------------------------------------- Fax: (301) 951-3240 ------------------------------------- PURCHASER: By: /s/ James Hertling ------------------------------------------ Name: James Hertling ---------------------------------------- (print) Title: --------------------------------------- Address: illegible ------------------------------------- ------------------------------------- PURCHASER: By: /s/ Michael Joe ------------------------------------------ Name: Michael Joe ---------------------------------------- (print) Title: --------------------------------------- Address: 563 Everett Street ------------------------------------- Wardwood, MA 02090 ------------------------------------- PURCHASER: By: /s/ Hydra Global Investments, Inc. ------------------------------------------ Name: Mimi Kwon ---------------------------------------- (print) Title: Investment Officer --------------------------------------- Address: Abott Building, 2nd Floor ------------------------------------- Roadwill, Tortaor, RVL ------------------------------------- PURCHASER: By: /s/ Keith Kitani ------------------------------------------ Name: Keith Kitani ---------------------------------------- (print) Title: --------------------------------------- Address: 2755 Kesey Lane ------------------------------------- San Jose, CA 95132 ------------------------------------- PURCHASER: By: /s/ Marcee Kleinman ------------------------------------------ Name: Marcee Kleinman ---------------------------------------- (print) Title: --------------------------------------- Address: 4334 Jubilo Dr ------------------------------------- Tarzana Ca 91388-6205 ------------------------------------- PURCHASER: By: /s/ Christopher J. Loh ------------------------------------------ Name: Christopher J. Loh ---------------------------------------- (print) Title: --------------------------------------- Address: illegible ------------------------------------- illegible ------------------------------------- PURCHASER: By: /s/ Linda Mac Cannell ------------------------------------------ Name: Linda Mac Cannell ---------------------------------------- (print) Title: --------------------------------------- Address: 3016 Conrad Dr. N.W. ------------------------------------- Calgary Alberta, Canada ------------------------------------- PURCHASER: By: /s/ Donald Mapel ------------------------------------------ Name: Donald Mapel ---------------------------------------- (print) Title: --------------------------------------- Address: 813 E. 4th Ave ------------------------------------- Durangh CA 81341 ------------------------------------- PURCHASER: By: /s/ Franis B. Mapel ------------------------------------------ Name: Franis B. Mapel ---------------------------------------- (print) Title: --------------------------------------- Address: 1928 St. Albnas Rd. ------------------------------------- San. Marinco, CA 91108 ------------------------------------- PURCHASER: By: /s/ Adam M. Palley ------------------------------------------ Name: Adam M. Palley ---------------------------------------- (print) Title: --------------------------------------- Address: 69 Fifth Ave, 16D ------------------------------------- New York, NY 10003 ------------------------------------- PURCHASER: /s/ Burt Polishook By: /s/ Sandy Polishook ------------------------------------------ Name: Sandy Polishook and Burt Polishook ---------------------------------------- (print) Title: --------------------------------------- Address: 3931 Bay Shore Rd. ------------------------------------- Saranota, Fl 34234 ------------------------------------- PURCHASER: By: /s/ Mark D. Rozells ------------------------------------------ Name: Mark D. Rozells ---------------------------------------- (print) Title: --------------------------------------- Address: 2334 Bronson Hill Dr. ------------------------------------- Los Angeles, CA 90068 ------------------------------------- PURCHASER: By: /s/ Raymond Sheen ------------------------------------------ Name: Raymond Sheen ---------------------------------------- (print) Title: --------------------------------------- Address: 136 Middle River Rd ------------------------------------- Danbury CT 06811 ------------------------------------- PURCHASER: By: /s/ Wendy Smith ------------------------------------------ Name: Wendy Smith ---------------------------------------- (print) Title: --------------------------------------- Address: 561 Jackson Dr. ------------------------------------- Palo Alto, CA 94303 ------------------------------------- PURCHASER: By: /s/ Alan G. Stanford ------------------------------------------ Name: Alan G. Stanford ---------------------------------------- (print) Title: Trustee --------------------------------------- Address: P.O. Box 300 ------------------------------------- Deer Harbor, WA 98243 ------------------------------------- PURCHASER: By: /s/ Larry N. Summers ------------------------------------------ Name: Larry N. Summers ---------------------------------------- (print) Title: --------------------------------------- Address: ------------------------------------- ------------------------------------- PURCHASER: By: /s/ Michael Toporek ------------------------------------------ Name: Michael Toporek ---------------------------------------- (print) Title: --------------------------------------- Address: ------------------------------------- ------------------------------------- PURCHASER: By: /s/ Norman Tsang ------------------------------------------ Name: Norman Tsang ---------------------------------------- (print) Title: --------------------------------------- Address: 20 Mellen St. ------------------------------------- Cambridge MA 02638 ------------------------------------- SIGNATURE PAGE TO PURCHASE AGREEMENT EXHIBITS Exhibit A - Schedule of Purchasers Exhibit B - Form of Amended and Restated Certificate of Incorporation Exhibit C - Schedule of Exceptions to Representations and Warranties Exhibit D - Form of Investors' Rights Agreement Exhibit E - Form of Right of First Refusal and Co-Sale Agreement Exhibit F - Form of Voting Agreement Exhibit G - Form of Legal Opinion of Venture Law Group Exhibit H - Form of Addendum Agreement Exhibit I - Form of Intel Letter Agreement EXHIBIT A SCHEDULE OF PURCHASERS EXHIBIT A SCHEDULE OF PURCHASERS
SERIES A PREFERRED NAME STOCK PURCHASE PRICE (SHARES) (CASH/WIRE TRANSFER) DynaFund L.P. 691,661 $ 428,829.82 DynaFund International L.P. 921,242 $ 571,170.04 Intel Corporation 1,612,903 $ 999,999.86 William S. Elkus 80,645 $ 49,999.90 Moore Global Investments, Ltd. 824,866 $ 511,416.92 Remington Investment Strategies, L.P. 68,952 $ 42,750.24 Multi Strategies Fund, L.P. 114,919 $ 71,249.78 Multi Strategies Fund Ltd. 523,521 $ 324,583.02 James L. Brock 8,064 $ 4,999.68 Glen R. Van Ligten 3,226 $ 2,000.12 - ------------------ ------------------- -------------------- Subtotal: 4,849,999 $ 3,006,999.38 SERIES A PREFERRED NAME STOCK PURCHASE PRICE (SHARES) (CANCELLATION OF DEBT) Ken Deemer 82,348 $ 51,055.76 Thomas Elden 24,704 $ 15,316.48 Brett Fisher 16,469 $ 10,210.78 Andrew Greenebaum 41,174 $ 25,527.88 Peter Hart 32,939 $ 20,422.18 David Hodess 57,643 $ 35,738.66 Marc Kozin 32,939 $ 20,422.18 Edward Lenk 32,939 $ 20,422.18 Richard Nanula 41,174 $ 25,527.88 Robert Sheriff 41,174 $ 25,527.88 Alan and Karen Sheriff 41,174 $ 25,527.88 Tom Staggs 49,409 $ 30,633.58 Arnold Whitman 41,174 $ 25,527.88 Ken Wong 82,348 $ 51,055.76 Richard Bock and Helene Rosenzweig 40,885 $ 25,348.70 John Cahill 16,354 $ 10,139.48 Jeff Colin 40,885 $ 25,348.70 Stephen De Kanter 40,885 $ 25,348.70 Cristina Fernandez 16,354 $ 10,139.48 Geoff Goodman 40,885 $ 25,348.70 Wesley Hein 40,885 $ 25,348.70 Bruce Hendricks 81,771 $ 50,698.02 James Hertling 24,531 $ 15,209.22 Michael Joe 24,531 $ 15,209.22 Mimi Kim/Hydra Global Investments 40,885 $ 25,348.70 Keith Kitani 16,354 $ 10,139.48 Marcee Kleinman 57,240 $ 35,488.80 Chris Loh 16,354 $ 10,139.48 Linda MacCannell 32,708 $ 20,278.96 Frank Mapel 40,885 $ 25,348.70 Don Mapel 40,885 $ 25,348.70 Adam Palley 24,531 $ 15,209.22
EXHIBIT A SCHEDULE OF PURCHASERS
SERIES A PREFERRED NAME STOCK PURCHASE PRICE (SHARES) (CANCELLATION OF DEBT) Burton and Sandra Polishook 16,354 $ 10,139.48 Mark Rozells 40,885 $ 25,348.70 Ray Sheen 16,354 $ 10,139.48 Wendy Smith 16,354 $ 10,139.48 Alan Stanford 40,885 $ 25,348.70 Larry Summers 40,885 $ 25,348.70 Mike Toporek 24,531 $ 15,209.22 Norman Tsang 16,354 $ 10,139.48 - ------------ ------------------- -------------------- SUBTOTAL: 1,468,018.00 $ 910,171.16 TOTAL: 6,318,017.00 $ 3,917,170.54 ------------------- -------------------- ------------------- --------------------
EXHIBIT B FORM OF FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ETOYS INC. The undersigned, Edward C. Lenk and Frank C. Han hereby certify that: 1. They are the duly elected and acting President and Secretary, respectively, of eToys Inc., a Delaware corporation. 2. The Certificate of Incorporation of this corporation was originally filed with the Secretary of State of Delaware on November 8, 1996. 3. The Certificate of Incorporation of this corporation shall be amended and restated to read in full as follows: ARTICLE I "The name of this corporation is eToys Inc. (the "CORPORATION"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 15 East North Street, Dover, County of Kent, Delaware 19901. The name of its registered agent at such address is Incorporating Services, Ltd. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. ARTICLE IV (A) CLASSES OF STOCK. The Corporation is authorized to issue two classes of stock to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK." The total number of shares which the Corporation is authorized to issue is Fifty-Seven Million Thirty-Six Thousand Three Hundred (57,036,300) shares, each with a par value of $0.0001 per share. Fifty Million (50,000,000) shares shall be Common Stock and Seven Million Thirty-Six Thousand Three Hundred (7,036,300) shares shall be Preferred Stock. (B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The Preferred Stock authorized by this First Amended and Restated Certificate of Incorporation may be issued from time to time in one or more series. The first series of Preferred Stock shall be designated "SERIES A PREFERRED STOCK" and shall consist of Seven Million Thirty-Six Thousand Three Hundred (7,036,300) shares. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock are as set forth below in this Article IV(B). 1. DIVIDEND PROVISIONS. (a) Subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of shares of Series A Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, at the rate of $0.043 per share per annum on each outstanding share of Series A Preferred Stock, (as adjusted for any stock splits, stock dividends, recapitalizations or the like) or, if greater (as determined on a per annum basis and on an as converted basis for the Series A Preferred Stock), an amount equal to that paid on any other outstanding shares of this corporation) payable quarterly when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. (b) After payment of such dividends, any additional dividends shall be distributed among all holders of Common Stock and all holders of Series A Preferred Stock in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Series A Preferred Stock were converted to Common Stock at the then effective conversion rate. 2. LIQUIDATION. (a) PREFERENCE. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to $0.62 per share for each share of Series A Preferred Stock then held by them, plus declared but unpaid dividends. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock that may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive. (b) REMAINING ASSETS. Upon the completion of the distribution required by Section 2(a) above and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of the Corporation available for distribution to stockholders shall be distributed among the holders of the Series A Preferred Stock and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series A Preferred Stock) until -2- such holders of Series A Preferred Stock shall have received an aggregate of $1.86 per share (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (including amounts paid pursuant to Section 2(a) above); thereafter, subject to the rights of series of Preferred Stock that may from time to time come into existence, if assets remain in the Corporation, the holders of the Common Stock of the Corporation shall receive all of the remaining assets of the Corporation pro rata based on the number of shares of Common Stock held by each. (c) CERTAIN ACQUISITIONS. (i) DEEMED LIQUIDATION. For purposes of this Section 2, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation); or (B) a sale of all or substantially all of the assets of the Corporation, UNLESS the Corporation's stockholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity in approximately the same relative percentages after such acquisition or sale as before such acquisition or sale. (ii) VALUATION OF CONSIDERATION. In the event of a deemed liquidation as described in Section 2(c)(i) above, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability: (1) If traded on a securities exchange or the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty-day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day period ending three (3) days prior to the closing; and (3) If there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors of the Corporation. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in Section 2(c)(ii)(A) to reflect -3- the approximate fair market value thereof, as determined in good faith by the Board of Directors of the Corporation. (iii) NOTICE OF TRANSACTION. The Corporation shall give each holder of record of Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than twenty (20) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (iv) EFFECT OF NONCOMPLIANCE. In the event the requirements of this Section 2(c) are not complied with, the Corporation shall forthwith either cause the closing of the transaction to be postponed until such requirements have been complied with, or cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in Section 2(c)(iii) hereof. 3. REDEMPTION. (a) Subject to the rights of series of Preferred Stock which may from time to time come into existence, on or at any time after the date November 26, 2002, this corporation shall, upon receipt by this corporation from the holders of 66 2/3% of the then outstanding shares of Series A Preferred Stock of their written consent to redemption hereunder of their respective shares (the "REDEMPTION NOTICE"), at such time and to the extent that it may lawfully do so, redeem in whole or in part the Series A Preferred Stock by paying in cash therefor a sum equal to $0.62 per share (as adjusted for any stock dividends, combinations or splits with respect to such share) plus all declared but unpaid dividends on such share (the "SERIES A REDEMPTION PRICE"). Any such redemption shall occur on the date forty-five (45) days after the receipt of the Redemption Notice or as soon thereafter as the Company may lawfully conduct such redemption under the terms of this Section 3. (b) As used herein and in subsection (3)(c) below, the term "REDEMPTION DATE" shall refer to each of "SERIES A REDEMPTION DATE" and the term "REDEMPTION PRICE" shall refer to the "SERIES A REDEMPTION PRICE." Subject to the rights of series of Preferred Stock which may from time to time come into existence, at least fifteen (15) but no more than thirty (30) days prior to the Redemption Date, if the holders of Series A Preferred Stock exercise their right of redemption pursuant to subsection 3(a) above, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next -4- preceding the day on which notice is given) of the Series A Preferred Stock to be redeemed, at the address last shown on the records of this corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to this corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares to be redeemed (the "REDEMPTION NOTICE"). Except as provided in subsection (3)(c) on or after the Redemption Date, each holder of Series A Preferred Stock to be redeemed shall surrender to this corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Series A Preferred Stock designated for redemption in the Redemption Notice as holders of Series A Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this corporation or be deemed to be outstanding for any purpose whatsoever. Subject to the rights of series of Preferred Stock which may from time to time come into existence, if the funds of this corporation legally available for redemption of shares of Series A Preferred Stock on the Redemption Date are insufficient to redeem the total number of shares of Series A Preferred Stock to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon their holdings of Series A Preferred Stock. The shares of Series A Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. Subject to the rights of series of Preferred Stock which may from time to time come into existence, at any time thereafter when additional funds of this corporation are legally available for the redemption of shares of Series A Preferred Stock, such funds will immediately be used to redeem the balance of the shares of Series A Preferred Stock which this corporation has not redeemed. (d) Three (3) days prior to the Redemption Date, this corporation shall deposit the Redemption Price of all outstanding shares of Series A Preferred Stock designated for redemption in the Redemption Notice, and not yet redeemed or converted, with a bank or trust company having aggregate capital and surplus in excess of $50,000,000 as a trust fund for the benefit of the respective holders of the shares designated for redemption and not yet redeemed, Simultaneously, this corporation shall deposit irrevocable instruction and authority to such bank or trust company to publish the notice of redemption thereof (or to complete such publication if theretofore commenced) and to pay, on and after the date fixed for redemption or prior thereto, the Redemption Price of the Series A Preferred Stock to the holders thereof upon surrender of their certificates. Any monies deposited by this corporation pursuant to this subsection 3(d) for the redemption of shares which are thereafter converted into shares of Common Stock pursuant -5- to Section 4 hereof no later than the close of business on the Redemption Date shall be returned to this corporation forthwith upon such conversion. The balance of any monies deposited by this corporation pursuant to this subsection 3(d) remaining unclaimed at the expiration of two (2) years following the Redemption Date shall thereafter be returned to this corporation, provided that the stockholder to which such money would be payable hereunder shall be entitled, upon proof of its ownership of the Series A Preferred Stock and payment of any bond requested by the Company, to receive such monies but without interest from the Redemption Date. 4. CONVERSION. The holders of the Preferred Stock shall have conversion rights as follows (the "CONVERSION RIGHTS"): (a) RIGHT TO CONVERT. Subject to Section 4(c), each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and on or prior to the close of business on the day prior to the Redemption Date, if any, as may be specified in the Redemption Notice with respect to the Series A Preferred Stock, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $0.62 by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share of Series A Preferred Stock shall be $0.62. Such initial Conversion Price shall be subject to adjustment as set forth in Section 4(d). (b) AUTOMATIC CONVERSION. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such share immediately upon the earlier of (i) except as provided below in Section 4(c), the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended (the "SECURITIES ACT"), which results in aggregate gross cash proceeds to the Corporation of at least $15,000,000 (an "IPO") or (ii) the date specified by written consent or agreement of the holders of at least forty percent (40%) of the then outstanding shares of Series A Preferred Stock. (c) MECHANICS OF CONVERSION. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such series of Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of such series of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten -6- offering of securities registered pursuant to the Securities Act the conversion may, at the option of any holder tendering such Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive Common Stock upon conversion of such Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN DILUTIVE ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price of the Series A Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) If the Corporation shall issue, after the date upon which any shares of Series A Preferred Stock were first issued (the "PURCHASE DATE"), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for the Series A Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for the Series A Preferred Stock in effect immediately prior to each such issuance shall automatically (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance, plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance, plus the number of shares of such Additional Stock. (B) No adjustment of the Conversion Price for the Series A Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in Sections 4(d)(i)(E)(3) and 4(d)(i)(E)(4), no adjustment of such Conversion Price pursuant to this Section 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors irrespective of any accounting treatment. -7- (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 4(d)(i) and Section 4(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 4(d)(i)(C) and 4(d)(i)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 4(d)(i)(C) and 4(d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, -8- rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Sections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Section 4(d)(i)(E)(3) or (4). (ii) "ADDITIONAL STOCK" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 4(d)(i)(E)) by the Corporation after the Purchase Date) other than: (A) Common Stock issued pursuant to a transaction described in Section 4(d)(iii) hereof, (B) Shares of Common Stock issuable or issued to employees, consultants or directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Corporation, (C) Capital stock, or options or warrants to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, which issuances are primarily for other than equity financing purposes, (D) Shares of Common Stock or Preferred Stock issuable upon exercise of warrants outstanding as of the date of this Amended and Restated Certificate of Incorporation, (E) Capital stock or warrants or options to purchase capital stock issued in connection with bona fide acquisitions, mergers or similar transactions, the terms of which are approved by the Board of Directors of the Corporation, (F) Shares of Common Stock issued or issuable upon conversion of the Preferred Stock, and (G) Shares of Common Stock issued or issuable in a public offering. (iii) In the event the Corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or -9- indirectly, additional shares of Common Stock (hereinafter referred to as "COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Section 4(d)(i)(E). (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 4(d)(iii), then, in each such case for the purpose of this Section 4(e), the holders of Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (f) RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of such Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of such Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of such Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (g) NO IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed -10- hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. (h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock pursuant to this Section 4, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of such Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for the Series A Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of the Series A Preferred Stock. (i) NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of such series of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of such series of Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to -11- increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate of Incorporation. (k) NOTICES. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. 5. VOTING RIGHTS. Except as provided below with respect to the election of directors, the holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. In addition, as long as twenty-five percent (25%) of the number of shares of Series A Preferred Stock issued by the Corporation on the date the Series A Preferred Stock was originally issued remain outstanding, the holders of the Series A Preferred Stock shall be entitled, voting together as a separate class, to elect one (1) director of this corporation at each annual election of directors. The holders of Common Stock shall be entitled, voting together as a separate class, to elect two (2) directors of this corporation at each annual meeting of directors. The holders of Preferred Stock and Common Stock voting together as a single class shall have the right to elect any remaining directors. 6. PROTECTIVE PROVISIONS. Subject to the rights of series of Preferred Stock which may from time to time come into existence, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least 66-2/3% of the then outstanding shares of Preferred Stock, voting together as a class: (a) sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of, PROVIDED that this Section 6(a) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Corporation; (b) alter or change the rights, preferences or privileges of the shares of the Series A Preferred Stock so as to affect adversely such shares; (c) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock; -12- (d) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security having a preference over, or being on a parity with, the Series A Preferred Stock with respect to voting, redemption, conversion, dividends or upon liquidation; (e) redeem, purchase or otherwise acquire (or pay into or set funds aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock; PROVIDED, HOWEVER, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or at cost upon the occurrence of certain events, such as the termination of employment; (f) increase the authorized number of directors of the Corporation; or (g) pay any dividend on the Common Stock other than dividends on the Common Stock solely in the form of additional shares of Common Stock. 7. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares of Preferred Stock shall be redeemed or converted pursuant to Section 3 or Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by the Corporation. The Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (C) COMMON STOCK. 1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be distributed as provided in Section 2 of Division (B) of this Article IV. 3. REDEMPTION. The Common Stock is not redeemable. 4. VOTING RIGHTS. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. -13- ARTICLE V The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE VI Elections of directors need not be by written ballot unless otherwise provided in the Bylaws of the Corporation. ARTICLE VII (A) To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (B) The Corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the Corporation or any predecessor of the Corporation, or serves or served at any other enterprise as a director or officer at the request of the Corporation or any predecessor to the Corporation. (C) Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision." ARTICLE VIII To the fullest extent permitted by applicable law, this corporation is authorized to provide indemnification of (and advancement of expenses to) agents of this corporation (and any other persons to which Delaware law permits this corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to this corporation, its stockholders, and others. * * * -14- The foregoing First Amended and Restated Certificate of Incorporation has been duly adopted by this corporation's Board of Directors and stockholders in accordance with the applicable provisions of Section 228, 242 and 245 of the General Corporation Law of the State of Delaware. Executed at Santa Monica, California, on the 22nd day of December, 1997. /s/ Edward C. Lenk ------------------------------ Edward C. Lenk, President /s/ Frank C. Han ------------------------------ Frank C. Han, Secretary SIGNATURE PAGE TO eTOYS INC. FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT C SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES December 23, 1997 This confidential Schedule of Exceptions (the "SCHEDULE") is delivered pursuant to Section 2 of the Series A Preferred Stock Purchase Agreement by and between eToys Inc., a Delaware corporation ("eTOYS" or the "COMPANY") and the purchasers listed on EXHIBIT A to the Series A Preferred Stock Purchase Agreement (the "PURCHASERS"). The section numbers in the Schedule correspond to the section numbers in the Agreement; however, any information reasonably disclosed under any section number of the Schedule shall be deemed to be disclosed and incorporated into any other section number under the Agreement to which it pertains, whether or not the specific section numbers are indicated below. All capitalized terms herein shall have the meanings given them in the Agreement, unless otherwise indicated in the Schedule. Copies of agreements, plans, policies and other documents referred to herein (the "DOCUMENTS") have been made available to the Purchasers. The foregoing, however, does not modify or limit the representations and warranties of the Company in Section 2 of the Agreement or the right of the Purchasers to rely thereon. 2.2 The Company has issued certain promissory notes that, upon the Closing, will be automatically convertible into 1,468,018 shares of Series A Preferred Stock. In connection with the issuance of such promissory notes, the Company issued certain warrants that, upon the Closing, will be exercisable for an aggregate of 721,757 shares of Series A Preferred Stock at an exercise price of $0.62 per share. 2.7 The filing of the Restated Certificate will be necessary to consummate the transactions contemplated by the Agreement. 2.8 [intentionally omitted] 2.9 The Company has filed an application for trademark registration with the United States Patent and Trademark Office for the mark "ETOYS". Pursuant to a Letter Agreement, dated March 14, 1997, by and between idealab! and Elliot Portwood Productions, Elliot Portwood Productions agreed to transfer to idealab! the domain names "eToys.com" and "e-toys.com" for certain consideration. In December 1997, the Company entered into an agreement with idealab! pursuant to which the rights to these domain names were transferred and assigned by idealab! to eToys. [intentionally omitted] [intentionally omitted] 2.10 The Company did not timely file notices under the securities laws of the states of Colorado, Maryland and Washington in connection with the issuance and sale of promissory notes and warrants. These issuances were made to two purchasers in the state of Colorado and to one purchaser in the states of Maryland and Washington, respectively. The Company is currently in the process of making these notice filings. -2- 2.11 (a) In June 1997, the Company issued and sold 2,500,000 shares of Common Stock to Toby Lenk pursuant to a Stock Purchase Agreement. In June 1997, the Company issued and sold an aggregate of 833,334 shares of Common Stock to Frank Han pursuant to two Stock Purchase Agreements. In June 1997, the Company issued and sold 6,466,667 shares of Common Stock to idealab!, an affiliate of the Company. In November 1997, pursuant to a letter agreement, idealab! returned 360,000 shares of Common Stock of the Company to the Company in the form of a capital contribution. Each of the Company's officers and directors have entered into proprietary information and inventions agreements with the Company. During 1997, the Company reimbursed Frank Han for approximately $10,000 in expenses incurred by Mr. Han on behalf of the Company. During 1997, the Company reimbursed Toby Lenk for approximately $15,000 in expenses incurred by Mr. Lenk on behalf of the Company. The Company has entered into an indemnification agreement with each of its current directors and with Frank Han. 2.11 (b) The Company is party to the following contracts that that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of, $10,000 , (ii) the license of a patent, copyright, trade secret or other proprietary right to or from the Company, or (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products: Engagement Letter, dated July 9, 1997, by and between the Company and Alexander Communications, Inc. Lease, dated July 15, 1997, by and between the Company and E.A. Three, Ltd. (the "WAREHOUSE LEASE"). [intentionally omitted] Lease, dated August 21, 1997, by and between the Company and Martin H. Waldman and Hal Spector (the "OFFICE LEASE"). -3- Lease, dated September 29, 1997, by and between the Company and IKON Office Solutions (copier lease) (the "COPIER LEASE"). Content License Agreement, dated October 1, 1997, by and between the Company and Dr. Stevanne Auerbach. Interactive Marketing Agreement, dated as of October 1, 1997, by and between the Company and America Online, Inc. Network Advertising Agreement, effective as of November 1, 1997, by and between the Company and Excite. Content and Services Agreement, dated as of October 1, 1997, by and between WebTV Network, Inc. and the Company. Shopping Development - Merchant Services Agreement, dated as of November 10, 1997, by and between GTE Media Ventures Incorporated and the Company. Market Square Agreement, effective as of October 27, 1997, by and between AT&T Corp. and the Company. The Company is a party to an agreement with FoneMart pursuant to which the Company rents its phone system on a month to month basis (the "PHONE SYSTEM LEASE"). The Company is a party to an agreement with Worldcom pursuant to which the Company is provided with long distance telephone service and internet access on a monthly basis. Advertising Insertion Orders No. 6964 and 6979, dated as of July 9, 1997 and July 10, 1997, respectively, by and between the Company and Yahoo! Inc.; Sponsorship Agreement, dated as of July 17, 1997, by and between the Company and Netscape Communications Corporation; Internet Advertising Insertion Orders, dated as of July 17, 1997, by and between the Company and SOFTBANK Interactive Marketing, Inc.; Advertiser Agreements, dated as of July 10, 1997, July 16, 1997, and July 16, 1997, by and between the Company and Infoseek; Global Center Service Order No. E-Toys 0001.1; Master Service Agreement, dated as of November 26, 1997, by and between Global Center, Inc. and the Company; and -4- [intentionally omitted] The Company enters into purchase orders in the ordinary course of business pursuant to which it purchases inventory for ultimate resale to customers. The dollar amounts of such purchase orders exceed $25,000 in the aggregate and in some cases exceed $10,000 individually. The Company enters into affiliate license agreements in the ordinary course of business pursuant to which it supplies the affiliate with artwork and text that can be placed on the affiliate's site and can act as a link to the Company's site. The dollar amounts covered by such license agreements exceed $25,000 in the aggregate and in some cases exceed $10,000 individually. 2.11 (c) Since the Company's inception, idealab! has paid for $100,000 in expenses incurred by the Company. In November 1997, the Company and idealab! entered into a letter agreement pursuant to which idealab! agreed to forgive the Company's repayment of such $100,000 amount. 2.12 Concurrent with the Closing, the Company will enter into letter agreements with both Intel Corporation and the DynaFund entities providing for certain Board visitation rights. 2.13 Since the Company's inception, idealab! has paid for $100,000 in expenses incurred by the Company. In November 1997, the Company and idealab! entered into a letter agreement pursuant to which idealab! agreed to forgive the Company's repayment of such $100,000 amount. 2.16 The Company leases certain warehouse space under the Warehouse Lease and office space under the Office Lease. The Company also leases a copier and its phone system under the Copier Lease and the Phone System Lease. 2.17 The Company's financial statements have not been prepared in accordance with generally accepted accounting principles. -5- 2.18 [intentionally omitted] 2.20 The Company has missed the deadline for filing its federal and state tax returns for the fiscal year ended March 31, 1997. The Company filed these returns on December 18, 1997. The Company believes that any penalties resulting from such late filing will not exceed $2,000. 2.21 The Company does not currently have in effect fire insurance. 2.22 The Company has adopted a stock option plan. 2.24 The Company is currently in the process of applying for a business permit from the city of Santa Monica. -6- EXHIBIT D FORM OF INVESTORS' RIGHTS AGREEMENT (See Exhibit 10.9) EXHIBIT E FORM OF RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT (See Exhibit 10.11) EXHIBIT F FORM OF VOTING AGREEMENT (See Exhibit 10.10) EXHIBIT G FORM OF LEGAL OPINION OF VENTURE LAW GROUP December 23, 1997 To the Purchasers of Series A Preferred Stock of eToys, Inc. Listed on EXHIBIT A to the Series A Preferred Stock Purchase Agreement Ladies and Gentlemen: We have acted as counsel for eToys Inc., a Delaware corporation (the "COMPANY"), in connection with the sale by the Company to you of 6,312,372 shares of the Company's Series A Preferred Stock (the "SHARES") pursuant to the Series A Preferred Stock Purchase Agreement (the "PURCHASE AGREEMENT") dated December 23, 1997 among the Company and the persons listed on EXHIBIT A attached thereto (the "PURCHASERS"), and the negotiation, execution and delivery by the Company of the Investors' Rights Agreement dated December 23, 1997 (the "INVESTORS' RIGHTS AGREEMENT"), the Co-Sale Agreement dated December 23, 1997 (the "CO-SALE AGREEMENT") and the Voting Agreement dated December 23, 1997. This opinion is given to you in compliance with Section 4.6 of the Purchase Agreement. The Purchase Agreement, the Investors' Rights Agreement, the Co-Sale Agreement and the Voting Agreement are referred to herein collectively as the "AGREEMENTS." Unless defined herein, capitalized terms have the meaning given them in the Agreements. In rendering this opinion, we have made such legal and factual examinations and inquiries as we have deemed advisable or necessary for the purpose of rendering this opinion. In addition, we have examined originals or copies of documents, corporate records and other writings which we consider relevant for the purposes of this opinion. In such examination, we have assumed the genuineness of all signatures on original documents, the conformity to original documents of all copies submitted to us and the due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof. In making our examination of documents executed by entities other than the Company, we have assumed that each other entity had the power to enter into and perform all its obligations thereunder and we also have assumed the due authorization by each such other entity of all requisite actions and the due execution and delivery of such documents by each such other entity. Whenever our opinion herein with respect to the existence or absence of facts is indicated to be based on our knowledge or belief, it is intended to signify that in the course of our representation of the Company in connection with the transactions referred to in the first paragraph hereof, no information has come to the attention of James L. Brock, Glen R. Van Ligten or Mitchell S. Zuklie (the only lawyers at Venture Law Group working on this Page 2 transaction) that would give them actual knowledge of the existence or absence of such facts. We have not undertaken any independent investigation to determine the existence or absence of such facts, and no inference as to our knowledge of the existence or absence of such facts should be drawn from the fact of our representation of the Company. In rendering the opinion set forth in paragraph (c) below relating to the fully paid status of all of the issued shares of capital stock of the Company, we have relied without independent verification on the Management Certificate of the President of the Company (the "OPINION CERTIFICATE"), to the effect that the Company has received the consideration approved by the Board of Directors for all of the issued shares of capital stock of the Company. In rendering the opinion set forth in paragraph (c) below to the extent they relate to the status of the capitalization of the Company, we have relied without further investigation on our review of the stock records of the Company and statements in the Opinion Certificate relating to the capitalization of the Company. In rendering the opinion set forth in paragraph (a) below, (a) in order to determine in which states qualification is appropriate, we have assumed that qualification may be required only in those states in which the Company own or lease real property, maintain offices or have employees, and we have relied on the Company's listing of those states in the Opinion Certificate, and (b) as to the qualification and good standing of the Company in the states so identified in such Opinion Certificate, we have relied exclusively on certificates of public officials, although we have not obtained tax good standing certificates (other than a Delaware long-form good standing certificate and a California franchise tax certificate for the Company) and no opinion is provided with respect to tax good standing (other than with respect to the Company in California). In rendering the opinion in paragraph (e) below, we have reviewed and are providing an opinion only with respect to those Contractual Obligations (as defined in the Opinion Certificate), judgments and orders set forth in the Opinion Certificate, and have assumed that the governing law (exclusive of California laws relating to conflicts of laws) of each such Contractual Obligation is California. We have not, however, reviewed the covenants in the Contractual Obligations that contain financial ratios and other similar financial restrictions, and no opinion is provided with respect thereto. In rendering the opinion expressed in paragraph (h) below, we have assumed and express no opinion with respect to the following: (a) that the representations and warranties of the Purchasers set forth in the Agreements are true and complete; and (b) the accuracy and completeness of the information provided by the Company to the Purchasers in connection with Page 3 such offer and sale. We have also assumed the accuracy of, and have relied upon, the Company's representations to us that the Company has made no offer to sell the Shares by means of any "GENERAL SOLICITATION," as defined in Regulation D under the Securities Act or the "PUBLICATION OF ANY ADVERTISEMENT" (as defined under the California Corporate Securities Law of 1968, as amended, and the regulations thereunder) and that no offer or sale of the Shares has been made or will be made in any states other than California, Illinois, Colorado, Massachusetts, New York, Pennsylvania, Georgia, Connecticut, Florida, Maryland and Washington. The opinions hereinafter expressed are subject to the following further qualifications: (i) Our opinions are qualified by the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally, including, without limitation, laws relating to fraudulent transfers or conveyances, preferences and equitable subordination; (ii) Our opinions are qualified by the limitations imposed by general principles of equity upon the availability of equitable remedies or the enforcement of provisions of the Agreements; and the effect of judicial decisions which have held that certain provisions are unenforceable when their enforcement would violate the implied covenant of good faith and fair dealing, or would be commercially unreasonable, or where their breach is not material; (iii) A requirement that provisions of the Agreements may only be waived in writing will not be enforced to the extent an oral agreement has been executed modifying provisions of the Agreements; (iv) Our opinion is based upon current statutes, rules, regulations, cases and official interpretive opinions, and it covers certain items that are not directly or definitively addressed by such authorities; (v) The effect of judicial decisions which may permit the introduction of extrinsic evidence to modify the terms or the interpretation of the Agreements; (vi) The enforceability of provisions of the Agreements providing for arbitration of disputes to the extent that arbitration of a particular dispute would be against public policy; (vii) The enforceability of provisions of the Agreements which purport to establish evidentiary standards or to make determinations conclusive; Page 4 (viii) The enforceability of provisions of the Agreements which purport to establish particular courts as the forum for the adjudication of any controversy relating to the Agreements; (ix) The enforceability of provisions of the Agreements expressly or by implication waiving broadly or vaguely stated rights, or waiving rights granted by law where such waivers are against public policy; (x) The enforceability of provisions of the Agreements providing that rights or remedies are not exclusive, that every right or remedy is cumulative, or that the election of a particular remedy or remedies does not preclude recourse to one or more other remedies. (xi) We express no opinion as to compliance with applicable antifraud statutes, rules or regulations of applicable state and federal laws concerning the issuance or sale of securities; and (xii) Provisions in the Investors' Rights Agreement purporting to provide for indemnification and contribution under certain circumstances may be unenforceable. (xiii) We express no opinion as to the enforceability of the Voting Agreement. Based upon and subject to the foregoing, and except as set forth in the Schedule of Exceptions, we are of the opinion that: (a) The Company is a corporation duly organized and existing under the laws of the State of Delaware, and is in good standing under such laws. The Company has the requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each state in which the failure to be so qualified would have a material adverse effect on the Company. (b) The Company has the requisite corporate power and authority to execute and deliver the Agreements, to sell and issue the Shares thereunder, to issue the Common Stock issuable upon conversion of the Shares and to carry out and perform its obligations under the terms of the Agreements. (c) The authorized capital stock of the Company consists or will, upon the filing of the First Amended and Restated Certificate of Incorporation (the "RESTATED CERTIFICATE"), consist of 50,000,000 shares of Common Stock, par value $0.0001 per share, 10,050,000 of which are issued and outstanding prior to the Closing Date, and 7,036,300 shares of Preferred Stock, par Page 5 value $0.0001 per share, all of which have been designated Series A Preferred Stock ("SERIES A PREFERRED"), none of which are issued and outstanding prior to the Closing. All of such issued and outstanding shares are validly issued, fully paid and nonassessable. The Company has reserved 7,036,300 shares of Common Stock for issuance upon conversion of Preferred Stock, 1,468,018 shares of Series A Preferred for issuance upon the automatic conversion of certain outstanding promissory notes (the "NOTES"), 721,757 shares of Series A Preferred for issuance upon the exercise of outstanding warrants (the "SERIES A WARRANTS"), 50,000 shares of Common Stock for issuance upon the exercise of outstanding warrants, and 7,036,300 shares of Series A Preferred for issuance under the Purchase Agreement (including the Series A Preferred issuable upon the automatic conversion of the Notes). There are options outstanding for the purchase of 1,276,093 shares of Common Stock under the Company's 1997 Stock Option Plan and 1,573,907 shares of Common Stock are available for issuance thereunder. To our knowledge, except as described above, there are no preemptive rights, options or warrants or other conversion privileges or rights presently outstanding to purchase any of the authorized but unissued stock of the Company, other than the rights of first refusal set forth in Section 2.3 of the Investors' Rights Agreement. (d) All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of the Agreements by the Company, the authorization, sale, issuance and delivery of the Shares (and the Common Stock issuable upon conversion thereof) and the performance of all of the Company's obligations under the Agreements, including, without limitation, the execution and filing with the Secretary of State of the State of Delaware of the Restated Certificate, has been taken. The Agreements constitute valid and binding obligations of the Company enforceable in accordance with their terms. The Shares have been validly issued, and are fully paid and nonassessable and have the rights, preferences and privileges described in the Restated Certificate; the shares of Common Stock issuable upon conversion of the Shares have been duly and validly reserved and, when issued in compliance with the provisions of the Purchase Agreement and the Restated Certificate, will be validly issued, fully paid and nonassessable. (e) The execution, delivery and performance of and compliance with the Agreements, and the issuance of the Shares and the Common Stock issuable upon conversion of the Shares, have not resulted and will not result in any material violation of, or conflict with, or constitute a material default under (i) the Restated Certificate or the Company's Bylaws, (ii) any Contractual Obligation to which the Company is a party or by which it is bound or (ii) any statute, rule or regulation of Federal or California law or Delaware corporate law, or any judgment or order set forth in the Opinion Certificate. Page 6 (f) To our knowledge, there are no actions, suits, proceedings or investigations pending or threatened against the Company, or its properties before any court or governmental agency that, either in any case or in the aggregate, might result in any materially adverse change in the business or financial condition of the Company or any of its properties or assets, or in any material impairment of the right or ability of the Company to carry on its business as now conducted, or in any material liability on the part of the Company, and none that questions the validity of the Agreements or any action taken or to be taken in connection therewith. (g) No consent, approval or authorization of or designation, qualification, regulation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of the Agreements, or the offer, sale or issuance of the Shares (and the Common Stock issuable upon conversion thereof), or the consummation of any other transaction contemplated by the Agreements, except the notice filing required by Section 25102(f) of the California Corporate Securities Law of 1968, as amended. (h) The offer, sale and issuance of the Shares to be issued in conformity with the terms of the Purchase Agreement and the issuance of the Common Stock, if any, to be issued upon conversion thereof, constitute transactions exempt from the registration requirements of Section 5 of the Securities Act and exempt from the qualification requirements of the California Corporate Securities Law of 1968, as amended. We express no opinion as to matters governed by any laws other than the laws of the State of California, the general corporate law of the State of Delaware and the federal law of the United States of America. We express no opinion as to whether the laws of any particular jurisdiction apply, and no opinion to the extent that the laws of any jurisdiction other than those identified above are applicable to the Agreements or the transactions contemplated thereby. Page 7 This opinion is furnished to you pursuant to Section 4.6 of the Purchase Agreement and is solely for your benefit and may not be relied on by, nor may copies be delivered to, any other person without our prior written consent. We assume no obligation to inform you of any facts, circumstances, events or changes in the law that may hereafter be brought to our attention that may alter, affect or modify the opinion expressed herein. Sincerely, VENTURE LAW GROUP, A Professional Corporation JLB EXHIBIT H FORM OF ADDENDUM AGREEMENT ETOYS INC. ADDENDUM TO SERIES A PREFERRED STOCK PURCHASE AGREEMENT This Addendum to Series A Preferred Stock Purchase Agreement (the "ADDENDUM") is made as of _____________, 199_ by and among eToys Inc., a Delaware corporation (the "COMPANY"), and the individuals and entities listed in EXHIBIT A hereto (the "ADDITIONAL PURCHASERS"). RECITALS On December ___, 1997, the Company entered into a Series A Preferred Stock Purchase Agreement (the "PURCHASE AGREEMENT") with certain investors set forth on EXHIBIT A attached thereto. The Purchase Agreement provides in Section 1.2 thereof that additional investors may, under conditions set forth therein, become parties to the Purchase Agreement at any time on or before January 15, 1998. AGREEMENT In consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. AUTHORIZATION AND SALE OF PREFERRED STOCK. 1.1 SALE OF PREFERRED STOCK. Subject to the terms and conditions hereof, at the Closing (as defined in Section 2.1 hereof) the Company will issue and sell to each Additional Purchaser, and each Additional Purchaser severally agrees to purchase from the Company, that number of Additional Shares specified opposite such Additional Purchaser's name on EXHIBIT A hereto, at a cash purchase price of $0.62 per share. Each of the Additional Purchasers, by its signature hereto, shall hereby (i) become a party to the Purchase Agreement, (ii) be considered a "PURCHASER" for all purposes under the Purchase Agreement and (iii) have all the rights and obligations of a Purchaser thereunder. The Additional Shares acquired by the Additional Purchasers thereunder shall be considered "STOCK" for all purposes under the Purchase Agreement, as amended. In addition, each Additional Purchaser, by its signature hereto, shall hereby (a) become a party to the Investors' Rights Agreement dated December ____, 1997 (the "RIGHTS AGREEMENT"), (b) be considered an "INVESTOR" for all purposes under the Rights Agreement and (c) have all rights and obligations of an "INVESTOR" thereunder. Further, each Additional Purchaser, by its signature hereto, shall hereby (x) become a party to the Voting Agreement dated December ____, 1997 (the "VOTING AGREEMENT"), (y) be considered an "INVESTOR" for all purposes under the Voting Agreement and (z) have all rights and obligations under the Voting Agreement. Further, each Additional Purchaser, by its signature hereto, shall hereby (q) become a party to the Right of First Refusal and Co-Sale Agreement dated December ____, 1997 (the "CO-SALE AGREEMENT"), (r) be considered an "INVESTOR" for all purposes under the Co-Sale Agreement and (s) have all rights and obligations of an "INVESTOR" thereunder. Finally, each Additional Purchaser, by its signature hereto, shall hereby (h) become a party to the Intel Letter Agreement dated December __, 1997 (the "INTEL LETTER AGREEMENT"), (i) be considered a "party" for all purposes under the Intel Letter Agreement and (j) have all rights and obligations of a party thereunder. 2. CLOSING; DELIVERY. 2.1 CLOSING. The closing of the purchase and sale of the Additional Shares hereunder (the "CLOSING") shall be held at the offices of Venture Law Group, Menlo Park, California, at such other time and place as the Company and the Additional Purchasers purchasing a majority of the Additional Shares may agree. 2.2 DELIVERY. At the Closing, the Company will deliver to each Additional Purchaser a certificate representing the number of Additional Shares set forth opposite such Additional Purchaser's name on EXHIBIT A, against payment of the purchase price therefor by each Additional Purchaser by wire transfer to the Company. 3. DISCLOSURE; CAPITALIZATION. 3.1 DISCLOSURE. Each Additional Purchaser hereby acknowledges receipt of the Purchase Agreement and the exhibits thereto. The Company affirms to each Additional Purchaser that: (i) The representations and warranties of the Company set forth in Section 2 of the Purchase Agreement were true and accurate when made; (ii) Except as set forth in Section 3.2 hereof, those representations and warranties, which are incorporated herein by this reference and made a part hereof, remain true and accurate in all material respects as of the date hereof, except (A) for changes resulting from the transactions contemplated in the Purchase Agreement and this Addendum and (B) as set forth in the Schedule of Exceptions to Representations and Warranties delivered to the Additional Purchasers prior to the date hereof. (iii) The conditions to closing set forth in Section 4 of the Purchase Agreement and in Section 5 hereof have been satisfied, provided that the conditions set forth in Section 4.1 of the Purchase Agreement shall include references to changes in the Company's representations and warranties and the Company's status, respectively, as set forth herein and in the Exhibits attached hereto, and resulting from the consummation of the transactions contemplated by the Purchase Agreement and this Addendum. 3.2 CAPITALIZATION. Immediately prior to the Closing, the authorized capital of the Company shall consist of: -2- (i) 7,036,300 shares of Preferred Stock, all of which have been designated Series A Preferred Stock, __________ of which are issued and outstanding. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Certificate. (ii) 50,000,000 shares of Common Stock, __________shares of which are issued and outstanding. All of the outstanding shares of Common Stock have been duly authorized, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. The Company has reserved 7,036,300 shares of Common Stock for issuance upon conversion of the Preferred Stock. (iii) The Company has reserved 2,950,000 shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its 1997 Stock Option Plan duly adopted by the Board of Directors and approved by the Company stockholders (the "STOCK PLAN"). __________shares have been granted and are currently outstanding, and __________shares of Common Stock remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. (iv) There are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. Except as otherwise contemplated herein, the Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of the Company. 4. REPRESENTATIONS AND WARRANTIES OF ADDITIONAL PURCHASERS. Each Additional Purchaser acknowledges that such Additional Purchaser has reviewed the representations and warranties set forth in Section 3 of the Purchase Agreement and agrees with the Company that such representations and warranties, which are incorporated herein by this reference and made a part hereof, are true and correct as of the date hereof as they relate to such Additional Purchaser's purchase of the Additional Shares hereunder. 5. CONDITIONS TO ADDITIONAL PURCHASERS' OBLIGATIONS AT CLOSING. The obligation of each Additional Purchaser to purchase the Additional Shares at the Closing is subject to the fulfillment to such Additional Purchaser's satisfaction at or prior to the Closing of the following conditions: 5.1 REPRESENTATIONS AND WARRANTIES CORRECT; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company in Section 3 hereof shall be true and correct when made, and shall be true and correct on the date of the Closing with the same force and effect as if they had been made on and as of said date, subject to changes contemplated by this Addendum; and the Company shall have performed all obligations and conditions herein required to be performed or observed by it at or prior to the Closing. -3- 5.2 CONSENTS AND WAIVERS. The Company shall have obtained any and all consents and waivers necessary or appropriate for consummation of the transactions contemplated by this Addendum. 5.3 LEGAL OPINION. Upon request, each of the Additional Purchasers will be entitled to receive from Venture Law Group, legal counsel for the Company, a legal opinion substantially in the form delivered to the investors pursuant to Section 4.6 of the Purchase Agreement. 6. CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company under Sections 1.1 of this Addendum are subject to the fulfillment at or before the Closing of each of the following conditions: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Additional Purchaser contained in Section 4 hereof shall be true at the Closing. 6.2 CONSENTS AND WAIVERS. The Company shall have obtained any and all consents and waivers necessary or appropriate for the Purchasers to become parties to the Investors' Rights Agreement and for the consummation of the transactions contemplated by this Addendum. 7. MISCELLANEOUS. 7.1 INCORPORATION BY REFERENCE. The provisions set forth in Section 6 of the Purchase Agreement are incorporated herein by this reference and made a part hereof. 7.2 COUNTERPARTS. This Addendum may be executed in any number of counterparts, each of which may be executed by less than all of the Additional Purchasers, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. [Signature Page Follows] -4- The parties hereto have executed this Addendum as of the date first set forth above. COMPANY: eTOYS INC. By: -------------------------------------- Edward C. Lenk President and Chief Executive officer Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 SIGNATURE PAGE TO ADDENDUM TO SERIES A PREFERRED STOCK PURCHASE AGREEMENT The parties hereto have executed this Addendum as of the date first set forth above. ADDITIONAL PURCHASERS: By: ----------------------------------------- Name: --------------------------------------- (Print) Title: -------------------------------------- (If applicable) Address: -------------------------------- -------------------------------- SIGNATURE PAGE TO ADDENDUM TO SERIES A PREFERRED STOCK PURCHASE AGREEMENT EXHIBIT A SCHEDULE OF ADDITIONAL PURCHASERS (SECOND SERIES A PREFERRED STOCK CLOSING) AGGREGATE NAME NUMBER OF SHARES PURCHASE PRICE ---- ---------------- -------------- EXHIBIT I FORM OF INTEL LETTER AGREEMENT Exhibit I INTEL CORPORATION December 19, 1997 To: The Parties Listed Below Re: SERIES A PREFERRED STOCK FINANCING OF eTOYS INC. Ladies and Gentlemen: Reference is made to the Series A Preferred Stock Purchase Agreement, dated as of December 19, 1997, by and between eToys Inc. (the "Company") and the investors listed on Exhibit A thereto (the "Purchase Agreement"). Reference is also made to the Investors' Rights Agreement, dated as of December 19, 1997, by and among the Company, the investors listed on Exhibit A thereto and Edward C. Lenk and Frank C. Han (the "Rights Agreement"). This letter and the exhibit hereto constitutes the Intel Letter Agreement referred to in the Purchase Agreement and the Rights Agreement. The parties hereto agree to the terms of Exhibit A attached to this letter. All exhibits to this letter are incorporated herein and made a part hereof by this reference. Please indicate your acceptance of this letter as a part of the Purchase Agreement and the Rights Agreement by countersigning in the space provided below. Very truly yours, INTEL CORPORATION By: /s/ Illegible ---------------------- ACCEPTED: eTOYS INC. By: /s/ Edward C. Lenk -------------------------- Name: Edward C. Lenk ----------------------- Title: CEO ------------------------ [Signatures intentionally omitted. See signature pages to Series A Preferred Stock Purchase Agreement.] SIGNATURE PAGE TO INTEL LETTER AGREEMENT eTOYS INC. SERIES A PREFERRED FINANCING -2- EXHIBIT A 1. PROTECTION OF CONFIDENTIAL INFORMATION. Confidential or proprietary information disclosed by any party under the Series A Preferred Stock Purchase Agreement, dated as of December 19, 1997, by and between eToys Inc. (the "Company") and the investors listed on Exhibit A thereto (the "Purchase Agreement") or the Investors' Rights Agreement, dated as of December 19, 1997, by and among the Company, the investors listed on Exhibit A thereto and Edward C. Lenk and Frank C. Han (the "Rights Agreement"), as well as the terms of the Purchase Agreement and the Rights Agreement and the investment of Intel Corporation ("Intel") in the Company, shall be considered confidential information (the "Confidential Information") and shall not be disclosed by the Company or any other party hereto to any third party, subject to Paragraph 2 of this Exhibit A below. Each party shall immediately notify the other parties of any information that comes to its attention which might indicate that there has been a loss of confidentiality with respect to the Confidential Information. In the event that the Company or any other party becomes legally compelled (by statute or regulation or by oral questions, interrogatories, request for information or documents, subpoena, criminal or civil investigative demand or similar process, including without limitation, in connection with any public or private offering of the Company's capital stock) to disclose any of the Confidential Information, such party (the "Disclosing Party") shall provide the other parties (the "Non-Disclosing Parties") with prompt written notice of that fact so that the appropriate party may seek (with the cooperation and reasonable efforts of the other parties) a protective order, confidential treatment or other appropriate remedy. In such event, the Disclosing Party shall furnish only that portion of the Confidential Information which is legally required and shall exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the Confidential Information to the extent reasonably requested by the Non-Disclosing Parties. The provisions of this Paragraph 1 of this Exhibit A shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties to the Purchase Agreement or the Rights Agreement with respect to the transaction contemplated thereby. 2. DISCLOSURE OF TERMS; PRESS RELEASES. Notwithstanding the provisions of Paragraph 1 of this Exhibit A, from and after the closing of the transactions contemplated by the Purchase Agreement, the Company and the other parties hereto may disclose the existence of the Purchase Agreement, the Rights Agreement and the general terms thereof, as well as Intel's investment in the Company solely to the Company's or the other parties' respective investors, investment bankers, lenders, accountants, legal counsel, business partners, and bona fide prospective investors, employees, lenders and business partners, in each case only where such persons or entities are under appropriate nondisclosure obligations. In addition, the Company and the other parties hereto may disclose the fact that Intel is an investor in the Company to third parties without the requirement for nondisclosure agreements. Within sixty (60) days of the Closing, the Company may issue a press release disclosing that Intel has invested in the Company; provided that the release does not disclose the amount or other specific terms of the investment and is approved in advance in writing by Intel. Intel, at its sole discretion, may provide an executive quote or other material regarding its investment in the Company. No other announcement regarding Intel's investment in the Company in a press conference, in any A-1 -3- professional or trade publication, in any marketing materials or otherwise to the general public may be made without the prior written consent of Intel, which consent may be withheld at the sole discretion of Intel. Notwithstanding the foregoing, Intel may disclose its investment in the Company and the terms thereof to third parties or to the public at its discretion, and the Company and the other parties hereto shall have the right to disclose to third parties any such information disclosed by Intel in a press release or other public announcement. If the Company, Intel or the other parties hereto determine that any disclosure not otherwise authorized by hereby is required by law or regulation, then the provisions of Paragraph 1 of this Exhibit A regarding disclosure of Confidential Information by a Disclosing Party shall govern. A-2 -4- EX-10.8 15 EXHIBIT 10.8 ETOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT INITIAL CLOSING: JUNE 3, 1998 ETOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT This Series B Preferred Stock Purchase Agreement (the "AGREEMENT") is made as of the 3rd day of June, 1998, by and between eToys Inc., a Delaware corporation (the "COMPANY") and the investors listed on EXHIBIT A attached hereto (each a "PURCHASER" and together the "PURCHASERS"). The parties hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED STOCK. 1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK. (a) The Company shall adopt and file with the Secretary of State of the State of Delaware on or before the Closing (as defined below) the Second Amended and Restated Certificate of Incorporation in the form attached hereto as EXHIBIT B (the "RESTATED CERTIFICATE"). (b) Subject to the terms and conditions of this Agreement, each Purchaser agrees to purchase at the Closing and the Company agrees to sell and issue to each Purchaser at the Closing that number of shares of Series B Preferred Stock set forth opposite each such Purchaser's name on EXHIBIT A attached hereto at a purchase price of $2.1032 per share. The shares of Series B Preferred Stock issued to the Purchaser pursuant to this Agreement shall be hereinafter referred to as the "STOCK." 1.2 CLOSING; DELIVERY. (a) The purchase and sale of the Stock shall take place at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California, at 12:00 p.m., on June 3, 1998, or at such other time and place as the Company and the Purchasers purchasing a majority of the shares of Stock mutually agree upon, orally or in writing (which time and place are designated as the "CLOSING"). (b) At the Closing, the Company shall deliver to each Purchaser a certificate representing the Stock being purchased thereby against payment of the purchase price therefor by check payable to the Company, wire transfer to the Company's bank account, cancellation of indebtedness, or any combination thereof. In the event that payment by a Purchaser is made, in whole or in part, by cancellation of indebtedness, then such Investor shall surrender to the Company for cancellation at the Closing any evidence of such indebtedness or shall executed an instrument of cancellation in form and substance acceptable to the Company. (c) If the full number of the authorized shares of Series B Preferred Stock of the Company is not sold at the Closing, the Company shall have the right, at any time prior to June 17, 1998, to sell the remaining authorized but unissued shares of Series B Preferred Stock to one or more additional purchasers as determined by the Company, or to any Purchaser hereunder who wishes to acquire additional shares of Series B Preferred Stock at the price and on the terms set forth herein, provided that any such additional purchaser shall be required to execute an Addendum Agreement substantially in the form attached hereto as EXHIBIT H. Any additional purchaser so acquiring shares of Series B Preferred Stock shall be considered a "Purchaser" for purposes of this Agreement, and any Series B Preferred Stock so acquired by such additional purchaser shall be considered "Stock" for purposes of this Agreement and all other agreements contemplated hereby. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Purchaser that, except as set forth on a Schedule of Exceptions attached hereto as EXHIBIT C, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION. The authorized capital of the Company consists, or will consist, immediately prior to the Closing, of: (a) Eighteen Million Nine Hundred Twenty-Six Thousand Four Hundred Twenty-Three (18,926,423) shares of Preferred Stock, Seven Million Thirty-Nine Thousand Seven Hundred Seventy-Four (7,039,774) shares of which have been designated Series A Preferred Stock, of which Six Million Three Hundred Eighteen Thousand Seventeen (6,318,017) shares are issued and outstanding; and Eleven Million Eight Hundred Eighty-Six Thousand Six Hundred Forty-Nine (11,886,649) shares of Series B Preferred Stock, none of which are issued and outstanding immediately prior to the Closing. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Certificate. (b) Fifty Million (50,000,000) shares of Common Stock, Eleven Million Seven Thousand Two Hundred Fifty-Nine (11,007,259) shares of which are issued and outstanding immediately prior to the Closing. All of the outstanding shares of Common Stock have been duly authorized, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. The Company has reserved Eleven Million Eight Hundred Eighty- Six Thousand Six Hundred Forty-Nine (11,886,649) shares of Common Stock for issuance upon conversion of the Series B Preferred Stock. (c) The Company has reserved Five Million Eight Hundred Thousand (5,800,000) shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its 1997 Stock Option Plan duly adopted by the Board of Directors and approved by the Company stockholders (the "STOCK PLAN"). Of such reserved shares of Common Stock, options to purchase One Million Nine Hundred Three Thousand (1,903,000) shares have been granted and are currently outstanding, options to purchase Seventy-Four Thousand One Hundred Sixty-Seven (74,167) shares have been exercised, and Three -2- Million Eight Hundred Twenty-Two Thousand Eight Hundred Thirty-Three (3,822,833) shares of Common Stock remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. (d) Except for currently outstanding options issued pursuant to the Stock Plan, warrants to purchase 721,757 shares of Series A Preferred Stock, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which effects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. 2.3 SUBSIDIARIES. The Company does not currently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the Amended and Restated Investors' Rights Agreement, in the form attached hereto as EXHIBIT D (the "INVESTORS' RIGHTS AGREEMENT"), the Amended and Restated Right of First Refusal and Co-Sale Agreement in the form attached hereto as EXHIBIT E (the "CO-SALE AGREEMENT"), and the Amended and Restated Voting Agreement in the form attached hereto as EXHIBIT F (the "VOTING AGREEMENT") and the Letter Agreement between Intel Corporation in the form attached hereto as EXHIBIT I (the "INTEL LETTER AGREEMENT") and collectively with this Agreement, the Investors' Rights Agreement, the Co-Sale Agreement and the Voting Agreement (the "AGREEMENTS"), the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance and delivery of the Stock and the Common Stock issuable upon conversion of the Stock (together, the "SECURITIES") has been taken or will be taken prior to the Closing, and the Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally, as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued to the Purchasers hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable state and federal securities laws. Based in part upon the representations of the Purchasers in this Agreement and subject to the provisions of Section 2.7 below, the Stock will be issued in compliance with all applicable federal and state -3- securities laws. The Common Stock issuable upon conversion of the Stock has been duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Restated Certificate, shall be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable federal and state securities laws and will be issued in compliance with all applicable federal and state securities laws. 2.6 OFFERING. Subject in part to the truth and accuracy of each Purchaser's representations set forth in Section 3 of the Agreement, the offer, sale and issuance of the Series B Preferred Stock as contemplated by this Agreement are exempt from the registration requirements of any applicable stock and federal securities laws, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.7 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for filings pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder, other applicable state securities laws and Regulation D of the Securities Act of 1933, as amended (the "SECURITIES ACT"). 2.8 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company or any of its subsidiaries that questions the validity of the Agreements or the right of the Company to enter into them, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition or affairs of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. Neither the Company nor any of its subsidiaries is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its subsidiaries currently pending or which the Company or any of its subsidiaries intends to initiate. 2.9 PATENTS AND TRADEMARKS. To its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, tradenames, copyrights, trade secrets, licenses, information and proprietary rights and processes and, to its knowledge, all patent rights necessary for its business without any conflict with, or infringement of, the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, servicemarks, tradenames, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed to be conducted in the Business Plan (as defined in Section 2.12), would violate any of the patents, trademarks, service marks, tradenames, -4- copyrights, trade secrets or other proprietary rights or processes of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interest of the Company or that would conflict with the Company's business as proposed to be conducted in the Business Plan. Neither the execution or delivery of this Agreement or the agreements, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed in the Business Plan, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of (i) idealab! and (ii) any of the Company's employees or people it currently intends to hire made prior to or outside the scope of their employment by the Company. No employee of idealab! has developed any technology which constitutes a material portion of any of the Company's products, and, to the best of the Company's knowledge, no current or former stockholder, employee, officer, director or consultant of the Company has (directly or indirectly) any right, title or interest in any intellectual property necessary for the operation of the business of the Company as presently conducted or as proposed to be conducted in the Business Plan. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. As of the date of the Closing, the Company is not in violation or default of any provisions of its Restated Certificate or Bylaws or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance of the Agreements and the consummation of the transactions contemplated hereby or thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any material permit, license, authorization applicable to the Company, its business or operations or any of its assets or properties, which suspension, revocation, impairment, forfeiture or nonrenewal will have a material adverse effect on the Company's financial condition, operating results, business or operations. 2.11 AGREEMENTS; ACTION. (a) There are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company or any of its subsidiaries is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company or any of its subsidiaries in excess of, $10,000, (ii) the license of any patent, copyright, trade secret or other -5- proprietary right to or from the Company or any of its subsidiaries, (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products, or (iv) indemnification by the Company with respect to infringements of proprietary rights. (c) Neither the Company nor any of its subsidiaries has (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $10,000 or in excess of $25,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, the indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity shall be aggregated for the purpose of meeting the individual minimum dollar amounts with such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or, at the time of Closing, subject to any restriction under its Restated Certificate or Bylaws, that adversely affects its business, its properties or its financial condition. 2.12 DISCLOSURE. The Company has fully provided the Purchasers with all the information that the Purchasers have requested for deciding whether to acquire the Stock and all information that the Company believes is reasonably necessary to enable the Purchasers to make such a decision, including certain of the Company's projections describing its proposed business (collectively, the "BUSINESS PLAN"). To the Company's knowledge, no representation or warranty of the Company contained in this Agreement and the exhibits attached hereto, any certificate furnished or to be furnished to Purchasers at the Closing, or the Business Plan (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. The Business Plan and the financial and other projections contained in the Business Plan concerning the Company were prepared in good faith; however, the Company does not warrant that it will achieve such projections. 2.13 NO CONFLICT OF INTEREST. The Company is not indebted, directly or indirectly, to any (i) of its officers or directors or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees and (ii) affiliate of the Company. To the Company's knowledge, none of the Company's officers or directors, or any members of their immediate families, or any affiliate of the Company, are, directly or indirectly, indebted to the Company (other than in connection with purchases of the Company's stock) or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or -6- corporation which competes with the Company except that officers, directors and/or stockholders of the Company may own stock in (but not exceeding two percent of the outstanding capital stock of) any publicly traded companies that may compete with the Company. To the Company's knowledge, none of the Company's officers or directors or any members of their immediate families, or any affiliate of the Company, are, directly or indirectly, interested in any material contract with the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.14 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. To the Company's knowledge, except as contemplated in the Voting Agreement, no stockholder of the Company has entered into any agreements with respect to the voting of capital shares of the Company. 2.15 PRIVATE PLACEMENT. Subject in part to the truth and accuracy of the Purchasers' representations set forth in this Agreement, the offer, sale and issuance of the Securities as contemplated by this Agreement is exempt from the registration requirements of the Securities Act. 2.16 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.17 FINANCIAL STATEMENTS. The Company has made available to each Purchaser its unaudited financial statements (including balance sheet and profit and loss statement) as of and for the twelve-month period ended March 31, 1998 (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated, except that the unaudited Financial Statements may not contain all footnotes required by generally accepted accounting principles. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject, in the case of the unaudited Financial Statements, to normal year-end audit adjustments, which individually or in the aggregate will not be material to the financial condition or operating results of the Company. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to March 31, 1998 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate are not material to the financial condition or operating results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnity of any indebtedness of any other person, firm or corporation. The -7- Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.18 CHANGES. Since March 31, 1998, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the business, properties, prospects, or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted in the Business Plan); (c) any waiver or compromise by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the business, properties, prospects or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted); (e) any material change to a material contract or agreement by which the Company or any of its assets is bound or subject; (f) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder; (g) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (h) any resignation or termination of employment of any officer or key employee of the Company; and the Company does not know of any impending resignation or termination of employment of any such officer or key employee; (i) receipt of notice that there has been a loss of, or material order cancellation by, any major customer of the Company; (j) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (k) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; -8- (l) any declaration, setting aside or payment or other distribution in respect to any of the Company's capital stock, or any direct or indirect redemption, purchase, or other acquisition of any of such stock by the Company; (m) to the best of the Company's knowledge, any other event or condition of any character that might materially and adversely affect the business, properties, prospects or financial condition of the Company (as such business is presently conducted and as it is proposed to be conducted in the Business Plan); or (n) any arrangement or commitment by the Company to do any of the things described in this Section 2.18. 2.19 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.20 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax returns and reports (including information returns and reports) as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, except those contested by it in good faith that are listed in the Schedule of Exceptions. The provision for taxes of the Company as shown in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended (the "CODE"), to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns have ever been audited by governmental authorities. Since the date of the Financial Statements, the Company has not incurred any taxes, assessments or governmental charges other than in the ordinary course of business and the Company has made adequate provisions on its books or accounts for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. 2.21 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed; and the Company has insurance against other hazards, risks and liabilities to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated. -9- 2.22 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company, nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have any present intention to terminate the employment of any of the foregoing. The employment of each officer and employee of the Company is terminable at the will of the Company, without the obligation to pay any severance or other compensation. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity laws and with other laws related to employment. The Company is not a party to or bound to any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. 2.23 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENTS. Each former and current employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms delivered to the counsel for the Purchasers. The Company is not aware that any of its former and current employees or consultants is in violation thereof, and the Company will use its best efforts to prevent any such violation. All consultants to or vendors of the Company with access to confidential information of the Company are parties to a written agreement substantially in the form or forms provided to counsel for the Purchasers under which, among other things, each such consultant or vendor is obligated to maintain the confidentiality of confidential information of the Company. The Company is not aware that any of its consultants or vendors are in violation thereof, and the Company will use its best efforts to prevent any such violation. 2.24 PERMITS. The Company and each of its subsidiaries has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.25 CORPORATE DOCUMENTS. The Restated Certificate and Bylaws of the Company are in the form provided to counsel for the Purchasers. The copy of the minute books of the Company provided to the Purchasers' counsel contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and reflects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes accurately in all material respects. -10- 2.26 SECTION 83(b) ELECTIONS. To the best of the Company's knowledge, all individuals who have purchased unvested shares of the Company's Common Stock have timely filed elections under Section 83(b) of the Code. 2.27 SIGNIFICANT CUSTOMERS AND SUPPLIERS. No major customer or supplier as of the date the Financial Statements has materially reduced or threatened to terminate or materially reduce its purchases from or provision of products or services to the Company, as the case may be. 2.28 QUALIFIED SMALL BUSINESS STOCK. As of the Closing, (i) the Company will be an eligible corporation as defined in Section 1202(e)(4) of the Code, (ii) the Company will not have made any purchases of its own stock during the one-year period proceeding the Closing having an aggregate value exceeding five percent (5%) of the aggregate value of all its stock as of the beginning of such period and (iii) the Company's aggregate gross assets, as defined by Code Section 1202(d)(2), at no time since incorporation and through the Closing have exceeded or will exceed $50 million, taking into account the assets of any corporations required to be aggregated with the Company in accordance with the Code Section 1202(d)(3). 2.29 REAL PROPERTY HOLDING COMPANY. The Company is not a real property holding company within the meaning of Section 897 of the Code. 2.30 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted rights to manufacture, produce, assemble, lease, market or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute market or sell its products. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents and warrants to the Company that: 3.1 AUTHORIZATION. The Agreements, when executed and delivered by the Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies, or (b) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Purchaser in reliance upon the Purchaser's representation to the Company, which by the Purchaser's execution of this Agreement, the Purchaser hereby confirms, that the Securities to be acquired by the Purchaser will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any -11- person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Purchaser represents that it has full power and authority to enter into this Agreement. The Purchaser has not been formed for the specific purpose of acquiring the Securities. 3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity to discuss the Company's business, management, financial affairs and the terms and conditions of the offering of the Stock with the Company's management and has had an opportunity to review the Company's facilities. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Purchasers to rely thereon. 3.4 RESTRICTED SECURITIES. The Purchaser understands that the Securities have not been registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser's representations as expressed herein. The Purchaser understands that the Securities are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Securities for resale except as set forth in the Investors' Rights Agreement. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. 3.5 NO PUBLIC MARKET. The Purchaser understands that no public market now exists for any of the securities issued by the Company, and that the Company has made no assurances that a public market will ever exist for the Securities. 3.6 LEGENDS. The Purchaser understands that the Securities and any securities issued in respect of or exchange for the Securities, may bear one or all of the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (b) Any legend set forth in the other Agreements. -12- (c) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended. 3.7 ACCREDITED INVESTOR. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Act. 3.8 FOREIGN INVESTORS. If the Purchaser is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended), such Purchaser hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Stock or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Stock, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Stock. Such Purchaser's subscription and payment for and continued beneficial ownership of the Stock, will not violate any applicable securities or other laws of the Purchaser's jurisdiction. 4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to the Purchasers at the Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating that there shall have been no adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Financial Statements. 4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Purchasers' special counsel, and they -13- shall have received all such counterpart and certified or other copies of such documents as they may reasonably request. 4.6 OPINION OF COMPANY COUNSEL. The Purchasers shall have received from Venture Law Group, A Professional Corporation, counsel for the Company, an opinion, dated as of the Closing, in substantially the form of EXHIBIT G. 4.7 BOARD OF DIRECTORS. As of the Closing, the size of the Company's Board of Directors shall be increased to six (6) members. As of the Closing, the holders of a majority of the outstanding Series A Preferred Stock will have the right to designate one (1) board seat, which designee shall initially be a representative of DynaFund, the holders of a majority of the outstanding Series B Preferred Stock will have the right to designate two (2) board seats, one such designee shall initially be a representative of Highland Capital Partners and the second designee shall initially be a representative of Sequoia Capital, and the holders of a majority of the outstanding Common Stock will have the right to designate two (2) board seats, which designees shall initially be William Gross and Edward C. Lenk. The remaining directors of the Company shall be designated by the holders of a majority of the outstanding Common and Preferred Stock, voting together as a single class, and as of the Closing such designee shall be Peter Hart. 4.8 INVESTORS' RIGHTS AGREEMENT. The Company, each Purchaser and each Founder shall have executed and delivered the Investors' Rights Agreement in substantially the form attached as EXHIBIT D. 4.9 CO-SALE AGREEMENT. The Company, each Purchaser, and each Founder shall have executed and delivered the Co-Sale Agreement in substantially the form attached as EXHIBIT E. 4.10 VOTING AGREEMENT. The Company and each Purchaser shall have executed and delivered the Voting Agreement in substantially the form attached as EXHIBIT F. 4.11 RESTATED CERTIFICATE. The Company shall have filed the Restated Certificate with the Secretary of State of Delaware on or prior to the Closing Date, which shall continue to be in full force and effect as of the Closing Date. 4.12 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. The Company and each of its employees shall have entered into the Company's standard form Confidential Information and Invention Assignment Agreement, in substantially the form provided to the Purchasers. 4.13 HIGHLAND CERTIFICATE. The Company shall have provided to Highland Capital Partners III Limited Partnership ("HIGHLAND") a certificate of the direct and indirect holdings of securities of the Company by certain persons designated by Highland as required by Highland's governing documents. 4.14 INTEL LETTER AGREEMENT. Each Purchaser shall have executed and delivered the Intel Letter Agreement in substantially the form attached as EXHIBIT I. -14- 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Purchaser contained in Section 3 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed by the Purchasers on or prior to the Closing shall have been performed or complied with in all material respects. 5.3 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 6. MISCELLANEOUS. 6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this Agreement, the warranties, representations and covenants of the Company and the Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Purchasers or the Company. 6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 6.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 6.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. -15- 6.6 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth below or on EXHIBIT A hereto, or as subsequently modified by written notice, and (a) if to the Company, with a copy to Venture Law Group, A Professional Corporation, 2800 Sand Hill Road, Menlo Park, California 94025, Attention: Glen R. Van Ligten or (b) if to Highland Capital Partners, with a copy to Hutchins, Wheeler & Dittmar, A Professional Corporation, 101 Federal Street, Boston, Massachusetts 02110, Attention: Michael J. Riccio, Jr. 6.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which each Purchaser or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.8 FEES AND EXPENSES. The Company shall pay at Closing the reasonable fees and expenses of Hutchins, Wheeler & Dittmar, A Professional Corporation, the counsel for the Purchasers, incurred with respect to this Agreement, the documents referred to herein and the transactions contemplated hereby and thereby, provided such fees and expenses do not exceed $15,000. 6.9 ATTORNEY'S FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended with the written consent of the Company and the holders of at least 66 2/3% of the Common Stock issued or issuable upon conversion of the Stock. Any amendment or waiver effected in accordance with this Section 6.10 shall be binding upon the Purchasers and each transferee of the Stock (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company. 6.11 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. -16- 6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 6.13 ENTIRE AGREEMENT. This Agreement, the documents referred to herein and certain side letter agreements between the Company and Intel Corporation and the Company and the DynaFund entities concerning Board visitation rights constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements relating to the subject matter hereof existing between the parties hereto are expressly canceled. 6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT. 6.15 CONFIDENTIALITY. Each party hereto agrees that, except with the prior written permission of the other party, it shall at all times keep confidential and not divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other parties to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of Stock purchased hereunder. Without granting any right or license, each party agrees that the foregoing clauses shall not apply with respect to any information after five (5) years following the disclosure thereof or any information that the other party can document (i) is or becomes (through no improper action or inaction by such party or any affiliate, agent, consultant or employee) generally available to the public, (ii) was in its possession known by it prior to receipt from the other party, or (iii) was rightfully disclosed to it by a third party without restriction. The provisions of this Section 6.15 shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby, including, without limitation, the Intel Letter Agreement. -17- 6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Securities. 6.17 WAIVER OF CONFLICTS. Each party to this Agreement acknowledges that Venture Law Group, counsel for the Company, has in the past performed and may continue to perform legal services for certain of the Purchasers in matters unrelated to the transactions described in this Agreement, including the representation of such Purchasers in venture capital financings and other matters. Accordingly, each party to this Agreement hereby (a) acknowledges that they have had an opportunity to ask for information relevant to this disclosure; and (b) gives its informed consent to Venture Law Group's representation of certain of the Purchasers in such unrelated matters and to Venture Law Group's representation of the Company in connection with this Agreement and the transactions contemplated hereby. [Signature Pages Follow] -18- The parties have executed this Series B Preferred Stock Purchase Agreement as of the date first written above. COMPANY: eTOYS INC. By: /s/ Edward C. Lenk ---------------------------------------- Edward C. Lenk President and Chief Executive officer Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: DYNAFUND LP By: /s/ Denny R. S. Ko ------------------------------------------ Name: Denny R. S. Ko ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: Illegible ------------------------------------- Illegible ------------------------------------- DYNAFUND INTERNATIONAL LP By: /s/ Denny R. S. Ko ------------------------------------------ Name: Denny R. S. Ko ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: Illegible ------------------------------------- Illegible ------------------------------------- SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASER: INTEL CORPORATION By: /s/ Illegible ------------------------------------------ Name: ---------------------------------------- (print) Title: --------------------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052 Attn: Treasurer SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: /s/ Glen R. Van Ligten --------------------------------------------- Glen R. Van Ligten Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 --------------------------------------------- James L. Brock Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: HIGHLAND CAPITAL PARTNERS III LIMITED PARTNERSHIP By: Highland Management Partners III Limited Partnership, its General Partner By: /s/ Daniel J. Nova ------------------------------------------ Name: Daniel J. Nova ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: c/o Highland Capital Partners Two International Place Boston, MA 02110 HIGHLAND ENTREPRENEURS' FUND III LIMITED PARTNERSHIP By: HEF III, LLC, its General Partner By: /s/ Daniel J. Nova ------------------------------------------ Name: Daniel J. Nova ---------------------------------------- (print) Title: Member --------------------------------------- Address: c/o Highland Capital Partners Two International Place Boston, MA 02110 SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: idealab! CAPITAL PARTNERS I-A, LP By its General Partner, idealab! Capital Management I, LLC By: /s/ William Elkus ------------------------------------------ Name: William Elkus ---------------------------------------- (print) Title: Managing Member --------------------------------------- Address: c/o idealab! Capital Partners 130 West Union Street Pasadena, CA 91103 idealab! CAPITAL PARTNERS I-B, LP By its General Partner, idealab! Capital Management I, LLC By: /s/ Wiliam Elkus ------------------------------------------ Name: William Elkus ---------------------------------------- (print) Title: Managing Member --------------------------------------- Address: c/o idealab! Capital Partners 130 West Union Street Pasadena, CA 91103 SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: BESSEMER VENTURE PARTNERS IV L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------------ Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 BESSEMER VENTURE INVESTORS L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------------ Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 BESSEC VENTURES IV L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------------ Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: MOORE GLOBAL INVESTMENTS, LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvis Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: c/o Citco Fund Services (Bahamas), Ltd. Bahamas Financial Center Charlotte & Shirley Street P.O. Box CB 13136 Nassau, Bahamas REMINGTON INVESTMENTS STRATEGIES, L.P. By: Moore Capital Advisors, L.L.C. Its: General Partner By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas New York, New York 10020 SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: MULTI-STRATEGIES FUND, L.P. By: Moore Capital Advisors, L.L.C. Its: General Partner By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas New York, New York 10020 MULTI-STRATEGIES FUND LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: c/o Citco Fund Services (Bahamas), Ltd. Bahamas Financial Center Charlotte & Shirley Street P.O. Box CB 13136 Nassau, Bahamas SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASER: SEQUOIA CAPITAL VIII SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS Q CMS SEQUOIA 1997 By: /s/ Michael Moritz ------------------------------------------ Name: Michael Moritz ---------------------------------------- (print) Title: --------------------------------------- Address: 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: VLG INVESTMENTS 1998 By: /s/ Joshua Pickus ------------------------------------------ Name: Joshua Pickus ---------------------------------------- (print) Title: Partner --------------------------------------- Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 PURCHASER: /s/ Glen R. Van Ligten --------------------------------------------- Glen R. Van Ligten Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASER: By: /s/ Andrew J. Greenbaum ------------------------------------------ Name: Andrew J. Greenbaum ---------------------------------------- (print) Title: --------------------------------------- Address:c/o CD Radio Inc. ------------------------------------- 1180 Avenue of the Americas ------------------------------------- New York, NY 10036 PURCHASER: By: /s/ David A. Hoddess ------------------------------------------ Name: David Hoddess ---------------------------------------- (print) Title: --------------------------------------- Address: 9925 Robbins ------------------------------------- 90212 ------------------------------------- PURCHASER: By: /s/ Richard Nanula ------------------------------------------ Name: Richard Nanula ---------------------------------------- (print) Title: --------------------------------------- Address: ------------------------------------- ------------------------------------- PURCHASER: By: /s/ Robert Sheriff ------------------------------------------ Name: Robert Sheriff ---------------------------------------- (print) Title: --------------------------------------- Address: Illegible ------------------------------------- ------------------------------------- PURCHASER: By: /s/ Thomas O. Staggs ------------------------------------------ Name: Thomas O. Staggs ---------------------------------------- (print) Title: --------------------------------------- Address: ------------------------------------- ------------------------------------- PURCHASER: By: /s/ Wesley Hein ------------------------------------------ Name: Wesley Hein ---------------------------------------- (print) Title: --------------------------------------- Address: 779 Latimer Road ------------------------------------- Santa Monica, CA 90402 ------------------------------------- PURCHASER: By: /s/ Michael J. Riccio, Jr. ------------------------------------------ Name: Michael J. Riccio, Jr. ---------------------------------------- (print) Title: --------------------------------------- Address: 101 Federal Street ------------------------------------- Boston, MA 02110 ------------------------------------- PURCHASER: By: /s/ Stephen E. Paul ------------------------------------------ Name: Stephen E. Paul ---------------------------------------- (print) --------------------------------------- Address: 109 Ocean Front Walk ------------------------------------- Venice, CA 90291 ------------------------------------- PURCHASER: SLK I PARTNERS By: /s/ Stephen E. Paul ------------------------------------------ Name: Stephen E. Paul ---------------------------------------- Title: Partner --------------------------------------- Address: 109 Ocean Front Walk ------------------------------------- Venice, CA 90291 ------------------------------------- SIGNATURE PAGE TO eTOYS INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT EXHIBITS Exhibit A - Schedule of Purchasers Exhibit B - Form of Second Amended and Restated Certificate of Incorporation Exhibit C - Schedule of Exceptions to Representations and Warranties Exhibit D - Form of Amended and Restated Investors' Rights Agreement Exhibit E - Form of Amended and Restated Right of First Refusal and Co-Sale Agreement Exhibit F - Form of Amended and Restated Voting Agreement Exhibit G - Form of Legal Opinion of Venture Law Group Exhibit H - Form of Addendum Agreement Exhibit I - Form of Intel Letter Agreement EXHIBIT A SCHEDULE OF PURCHASERS EXHIBIT A SCHEDULE OF PURCHASERS
SERIES B PREFERRED NAME STOCK PURCHASE PRICE (SHARES) (CASH/WIRE TRANSFER) Highland Capital Partners III Limited Partnership 3,651,579 $ 7,680,000.95 Highland Entrepreneurs' Fund III Limited Partnership 152,149 $ 319,999.78 DynaFund L.P. 419,406 $ 882,094.70 DynaFund International L.P. 531,526 $ 1,117,905.48 idealab! Capital Partners I-A, LP 574,550 $ 1,208,393.56 idealab! Capital Partners I-B, LP 138,648 $ 291,604.47 Entities Affiliated with Bessemer Venture Partners 1,426,397 $ 2,999,998.17 Entities Affiliated with Sequoia Capital 2,377,330 $ 5,000,000.46 ----------------- --------------------------- SUBTOTAL: 9,271,585 $ 19,499,997.57 SERIES B PREFERRED NAME STOCK PURCHASE PRICE (SHARES) (CASH/WIRE TRANSFER) Moore Global Investments, Ltd. 760,697 $ 1,599,897.93 Remington Investment Strategies, L.P. 108,292 $ 227,759.73 Multi-Strategies Fund, L.P. 60,162 $ 126,532.72 Multi-Strategies Fund Ltd. 274,101 $ 576,489.22 ----------------- --------------------------- SUBTOTAL: 1,203,252 $ 2,530,679.61 TOTAL: 10,474,837.00 $ 22,030,677.18 ----------------- --------------------------- ----------------- ---------------------------
EXHIBIT B FORM OF SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION (See Exhibit 3.1) EXHIBIT C SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES June 4, 1998 This confidential Schedule of Exceptions (the "SCHEDULE") is delivered pursuant to Section 2 of the Series B Preferred Stock Purchase Agreement (the "AGREEMENT") by and between eToys Inc., a Delaware corporation ("eTOYS" or the "COMPANY") and the purchasers listed on EXHIBIT A to the Agreement (the "PURCHASERS"). The section numbers in the Schedule correspond to the section numbers in the Agreement; however, any information reasonably disclosed under any section number of the Schedule shall be deemed to be disclosed and incorporated into any other section number under the Agreement to which it pertains, whether or not the specific section numbers are indicated below. All capitalized terms herein shall have the meanings given them in the Agreement, unless otherwise indicated in the Schedule. Copies of agreements, plans, policies and other documents referred to herein (the "DOCUMENTS") have been made available to the Purchasers. The foregoing, however, does not modify or limit the representations and warranties of the Company in Section 2 of the Agreement or the right of the Purchasers to rely thereon. 2.2 As of May 6, 1998, the Company issued certain convertible promissory notes to Moore Global Investments, Ltd., Remington Investments Strategies, L.P., Multi-Strategies Fund Ltd. and Multi-Strategies Fund, L.P. (the "SERIES B CONVERTIBLE NOTES"). The Company has an agreement to issue Stephen Paul an option to acquire 125,000 shares of Common Stock. In addition, the Company has agreed to sell Mr. Paul 50,000 shares of the Company's Common Stock at 50,000 shares of the Company's Series B Preferred Stock. 2.7 The filing of the Restated Certificate will be necessary to consummate the transactions contemplated by the Agreement. 2.8 [intentionally omitted] 2.9 The Company has filed an application for trademark registration with the United States Patent and Trademark Office for the mark "ETOYS." The Company is in the process of preparing an application for trademark registration with the United States Patent and Trademark Office for the mark "TOYSEARCH." Pursuant to a Letter Agreement, dated March 14, 1997, by and between idealab! and Elliot Portwood Productions, Elliot Portwood Productions agreed to transfer to idealab! the domain names "eToys.com" and "e-toys.com" for certain consideration. In March 1997, the Company entered into an agreement with idealab! pursuant to which the rights to these domain names were transferred and assigned by idealab! to eToys. [intentionally omitted] 2.10 The Company did not timely file notices under the securities laws of the states of Colorado, Maryland and Washington in connection with the issuance and sale of promissory notes and warrants. These issuances were made to two purchasers in the state of Colorado and to one purchaser in the states of Maryland and Washington, respectively. The Company is currently in the process of making these notice filings. -2- 2.11 (a) In June 1997, the Company issued and sold 2,500,000 shares of Common Stock to Toby Lenk pursuant to a Stock Purchase Agreement. In June 1997, the Company issued and sold an aggregate of 833,334 shares of Common Stock to Frank Han pursuant to two Stock Purchase Agreements. In June 1997, the Company issued and sold 6,466,667 shares of Common Stock to idealab!, an affiliate of the Company. In November 1997, pursuant to a letter agreement, idealab! returned 360,000 shares of Common Stock of the Company to the Company in the form of a capital contribution. Each of the Company's officers and directors have entered into proprietary information and inventions agreements with the Company. During 1997, the Company reimbursed Frank Han for approximately $10,000 in expenses incurred by Mr. Han on behalf of the Company. During 1997, the Company reimbursed Toby Lenk for approximately $15,000 in expenses incurred by Mr. Lenk on behalf of the Company. The Company has entered into an indemnification agreement with each of its current directors and with Frank Han. The Company has an informal policy of reimbursing Peter Hart, a director of the Company, for travel expenses associated with his attendance at Board of Director meetings. In addition, the Company has an informal agreement with Peter Hart pursuant to which Mr. Hart provides consulting services to the Company in exchange for monthly option grants for 3,500 shares of Common Stock and cash compensation of $6,500 per month. 2.11 (b) The Company is party to the following contracts that that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of, $10,000 , (ii) the license of a patent, copyright, trade secret or other proprietary right to or from the Company, or (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products: Engagement Letter, dated July 9, 1997, by and between the Company and Alexander Communications, Inc., as amended. -3- Lease, dated July 15, 1997, by and between the Company and E.A. Three, Ltd. (the "WAREHOUSE LEASE"). Client Agreement, dated July 24, 1997, by and between Digital Boardwalk, Inc. and the Company. Lease, dated August 21, 1997, by and between the Company and Martin H. Waldman and Hal Spector (the "OFFICE LEASE"). Lease, dated September 29, 1997, by and between the Company and IKON Office Solutions (copier lease) (the "COPIER LEASE"). Content License Agreement, dated October 1, 1997, by and between the Company and Dr. Stevanne Auerbach. Interactive Marketing Agreement, dated as of October 1, 1997, by and between the Company and America Online, Inc. Network Advertising Agreement, effective as of November 1, 1997, by and between the Company and Excite. Content and Services Agreement, dated as of October 1, 1997, by and between WebTV Network, Inc. and the Company. Shopping Development - Merchant Services Agreement, dated as of November 10, 1997, by and between GTE Media Ventures Incorporated and the Company. Market Square Agreement, effective as of October 27, 1997, by and between AT&T Corp. and the Company. The Company is a party to an agreement with FoneMart pursuant to which the Company rents its phone system on a month to month basis (the "PHONE SYSTEM LEASE"). The Company is a party to an agreement with Worldcom pursuant to which the Company is provided with long distance telephone service and internet access on a monthly basis. Advertising Insertion Orders No. 6964 and 6979, dated as of July 9, 1997 and July 10, 1997, respectively, by and between the Company and Yahoo! Inc. Sponsorship Agreement, dated as of July 17, 1997, by and between the Company and Netscape Communications Corporation. Internet Advertising Insertion Orders, dated as of July 17, 1997, by and between the Company and SOFTBANK Interactive Marketing, Inc. -4- Advertiser Agreements, dated as of July 10, 1997, July 16, 1997, and July 16, 1997, by and between the Company and Infoseek. Global Center Service Order No. E-Toys 0001.1. Master Service Agreement, dated as of November 26, 1997, by and between Global Center, Inc. and the Company. [intentionally omitted] Yahoo! Insertion Order #9945 dated as of November 1, 1997. Netscape Sponsorship Agreement dated as of February 18, 1998. Be Free Affiliate Provider Agreement dated as of March 10, 1998. Lycos Advertising Contract dated as of March 25, 1998. Nix, Hilton & Associates On Target Advertising Agreement dated as of March 30, 1998. Letter Agreement with Kalis & Savage Advertising dated as of April 8, 1998. Offer Letter to Steven Paul dated May 22, 1998. The Company enters into purchase orders in the ordinary course of business pursuant to which it purchases inventory for ultimate resale to customers. The dollar amounts of such purchase orders exceed $25,000 in the aggregate and in some cases exceed $10,000 individually. The Company enters into affiliate license agreements in the ordinary course of business pursuant to which it supplies the affiliate with artwork and text that can be placed on the affiliate's site and can act as a link to the Company's site. The dollar amounts covered by such license agreements exceed $25,000 in the aggregate and in some cases exceed $10,000 individually. The Company has advanced the salaries of certain employees in an amount of approximately $10,000 in the aggregate. 2.11 (c) Since the Company's inception, idealab! has paid for $100,000 in expenses incurred by the Company. In November 1997, the Company and idealab! entered into a -5- letter agreement pursuant to which idealab! agreed to forgive the Company's repayment of such $100,000 amount. 2.12 The Company has entered into letter agreements with both Intel Corporation and the DynaFund entities providing for certain Board visitation rights. In connection with the Series B Convertible Note financing, the Company agreed that if Moore Global Investments, Ltd., Remington Investments Strategies, L.P., Multi-Strategies Fund, L.P. and Multi-Strategies Fund Ltd. (collectively, the "BRIDGE INVESTORS") collectively were to convert at least $4,000,000 of the outstanding principal amount of the Series B Convertible Notes into shares of the Company's capital, the Company will permit one representative (the "OBSERVER") on behalf of the Bridge Investors, collectively, to attend all meetings of the Company's Board of Directors and all committees thereof (whether in person, telephonic or other) in a non-voting, observer capacity. The Company anticipates that it will grant Board visitation rights to certain of the Purchasers. 2.13 Since the Company's inception, idealab! has paid for $100,000 in expenses incurred by the Company. In November 1997, the Company and idealab! entered into a letter agreement pursuant to which idealab! agreed to forgive the Company's repayment of such $100,000 amount. 2.16 The Company leases certain warehouse space under the Warehouse Lease and office space under the Office Lease. The Company also leases a copier and its phone system under the Copier Lease and the Phone System Lease. 2.17 The Company's financial statements have not been prepared in accordance with generally accepted accounting principles. 2.18 (n) [intentionally omitted] The Company has recently hired Steven Paul as the Company's Vice President of Business Development, commencing June 1, 1998. Pursuant to the terms of Mr. Paul's offer letter, the Company will loan Mr. Paul the necessary funds to enable him to purchase up to 175,00 shares of Common Stock and up to 50,000 shares of Series B -6- Preferred Stock, subject to subject to the execution of full recourse promissory notes in favor of the Company that accrue interest at the minimum applicable federal rate. 2.21 The Company does not currently have in effect fire insurance and receives casualty coverage through idealab! 2.22 The Company has adopted a stock option plan. The restricted stock grants to Edward Lenk, Frank Han and Phil Polishook each accelerate in full upon a change of control. The restricted stock grant to Steven Paul accelerates with respect to one year of vesting upon termination without cause following a change of control. -7- EXHIBIT D FORM OF AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (See Exhibit 10.9) EXHIBIT E FORM OF AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT (see Exhibit 10.11) EXHIBIT F FORM OF AMENDED AND RESTATED VOTING AGREEMENT (See Exhibit 10.10) EXHIBIT G FORM OF LEGAL OPINION OF VENTURE LAW GROUP June 17, 1998 To the Purchasers of Series B Preferred Stock of eToys, Inc. Listed on EXHIBIT A to the Series B Preferred Stock Addendum Agreement Ladies and Gentlemen: We have acted as counsel for eToys Inc., a Delaware corporation (the "COMPANY"), in connection with the sale by the Company to you of 1,411,812 shares of the Company's Series B Preferred Stock (the "SHARES") pursuant to the Series B Preferred Stock Addendum Agreement (the "PURCHASE AGREEMENT") dated June 17, 1998 among the Company and the persons listed on EXHIBIT A attached thereto (the "PURCHASERS"), and the negotiation, execution and delivery by the Company of the Amended and Restated Investors' Rights Agreement dated June 4, 1998 (the "INVESTORS' RIGHTS AGREEMENT"), the Amended and Restated Right of First Refusal and Co-Sale Agreement dated June 4, 1998 (the "CO-SALE AGREEMENT") and the Amended and Restated Voting Agreement dated June 4, 1998. This opinion is given to you in compliance with Section 5.3 of the Purchase Agreement. The Purchase Agreement, the Investors' Rights Agreement, the Co-Sale Agreement and the Voting Agreement are referred to herein collectively as the "AGREEMENTS." Unless defined herein, capitalized terms have the meaning given them in the Agreements. In rendering this opinion, we have made such legal and factual examinations and inquiries as we have deemed advisable or necessary for the purpose of rendering this opinion. In addition, we have examined originals or copies of documents, corporate records and other writings which we consider relevant for the purposes of this opinion. In such examination, we have assumed the genuineness of all signatures on original documents, the conformity to original documents of all copies submitted to us and the due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof. In making our examination of documents executed by entities other than the Company, we have assumed that each other entity had the power to enter into and perform all its obligations thereunder and we also have assumed the due authorization by each such other entity of all requisite actions and the due execution and delivery of such documents by each such other entity. Whenever our opinion herein with respect to the existence or absence of facts is indicated to be based on our knowledge or belief, it is intended to signify that in the course of our representation of the Company in connection with the transactions referred to in the first paragraph hereof, no information has come to the attention of Glen R. Van Ligten or Page 2 Mitchell S. Zuklie (the only lawyers at Venture Law Group working on this transaction) that would give them actual knowledge of the existence or absence of such facts. We have not undertaken any independent investigation to determine the existence or absence of such facts, and no inference as to our knowledge of the existence or absence of such facts should be drawn from the fact of our representation of the Company. In rendering the opinion set forth in paragraph (c) below relating to the fully paid status of all of the issued shares of capital stock of the Company, we have relied without independent verification on the Management Certificate of the President of the Company (the "OPINION CERTIFICATE"), to the effect that the Company has received the consideration approved by the Board of Directors for all of the issued shares of capital stock of the Company. In rendering the opinion set forth in paragraph (c) below to the extent they relate to the status of the capitalization of the Company, we have relied without further investigation on our review of the stock records of the Company and statements in the Opinion Certificate relating to the capitalization of the Company. In rendering the opinion set forth in paragraph (a) below, (a) in order to determine in which states qualification is appropriate, we have assumed that qualification may be required only in those states in which the Company own or lease real property, maintain offices or have employees, and we have relied on the Company's listing of those states in the Opinion Certificate, and (b) as to the qualification and good standing of the Company in the states so identified in such Opinion Certificate, we have relied exclusively on certificates of public officials, although we have not obtained tax good standing certificates (other than a Delaware long-form good standing certificate and a California franchise tax certificate for the Company) and no opinion is provided with respect to tax good standing (other than with respect to the Company in California). In rendering the opinion in paragraph (e) below, we have reviewed and are providing an opinion only with respect to those Contractual Obligations (as defined in the Opinion Certificate), judgments and orders set forth in the Opinion Certificate, and have assumed that the governing law (exclusive of California laws relating to conflicts of laws) of each such Contractual Obligation is California. We have not, however, reviewed the covenants in the Contractual Obligations that contain financial ratios and other similar financial restrictions, and no opinion is provided with respect thereto. In rendering the opinion expressed in paragraph (h) below, we have assumed and express no opinion with respect to the following: (a) that the representations and warranties of the Purchasers set forth in the Agreements are true and complete; and (b) the accuracy and Page 3 completeness of the information provided by the Company to the Purchasers in connection with such offer and sale. We have also assumed the accuracy of, and have relied upon, the Company's representations to us that the Company has made no offer to sell the Shares by means of any "GENERAL SOLICITATION," as defined in Regulation D under the Securities Act or the "PUBLICATION OF ANY ADVERTISEMENT" (as defined under the California Corporate Securities Law of 1968, as amended, and the regulations thereunder) and that no offer or sale of the Shares has been made or will be made in any states other than California and New York. The opinions hereinafter expressed are subject to the following further qualifications: (i) Our opinions are qualified by the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally, including, without limitation, laws relating to fraudulent transfers or conveyances, preferences and equitable subordination; (ii) Our opinions are qualified by the limitations imposed by general principles of equity upon the availability of equitable remedies or the enforcement of provisions of the Agreements; and the effect of judicial decisions which have held that certain provisions are unenforceable when their enforcement would violate the implied covenant of good faith and fair dealing, or would be commercially unreasonable, or where their breach is not material; (iii) A requirement that provisions of the Agreements may only be waived in writing will not be enforced to the extent an oral agreement has been executed modifying provisions of the Agreements; (iv) Our opinion is based upon current statutes, rules, regulations, cases and official interpretive opinions, and it covers certain items that are not directly or definitively addressed by such authorities; (v) The effect of judicial decisions which may permit the introduction of extrinsic evidence to modify the terms or the interpretation of the Agreements; (vi) The enforceability of provisions of the Agreements providing for arbitration of disputes to the extent that arbitration of a particular dispute would be against public policy; (vii) The enforceability of provisions of the Agreements which purport to establish evidentiary standards or to make determinations conclusive; Page 4 (viii) The enforceability of provisions of the Agreements which purport to establish particular courts as the forum for the adjudication of any controversy relating to the Agreements; (ix) The enforceability of provisions of the Agreements expressly or by implication waiving broadly or vaguely stated rights, or waiving rights granted by law where such waivers are against public policy; (x) The enforceability of provisions of the Agreements providing that rights or remedies are not exclusive, that every right or remedy is cumulative, or that the election of a particular remedy or remedies does not preclude recourse to one or more other remedies. (xi) We express no opinion as to compliance with applicable antifraud statutes, rules or regulations of applicable state and federal laws concerning the issuance or sale of securities; and (xii) Provisions in the Investors' Rights Agreement purporting to provide for indemnification and contribution under certain circumstances may be unenforceable. (xiii) We express no opinion as to the enforceability of the Voting Agreement. Based upon and subject to the foregoing, and except as set forth in the Schedule of Exceptions, we are of the opinion that: (a) The Company is a corporation duly organized and existing under the laws of the State of Delaware, and is in good standing under such laws. The Company has the requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each state in which the failure to be so qualified would have a material adverse effect on the Company. (b) The Company has the requisite corporate power and authority to execute and deliver the Agreements, to sell and issue the Shares thereunder, to issue the Common Stock issuable upon conversion of the Shares and to carry out and perform its obligations under the terms of the Agreements. (c) The authorized capital stock of the Company consists or will, upon the filing of the Amended and Restated Certificate of Incorporation (the "RESTATED CERTIFICATE"), consist of 50,000,000 shares of Common Stock, par value $0.0001 per share, 11,007,259 of which are issued and outstanding prior to the Closing Date, and 18,926,423 shares of Preferred Stock, par Page 5 value $0.0001 per share, 7,039,744 of which have been designated Series A Preferred Stock (the "SERIES A PREFERRED"), 6,318,017 of which are issued and outstanding prior to the Closing Date, and 11,886,649 of which have been designated Series B Preferred Stock ("SERIES B PREFERRED"), 8,097,507 of which are issued and outstanding prior to the Closing. All of such issued and outstanding shares are validly issued, fully paid and nonassessable. The Company has reserved 18,926,423 shares of Common Stock for issuance upon conversion of Preferred Stock and 721,757 shares of Series A Preferred for issuance upon the exercise of outstanding warrants (the "SERIES A WARRANTS"). There are options outstanding for the purchase of 1,903,000 shares of Common Stock under the Company's 1997 Stock Option Plan, 74,167 shares have been exercised thereunder and 3,822,833 shares of Common Stock are available for issuance thereunder. To our knowledge, except as described above, there are no preemptive rights, options or warrants or other conversion privileges or rights presently outstanding to purchase any of the authorized but unissued stock of the Company, other than the rights of first refusal set forth in Section 2.3 of the Investors' Rights Agreement, which rights of first refusal have been waived with respect to the issuance of the Stock. (d) All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of the Agreements by the Company, the authorization, sale, issuance and delivery of the Shares (and the Common Stock issuable upon conversion thereof) and the performance of all of the Company's obligations under the Agreements, including, without limitation, the execution and filing with the Secretary of State of the State of Delaware of the Restated Certificate, has been taken. The Agreements constitute valid and binding obligations of the Company enforceable in accordance with their terms. The Shares have been validly issued, and are fully paid and nonassessable and have the rights, preferences and privileges described in the Restated Certificate; the shares of Common Stock issuable upon conversion of the Shares have been duly and validly reserved and, when issued in compliance with the provisions of the Purchase Agreement and the Restated Certificate, will be validly issued, fully paid and nonassessable. (e) The execution, delivery and performance of and compliance with the Agreements, and the issuance of the Shares and the Common Stock issuable upon conversion of the Shares, have not resulted and will not result in any material violation of, or conflict with, or constitute a material default under (i) the Restated Certificate or the Company's Bylaws, (ii) any Contractual Obligation to which the Company is a party or by which it is bound or (iii) any statute, rule or regulation known to us of Federal or California law or Delaware corporate law, or any judgment or order set forth in the Opinion Certificate. (f) To our knowledge, there are no actions, suits, proceedings or investigations pending or threatened against the Company, or its properties before any court or governmental Page 6 agency that, either in any case or in the aggregate, might result in any materially adverse change in the business or financial condition of the Company or any of its properties or assets, or in any material impairment of the right or ability of the Company to carry on its business as now conducted, or in any material liability on the part of the Company, and none that questions the validity of the Agreements or any action taken or to be taken in connection therewith. (g) No consent, approval or authorization of or designation, qualification, regulation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of the Agreements, or the offer, sale or issuance of the Shares (and the Common Stock issuable upon conversion thereof), or the consummation of any other transaction contemplated by the Agreements, except the notice filing required by Section 25102(f) of the California Corporate Securities Law of 1968, as amended. (h) The offer, sale and issuance of the Shares to be issued in conformity with the terms of the Purchase Agreement and the issuance of the Common Stock, if any, to be issued upon conversion thereof, constitute transactions exempt from the registration requirements of Section 5 of the Securities Act and exempt from the qualification requirements of the California Corporate Securities Law of 1968, as amended. We express no opinion as to matters governed by any laws other than the laws of the State of California, the general corporate law of the State of Delaware and the federal law of the United States of America. We express no opinion as to whether the laws of any particular jurisdiction apply, and no opinion to the extent that the laws of any jurisdiction other than those identified above are applicable to the Agreements or the transactions contemplated thereby. Page 7 This opinion is furnished to you pursuant to Section 5.3 of the Purchase Agreement and is solely for your benefit and may not be relied on by, nor may copies be delivered to, any other person without our prior written consent. We assume no obligation to inform you of any facts, circumstances, events or changes in the law that may hereafter be brought to our attention that may alter, affect or modify the opinion expressed herein. Sincerely, VENTURE LAW GROUP, A Professional Corporation GVL EXHIBIT H FORM OF ADDENDUM AGREEMENT eTOYS INC. ADDENDUM TO SERIES B PREFERRED STOCK PURCHASE AGREEMENT This Addendum to Series B Preferred Stock Purchase Agreement (the "ADDENDUM") is made as of the 17th day of June, 1998 by and among eToys Inc., a Delaware corporation (the "COMPANY"), and the individuals and entities listed on the signature page attached hereto (the "ADDITIONAL PURCHASERS"). RECITALS On June 3, 1998, the Company entered into a Series B Preferred Stock Purchase Agreement (the "PURCHASE AGREEMENT") with certain investors set forth on EXHIBIT A attached thereto. The Purchase Agreement provides in Section 1.2(c) thereof that additional investors may, under conditions set forth therein, become parties to the Purchase Agreement at any time on or before June 17, 1998. AGREEMENT In consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. AUTHORIZATION AND SALE OF PREFERRED STOCK. 1.1 AUTHORIZATION OF PREFERRED STOCK. The Company will, prior to the Closing (as defined in Section 2.1 below), authorize the issuance pursuant to this Addendum of up to 1,411,812 shares of its Series B Preferred Stock (the "ADDITIONAL SHARES"). The rights, preferences, privileges and restrictions of the Series B Preferred Stock are as set forth in the Company's First Amended and Restated Certificate of Incorporation attached as EXHIBIT B to the Purchase Agreement (the "RESTATED CERTIFICATE"). 1.2 SALE OF PREFERRED STOCK. Subject to the terms and conditions hereof, at the Closing (as defined in Section 2.1 hereof) the Company will issue and sell to each Additional Purchaser, and each Additional Purchaser severally agrees to purchase from the Company, that number of Additional Shares specified opposite such Additional Purchaser's name on EXHIBIT A hereto, at a cash purchase price of $2.1032 per share. Each of the Additional Purchasers, by their signatures hereto, shall hereby (i) become parties to the Purchase Agreement, (ii) be considered a "PURCHASER" for all purposes under the Purchase Agreement and (iii) have all the rights and obligations of a Purchaser thereunder. The Additional Shares acquired by the Additional Purchasers hereunder shall be considered "STOCK" for all purposes under the Purchase Agreement, as amended. 2. CLOSING; DELIVERY. 2.1 CLOSING. The closing of the purchase and sale of the Additional Shares hereunder (the "CLOSING") shall be held at the offices of Venture Law Group, Menlo Park, California, at 12:00 p.m., on June 17, 1998, or at such other time and place as the Company and the Additional Purchasers may agree. 2.2 DELIVERY. At the Closing, the Company will deliver to each Additional Purchaser a certificate representing the number of Additional Shares set forth opposite such Additional Purchaser's name on EXHIBIT A, against payment of the purchase price therefor by each Additional Purchaser by wire transfer to the Company. 3. DISCLOSURE; CAPITALIZATION. 3.1 DISCLOSURE. Each Additional Purchaser hereby acknowledges receipt of the Purchase Agreement and the exhibits thereto. The Company affirms to each Additional Purchaser that: (i) The representations and warranties of the Company set forth in Section 2 of the Purchase Agreement were true and accurate when made; (ii) Those representations and warranties, which are incorporated herein by this reference and made a part hereof, remain true and accurate in all material respects as of the date hereof, except (A) for changes resulting from the transactions contemplated in the Purchase Agreement and (B) as set forth in the Schedule of Exceptions to Representations and Warranties attached hereto as EXHIBIT B. (iii) The conditions to closing set forth in Section 4 of the Purchase Agreement and in Section 5 hereof have been satisfied, provided that the conditions set forth in Section 4.1 of the Purchase Agreement shall include references to changes in the Company's representations and warranties and the Company's status, respectively, as set forth herein and in the Exhibits attached hereto, and resulting from the consummation of the transactions contemplated by the Purchase Agreement. 3.2 CAPITALIZATION. Immediately prior to the Closing, the authorized capital of the Company shall consist of: (i) 18,926,423 shares of Preferred Stock, of which 7,039,774 shares have been designated Series A Preferred Stock, 6,318,017 shares of which are issued and outstanding and 11,886,649 shares of Series B Preferred Stock, of which 8,097,507 shares are issued and outstanding. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Certificate. All of the outstanding shares of Preferred Stock have been duly authorized and fully paid and are nonassessable and issued in compliance with all applicable securities laws. -2- (ii) 50,000,000 shares of Common Stock, 11,007,259 shares of which are issued and outstanding, and all such shares have been duly authorized and fully paid and are nonassessable and issued in compliance with all applicable securities laws. (iii) Based in part upon the representations of each Purchaser in this Addendum and subject to the provisions of Section 2.6 of the Purchase Agreement, the Stock (and the Common Stock issuable upon conversion thereof) has been issued or will be issued in compliance with all applicable federal and state securities laws. (iv) Except for (A) conversion privileges of the Preferred Stock, (B) outstanding options to purchase 1,903,000 shares of Common Stock granted to certain employees of the Company pursuant to the terms of the Company's 1997 Stock Plan duly adopted by the Board of Directors (the "STOCK PLAN") and (C) a warrants to purchase 721,757 shares of Series A Preferred Stock issued to certain investors, there are no outstanding options, warrants, rights (including conversion or preemptive rights) or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. The Company has reserved 5,800,000 shares of Common Stock for issuance upon exercise of options under the Stock Plan. Options to purchase 3,822,833 shares of Common Stock are currently available for grant, at the discretion of the Board of Directors, to officers, directors, employees and consultants pursuant to the Stock Plan. Except as otherwise contemplated herein, the Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of the Company. 4. REPRESENTATIONS AND WARRANTIES OF ADDITIONAL PURCHASERS. Each Additional Purchaser acknowledges that such Additional Purchaser has reviewed the representations and warranties set forth in Section 3 of the Purchase Agreement and agrees with the Company that such representations and warranties, which are incorporated herein by this reference and made a part hereof, are true and correct as of the date hereof as they relate to such Additional Purchaser's purchase of the Additional Shares hereunder. 5. CONDITIONS TO ADDITIONAL PURCHASERS' OBLIGATIONS AT CLOSING. The obligation of each Additional Purchaser to purchase the Additional Shares at the Closing is subject to the fulfillment to such Additional Purchaser's satisfaction at or prior to the Closing of the following conditions: 5.1 REPRESENTATIONS AND WARRANTIES CORRECT; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company in Section 3 hereof shall be true and correct when made, and shall be true and correct on the date of the Closing with the same force and effect as if they had been made on and as of said date, subject to changes contemplated by this Addendum; and the Company shall have performed all obligations and conditions herein required to be performed or observed by it at or prior to the Closing. -3- 5.2 CONSENTS AND WAIVERS. The Company shall have obtained any and all consents and waivers necessary or appropriate for consummation of the transactions contemplated by this Addendum. 5.3 LEGAL OPINION. Upon request, each of the Additional Purchasers will be entitled to receive from Venture Law Group, A Professional Corporation, legal counsel for the Company, a legal opinion substantially in the form delivered to the investors pursuant to Section 4.6 of the Purchase Agreement. 6. CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company under Sections 1.1 and 1.2 of this Addendum are subject to the fulfillment at or before the Closing of each of the following conditions: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Additional Purchaser contained in Section 4 hereof shall be true at the Closing. 6.2 CONSENTS AND WAIVERS. The Company shall have obtained any and all consents and waivers necessary or appropriate for the Purchasers to become parties to the Investors' Rights Agreement, the Voting Agreement and the Co-Sale Agreement and for the consummation of the transactions contemplated by this Addendum. 7. MISCELLANEOUS. 7.1 INCORPORATION BY REFERENCE. The provisions set forth in Section 6 of the Purchase Agreement (other than Section 6.6) are incorporated herein by this reference and made a part hereof. 7.2 NOTICES. Any notice required or permitted by this Addendum shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or sent by overnight courier telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or fax number (as set forth below or in the Purchase Agreement or on Exhibit A hereto or thereto, or as subsequently modified by written notice) and (a) if to the Company, with a copy to Venture Law Group, A Professional Corporation, 2800 Sand Hill Road, Menlo Park, California 94025, Attention Glen R. Van Ligten or (b) if to the Purchasers, with a copy to Hutchins, Wheeler & Dittmar, A Professional Corporation, 101 Federal Street, Boston, Massachusetts, 02110, Attention: Michael J. Riccio, Jr. 7.3 COUNTERPARTS. This Addendum may be executed in any number of counterparts, each of which may be executed by less than all of the Additional Purchasers, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. [Signature Page Follows] -4- The parties hereto have executed this Addendum as of the date first set forth above. eTOYS, INC. By: ---------------------------------------- Edward C. Lenk Title: President and Chief Executive Officer Address: Fax Number: SIGNATURE PAGE TO eTOYS INC. ADDENDUM TO PURCHASE AGREEMENT ADDITIONAL PURCHASERS: By: ---------------------------------------- Name: ---------------------------------------- (Print) Title: --------------------------------------- (If applicable) Address: ----------------------------------- ----------------------------------- Fax: ----------------------------------- SIGNATURE PAGE TO eTOYS INC. ADDENDUM TO PURCHASE AGREEMENT EXHIBIT A SCHEDULE OF ADDITIONAL PURCHASERS
NAME SHARES PURCHASE PRICE Andrew J. Greenebaum 23,773 $ 49,999.37 David A. Hodess 11,886 $ 24,998.64 Richard Nanula 47,546 $ 99,998.75 Robert Sheriff 23,773 $ 49,999.37 Thomas O. Staggs 17,829 $ 37,497.95 Wesley Hein 23,773 $ 49,999.37 Glen R. Van Ligten 1,188 $ 2,498.60 VLG Investments 1998 9,510 $ 20,001.43 Michael J. Riccio, Jr. 4,754 $ 9,998.61 SLK I Partners 118,866 $ 249,998.97 Intel Corporation 950,931 $ 1,999,998.08 Stephen E. Paul 50,000 $ 105,160.00 Moore Global Investments, Ltd. 80,911 $ 170,172.00 Remington Investments Strategies, L.P. 11,518 $ 24,224.65 Multi-Strategies Fund, L.P. 6,399 $ 13,458.38 Multi-Strategies Fund Ltd. 29,155 $ 61,318.80 ------ -------------- TOTAL: 1,411,812 $ 2,969,322.97 --------- -------------- --------- --------------
EXHIBIT B SCHEDULE OF EXCEPTIONS All exceptions listed from the Schedule of Exceptions dated June 4, 1998 are expressly incorporated herein. EXHIBIT I FORM OF INTEL LETTER AGREEMENT INTEL CORPORATION June __, 1998 To: The Parties Listed Below Re: SERIES B PREFERRED STOCK FINANCING OF eTOYS INC. Ladies and Gentlemen: Reference is made to (i) the Series B Preferred Stock Purchase Agreement, dated as of June __, 1998, by and among eToys Inc. (the "COMPANY") and certain investors (the "NEW INVESTORS") listed on EXHIBIT A thereto (the "PURCHASE AGREEMENT") and (ii) the Amended and Restated Investors' Rights Agreement, dated as of June __, 1998, by and among the Company, the New Investors, certain prior investors (the "PRIOR INVESTORS") listed on EXHIBIT B thereto, Edward C. Lenk and Frank C. Han (THE "RIGHTS AGREEMENT"). On December 19, 1997, the Company and the Prior Investors entered into the "INTEL LETTER AGREEMENT" in the form attached hereto as EXHIBIT A. The New Investors hereby agree that by their signature hereto, they shall become parties to, and obligated by, the Intel Letter Agreement; provided, however, that nothing in this Agreement shall prevent the New Investors from disclosing any non-proprietary information learned about the Company to such New Investors' limited partners or other investors, consistent with such New Investors' disclosure obligations to such limited partners or other investors. All exhibits to this letter are incorporated herein and made a part hereof. Please indicate your acceptance of this letter as a part of the Purchase Agreement and the Rights Agreement by countersigning in the space provided below. AGREED AND ACCEPTED: NEW INVESTORS: [Signatures intentionally omitted. See signature pages to Series B Preferred Stock Purchase Agreement.] SIGNATURE PAGE TO INTEL LETTER AGREEMENT eTOYS INC. SERIES B PREFERRED FINANCING EX-10.9 16 EXHIBIT 10.9 ETOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT JUNE 4, 1998 ETOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT This Amended and Restated Investors' Rights Agreement (the "AGREEMENT") is made as of the 4th day of June, 1998, by and among eToys Inc., a Delaware corporation (the "COMPANY"), Edward C. Lenk and Frank C. Han, each of whom is herein referred to as a "FOUNDER", the prior investors listed on EXHIBIT A hereto (the "PRIOR INVESTORS") and the new investors listed on EXHIBIT B hereto (the "NEW INVESTORS"). The Prior Investors and the New Investors are referred to herein collectively as the "INVESTORS" and each individually as an "INVESTOR". RECITALS The Company, the Founders and the Prior Investors entered into an Investors' Rights Agreement on December 23, 1997 (the "EXISTING AGREEMENT"). The Company and the New Investors have entered into a Series B Preferred Stock Purchase Agreement (the "PURCHASE AGREEMENT") of even date herewith pursuant to which the Company desires to sell to the New Investors and the New Investors desire to purchase from the Company shares of the Company's Series B Preferred Stock. A condition to the New Investors' obligations under the Purchase Agreement is that the Company, the Founders and the Prior Investors enter into this Agreement in order to provide the New Investors with (i) certain rights to register shares of the Company's Common Stock issuable upon conversion of the Series B Preferred Stock held by the New Investors, (ii) certain rights to receive or inspect information pertaining to the Company, and (iii) a right of first offer with respect to certain issuances by the Company of its securities. The Company, the Prior Investors and the Founders each desire to induce the New Investors to purchase shares of Series B Preferred Stock pursuant to the Purchase Agreement by agreeing to amend and restate the terms and conditions of the Existing Agreement as set forth herein. AGREEMENT The parties hereby agree as follows: 1. REGISTRATION RIGHTS. The Company and the Investors covenant and agree as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) The terms "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "SECURITIES ACT"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "REGISTRABLE SECURITIES" means (i) the shares of Common Stock issuable or issued upon conversion of the Series A Preferred Stock, (ii) the shares of Common Stock issuable or issued upon conversion of the Series B Preferred Stock, (iii) the shares of Common Stock issued to the Founders (the "FOUNDERS' STOCK"), PROVIDED, HOWEVER, that for the purposes of Section 1.2, 1.4 or 1.13 the Founders' Stock shall not be deemed Registrable Securities and the Founders shall not be deemed Holders, and (iii) any other shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares listed in (i) and (ii); PROVIDED, HOWEVER, that the foregoing definition shall exclude in all cases any Registrable Securities sold by a person in a transaction in which his or her rights under this Agreement are not assigned. Notwithstanding the foregoing, Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale; (c) The number of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities; (d) The term "HOLDER" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.12 hereof; (e) The term "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any successor form under the Securities Act; and (f) The term "SEC" means the Securities and Exchange Commission. 1.2 REQUEST FOR REGISTRATION. (a) If the Company shall receive at any time after the earlier of (i) November 26, 2002, or (ii) one hundred eighty (180) days after the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or an SEC Rule 145 transaction), a written request from the Holders of twenty-five percent (25%) or more of the Registrable Securities then outstanding that the Company file a registration statement under the Securities Act covering the registration of at least twenty- five percent (25%) of the Registrable Securities then outstanding (or a lesser percent if the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $5,000,000), then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 1.2(b), use its best efforts to effect as soon as practicable, and in any event within 60 days of the receipt of such request, the registration under the Securities Act of all -2- Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.5. (b) If the Holders initiating the registration request hereunder ("INITIATING HOLDERS") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter will be selected by a majority in interest of the Initiating Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.5(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; PROVIDED, HOWEVER, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. (c) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than 90 days after receipt of the request of the Initiating Holders; PROVIDED, HOWEVER, that the Company may not utilize this right more than once in any twelve-month period. (d) In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 1.2: (i) After the Company has effected two (2) registrations pursuant to this Section 1.2 and such registrations have been declared or ordered effective; (ii) During the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a registration subject to Section 1.3 hereof; -3- provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iii) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 1.4 below. 1.3 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan or a transaction covered by Rule 145 under the Securities Act, a registration in which the only stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered, or any registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered. 1.4 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders of not less than twenty-five percent (25%) of the Registrable Securities then outstanding, or a lesser percentage if the aggregate offering price of the Registrable Securities to be included in the registration is at least $5,000,000, a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; PROVIDED, HOWEVER, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.4: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $2,000,000; (iii) if the Company shall furnish to the Holders a certificate signed by the -4- President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 90 days after receipt of the request of the Holder or Holders under this Section 1.4; PROVIDED, HOWEVER, that the Company shall not utilize this right more than once in any twelve month period; (iv) if the Company has already effected three registrations on Form S-3 for the Holders pursuant to this Section 1.4; or (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 1.2 or 1.3, respectively. 1.5 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of at least twenty-five percent (25%) majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days. The Company shall not be required to file, cause to become effective or maintain the effectiveness of any registration statement that contemplates a distribution of securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for up to one hundred twenty (120) days. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, PROVIDED that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. -5- (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, such obligation to continue for one hundred twenty (120) days. (g) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. (i) Use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.6 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. The Company shall have no obligation with respect to any registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement if, as a result of the application of the preceding sentence, the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's -6- obligation to initiate such registration as specified in subsection 1.2(a) or subsection 1.4(b)(2), whichever is applicable. 1.7 EXPENSES OF REGISTRATION. (a) DEMAND REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 1.2, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, shall be borne by the Company; PROVIDED, HOWEVER, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2; provided further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2. (b) COMPANY REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications of Registrable Securities pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1.12), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holder or Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, shall be borne by the Company. (c) REGISTRATION ON FORM S-3. All expenses incurred in connection with a registration requested pursuant to Section 1.4, including (without limitation) all registration, filing, qualification, printers' and accounting fees and the reasonable fees and disbursements of one counsel for the selling Holder or Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, and counsel for the Company, and any underwriters' discounts or commissions associated with Registrable Securities, shall be borne by the Company. 1.8 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such -7- quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders) but in no event shall: (i) the amount of securities of the selling Holders included in the offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities in which case the selling stockholders may be excluded if the underwriters make the determination described above and no other stockholder's securities are included; or (ii) notwithstanding (i) above, any shares being sold by a stockholder exercising a demand registration right similar to that granted in Section 1.2 be excluded from such offering; or (iii) any securities held by a Founder be included if any securities held by any selling Holder are excluded. For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder which is a holder of Registrable Securities and which is a partnership, limited liability company or corporation, the partners, retired partners, members and stockholders of such holder, or the estates and family members of any such partners, retired partners and members and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "SELLING STOCKHOLDER," and any pro-rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling stockholder," as defined in this sentence. 1.9 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.10 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder and the partners, officers, directors and stockholders of each Holder, and any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any -8- preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection 1.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; PROVIDED, that in no event shall any indemnity under this subsection 1.10(b) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, -9- with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10. (d) If the indemnification provided for in this Section 1.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations; PROVIDED, that in no event shall any contribution by a Holder under this Subsection 1.10(d) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. The Company acknowledges that an agreement by a Holder to indemnify and hold harmless the indemnitees and their affiliates and controlling persons which is broader than the indemnification contained in this Section 1.10 shall not be considered a conflict between the terms of this Section 1.10 and the indemnification and contribution provisions contained in the underwriting agreement. (f) The obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: -10- (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public so long as the Company remains subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.12 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of at least 500,000 shares of such securities (subject to stock splits, combinations and the like) or all of such Holder's shares, if less, PROVIDED the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and PROVIDED, FURTHER, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership or limited liability company who are partners or retired partners of such partnership or members of such limited liability company (including spouses and ancestors, lineal descendants and siblings of such partners or members or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership or limited liability company, as the case may be; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under Section 1. -11- 1.13 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 1.2(a) or within one hundred eighty (180) days of the effective date of any registration effected pursuant to Section 1.2. 1.14 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that, during the period of duration (up to, but not exceeding, 180 days) specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Securities Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration; PROVIDED, HOWEVER, that: (a) such agreement shall be applicable only to the first such registration statement of the Company which covers Common Stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and (b) all officers and directors of the Company, all one-percent securityholders, and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period, and each Holder agrees that, if so requested, such Holder will execute an agreement in the form provided by the underwriter containing terms which are essentially consistent with the provisions of this Section 1.14. Notwithstanding the foregoing, the obligations described in this Section 1.14 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, or a registration relating solely to an SEC Rule 145 transaction on Form S-4 or similar forms which may be promulgated in the future. 1.15 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled to exercise any right provided for in this Section 1 after the earlier of (i) five (5) years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Securities Act in connection with the initial firm commitment underwritten offering of -12- its securities to the general public, or (ii) such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder's shares during a three (3)-month period without registration. 2. COVENANTS OF THE COMPANY. 2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each Investor holding, and to transferees of, at least 500,000 shares of Registrable Securities (subject to stock splits, combinations and the like): (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholder's equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles ("GAAP"), and audited and certified by an independent public accounting firm of nationally recognized standing selected by the Company; (b) as soon as practicable, but in any event within thirty (30) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited profit or loss statement, a statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter; (c) within thirty (30) days of the end of each month, an unaudited income statement and a statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail; (d) as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets and sources and applications of funds statements for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; (e) with respect to the financial statements called for in subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company and certifying that such financials were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment, provided that the foregoing shall not restrict the right of the Company to change its accounting principles consistent with GAAP, if the Board of Directors determines that it is in the best interest of the Company to do so; and (f) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Investor or any assignee of the Investor may from time to time reasonably request; PROVIDED, HOWEVER, that the Company shall not be -13- obligated under this subsection (f) or any other subsection of Section 2.1 to provide information which it deems in good faith to be a trade secret or similar confidential information. 2.2 INSPECTION. The Company shall permit each Investor who holds not less than 500,000 shares of Registrable Securities (subject to stock splits, combinations and the like), at such Investor's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Investor; PROVIDED, HOWEVER, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. 2.3 RIGHT OF FIRST OFFER. Subject to the terms and conditions specified in this Section 2.3, the Company hereby grants to each Major Investor (as hereinafter defined) a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.3, a "MAJOR INVESTOR" shall mean any person who holds at least 500,000 shares of Series A and/or B Preferred Stock (or the Common Stock issued upon conversion thereof) (as adjusted for stock splits, stock dividends, recapitalizations (subject to stock splits, combinations and the like), issued pursuant to the Purchase Agreement or the Series A Preferred Stock Purchase Agreement dated as of December 23, 1997. For purposes of this Section 2.3, Major Investor includes any partners and other affiliates of a Major Investor. A Major Investor who chooses to exercise the right of first offer may designate as purchasers under such right itself or its partners or affiliates in such proportions as it deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("SHARES"), the Company shall first make an offering of such Shares to each Major Investor in accordance with the following provisions: (a) The Company shall deliver a notice by certified mail ("NOTICE") to the Major Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) Within 20 calendar days after delivery of the Notice, the Major Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion and exercise of all outstanding convertible or exercisable securities then held, by such Major Investor bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities). The Company shall promptly, in writing, inform each Major Investor that purchases all the shares available to it (each, a "FULLY-EXERCISING INVESTOR") of any other Major Investor's failure to do likewise. During the ten (10)-day period commencing after receipt of such information, each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares for which Major Investors were entitled to subscribe but which were not subscribed for by the Major Investors that is equal to the proportion that the number of shares of Common Stock -14- issued and held, or issuable upon conversion and exercise of all outstanding convertible or exercisable securities then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities). (c) The Company may, during the 45-day period following the expiration of the period provided in subsection 2.3(b) hereof, offer the remaining unsubscribed portion of the Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 60 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Major Investors in accordance herewith. (d) The right of first offer in this paragraph 2.3 shall not be applicable (i) to the issuance or sale of up to 5,800,000 shares Common Stock (or options therefor) to employees, consultants and directors, pursuant to plans or agreements approved by the Board of Directors, including options to purchase 1,903,000 shares of Common Stock outstanding on the date hereof, (ii) to or after consummation of a public offering of shares of Common Stock, (iii) to the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities which were originally excluded from this Section 2.3, (iv) to the issuance of securities in connection with a bona fide business acquisition by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (v) to the issuance of securities to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, or similar transactions, which issuances are primarily for other than equity financing purposes and provided that the aggregate of such issuance and similar issuances in the preceeding twelve month period do not exceed 1% of the then outstanding Common Stock of the Company (assuming full conversion and exercise of all outstanding convertible and exercisable securities), (vi) to the issuance or sale of the Series B Preferred Stock, or (vii) the issuance of securities pursuant to a stock split, stock dividend, recapitalization or other combination. 2.4 TERMINATION OF COVENANTS. The covenants set forth in Sections 2.1 through Section 2.3 shall terminate as to each Investor and be of no further force or effect (i) immediately prior to the consummation of the Company's initial public offering of shares of its Common Stock registered under the Securities Act, or (ii) when the Company shall sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, provided that this subsection (ii) shall not apply to (x) a merger effected exclusively for the purpose of changing the domicile of the Company, or (y) a merger or consolidation in which the holders of the Company's voting securities immediately prior to such transaction continue to own more than fifty percent (50%) of the voting power of the surviving or resulting entity. The covenants set forth in Sections 2.1 and 2.2 shall terminate as to each Investor and be of no further force or effect when the Company first becomes subject to the periodic reporting requirements of -15- Sections 13 or 15(d) of the Exchange Act, if this occurs earlier than the events described in (i) or (ii) above. 3. MISCELLANEOUS. 3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any of the Series A and/or B Preferred Stock or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws. 3.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 NOTICES. Unless otherwise provided, any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth below or on EXHIBIT A hereto or as subsequently modified by written notice. 3.6 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of at least 66 2/3% of the Registrable Securities then outstanding, not including the Founders' Stock; provided that if such amendment has the effect of affecting the Founders' Stock (i) in a manner different than securities issued to the Investors and (ii) in a manner adverse to the interests of the holders of the Founders' Stock, then such amendment shall require the consent of the holder or holders of a majority of the Founders' Stock. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each -16- holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. 3.8 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 3.9 AGGREGATION OF STOCK. All shares of the Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.10 TERMINATION OF EXISTING AGREEMENT. This Agreement contains the entire understanding of the parties, and there are no further or other agreements or understandings, written or oral, in effect between the parties relating to the subject matter hereof except for the Intel Letter Agreement of even date herewith, the terms of which are expressly incorporated herein by reference. The signatories to this Agreement (other than the Company), as the holders of more than sixty six and two thirds (66 2/3%) in interest of the Registrable Securities (as defined in the Existing Agreement), hereby agree that the Existing Agreement is hereby amended and restated in its entirety by this Agreement, and the Existing Agreement shall be of no further force or effect. [Signature Page Follows] -17- The parties have executed this Amended and Restated Investors' Rights Agreement as of the date first above written. COMPANY: eTOYS INC. By: /s/ Edward C. Lenk ---------------------------------------- Edward C. Lenk President and Chief Executive officer Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTORS: DYNAFUND LP By: /s/ Denny R. S. Ko ------------------------------------------ Name: Denny R. S. Ko ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: illegible ------------------------------------- illegible ------------------------------------- Fax: 310-543-8733 ------------------------------------- DYNAFUND INTERNATIONAL LP By: /s/ Denny R. S. Ko ------------------------------------------ Name: Denny R. S. Ko ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: Illegible ------------------------------------- Illegible ------------------------------------- Fax: 310-543-8733 ------------------------------------- SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTOR: INTEL CORPORATION By: Illegible ------------------------------------------ Name: Illegible ---------------------------------------- (print) Title: --------------------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052 Attn: Treasurer Fax: (408) 765-6038 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTORS: MOORE GLOBAL INVESTMENTS, LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: c/o Citco Fund Services (Bahamas), Ltd. Bahamas Financial Center Charlotte & Shirley Street P.O. Box CB 13136 Nassau, Bahamas Fax: 242-356-0223 ----------------------------------- REMINGTON INVESTMENTS STRATEGIES, L.P. By: Moore Capital Advisors, L.L.C. Its: General Partner By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas New York, New York 10020 Fax: 212-582-9813 ----------------------------------- SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTORS: MULTI-STRATEGIES FUND, L.P. By: Moore Capital Advisors, L.L.C. Its: General Partner By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas New York, New York 10020 Fax: 212-582-9813 ----------------------------------- MULTI-STRATEGIES FUND LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: c/o Citco Fund Services (Bahamas), Ltd. Bahamas Financial Center Charlotte & Shirley Street P.O. Box CB 13136 Nassau, Bahamas Fax: 242-356-0223 ----------------------------------- SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTORS: /s/ Glen R. Van Ligten --------------------------------------------- Glen R. Van Ligten Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Fax: (650) 854-1121 /s/ James L. Brock ---------------------------------------- James L. Brock Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Fax: (650) 854-1121 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTORS: HIGHLAND CAPITAL PARTNERS III LIMITED PARTNERSHIP By: Highland Management Partners III Limited Partnership, its General Partner By: /s/ Daniel J. Nova ------------------------------------------ Name: Daniel J. Nova ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: c/o Highland Capital Partners Two International Place Boston, MA 02110 Fax: (617) 531-1550 HIGHLAND ENTREPRENEURS' FUND III LIMITED PARTNERSHIP By: HEF III, LLC, its General Partner By: /s/ Daniel J. Nova ------------------------------------------ Name: Daniel J. Nova ---------------------------------------- (print) Title: Member --------------------------------------- Address: c/o Highland Capital Partners Two International Place Boston, MA 02110 Fax: (617) 531-1550 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTORS: idealab! CAPITAL PARTNERS I-A, LP By its General Partner, idealab! Capital Management I, LLC By: /s/ William Elkus ---------------------------------------- William Elkus Managing Member Address: c/o idealab! Capital Partners 130 West Union Street Pasadena, CA 91103 Fax: (626) 535-2881 idealab! CAPITAL PARTNERS I-B, LP By its General Partner, idealab! Capital Management I, LLC By: /s/ William Elkus ---------------------------------------- William Elkus Managing Member Address: c/o idealab! Capital Partners 130 West Union Street Pasadena, CA 91103 Fax: (626) 535-2881 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTORS: BESSEMER VENTURE PARTNERS IV L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------------ Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 Fax: (516) 997-2371 BESSEMER VENTURE INVESTORS L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------------ Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 Fax: (516) 997-2371 BESSEC VENTURES IV L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------------ Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 Fax: (516) 997-2371 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTORS: SEQUOIA CAPITAL VIII SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS Q CMS SEQUOIA 1997 By: /s/ Michael Moritz ------------------------------------------ Name: Michael Moritz ---------------------------------------- (print) Title: --------------------------------------- Address: 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Fax: (650) 854-2977 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT INVESTORS: VLG INVESTMENTS 1998 By: /s/ Illegible ------------------------------------------ Name: ---------------------------------------- (print) Title: --------------------------------------- Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 /s/ Glen R. Van Ligten --------------------------------------------- Glen R. Van Ligten Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT FOUNDERS: /s/ Edward C. Lenk ------------------------------------------ Edward C. Lenk Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 /s/ Frank C. Han ------------------------------------------ Frank C. Han Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT EXHIBIT A PRIOR INVESTORS DynaFund International LP DynaFund LP Intel Corporation idealab! Capital Partners I-A, LP EXHIBIT B NEW INVESTORS Highland Capital Partners III Limited Partnership Highland Entrepreneurs' Fund III Limited Partnership idealab! Capital Partners I-A, LP idealab! Capital Partners I-B, LP Bessemer Venture Partners IV L.P. Bessemer Venture Investors L.P. Bessec Ventures IV L.P. DynaFund International LP DynaFund LP Moore Global Investments, Ltd. Remington Investment Strategies, L.P. Multi Strategies Fund, L.P. Multi-Strategies Fund Ltd. Sequoia Capital VIII Sequoia International Technology Partners Sequoia International Technology Partners Q CMS Sequoia 1997 EX-10.10 17 EXHIBIT 10.10 ETOYS INC. AMENDED AND RESTATED VOTING AGREEMENT This Amended and Restated Voting Agreement (the "AGREEMENT") is made as of the 4th day of June, 1998, by and among eToys Inc., a Delaware corporation (the "COMPANY"), idealab!, a Delaware corporation, Edward C. Lenk, Frank C. Han (collectively, the "COMMON STOCKHOLDERS"), the prior investors listed on EXHIBIT A hereto (the "PRIOR INVESTORS") and the new investors listed on EXHIBIT B hereto (the "NEW INVESTORS"). The Prior Investors and the New Investors are referred to herein collectively as the "INVESTORS" and each individually as an "INVESTOR". RECITALS The Company and the Prior Investors entered into that certain Voting Agreement on December 23, 1997 (the "EXISTING AGREEMENT"). The Company and the New Investors have entered into a Series B Preferred Stock Purchase Agreement (the "PURCHASE AGREEMENT") of even date herewith pursuant to which the Company desires to sell to the New Investors and the Investors desire to purchase from the Company shares of the Company's Series B Preferred Stock. A condition to the New Investors' obligations under the Purchase Agreement is that the Company and the Prior Investors amend and restate the Existing Agreement in the manner set forth herein, for the purpose of setting forth the terms and conditions pursuant to which the Investors shall vote their shares of the Company's voting stock in favor of certain designees to the Company's Board of Directors. The Company's Second Amended and Restated Certificate of Incorporation provides as follows: the holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of the Company, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. In addition, (i) as long as twenty-five percent (25%) of the number of shares of Series B Preferred Stock issued by the Company on the date the Series B Preferred Stock was originally issued remain outstanding, the holders of the Series B Preferred Stock shall be entitled, voting together as a separate class, to elect two (2) directors (the "SERIES B DIRECTORS") of this corporation at each annual election of directors and (ii) as long as twenty-five percent (25%) of the number of shares of Series A Preferred Stock issued by the Company on the date the Series A Preferred Stock was originally issued remain outstanding, the holders of the Series A Preferred Stock shall be entitled, voting together as a separate class, to elect one (1) director (the "SERIES A DIRECTOR") of the Company at each annual election of directors. The holders of Common Stock shall be entitled, voting together as a separate class, to elect two (2) directors (the "COMMON DIRECTORS") of the Company at each annual meeting of directors. The holders of Preferred Stock and Common Stock voting together as a single class shall have the right to elect any remaining directors (the "INDEPENDENT DIRECTORS"). The Company and the Investors each desire to facilitate the voting arrangements set forth in this Agreement, and the sale and purchase of shares of Series B Preferred Stock pursuant to the Purchase Agreement, by agreeing to the terms and conditions set forth herein. AGREEMENT The parties hereby agree as follows: 1. BOARD REPRESENTATION. Until the earlier of (i) the date the number of shares of Common Stock held in the aggregate by Highland Capital Partners III Limited Partnership and Highland Entrepreneurs' Fund III Limited Partnership (the "HIGHLAND ENTITIES") (assuming conversion of the Series B Preferred Stock held by such entities) falls below five percent (5%) of the Company's then outstanding capital stock or (ii) the date that the Highland Entities in the aggregate hold less than twenty-five percent (25%) of the number of shares of Common Stock (assuming conversion of the Series B Preferred Stock held by the Highland Entities) that the Highland Entities in the aggregate purchased pursuant to the Purchase Agreement, the Investors agree to vote or act with respect to their shares so as to elect as the Series B Director an individual designated by Highland Capital Partners III Limited Partnership, the initial designee of which shall be Dan Nova. Until the earlier of (i) the date the number of shares of Common Stock held in the aggregate by funds affiliated with Sequoia Capital (the "SEQUOIA ENTITIES") (assuming conversion of the Series B Preferred Stock held by such entities) falls below five percent (5%) of the Company's then outstanding capital stock or (ii) the date that the Sequoia Entities in the aggregate hold less than twenty-five percent (25%) of the number of shares of Common Stock (assuming conversion of the Series B Preferred Stock held by the Sequoia Entities) that the Se Sequoia Entities in the aggregate purchased pursuant to the Purchase Agreement, the Investors agree to vote or act with respect to their shares so as to elect as the Series B Director an individual designated by the Sequoia Entities, the initial designee of which shall be Michael Moritz. Until the earlier of (i) the date the number of shares of Common Stock held in the aggregate by DynaFund LP and DynaFund International LP (the "DYNAFUND ENTITIES") (assuming conversion of the Series A Preferred Stock held by such entities) falls below five percent (5%) of the Company's then outstanding capital stock or (ii) the date that the DynaFund Entities in the aggregate hold less than twenty-five percent (25%) of the number of shares of Common Stock (assuming conversion of the Series A Preferred Stock held by the DynaFund Entities) that the DynaFund Entities in the aggregate purchased pursuant to the Series A Preferred Stock Purchase Agreement dated as of December 23, 1997, the Investors agree to vote or act with respect to their shares so as to elect as the Series A Director an individual designated by DynaFund LP, the initial designee of which shall be Tony Hung. During the term of this Agreement, the Common Stockholders agree to vote or act with respect to their shares so as to elect the Company's then-current Chief Executive Officer as one of the Common Directors. During the term of this Agreement, the parties to this Agreement agree to vote or act with respect to their shares so as to elect as one of the Independent Directors an individual with relevant experience in the Company's industry, which person shall be designated -2- by the holders of a majority of the outstanding Preferred Stock and Common Stock voting together as a single class, and which designee shall initially be Peter Hart. 2. REMOVAL. In the event of any termination, removal or resignation of any director, the Investors shall take all actions necessary and appropriate to cause such vacancy to be filled in the manner by which such director was elected pursuant to the terms of this Agreement. 3. CHANGE IN NUMBER OF DIRECTORS. The Investors will not vote for any amendment or change to the Bylaws providing for the election of more than six (6) directors, or any other amendment or change to the Bylaws inconsistent with the terms of this Agreement. 4. LEGENDS. Each certificate representing Investors' Shares shall be endorsed by the Company with a legend reading as follows: "THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT BY AND AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY (A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT." 5. TERMINATION. This Agreement shall terminate upon the earlier of (a) the consummation of the Company's initial public offering on a firm underwriting basis of any of its securities reflecting in proceeds of at least $20,000,000, or (b) ten (10) years from the date hereof. 6. AMENDMENTS; WAIVERS. Any term hereof may be amended or waived only with the written consent of the Company and holders of at least 66-2/3% of the Series A and Series B Preferred Stock; PROVIDED, HOWEVER, that, subject to the limitation set forth in Section 1 hereto, in no event shall an amendment or waiver hereto which limits the rights of Highland Capital Partners III Limited Partnership, the Sequoia Entities or DynaFund L.P., respectively, to designate a director under Section 1 be effective without the written consent of the Highland Capital Partners III Limited Partnership, the Sequoia Entities or DynaFund L.P., respectively. In addition, in no event shall an amendment or waiver hereto which alters the obligations of the parties hereto under Section 1 to agree to vote or act with respect to their shares so as to elect as one of the Independent Directors an individual with relevant experience in the Company's industry that is designated by the holders of the outstanding Preferred Stock and Common Stock voting together as a single class be effective without the written consent of the Common Stockholders. Any amendment or waiver effected in accordance with this Section 5 shall be binding upon the Company, the holders of the Preferred Stock and each of their respective successors and assigns. 7. NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient on the date of delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. -3- mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth below or on EXHIBIT A hereto, or as subsequently modified by written notice. 8. SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 9. ENFORCEABILITY/SEVERABILITY. The parties hereto agree that each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law. If any provision of this Agreement shall nonetheless be held to be prohibited by or invalid under applicable law, (a) such provision shall be effective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement, and (b) the parties shall, to the extent permissible by applicable law, amend this Agreement, or enter into a voting trust agreement under which shares of the DynaFund Entities the ("DYNAFUND SHARES"), the shares held by the Highland Entities ("HIGHLAND SHARES"), the shares of the Sequoia Entities (the "SEQUOIA SHARES") and shares of the Investors ("INVESTOR SHARES) and the Shares of the Common Stockholders (the "COMMON STOCKHOLDER SHARES") (collectively, the "TRUST SHARES") shall be transferred to the voting trust created thereby, so as to make effective and enforceable the intent of this Agreement. 10. GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 11. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 12. SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 13. REMEDIES. Each party hereto will be entitled to enforce its rights under this Agreement specifically, to recover damages by reason of any breach of any provision hereof, and to exercise all other rights existing in its favor. Each party hereto agrees and acknowledges that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that each holder may, in its sole discretion, apply for specific performance and injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. -4- 14. EXPENSES. The Company shall pay the reasonable expenses of directors in attending Board meetings. 15. ENTIRE AGREEMENT. This Agreement, and the documents referred to herein, constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements existing between the parties hereto are expressly canceled. [Signature Pages Follow] -5- The parties hereto have executed this Amended and Restated Voting Agreement as of the date first written above. COMPANY: eTOYS INC. By: /s/ Edward C. Lenk ---------------------------------------- Edward C. Lenk President and Chief Executive officer Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT INVESTORS: DYNAFUND LP By: /s/ Denny R. S. Ko ------------------------------------------ Name: Denny R. S. Ko ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: Illegible ------------------------------------- Illegible ------------------------------------- Fax: Illegible ------------------------------------- DYNAFUND INTERNATIONAL LP By: /s/ Denny R.S. Ko ------------------------------------------ Name: Denny R. S. Ko ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: Illegible ------------------------------------- Illegible ------------------------------------- Fax: Illegible ------------------------------------- SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT INVESTOR: INTEL CORPORATION By: /s/ Illegible ------------------------------------------ Name: Illegible ---------------------------------------- (print) Title: --------------------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052 Attn: Treasurer Fax: (408) 765-6038 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT INVESTORS: MOORE GLOBAL INVESTMENTS, LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: c/o Citco Fund Services (Bahamas), Ltd. Bahamas Financial Center Charlotte & Shirley Street P.O. Box CB 13136 Nassau, Bahamas Fax: 242-356-0223 ----------------------------------- REMINGTON INVESTMENTS STRATEGIES, L.P. By: Moore Capital Advisors, L.L.C. Its: General Partner By: /s/ Savvas Savvinidis ------------------------------------------ Name: Savvas Savvinidis ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas New York, New York 10020 Fax: 212-582-9813 ----------------------------------- SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT INVESTORS: MULTI-STRATEGIES FUND, L.P. By: Moore Capital Advisors, L.L.C. Its: General Partner By: /s/ Savvas Savvinidi ------------------------------------------ Name: Savvas Savvinidi ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: 1251 Avenue of the Americas New York, New York 10020 Fax: 212-582-9813 ----------------------------------- MULTI-STRATEGIES FUND LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ Savvas Savvinidi ------------------------------------------ Name: Savvas Savvinidi ---------------------------------------- (print) Title: Director of Operations --------------------------------------- Address: c/o Citco Fund Services (Bahamas), Ltd. Bahamas Financial Center Charlotte & Shirley Street P.O. Box CB 13136 Nassau, Bahamas Fax: 242-356-0223 ----------------------------------- SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT INVESTORS: /s/ Glen R. Van Ligten --------------------------------------------- Glen R. Van Ligten Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Fax: (650) 854-1121 /s/ James L. Brock --------------------------------------------- James L. Brock Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Fax: (650) 854-1121 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT COMMON STOCKHOLDERS: /s/ Edward C. Lenk --------------------------------------------- Edward C. Lenk Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 /s/ Frank C. Han --------------------------------------------- Frank C. Han Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 Bill Gross' idealab!, a Delaware corporation By: /s/ William Gross ------------------------------------------ Name: William Gross ---------------------------------------- (print) Title: --------------------------------------- Address: 130 West Union Street Pasadena, CA 91103 Fax: (626) 535-2701 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT NEW INVESTORS: HIGHLAND CAPITAL PARTNERS III LIMITED PARTNERSHIP By: Highland Management Partners III Limited Partnership, its General Partner By: /s/ Daniel J. Nova ------------------------------------------ Name: Daniel J. Nova ---------------------------------------- (print) Title: General Partner --------------------------------------- Address: c/o Highland Capital Partners Two International Place Boston, MA 02110 Fax: (617) 531-1550 HIGHLAND ENTREPRENEURS' FUND III LIMITED PARTNERSHIP By: HEF III, LLC, its General Partner By: /s/ Daniel J. Nova ------------------------------------------ Name: Daniel J. Nova ---------------------------------------- (print) Title: Member --------------------------------------- Address: c/o Highland Capital Partners Two International Place Boston, MA 02110 Fax: (617) 531-1550 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT INVESTORS: idealab! CAPITAL PARTNERS I-A, LP By its General Partner, idealab! Capital Management I, LLC By: /s/ William Elkus ---------------------------------------- William Elkus Managing Member Address: c/o idealab! Capital Partners 130 West Union Street Pasadena, CA 91103 Fax: (626) 535-2881 idealab! CAPITAL PARTNERS I-B, LP By its General Partner, idealab! Capital Management I, LLC By: /s/ William Elkus ---------------------------------------- William Elkus Managing Member Address: c/o idealab! Capital Partners 130 West Union Street Pasadena, CA 91103 Fax: (626) 535-2881 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT INVESTORS: BESSEMER VENTURE PARTNERS IV L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------------ Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 Fax: (516) 997-2371 BESSEMER VENTURE INVESTORS L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------------ Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 Fax: (516) 997-2371 BESSEC VENTURES IV L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------------ Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 Fax: (516) 997-2371 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT INVESTORS: SEQUOIA CAPITAL VIII SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS Q CMS SEQUOIA 1997 By: /s/ Michael Moritz ------------------------------------------ Name: Michael Moritz ---------------------------------------- (print) Title: --------------------------------------- Address: 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Fax: (650) 854-2977 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT INVESTORS: VLG INVESTMENTS 1998 By: /s/ Joshua Pickus ------------------------------------------ Name: Joshua Pickus ---------------------------------------- (print) Title: Partner --------------------------------------- Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 /s/ Glen R. Van Ligten --------------------------------------------- Glen R. Van Ligten Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED VOTING AGREEMENT EXHIBIT A PRIOR INVESTORS DynaFund International LP DynaFund LP Intel Corporation idealab! Capital Partners I-A, LP EXHIBIT B NEW INVESTORS Highland Capital Partners III Limited Partnership Highland Entrepreneurs' Fund III Limited Partnership idealab! Capital Partners I-A, LP idealab! Capital Partners I-B, LP Bessemer Venture Partners IV L.P. Bessemer Venture Investors L.P. Bessec Ventures IV L.P. DynaFund International LP DynaFund LP Intel Corporation Moore Global Investments, Ltd. Remington Investment Strategies, L.P. Multi Strategies Fund, L.P. Multi Strategies Fund Ltd. Glen R. Van Ligten Entities Affiliated with Sequoia Capital EX-10.11 18 EXHIBIT 10.11 ETOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT This Amended and Restated Right of First Refusal and Co-Sale Agreement (the "AGREEMENT") is made and entered into as of the 4th day of June, 1998, by and among idealab!, a Delaware corporation ("IDEALAB!"), Edward C. Lenk ("LENK") and Frank C. Han ("HAN") (idealab!, Lenk and Han collectively the "FOUNDERS" and individually , the "FOUNDER"), eToys Inc., a Delaware corporation (the "COMPANY"), the prior investors listed on EXHIBIT A hereto (the "PRIOR INVESTORS") and the new investors listed on EXHIBIT B hereto (the "NEW INVESTORS"). The Prior Investors and the New Investors are referred to herein collectively as the "INVESTORS" and each individually as an "INVESTOR". RECITALS The Company, the Founders and the Existing Investors entered into a Right of First Refusal and Co-Sale Agreement on December 23, 1997 (the "EXISTING AGREEMENT.") The Company and the New Investors have entered into a Series B Preferred Stock Purchase Agreement (the "PURCHASE AGREEMENT") of even date herewith, pursuant to which the Company desires to sell to the New Investors and the New Investors desire to purchase from the Company shares of the Company's Series B Preferred Stock. A condition to the New Investors' obligations under the Purchase Agreement is that the Company, the Founders and the Prior Investors amend and restate the Existing Agreement in the manner set forth in this Agreement in order to provide the New Investors with the opportunity to purchase and/or participate, upon the terms and conditions set forth in this Agreement, in subsequent sales by any Founder's of shares of the Company's capital stock. The Company, the Prior Investors and the Founders each desire to induce the New Investors to purchase shares of Series B Preferred Stock pursuant to the Purchase Agreement by agreeing to the terms and conditions set forth herein. AGREEMENT The Company, the Prior Investors, the New Investors and the Founders hereby agree as follows: 1. SALES BY FOUNDERS. (a) NOTICE OF SALES; ASSIGNMENT OF COMPANY RIGHT OF FIRST REFUSAL. (i) Should any Founder propose to accept one or more bona fide offers (collectively, a "PURCHASE OFFER") from any persons to purchase shares of the Company's capital stock (or securities exercisable into the Company's capital stock) now or hereafter owned (the "SHARES") by such Founder (other than as set forth in Section 1(e) below), such Founder shall promptly deliver a notice (the "NOTICE") to the Company and each Investor stating the terms and conditions of such Purchase Offer including, without limitation, the number of Shares, the nature of such sale or transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee. (ii) The Company agrees that in the event that the Company declines to exercise in full the Right of First Refusal set forth in Section 3 of the Restricted Stock Purchase Agreement (or Section 5 of the Stock and Note Purchase Agreement in the case of idealab!) between such Founder and the Company (the "RIGHT OF FIRST REFUSAL"), the Company will provide each Investor with notice of such determination at least thirty (30) days prior to the end of the period in which the Right of First Refusal expires under such Restricted Stock Purchase Agreement or Stock and Note Purchase Agreement. Each Investor shall then have the right, exercisable by notice prior to the end of such period, to exercise such Right of First Refusal as the Company's assignee on a pro rata basis (based upon the number of Conversion Shares (as defined below) held by such Investor relative to the aggregate number of Conversion Shares held by all Investors); provided that if fewer than all Investors elect to participate, the Shares that would otherwise be allocated to non-participating Investors shall be allocated to each participating Investor so that each participating Investor is entitled to purchase at least such Investor's pro rata portion of such unallocated Shares (based upon the number of Conversion Shares held by all participating Investors) or such different number of shares as the participating Investors shall mutually agree. In the event the Purchase Offer provides for consideration other than cash, in lieu of such consideration, the Company and the Investors, may make payment in cash in an amount equal to the full market value of such consideration. Upon expiration or exercise of the Right of First Refusal, the Company will provide notice to all Investors as to whether or not the Right of First Refusal has been exercised by the Company or the Investors. (b) CO-SALE RIGHT. To the extent that the Right of First Refusal is not exercised by the Company or the Investors, each Investor shall have the right (the "CO-SALE RIGHT"), exercisable upon written notice to the Company within fifteen (15) business days after the expiration of the Right of First Refusal to participate in such Founder's sale of Shares pursuant to the specified terms and conditions of such Purchase Offer. To the extent an Investor exercises such Co-Sale Right in accordance with the terms and conditions set forth below, the number of Shares which such Founder may sell pursuant to such Purchase Offer shall be correspondingly reduced. The Co-Sale Right of each Investor shall be subject to the following terms and conditions: (i) CALCULATION OF SHARES. Each Investor may sell all or any part of that number of shares of Common Stock of the Company issued or issuable upon conversion of Series A and/or Series B Series A and/or Series B Preferred Stock or Common Stock received in connection with any stock dividend, stock split or other reclassification thereof (the "CONVERSION SHARES") equal to the product obtained by multiplying (A) the aggregate number of shares of Common Stock covered by the Purchase Offer by (B) a fraction, the numerator of which is the number of Conversion Shares at the time owned by such Investor and the denominator of which is the combined number of Conversion Shares at the time owned by all Investors and all Founders participating in such sale. The provisions of this Agreement do not confer any Co-Sale rights with respect to any shares of Common Stock or other securities held by an Investor that are -2- not Conversion Shares. An Investor who chooses to exercise the Co-Sale Right hereunder may designate as sellers under such right itself or its partners or affiliates, in such proportions as it deems appropriate. (ii) DELIVERY OF CERTIFICATES. Each Investor may effect its participation in the sale by delivering to the selling Founder for transfer to the purchase offeror one or more certificates, properly endorsed for transfer, which represent the Conversion Shares, which such Investor elects to sell. (c) TRANSFER. The stock certificate or certificates which the Investor delivers to the selling Founder pursuant to Section 1(b) shall be delivered by such Founder to the purchase offeror in consummation of the sale pursuant to the terms and conditions specified in the Notice, and such Founder shall promptly thereafter remit to such Investor that portion of the sale proceeds to which such Investor is entitled by reason of its participation in such sale. To the extent that any prospective purchaser or purchasers prohibits such assignment or otherwise refuses to purchase Conversion Shares from an Investor exercising its Co-Sale Right hereunder, the selling Founder or Founders shall not sell to such prospective purchaser or purchasers any Shares unless and until, simultaneously with such sale, the selling Founder or Founders shall purchase such Conversion Shares from such Investor for the same consideration and on the same terms and conditions as the proposed transfer described in the Notice (which terms and conditions shall be no less favorable than those governing the sale to the purchaser by the Founder or Founders). (d) NO ADVERSE EFFECT. The exercise or non-exercise of the rights of the Investors hereunder to participate in one or more sales of Shares made by a Founder shall not adversely affect their rights to participate in subsequent sales of Shares by a Founder. (e) PERMITTED TRANSACTIONS. The provisions of Section 1 of this Agreement shall not pertain or apply to: (i) Any pledge of the Company's Common Stock made by a Founder pursuant to a bona fide loan transaction which creates a mere security interest; (ii) Any repurchase of Common Stock by the Company; (iii) Any transfer to a Founder's ancestors, descendants or spouse or to a trust for their benefit by gift or inheritance; (iv) any sale or transfer (including any bona fide gift) by a Founder of up to 5% of the total number of shares of Common Stock held by such Founder on the date of this Agreement. PROVIDED, that (A) the Founder(s) shall inform the Company of such pledge, transfer or gift prior to effecting it, and (B) the pledgee, transferee or donee (collectively, the "PERMITTED TRANSFEREES") shall furnish the Company with a written agreement to be bound by and comply with all provisions of this Agreement applicable to the Founders. -3- 2. PROHIBITED TRANSFERS. Any attempt by a Founder to transfer Shares in violation of Section 1 of this Agreement shall be void and the Company agrees it will not effect such a transfer nor will it treat any alleged transferee as the holder of such shares without the written consent of the holders of 66-2/3% of the Conversion Shares. 3. LEGENDED CERTIFICATES. Each certificate representing shares of the Common Stock of the Company now or hereafter owned by the Founders or issued to any Permitted Transferee pursuant to Section 1(e) shall be endorsed with the following legend: "THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT BY AND BETWEEN THE STOCKHOLDER, THE CORPORATION AND CERTAIN HOLDERS OF COMMON AND PREFERRED STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION." The foregoing legend shall be removed upon termination of this Agreement in accordance with the provisions of Section 4(a). 4. MISCELLANEOUS PROVISIONS. (a) TERMINATION. This Agreement shall terminate upon the earliest to occur of any one of the following events (and shall not apply to any transfer by a Founder in connection with any such event): (i) The liquidation, dissolution or indefinite cessation of the business operations of the Company; (ii) The execution by the Company of a general assignment for the benefit of creditors or the appointment of a receiver or trustee to take possession of the property and assets of the Company; (iii) The closing of the Company's initial public offering of securities; PROVIDED that all shares of the Company's Series A and/or Series B Preferred Stock are converted into shares of Common Stock prior to or in connection with such offering; or (iv) The closing of any acquisition, merger, reorganization or other transaction which results in the stockholders of the Company immediately prior to such transaction owning less than 50% of the Company's voting stock immediately after such transaction. (b) NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient on the date of delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the -4- U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth below or on EXHIBIT A hereto, or as subsequently modified by written notice. (c) SUCCESSORS AND ASSIGNS. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. The rights of the Investors hereunder shall be assignable only (i) by each of such Investors to any other Investor or (ii) an assignee or transferee who acquires not less than 500,000 shares of the Company's Common Stock (as adjusted for stock splits, stock dividends and the like, and assuming conversion of all Series A and/or Series B Preferred Stock held by such Investor) or all of such Investor's shares, if less; PROVIDED that such limitation shall not apply to transfers by an Investor to constituent stockholders, constituent partners or retired constituent partners or members (including any constituent of a constituent) of the Investor (including spouses and ancestors, lineal descendants and siblings of such partners or members or spouses who acquire the Series A and/or Series B Preferred Stock or Common Stock issued upon conversion thereof) if all such transferees or assignees irrevocably agree in writing to appoint a single representative as their attorney in fact for the purpose of receiving any notices and exercising their rights under this Agreement. (d) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (e) MODIFICATIONS AND AMENDMENTS. Any term hereof may be amended or waived with the written consent of the Company, Investors holding at least 66-2/3% the Series A and B Preferred Stock, and holders of 66-2/3% of the Founders' shares (or their respective successors and assigns) voting together as a class. Any amendment or waiver effected in accordance with this Section 4(e) shall be binding upon the Company, the holders of Series A and Series B Preferred Stock and any holder of Founders' Shares, and each of their respective successors and assigns. (f) ATTORNEY'S FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. (g) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. -5- (h) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (i) ENTIRE AGREEMENT. This Agreement, and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements existing between the parties hereto are expressly canceled. [Signature Page Follows] -6- The parties have executed this Agreement as of the date first written above. COMPANY: eTOYS INC. By: /s/ Edward C. Lenk ---------------------------------------- Edward C. Lenk President and Chief Executive officer Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTORS: DYNAFUND LP By: /s/ Denny R.S. Ko -------------------------------------- Name: Denny R.S. Ko -------------------------------------- (print) Title: General Partner -------------------------------------- Address: illegible ------------------------------ ------------------------------ Fax: illegible ------------------------------ DYNAFUND INTERNATIONAL LP By: /s/ Denny R.S. Ko -------------------------------------- Name: Denny R.S. Ko -------------------------------------- (print) Title: General Partner -------------------------------------- Address: illegible ------------------------------ ------------------------------ Fax: illegible ------------------------------ SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTOR: INTEL CORPORATION By: /s/ illegible -------------------------------------- Name: Illegible -------------------------------------- (print) Title: -------------------------------------- Address: 2200 Mission College Blvd. Santa Clara, CA 95052 Attn: Treasurer Fax: (408) 765-6038 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTORS: MOORE GLOBAL INVESTMENTS, LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ Savvas Savvinidis -------------------------------------- Name: Savvas Savvinidis -------------------------------------- (print) Title: Director of Operations -------------------------------------- Address: c/o Citco Fund Services (Bahamas), Ltd. Bahamas Financial Center Charlotte & Shirley Street P.O. Box CB 13136 Nassau, Bahamas Fax: ----------------------------------- REMINGTON INVESTMENTS STRATEGIES, L.P. By: Moore Capital Advisors, L.L.C. Its: General Partner By: /s/ Savvas Savvinidis -------------------------------------- Name: Savvas Savvinidis -------------------------------------- (print) Title: Director of Operations -------------------------------------- Address: 1251 Avenue of the Americas New York, New York 10020 Fax: ----------------------------------- SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTORS: MULTI-STRATEGIES FUND, L.P. By: Moore Capital Advisors, L.L.C. Its: General Partner By: /s/ Savvas Savvinidis -------------------------------------- Name: Savvas Savvinidis -------------------------------------- (print) Title: Director of Operations -------------------------------------- Address: 1251 Avenue of the Americas New York, New York 10020 Fax: ----------------------------------- MULTI-STRATEGIES FUND LTD. By: Moore Capital Management, Inc. Its: Trading Advisor By: /s/ Savvas Savvinidis -------------------------------------- Name: Savvas Savvinidis -------------------------------------- (print) Title: Director of Operations -------------------------------------- Address: c/o Citco Fund Services (Bahamas), Ltd. Bahamas Financial Center Charlotte & Shirley Street P.O. Box CB 13136 Nassau, Bahamas Fax: ----------------------------------- SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTORS: /s/ Glen R. Van Ligten --------------------------------------------- Glen R. Van Ligten Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Fax: (650) 854-1121 /s/ James L. Brock --------------------------------------------- James L. Brock Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Fax: (650) 854-1121 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTORS: HIGHLAND CAPITAL PARTNERS III LIMITED PARTNERSHIP By: Highland Management Partners III Limited Partnership, its General Partner By: /s/ Daniel J. Nova -------------------------------------- Name: Daniel J. Nova -------------------------------------- (print) Title: General Partner -------------------------------------- Address: c/o Highland Capital Partners Two International Place Boston, MA 02110 Fax: (617) 531-1550 HIGHLAND ENTREPRENEURS' FUND III LIMITED PARTNERSHIP By: HEF III, LLC, its General Partner By: /s/ Daniel J Nova -------------------------------------- Name: Daniel J Nova -------------------------------------- (print) Title: Member -------------------------------------- Address: c/o Highland Capital Partners Two International Place Boston, MA 02110 Fax: (617) 531-1550 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTORS: idealab! CAPITAL PARTNERS I-A, LP By its General Partner, idealab! Capital Management I, LLC By: /s/ William Elkus -------------------------------------- William Elkus Managing Member Address: c/o idealab! Capital Partners 130 West Union Street Pasadena, CA 91103 Fax: (626) 535-2881 idealab! CAPITAL PARTNERS I-B, LP By its General Partner, idealab! Capital Management I, LLC By: /s/ William Elkus -------------------------------------- William Elkus Managing Member Address: c/o idealab! Capital Partners 130 West Union Street Pasadena, CA 91103 Fax: (626) 535-2881 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTORS: BESSEMER VENTURE PARTNERS IV L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------- Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 Fax: (516) 997-2371 BESSEMER VENTURE INVESTORS L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------- Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 Fax: (516) 997-2371 BESSEC VENTURES IV L.P. By: Deer IV & Co. LLC, General Partner By: /s/ Robert H. Buescher ------------------------------------- Name: Robert H. Buescher Title: Manager Address: 1400 Old Country Road, Suite 407 Westbury, NY 11590 Fax: (516) 997-2371 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTORS: SEQUOIA CAPITAL VIII SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS SEQUOIA INTERNATIONAL TECHNOLOGY PARTNERS Q CMS SEQUOIA 1997 By: /s/ Michael Moritz --------------------------------------- Name: Michael Moritz ------------------------------------- (print) Title: ------------------------------------ Address: 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Fax: (650) 854-2977 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT INVESTORS: VLG INVESTMENTS 1998 By: /s/ Joshua Pickus ------------------------------------------ Name: Joshua Pickus ---------------------------------------- (print) Title: Partner --------------------------------------- Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 /s/ Glen R. Van Ligten --------------------------------------------- Glen R. Van Ligten Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT FOUNDERS: Bill Gross' idealab!, a Delaware corporation By: /s/ William Gross --------------------------------------- Name: William Gross ------------------------------------- (print) Title: ------------------------------------ Address: 130 West Union Street Pasadena, CA 91103 Fax: (626) 535-2701 /s/ Edward C. Lenk ------------------------------------------ Edward C. Lenk Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 /s/ Frank C. Han ------------------------------------------ Frank C. Han Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 Fax: (310) 576-7784 SIGNATURE PAGE TO eTOYS INC. AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT EXHIBIT A PRIOR INVESTORS DynaFund International LP DynaFund LP Intel Corporation idealab! Capital Partners I-A, L.P. Glen R. Van Ligten James L. Brock EXHIBIT B NEW INVESTORS Highland Capital Partners III Limited Partnership Highland Entrepreneurs' Fund III Limited Partnership idealab! Capital Partners I-A, LP idealab! Capital Partners I-B, LP Bessemer Venture Partners IV L.P. Bessemer Venture Investors L.P. Bessec Ventures IV L.P. DynaFund International LP DynaFund LP Moore Global Investments, Ltd. Remington Investment Strategies, L.P. Multi Strategies Fund, L.P. Multi-Strategies Fund Ltd. Glen R. Van Ligten Entities Associated with Sequoia Capital EX-10.12 19 EXHIBIT 10.12 BASIC LEASE INFORMATION OFFICE GROSS LEASE DATE: (same as date in first paragraph of the Lease) As of January 22, 1999 TENANT: eToys, Inc., a Delaware Corporation TENANT'S NOTICE ADDRESS: 3100 Ocean Park Blvd., Suite 300 (after Commencement Date) Santa Monica, CA 90405 TENANT'S BILLING ADDRESS: 3100 Ocean Park Blvd., Suite 300 (after Commencement Date) Santa Monica, CA 90405 TENANT CONTACT: JORDAN POSELL PHONE NUMBER: (310) 576-6776 ext. 118 FAX NUMBER: (310) 576-7784 LANDLORD: Spieker Properties, L.P., a California limited partnership LANDLORD'S NOTICE ADDRESS: 3250 Ocean Park Boulevard, Suite 150 Santa Monica, California 90405 LANDLORD'S REMITTANCE ADDRESS: P.O. Box 60077 Department 12371 Los Angeles, California 90060-0077 PROJECT DESCRIPTION: A project commonly known as Santa Monica Business Park consisting of nineteen (19) buildings, as further shown on Exhibit "B" attached hereto. BUILDING DESCRIPTIONS: A three (3) story office building containing approximately 141,961 rentable square feet, located at 2850 Ocean Park Boulevard, Santa Monica, California, as shown on Exhibit B attached hereto (the "2850 Building"). A three (3)-story office building containing approximately 141,833 rentable square feet, located at 3100 Ocean Park Boulevard, Santa Monica, California, as shown on Exhibit B attached hereto (the "3100 Building"). The term "Building" as used in this Lease shall collectively mean and refer to the 2850 Building and the 3100 Building. PREMISES: 59,023 rentable square feet of space commonly known as Suites 225 ("Suite 225"), 230, 240 and 270 of the 2850 Building (collectively, the "2850 Space") and the entire third (3rd) floor of the 3100 Building (the "3100 Space"), as shown on Exhibit B attached hereto. The 2850 Space collectively contains 16,873 rentable square feet (broken down -1- as follows -- Suite 225 - 12,364 rentable square feet; Suites 230 and 240 - 2,466 rentable square feet; and Suite 270 - 2,043 rentable square feet), and the 3100 Space contains 42,150 rentable square feet. The term "Premises" shall collectively mean the 2850 Space and the 3100 Space. Landlord and Tenant hereby stipulate and agree to the foregoing square footage figures. PERMITTED USE: General office, non-medical use OCCUPANCY DENSITY: Six (6) people per 1,000 rentable square feet of the Premises. PARKING DENSITY: Subject to the terms of Article 4 below, up to five (5) non-exclusive parking spaces per 1,000 rentable square feet of the Premises which will be in common with other tenants of the Project. Tenant agrees that for that portion of the parking requirements of Tenant at any given time during the Term (i) which exceed three (3) non-exclusive parking spaces per 1,000 rentable square feet of the Premises, Tenant will utilize parking on level No. 3 of the parking structure adjacent to the Building (which parking structure is located at 2910 31st Street, Santa Monica, California, and is hereinafter referred to as the "Adjacent Parking Structure"), and (ii) which exceed 4.5 non-exclusive parking spaces per 1,000 rentable square feet of the Premises or occur during the Seasonal Period (defined below), Tenant will utilize valet parking services (provided by Landlord as an Operating Expense) on certain levels in the Adjacent Parking Structure to be designated by Landlord. The term "Seasonal Period" shall mean the months of October, November, December during each calendar year of the Term and January of the immediately following calendar year. In addition to non-exclusive parking spaces, the Original Tenant (as defined in Article 39E below) and any Affiliate (but not any other assignee or subtenant of the Original Tenant) shall have the right to lease five (5) reserved parking spaces in front of the 3100 Building (the exact location of which is delineated on Exhibit "B" attached hereto). PARKING AND PARKING CHARGE: Up to 300 non-exclusive parking spaces and, subject to the preceding paragraph, five (5) reserved parking spaces at Landlord's prevailing market rates plus applicable governmental taxes. Landlord's prevailing market rates for parking are $60.00 per unreserved parking space per month and $60.00 per reserved parking space per month plus applicable governmental taxes, which rates are subject to change from time to time (subject to a cap on increases in parking rates in accordance with Article 37 below). -2- ESTIMATED TERM COMMENCEMENT DATE: April 1, 1999, subject to the terms of Article 2 of the Lease. ESTIMATED LENGTH OF TERM: Fifty-three (53) months. TERM EXPIRATION DATE: August 31, 2003. RENT:
2850 SPACE ---------- COMMENCEMENT DATE -- AUGUST 31, 1999 $33,746.00 PER MONTH SEPT. 1, 1999 -- AUGUST 31, 2000 $34,758.38 PER MONTH SEPT. 1, 2000 -- AUGUST 31, 2001 $35,801.14 PER MONTH SEPT. 1, 2001 -- AUGUST 31, 2002 $36,875.17 PER MONTH SEPT. 1, 2002 -- AUGUST 31, 2003 $37,981.42 PER MONTH 3100 SPACE ---------- MONTHS 1 -- 3 $42,150.00 PER MONTH ($1.00 PER RENTABLE SQUARE FOOT PER MONTH) MONTHS 4 -- 12 $82,192.50 PER MONTH ($1.95 PER RENTABLE SQUARE FOOT PER MONTH) MONTHS 13 -- 24 $85,564.50 PER MONTH ($2.03 PER RENTABLE SQUARE FOOT PER MONTH) MONTHS 25 -- 36 $88,936.50 PER MONTH ($2.11 PER RENTABLE SQUARE FOOT PER MONTH) MONTHS 37 -- 48 $92,730.00 PER MONTH ($2.20 PER RENTABLE SQUARE FOOT PER MONTH) MONTHS 49 -- AUGUST 31, 2003 $96,945.00 PER MONTH ($2.30 PER RENTABLE SQUARE FOOT PER MONTH)
2850 BUILDING BASE YEAR -- CALENDAR YEAR 1998 3100 BUILDING BASE YEAR -- CALENDAR YEAR 1999 SECURITY DEPOSIT: $37,981.42 PLUS $900,000 (which amount shall be paid to Landlord by means of a cash security deposit and/ or letter(s) of credit in accordance with paragraph 39C below). Landlord and Tenant acknowledge that (i) Landlord is currently holding an amount equal to $583,856.54 as a security deposit for Tenant's obligations under the Existing Lease (as defined in Article 39G below), (ii) Landlord shall continue to hold said security deposit as part of the security deposit which Tenant is obligated to deliver to Landlord hereunder, and (iii) Tenant shall be credited against its obligations to provide a security deposit to Landlord under this Lease with the amount of the security deposit being held by Landlord under the Existing Lease. -3- TENANT'S 2850 SPACE PROPORTIONATE SHARE: 11.88% TENANT'S 3100 SPACE PROPORTIONATE SHARE: 30.90% The foregoing proportionate shares are hereby stipulated by Landlord and Tenant to be true and correct. The foregoing Basic Lease Information is incorporated into and made a part of this Lease. Each reference in this Lease to any of the Basic Lease Information shall mean the respective information above and shall be construed to incorporate all of the terms provided under the particular Lease paragraph pertaining to such information. In the event of any conflict between the Basic Lease Information and the Lease, the latter shall control. LANDLORD TENANT Spieker Properties, L.P., eToys, Inc. a California limited partnership a Delaware corporation By: Spieker Properties, Inc., By: /s/ a Maryland corporation, ------------------------ Its: ------------------------ By: /s/ By: /s/ ------------------------ ------------------------ Its: Its: ------------------------ ------------------------ -4- TABLE OF CONTENTS
Page ---- 1. PREMISES................................................................ 1 2. POSSESSION AND LEASE COMMENCEMENT....................................... 1 3. TERM.................................................................... 2 4. USE..................................................................... 2 5. RULES AND REGULATIONS................................................... 5 6. RENT.................................................................... 5 7. OPERATING EXPENSES...................................................... 6 8. INSURANCE AND INDEMNIFICATION.......................................... 15 9. WAIVER OF SUBROGATION.................................................. 17 10. LANDLORD'S REPAIRS AND MAINTENANCE.................................... 18 11. TENANT'S REPAIRS AND MAINTENANCE...................................... 19 12. ALTERATIONS........................................................... 20 13. SIGNS................................................................. 21 14. INSPECTION/POSTING NOTICES............................................ 21 15. SERVICES AND UTILITIES................................................ 22 16. SUBORDINATION......................................................... 26 17. FINANCIAL STATEMENTS.................................................. 26 18. ESTOPPEL CERTIFICATE.................................................. 26 19. SECURITY DEPOSIT...................................................... 27 20. LIMITATION OF TENANT'S REMEDIES....................................... 27 21. ASSIGNMENT AND SUBLETTING............................................. 28 22. AUTHORITY............................................................. 30 23. CONDEMNATION.......................................................... 30 24. CASUALTY DAMAGE....................................................... 31 25. HOLDING OVER.......................................................... 33 26. DEFAULT............................................................... 34 27. LIENS................................................................. 36
-2- 28. SUBSTITUTION.......................................................... 36 29. TRANSFERS BY LANDLORD................................................. 37 30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS....................... 37 31. WAIVER................................................................ 37 32. NOTICES............................................................... 37 33. ATTORNEYS' FEES....................................................... 38 34. SUCCESSORS AND ASSIGNS................................................ 38 35. FORCE MAJEURE......................................................... 38 36. SURRENDER OF PREMISES................................................. 38 37. PARKING............................................................... 39 38. MISCELLANEOUS......................................................... 40 39. ADDITIONAL PROVISIONS................................................. 42 40. STANDARD FOR CONDUCT AND CONSENT...................................... 48 41. JURY TRIAL WAIVER..................................................... 48
-3- LEASE THIS LEASE is made as of the 22nd day of January, 1999, by and between Spieker Properties, L.P., a California limited partnership (hereinafter called "LANDLORD"), and eToys, Inc., a Delaware corporation (hereinafter called "TENANT"). 1. PREMISES Landlord leases to Tenant and Tenant leases from Landlord, upon the terms and conditions hereinafter set forth, those premises (the "PREMISES") outlined in red on EXHIBIT B and described in the Basic Lease Information. Tenant's rights to the Premises shall include the limited right to use and access upon reasonable prior notice to Landlord, the janitorial closet and the electrical and telephone rooms on the floors containing the Premises as reasonably necessary for Tenant's effective and efficient use of the Premises. Upon reasonable prior notice to Landlord, Tenant, at its sole expense, shall also be permitted to enter such areas to service its equipment. Upon reasonable prior notice to Landlord, Tenant, at its sole expense, shall have the right to use, or access, any ceilings or space above the ceilings on the floors or walls containing the Premises to the extent necessary to service Tenant's equipment in the Premises and to run wires, cables, and other conduits to the Premises to the extent permitted by applicable laws. In addition, upon reasonable prior notice to Landlord, Tenant, at its sole expense, shall be allowed to use such space as necessary for providing utility services such as the installation of computer cable conduits. Notwithstanding anything to the contrary set forth in this Lease, (i) in no event shall Tenant (A) take any action in the Premises or the Project which may affect the base, shell and core or any of the Project's systems or equipment, (B) take any action which may interfere with the use or occupancy by another tenant in the Project of its premises or the exercise by another tenant in the Project of similar rights, or (C) take any action which may impair the health or safety of any of the occupants of the Project or violate any Regulations, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed; and (ii) Landlord shall have the right to have a representative of Landlord present to supervise or otherwise coordinate any such action by Tenant. The Premises shall be all or part of a building (the "BUILDING") and of a project (the "PROJECT"), which may consist of more than one building and additional facilities, as described in the Basic Lease Information. The Building and Project are outlined in blue and green respectively on EXHIBIT B. Landlord and Tenant acknowledge that physical changes may occur from time to time in the Premises, Building or Project, and that the number of buildings and additional facilities which constitute the Project may change from time to time, which may result in an adjustment in Tenant's Proportionate Share, as defined in the Basic Lease Information, as provided in Paragraph 7.A; provided that Tenant's obligations under Paragraph 7 below shall not be increased as a result of additional buildings or facilities being added to the Project and such changes shall not materially and adversely interfere with Tenant's use of or access to the Premises. 2. POSSESSION AND LEASE COMMENCEMENT A. CONSTRUCTION OF IMPROVEMENTS. The term commencement date ("TERM COMMENCEMENT DATE") shall be the earlier of the date on which: (1) Tenant takes possession of some or all of the 3100 Space and commences business therefrom; or (2) the first Monday following the date Tenant receives a factually correct notice that the improvements to be constructed or performed in the 3100 Space by Landlord (the "Tenant Improvements") shall have been substantially completed in accordance with the plans and specifications described on EXHIBIT C. Landlord shall use its commercially reasonable efforts to provide Tenant with at least ten (10) business days' advance notice of Landlord's estimated date of substantial completion of the 3100 Space. The terms "substantially completed" or "substantial completion" shall mean: (1) all the Building systems and equipment are operational to the extent necessary to service the 3100 Space; (2) Landlord has completed all work required to be performed by Landlord in accordance with the Plans as certified by Landlord's architect, excluding "punch-list" items which do not adversely and materially affect Tenant's use and occupancy of the 3100 Space and shall be -2- completed as soon thereafter as reasonably practicable; (3) Landlord has obtained a certificate of occupancy for the 3100 Space, or its legal equivalent; and (4) Tenant has been provided the number of parking privileges and spaces to which it is entitled under the Lease and has been provided access to the 3100 Space, Building and Project parking facilities in accordance with the terms of this Lease. In the event the Term Commencement Date does not occur by July 31, 1999 (the "Outside Commencement Date"), which date shall be extended by governmental delays (up to but not exceeding 90 days), Force Majeure Delays (defined below) (up to but not exceeding 90 days) (provided that in no event shall the Outside Commencement Date be extended by more than 90 days, in the aggregate, for Force Majeure Delays and governmental delays) and Tenant Delays (defined below), Tenant shall have the right to terminate this Lease by delivering ten (10) days' prior notice to Landlord at any time prior to the occurrence of the Term Commencement Date. Subject to the preceding sentence, if for any reason Landlord cannot deliver possession of the 3100 Space to Tenant on the scheduled Term Commencement Date, Landlord shall not be subject to any liability therefor, nor shall Landlord be in default hereunder nor shall such failure affect the validity of this Lease, and Tenant agrees to accept possession of the 3100 Space at such time as such improvements have been substantially completed, which date shall then be deemed the Term Commencement Date. Tenant shall not be liable for any Rent for any period prior to the Term Commencement Date (but without affecting any obligations of Tenant under any improvement agreement appended to this Lease). Substantial completion shall have occurred notwithstanding Tenant's submission of a punchlist to Landlord, which Tenant shall submit, if at all, within thirty (30) days after the Term Commencement Date or otherwise in accordance with any improvement agreement appended to this Lease. Landlord shall deliver within sixty (60) days of the Term Commencement Date to Tenant a "Start-Up Letter" in which Tenant shall agree, among other things, to acceptance of the 3100 Space (subject to latent defects and Tenant's rights under any warranties assigned to Tenant pursuant to the Improvement Agreement attached hereto as Exhibit "C") and to the determination of the Term Commencement Date, in accordance with the terms of this Lease. Tenant shall execute and return said Start-Up Letter to Landlord within ten (10) business days following Tenant's receipt of the same, but Tenant's failure or refusal to do so shall not negate Tenant's acceptance of the 3100 Space or affect determination of the Term Commencement Date. Landlord represents to Tenant that, to the best of Landlord's actual knowledge (without any independent inquiry or investigation), Landlord has not received any notice from any governmental authority informing Landlord that the 2850 Building or the 3100 Building is in violation of the Americans With Disabilities Act of 1990 (41 U.S.C. 12101 et seq.), as well as the regulations and accessibility guidelines promulgated thereunder (collectively, "ADA"), or any laws, ordinances or statutes of the City of Santa Monica or State of California based upon or similar to ADA (collectively, the "Santa Monica Disability Codes") for new construction without regard to grandfathering. In the event any portion of the Project (including the Premises) does not comply with ADA or Santa Monica Disability Codes, and Tenant is not responsible for such non-compliance in accordance with the terms of this Lease, then as Tenant's sole remedy (other than Tenant's right to recover from Landlord any claims, losses or damages suffered by Tenant as a result of a third party claim brought against Tenant), Landlord shall be obligated to promptly, at Landlord's sole cost and expense (and not as an Operating Expense pass-through item), rectify said violation and cause the 2850 Building and/or 3100 Building and/or Project to be in material compliance with ADA or the Santa Monica Disability Codes, as applicable. 3. TERM The term of this Lease (the "TERM") shall commence on the Term Commencement Date and continue in full force and effect until August 31, 2003, or until this Lease is terminated as otherwise provided herein. If the Term Commencement Date is a date other than the first day of the calendar month, the Term shall be the number of months of the Length of Term in addition to the remainder of the calendar month following the Term Commencement Date. 4. USE A. GENERAL. Tenant shall use the Premises for the permitted use specified in the Basic Lease Information ("PERMITTED USE") and for no other use or purpose. Tenant shall control Tenant's (and Tenant's assignees' and subtenants') employees, independent contractors and agents -3- (collectively, "TENANT'S PARTIES") in such a manner that Tenant and Tenant's Parties cumulatively do not exceed the occupant density (the "OCCUPANCY DENSITY") or the parking density (the "PARKING DENSITY") specified in the Basic Lease Information at any time. Notwithstanding the definition of Occupancy Density set forth in the Basic Lease Information, unless otherwise approved by Landlord, upon an assignment of this Lease or a sublease of all or a portion of the Premises to other than an Affiliate, the "Occupancy Density" with respect to the portion of the Premises affected by the assignment or sublease shall be reduced to 5 people per 1,000 rentable square feet of office space. If Tenant and Tenant's Parties exceed the Occupancy Density, Tenant shall be directly responsible for any additional costs actually incurred by Landlord as a result of such excessive Occupancy Density, including without limitation, costs for excess use and excess wear and tear (i.e. additional costs to maintain elevators, elevator lobbies, . . .). Notwithstanding the definition of Parking Density set forth in the Basic Lease Information, upon an assignment of this Lease or a sublease of all or a portion of the Premises to other than an Affiliate, the "Parking Density" with respect to the portion of the Premises affected by the assignment or sublease shall be reduced to 4.5 non-exclusive parking spaces per 1,000 rentable square feet of office space. Tenant shall pay the Parking Charge specified in the Basic Lease Information for spaces leased by Tenant as Additional Rent (as hereinafter defined) hereunder. Tenant and Tenant's Parties and any approved subtenants and/or assignees shall have the nonexclusive right to use, in common with other parties occupying the Building or Project, the parking areas, driveways and other common areas of the Building and Project, subject to the terms of this Lease and such reasonable, non-discriminatory rules and regulations as Landlord may from time to time prescribe. Landlord reserves the right, without notice or liability to Tenant, and without the same constituting an actual or constructive eviction, to alter or modify the common areas from time to time, including the location and configuration thereof, and the amenities and facilities which Landlord may determine to provide from time to time, provided Landlord agrees to use its commercially reasonable efforts not to materially and adversely interfere with Tenant's use of or access to the Premises and parking facilities. Landlord shall have the right to alter the Common Areas from time to time so long as any such alteration does not materially and adversely impair Tenant's use or access to the Premises; provided, however, Landlord shall use its best efforts to provide Tenant with fifteen (15) business days prior notice of any of the actions set forth in this Section 4A, above, to be taken by Landlord if such action will materially and adversely interfere with Tenant's ability to (i) conduct business in the Premises, (ii) gain access to and from the Building and the parking facilities and adjacent streets, or (iii) use the parking facilities. All of Landlord's entries and the performance of Landlord's work pursuant to this Lease, shall be scheduled and performed, as applicable, so as to use commercially reasonable efforts to minimize interference with Tenant's use of and access to the Premises and parking facilities. Tenant may, subject to Landlord's prior approval, designate certain areas of the Premises as "Security Areas" should Tenant require such areas for the purpose of securing certain valuable property or confidential information. Landlord may only enter such Security Areas upon two (2) business days' notice to Tenant which notice shall specify the date and time of such entry by Landlord; provided, however, that Landlord may enter the Security Areas without notice to Tenant in the event of an emergency, in which case Landlord shall provide Tenant with notice of such entry promptly thereafter. Landlord shall maintain the Building and Project in a manner consistent with the manner in which the Building and pRoject are being maintained as of the date of this Lease. Subject to the terms and conditions of this Lease, Tenant shall have access to the Premises and the parking facilities serving the Premises twenty-four (24) hours per day, three hundred sixty-five (365) days per year. B. LIMITATIONS. Tenant shall not permit unreasonable amounts (as reasonably determined by Landlord) of any odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises or from any portion of the common areas as a result of Tenant's or any Tenant's Party's use thereof, nor take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants or occupants of the Building or Project or elsewhere, or interfere with their use of their respective premises or common areas. Storage outside the Premises of materials, vehicles or any other items is prohibited. Tenant shall not use or allow the Premises to be used for any immoral, improper or unlawful purpose, nor shall Tenant cause or maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit -4- or suffer the commission of any waste in, on or about the Premises. Tenant shall not allow any sale by auction upon the Premises, or place any loads upon the floors, walls or ceilings which could endanger the structure, or place any harmful substances in the drainage system of the Building or Project. No waste, materials or refuse shall be dumped upon or permitted to remain outside the Premises. Landlord shall not be responsible to Tenant for the non-compliance by any other tenant or occupant of the Building or Project with any of the above-referenced rules or any other terms or provisions of such tenant's or occupant's lease or other contract, provided that Landlord agrees to use its reasonable efforts to enforce said rules and other terms or provisions in order to ensure compliance therewith. C. COMPLIANCE WITH REGULATIONS. By entering the Premises, Tenant accepts the Premises in its "AS-IS" condition existing as of the date of such entry, subject to any punchlist items, latent defects, structural defects and any covenants and/or representations set forth in this Lease and Tenant's rights under any warranties assigned to Tenant pursuant to the Improvement Agreement attached hereto as Exhibit "C". Except for items which are Landlord's responsibility hereunder, Tenant shall at its sole cost and expense cause its use and occupancy of the Premises and any Alterations (defined in Paragraph 12 below) performed by or on behalf of Tenant (except those performed by Landlord) to strictly comply with all existing or future applicable municipal, state and federal and other governmental statutes, rules, requirements, regulations, laws and ordinances, including zoning ordinances and regulations, ADA and the Santa Monica Disability Codes, and covenants, easements and restrictions of record governing and relating to the use, occupancy or possession of the Premises, to Tenant's use of the common areas, or to the use, storage, generation or disposal of Hazardous Materials caused by Tenant or any employee, agent, representative, contractor, licensee or invitee of Tenant (hereinafter defined) (collectively "REGULATIONS"). Tenant shall at its sole cost and expense obtain any and all licenses or permits necessary for Tenant's use of the Premises. Tenant shall at its sole cost and expense promptly comply with the requirements of any board of fire underwriters or other similar body now or hereafter constituted. Tenant shall not do or permit anything to be done in, on, under or about the Project or bring or keep anything which will in any way increase the rate of any insurance upon the Premises, Building or Project or upon any contents therein or cause a cancellation of said insurance. Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect and hold Landlord harmless from and against any loss, cost, expense, damage, attorneys' fees or liability arising out of the failure of Tenant to comply with any Regulation. Tenant's obligations pursuant to the foregoing indemnity shall survive the expiration or earlier termination of this Lease. Notwithstanding the foregoing, Tenant shall not be responsible for any capital improvements, costs incurred to comply with ADA or the Santa Monica Disability Codes, for costs to comply with environmental or fire/life/safety laws or structural work required to be performed unless such work is required by reason of Tenant's particular use of the Premises (other than as general office use), any Alterations performed by or on behalf of Tenant, any Tenant Improvements which do not constitute normal general office improvements, or as a result of any act of Tenant or any of Tenant's agents, representatives, employees, contractors or invitees (in which event Tenant shall be responsible for said capital improvement costs, compliance costs or structural work, as applicable). D. HAZARDOUS MATERIALS. As used in this Lease, "HAZARDOUS MATERIALS" shall include, but not be limited to, hazardous, toxic and radioactive materials and those substances defined as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or other similar designations in any Regulation. Tenant shall not cause, or allow any of Tenant's Parties to cause, any Hazardous Materials to be handled, used, generated, stored, released or disposed of in, on, under or about the Premises, the Building or the Project or surrounding land or environment in violation of any Regulations. Tenant must obtain Landlord's written consent prior to the introduction of any Hazardous Materials onto the Project. Notwithstanding the foregoing, Tenant may handle, store, use and dispose of products containing small quantities of Hazardous Materials for "general office purposes" (such as toner for copiers) to the extent customary and necessary for the Permitted Use of the Premises; provided that Tenant shall always handle, store, use, and dispose of any such Hazardous Materials in a safe and lawful manner and never allow such Hazardous Materials to contaminate the Premises, Building, or Project or surrounding land or environment. Tenant shall immediately notify Landlord in writing of any Hazardous Materials' contamination of any portion of the Project of which Tenant becomes aware if caused by Tenant. Landlord shall have the right at all reasonable times to inspect the -5- Premises and to conduct tests and investigations to determine whether Tenant is in compliance with the foregoing provisions, the costs of all such inspections, tests and investigations to be borne by Tenant to the extent it is determined Tenant is not in compliance with said provisions. Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect and hold Landlord and its directors, officers, employees, agents, successors and assigns harmless from and against any and all claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or expenses (including attorneys' and consultants' fees and court costs), demands, causes of action, or judgments directly or indirectly arising out of or related to the use, generation, storage, release, or disposal of Hazardous Materials by Tenant or any of Tenant's Parties in, on, under or about the Premises, the Building or the Project or surrounding land or environment, which indemnity shall include, without limitation, damages for personal or bodily injury, property damage, damage to the environment or natural resources occurring on or off the Premises, losses attributable to diminution in value or adverse effects on marketability, the cost of any investigation, monitoring, government oversight, repair, removal, remediation, restoration, abatement, and disposal, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the expiration or earlier termination of this Lease. Neither the consent by Landlord to the use, generation, storage, release or disposal of Hazardous Materials nor the strict compliance by Tenant with all laws pertaining to Hazardous Materials shall excuse Tenant from Tenant's obligation of indemnification pursuant to this Paragraph 4.D. E. Landlord represents to Tenant that, to the best of Landlord's actual knowledge (without any independent inquiry or investigation), the Premises and the Building are in material compliance with all Regulations as of the date of this Lease. Landlord shall indemnify, defend, protect and hold harmless Tenant, its affiliates, their respective directors, officers, employees, agents and successors and assigns harmless from and against any and all claims, demands, causes of action, judgments, injuries, damages, penalties, fines, costs, liabilities or losses and attorneys' fees, consultant fees and court costs arising out of, directly or indirectly, any Hazardous Material in, on or about the Project or the Premises which was created, handled, placed, stored, used, transported or disposed of by Landlord, excluding, however, any Hazardous Material whose presence was caused by Tenant or its affiliates or their respective agents. F. To the extent the representation set forth in the first sentence of paragraph 4E above is breached or to the extent otherwise required by any Regulations, Landlord agrees, at its sole cost and expense and not as an Operating Expense, to (i) commence to remove, restore, remediate and/or otherwise abate any Hazardous Materials located in the Project not caused by Tenant or any of Tenant's employees, agents, representatives, contractors, licensees or invitees, and (ii) diligently pursue such removal, restoration, remediation or abatement to completion. G. Notwithstanding anything to the contrary set forth in this Lease, the provisions of this Section 4 and the obligation or each party hereunder shall survive the expiration or earlier termination of this Lease. 5. RULES AND REGULATIONS Tenant shall faithfully observe and comply with the building rules and regulations attached hereto as EXHIBIT A and any other reasonable, non-discriminatory rules and regulations and any modifications or additions thereto which Landlord may from time to time prescribe in writing for the purpose of maintaining the proper care, cleanliness, safety, traffic flow and general order of the Premises or the Building or Project. Tenant shall cause Tenant's Parties to comply with such rules and regulations. Landlord shall not be responsible to Tenant for the non-compliance by any other tenant or occupant of the Building or Project with any of such rules and regulations, any other tenant's or occupant's lease or any Regulations, provided that Landlord agrees to use its reasonable efforts to enforce said rules and regulations in a uniform, non-discriminatory manner against all tenants of the Project. Notwithstanding anything to the contrary contained in this Lease, Landlord agrees that the rules and regulations for the Project shall not be (i) modified or enforced in any way by Landlord so as to unreasonably and materially interfere with the permitted use set forth in the Lease or Tenant's access to the Premises, Building or Project parking facility, or (ii) discriminatorily enforced against Tenant and not against other tenants of the Project. Landlord agrees that none -6- of the rules and regulations for the Project shall be used to prohibit the conduct of any business from the Premises which Tenant is permitted to conduct, unless said conduct constitutes a nuisance to other tenants of the Project or materially injures or impairs the reputation or image of the Project as a professional office park. In the event any other tenant or occupant fails to comply with the rules and regulations for the Project, and such non-compliance unreasonably and materially interferes with Tenant's use of the Premises, Landlord shall use its reasonable efforts to cause such other tenants and/or occupants to comply with such rules and regulations. 6. RENT A. BASE RENT. Tenant shall pay to Landlord and Landlord shall receive, without notice or demand, except as otherwise provided herein, throughout the Term, Base Rent as specified in the Basic Lease Information, payable in monthly installments in advance on or before the first day of each calendar month, in lawful money of the United States, without deduction or offset whatsoever, except as otherwise provided herein, at the Remittance Address specified in the Basic Lease Information or to such other place as Landlord may from time to time designate in writing. Bass Rent for the first full month of the Term shall be paid by Tenant upon Tenant's execution of this Lease. If the obligation for payment of Base Rent commences on a day other than the first day of a month, then Base Rent shall be prorated and the prorated installment shall be paid on the first day of the calendar month next succeeding the Term Commencement Date. As used herein, the term "Base Rent" shall mean the Base Rent specified in the Basic Lease Information as it may be so adjusted from time to time. B. ADDITIONAL RENT. All monies other than Base Rent required to be paid by Tenant hereunder, including, but not limited to, Tenant's 2850 Space Proportionate Share of 2850 Building Operating Expenses and Tenant's 3100 Space Proportionate Share of 3100 Building Operating Expenses, as specified in Paragraph 7 of this Lease, charges to be paid by Tenant under Paragraph 15, the interest and the late charge described in Paragraphs 26.C. and D., and any monies spent by Landlord pursuant to Paragraph 30, shall be considered additional rent ("ADDITIONAL RENT"). "RENT' shall mean Base Rent and Additional Rent. 7. OPERATING EXPENSES A. OPERATING EXPENSES. In addition to the Base Rent required to be paid hereunder, beginning with the expiration of the applicable Base Year specified in the Basic Lease Information, Tenant shall pay as Additional Rent, (i) Tenant's 2850 Space Proportionate Share of increases in the 2850 Building Operating Expenses (defined below) over the 2850 Building Operating Expenses incurred by Landlord during the 2850 Building Base Year ("2850 Building Base Year Operating Expenses"), and (ii) Tenant's 3100 Proportionate Share of increases in the 3100 Building Operating Expenses (defined below) over the 3100 Building Operating Expenses incurred by Landlord during the 3100 Building Base Year ("3100 Building Base Year Operating Expenses"), all as determined in the manner set forth below. Landlord and Tenant acknowledge that if the number of buildings which constitute the Project increases or decreases, or if physical changes are made to the Premises, Building or Project or the configuration of any thereof, Landlord shall, to the extent appropriate, reasonably adjust Tenant's 2850 Space Proportionate Share and/or Tenant's 3100 Space Proportionate Share to reflect the change, provided that Tenant's obligations under this Paragraph 7 shall not be increased as a result thereof. "OPERATING EXPENSES" shall mean all expenses and costs of every kind and nature which Landlord shall pay, because of or in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of the 2850 Building or 3100 Building, as applicable, and its supporting facilities and such additional facilities now and in subsequent years as may be determined by Landlord to be reasonably necessary or desirable to the 2850 Building or 3100 Building, as applicable, (as determined in a reasonable manner in accordance with sound real estate management principles) other than those expenses and costs which are specifically attributable to Tenant or which are expressly made the financial responsibility of Landlord or specific tenants of the 2850 Building or 3100 Building as applicable, pursuant to this Lease or such other tenants' leases. The "2850 Building Operating Expenses" shall mean those Operating Expenses which relate to the ownership, management, maintenance, repair, preservation, replacement and/or operation of the 2850 Building. The "3100 Building -7- Operating Expenses" shall mean those Operating Expenses which relate to the ownership, management, repair, preservation, replacement and/or operation of the 3100 Building. "Operating Expenses" shall collectively mean and refer to the 2850 Operating Expenses and the 3100 Operating Expenses. The Operating Expenses shall include, but are not limited to, the following: (1) TAXES. All real property taxes and assessments, possessory interest taxes, sales taxes, personal property taxes, business or license taxes or fees, gross receipts taxes, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, mandatory transit charges, and other impositions, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind (including fees "in-lieu" of any such tax or assessment) which are now or hereafter assessed, levied, charged, confirmed, or imposed by any public authority upon the 2850 Building or 3100 Building, as applicable, its operations or the Rent (or any portion or component thereof), or any tax, assessment or fee imposed in substitution, partially or totally, of any of the above. Operating Expenses shall also include any taxes, assessments, reassessments, or other fees or impositions with respect to the development, leasing, management, maintenance, alteration, repair, use or occupancy of the Premises or 2850 Building or 3100 Building, as applicable, or any portion thereof, including, without limitation, by or for Tenant, and all, except as otherwise provided herein, increases therein or reassessments thereof whether the increases or reassessments result from increased rate and/or valuation (whether upon a transfer of the 2850 Building or 3100 Building, as applicable, or any portion thereof or any interest therein or for any other reason). Operating Expenses shall not include inheritance or estate taxes imposed upon or assessed against the interest of any person in the 2850 Building or 3100 Building, as applicable, or taxes computed upon the basis of the net income of any owners of any interest in the 2850 Building or 3100 Building, as applicable. If it shall not be lawful for Tenant to reimburse Landlord for all or any part of such taxes, the monthly rental payable to Landlord under this Lease shall be revised to net Landlord the same net rental after imposition of any such taxes by Landlord as would have been payable to Landlord prior to the payment of any such taxes. There shall be included within the definition of "Taxes" with respect to any calendar year only the amount currently payable on any bonds or assessments, including interest for such tax calendar year or the current annual installment for such calendar year, and such shall be paid in the maximum number of installments allowable. Tax refunds shall be credited against Taxes and refunded to Tenant, regardless of when received, based on the year to which the refund is applicable. For purposes of this Lease, Taxes shall be calculated as if the tenant improvements in the 2850 Building and 3100 Building were fully constructed and the 2850 Building and 3100 Building, all parking facilities and all tenant improvements in the 2850 Building and 3100 Building were fully assessed for real estate tax purposes, specifically excluding any Proposition 8 reduction. Notwithstanding anything to the contrary contained in the Lease, Taxes shall not include (i) any excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents or receipts), (ii) any items for which Tenant or other tenants are liable pursuant to their lease (other than as Operating Expense pass through item), or (iii) penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments of, and/or to file any tax or informational returns with respect to, any real property taxes or assessment, when due, or (iv) taxes on tenant improvements in any space in either the 2850 Building or the 3100 Building or the Project based upon an assessed level in excess of $25.00 per rentable square foot. After written request (the "Tax Notice") by Tenant, at Landlord's option, either (i) Landlord shall diligently pursue claims for reductions in the Taxes of the Building, Project or any part thereof, in which event Landlord shall provide Tenant with detailed information as to how Landlord will pursue such claims, (ii) Tenant may pursue such claims with Landlord's concurrence, in the name of Landlord, or (iii) Tenant may pursue such claims, at Tenant's expense (except as otherwise set forth in this paragraph), in the name of Landlord without Landlord's concurrence. In the event that Landlord does not elect either item (i) or (ii), above, within thirty (30) days of receipt of the Tax Notice, Tenant shall thereafter have the right to pursue such claims under item (iii), above. If either Landlord agrees to pursue such claims or concurs in the decision to pursue such claims but elects to have them -8- pursued by Tenant, the cost of such proceedings shall be paid by Landlord and included in taxes in the fiscal year such expenses are paid. If Tenant pursues such claims without obtaining Landlord's concurrence and such contest is successful, then the cost of such proceedings, but in no event more than the cumulative tax savings achieved, shall be included in Operating Expenses in the fiscal year such expenses are paid, and Landlord shall pay or reimburse to Tenant such cost. Tenant may give a Tax Notice prior to the issuance of the actual tax bill by the taxing authority or receipt by Tenant of a billing from Landlord for Tenant's proportionate share thereof. If Tenant pursues any claims for reductions in Taxes pursuant to the terms hereof, Tenant shall notify Landlord in writing, on a regular basis, of the status of such claims and provide Landlord with a copy of any correspondence or other information delivered to or received by Tenant in connection therewith. (a) PROPOSITION 13 PROTECTION. Despite any other provision of this Lease, if (x) with respect to the 2850 Space, during the period ending on August 31, 2001, any sale, refinancing, or change in ownership of the 2850 Building is consummated and, as a result, all or part of the 2850 Building is reassessed ("Reassessment") for real estate tax purposes by the appropriate government authority under the terms of Proposition 13 (as adopted by the voters of the State of California in the June 1978 election), and (y) with respect to the 3100 Space, during the initial Term there is a reassessment of the 3100 Building, the terms of this Paragraph 7(A)(1)(a) shall apply. I. For purposes of this Paragraph 7(A)(1)(a), the term "Tax Increase" shall mean that portion of the Taxes, as calculated immediately following the Reassessment, that is attributable solely to the Reassessment. Accordingly, a Tax Increase shall not include any portion of the Taxes, as calculated immediately following the Reassessment, that is: (1) Attributable to the initial assessment of the value of the 2850 Building or 3100 Building, as applicable, the base, shell and core of the 2850 Building, or 3100 Building, as applicable, or the tenant improvements located in the 2850 Building or 3100 Building, as applicable; (2) Attributable to assessments pending immediately before the Reassessment, but not otherwise excludable, that were conducted during, and included in, that Reassessment or that were otherwise rendered unnecessary following the Reassessment; (3) Attributable to the annual inflationary increase in real estate taxes; or (4) Part of Taxes incurred or considered to be incurred during the applicable Base Year as determined under this Lease. II. With respect to the 2850 Space, during the period ending on August 31, 2001, Tenant shall not be obligated to pay any portion of the Tax Increase relating to a Reassessment of the 2850 Building occurring during the period ending on August 31, 2001. III. With respect to the 3100 Space, during the initial Term, Tenant shall not be obligated to pay any portion of the Tax Increase relating to a Reassessment of the 3100 Building occurring during the initial Term. IV. The amount of Taxes that Tenant is not obligated to pay or shall not be obligated to pay during the Term in connection with a particular Reassessment under the terms of this Paragraph 7(A)(1)(a) shall be referred to as the Proposition 13 Protection Amount. If a Reassessment is reasonably -9- foreseeable by Landlord and the Proposition 13 Protection Amount attributable to that Reassessment may be reasonably quantified or estimated for each Lease Year beginning with the Lease Year in which the Reassessment will occur, the terms of this Paragraph 7(A)(1)(a) shall apply to each such Reassessment. On notice to Tenant, Landlord shall have the right to purchase the entire Proposition 13 Protection Amount relating to the applicable Reassessment (Applicable Reassessment), at any time during the Term, by paying to Tenant an amount equal to the Proposition 13 Purchase Price, as defined below, as long as the right of any successor of Landlord to exercise its right of repurchase under this Lease shall not apply to any Reassessment that results from the event under which that successor became Landlord under this Lease. As used in this Lease, the term "Proposition 13 Purchase Price" shall mean the present value of the Proposition 13 Protection Amount remaining during the Term, as of the date of payment of the Proposition 13 Purchase Price by Landlord. The present value shall be calculated by: (1) Using the portion of the Proposition 13 Protection Amount attributable to each remaining Lease Year (as though the portion of that Proposition 13 Protection Amount benefited Tenant at the end of each Lease Year) as the amounts to be discounted; and (2) Using discount rates for each amount to be discounted equal to: (A) The average rates of yield for United States Treasury Obligations with maturity dates as close as reasonably possible to the end of each Lease Year during which the portions of the Proposition 13 Protection Amount would have benefited Tenant, using the rates in effect as of Landlord's exercise of its right to purchase, as set forth in this Paragraph 7(A)(1)(a); plus (B) two percent (2%) per annum. On payment of the Proposition 13 Purchase Price, subparagraphs (II) and/or (III), as applicable, of this Paragraph 7(A)(1)(a) shall not apply to any Taxes attributable to the Applicable Reassessment. Because Landlord is estimating the Proposition 13 Purchase Price because a Reassessment has not yet occurred, an adjustment shall be made when a Reassessment occurs. If Landlord has underestimated the Proposition 13 Purchase Price, Landlord shall, on notice to Tenant, credit Tenant's Rent next due with the amount of that underestimation (and Landlord's successor in interest shall be bound by any such underestimation). If Landlord has overestimated the Proposition 13 Purchase Price, Landlord shall, on notice to Tenant, increase Tenant's Rent next due by the amount of the overestimation. (2) INSURANCE. All insurance premiums and costs, including, but not limited to, any deductible amounts, premiums and other costs of insurance incurred by Landlord with respect to the 2850 Building or 3100 Building, as applicable, including for the insurance coverage set forth in Paragraph 8.A. herein. (3) COMMON AREA MAINTENANCE. (a) Repairs, replacements, and general maintenance of and for the 2850 Building or 3100 Building, as applicable, and public and common areas and facilities of and comprising the 2850 Building or 3100 Building, as applicable, including, but not limited to, the roof and roof membrane, windows, elevators, restrooms, conference rooms, health club facilities (if -10- any), lobbies, mezzanines, balconies, mechanical rooms, building exteriors, alarm systems, pest extermination, landscaped areas, parking and service areas, driveways, sidewalks, loading areas, fire sprinkler systems, sanitary and storm sewer lines, utility services, heating/ventilation/air conditioning systems, electrical, mechanical or other systems, telephone equipment and wiring servicing, plumbing, lighting, and any other items or areas which affect the operation or appearance of the 2850 Building or 3100 Building, as applicable, except for: those items expressly made the financial responsibility of Landlord pursuant to Paragraph 10 hereof; those items to the extent paid for by the proceeds of insurance; those items attributable solely or jointly to specific tenants of the 2850 Building or 3100 Building, as applicable, and those items specifically excluded from Operating Expenses. (b) Repairs, replacements, and general maintenance shall include the cost of any capital improvements made to or capital assets acquired for the 2850 Building or 3100 Building, as applicable, that in Landlord's discretion may reduce any other Operating Expenses (only to the extent of cost savings), including present or future repair work, are reasonably necessary for the health and safety of the occupants of the 2850 Building or 3100 Building, as applicable, or are required to comply with any Regulation enacted after June 25, 1998 (with respect to the 2850 Building Operating Expenses) and after the date hereof (with respect to the 3100 Building Operating Expenses), such costs or allocable portions thereof to be amortized over their respective useful life, together with interest on the unamortized balance at the publicly announced "prime rate" charged by Wells Fargo Bank, N.A. (San Francisco) or its successor at the time such improvements or capital assets are constructed or acquired, plus two (2) percentage points, or in the absence of such prime rate, than at the U.S. Treasury six-month market note (or bond, if so designated) rate as published by any national financial publication selected by Landlord, plus two (2) percentage points, but in no event more than the maximum rate permitted by law. (c) Payment under or for any easement, license, permit, operating agreement, declaration, restrictive covenant or instrument relating to the 2850 Building or 3100 Building, as applicable. (d) All expenses and rental related to services and costs of supplies, materials and equipment used in operating, managing and maintaining the Premises and the 2850 Building or 3100 Building, as applicable, the equipment therein and the adjacent sidewalks, driveways, parking and service areas, including, without limitation, expenses related to service agreements regarding security, fire and other alarm systems, janitorial services, window cleaning, elevator maintenance, 2850 Building or 3100 Building, as applicable, exterior maintenance landscaping and expenses related to the administration, management and operation of the 2850 Building or 3100 Building, as applicable, including without limitation salaries, wages and benefits of personnel up to the level of the Project director (and/or vice president responsible for the Project) and building engineer and fair market management office rent (based on size and rent per square foot). (e) The cost of supplying any services and utilities which benefit all or a portion of the Premises or 2850 Building or 3100 Building, as applicable, including without limitation services and utilities provided pursuant to Paragraph 15 hereof. (f) Reasonable legal expenses and the cost of audits by certified public accountants (other than in connection with defending operating -11- expense audits performed by other tenants) relating to the 2850 Building or 3100 Building, as applicable; provided, however, that legal expenses chargeable as Operating Expenses shall not include the cost of negotiating leases, collecting rents, evicting tenants nor shall it include costs incurred in legal proceedings with or against any tenant or to enforce the provisions of any lease. (g) The deductible portion of any repair costs for the 2850 Building or 3100 Building, as applicable, covered by earthquake insurance, provided that said deductible portion shall be amortized over a fifteen (15) year period. (h) A management and accounting cost recovery fee equal to five percent (5%) of the sum of the Project's base rents and Operating Expenses to the extent not included in such base rents (other than such management and accounting fee). If the rentable area of the 2850 Building and/or 3100 Building, as applicable, is not at least ninety-five percent (95%) occupied during any fiscal year of the Term (including the applicable Base Year), an adjustment shall be made in computing the variable components of 2850 Building Operating Expenses and/or 3100 Building Operating Expenses, as applicable, for such year so that Tenant pays an equitable portion of all variable items (e.g., utilities, janitorial services and other component expenses that are affected by variations in occupancy levels) of the 2850 Building Operating Expenses and 3100 Building Operating Expenses, as applicable, as reasonably determined by Landlord; provided, however, that in no event shall Landlord be entitled to collect in excess of one hundred percent (100%) of the total Operating Expenses from all of the tenants in the Building or Project, as the case may be. Operating Expenses shall not include the cost of providing tenant improvements or other specific costs incurred for the account of, separately billed to and paid by specific tenants of the Project, the initial construction cost of the Project, or debt service on any mortgage or deed of trust recorded with respect to the Project other than pursuant to Paragraph 7.A.(3)(b) above. Notwithstanding anything herein to the contrary, in any instance wherein Tenant uses excessive services of the 2850 Building or 3100 Building, as applicable, or otherwise creates a greater burden on the operation of the 2850 Building or 3100 Building, as applicable, than other tenants, except as specifically allowed by this Lease (such determination to be adjusted based on relative square footages of the space leased by Tenant and other tenants), Landlord shall have the right to reasonably allocate any such additional costs. Landlord (x) shall not collect or be entitled to collect from Tenant an amount in excess of Tenant's applicable share of one hundred percent (100%) of the 2850 Building Operating Expenses and 3100 Building Operating Expenses actually paid or incurred by Landlord; and (y) shall reduce the amount of the 2850 Building Operating Expenses and 3100 Building Operating Expenses, as applicable, by any refund or discount received by Landlord in connection with any expenses previously included in the 2850 Building Operating Expenses and/or 3100 Building Operating Expenses (such reduction to be credited to Tenant in the year in which the refund or discount is received by Landlord). Notwithstanding the foregoing, for the purposes of this Lease, the Operating Expenses shall not, however, include: I. bad debt expenses and interest, principal, points and fees on debts (except in connection with the financing of items which may be included in the Operating Expenses) or amortization on any mortgage or mortgages or any other debt instrument encumbering the Building or the Project; II. marketing costs, including leasing commissions, attorneys' fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses -12- incurred in connection with lease, sublease and/or assignment negotiations and transactions with present or prospective tenants or other occupants of the Project, including attorneys' fees and other costs and expenditures incurred in connection with disputes with present or prospective tenants or other occupants of the Project; III. costs of inspecting and correcting defects in the Project (including without limitation, defects discovered as a result of earthquake damage) and costs, including permit, license and inspection costs, incurred with respect to the installation of other tenants' or occupants' improvements made for tenants or other occupants in the Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants in the Project; IV. the cost of providing any service directly to an paid directly by any tenant; V. any costs expressly excluded from the Operating Expenses elsewhere in this Lease; VI. costs of any items (including, but not limited to, costs incurred by Landlord for the repair or damage to the Project or Building) to the extent Landlord receives reimbursement from insurance proceeds (such proceeds to be deducted from the Operating Expenses in the year in which received) or from a third party (such proceeds to be credited to the Operating Expenses in the year in which received, except that any deductible amount under any insurance policy shall be included within the Operating Expenses of the Project); VII. Costs of a capital nature, including, without limitation, capital improvements, capital repairs and capital equipment; except for those (i) acquired to reduce the Operating Expenses (amortized at an annual rate reasonably calculated to equal the amount of the Operating Expenses to be saved in each calendar year throughout the Term of the Lease, as reasonably determined at the time Landlord elected to proceed with the capital improvement or acquisition of the capital equipment to reduce the Operating Expenses), together with interest at the actual interest rate incurred by the Landlord, or (ii) incurred after the Term Commencement Date in order to comply with any governmental law or regulation that was enacted subsequent to the Term Commencement Date (but specifically not including any re-enactment or subsequent codification, local or otherwise, of any laws or regulations existing as of the Term Commencement Date, including without limitation the Americans with Disabilities Act or any state or local codifications thereof) provided that such capital costs shall be amortized over their useful life, together with interest at the actual interest rate incurred by Landlord; all other capital expenditures shall be excluded from the Operating Expenses; VIII. rentals and other related expenses for leasing a HVAC system, elevators, or other items (except when needed in connection with normal repairs and maintenance of the Project) which if purchased, rather than rented, would constitute a capital improvement not included in the Operating Expenses pursuant to this Lease; IX. depreciation, amortization and interest payments, except as specifically included in the Operating Expenses pursuant to the terms of this Lease and except on material, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with generally accepted accounting principles, consistently applied, and when depreciation or amortization is permitted or required, the item shall be amortized over its reasonably anticipated useful life; X. costs incurred by Landlord for alterations (including structural additions), repairs, equipment and tools which are of a capital nature and/or which are considered capital improvements or replacements under generally accepted accounting principles, -13- consistently applied, except as specifically included in the Operating Expenses pursuant to the terms of this Lease; XI. expenses in connection with services or other benefits which are not offered to Tenant or for which Tenant is charged for directly but which are provided to another tenant or occupant of the Project, without charge; XII. costs incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease of space in the Project; XIII. overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services in the Project to the extent the same exceeds the costs of such by unaffiliated third parties on a competitive basis; XIV. Landlord's general corporate overhead and general and administrative expenses, excluding on-site management to the level of Project director (and/or vice president responsible for the Project) and Project engineer and on-site accounting attributable to the Project, but including costs associated with the operation of the business of the ownership or entity which constitutes "Landlord," as distinguished from the costs of building operations, including, but not limited to, partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee, costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Project, costs of any disputes between Landlord and its employees or with its Project management; XV. advertising and promotional expenditures, and costs of signs in or on the Project identifying the owner of the Project or other tenants' signs, except for Project directories or Project standard signage; XVI. electric power costs or other utility costs for which any tenant directly contracts with the local public service company (but Landlord shall have the right to "gross up" as if the floor was vacant); XVII. tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments or file returns when due; XVIII.costs arising from Landlord's charitable or political contributions; XIX. costs of installing, maintaining and operating any specialty service operated by landlord including without limitation, any luncheon club or athletic facility, or the repair thereof; XX. costs necessitated by or resulting from the gross negligence of Landlord, or any of its agents, employees or independent contractors; XXI. any ground lease rental; XXII. costs of capital acquisition of sculptures, paintings or other objects of art; XXIII. costs of earthquake insurance (except to the extent maintained in the applicable Base Year); XXIV. notwithstanding any contrary provision of this Lease, including without limitation, any provision relating to capital expenditures, costs arising from the presence of "hazardous materials," "hazardous substances," and/or "toxic substances," as defined in any federal, state, county or local law, including asbestos, in or about the Building and the Project; and XXV. Management fees to the extent in excess of that specifically includable in Operating Expenses. -14- The Operating Expenses shall also include the 2850 Building's and the 3100 Building's respective share of Project Operating Costs (defined below), such share to be based upon the rentable square footage of the 2850 Building and 3100 Building, as applicable, divided by the rentable square footage of all the office buildings comprising the Project. The term "Project Operating Costs" shall include all expenses incurred of the type included in the Operating Expenses but which are directly and separately identifiable to the ownership, operation and maintenance of areas of the Project which are owned by Landlord other than the 2850 Building, the 3100 Building or other office buildings within the Project, such as real property taxes applicable to the Common Areas, liability insurance with respect to the Common Areas, maintenance service for all of the buildings within the Project and repair costs with respect to the entire Project. To the extent that, in Landlord's reasonable judgment, it may not be equitable to allocate certain Project Operating Costs on a pro rata basis based upon the rentable areas of the buildings in the Project, then Landlord may allocate the same on such basis as Landlord, in its reasonable judgment, determines to be equitable. The above enumeration of services and facilities shall not be deemed to impose an obligation on Landlord to make available or provide such services or facilities except to the extent if any that Landlord has specifically agreed elsewhere in this Lease to make the same available or provide the same. Without limiting the generality of the foregoing, Tenant acknowledges and agrees that it shall be responsible for providing adequate security for its use of the Premises, the Building and the Project and that Landlord shall have no obligation or liability with respect thereto, except to the extent of Landlord's negligence or willful misconduct or to the extent that Landlord has specifically agreed elsewhere in this Lease to provide the same. B. PAYMENT OF ESTIMATED OPERATING EXPENSES. "ESTIMATED OPERATING EXPENSES" for any particular year shall mean Landlord's estimate of the Operating Expenses for such fiscal year made with respect to such fiscal year as hereinafter provided. Landlord shall have the right from time to time to revise its fiscal year and interim accounting periods so long as the periods as so revised are reconciled with prior periods in a reasonable manner and do not result in any net increase to Tenant. During the last month of each fiscal year during the Term, or as soon thereafter as practicable, Landlord shall give Tenant written notice of the Estimated Operating Expenses for the ensuing fiscal year on a line item by line item basis. Tenant shall pay Tenant's applicable share of the difference between Estimated Operating Expenses for the respective building and the applicable Base Year Operating Expenses for each building with installments of Base Rent for the fiscal year to which the Estimated Operating Expenses applies in monthly installments on the first day of each calendar month during such year, in advance. Such payment shall be construed to be Additional Rent for all purposes hereunder. If at any time during the course of the fiscal year, Landlord reasonably determines that Operating Expenses are projected to vary from the then Estimated Operating Expenses by more than five percent (5%), Landlord may, by written notice to Tenant, revise the Estimated Operating Expenses for the balance of such fiscal year, and Tenant's monthly installments for the remainder of such year shall be adjusted so that by the end of such fiscal year Tenant has paid to Landlord Tenant's applicable share of the revised difference between Estimated Operating Expenses and the applicable Base Year Operating Expenses for each building for such year, such revised installment amounts to be Additional Rent for all purposes hereunder. C. COMPUTATION OF OPERATING EXPENSE ADJUSTMENT. "OPERATING EXPENSE ADJUSTMENT" shall mean the difference between Estimated Operating Expenses and actual Operating Expenses for any fiscal year, over the applicable Base Year Operating Expenses for each building, determined as hereinafter provided. Within one hundred twenty (120) days after the end of each fiscal year, or as soon thereafter as practicable (but in no event beyond two (2) years following such 120th day), Landlord shall deliver to Tenant a reasonably detailed statement (line item by line item basis) of actual Operating Expenses for the fiscal year just ended, accompanied by a computation of Operating Expense Adjustment. If such statement shows that Tenant's payment based -15- upon Estimated Operating Expenses is less than Tenant's applicable share of actual increases in each building's Operating Expenses over the applicable Base Year Operating Expenses for each building, then Tenant shall pay to Landlord the difference within thirty (30) days after receipt of such statement, such payment to constitute Additional Rent for all purposes hereunder. If such statement shows that Tenant's payments of Estimated Operating Expenses exceed Tenant's applicable share of actual increases in each building's Operating Expenses over the applicable Base Year Operating Expenses for each building, then (provided that Tenant is not in default under this Lease beyond applicable notice and cure periods) Landlord shall pay to Tenant the difference within thirty (30) days after delivery of such statement to Tenant. If this Lease has been terminated or the Term hereof has expired prior to the date of such statement, then the Operating Expense Adjustment shall be paid by the appropriate party within thirty (30) days after the date of delivery of the statement (which Landlord agrees to use its commercially reasonable efforts to deliver within six (6) months following the end of the applicable fiscal year). Tenant's obligation to pay increases in each building's Operating Expenses over the applicable Base Year Operating Expenses for each building, shall commence on January 1 of the year succeeding the applicable Base Year. Should this Lease terminate at any time other than the last day of the fiscal year, Tenant's applicable share of the Operating Expense Adjustment shall be prorated based on a month of 30 days and the number of calendar months during such fiscal year that this Lease is in effect. Tenant shall in no event be entitled to any credit if applicable Operating Expenses in any year are less than applicable Base Year Operating Expenses. Notwithstanding anything to the contrary contained in Paragraph 7.A or 7.B, Landlord's failure to provide any notices or statements within the time periods specified in those paragraphs shall in no way excuse Tenant from its obligation to pay Tenant's applicable share of increases in each building's Operating Expenses (unless Landlord still has not provided any required statement within two (2) years following the date said statement was required to be delivered pursuant to the terms hereof). D. GROSS LEASE. This shall be a gross Lease; however, it is intended that Base Rent shall be paid to Landlord absolutely net of all costs and expenses other than Operating Expenses each year equal to Tenant's applicable share of applicable Base Year Operating Expenses for each building, except as otherwise specifically provided to the contrary in this Lease. The provisions for payment of increases in each building's Operating Expenses and the Operating Expense Adjustment are intended to pass on to Tenant and reimburse Landlord for all costs and expenses of the nature described in Paragraph 7.A. incurred in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of the Building and/or Project and its supporting facilities and such additional facilities, in excess of the applicable Base Year Operating Expenses, now and in subsequent years as may be reasonably determined by Landlord to be necessary or desirable to the Building and/or Project. E. TENANT AUDIT. If Tenant shall dispute the amount set forth in any statement provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant shall have the right, not later than two hundred seventy (270) days following receipt of such statement and upon the condition that Tenant shall first deposit with Landlord the full amount in dispute, without waiving its rights, to cause Landlord's books and records with respect to applicable Operating Expenses for such fiscal year to be audited by certified public accountants selected by Tenant and subject to Landlord's reasonable right of approval. The Operating Expense Adjustment shall be appropriately adjusted on the basis of such audit. If such audit discloses a liability for a refund in excess of five percent (5%) of Tenant's applicable share of the applicable Operating Expenses previously reported, the cost of such audit shall be borne by Landlord, otherwise the cost of such audit shall be paid by Tenant. If Tenant shall not request an audit in accordance with the provisions of this Paragraph 7.E. within two hundred seventy (270) days after receipt of Landlord's statement provided pursuant to Paragraph 7.B. or 7.C., such statement shall be final and binding for all purposes hereof. 8 INSURANCE AND INDEMNIFICATION -16- A LANDLORD'S INSURANCE. All insurance maintained by Landlord shall be for the sole benefit of Landlord and under Landlord's sole control. (1) PROPERTY INSURANCE. Landlord agrees to maintain All Perils property insurance insuring the Building at all times against damage or destruction due to risk including fire, vandalism, and malicious mischief in an amount not less than the replacement cost thereof, in the form and with deductibles and endorsements as selected by Landlord (in its reasonable discretion). At its election, Landlord may (but shall have no obligation to) obtain earthquake, and/or pollution, in amounts selected by Landlord (in its reasonable discretion). Landlord represents to Tenant that as of the date of this Lease, Landlord carries "All-Perils" coverage and rental income insurance for twelve (12) months. (2) OPTIONAL INSURANCE. Landlord shall carry insurance against loss of rent, in an amount equal to the amount of Base Rent and Additional Rent that Landlord could be required to abate to all Building tenants in the event of condemnation or casualty damage for a period of twelve (12) months. Landlord may also (but shall have no obligation to) carry such other insurance as Landlord may deem prudent or advisable, including, without limitation, liability insurance in such amounts and on such terms as Landlord shall determine (in its reasonable discretion), provided such insurance is reasonably comparable (as determined by Landlord) to that being carried by other landlords of Comparable Projects (as defined in paragraph 39E below). Landlord shall not be obligated to insure, and shall have no responsibility whatsoever for any damage to, any furniture, machinery, goods, inventory or supplies, or other personal property or fixtures which Tenant may keep or maintain in the Premises, or any leasehold improvements, additions or alterations within the Premises, except as otherwise provided herein. B TENANT'S INSURANCE. (1) PROPERTY INSURANCE. Tenant shall procure at Tenant's sole cost and expense and keep in effect from the date of this Lease and at all times until the end of the Term, insurance on all personal property and fixtures of Tenant and all improvements, additions or alterations made by or for Tenant to the Premises on an "All Perils" basis, insuring such property for the full replacement value of such property. (2) LIABILITY INSURANCE. Tenant shall procure at Tenant's sole cost and expense and keep in effect from the date of this Lease and at all times until the end of the Term Commercial General Liability insurance covering bodily injury and property damage liability occurring in or about the Premises or arising out of the use and occupancy of the Premises and the Project, and any part of either, and any areas adjacent thereto, and the business operated by Tenant or by any other occupant of the Premises. Such insurance shall include contractual liability insurance coverage insuring all of Tenant's indemnity obligations under this Lease. Such coverage shall have a minimum combined single limit of liability of at least Two Million Dollars ($2,000,000.00), and a minimum general aggregate limit of Three Million Dollars ($3,000,000.00), with an "Additional Insured-Managers or Lessors of Premises Endorsement." All such policies shall be written to apply to all bodily injury (including death), property damage or loss, personal and advertising injury and other covered loss, however occasioned, occurring during the policy term, shall be endorsed to add Landlord and any party holding an interest to which this Lease may be subordinated as an additional insured, and shall provide that such coverage shall be "PRIMARY" and non-contributing with any insurance maintained by Landlord, which shall be excess insurance only. Such coverage shall also contain endorsements including employees as additional insured if not covered by Tenant's Commercial General Liability Insurance. All such insurance shall provide for the severability of interests of insured; and shall be written on an "OCCURRENCE" basis, which shall afford coverage for all claims -17- based on acts, omissions, injury and damage, which occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period. (3) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE. Tenant shall carry Workers' Compensation Insurance as required by any Regulation, throughout the Term at Tenant's sole cost and expense. Tenant shall also carry Employers' Liability Insurance in amounts not less than One Million Dollars ($1,000,000) each accident for bodily injury by accident; One Million Dollars ($1,000,000) policy Limit for bodily injury by disease; and One Million Dollars ($1,000,000) each employee for bodily injury by disease, throughout the Term at Tenant's sole cost and expense. (4) GENERAL INSURANCE REQUIREMENTS. All coverages described in this Paragraph 8.B. shall be endorsed to provide Landlord with thirty (30) days' notice of cancellation or change in terms. If at any time during the Term the amount or coverage of insurance which Tenant is required to carry under this Paragraph 8.B. is, in Landlord's reasonable judgment, materially less than the amount or type of insurance coverage typically carried by tenants of properties located in the general area in which the Premises are located which are similar to and operated for similar purposes as the Premises or if Tenant's use of the Premises should change with or without Landlord's consent, Landlord shall have the right to require Tenant to increase the amount or change the types of insurance coverage required under this Paragraph 8.B. All insurance policies required to be carried by Tenant under this Lease shall be written by companies rated A X or better in "Best's Insurance Guide" and authorized to do business in the State of California. In any event deductible amounts under all insurance policies required to be carried by Tenant under this Lease shall not exceed Seven Thousand Five Hundred Dollars ($15,000.00) per occurrence. Tenant shall deliver to Landlord on or before the Term Commencement Date, and thereafter at least thirty (30) days before the expiration dates of the expired policies, a certificate evidencing the same issued by the insurer thereunder; and, if Tenant shall fail to procure such insurance, or to deliver such certificates, Landlord may, at Landlord's option and in addition to Landlord's other remedies in the event of a default by Tenant hereunder, after five (5) business days prior notice to Tenant, procure the same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent. C INDEMNIFICATION. Tenant shall indemnify, defend by counsel reasonably acceptable to Landlord, protect and hold Landlord harmless from and against any and all claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or expenses, including reasonable attorneys' and consultants' fees and court costs, demands, causes of action, or judgments, directly or indirectly arising out of or related to or resulting from: (1) claims of injury to or death of persons or damage to property occurring or resulting directly or indirectly from the use or occupancy of the Premises by Tenant or Tenant's Parties, or from activities or failures to act of Tenant or Tenant's Parties within the Premises; (2) claims arising from work or labor performed, or for materials or supplies furnished to or at the request or for the account of Tenant in connection with performance of any work done for the account of Tenant within the Premises or Project (other than by Landlord); (3) claims arising from any breach or default on the part of Tenant in the performance of any covenant contained in this Lease; and (4) claims arising from the negligence or intentional acts or omissions of Tenant or Tenant's Parties. The foregoing indemnity by Tenant shall not be applicable to claims to the extent arising from a the gross negligence or willful misconduct of Landlord. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury or damage to any person or property in or about the Premises by or from any cause whatsoever (other than Landlord's gross negligence or willful misconduct) and, without limiting the generality of the foregoing, whether caused by water leakage of any character from the roof, walls, basement or other portion of the Premises, Building or Project, or caused by gas, fire, oil or electricity in, on or about the Premises, Building or Project. Provisions of this Paragraph shall survive the expiration or earlier termination of this Lease. -18- Landlord shall indemnify, defend, protect and hold harmless Tenant from any and all loss, cost, liability, damage, claims, injuries or expense, including reasonable attorneys' and consultants' fees and court costs, demands, causes of action or judgments, directly or indirectly arising out of or related to or resulting from (1) the negligence or willful misconduct of Landlord or its agents, servants, employees, contractors or licensees (collectively, "Landlord's Parties") within the Project (but outside of the Premises), (2) the activities or failures to act of Landlord or Landlord's Parties within the Project (but outside of the Premises), (3) any default by Landlord under the terms of this Lease, or (4) Tenant's use of the Project in general (other than its occupancy and use of the Premises) (except for damage to the tenant improvements and Tenant's personal property, fixtures, furniture and equipment in the Premises to the extent such damage is covered by insurance Tenant is required to carry pursuant to Paragraph 8B). The foregoing indemnity by Landlord shall not be applicable to claims to the extent arising from the gross negligence or wilful misconduct of Tenant or Tenant's Parties. 9 WAIVER OF SUBROGATION To the extent permitted by law and without affecting the coverage provided by insurance to be maintained hereunder or any other rights or remedies, Landlord and Tenant each waive any right to recover against the other for: (a) damages for injury to or death of persons; (b) damages to property, including personal property; (c) damages to the Premises or any part thereof; and (d) claims arising by reason of the foregoing due to hazards covered by insurance maintained or required to be maintained pursuant to this Lease to the extent of proceeds recovered therefrom, or proceeds which would have been recoverable therefrom in the case of the failure of any party to maintain any insurance coverage required to be maintained by such party pursuant to this Lease. This provision is intended to waive fully, any rights and/or claims arising by reason of the foregoing, but only to the extent that any of the foregoing damages and/or claims referred to above are covered or would be covered, and only to the extent of such coverage, by insurance actually carried or required to be maintained pursuant to this Lease by either Landlord or Tenant. This provision is also intended to waive fully, and for the benefit of each party, any rights and/or claims which might give rise to a right of subrogation on any insurance carrier. Subject to all qualifications of this Paragraph 9, Landlord waives its rights as specified in this Paragraph 9 with respect to any subtenant that it has approved pursuant to Paragraph 21 but only in exchange for the written waiver of such rights to be given by such subtenant to Landlord upon such subtenant taking possession of the Premises or a portion thereof. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. 10 LANDLORD'S REPAIRS AND MAINTENANCE Landlord shall at Landlord's expense maintain in good repair, reasonable wear and tear excepted, the structural soundness of the roof, foundations, and exterior walls of the Building, Landlord shall furthermore be responsible, at its sole cost and expense (not as an Operating Expense), for repairing any latent or patent structural defects in the Building, except to the extent any such defect is caused, exacerbated or aggravated by any acts of Tenant or any of Tenant's Parties. Landlord shall also use its commercially reasonable efforts to keep the Building and Project free from any infestation of insects, rodents, bugs or other animals. The term "exterior walls" as used herein shall not include windows, glass or plate glass, doors, special store fronts or office entries. Without limiting the generality of the foregoing, Landlord shall diligently maintain, repair and keep in a clean and sanitary working order and condition equal to the standards of the Comparable Projects as part of Operating Expenses to the extent allowable under this Lease: (i) the foundations, roof and all structural aspects of the Building, the Common Areas, and the parking facilities; (ii) all nonstructural aspects of the Building which relate to more than one (1) tenant's premises, or which no tenant of the Building is required to maintain and repair, including all systems and facilities necessary for the -19- operation of the Building and the provision of services and utilities as required herein, and the electrical, mechanical, plumbing, lighting, lifesafety, fire sprinkler, HVAC and security systems, fixtures, and equipment located in the Premises and all other elements thereof; (iii) the parking facilities; and (iv) the Common Areas, including, but not limited to, elevators and escalators, electrical, mechanical and plumbing systems, fixtures and equipment, restrooms, structural components, lighting, heating, ventilating and air conditioning equipment and systems and security systems and all other areas or elements thereof. Any damage caused by or repairs necessitated by any negligence or wilful misconduct of Tenant or Tenant's Parties may be repaired by Landlord at Landlord's option and Tenant's expense. Tenant shall immediately give Landlord written notice of any defect or need of repairs in such components of the Building for which Landlord is responsible, after which Landlord shall have a reasonable opportunity and the right to enter the Premises at all reasonable times to repair same (subject to the immediately succeeding paragraph). Landlord's liability with respect to any defects, repairs, or maintenance for which Landlord is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance, and there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of repairs, alterations or improvements in or to any portion of the Premises, the Building or the Project or to fixtures, appurtenances or equipment in the Building, except as provided in Paragraph 24 or elsewhere in this Lease. By taking possession of the Premises, Tenant accepts them "as is," as being in good order, condition and repair and the condition in which Landlord is obligated to deliver them and suitable for the Permitted Use and Tenant's intended operations in the Premises, whether or not any notice of acceptance is given, subject to punchlist items, latent defects, structural defects, any covenants and/or representations set forth in this Lease, Tenant's rights under any warranties assigned to Tenant pursuant to the Improvement Agreement attached hereto as Exhibit "C" and the performance by Landlord of its obligations under this Paragraph 10. Except in the case of emergency, Landlord shall use its best efforts to provide Tenant with at least forty-eight (48) hours prior written notice (unless such entry is approved by the on-site manager for a lesser time period or with respect to janitorial or normal periodic minor maintenance and upkeep) of Landlord's intent to enter the Premises, shall use reasonable efforts to minimize any interference to Tenant, shall attempt to reasonably schedule such entry with Tenant and shall attempt to make all such entries during normal business hours. If Tenant provides notice to Landlord of an event or circumstance which requires the action of Landlord with respect to the provision of utilities and/or services and/or repairs and/or maintenance as set forth in ARTICLES 10 AND 15 of this Lease, and Landlord fails to provide such action as required by the terms of this Lease, then Tenant may proceed to take the required action upon delivery of an additional ten (10) business days notice (or less in the event of an emergency) to Landlord specifying that Tenant is taking such required action, and if such action was required under the terms of this Lease to be taken by Landlord, then Tenant shall be entitled to prompt reimbursement by Landlord of Tenant's reasonable costs and expenses in taking such action plus interest at the Applicable Interest Rate (defined below). In the event Tenant takes such action, and such work will affect, in Landlord's reasonable determination, any of the Building systems and equipment, structural integrity or exterior appearance of the Building, Tenant shall use only those contractors used by Landlord in the Project for such work unless such contractors are unwilling or unable to perform such work within a reasonable period of time, in which event Tenant may utilize the services of any other qualified contractor which normally and regularly performs similar work in comparable projects. Further, if Landlord does not deliver a detailed written objection to Tenant, within thirty (30) days after receipt of an invoice by Tenant of its costs of taking action which Tenant claims should have been taken by Landlord, and if such invoice from Tenant sets forth a reasonably particularized breakdown of its costs and expenses in connection with taking such action on behalf of Landlord, then Tenant shall be entitled to deduct from Rent payable by Tenant under this Lease, the amount set forth in such invoice together with interest at the Applicable Interest Rate. If, however, Landlord delivers to Tenant within -20- thirty (30) days after receipt of Tenant's invoice, a written objection to the payment of such invoice, setting forth with reasonable particularity Landlord's reasons for its claim that such action did not have to be taken by Landlord pursuant to the terms of this Lease or that the charges are excessive (in which case Landlord shall pay the amount it contends would not have been excessive), then Tenant shall not be entitled to such deduction from Rent, but as Tenant's sole remedy, Tenant may proceed to institute legal proceedings against Landlord to collect the amount set forth in the subject invoice. For purposes of the first sentence of this paragraph, Landlord shall not be deemed to have "failed to provide such action as required by the terms of this Lease" if Landlord commences any requisite repair work within a reasonable period of time (in light of the required repair) following Landlord's receipt of written notice of the need for repairs and Landlord prosecutes such repair work toward completion with reasonable diligence. 11 TENANT'S REPAIRS AND MAINTENANCE Tenant shall at all times during the Term at Tenant's expense maintain all parts of the Premises (including partitions and interior dry walls) (other than Building systems and equipment and the structural parts of the Premises) and such portions of the Building as are within the exclusive control of Tenant in good repair and condition, reasonable wear and tear excepted, clean and secure condition and promptly make all necessary repairs and replacements with materials and workmanship of the same character, kind and quality as the original, except to the extent the necessity for any such repairs or replacements results from Landlord's negligence or willful misconduct of Landlord. Notwithstanding anything to the contrary contained herein, but subject to the terms of the last paragraph of Article 8 above, Tenant shall, at its expense, promptly repair any damage to the Premises or the Building or Project resulting from or caused by the negligence or wilful misconduct of Tenant or Tenant's Parties. 12 ALTERATIONS A. Tenant shall not make, or allow to be made, any alterations, physical additions, improvements or partitions, including without limitation the attachment of any fixtures or equipment, in, about or to the Premises ("ALTERATIONS") without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld with respect to proposed Alterations (and shall be granted or denied within fifteen (15) business days following Landlord's receipt of Tenant's request therefor [together with all relevant information required by Landlord with respect to such Alterations] , stating detailed reasons for denial) which: (a) comply with all applicable Regulations; (b) in Landlord's reasonable opinion, do not adversely affect the structure of the Building or the Project and its mechanical, plumbing, electrical, heating/ventilation/air conditioning systems, and will not cause the Building or Project or such systems to be required to be modified to comply with any Regulations (including, without limitation, the Americans With Disabilities Act); and (c) will not interfere with the use and occupancy of any other portion of the Building or Project by any other tenant or its invitees. Specifically, but without limiting the generality of the foregoing, Landlord shall have the right of written consent for all plans and specifications for the proposed Alterations (to the extent plans and specifications are reasonably required), construction means and methods, all appropriate permits and licenses, any contractor or subcontractor to be employed on the work of Alterations, and the time for performance of such work, and may impose reasonable, non-discriminatory rules and regulations for contractors and subcontractors performing such work, all of which shall not be unreasonably withheld or delayed. Tenant shall also supply to Landlord any documents and information reasonably requested by Landlord in connection with Landlord's consideration of a request for approval hereunder. Tenant shall cause all Alterations to be accomplished in a good and workmanlike manner, and to comply with all applicable Regulations and Paragraph 27 hereof. Tenant shall at Tenant's sole expense, perform any additional work required under applicable Regulations due to the Alterations hereunder. Tenant shall have the right to use non-union contractors to perform all or a portion of the Alterations, but only to the extent (i) Tenant provides Landlord with prior written notice of its request to hire a non-union contractor, and (ii) hiring non-union contractors does not violate any -21- contracts to which Landlord is a party. No review or consent by Landlord of or to any proposed Alteration or additional work shall constitute a waiver of Tenant's obligations under this Paragraph 12, nor constitute any warranty or representation that the same complies with all applicable Regulations, for which Tenant shall at all times be solely responsible. Tenant shall reimburse Landlord for all actual, out-of-pocket costs which Landlord may incur in connection with granting approval to Tenant for any such Alterations, including any costs or expenses which Landlord may incur in electing to have outside architects and engineers review said plans and specifications, and shall pay no administration fee to Landlord. All such Alterations shall remain the property of Tenant until the expiration or earlier termination of this Lease, at which time they shall be and become the property of Landlord; provided, however, that Landlord may, at Landlord's option, at the time of Landlord's consent (or if Landlord's consent is not required, within ten (10) business days following Tenant's notice to Landlord of its intention to perform any Alterations) require that Tenant, at Tenant's expense, remove any or all Alterations made by Tenant (but not the Tenant Improvements constructed in accordance with the Improvement Agreement attached hereto as Exhibit "C") and restore the Premises by the expiration or earlier termination of this Lease, to their condition existing prior to the construction of any such Alterations. All such removals and restoration shall be accomplished in a good and workmanlike manner so as not to cause any damage to the Premises or Project whatsoever. If Tenant fails to remove such Alterations which Landlord timely required Tenant to remove or Tenant's trade fixtures or furniture or other personal property at the expiration or earlier termination of this Lease, Landlord may keep and use them or remove any of them and cause them to be stored or sold all in accordance with applicable law, at Tenant's sole expense. In addition to and wholly apart from Tenant's obligation to pay Tenant's Proportionate Share of Operating Expenses, Tenant shall be responsible for and shall pay prior to delinquency any taxes or governmental service fees, possessory interest taxes, fees or charges in lieu of any such taxes, capital levies, or other charges imposed upon, levied with respect to or assessed against its fixtures or personal property, on the value of Alterations within the Premises, and on Tenant's interest pursuant to this Lease, or any increase in any of the foregoing based on such Alterations. To the extent that any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced to Tenant by Landlord within thirty (30) days. Notwithstanding anything to the contrary contained herein, Tenant may make any cosmetic Alterations which do not affect the Building systems and equipment, exterior appearance of the Building, or structural aspects, by providing Landlord with notice not less than ten (10) business days prior to the commencement thereof. Landlord's consent shall not be required with respect to any such Alterations provided the cost of said Alterations do not exceed $50,000 in any twelve (12) month period. Tenant may not make any Alterations which may affect the Building systems and equipment, exterior appearance of the Building, or structural aspects or which require a permit from the applicable governmental authorities, without first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than fifteen (15) days prior to commencement thereof, and which consent may be withheld by Landlord in its reasonable discretion. Any time Tenant proposes to make Alterations which require the consent of Landlord pursuant to this Section, Tenant's notice regarding the proposed Alterations shall be provided together with the plans and specifications for the Alterations, and Landlord shall approve or disapprove of the same within fifteen (15) business Days after its receipt of all of the same. B. In compliance with Paragraph 27 hereof, at least ten (10) business days before beginning construction of any Alteration, Tenant shall give Landlord written notice of the expected commencement date of that construction to permit Landlord to post and record a notice of non-responsibility. Upon substantial completion of construction, if the law so provides, Tenant shall cause a timely notice of completion to be recorded in the office of the recorder of the county in which the Building is located. 13. SIGNS -22- Except as otherwise set forth in Paragraph 39D below, Tenant shall not place, install, affix, paint or maintain any signs, notices, graphics or banners whatsoever or any window decor which is visible in or from public view or corridors, the common areas or the exterior of the Premises or the Building, in or on any exterior window or window fronting upon any common areas or service area without Landlord's prior written approval which Landlord shall have the right to withhold in its absolute and sole discretion; provided that Tenant's name and/or logo shall be included in any Building-standard door and directory signage in buildings containing the Premises (such directory signage not to exceed one (1) line per 1,000 rentable square feet of the Premises), if any, in accordance with Landlord's Building signage program, including without limitation, payment by Tenant of any Project standard reasonable fee charged by Landlord for installing and/or maintaining such signage, which fee shall constitute Additional Rent hereunder. Any installation of signs, notices, graphics or banners on or about the Premises or Project approved by Landlord shall be subject to any Regulations and to any other requirements imposed by Landlord. Tenant shall remove all such signs or graphics (except directories) by the expiration or any earlier termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury to or defacement of the Premises, Building or Project and any other improvements contained therein, and Tenant shall repair any injury or defacement including without limitation discoloration caused by such installation or removal. 14. INSPECTION/POSTING NOTICES After forty-eight (48) hours prior notice (unless approved by Tenant's on-site manager for lesser time period or with respect to janitorial or normal periodic minor maintenance and upkeep), except in emergencies where no such notice shall be required, Landlord and Landlord's agents and representatives, shall have the right to enter the Premises at all reasonable times to inspect the same, to clean, to perform such work as may be permitted or required hereunder, to make repairs, improvements or alterations to the Premises, Building or Project or to other tenant spaces therein, to deal with emergencies, to post such notices as may be permitted or required by law to prevent the perfection of liens against Landlord's interest in the Project or to exhibit the Premises to prospective tenants (only during the last nine months of the Term), purchasers, encumbrancers or to others, or for any other purpose as Landlord may deem reasonably necessary or desirable; provided, however, that Landlord shall use reasonable efforts not to unreasonably interfere with Tenant's business operations or access to the Premises and Landlord shall attempt to reasonably schedule any such entry with Tenant and make entries during normal business hours. Tenant shall not be entitled to any abatement of Rent by reason of the exercise of any such right of entry, except as otherwise provided herein. Tenant waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes or special security areas (designated in advance), and Landlord shall have the right to use any and all means which Landlord may deem reasonably necessary or proper to open said doors in an emergency, in order to obtain entry to any portion of the Premises, and any entry to the Premises or portions thereof obtained by Landlord by any of said means, or otherwise, shall not be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portions thereof. At any time within nine (9) months prior to the expiration of the Term or following any earlier termination of this Lease or agreement to terminate this Lease, Landlord shall have the right to erect on the Building and/or Project a suitable sign indicating that the Premises are available for lease. 15. SERVICES AND UTILITIES A. Subject to the provisions elsewhere herein contained and to the rules and regulations of the Building, Landlord shall furnish to the Premises during ordinary business hours (which business hours, as of the date of this Lease, are 7:00 a.m. to 6:00 -23- p.m. Monday through Friday, as such hours may change from time to time, excluding legal holidays generally recognized by most Comparable Projects (as defined in Paragraph 39E below)), water for kitchen, lavatory and drinking purposes and electricity, heat and air conditioning as usually furnished or supplied for use of the Premises for reasonable and normal office use (consistent with other tenants in the Project). Notwithstanding the foregoing, and subject to all of the other terms and conditions of this Lease, water, elevator service, electricity and heat and air conditioning shall be furnished or supplied for use of the Premises twenty-four (24) hours per day, three hundred sixty-five (365) days per year. Subject to Landlord's approval (not to be unreasonably withheld or delayed), Tenant shall have the right to provide supplemental water systems in order to service the Premises. B. Landlord shall provide adequate electrical wiring, facilities and power for normal general office use as reasonably determined by Landlord (but not including above-standard or continuous cooling for excessive heat-generating machines, excess lighting or equipment), and elevator service, which shall mean service either by nonattended automatic elevators or elevators with attendants, or both, at the option of Landlord. For purposes of this Paragraph 15B, the term "power for normal general office use" shall equal five (5) watts connected load per usable square foot of the Premises on an annual basis. Landlord represents to Tenant that the electrical capacity for the Premises equals seven (7) watts demand load per usable square foot of the Premises on an annual basis. C. Tenant shall have the right to install its own supplemental air-conditioning units, provided that Landlord approves of the installation of such units pursuant to Section 12 and the same does not interfere with the operation systems and equipment, including without limitation, the Building heating, ventilation and air-conditioning systems (as determined by Landlord in its reasonable discretion); provided, however, Tenant shall be solely responsible for all costs relating to the installation and operation of such units, and shall, upon Landlord's request, remove such units upon the expiration or earlier termination of the Term and shall cause such units to be separately metered at Tenant's expense. D. Landlord shall provide janitorial services in accordance with the janitorial specifications attached hereto as Exhibit "F". E. Landlord will maintain reasonable security measures at the Project, as determined by Landlord in its reasonable discretion given the character and nature of the Project. Subject Landlord's approval as to the method of installation and type of security system, Tenant shall have the right to install its own security system and/or personnel provided (i) Landlord and its agents, representatives and employees shall be able to reasonably access the Premises for any purposes for which Landlord is entitled to access the Premises under this Lease (including, without limitation, for emergency purposes), (ii) the same does not interfere with the Building systems or equipment, (iii) Tenant shall indemnify, defend and hold harmless Landlord from and against any and all claims, loss, damage or expenses suffered by Landlord resulting from or arising out of the installation of said security system or maintenance of security personnel, and (iv) upon Landlord's request (and notwithstanding anything to the contrary set forth in Paragraph 26 below), Tenant shall remove any such system upon the expiration or earlier termination of this Lease and repair any damage caused by such removal. F. Notwithstanding anything to the contrary contained in this Article 15, with respect to the 3100 Space, (i) if the two (2) twenty (20) ton supplemental HVAC units located on the roof of the 3100 Building (the "20-Ton Units") are not required to provide air conditioning to the 3100 Space for reasonable and normal office use, then (A) there shall be no additional charge to Tenant for normal HVAC usage during ordinary business hours of generally recognized business days, (B) the charge to Tenant for after-hours HVAC usage shall equal the actual utility costs incurred by Landlord to provide HVAC usage from the 20-Ton Units (the "20-Ton HVAC Supply Costs"), and (C) any work necessary to allow for the distribution of air conditioning from the 20-Ton Units into the 3100 Space (i.e. ducting) shall be part of and applied against the Tenant Improvement -24- Allowance (as defined in the attached Improvement Agreement); and (ii) if the 20-Ton Units are required to provide air conditioning to the 3100 Space for reasonable and normal office use, then (a) the 20-Ton HVAC Supply Costs incurred by Landlord during ordinary business hours of generally recognized business days shall be paid for by Landlord as an Operating Expense, (b) for any after-hours HVAC usage, Tenant shall be directly responsible for the 20-Ton HVAC Supply Costs and the actual costs incurred by Landlord to operate the other HVAC units serving the 3100 Space (which actual costs are currently at a rate of $15.00 per unit and $10.00 per zone, as such rates may be reasonably adjusted by Landlord based upon Landlord's actual costs [with the per-zone charge to be reduced to $5.00 per zone for any additional zones beyond the first two zones] per hour), and (c) Landlord shall, at Landlord's expense (not to be applied against the Tenant Improvement Allowance), perform the work necessary to allow for the distribution of air conditioning from the 20-Ton Units into the 3100 Space (with the costs of all other HVAC-related work to be applied against the Tenant Improvement Allowance -- i.e., installation of controls, distribution to ceilings or specified areas within the 3100 Space and thermostat controls). With respect to the 2850 Building, Tenant acknowledges that Landlord currently charges Twenty-five Dollars ($25.00) per hour for after-hours heat or air-conditioning. Tenant further acknowledges that such hourly charge shall be applicable to any after-hours heat or air-conditioning which Tenant requests and obtains from the 2850 Building's heating and air-conditioning system. G. Landlord agrees that the charge for after-hours heating or air conditioning shall not be increased in any calendar year by more than 10% from that charged for the preceding calendar year (calculated on a cumulative basis). Tenant agrees to keep and cause to be kept closed all window covering when necessary because of the sun's position, and Tenant also agrees at all times to cooperate fully with Landlord and to abide by all of the reasonable, non-discriminatory regulations and requirements which Landlord may prescribe for the proper functioning and protection of electrical, heating, ventilating and air conditioning systems. Wherever heat-generating machines, excess lighting or equipment are used in the Premises which affect the temperature otherwise maintained by the air conditioning system (other than standard office equipment), Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord within thirty (30) days after demand by Landlord. H. Tenant shall not without written consent of Landlord (which shall not be unreasonably withheld or delayed) use any apparatus, equipment or device in the Premises, including without limitation, electronic data processing machines, and other over-standard machines using electric current or water, in excess of or which will in any way increase the amount of electricity or water being furnished or supplied for the use of the Premises (which, with respect to electricity consumption, is in excess of 5 watts per usable square foot of the Premises) or which will require additions or alterations to or interfere with the Building power distribution systems; nor connect with electric current, except through existing electrical outlets in the Premises or water pipes, any apparatus, equipment or device for the purpose of using electrical current, water, or any other resource. If Tenant shall require water or electric current or any other resource in excess of that being furnished or supplied for the use of the Premises, Tenant shall first procure the written consent of Landlord (which shall not be unreasonably withheld or delayed), and Landlord may cause a special meter to be installed in the Premises so as to measure the amount of water, electric current or other resource consumed for any such other use. Tenant shall pay directly to Landlord as an addition to and separate from payment of Operating Expenses the cost of all such additional resources, energy, utility service and meters (and of installation, maintenance and repair thereof and of any additional circuits or other equipment necessary to furnish such additional resources, energy, utility or service). Landlord may add to the separate or metered charge a recovery of additional expense incurred in keeping account of the excess water, electric current or other resource so consumed. Except as otherwise provided herein, Landlord -25- shall not be liable for any damages directly or indirectly resulting from nor shall the Rent or any monies owed Landlord under this Lease herein reserved be abated by reason of: (a) the installation, use or interruption of use of any equipment used in connection with the furnishing of any such utilities or services, or any change in the character or means of supplying or providing any such utilities or services or any supplier thereof; (b) the failure to furnish or delay in furnishing any such utilities or services when such failure or delay is caused by acts of God or the elements, labor disturbances of any character, or any other accidents or other conditions beyond the reasonable control of Landlord or because of any interruption of service due to Tenant's use of water, electric current or other resource in excess of that being supplied or furnished for the use of the Premises; (c) the inadequacy, limitation, curtailment, rationing or restriction on use of water, electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises or Project, whether by Regulation or otherwise beyond Landlord's reasonable control; or (d) the partial or total unavailability of any such utilities or services to the Premises or the Building, whether by Regulation or otherwise beyond Landlord's reasonable control; nor shall any such occurrence constitute an actual or constructive eviction of Tenant. Provided the utility services provided to Tenant are not materially reduced or impaired, Landlord shall be entitled to cooperate voluntarily and in a reasonable manner with the efforts of national, state or local governmental agencies or utility suppliers in reducing energy or other resource consumption. In addition, Landlord reserves the right to change the supplier or provider of any such utility or service from time to time, so long as the cost to provide said utilities or services arc reasonably competitive with that of other providers or suppliers. Tenant shall have no right to contract with or otherwise obtain any electrical service for or with respect to the Premises or Tenant's operations therein from any supplier or provider of any such service. Tenant shall cooperate, at no expense to Tenant, with Landlord and any supplier or provider of such services designated by Landlord from time to time to facilitate the delivery of such services to Tenant at the Premises and to the Building and Project, including without limitation allowing Landlord and Landlord's suppliers or providers, and their respective agents and contractors, reasonable access to the Premises for the purpose of installing, maintaining, repairing, replacing or upgrading such service or any equipment or machinery associated therewith. Landlord agrees to use its best efforts to minimize any interference caused to Tenant's business operations as a result of such access. I. In the event that Tenant requires utilities (other than electricity, water and HVAC) and/or services in excess of what Landlord is required to provide during Business Hours, Landlord agrees to use its commercially reasonable efforts to provide such extra utilities and services, and Tenant agrees to pay to Landlord its then standard charge for any such extra utilities or services. J. For all utilities furnished to the Premises and separately billed to or metered to Tenant in accordance with the terms of this Paragraph 15, Tenant shall pay the charges therefor within 30 days after written demand from Landlord. For all other utilities furnished to the Premises, Tenant shall pay Tenant's applicable share of all charges jointly serving the Project in accordance with Paragraph 7. All sums payable under this Paragraph 15 shall constitute Additional Rent hereunder. K. In the event that Tenant is prevented from using, and does not use, the Premises or any portion thereof, for more than three (3) consecutive business days or ten (10) business days in any twelve (12) month period following Landlord's receipt of written notice from Tenant (which notice shall not be deemed given until the following non-holiday weekday if it is given on a Saturday, Sunday or holiday) (the "Eligibility Period") as a result of any (i) repair, maintenance or alteration performed by Landlord, or which Landlord failed to perform and which was required by this Lease (which is not necessitated by the negligence of Tenant or its employees, agents, contractors or invitees) and which substantially interferes with Tenant's use of the Premises, and (ii) interruption in any of the following building services required to be provided by Landlord (so long as it is not due to the fault or neglect of Tenant, its agents, employees, contractors or invitees): heating, ventilation and air conditioning, fire life safety, electrical services, janitorial service or water or any other "essential" building service (each such -26- circumstance to be known as an "Abatement Event"), then Tenant's rent and parking charges shall be abated or reduced, as the case may be, after expiration of the Eligibility Period for such time that Tenant continues to be so prevented from using, and does not use, the Premises, or a portion thereof, in the proportion that the rentable area of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total rentable area of the Premises. However, in the event that Tenant is prevented from conducting, and does not conduct, its business in any portion of the Premises for a period of time in excess of the Eligibility Period, and the remaining portion of the Premises is not sufficient to allow Tenant to effectively conduct its business therein, and if Tenant does not conduct its business from such remaining portion, then for such time after expiration of the Eligibility Period during which Tenant is so prevented from effectively conducting its business therein, the rent for the entire Premises and all of Tenant's parking charges shall be abated; provided, however, if Tenant reoccupies and conducts its business from any portion of the Premises during such period, the rent and parking charges allocable to such reoccupied portion, based on the proportion that the rentable area of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable by Tenant from the date such business operations commence. If the Eligibility Period continues for more than six (6) consecutive months, and the Abatement Event is reasonably capable of being remedied by Landlord (and is not an event covered by Articles 23 or 24 below), then Tenant shall have the right to elect to terminate this Lease effective ninety (90) days thereafter by notifying Landlord in writing of such election within five (5) business days following the end of such six (6) consecutive month period and thereafter during the first five (5) business days after each calendar month following the end of such six (6) consecutive month period until such time as the Abatement Event is remedied and Tenant is able to conduct its business from the Premises. The six (6) consecutive month period set forth in this paragraph shall not be extended by any delays in remedying the Abatement Event which result from a Force Majeure Delay (as defined in Paragraph 35 below). Notwithstanding anything to the contrary contained herein, the terms of Article 23 and 24 shall govern and control Tenant's right to any rental abatement as a result of any event covered by Article 23 or 24 below. L. Landlord agrees to maintain and operate the Common Areas in a manner consistent with the manner in which the Common Areas are being maintained and operated as of the date of this Lease. 16. SUBORDINATION Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, the Lease shall be and is hereby declared to be subject and subordinate at all times to: (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Premises and/or the land upon which the Premises and Project are situated, or both; and (b) any mortgage or deed of trust which may now exist or be placed upon the Building, the Project and/or the land upon which the Premises or the Project are situated, or said ground leases or underlying leases, or Landlord's interest or estate in any of said items which is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. If any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord provided that such successor agrees that Tenant shall not be disturbed in its possession under this Lease by such successor in interest so long as Tenant is not in default under this Lease. Within fifteen (15) business days after request by Landlord, Tenant shall execute and deliver any additional documents evidencing Tenant's attornment or the subordination of this Lease with respect to any such ground leases or underlying leases or any such mortgage or deed of trust, in a commercially reasonable form requested by Landlord or by any ground landlord, -27- mortgagee, or beneficiary under a deed of trust, subject to such nondisturbance requirement. Landlord shall provide Tenant within sixty (60) days from the date of Tenant's execution of the Lease, a commercially reasonable non-disturbance agreement in favor of Tenant, from any ground lessors, mortgage holders or lien holders then in existence. Landlord also agrees to provide Tenant with commercially reasonable non-disturbance agreement(s) in favor of Tenant from any ground lessors, mortgage holders or lien holders of Landlord who later come into existence at any time prior to the expiration of the Term of the Lease in consideration of, and as a condition precedent to, Tenant's agreement to be bound by Article 16 of the Lease. 17. FINANCIAL STATEMENTS At the request of Landlord from time to time and, if Tenant is not a public company, upon Landlord's signing a commercially reasonable confidentiality agreement, Tenant shall provide to Landlord Tenant's current financial statements prepared in the normal course of business, which Landlord shall use solely for purposes of this Lease and in connection with the ownership, management, financing and disposition of the Project. 18. ESTOPPEL CERTIFICATE Tenant agrees from time to time (but no more than two (2) times per year), within fifteen (15) business days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate stating that this Lease is in full force and effect, that this Lease has not been modified (or stating all modifications, written or oral, to this Lease), the date to which Rent has been paid, the unexpired portion of this Lease, to Tenant's actual knowledge, that there are no current defaults by Landlord or Tenant under this Lease (or specifying any such defaults), that the leasehold estate granted by this Lease is the sole interest of Tenant in the Premises and/or the land at which the Premises are situated, and such other matters pertaining to this Lease as may be reasonably requested by Landlord or any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or Project or any interest therein. Failure by Tenant to execute and deliver such certificate shall constitute an acknowledgment by Tenant that the statements included are true and correct without exception. Tenant agrees that if Tenant fails to execute and deliver such certificate within such fifteen (15) business day period, Landlord may execute and deliver such certificate on Tenant's behalf and that such certificate shall be binding on Tenant. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or Project or any interest therein. The parties agree that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of the Lease, and shall be an event of default (without any cure period that might be provided under Paragraph 26.A(3) of this Lease) if Tenant fails to fully comply within two (2) business days after Tenant's receipt of a notice from Landlord notifying Tenant of its failure to provide said estoppel certificate within the foregoing fifteen (15) business day period or makes any material misstatement in any such certificate. Landlord hereby agrees to provide to Tenant an estoppel certificate signed by Landlord, containing the same types of information, and within the same period of time, as set forth above, with such changes as are reasonably necessary to reflect that the estoppel certificate is being granted and signed by Landlord to Tenant, rather than from Tenant to Landlord or a lender. 19. SECURITY DEPOSIT Tenant agrees to deposit with Landlord upon execution of this Lease, a security deposit as stated in the Basic Lease Information (the "SECURITY DEPOSIT"), which sum shall be held by Landlord, as security for the performance of Tenant's covenants and obligations under this Lease. The Security Deposit is not an advance rental deposit or -28- a measure of damages incurred by Landlord in case of Tenant's default. Upon the occurrence of any event of default by Tenant, beyond any applicable notice and cure period, Landlord may from time to time, without prejudice to any other remedy provided herein or by law, use such fund as a credit to the extent necessary to credit against any arrears of Rent or other payments due to Landlord hereunder, and any other damage, injury, expense or liability caused by such event of default, and Tenant shall pay to Landlord, on demand, the amount so applied in order to restore the Security Deposit to its original amount. Any remaining balance of such deposit shall be returned by Landlord to Tenant within ninety (90) days after termination of this Lease, reduced by such amounts as may be required by Landlord to remedy defaults on the part of Tenant in the payment of Rent or other obligations of Tenant under this Lease, to repair damage to the Premises, Building or Project caused by Tenant or any Tenant's Parties, to clean the Premises and to compensate Landlord for Landlord's reasonable estimate of any additional amounts to be owed by Tenant to Landlord on account of Tenant's proportionate share of Operating Expenses. Landlord agrees to invest the amount of the cash portion of the Security Deposit provided by Tenant under this Lease which exceeds $37,981.42 into a three (3) month certificate of deposit account at a financial institution selected by Landlord (with such certificate of deposit to rollover for successive periods of three (3) months each). The interest earned on such certificate of deposit account shall accrue for the benefit of Tenant, subject to Landlord's right to apply the Security Deposit (including said interest) in accordance with the terms hereof against any of Tenant's obligations under this Lease. To the extent Landlord properly applies any portion of the Security Deposit against Tenant's obligations under this Lease and a penalty is incurred in connection with such application due to the early withdrawal of said funds from the certificate of deposit account, then Tenant shall be responsible for restoring the Security Deposit to its original amount immediately prior to said application, subject to the terms of Paragraph 39C below. Accordingly, the amount received by Landlord from the certificate of deposit account, together with any penalty amount assessed in connection with said withdrawal, shall be paid by Tenant to Landlord to replenish the Security Deposit. 20. LIMITATION OF TENANT'S REMEDIES The obligations and liability of Landlord to Tenant for any default by Landlord under the terms of this Lease are not personal obligations of Landlord or of the individual or other partners of Landlord or its or their partners, directors, officers, or shareholders, and Tenant agrees to look solely to Landlord's interest in the Project for the recovery of any amount from Landlord, including all rental income, insurance, condemnation and net sale proceeds, and shall not look to other assets of Landlord nor seek recourse against the assets of the individual or other partners of Landlord or its or their partners, directors, officers or shareholders. Any lien obtained to enforce any such judgment and any levy of execution thereon shall be subject and subordinate to any lien, mortgage or deed of trust on the Project. Under no circumstances shall Tenant have the right to offset against or recoup Rent or other payments due and to become due to Landlord hereunder except as expressly provided in this Lease, including Paragraph 23.B. below, which Rent and other payments shall be absolutely due and payable hereunder in accordance with the terms hereof. 21. ASSIGNMENT AND SUBLETTING A. (1 GENERAL. Tenant shall not assign or pledge this Lease or sublet the Premises or any part thereof, whether voluntary or by operation of law, or permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant, or suffer or permit any such assignment, pledge, subleasing or occupancy, without Landlord's prior written consent except as provided herein. If Tenant desires to assign this Lease or sublet any or all of the Premises, Tenant shall give Landlord written notice (the "TRANSFER NOTICE") at least twenty (20) days prior to the anticipated effective date of the proposed assignment or sublease, which shall contain all of the information reasonably requested by Landlord to address Landlord's decision criteria specified hereinafter. Within twenty (20) days -29- following Landlord's receipt of the Transfer Notice, Landlord shall notify Tenant in writing that Landlord elects either: (i) to terminate this Lease as to the space so affected as of the date so requested by Tenant for the period of time so requested by Tenant (provided that Landlord shall have no such termination right during the initial Term); or (ii) to consent to the proposed assignment or sublease, or (iii) deny consent for reasonable grounds detailed to Tenant. Consent to any assignment or subletting shall not constitute consent to any subsequent transaction to which this Paragraph 21 applies. (2 CONDITIONS OF LANDLORD'S CONSENT. Without limiting the other instances in which it may be reasonable for Landlord to withhold Landlord's consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold Landlord's consent in the following instances: if the proposed assignee does not agree to be bound by and assume the obligations of Tenant under this Lease in a commercially reasonable form and substance reasonably satisfactory to Landlord; the use of the Premises by such proposed assignee or subtenant would not be a Permitted Use or would violate any exclusivity or other arrangement which Landlord has with any other tenant or occupant or any Regulation or would violate the Occupancy Density or Parking Density of the Building or Project; the proposed assignee or subtenant is not of sound financial condition in light of its obligations under any such sublease or assignment; the proposed assignee or subtenant is a governmental agency with the power of condemnation or high foot traffic or otherwise of a character which is not consistent (in Landlord's reasonable opinion) with the professional image of the Building or the character of the other tenants therein; the proposed assignee or subtenant does not have a good reputation as a tenant of property or a good business reputation (as determined by Landlord in its reasonable discretion); the proposed assignee or subtenant is a person with whom Landlord is actively negotiating to lease space in the Project (which for purposes of this Lease shall mean that a written lease proposal/counter-proposals setting forth the material business terms of a proposal lease transaction have been exchanged within the immediately proceeding three (3) month period between Landlord and the proposed transferee) or is a present tenant of the Project; the assignment or subletting would entail any use of any Hazardous Materials or other noxious use or use which may disturb other tenants of the Project; or Tenant is in default of any obligation of Tenant under this Lease, beyond applicable notice and cure provision. Failure by or refusal of Landlord to consent to a proposed assignee or subtenant shall not cause a termination of this Lease. Upon a termination under Paragraph 21.A.(1)(i), Landlord may lease the Premises to any party, including parties with whom Tenant has negotiated an assignment or sublease, without incurring any liability to Tenant. At the option of Landlord, a surrender and termination of this Lease shall operate as an assignment to Landlord of some or all subleases or subtenancies. Landlord shall exercise this option by giving notice of that assignment to such subtenants on or before the effective date of the surrender and termination. In connection with each request for assignment or subletting, Tenant shall pay to Landlord Landlord's actual out-of-pocket costs for approving such requests, as well as all costs incurred by Landlord or any mortgagee or ground lessor in approving each such request and effecting any such transfer, including, without limitation, reasonable attorneys' fees (not to exceed $1,500 in the aggregate). B. BONUS RENT. Any Rent or other consideration realized by Tenant under any such sublease or assignment in excess of the Rent payable hereunder, after deducting any Subleasing Costs (defined below) incurred by Tenant in connection with said sublease or assignment (which Subleasing Costs shall be amortized over the term of said sublease or assignment), shall be divided and paid, fifty percent (50%) to Tenant, fifty percent (50%) to Landlord. "Subleasing Costs" shall mean reasonable, out-of-pocket expenses for (i) any changes, alterations and improvements to the Premises in connection with the transfer, (ii) any brokerage commissions in connection with the transfer, (iii) any costs to buy-out or takeover the previous lease of a transferee, (iv) reasonable legal fees incurred in connection with the transfer including those fees and costs reimbursed to -30- Landlord pursuant to this Lease, (v) provided Tenant is marketing the Premises (or a portion thereof) for sublease or assignment after Tenant is no longer occupying said space, the amount of Base Rent paid by Landlord during the period from the date Tenant is no longer occupying all or a portion of the Premises until the commencement date of such sublease or assignment (with such Base Rent payments to be appropriately prorated in the event of a sublease of a portion of the Premises) and (vi) any other "out-of-pocket" monetary concessions reasonably provided in connection with the transfer including, but not limited to, tenant improvement or decorating allowances (collectively, the "Subleasing Costs"). Tenant may recoup all Subleasing Costs before any profit is paid to Landlord pursuant to the terms hereof. C. CORPORATION. If Tenant is a corporation, a transfer of corporate shares by sale, assignment, bequest, inheritance, operation of law or other disposition (including such a transfer to or by a receiver or trustee in federal or state bankruptcy, insolvency or other proceedings) resulting in a change in the present control of such corporation or any of its parent corporations by the person or persons owning a majority of said corporate shares, shall constitute an assignment for purposes of this Lease. The terms of this Paragraph 21B shall not apply if Tenant becomes a publicly traded company on a nationally or regionally recognized stock exchange or in connection with Tenant becoming a publicly traded company or in connection with the investment of money into Tenant (without a change in the present control of Tenant). D. UNINCORPORATED ENTITY. If Tenant is a partnership, joint venture, unincorporated limited liability company or other unincorporated business form, a transfer of the interest of persons, firms, or entities responsible for managerial control of Tenant by sale, assignment, bequest, inheritance, operation of law or other disposition, so as to result in a change in the present control of said entity and/or of the underlying beneficial interests of said entity and/or a change in the identity of the persons responsible for the general credit obligations of said entity shall constitute an assignment for all purposes of this Lease. E. LIABILITY. No assignment or subletting by Tenant, permitted or otherwise, shall relieve Tenant of any obligation under this Lease or alter the primary liability of the Tenant named herein for the payment of Rent or for the performance of any other obligations to be performed by Tenant, including obligations contained in Paragraph 25 with respect to any assignee or subtenant. From and after the date of any default by Tenant under this Lease, beyond any applicable notice and cure period, until such default is cured, Landlord may collect rent or other amounts or any portion thereof from any assignee, subtenant, or other occupant of the Premises, permitted or otherwise, and apply the net rent collected to the Rent payable hereunder, but no such collection shall be deemed to be a waiver of this Paragraph 21, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of the obligations of Tenant under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void to such extent. F. SUBLEASE AND ASSIGNMENT. Notwithstanding anything to the contrary contained in this Section, neither (i) an assignment or subletting of all or a portion of the Premises (A) to an entity which is controlled by, controls or is under common control with Tenant (or a valid assignee of this Lease), or (B) to a purchaser of all or substantially all of the assets of Tenant or of an entity which is controlled by, controls or is under common control with Tenant (or a valid assignee of this Lease), (ii) a transfer, by operation of law or otherwise, in connection with the merger, consolidation or other reorganization of Tenant or of an entity which is controlled by, controls or is under common control with Tenant (or a valid assignee of this Lease), nor (iii) the temporary use or occupancy of portions of the Premises (not to exceed 8,000 rentable square feet, in the aggregate) by a party or parties in connection with the transaction of business with Tenant or with an entity which is controlled by, controls or is under common control with Tenant (or with a valid assignee of this Lease), shall be subject to the Landlord's consent (collectively, such entities, purchasers, and parties shall be referred to herein collectively or individually as an "Affiliate"), provided such assignment -31- or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease. Tenant shall immediately notify Landlord of any such assignment, purchase, transfer, sublease, action, or use. For purposes of this Lease, "control" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person or entity, or majority ownership of any sort, whether through the ownership of voting securities, by contract or otherwise. 22. AUTHORITY Landlord represents and warrants that it has full right and authority to enter into this Lease and to perform all of Landlord's obligations hereunder and that all persons signing this Lease on its behalf are authorized to do. Tenant represents and warrants that Tenant has full right and authority to enter into this Lease, and to perform all of Tenant's obligations hereunder, and that all persons signing this Lease on its behalf are authorized to do so. 23. CONDEMNATION A. CONDEMNATION RESULTING IN TERMINATION. If the whole or any substantial part of the Premises should be taken or condemned for any public use under any Regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the Permitted Use of the Premises, either party shall have the right to terminate this Lease at its option. If any material portion of the Building or Project is taken or condemned for any public use under any Regulation, or by right of eminent domain, or by private purchase in lieu thereof, Landlord may terminate this Lease at its option. In either of such events, the Rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of said Premises shall have occurred. B. CONDEMNATION NOT RESULTING IN TERMINATION. If a portion of the Project of which the Premises are a part should be taken or condemned for any public use under any Regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking prevents or materially interferes with the Permitted Use of the Premises, and this Lease is not terminated as provided in Paragraph 23.A. above, the Rent payable hereunder during the unexpired portion of the Lease shall be reduced, beginning on the date when the physical taking shall have occurred, to such amount as may be fair and reasonable under all of the circumstances, but only after giving Landlord credit for all sums received or to be received by Tenant by the condemning authority. Notwithstanding anything to the contrary contained in this Paragraph, if the temporary use or occupancy of any part of the Premises shall be taken or appropriated under power of eminent domain during the Term, this Lease shall be and remain unaffected by such taking or appropriation and Tenant shall continue to pay in full all Rent payable hereunder by Tenant during the Term; in the event of an such temporary appropriation or taking, Tenant shall be entitled to receive that portion of any award which represents compensation for the use of or occupancy of the Premises during the Term, and Landlord shall be entitled to receive that portion of any award which represents the cost of restoration of the Premises and the use and occupancy of the Premises beyond the Term. C. AWARD. Landlord shall be entitled to (and Tenant shall assign to Landlord) any and all payment, income, rent, award or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance and Tenant shall have no claim against Landlord or otherwise for any sums paid by virtue of such proceedings, whether or not attributable to the value of any unexpired portion of this Lease, except as expressly provided in this Lease. Notwithstanding the foregoing, any compensation awarded Tenant for Tenant's personal property, fixtures and moving costs, shall be and remain the property of Tenant. D. WAIVER OF CCP SECTION 1265.130. Each party waives the provisions of California Civil Code Procedure Section 1265.130 allowing either party to petition the superior court to terminate this Lease as a result of a partial taking. -32- 24. CASUALTY DAMAGE A. GENERAL. If the Premises or Building should be damaged or destroyed by fire, tornado, or other casualty (collectively, "CASUALTY") and Tenant has determined that Landlord is not otherwise aware of such Casualty, Tenant shall give immediate written notice thereof to Landlord. Within sixty (60) days after the earlier of Landlord's receipt of such notice or Landlord's becoming aware of the Casualty, Landlord shall notify Tenant whether in Landlord's estimation (as reasonably certified by Landlord's contractor) restoration of the Premises can reasonably be made within two hundred ten (210) days from the date of such notice ("Landlord's Damage Notice"). Landlord's contractor's reasonable determination shall be binding on Tenant. B. WITHIN 210 DAYS. If the Premises or Building should be damaged by Casualty to such extent that restoration can in Landlord's estimation be reasonably completed within two hundred ten (210) days after the earlier of the date of such notice, or Landlord's becoming aware of the Casualty, this Lease shall not terminate. Provided that insurance proceeds are received by Landlord to fully repair the damage, Landlord shall proceed to rebuild and repair the Premises to its pre-existing condition, except that Landlord shall not be required to rebuild, repair or replace any part of the Alterations which may have been placed on or about the Premises by Tenant. If the Premises are untenantable in whole or in part following such damage, the Rent payable hereunder during the period in which they are untenantable shall be abated proportionately, but only to the extent the Premises are unfit for occupancy and Tenant does not occupy the same. C. GREATER THAN 210 DAYS. If the Premises or Building should be damaged by Casualty to such extent that rebuilding or repairs cannot in Landlord's estimation be reasonably completed within two hundred ten (210) days after the earlier of the date of such notice or Landlord's becoming aware of the Casualty, then Landlord shall have the option of either: (1) terminating this Lease effective upon the date of the occurrence of such damage, in which event the Rent shall be abated during the unexpired portion of this Lease; or (2) electing to rebuild or repair the Premises diligently and to its pre-existing condition. Landlord shall notify Tenant of its election within thirty (30) days after the earlier of Landlord's receipt of notice of the damage or destruction or Landlord's becoming aware of the Casualty. Landlord may only elect to terminate this Lease hereunder if Landlord terminates all leases of similarly damaged space in the Building. Notwithstanding the above, Landlord shall not be required to rebuild, repair or replace any part of any Alterations which may have been placed, on or about the Premises by Tenant. If the Premises are untenantable in whole or in part following such damage, the Rent payable hereunder during the period in which they are untenantable shall be abated proportionately, but only to the extent the Premises are unfit for occupancy and Tenant does not occupy the same. D. TENANT'S FAULT. Notwithstanding anything herein to the contrary, if the Premises or any other portion of the Building are damaged by Casualty resulting from the fault, negligence, or breach of this Lease by Tenant or any of Tenant's Parties, Base Rent and Additional Rent shall not be diminished during the repair of such damage (except to the extent of rental income insurance proceeds actually received by Landlord) and Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds. E. INSURANCE PROCEEDS. Notwithstanding anything herein to the contrary, if the Premises or Building are damaged or destroyed and are not fully covered by the insurance proceeds received by Landlord (other than any deductible portion and an additional amount up to 5% of the total replacement cost of the 2850 Building and/or 3100 Building, as applicable) or if the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises requires that the insurance proceeds be applied to such indebtedness, then in either case Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within thirty (30) days after the date of notice to Landlord that said damage or destruction is not fully covered by -33- insurance (other than any deductible portion and an additional amount up to 5% of the total replacement cost of the 2850 Building or 3100 Building, as applicable) or such requirement is made by any such holder, as the case may be, whereupon this Lease shall terminate. F. WAIVER. This Paragraph 24 shall be Tenant's sole and exclusive remedy in the event of damage or destruction to the Premises or the Building. As a material inducement to Landlord entering into this Lease, Tenant hereby waives any rights it may have under Sections 1932, 1933(4), 1941 or 1942 of the Civil Code of California with respect to any destruction of the Premises, Landlord's obligation for tenantability of the Premises and Tenant's right to make repairs and deduct the expenses of such repairs, or under any similar law, statute or ordinance now or hereafter in effect. G. TENANT'S PERSONAL PROPERTY. In the event of any damage or destruction of the Premises or the Building, except to the extent resulting from Landlord's negligence or willful misconduct, under no circumstances shall Landlord be required to repair any injury or damage to, or make any repairs to or replacements of, Tenant's personal property. H. TENANT'S TERMINATION RIGHT. If Landlord does not elect to terminate this Lease pursuant to Paragraph 24C above and if the estimated date by which Landlord's repair obligations are expected to be sufficiently completed so that Tenant can resume normal business operations in the affected portions of the Premises (the "Estimated Completion Date") is greater than two hundred ten (210) days after the earlier of the date Landlord receives notice of the Casualty or Landlord's becoming aware of the Casualty, Tenant may elect, no later than thirty (30) days after Tenant's receipt of Landlord's Damage Notice, to terminate this Lease by written notice to Landlord effective as of the date specified in Tenant's notice, which date shall be not greater than ninety (90) days after the date of delivery of Tenant's notice. Furthermore, if neither Landlord nor Tenant have terminated this Lease and the repairs are not actually completed within two hundred ten (210) days after the date Landlord receives notice of the Casualty (which two hundred ten (210) day period shall be extended by Force Majeure Delays [which delays shall not exceed sixty (60) days] and by any delays resulting from the acts or omissions of Tenant and/or its agents, employees or contractors), Tenant shall have the right to terminate this Lease within five (5) business days after the end of such period and thereafter during the first five (5) business days after each calendar month following the end of such period until such time as the repairs are complete, by notice to Landlord (the "Damage Termination Notice"), effective as of the date set forth in the Damage Termination Notice (the "Damage Termination Date"), which Damage Termination Date shall not be less than five (5) business days following the end of such period or each such month, as the case may be. Notwithstanding the foregoing, if Tenant delivers a Damage Termination Notice to Landlord, then Landlord shall have the right to suspend the occurrence of the Damage Termination Date for a period ending thirty (30) days after the Damage Termination Date set forth in the Damage Termination Notice by delivering to Tenant, within five (5) business days of Landlord's receipt of the Damage Termination Notice, a certificate of Landlord's contractor responsible for the repair of the damage certifying that it is such contractor's good faith judgment that the repairs shall be substantially completed within thirty (30) days after the Damage Termination Date. If repairs shall be substantially completed prior to the expiration of such thirty (30) day period, then the Damage Termination Notice shall be of no force or effect but if the repairs shall not be substantially completed within such thirty (30) day period, then this Lease shall terminate upon the expiration of such thirty (30) day period. If Landlord undertakes repair and/or restoration pursuant to Paragraph 24B and thereafter determines that it will not be able to complete the same within the two hundred ten (210) day period set forth herein, then Landlord shall promptly notify Tenant thereof and shall provide Tenant with Landlord's revised estimate of the date upon which Landlord will complete the same ("Revised Completion Date"). Within ten (10) business days after Tenant's receipt of such notice, Tenant shall have the right to elect to terminate this Lease or to agree to extend the two hundred ten (210) day period to the Revised Completion Date. Such notice by Landlord shall identify Tenant's option pursuant to the preceding -34- sentence. Tenant's failure to elect to terminate or to extend such time period to the Revised Completion Date by written notice to Landlord within such ten (10) business day period shall be conclusively deemed to be Tenant's election to extend the time to the Revised Completion Date. Upon any such termination of this Lease pursuant to this Paragraph 24, Tenant shall pay the monthly Base Rent and Additional Rent, properly apportioned up to such date of termination, and both parties hereto shall thereafter be freed and discharged of all further obligations hereunder, except as provided for in provisions of this Lease which by their terms survive the expiration or earlier termination of the Term. I. LAST 12 MONTHS OF TERM. Landlord and Tenant shall each have the right to terminate this Lease in the event any material damage by Casualty occurs during the last twelve (12) months of the Term. 25. HOLDING OVER Unless Landlord expressly consents in writing to Tenant's holding over, Tenant shall be unlawfully and illegally in possession of the Premises, whether or not Landlord accepts any rent from Tenant or any other person while Tenant remains in possession of the Premises without Landlord's written consent. If Tenant shall retain possession of the Premises or any portion thereof without Landlord's consent following the expiration of this Lease or sooner termination for any reason, then (i) for the first two (2) months of such retention, Tenant shall pay to Landlord Base Rent (in addition to its other obligations under this Lease) for each day of such retention in an amount equal to one hundred twenty-five percent (125%) of the amount of Base Rent as of the last month prior to the date of expiration or earlier termination, and (ii) thereafter, Tenant shall pay to Landlord Base Rent (in addition to its other obligations under this Lease) for each day of such retention in an amount equal to one hundred fifty percent (150%) of the amount of Base Rent as of the last month prior to the date of expiration or earlier termination. Tenant shall also indemnify, defend, protect and hold Landlord harmless from any loss, liability or cost, including consequential and incidental damages and reasonable attorneys' fees, incurred by Landlord resulting from delay by Tenant in surrendering the Premises, including, without limitation, any claims made by the succeeding tenant founded on such delay. Acceptance of Rent by Landlord following expiration or earlier termination of this Lease, or following demand by Landlord for possession of the Premises, shall not constitute a renewal of this Lease, and nothing contained in this Paragraph 25 shall waive Landlord's right of reentry or any other right. Additionally, if upon expiration or earlier termination of this Lease, or following demand by Landlord for possession of the Premises, Tenant has not fulfilled its obligation with respect to repairs and cleanup of the Premises or any other Tenant obligations as set forth in this Lease, then, upon notice to Tenant and the expiration of two (2) days following said notice, Landlord shall have the right to perform any such obligations as it deems necessary at Tenant's sole cost and expense, and any commercially reasonable time required by Landlord to complete such obligations shall be considered a period of holding over and the terms of this Paragraph 25 shall apply to the extent Landlord is delayed in causing a new tenant to take occupancy of all or a portion of the Premises. The provisions of this Paragraph 25 shall survive any expiration or earlier termination of this Lease. 26. DEFAULT A. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an event of default on the part of Tenant: (1) ABANDONMENT. Abandonment of the Premises for a continuous period in excess of five (5) business days after written notice. Tenant waives any right to notice Tenant may have under Section 1951.3 of the Civil Code of the State of California, the terms of this Paragraph 26.A. being deemed such notice to Tenant as required by said Section 1951.3. (2) NONPAYMENT OF RENT. Failure to pay any installment of Rent or any other amount due and payable hereunder within five (5) days following written -35- notice that said amount is due, as to which time is of the essence (which notice shall be in lieu of, and not in addition to, the notice requirements of Section 1161 of the California Code of Civil Procedure or any similar or successor law). (3) OTHER OBLIGATIONS. Failure to perform any obligation, agreement or covenant under this Lease other than those matters specified in subparagraphs (1) and (2) of this Paragraph 26.A., such failure continuing for thirty (30) days after written notice of such failure, as to which time is of the essence, provided that if the nature of such default is such that the same cannot reasonably be cured within a thirty (30) day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure said default. (4) GENERAL ASSIGNMENT. A general assignment by Tenant for the benefit of creditors. (5) BANKRUPTCY. The filing of any voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition by Tenant's creditors, which involuntary petition remains undischarged for a period of sixty (60) days. If under applicable law, the trustee in bankruptcy or Tenant has the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant's obligations under this Lease. (6) RECEIVERSHIP. The employment of a receiver to take possession of substantially all of Tenant's assets or Tenant's leasehold of the Premises, if such appointment remains undismissed or undischarged for a period of sixty (60) days after the order therefor. (7) ATTACHMENT. The attachment, execution or other judicial seizure of all or substantially all of Tenant's assets or Tenant's leasehold of the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of sixty (60) days after the levy thereof. (8) INSOLVENCY. The admission signed by Tenant in writing of its inability to pay its debts as they become due. B. REMEDIES UPON DEFAULT. (1) TERMINATION. In the event of the occurrence of any event of default, Landlord shall have the right to give a written termination notice to Tenant, and on the date specified in such notice, Tenant's right to possession shall terminate, and this Lease shall terminate unless on or before such date all Rent in arrears and all costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other events of default of this Lease by Tenant at the time existing shall have been fully remedied to the satisfaction of Landlord. At any time after such termination, Landlord may recover possession of the Premises or any part thereof and expel and remove therefrom Tenant and any other person occupying the same, including any subtenant or subtenants notwithstanding Landlord's consent to any sublease, by any lawful means, and again repossess and enjoy the Premises without prejudice to any of the remedies that Landlord may have under this Lease, or at law or equity by any reason of Tenant's default or of such termination, Landlord hereby reserves the right, but shall not have the obligation, to recognize the continued possession of any subtenant. The delivery or surrender to Landlord by or on behalf of Tenant of keys, entry codes, or other means to bypass security at the Premises shall not terminate this Lease. -36- (2) CONTINUATION AFTER DEFAULT. Even though an event of default may have occurred, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession under Paragraph 26.B.(1) hereof, and Landlord may enforce all of Landlord's rights and remedies under this Lease and at law or in equity, including without limitation, the right to recover Rent as it becomes due, and Landlord, without terminating this Lease, may exercise all of the rights and remedies of a landlord under Section 1951.4 of the Civil Code of the State of California or any successor code section. Acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver under application of Landlord to protect Landlord's interest under this Lease or other entry by Landlord upon the Premises shall not constitute an election to terminate Tenant's right to possession. C. DAMAGES AFTER DEFAULT. Should Landlord terminate this Lease pursuant to the provisions of Paragraph 26.B.(1) hereof, Landlord shall have the rights and remedies of a Landlord provided by Section 1951.2 of the Civil Code of the State of California, or any successor code sections. Upon such termination, in addition to any other rights and remedies to which Landlord may be entitled under applicable law or at equity, Landlord shall be entitled to recover from Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts which had been earned at the time of termination, (2) the worth at the time of award of the amount by which the unpaid Rent and other amounts that would have been earned after the date of termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; (3) the worth at the time of award of the amount by which the unpaid Rent and other amounts for the balance of the Term after the time of award exceeds the amount of such Rent loss that the Tenant proves could be reasonably avoided; and (4) any other amount and court costs necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom. The "worth at the time of award" as used in (1) and (2) above shall be computed at the Applicable Interest Rate (defined below). The "worth at the time of award" as used in (3) above shall be computed by discounting such amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). D. LATE CHARGE. In addition to its other remedies, Landlord shall have the right to add to the amount of any payment required to be made by Tenant hereunder, and which is not paid and received by Landlord within five (5) days following written notice that said amount is past due, an amount equal to five percent (5 %) of the delinquency for each month or portion thereof that the delinquency remains outstanding to compensate Landlord for the loss of the use of the amount not paid and the administrative costs caused by the delinquency, the parties agreeing that Landlord's damage by virtue of such delinquencies would be extremely difficult and impracticable to compute and the amount stated herein represents a reasonable estimate thereof. Any waiver by Landlord of any late charges or failure to claim the same shall not constitute a waiver of other late charges or any other remedies available to Landlord. E. INTEREST. Interest shall accrue on all sums not paid when due hereunder at the lesser of the "prime rate" charged by Wells Fargo Bank, N.A. (San Francisco) or its successor plus 2% per annum or the maximum interest rate allowed by law ("APPLICABLE INTEREST RATE") from the due date until paid. F. REMEDIES CUMULATIVE. All rights, privileges and elections or remedies of the parties are cumulative and not alternative, to the extent permitted by law and except as otherwise provided herein. G. LANDLORD'S DEFAULT. Landlord shall not be in default under this Lease unless Landlord fails to perform obligations required of Landlord within thirty (30) days after written notice is delivered by Tenant to Landlord and to the holder of any mortgages or deeds of trust (collectively, "LENDER") covering the Premises whose name and address shall have theretofore been furnished to Tenant in writing, specifying the obligation -37- which Landlord has failed to perform; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord or Lender commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 27. LIENS Tenant shall at all times keep the Premises and the Project free from liens arising out of or related to work or services performed, materials or supplies furnished or obligations incurred by or on behalf of Tenant or in connection with work made, suffered or done by or on behalf of Tenant in or on the Premises or Project. If Tenant shall not, within fifteen (15) business days following receipt of notice of the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as Landlord shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord on behalf of Tenant and all expenses incurred by Landlord in connection therefor shall be payable to Landlord by Tenant on demand with interest at the Applicable Interest Rate as Additional Rent. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Premises, the Project and any other party having an interest therein, from mechanics' and materialmen's liens, and Tenant shall give Landlord not less than ten (10) business days prior written notice of the commencement of any work in the Premises or Project which could lawfully give rise to a claim for mechanics' or materialmen's liens to permit Landlord to post and record a timely notice of non-responsibility, as Landlord may elect to proceed or as the law may from time to time provide, for which purpose, if Landlord shall so determine, Landlord may enter the Premises in accordance with provisions of this Lease. Tenant shall not remove any such notice posted by Landlord without Landlord's consent, and in any event not before completion of the work which could lawfully give rise to a claim for mechanics' or materialmen's liens. 28. INTENTIONALLY OMITTED. 29. TRANSFERS BY LANDLORD In the event of a sale or conveyance by Landlord of the Building or a foreclosure by any creditor of Landlord and provided said transferee (other than a creditor of Landlord) assumes Landlord's obligations under this Lease, the same shall operate to release Landlord from any liability upon any of the covenants or conditions, express or implied, herein contained in favor of Tenant to the extent required to be performed after the passing of title to Landlord's successor-in-interest. In such event, Tenant agrees to look solely to the responsibility of the successor-in-interest of Landlord under this Lease with respect to the performance of the covenants and duties of "Landlord" to be performed after the passing of title to Landlord's successor-in-interest. This Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. 30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of Rent, except as otherwise provided herein. If Tenant shall fail to pay any sum of money, other than Base Rent, required to be paid by Tenant hereunder or shall fail to perform any other act on Tenant's part to be performed hereunder, including Tenant's obligations under Paragraph 11 hereof, and such failure shall continue for fifteen (15) days after written notice thereof by Landlord, in addition to the other rights and remedies of Landlord, Landlord may make any such payment and perform any such -38- act on Tenant's part. In the case of an emergency, no prior notification by Landlord shall be required. Landlord may take such actions without any obligation and without releasing Tenant from any of Tenant's obligations. All sums so paid by Landlord and all incidental costs incurred by Landlord and interest thereon at the Applicable Interest Rate, from the date of payment by Landlord, shall be paid to Landlord on demand as Additional Rent. 31. WAIVER If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition contained herein, or constitute a course of dealing contrary to the expressed terms of this Lease. The acceptance of Rent by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord's knowledge of such preceding breach at the time Landlord accepted such Rent. Payment by Tenant of any amount due and owing hereunder shall not constitute a waiver of any preceding breach by Landlord of any term, covenant or condition of this Lease. Failure by Landlord or Tenant to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or decrease the right of Landlord or Tenant, as applicable, to insist thereafter upon strict performance by the other party. Waiver by Landlord or Tenant of any term, covenant or condition contained in this Lease may only be made by a written document signed by Landlord or Tenant, as applicable. 32. NOTICES Each provision of this Lease or of any applicable governmental laws, ordinances, regulations and other requirements with reference to sending, mailing, or delivery of any notice or the making of any payment by Landlord or Tenant to the other shall be deemed to be complied with when and if the following steps are taken: A. RENT. All Rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at Landlord's Remittance Address set forth in the Basic Lease Information, or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligation to pay Rent and any other amounts to Landlord under the terms of this Lease shall not be deemed satisfied until such Rent and other amounts have been actually received by Landlord. B. OTHER. All notices, demands, consents and approvals which may or are required to be given by either party to the other hereunder shall be in writing and either personally delivered, sent by commercial overnight courier, mailed, certified or registered, postage prepaid or sent by facsimile with confirmed receipt (and with an original sent by commercial overnight courier), and in each case addressed to the party to be notified at the Notice Address for such party as specified in the Basic Lease Information or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days notice to the notifying party. Notices shall be deemed served upon receipt or refusal to accept delivery. C. REQUIRED NOTICES. Tenant shall immediately notify Landlord in writing of any notice of a violation or a potential or alleged violation of any Regulation that relates to the Premises or the Project, or of any inquiry, investigation, enforcement or other action that is instituted or threatened by any governmental or regulatory agency against Tenant or any other occupant of the Premises, or any claim that is instituted or threatened by any third party that relates to the Premises or the Project. 33. ATTORNEYS' FEES In any action which Landlord or Tenant brings to enforce its respective rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party -39- including reasonable attorneys' fees, to be fixed by the court, and said costs and attorneys' fees shall be a part of the judgment in said action. 34. SUCCESSORS AND ASSIGNS This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant, its successors, and to the extent assignment is approved by Landlord as provided hereunder, Tenant's assigns. 35. FORCE MAJEURE Except as otherwise provided herein, if performance by a party of any portion of this Lease is made impossible by any prevention, delay, or stoppage caused by strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes for those items, government actions, civil commotions, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform, performance by that party for a period equal to the period of that prevention, delay, or stoppage (a "Force Majeure Delay") is excused. Tenant's obligation to pay Rent, however, is not excused by this Paragraph 35. 36. SURRENDER OF PREMISES Tenant shall, upon expiration or sooner termination of this Lease, surrender the Premises to Landlord in the same condition as existed on the date Tenant originally took possession thereof, reasonable wear and tear, damage and destruction which is not Tenant's obligation to repair, and approved Alterations which Landlord has not required Tenant to remove excepted. Tenant shall remove all of its debris from the Project. At or before the time of surrender, Tenant shall comply with the terms of Paragraph 12.A. hereof with respect to Alterations to the Premises and all other matters addressed in such Paragraph. If the Premises are not so surrendered at the expiration or sooner termination of this Lease, the provisions of Paragraph 25 hereof shall apply. All keys to the Premises or any part thereof in Tenant's possession shall be surrendered to Landlord upon expiration or sooner termination of the Term. Within a reasonable period of time prior to the expiration of the Term, Landlord shall notify Tenant in writing of (i) Landlord's intent to conduct a joint inspection of the Premises immediately prior to the date of Tenant's vacating the Premises, (ii) at least three (3) different times and dates that Landlord proposes for such a joint inspection to be conducted at the Premises, and (iii) the consequences to Tenant, as set forth in the immediately succeeding sentence, if Tenant fails to timely respond or if Tenant fails to have a representative available at the designated time and date. If Tenant either fails to respond to Landlord within five (5) days following Tenant's receipt of such notice regarding its selection of a proposed time and date or if Tenant timely responds, but Tenant fails to have a representative available at such scheduled time and date to conduct the joint inspection with Landlord, then Landlord's inspection at or after Tenant's vacating the Premises shall conclusively be deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. Notwithstanding anything to the contrary contained herein, but subject to the terms of Paragraph 15E above, upon the expiration of the term of this Lease, or upon any earlier termination of this Lease, Tenant may, at its expense, remove or cause to be removed from the Premises any security system installed by Tenant in the Premises provided that Tenant shall repair all damage resulting from such removal. 37. PARKING Tenant and Tenant's Parties shall have the right to use up to the number of parking spaces, if any, specified in the Basic Lease Information on an unreserved, nonexclusive basis, for passenger-size automobiles, for use in common by tenants of the Building, and also for certain reserved parking spaces in front of the 3100 Building (the exact location of which is identified on Exhibit "B" attached hereto), as same may be modified in the Basic Lease Information. -40- Tenant may request additional parking spaces from time to time and if Landlord in its reasonable discretion agrees to make such additional spaces available for use by Tenant, such spaces shall be provided on a month-to-month unreserved and nonexclusive basis (unless otherwise agreed in writing by Landlord), and subject to such parking charges as Landlord shall determine (provided that such parking rates shall not increase annually, on a percentage basis, by more than the annual percentage increase in parking rental rates during the same period of time at the Comparable buildings [defined below]), and shall otherwise be subject to such terms and conditions as Landlord may reasonably require. For purposes of this paragraph, the term "Comparable Buildings" shall mean the following office buildings in West Los Angeles: (i) the office building located at 11150 Olympic Boulevard (Marathon Building), (ii) the office building located at 11444 Olympic Boulevard, (iii) the office buildings located at 11835 and 11845 Olympic Boulevard (Westside Towers), (iv) the office buildings located at 2401-2500 Colorado Boulevard (MGM Plaza), (v) the office building located at 2600 Colorado Boulevard (MTV Building), and (vi) the office building located at 1601 Cloverfield (Water Garden). Tenant shall at all times comply and shall cause all Tenant's Parties and visitors to comply with all Regulations and any reasonable, non-discriminatory rules and regulations established from time to time by Landlord relating to parking at the Project, including any keycard, sticker or other identification or entrance system, as applicable. Except to the extent resulting from Landlord's negligence or willful misconduct, and subject to the terms of Articles 8 and 9 above, Landlord shall have no liability for any damage to property or other items located in the parking areas of the Project, nor for any personal injuries or death arising out of the use of parking areas in the Project by Tenant or any Tenant's Parties. Without limiting the foregoing, except to the extent resulting from Landlord's negligence or willful misconduct, and subject to the terms of Articles 8 and 9 above, if Landlord arranges for the parking areas to be operated by an independent contractor not affiliated with Landlord, Tenant acknowledges that Landlord shall have no liability for claims arising through acts or omissions of such independent contractor. Except as otherwise provided herein, in all events, Tenant agrees to look first to its insurance carrier and to require that Tenant's Parties look first to their respective insurance carriers for payment of any losses sustained in connection with any use of the parking areas. Landlord reserves the right to assign specific spaces, and to reserve spaces for visitors, small cars, disabled persons or for other tenants or guests, and Tenant shall not park and shall not allow Tenant's Parties to park in any such assigned or reserved spaces. Tenant may validate visitor parking by such non-discriminatory method as Landlord may approve, at the validation rate from time to time generally applicable to visitor parking. Landlord agrees, on a one-time basis, to provide Tenant with validation stickers, free of charge, for validating visitor parking. Said validation stickers shall (i) be implemented through a stamping machine to be installed by Landlord, at Landlord's expense, in the lobby area of the Premises, and (ii) validate parking by Tenant's visitors in an amount equivalent to $43,000.00 worth of visitor parking fees. Landlord also reserves the right to temporarily alter, modify, relocate or close all or any portion of the parking areas in order to make repairs or perform maintenance service, or to restripe or renovate the parking areas, or if required by casualty, condemnation, act of God, Regulations or for any other reason deemed reasonable by Landlord, provided that if any such work restricts Tenant from parking the number of automobiles to which it is entitled to park in the parking structure and/or lot serving the Building, Landlord shall use its commercially reasonable efforts to provide Tenant with alternate parking within a reasonable proximity to the Premises. Tenant shall pay to Landlord (or Landlord's parking contractor, if so directed in writing by Landlord), as Additional Rent hereunder, the monthly charges established from time to time by Landlord for parking in such parking areas (which shall initially be the charge specified in the Base Lease Information, as applicable), provided that Tenant shall be entitled to a credit equal of $72,212.00 to be applied against parking charges for -41- any non-exclusive parking spaces leased by Tenant which are in excess of three (3) non-exclusive parking spaces per 1,000 rentable square feet of the Premises. Such parking charges shall be payable in advance with Tenant's payment of Base Rent. No deductions from the monthly parking charge shall be made for days on which the Tenant does not use any of the parking spaces entitled to be used by Tenant. Tenant shall not be separately charged for the use of any valet parking services identified in the Basic Lease Information (except as an Operating Expense pass-through item), provided that any subtenant or assignee of Tenant which uses such valet parking services shall be directly charged for said valet parking services at the actual out-of-pocket cost incurred by Landlord to provide such valet parking services plus a management fee of 10% of such costs. 38. MISCELLANEOUS A. GENERAL. The term "Tenant" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their respective successors, executors, administrators and permitted assigns, according to the context hereof. B. TIME. Time is of the essence regarding this Lease and all of its provisions. C. CHOICE OF LAW. This Lease shall in all respects be governed by the laws of the State of California. D. ENTIRE AGREEMENT. This Lease, together with its Exhibits, addenda and attachments and the Basic Lease Information, contains all the agreements of the parties hereto and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its Exhibits, addenda and attachments and the Basic Lease Information. E. MODIFICATION. This Lease may not be modified except by a written instrument signed by the parties hereto. Tenant and Landlord accept the area of the Premises as specified in the Basic Lease Information as the approximate area of the Premises for all purposes under this Lease, and acknowledge and agree that no other definition of the area (rentable, usable or otherwise) of the Premises shall apply. Neither Landlord nor Tenant shall be entitled to a recalculation of the square footage of the Premises, rentable, usable or otherwise, and no recalculation, if made, irrespective of its purpose, shall modify Tenant's or Landlord's obligations under this Lease in any manner, including without limitation the amount of Base Rent payable by Tenant or Tenant's Proportionate Share of the Building and of the Project. F. SEVERABILITY. If, for any reason whatsoever, any of the provisions hereof shall be unenforceable or ineffective, all of the other provisions shall be and remain in full force and effect. G. RECORDATION. Tenant shall not record this Lease or a short form memorandum hereof. H. EXAMINATION OF LEASE. Submission of this Lease to Tenant does not constitute an option or offer to lease and this Lease is not effective otherwise until execution and delivery by both Landlord and Tenant. I. ACCORD AND SATISFACTION. No payment by Tenant of a lesser amount than the total Rent due nor any endorsement on any check or letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction of full payment of Rent, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue other remedies. All offers by or on behalf of Tenant of accord and satisfaction are hereby rejected in advance. -42- J. EASEMENTS. Landlord may grant easements on the Project and dedicate for public use portions of the Project without Tenant's consent; provided that no such grant or dedication shall materially interfere with Tenant's Permitted Use of the Premises. Upon Landlord's request, Tenant shall execute, acknowledge and deliver to Landlord documents, instruments, maps and plats necessary to effectuate Tenant's covenants hereunder. K. DRAFTING AND DETERMINATION PRESUMPTION. The parties acknowledge that this Lease has been agreed to by both the parties, that both Landlord and Tenant have consulted with attorneys with respect to the terms of this Lease and that no presumption shall be created against Landlord because Landlord drafted this Lease. Except as otherwise specifically set forth in this Lease, with respect to any consent, determination or estimation of Landlord required or allowed in this Lease or requested of Landlord, Landlord's consent, determination or estimation shall be given or made solely by Landlord in Landlord's good faith opinion, whether or not objectively reasonable. If Landlord fails to respond to any request for its consent within the time period, if any, specified in this Lease, Landlord shall be deemed to have disapproved such request. L. EXHIBITS. The Basic Lease Information, and the Exhibits, addenda and attachments attached hereto are hereby incorporated herein by this reference and made a part of this Lease as though fully set forth herein. M. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to or in the vicinity of the Building shall in no way affect this Lease or impose any liability on Landlord. N. NO THIRD PARTY BENEFIT. This Lease is a contract between Landlord and Tenant and nothing herein is intended to create any third party benefit. O. QUIET ENJOYMENT. Upon payment by Tenant of the Rent, and upon the observance and performance of all of the other covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Premises for the term hereby demised without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, subject, nevertheless, to all of the other terms and conditions of this Lease. Landlord shall not be liable for any hindrance, interruption, interference or disturbance by other tenants or third persons, nor shall Tenant be released from any obligations under this Lease because of such hindrance, interruption, interference or disturbance, except as otherwise provided herein. P. COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed an original. Q. MULTIPLE PARTIES. If more than one person or entity is named herein as Tenant, such multiple parties shall have joint and several responsibility to comply with the terms of this Lease. R. PRORATIONS. Any Rent or other amounts payable to Landlord by Tenant hereunder for any fractional month shall be prorated based on a period of thirty (30) days in such month. As used herein, the term "fiscal year" shall mean the calendar year or such other fiscal year as Landlord may deem appropriate. S. CONFIDENTIALITY. Tenant and Landlord each acknowledge that the content of this Lease and any related documents are confidential information. Tenant and Landlord shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Tenant's or Landlord's financial, legal and space planning consultants and any proposed subtenants or assignees. T. EXECUTION OF NEW LEASE AGREEMENT. Tenant agrees, upon a request from Landlord (which may be given at any time), to cooperate with Landlord and execute any and all documents necessary to terminate this Lease and concurrently therewith enter into -43- two (2) new leases with Landlord (one lease with respect to the 2850 Space and one lease with respect to the 3100 Space) on the same terms and conditions as are set forth herein, provided that each such new lease shall contain a cross-default provision based upon a default, beyond applicable notice and cure periods by Tenant under the other lease. The intent of any such re-documentation is not to change any of the respective rights, duties, liabilities or obligations of Landlord or Tenant set forth under this Lease, but simply to facilitate the creation of two (2) separate leases for the Premises, rather than one (1). 39. ADDITIONAL PROVISIONS A. EARLY ENTRY INTO PREMISES. Tenant may enter into the 3100 Space fifteen (15) days prior to the Term Commencement Date, solely for the purpose of installing furniture, trade fixtures, telephones, computers, photocopy equipment, and other business equipment. Such early entry will not advance the Term Commencement Date so long as Tenant does not commence business operations from any part of the Premises. All of the provisions of this Lease shall apply to Tenant during any early entry, including the indemnity in Section 8.c, but excluding the obligation to pay Rent on the 3100 Space unless and until Tenant has commenced business operations in the 3100 Space, whereupon Rent for the 3100 Space shall commence. Tenant shall not be obligated to pay any charges for electricity, restrooms, HVAC, water, elevators, parking or access to loading docks with respect to the 3100 Space during such early entry period. Landlord may revoke its permission for Tenant's early entry if Tenant's activities or workers interfere with the completion of the Tenant Improvements, provided that (i) Landlord and Tenant agree to use their commercially reasonable efforts to coordinate their respective schedules and improvement work to enable Tenant's early entry work to be performed concurrently with the completion of the Tenant Improvements, and (ii) Tenant acknowledges that in the event of a conflict between Landlord's and Tenant's respective schedules or any interference by Tenant with the performance of the Tenant Improvements, the completion of the Tenant Improvements shall have first priority and accordingly Tenant will accommodate Landlord's scheduling requests and not interfere with the performance of the Tenant Improvements. If Tenant is granted early entry, Landlord shall not be responsible for any loss, including theft, damage or destruction to any work or material installed or stored by Tenant at the Premises or for any injury to Tenant or Tenant's Parties. Landlord shall have the right to post appropriate notices of non-responsibility and to require Tenant to provide Landlord with evidence that Tenant has fulfilled its obligation to provide insurance pursuant to this Lease. B. RIGHT OF FIRST OFFER. Provided Tenant is not in default under this Lease, beyond the expiration of any applicable notice and cure period, Landlord hereby grants to Tenant a right of first offer with respect to all of that certain space in the buildings outlined on Exhibit "D" attached hereto and made a part hereof ("FIRST OFFER SPACE"). Notwithstanding the foregoing, such first offer right shall be subordinate and secondary to all rights of expansion, first refusal, first offer or similar rights identified on Exhibit "D" attached hereto (which rights shall hereafter be known collectively as "SUPERIOR RIGHTS"). Tenant's right of first offer shall be on the terms and conditions set forth in this Paragraph 39B. (1) PROCEDURE FOR OFFER. Landlord shall notify Tenant (the "FIRST OFFER NOTICE") when Landlord first has received from a third party a lease proposal or offer for the First Offer Space which Landlord intends to respond to with a counter-offer or counter-lease proposal, where no holder of a Superior Right desires to lease such space. The First Offer Notice shall describe the space so offered to Tenant and shall set forth Landlord's proposed good faith economic terms and conditions applicable to Tenant's lease of such space (collectively, the "ECONOMIC TERMS"). Notwithstanding the foregoing, Landlord's obligation to deliver the First Offer Notice shall not apply during the last nine (9) months of the initial Term. (2) PROCEDURE FOR ACCEPTANCE. If Tenant wishes to exercise Tenant's right of first offer with respect to the space described in the First Offer Notice, then -44- within five (5) business days after delivery of the First Offer Notice to Tenant, Tenant shall deliver notice to Landlord of Tenant's intention to exercise its right of first offer with respect to the entire space described in the First Offer Notice. If Tenant does not exercise its right of first offer within the five (5) business day period, then Landlord shall be free to lease the space described in the First Offer Notice to anyone to whom Landlord desires on any terms which are not substantially more favorable to said prospective tenant than the Economic Terms set forth in the First Offer Notice and if Landlord enters into such a lease with said prospective tenant, Tenant's right of first offer shall terminate as to the First Offer Space described in the First Offer Notice. The term "substantially more favorable" shall mean that the net effective rent offered to the prospective tenant is ninety percent (90%) or less of the net effective rent set forth in the First Offer Notice. The term "net effective rent" shall mean the net rental amount to be paid to Landlord, taking into account any tenant improvement expenses or allowances to be incurred by Landlord and any other monetary concessions granted by Landlord. Notwithstanding the foregoing, if Tenant fails to exercise its right of first offer in accordance with the terms of this Paragraph 39B(2), Tenant's right of first offer shall continue with respect to any applicable First Offer Space if Landlord has not entered into a lease for such First Offer Space within six (6) months following that date of Landlord's First Offer Notice to Tenant or if such First Offer Space thereafter becomes vacant. Notwithstanding anything to the contrary contained herein, Tenant must elect to exercise its right of first offer, if at all, with respect to all of the space offered by Landlord to Tenant at any particular time, and Tenant may not elect to lease only a portion thereof. (3) CONSTRUCTION OF FIRST OFFER SPACE. Except as set forth above, including the determination of the Economic Terms, Tenant shall take the First Offer Space in its "as-is" condition, and Tenant shall be entitled to construct improvements in the First Offer Space in accordance with the provisions of Paragraph 12 of this Lease. (4) LEASE OF-FIRST OFFER SPACE. If Tenant timely exercises Tenant's right to lease the First Offer Space as set forth herein, Landlord and Tenant shall execute an amendment adding such First Offer Space to this Lease upon the same non-economic terms and conditions as applicable to the initial Premises, and the economic terms and conditions as provided in this Paragraph 39B. Tenant shall commence payment of rent for the First Offer Space and the Term of the First Offer Space shall commence upon the date set forth in the Economic Terms (the "First Offer Space Delivery Date"). The Term for the First Offer Space shall expire co-terminously with Tenant's lease of the initial Premises. (5) NO DEFAULTS. The rights contained in this Paragraph 39B shall be personal to the Original Tenant or an Affiliate, and may only be exercised by the Original Tenant or Affiliate (and not any assignee, sublessee or other transferee of the Original Tenant's interest in this Lease) if Tenant occupies the entire Premises as of the date of the First Offer Notice. Tenant shall not have the right to lease First Office Space as provided in this Paragraph 39B if, as of the date of the First Offer Notice, or, at Landlord's option, as of the scheduled date of delivery of such First Offer Space to Tenant, Tenant is in default under this Lease, beyond all applicable notice and cure periods. C. LETTER OF CREDIT. Concurrently with the execution of this Lease by Tenant, Tenant shall either (i) deliver the non-cash portion of its security deposit to Landlord in the form of an irrevocable standby letter of credit in favor of Landlord in an amount equal to $900,000 (the "Letter of Credit"), or (ii) deposit with Landlord an amount equal to $900,000 in lawful money of the United States, or any combination of the two. Tenant's obligations under the preceding sentence may be satisfied by the delivery to Landlord of two (2) letters of credit in a total amount equal to $900,000 (or one (1) letter of credit and cash in a total amount equal to $900,000), provided each such letter(s) of credit may be drawn against by Landlord after any default by Tenant under this Lease (after the expiration of any applicable notice and cure period) and is otherwise in accordance with the terms of this Paragraph 39C (including a proration between such letters of credit of the applicable reduction in the total amount of the Letter of Credit -45- pursuant to the schedule set forth below). If Tenant elects to initially deposit with Landlord all or a portion of the $900,000 in lawful money of the United States as its security deposit, Tenant shall retain the right, from time to time, upon ten (10) days prior written notice to Landlord, to replace up to $900,000 of the Security Deposit with the Letter(s) of Credit. Tenant shall also retain from time to time the right to cancel the Letter(s) of Credit at any time provided Tenant concurrently replaces such Letter(s) of Credit being canceled with cash in an amount equal to the then outstanding amount of the Letter(s) of Credit which were canceled. The Letter(s) of Credit, if any, shall be (i) from a bank reasonably acceptable to Landlord, (ii) in the form and content of that attached hereto as Exhibit "E" (or on a different form which is reasonably acceptable to Landlord), and (iii) subject to the conditions stated in this paragraph. The Letter(s) of Credit shall have a term of at least 12 months and be automatically renewed (or a reasonably satisfactory replacement Letter(s) of Credit from a bank reasonably acceptable to Landlord shall be in place in strict accordance with the terms hereof) at least thirty (30) days prior to expiration of each 12 month period for additional periods of 12 months each until the 30th day following the expiration of the Term. The Letter(s) of Credit shall be held by Landlord as additional security for the full and faithful performance by Tenant of the terms, covenants and conditions of this Lease during the Term. Provided that Tenant is not in default under this Lease, beyond all applicable notice and cure periods, and based upon a Letter(s) of Credit in the original amount of $900,000, the amount of the Letter(s) of Credit shall be reduced on the first day of each of the following months of the Term by the amounts set forth in the schedule set forth below:
Month of Term Amount of Reduction of Letter(s) of Credit ------------- ------------------------------------------ 13 $135,000.00 25 $114,750.00 37 $ 97,537.50 49 $ 82,906.88
If Tenant becomes a publicly traded company on a nationally recognized stock exchange with a market capitalization in excess of $100,000,000 for no less than three (3) consecutive months, Tenant shall have the right to cancel the Letter(s) of Credit (even if the Letter(s) of Credit was previously canceled and then reinstated pursuant to the following sentence), provided that Tenant maintains a cash security deposit or letter of credit (in accordance with the terms hereof) with Landlord in an amount not less than $136,881.42. If Tenant cancels the Letter(s) of Credit pursuant to the preceding sentence and thereafter the market capitalization of Tenant falls below $80,000,000 for thirty (30) consecutive days, Tenant shall be obligated to reinstate the Letter(s) of Credit immediately following the end of such thirty (30) day period, and within ten (10) days following written notice from Landlord demanding the reinstatement of the Letter(s) of Credit (which notice shall include supporting documentation from a third party stock brokerage company or credit bureau reporting agency evidencing such reduced market capitalization value). In the event Tenant elects to initially deposit all or a portion of the $900,000 in lawful money of the United States, and thereafter exercise its right to deposit the Letter(s) of Credit with Landlord in lieu of such cash security deposit, within five (5) days following Landlord's demand therefor, Tenant shall execute an amendment to this Lease to reflect Tenant's election to replace all or a portion of the cash Security Deposit with the Letter(s) of Credit, If Tenant breaches any of the terms or conditions of this Lease, beyond the expiration of all applicable notice and cure periods, or if Tenant has filed a voluntary petition under the United States Bankruptcy Code, or Tenant's creditors have filed an involuntary petition under the United States Bankruptcy Code, then Landlord may draw upon all or a portion of the Letter(s) of Credit for the payment of the required amount of any sum in default, and for the payment of any amount that Landlord may spend or may become obligated to spend by reason of Tenant's default, and to compensate Landlord for any other loss or damage that Landlord suffers by reason of Tenant's default to the extent Landlord is entitled to compensation therefor pursuant to the terms of this Lease (any amount of the Letter(s) of Credit which is drawn upon by Landlord in accordance with the provisions hereof, but is not used or applied in accordance with the terms of this Lease, shall be deemed a part of the Security Deposit). The use, application or retention of the Letter(s) of Credit, or any portion thereof, shall not prevent Landlord from exercising any other rights or remedies provided under this Lease, it being intended that -46- Landlord shall nor be required to proceed against the Security Deposit and/or the Letter(s) of Credit, and shall not operate as a limitation on any recovery to which Landlord may otherwise be entitled. D. SIGNAGE. Subject to (a) the approval of all necessary governmental or regulatory agencies with jurisdiction over the Project, and (b) the terms of Paragraph 39D(ii) below, and provided Original Tenant or its Affiliate is not in default under this Lease beyond applicable notice and cure provisions, Original Tenant or Affiliate (and not any assignee, sublessee or other transferee of the Original Tenant's or Affiliate's interest in this Lease) shall have the right to install an exclusive monument sign facing Ocean Park Boulevard and at Original Tenant's sole cost and expense; providing, however, that such identification signage shall be consistent with the design, type and general appearance of other monument signs in the Project and otherwise subject to Landlord's approval, which shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Landlord and Tenant agree that said monument sign shall be no less than 23" in height and 117" in length. Tenant acknowledges that Landlord retains the right to install additional monument signs for the 2850 Building and 3100 Building, provided that no other tenant of either the 2850 Building or 3100 Building shall have the right to an individual monument sign which is larger in size than the monument sign provided to Tenant hereunder. Original Tenant agrees, at its expense, to be responsible for the maintenance of said sign, including any repair or restoration work required thereto. Such monument signage shall be subject to the rules and regulations attached hereto as Exhibit "G." Notwithstanding the foregoing, (I) the location of said monument signage shall be subject and subordinate to the location of a monument sign to be installed for the benefit of Activision, a tenant of the Project, (II) the monument sign granted to Tenant hereunder shall be comparable in size to the other monument signs currently located in the Project, and (III) in no event shall Original Tenant or any Affiliate have the right to install a monument sign which contains any word or name which relates to an entity which is of a character or reputation, or is associated with a political orientation or faction, which is inconsistent with the quality of the Project, or which would otherwise reasonably offend a landlord of a building or project comparable to the Project in the vicinity of the Project. Furthermore, (x) Tenant acknowledges that Landlord is in the process of developing a master plan for signage at the Project (the "Master Signage Plan") and that upon completion of the same Landlord intends to submit said Master Signage Plan to the City of Santa Monica for approval, (y) Landlord agrees, at its sole expense, to be responsible for any additional costs incurred by Tenant as a result of required changes to its monument sign to the extent said required changes result from the need to comply with the Master Signage Plan or requirements of the City of Santa Monica specifically resulting from the implementation of the Master Signage Plan, and (z) Landlord agrees that neither the size of Tenant's monument sign nor the size of the lettering or any logo thereon shall be significantly reduced in order to comply with the Master Signage Plan. E. OPTION TO RENEW. Tenant shall, provided this Lease is in full force and effect and Tenant is not and has not been in default under any of the terms and conditions of this Lease, beyond all applicable notice and cure periods, have one (1) option to renew this Lease for a term of five (5) years (the "Option Term") for the entire Premises or the entire 2850 Space or the entire 3100 Space on the same terms and conditions set forth in this Lease, except as modified by the terms, covenants and conditions set forth below: (1) If Tenant elects to exercise such option, then Tenant shall provide Landlord with written notice no earlier than the date which is twelve (12) month prior to the expiration of the then current term of this Lease, but no later than 5:00 p.m. (Pacific Standard Time) on the date which is six (6) months prior to the expiration of the then current term of this Lease. If Tenant fails to timely provide such notice, Tenant shall have no further or additional right to extend or renew the term of this Lease. -47- (2) The rent payable by Tenant during the Option Term (the "Option Rent") shall be equal to (i) ninety-five percent (95%) of the "face" or "stated" rental rate (including any escalation thereof if escalations are contained in such "Comparable Deals," as that term is defined below), at which tenants, as of the commencement of the Option Term, are leasing non-sublease, non-encumbered, non-equity, non-expansion and non-renewal space comparable in size, location and quality to the Premises for a term of five (5) years, which comparable space is located in comparable office buildings in Santa Monica, California (the "Comparable Projects"), comparable in age, location, services and amenities (the "Comparable Deals"); and shall take into account (ii) one hundred percent (100%) of the following concessions, which shall be granted by Landlord to Tenant to the extent granted in Comparable Deals (collectively, the "Option Concessions"): (a) any operating expense and tax protection granted in such Comparable Deals (e.g., "base year" or "expense stop" protection), (b) rental abatement concessions, if any, being given such tenants in connection with such Comparable Deals, (c) tenant improvements or allowances provided or to be provided for such Comparable Deals, and (d) all other monetary concessions, if any, being granted such tenants in connection with such comparable space; provided, however, that (A) in determining any tenant improvements or allowances provided in Comparable Deals, Landlord and Tenant shall also take into account and credit Landlord for the value to a general office user of the existing improvements in the Premises, and (B) notwithstanding anything to the contrary contained herein, no consideration shall be given to the fact that Landlord is or is not required to pay a real estate brokerage commission in connection with Tenant's exercise of its right to lease the Premises during the Option Term (3) Landlord shall advise Tenant of the new Base Rent for the Premises for the renewal term based on Landlord's determination of fair market rental value, as well as the terms and conditions for the renewal term, no later than fifteen (15) days after receipt of notice of Tenant's exercise of its option to renew. (4) Landlord and Tenant shall negotiate in good faith to agree on the fair market rental value of the Premises and terms and conditions for the renewal term. If Tenant and Landlord are unable to agree on a mutually acceptable rental rate for the renewal term within thirty (30) days after notification by Landlord to Tenant of Landlord's determination of the new Base Rent for the renewal term, but in any event no later than the date which is ninety (90) days prior to the expiration of the then current term, then on or before such date Landlord and Tenant shall each appoint a licensed real estate broker with at least ten (10) year's experience in leasing office space in the area in which the Building is located to act as arbitrators. The two (2) arbitrators so appointed shall determine the fair market rental value for the Premises for the applicable renewal term based on the above criteria and each shall submit his or her determination of such fair market rental value to Landlord and Tenant in writing, within sixty (60) days after their appointment. If the two (2) arbitrators so appointed cannot agree on the fair market rental value for the renewal term within such 60-day period, the two (2) arbitrators shall within five (5) days thereafter appoint a third arbitrator who shall be a licensed real estate broker with at least ten (10) year's experience in leasing office space in the area in -48- which the Building is located. The third arbitrator so appointed shall independently determine the fair market rental value for the Premises for the renewal term within thirty (30) days after appointment, by selecting from the proposals submitted by each of the first two arbitrators the one that most closely approximates the third arbitrator's determination of such fair market rental value. The third arbitrator shall have no right to adopt a compromise or middle ground or any modification of either of the proposals submitted by the first two arbitrators. The proposal chosen by the third arbitrator as most closely approximating the third arbitrator's determination of the fair market rental value shall constitute the decision and award of the arbitrators and shall be final and binding on the parties. Each party shall pay the fees and expenses of the arbitrator appointed by such party and one-half (1/2) of the fees and expenses of the third arbitrator. If either party fails to appoint an arbitrator, or if either of the first two arbitrators fails to submit his or her proposal of fair market rental value to the other party, in each case within the time periods set forth above, then the decision of the other party's arbitrator shall be considered final and binding. In the event the third arbitrator fails to present a fair market rental value within such 30-day period, then by mutual consent of the Landlord and Tenant: (a) the time period will be extended, or (b) If either Landlord or Tenant do not wish to extend the time period, a fourth arbitrator shall be selected by the first two arbitrators and a new thirty (30) day period shall begin. (5) Tenant's right to exercise the option to renew under this Paragraph 39E shall be conditioned upon Tenant directly occupying no less than 80% of the entire Premises at the time of exercise of the option and commencement of the renewal term. (6) Any exercise by Tenant of the option to renew under this Paragraph 39E shall be irrevocable. If requested by Landlord, Tenant agrees to execute a lease amendment reflecting the foregoing terms and conditions, prior to the commencement of the renewal term. The option to renew granted under this Paragraph 39E is not transferable; the parties hereto acknowledge and agree that they intend that the option to renew this Lease under this Paragraph shall be "personal" to the specific Tenant named in this Lease (the "Original Tenant") and any Affiliate and that in no event will any other assignee or sublessee have any rights to exercise such option to renew. All references in this Paragraph 39E to the "Premises" shall mean and refer to the entire Premises or if Tenant elects to renew this Lease as to less than the entire Premises, either the entire 2850 Space or the entire 3100 Space, as applicable. F. ARBITRATION. (1) Any claim, controversy or dispute, whether sounding in contract, statute, tort, fraud, misrepresentation, or other legal theory, related directly or indirectly to this Lease, whenever brought and whether between the parties to this Lease or between -49- one of the parties to this Lease and the employees, agents, or affiliated businesses of the other party, shall be resolved by arbitration as prescribed in this section. The Federal Arbitration Act, 9 U.S.C. Sections 1-15, not state law, shall govern the arbitrability of all claims. (2) Notwithstanding the foregoing, the following claims, controversies or disputes shall not be resolved by arbitration: (1) any action by Landlord that seeks repossession of the Premises as part of Landlord's remedy, (2) any action seeking an injunction or temporary restraining order, (3) any action seeking any prejudgment remedy, (4) any action founded upon fraud, willful misconduct, bad faith or other tortious action, and (5) any matter not related to this Lease or the Premises. (3) The arbitration shall be conducted under the then current rules of the American Arbitration Association (the "AAA"). Where no disclosed claim or counterclaim exceeds $300,000, exclusive of interest and attorneys' fees, there shall be one arbitrator, who shall be an attorney with at least ten years' experience in the commercial real estate field. In all other cases, there shall be three arbitrators, at least one of whom shall be an attorney with at least ten years' experience in the commercial real estate field. Subject to the foregoing, the arbitrator or arbitrators shall be selected in accordance with AAA procedures from a list of qualified people maintained by the AAA. The arbitration shall be conducted in the regional AAA office closest to where the claim arose, and all expedited procedures prescribed by the AAA rules shall apply. (4) There shall be no discovery other than the exchange of information which is provided to the arbitrator or arbitrators by the parties. The arbitrator or arbitrators shall have authority only to award compensatory damages and shall not have authority to award punitive damages or other noncompensatory damages; the parties hereby waive all rights to and claims for monetary awards other than compensatory damages. The decision and award of the arbitrator or arbitrators shall be final and binding, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The non-prevailing party shall pay the fees and expenses of the arbitrator or arbitrators, as well as the costs and attorneys' fees of the prevailing party. (5) All parties shall proceed in good faith to conclude the arbitration proceedings within 180 days after either party delivers to the other a demand for arbitration, and the arbitrator or arbitrators shall be empowered to impose sanctions for any party's failure to do so. (6) If any party files a judicial or administrative action asserting claims subject to arbitration as prescribed herein, and another party successfully stays such action or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay or compelling arbitration, including reasonable attorneys' fees. G. TERMINATION OF EXISTING LEASE. Effective on the day immediately preceding the Term Commencement Date (the "Termination Date"), Landlord and Tenant agree that the Existing Lease (defined below) shall terminate and be of no further force or effect, except that all liabilities, duties and obligations which have arisen or accrued under the Existing Lease by either party prior to the Termination Date shall survive the Termination Date and remain continuing liabilities, duties and/or obligations of such party fully enforceable in accordance with the terms of this Lease. The term "Existing Lease" shall mean that certain Lease dated as of June 25, 1998, by and between Landlord and Tenant with respect to Suite 225, as amended by that certain First Amendment to Lease dated as of August 6, 1998, by and between Landlord and Tenant. -50- 40. STANDARD FOR CONDUCT AND CONSENT Notwithstanding anything to the contrary contained in the Lease, except to the extent this Lease provides that Landlord's or Tenant's approval or consent may be given or withheld in such party's "sole" or "absolute" discretion, any time the consent of Landlord or Tenant is required, such consent shall not be unreasonably withheld, conditioned or delayed. Except as otherwise provided in this Lease, whenever this Lease grants Landlord or Tenant the right to take action, exercise discretion, establish rules and regulations or make allocations or other determinations, Landlord and Tenant shall act reasonably and in good faith. 41. JURY TRIAL WAIVER EACH PARTY HERETO (WHICH INCLUDES ANY ASSIGNEE, SUCCESSOR HEIR OR PERSONAL REPRESENTATIVE OF A PARTY) SHALL NOT SEEK A JURY TRIAL, HEREBY WAIVES TRIAL BY JURY, AND HEREBY FURTHER WAIVES ANY OBJECTION TO VENUE IN THE COUNTY IN WHICH THE BUILDING IS LOCATED, AND AGREES AND CONSENTS TO PERSONAL JURISDICTION OF THE COURTS OF THE STATE IN WHICH THE PROPERTY IS LOCATED, IN ANY ACTION OR PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY STATUTE, EMERGENCY OR OTHERWISE, WHETHER ANY OF THE FOREGOING IS BASED ON THIS LEASE OR ON TORT LAW. EACH PARTY REPRESENTS THAT IT HAS HAD THE OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL CONCERNING THE EFFECT OF THIS PARAGRAPH 41. THE PROVISIONS OF THIS PARAGRAPH 41 SHALL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS LEASE. The terms of that certain Addendum attached to this Lease are incorporated herein and made a part hereof. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and the year first above written. LANDLORD Spieker Properties, L.P., a California limited partnership By: Spieker Properties, Inc., a Maryland corporation, its general partner By: /s/ --------------------------------- Name: John Davenport Title: Regional Senior Vice President Date: ------------------------------- -51- TENANT eToys, Inc. a Delaware corporation By: /s/ --------------------------------- Its: ----------------------------- By: /s/ --------------------------------- Its: ----------------------------- Date: ------------------------------- -52- EXHIBIT A RULES AND REGULATIONS 1. Sidewalks, halls, passages, exits, entrances, elevators, escalators and stairways shall not be obstructed by tenants or used by tenants for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, elevators and stairways are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the reasonable judgment of Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building, the Project and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of such tenant's business unless such persons are engaged in illegal activities. No tenant, and no employees or invitees of any tenant, shall go upon the roof of any Building, except as authorized by Landlord or for purposes related to satellite dishes in strict accordance with the terms of this Lease. No tenant, and no employees or invitees of any tenant shall move any common area furniture without Landlord's consent. 2. Except as otherwise set forth in this Lease, no sign, placard, banner, picture, name, advertisement or notice, visible from the exterior of the Premises or the Building or the common areas of the Building shall be inscribed, painted, affixed, installed or otherwise displayed by Tenant either on its Premises or any part of the Building or Project without the prior written consent of Landlord in Landlord's sole and absolute discretion. Landlord shall have the right to remove any such sign, placard, banner, picture, name, advertisement, or notice without notice to and at the expense of the Tenant, which were installed or displayed in violation of this rule. If Landlord shall have given such consent to Tenant at anytime, whether before or after the execution of Tenant's Lease, such consent shall in no way operate as a waiver or release of any of the provisions hereof or of the Lease, and shall be deemed to relate only to the particular sign, placard, banner, picture, name, advertisement or notice so consented to by Landlord and shall not be construed as dispensing with the necessity of obtaining the specific written consent of Landlord with respect to any other such sign, placard, banner, picture, name, advertisement or notice. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person or vendor reasonably approved by Landlord and shall be removed by Tenant at the time of vacancy at Tenant's expense. 3. The directory of the Building will be provided exclusively for the display of the name and location of tenants only (and approved assignees or subtenants) and Landlord reserves the right to charge a reasonable fee for the installation thereof. 4. No curtains, draperies, blinds, shutters, shades, screens or other coverings, awnings, hangings or decorations shall be attached to, hung or placed in, or used in connection with, any window or door on the Premises without the prior written reasonable consent of Landlord. In any event with the prior written consent of Landlord, all such items shall be installed inboard of Landlord's standard window covering and shall in no way be visible from the exterior of the Building. All electrical ceiling fixtures hung in offices or spaces along the perimeter of the Building must be fluorescent or of a quality, type, design, and bulb color reasonably approved by Landlord. No articles shall be placed or kept on the window sills so as to be visible from the exterior of the Building. No articles shall be placed against glass partitions or doors which Landlord considers unsightly from outside Tenant's Premises. 5. Landlord reserves the right to exclude from the Building and the Project, between the hours of 6 p.m. and 8 a.m. and at all hours on Saturdays, A-1 Sundays and legal holidays, all persons who are not tenants or their guests in the Building. Each tenant shall be responsible for all persons for whom it allows to enter the Building or the Project and shall be liable to Landlord for all acts of such persons, except as otherwise provided in this Lease. Landlord and its agents shall not be liable for damages for any error concerning the admission to, or exclusion from, the Building or the Project of any person, except to the extent resulting from Landlord's negligence or willful misconduct. During the continuance of any invasion, mob, riot, public excitement or other circumstance rendering such action advisable in Landlord's opinion, Landlord reserves the right (but shall not be obligated) to prevent access to the Building and the Project during the continuance of that event by any means it considers appropriate for the safety of tenants and protection of the Building, property in the Building and the Project. 6. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord. Except with the written consent of Landlord, no person or persons other than those reasonably approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness of its Premises. Landlord shall in no way be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to Tenant's property by the janitor or any other employee or any other person, except to the extent resulting from Landlord's negligence or willful misconduct. 7. Tenant shall use commercially reasonable efforts to see that all doors of its Premises are closed and securely locked and to observe strict care and caution that all water faucets or water apparatus, coffee pots or other heat-generating devices are entirely shut off before Tenant or its employees leave the Premises, and that all utilities shall likewise be carefully shut off, so as to prevent waste or damage. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or Project or by Landlord for noncompliance with this rule. On multiple-tenancy floors, all tenants shall keep the door or doors to the Building corridors closed at all times except for ingress and egress. 8. Except as provided in this Lease, Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord. As more specifically provided in the Tenant's lease of the Premises, Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning, and shall refrain from attempting to adjust any controls other than room thermostats installed for Tenant's use. 9. Landlord will furnish Tenant free of charge with two keys to each door in the Premises, Landlord may make a reasonable charge for any additional keys (provided such charge shall not exceed the charge to any other tenant in the Project for said additional keys), and Tenant shall not make or have made additional keys. Tenant shall not alter any lock or access device or install a new or additional lock or access device or bolt on any door of its Premises, without the prior written consent of Landlord, which shall not be unreasonably withheld. If Landlord shall give its consent, Tenant shall in each case furnish Landlord with a key for any such lock (except for any secured areas which Landlord has approved). Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys for all doors which have been furnished to Tenant, or which have otherwise been made for Tenant, and in the event of loss of any keys so furnished or made, shall pay Landlord therefor. A-2 10. The restrooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown into them. The expense of any breakage, stoppage, or damage resulting from violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused the breakage, stoppage, or damage. 11. Tenant shall not use or keep in or on the Premises, the Building or the Project any kerosene, gasoline, or inflammable or combustible fluid or material, except incidental to the Permitted Use and in compliance with all Regulations and subject to Landlord's approval. 12. Tenant shall not use, keep or permit to be used or kept in its Premises any foul or noxious gas or substance. Tenant shall not allow the Premises to be occupied or used in a manner which unreasonably interferes with Landlord or other occupants of the Building by reason of noise, odors and/or vibrations or interfere in any way with other tenants or those having business therein, nor shall any animals (other than guide dogs) or birds be brought or kept in or about the Premises, the Building, or the Project. 13. No cooking shall be done or permitted by any tenant on the Premises, except that use by the tenant of Underwriters' Laboratory (UL) approved equipment, refrigerators and microwave ovens may be used in the Premises for the preparation of coffee, tea, hot chocolate and similar beverages, storing and heating food for tenants and their employees shall be permitted. All uses must be in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations and the Lease. 14. Except with the prior written consent of Landlord, Tenant shall not sell, or permit the sale, at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise in or on the Premises, nor shall Tenant carry on, or permit or allow any employee or other person to carry on, the business of stenography, typewriting or any similar business in or from the Premises for the service or accommodation of occupants of any other portion of the Building, nor shall the Premises be used for the storage of merchandise or for manufacturing of any kind, or the business of a public barber shop, beauty parlor, nor shall the Premises be used for any illegal, improper, or immoral purpose, or any business or activity other than that specifically provided for in such Tenant's Lease. Tenant shall not accept hairstyling, barbering, shoeshine, nail, massage or similar services in the Premises or common areas except as authorized by Landlord. 15. If Tenant requires telegraphic, telephonic, telecommunications, data processing, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation, except as otherwise provided in this Lease. 16. Landlord will direct electricians as to where and how telephone, telegraph and electrical wires are to be introduced or installed. No boring or cutting for wires will be allowed without the prior consent of Landlord. The location of burglar alarms, telephones, call boxes and other office equipment affixed to the Premises shall be subject to the written approval of Landlord. 17. Except as otherwise set forth in this Lease, Tenant shall not install any radio or television antenna, satellite dish, loudspeaker or any other device on the exterior walls or the roof of the Building, without Landlord's consent. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building, the Project or elsewhere. 18. Except in connection with the normal hanging of pictures or other decorative items of art, Tenant shall not mark, or drive nails, screws or drill into the A-3 partitions, woodwork or drywall or in any way deface the Premises or any part thereof without Landlord's consent. Tenant may install nails and screws in areas of the Premises that have been identified for those purposes to Landlord by Tenant at the time those walls or partitions were installed in the Premises. Tenant shall not lay linoleum, tile, carpet or any other floor covering so that the same shall be affixed to the floor of its Premises in any manner except as approved in writing by Landlord. The expense of repairing any damage resulting from a violation of this rule or the removal of any floor covering shall be borne by the tenant by whom, or by whose contractors, employees or invitees, the damage shall have been caused. 19. No bulk furniture, freight, equipment, materials, supplies, packages, merchandise or other property will be received in the Building or carried up or down the elevators except between such hours and in such elevators as shall be designated by Landlord. Tenant shall not place a load upon any floor of its Premises which exceeds the load per square foot which such floor was designed to carry or which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all safes, furniture or other heavy equipment brought into the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as determined by Landlord to be necessary to properly distribute the weight thereof. Landlord will not be responsible for loss of or damage to any such safe, equipment or property from any cause, and all damage done to the Building by moving or maintaining any such safe, equipment or other property shall be repaired at the expense of Tenant. Business machines and mechanical equipment belonging to Tenant which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be reasonably acceptable to Landlord. 20. Intentionally Omitted. 21. There shall not be used in any space, or in the public areas of the Project either by Tenant or others, any hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. Tenants using hand trucks shall be required to use the freight elevator, or such elevator as Landlord shall designate. No other vehicles of any kind shall be brought by Tenant into or kept in or about its Premises. 22. Each tenant shall store all its trash and garbage within the interior of the Premises. Tenant shall not place in the trash boxes or receptacles any personal trash or any material that may not or cannot be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the city, without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes and at such times as Landlord shall designate. If the Building has implemented a building-wide recycling program for tenants, Tenant shall use good faith efforts to participate in said program. 23. Canvassing, soliciting, distribution of handbills or any other written material and peddling in the Building and the Project are prohibited and each tenant shall cooperate to prevent the same. No tenant shall make room-to-room solicitation of business from other tenants in the Building or the Project, without the written consent of Landlord. A-4 24. Landlord shall have the right, exercisable without notice and without liability to any tenant, to change the name and address of the Building and the Project. 25. Landlord reserves the right to exclude or expel from the Project any person who, in Landlord's reasonable judgment, is under the influence of alcohol or drugs or who commits any act in violation of any of these Rules and Regulations. 26. Without the prior written consent of Landlord, Tenant shall not use the name of the Building or the Project or any photograph or other likeness of the Building or the Project in connection with, or in promoting or advertising, Tenant's business except that Tenant may include the Building's or Project's name in Tenant's address. 27. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations reasonably established by Landlord or any governmental agency. 28. Except for Landlord's negligence or willful misconduct, Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 29. The requirements of Tenant will be attended to only upon appropriate application at the office of the Building by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employees of Landlord will admit any person (tenant or otherwise) to any office without specific instructions from Landlord. 30. Landlord reserves the right to designate the use of the parking spaces on the Project. Tenant or Tenant's guests shall park between designated parking lines only, and shall not occupy two parking spaces with one car. Parking spaces shall be for passenger vehicles, sport utility vehicles and pick-up trucks only; no boats, trucks, trailers, recreational vehicles or other types of vehicles may be parked in the parking areas (except that trucks may be loaded and unloaded in designated loading areas). Vehicles in violation of the above shall be subject to tow-away, at vehicle owner's expense. Vehicles parked on the Project overnight without prior written consent of the Landlord shall be deemed abandoned and shall be subject to tow-away at vehicle owner's expense. No tenant of the Building shall park in visitor or reserved parking areas. Any tenant found parking in such designated visitor or reserved parking areas shall be subject to tow-away at vehicle owner's expense. The parking areas shall not be used to provide car wash, oil changes, detailing, automotive repair or other services unless otherwise approved or furnished by Landlord. 31. No smoking of any kind shall be permitted anywhere within the Building, including, without limitation, the Premises and those areas immediately adjacent to the entrances and exits to the Building, or any other area as Landlord elects. Smoking in the Project is only permitted in smoking areas identified by Landlord, which may be relocated from time to time. 32. If the Building furnishes common area conferences rooms for tenant usage, Landlord shall have the right to control each tenant's usage of the conference rooms, including limiting tenant usage so that the rooms are equally available to all tenants in the Building. Any common area amenities or facilities shall be provided from time to time at Landlord's discretion. 33. Tenant shall not swap or exchange building keys or cardkeys with other employees or tenants in the Building or the Project. A-5 34. Tenant shall be responsible for the observance of all of the foregoing Rules and Regulations by Tenant's employees, agents, clients, customers, invitees and guests. 35. These Rules and Regulations are in addition to, and shall not be construed to in any way modify, alter or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of any premises in the Project. 36. Subject to the terms of this Lease, Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for safety and security, for care and cleanliness of the Building and the Project and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations herein stated and any additional rules and regulations which are adopted. A-6 EXHIBIT B B-1 EXHIBIT C OFFICE LEASE IMPROVEMENT AGREEMENT This Office Lease Improvement Agreement ("Improvement Agreement") sets forth the terms and conditions relating to construction of the initial tenant improvements described in the Plans referred to below (the "Tenant Improvements") in the Premises. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Lease (the "Lease") to which this Improvement Agreement is attached and forms a part. 1. BASE, SHELL AND CORE. Landlord shall be responsible, at its cost (not to be applied against the Tenant Improvement Allowance), for causing the base, shell and core of the Premises (the "Base, Shell and Core") to be in material compliance with all Regulations (including all laws relating to Hazardous Materials) as of the date of this Lease (without reference to the performance of the Tenant Improvements and without regard to grandfathering). 2. PLANS AND SPECIFICATIONS. 2.1 Tenant shall directly retain the services of a space planner/architect approved by Landlord (the "Space Planner") to prepare a detailed space plan (the "Space Plan") for the construction of the Tenant Improvements in the Premises (and Tenant shall pay said Space Planner directly for said services, subject to reimbursement from Landlord out of the Tenant Improvement Allowance in accordance with the terms of Paragraph 4 below). Landlord hereby approves of Wirt and Associates as Tenant's Space Planner. Tenant's Space Planner shall submit the Space Plan to Landlord for Landlord's review on or before January 29, 1999. Landlord shall either approve or disapprove the Space Plan within five (5) business days following Landlord's receipt of the same, provided that Landlord shall have no right to disapprove the Space Plan unless there is a "Design Problem". The term "Design Problem" shall mean any of the following: (i) any adverse effect on the Building's structural elements or Building systems or the safety of the Building or its occupants; (ii) non-compliance with any Regulations; (iii) any adverse effect on the exterior appearance of the Building; (iv) the existence of any Hazardous Materials which would violate applicable Regulations or are not ordinarily used in connection with the construction of improvements in similar office buildings; (v) any impairment to Landlord's ability to furnish services to Tenant or other tenants; (vi) an increase in the costs of operating the Building (above any increase which would typically result from a general office use); and (vii) any adverse effect on another tenant's premises. Based on and promptly following an approved Space Plan, Tenant shall cause the Space Planner to prepare detailed plans, specifications and working drawings for the construction of the Tenant Improvements (the "Plans"). Landlord shall approve or disapprove the Plans within five (5) business days following Landlord's receipt of the same, provided that Landlord shall have no right to disapprove of the Plans unless there is a Design Problem. 2.2 Notwithstanding Landlord's review and approval of the Space Plan and the Plans and any revisions thereto, Landlord shall have no responsibility or liability whatsoever for any errors or omissions contained in the Space Plan or Plans (except to the extent said errors or omissions are due to changes required by Landlord, rather than errors made by the Space Planner), or to verify dimensions or conditions, or for the quality, design or compliance with applicable Regulation of any improvements described therein or constructed in accordance therewith. Landlord hereby assigns to Tenant all warranties and guarantees by the Space Planner or the contractor who constructs the Tenant Improvements relating to the Tenant Improvements (which warranties shall guarantee the work performed against defective workmanship and materials for a one (1) year period), and Tenant hereby waives all claims against Landlord relating to, or arising out of the design or construction of, the C-1 Tenant Improvements, except for punchlist work and to the extent resulting from Landlord's negligence or willful misconduct. 3. SPECIFICATIONS FOR STANDARD TENANT IMPROVEMENTS. 3.1 The minimum specifications and quantities of standard building components which will comprise and be used in the construction of the Tenant Improvements ("Standards") are set forth in Schedule 1 to this Exhibit C. As used herein, "Standards" or "Building Standards" shall mean the standards for a particular item selected from time to time by Landlord for the Building, including those set forth on Schedule 1 of this Exhibit C, or such other standards of equal or better quality as may be mutually agreed between Landlord and Tenant in writing. 3.2 No deviations from the Standards are permitted, except to the extent set forth in the Plans. Landlord will approve a deviation from the Standards to the extent said deviation is of a quality which is better than the Standards and is otherwise consistent, in terms of appearance, with the Standards. 4. TENANT IMPROVEMENT COST. 4.1 The cost of the Tenant Improvements shall be paid for by Tenant, including, without limitation, the cost of: Standards; space plans and studies; architectural and engineering fees; permits, approvals and other governmental fees; labor, material, equipment and supplies; construction fees and other amounts payable to contractors or subcontractors; any demolition costs; certain costs identified in Paragraph 15 F(i)(C) of the Lease relating to the 20-Ton Units; taxes; off-site improvements; remediation and preparation of the Premises for construction of the Tenant Improvements; taxes; filing and recording fees; premiums for insurance and bonds; attorneys' fees; financing costs; and all other costs expended or to be expended in the design and construction of the Tenant Improvements. The cost of the Tenant Improvements shall not include any supervisory fee paid to Landlord in connection with the construction of the Tenant Improvements. 4.2 Provided Tenant is not in default under the Lease, beyond applicable notice and cure periods, including this Improvement Agreement, Landlord shall contribute a one-time tenant improvement allowance not to exceed $1,053,750.00 ($25.00 per rentable square foot of the 3100 Building) ("Tenant Improvement Allowance") to be credited by Landlord toward the cost of the initial Tenant Improvements, which shall include the costs of the Space Plan and Plans. If the actual cost of the Tenant Improvements exceeds the Tenant Improvement Allowance at any time, Tenant shall pay Landlord such excess cost within fifteen (15) business days after the performance of the actual work and Tenant's receipt of an invoice reflecting the cost of such work. No credit shall be given to Tenant if the cost of the Tenant Improvements is less than the Tenant Improvement Allowance. Tenant shall have the right to use any tenant improvement costs which Landlord remains obligated to fund as of the date of this Lease under the Existing Lease at any time on any portion of the Premises and Tenant shall have the right to use any remaining portion of the Tenant Improvement Allowance, if any, against any tenant improvement costs incurred by Tenant with respect to the 2850 Space. 4.3 If Tenant requests any changes(s) in the approved Plans after approval of the estimate of the cost of the Tenant Improvements, Landlord shall advise Tenant promptly of any cost increases and/or delays such approved change(s) will cause in the construction of the Tenant Improvements. Tenant shall approve or disapprove any or all such change(s) within three (3) business days after notice from Landlord of such cost increases and/or delays. To the extent Tenant disapproves any such cost increase and/or delay attributable thereto, Landlord shall have the right, in its sole discretion, to disapprove Tenant's request for any changes to the approved Plans. C-2 5. CONSTRUCTION OF TENANT IMPROVEMENTS. 5.1 Promptly upon the execution of this Improvement Agreement, Landlord shall secure a building permit and commence construction of the Tenant Improvements provided that Tenant shall cooperate with Landlord in executing permit applications and performing other actions reasonably necessary to enable Landlord to obtain any required permits or certificates of occupancy. Without limiting the provisions of Paragraph 35 of the Lease, Landlord shall not be liable for any direct or indirect damages suffered by Tenant as a result of delays in construction beyond Landlord's reasonable control except as set forth in the Lease, including, but not limited to, delays due to strikes or unavailability of materials or labor, or delays caused by Tenant as provided in Section 5 below (provided no Tenant delay shall have commenced until Landlord has delivered to Tenant notice of said delay)(including delays by the contractor or anyone else performing services on behalf of Landlord or Tenant). 5.2 If any work is to be performed on the Premises by Tenant or Tenant's contractor or agents: (i) Such work shall proceed upon Landlord's written approval (which approval shall not be unreasonably withheld and shall be given within five (5) business days following Tenant's request therefor and Tenant's submittal to Landlord of any applicable back-up documentation with respect thereto) of Tenant's contractor, public liability and property damage insurance carried by Tenant's contractor, and detailed plans and specifications for such work shall be at Tenant's sole cost and expense, and shall further be subject to the provisions of Paragraphs 12 and 27 of the Lease. (ii) All work shall be done in conformity with a valid building permit when required, a copy of which shall be furnished to Landlord before such work is commenced, and in any case, all such work shall be performed in accordance with all applicable Regulations. Notwithstanding any failure by Landlord to object to any such work, Landlord shall have no responsibility for Tenant's failure to comply with all applicable Regulations. (iii) Intentionally omitted. (iv) All work by Tenant or Tenant's contractor or agents shall be reasonably scheduled through Landlord. (v) Tenant's entry to the Premises for any purpose, including, without limitation, inspection or performance of Tenant construction by Tenant's agents, prior to the date Tenant's obligation to pay rent commences shall be subject to all the terms and conditions of the Lease except the payment of Rent. Tenant's entry shall mean entry by Tenant, its officers, contractors, licensees, agents, servants, employees, guests, invitees, or visitors. (vi) Tenant shall promptly reimburse Landlord within thirty (30) days after demand by Landlord for any reasonable out-of-pocket expense actually incurred by the Landlord by reason of faulty work done by Tenant or its contractors or by reason of any delays caused by such work, or by reason of inadequate clean-up. 6. COMPLETION AND RENTAL COMMENCEMENT DATE. 6.1 Tenant's obligation to pay Rent under the Lease shall commence on the applicable date described in Paragraph 2 of the Lease. However: (i) If Tenant delays in approving any matter requiring Tenant's approval within the time limits specified herein; or C-3 (ii) If the construction period is extended because Tenant requests any changes in construction or modifies the Plans or if the Plans do not comply with applicable Regulations (other than due to any non-compliance of the Base, Shell and Core with applicable Regulations as of the date of this Lease); or (iii) If Landlord is otherwise delayed in the construction of the Tenant Improvements by any act or omission of or breach by Tenant or anyone performing services on behalf of Tenant (other than Landlord and Landlord's agents) or on account of any work performed on the Premises by Tenant or Tenant's contractors or agents, then the date described in Paragraph 2 of the Lease shall be deemed to be accelerated by the total number of days of Tenant delays described in (a) through (c) above (each, a "TENANT DELAY"), but only to the extent the substantial completion of the Tenant Improvements is actually delayed as a result thereof, calculated in accordance with the provisions of Paragraph 4.2 below. No Tenant Delay shall have commenced until Landlord has provided Tenant with notice of the Tenant delay described in (a) through (c) above. 6.2 If the Term of the Lease has not already commenced pursuant to the provisions of Paragraph 2 of the Lease and substantial completion of the Tenant Improvements has been delayed on account of any Tenant Delays, then upon actual substantial completion of the Tenant Improvements (as defined in Paragraph 2 of the Lease), Landlord shall notify Tenant in writing of the date substantial completion of the Tenant Improvements would have occurred but for such Tenant Delays, and such date shall thereafter be deemed to be the Term Commencement Date for all purposes under the Lease. Tenant shall pay to Landlord, within thirty (30) days after receipt of such written notice (which notice shall include a summary of Tenant Delays), the per diem Base Rent times the number of days between the date the Term Commencement Date would have otherwise occurred but for the Tenant Delays and the date of actual substantial completion of the Tenant Improvements. 6.3 Promptly after substantial completion of the Tenant Improvements, Landlord shall give notice to Tenant and Tenant shall conduct an inspection of the Premises with a representative of Landlord and develop with such representative of Landlord a punchlist of items, if any, of the Tenant Improvements that are not complete or that require correction. Upon receipt of such punchlist, Landlord shall proceed diligently to remedy such items at Landlord's cost and expense provided such items are part of the Tenant Improvements to be constructed by Landlord hereunder and are otherwise consistent with Landlord's obligations under this Improvement Agreement. Substantial completion shall occur notwithstanding delivery of any such punchlist. 6.4 A default under this Improvement Agreement shall constitute a default under the Lease, and the parties shall be entitled to all rights and remedies under the Lease in the event of a default hereunder by the other party (notwithstanding that the Term thereof has not commenced). 7. MISCELLANEOUS. 7.1 Tenant shall not be responsible for and the Tenant Improvement Allowance shall not be applied to pay any portion of, and Landlord shall pay, the following costs and expenses: (i) any costs incurred to remove, encapsulate, contain or otherwise dispose of any Hazardous Materials in the Premises; and (ii) any costs incurred in order to cause the Base, Shell and Core to be in material compliance with all Regulations (including all laws relating to Hazardous Materials) as of the date of this Lease (without reference to the Tenant Improvements to be performed in the Premises and without regard to grandfathering). 7.2 Prior to Tenant's move into the 3100 Space, Landlord shall thoroughly clean same. In addition, after Tenant has completed its move into the 3100 Space, Landlord shall, at Landlord's expense, thoroughly clean the 3100 Space such that C-4 Tenant may commence its business operations from the 3100 Space immediately after Landlord completes such cleanup. The costs of the cleaning provided by Landlord hereunder shall not be deducted from the Tenant Improvement Allowance, but rather shall be paid by Landlord and included as an Operating Expense. C-5 EXHIBIT "D" FIRST OFFER SPACE
Suite Square Ft. Expiration Superior Right 1. BUILDING LOCATED AT 2850 OCEAN PARK BOULEVARD: 100 44,000 06/2003 Any renewal of Lease 292 8,000 12/2000 One five year option to renew 300 20,000 01/2002 One five year option to renew right of first refusal for additional space on third floor 320 9,000 11/2001 Right to contiguous space 2. BUILDING LOCATED AT 2901 28TH STREET: 200 33,000 09/2002 One five year option to renew and expansion option on additional space in building 3. BUILDING LOCATED AT 2950 31ST STREET: 300 24,000 01/2002 One five year option to renew 4. BUILDING LOCATED ON 3000 OCEAN PARK BOULEVARD: 1025 3,000 02/2002 One three year option to renew 1050 9,000 05/2000 One three year option to renew 2001 27,500 07/2000 One five year option to renew 3050 5,500 05/2002 Any renewal of Lease 5. BUILDING LOCATED AT 3250 OCEAN PARK BOULEVARD: 100 9,000 06/2001 One three year option to renew and right to refusal on balance of first floor 200 17,200 07/2001 Any renewal of Lease 300 7,500 11/2001 Any renewal of Lease 350 2,500 01/2000 One one year option to renew 3070 3,000 10/2001 Any renewal of Lease
6. Any space leased by Activision and located in the Building at 3100 Ocean Park Boulevard in the event (i) Activision defaults under its existing lease and Landlord recovers possession of all or any portion of the space currently leased by Activision, (ii) Activision surrenders all or a portion of the space it currently leases to Landlord, or (iii) Activision and Landlord enter into a mutual termination of all or a portion of the space currently leased by Activision and Landlord regains possession of such space. D-1 EXHIBIT "E" IRREVOCABLE STANDBY LETTER OF CREDIT NO. ______________ _________,199_ - --------------------- - --------------------- - --------------------- Ladies and Gentlemen: We hereby establish our Irrevocable Standby Letter of Credit in your favor for the account of ___________: for an aggregate amount of $_______________ available to you by your drafts as SIGHT ON US and accompanied by the following documents: 1. Original Irrevocable Standby Letter of Credit; and 2. Beneficiary's or its designee's signed certificate dated not more than ten (10) calendar days before the date of the drawing under this letter of credit, executed by Beneficiary or its designee and stating that either one or more of the following events has occurred: (a) Tenant has defaulted under any of the terms, covenants or conditions under that certain Lease Agreement dated ________, 199_, by and between Landlord and Tenant ("Lease"), beyond all applicable notice and cure periods; or (b) The filing of any voluntary petition by Tenant (or involuntary petition by Tenant's creditors) under the United States Bankruptcy Code; or (c) Tenant has failed to procure and deliver a replacement Letter of Credit reasonably satisfactory to Beneficiary in compliance with the terms of Paragraph 39C of the Lease on or before thirty (30) days prior to the expiration of the Letter of Credit. It is a condition of this Irrevocable Standby Letter of Credit that it shall be deemed automatically extended for a period of one year from the present or each future expiration date, unless thirty (30) days prior to the expiration date we shall notify the Beneficiary by registered mail that we elect not to renew this Letter of Credit. Each draft drawn hereunder must bear the clause: "Drawn under ___________ Irrevocable Standby Letter of Credit No. ____________ dated ____________." We hereby agree with you that drafts drawn under and in compliance with the terms of this Credit will be duly honored upon presentation and delivery of documents as specified to _________________ on or before _________________. This Letter of Credit is freely transferrable in its entirety without our consent or approval to a subsequent owner or lender of the Building, but with written notice to us. In the event of such transfer, the transferee shall be deemed the beneficiaries hereunder in the full place and stead and with all the rights hereunder of the Original Beneficiary. This Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500. - ------------------------ Authorized Signature E-1 EXHIBIT F JANITORIAL SPECIFICATIONS F-1 [Intentionally Omitted] EXHIBIT G EXTERIOR SIGNS 1. Tenant shall not install the monument signage referenced in Paragraph 39D of this Lease ("Tenant's Exterior Sign") or thereafter replace or make alterations to Tenant's Exterior Sign, until: (a) Landlord has approved in writing the sign planner, engineer and installation company and professionally prepared sign plans submitted by Tenant showing the design, size, content, color, and quality of materials and placement of the sign, all required engineering (which approval shall not be unreasonably withheld and which Landlord's receipt of Tenant's request therefor and all back-up documentation requested by Landlord with respect thereto), and (b) Tenant has obtained and submitted to Landlord evidence of the insurance required hereunder and any permits or approvals required by law. The original installation work for Tenant's Exterior Sign shall be performed in a manner so as to avoid damage to the Project or unreasonable interference with the operation of the Project or any of its occupants. Without limiting the generality of the foregoing, Landlord shall have the right to reasonably approve all staging and other construction procedures. All installation or other work hereunder shall be performed in a good and workman-like manner, in accordance with all governmental requirements, and at Tenant's sole cost and expense. If Tenant is required to remove any glass or other material from the Project, Tenant will obtain Landlord's prior written consent (not to be unreasonably withheld) to such removal (unless such removal is shown on the plans previously approved by Landlord) and shall store all such material with appropriate care and replace it when Tenant's Exterior Sign is removed. 2. Once installation of Tenant's Exterior Sign has commenced, it shall be completed as soon as possible, and (subject to force majeure delays and delays caused by Landlord) in no event later than three (3) months thereafter. 3. Tenant shall maintain Tenant's Exterior Sign in good, slightly and first-class appearance, condition and repair, and so as not to detract from the appearance of the Project. Landlord shall have the right to approve maintenance personnel. If Tenant shall fail to maintain or repair Tenant's Exterior Sign in the condition required hereunder within thirty (30) days after written notice by Landlord, Landlord may so repair and maintain Tenant's Exterior Sign, at Tenant's sole cost and expense (which Tenant shall pay to Landlord as additional rent when billed by Landlord), without limiting Landlord's other rights and remedies. 4. Intentionally Omitted. 5. Landlord does not represent or warrant that installation of Tenant's Exterior Sign hereunder will comply with any applicable federal, state, county or local law or ordinances or the regulations of any of their agencies or any quasi-governmental requirements or any other applicable agreements. Landlord shall use its best efforts (without the expenditure of any money unless paid by Tenant in advance of the required expenditure) to assist Tenant in obtaining such approvals. Tenant shall at all times comply with any applicable laws, ordinances, regulations and requirements pertaining to Tenant's Exterior Sign. 6. Except to the extent arising out of the negligence or intentional acts of Landlord, its agents or employees, Tenant shall defend, indemnify, and hold Landlord harmless from and against any and all loss, cost, claim, damage, liability or expense which Landlord may incur as a direct or indirect result of Tenant's installation, maintenance or other activities in connection therewith, and including but not limited to attorneys' fees, whether or not any legal action is instituted. This indemnity obligation shall include Landlord's partners, officers, directors, employees, trustees, beneficiaries, affiliates and agents ("Indemnitees"). Tenant shall maintain commercial G-1 general liability insurance covering risks of bodily injury, death or property damage arising directly or indirectly out of Tenant's installation, maintenance or other activities in connection therewith, in the amount of at least $3,000,000 combined single limit per occurrence with a responsible insurance company reasonably satisfactory to Landlord having a rating of not less than A-X in Best's Insurance Guide and licensed to do business in the State of California, which policy shall include a contractual liability endorsement and shall include Landlord and the other Indemnitees (as defined above) as additional insureds. Tenant shall provide a certificate of such insurance to Landlord prior to commencing the installation work for the Tenant's Exterior Sign, and such insurance policy shall not be cancelable without at least thirty (30) days written notice to Landlord. Except to the extent arising out of the negligence or intentional acts of Landlord, its agents and employees, Landlord shall not be responsible for Tenant's Exterior Sign in the event of loss or damage thereto from any cause whatsoever. Tenant, on behalf of its insurers, hereby waives any rights of subrogation against Landlord (or the "Indemnitees" defined above). 7. Landlord shall have the right to use photographs of the Project, including Tenant's Exterior Sign, in Landlord's brochures and other materials without compensation to Tenant. 8. Upon termination of this Lease, or the sign rights hereunder by expiration or otherwise, unless Landlord requests Tenant to leave Tenant's Exterior Sign in place, Tenant shall (and may at any time during the Term upon three (3) months' prior written notice) remove Tenant's Exterior Sign and fully repair and restore the Project to the same or better condition than prior to installation of Tenant's Exterior Sign. If Tenant does not commence to repair any damage or injury to Tenant's Exterior Sign or to the Project as a result of the installation or removal of Tenant's Exterior Sign, or does not commence to remove (after Tenant's sign rights hereunder have terminated) Tenant's Exterior Sign within ten (10) days after written request, or if Tenant does not thereafter proceed to diligently complete such work, Tenant hereby authorizes Landlord to make such repairs or remove and dispose of Tenant's Exterior Sign, and Tenant shall promptly pay Landlord's reasonable charges for doing so as additional rent. Landlord shall not be liable for any property so disposed or removed by Landlord. 9. Tenant acknowledges that Tenant's signage rights with respect to Tenant's Exterior Sign were negotiated by Landlord and Tenant in consideration of, and would not have been granted by Landlord but for, the high quality, first-class reputation of Tenant and the size and intended use of the Premises. Tenant may not assign, sublease, or otherwise transfer such signage rights to any third party or transferee (other than Affiliate) or change the name on Tenant's Exterior Sign without the prior consent of Landlord (which may be withheld in Landlord's reasonable discretion). 10. Tenant's rights to Tenant's Exterior Sign as set forth in this Exhibit "G" shall constitute a license coupled with an interest. Landlord agrees not to revoke this license until the Term (including any options to renew thereunder validly exercised) expires or is sooner terminated, except pursuant to Paragraph 39D of this Lease. 11. Tenant shall pay all costs directly or indirectly related to Tenant's Exterior Sign, including, but not limited to their design, installation, maintenance, replacement and removal, and except as expressly set forth in this Lease, or this Exhibit, shall reimburse Landlord for any out-of-pocket costs reasonably incurred by Landlord that Landlord would not have incurred but for Tenant's exercise of its rights with respect to Tenant's Exterior Sign. G-2 ADDENDUM TO LEASE AGREEMENT RE: LEASE OF PREMISES AT 2850 OCEAN PARK BOULEVARD AND 3100 OCEAN PARK BOULEVARD, SANTA MONICA, CALIFORNIA (THE "PREMISES") NOTWITHSTANDING anything to the contrary contained in the Lease Agreement (the "Lease"), between Spieker Properties, L.P., a California limited partnership ("Lessor"), and eToys, Inc., a Delaware corporation ("Tenant"), the following provisions of this Addendum to Lease Agreement (this "Addendum") shall be incorporated into and be a part of the Lease and shall supersede any inconsistent provisions of the Lease. 1. GRANT OF LICENSE. Landlord hereby grants Tenant, at no charge, a nonexclusive license to install on the roof of each of the 2850 Building and the 3100 Building ONE (1) satellite dish which is no more than eighteen (18) inches in diameter which shall be enclosed by a screen and the nonexclusive right to run connecting lines to such satellite from the 2850 Space or 3100 Space, as applicable (such satellite dish and such connecting lines and equipment herein referred to as the "Equipment"). Tenant shall not penetrate the roof in connection with any installation or reinstallation of the Equipment without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed. The plans and specifications for all the Equipment shall be approved by Landlord in writing prior to any installation. Tenant shall be responsible for any damage to the roof or conduit system as a result of Tenant's installation, maintenance and/or removal of the Equipment. 2. LOCATION. The location of the satellite dish and the rest of the Equipment shall be subject to Landlord's prior written approval, which approval shall not be unreasonably withheld or delayed. Tenant shall not change the location of, or alter or install additional Equipment or paint the satellite dish or the other Equipment without Landlord's prior written reasonable consent. Tenant agrees that Landlord shall direct the placement of the satellite dish inside the roof well (in a location which provides Tenant with good reception), other than locations that are scheduled to accommodate building equipment or services. 3. COMPLIANCE WITH LAW. Tenant, at Tenant's sole expense, shall comply with all laws, rules, orders and regulations regarding the installation, construction, operation, maintenance and removal of the Equipment and shall be solely responsible for obtaining and maintaining in force all permits, licenses and approvals necessary for such operations. 4. TAXES. Tenant shall be responsible for and promptly shall pay all taxes, assessments, charges, fees and other governmental impositions levied or assessed on the Equipment or based on the operation thereof. 5. RELOCATION. Landlord may require Tenant, at Tenant's sole cost and expense, to relocate the Equipment during the term of the Lease to a location approved by Tenant, which approval shall not be unreasonably withheld, conditioned or delayed. 6. TERMINATION. Upon any termination of the Lease, Landlord reserves the right to terminate Tenant's right pursuant to this Addendum immediately. 7. INTERFERENCE. Operation of the Equipment shall not unreasonably interfere in any manner with equipment systems or utility systems of other tenants, including without limitation, telephones, dictation equipment, lighting, heat and air -1- conditioning, computers, electrical systems and elevators. If operation of the Equipment causes such unreasonable interference, Tenant immediately shall suspend operation of the Equipment until such unreasonable interference is eliminated. 8. MAINTENANCE AND REPAIR. Tenant shall maintain the Equipment in good condition and repair, at Tenant's sole cost and expense. Landlord may from time to time require that Tenant repaint the satellite dishes at Tenant's expense to keep the same in an attractive condition. In the event the Tenant fails to repair an maintain the Equipment in accordance with this paragraph 8, Landlord may, but shall not be obligated to, make any such repairs or perform any maintenance to the Equipment after 30 days notice to Tenant and Tenant shall reimburse Landlord upon demand for all out-of-pocket costs and expenses incurred by Landlord in connection therewith. 9. ACCESS. Tenant may access the roof for repair and maintenance of each satellite dish, only during normal business hours, on not less than 24 hours prior written notice to Landlord unless otherwise approved by Landlord. Tenant shall designate in writing to Landlord all persons whom Tenant authorizes to have access to the roof for such purposes. Upon such designation and prior identification to Landlords' building security personnel, such authorized persons shall be granted access to the roof by Landlord's building engineer. Tenant shall be responsible for all costs and expenses incurred by Landlord in connection with Tenant's access to the roof pursuant to this Paragraph 9. 10. INDEMNITY AND INSURANCE. Tenant shall indemnify, defend, protect and hold harmless Landlord from and against any and all claims related to the Equipment or operation of the same as if the Equipment were located wholly within the Premises. Tenant shall provide evidence satisfactory to Landlord that Tenant's property and liability insurance policies required under the Lease include coverage for the Equipment and any claim, loss, damage, or liability relating to the Equipment. 11. NO LANDLORD RESPONSIBILITY. Landlord shall have no responsibility or liability whatsoever relating to (i) maintenance or repair of the Equipment, (ii) damage to the Equipment; (iii) damage to persons or property relating to the Equipment or the operation thereof, or (iv) interference with use of the Equipment arising out of utility interruption or any other cause, except for injury to persons or damage to property caused by the negligence or intentional misconduct of Landlord, its agents or the Landlord Related Parties. If no event shall Landlord be responsible for consequential damages. Upon installation of the Equipment, Tenant shall accept the area where the Equipment is located in its "as is" condition. Tenant acknowledges that Landlord shall have no obligation whatsoever to improve, maintain or repair the area in which the Equipment will be installed. 12. USE. Tenant shall use the Equipment solely for the operations within the Premises and shall not use or allow use of the Equipment, for consideration or otherwise, for the benefit of other tenants in the Project or any other person or entity. 13. REMOVAL. Tenant shall, at Tenant's sole expense, remove each satellite dish and such other portions of the Equipment as Landlord may designate, and restore the affected areas to their condition prior to installation of the Equipment (i) if Tenant fails to perform any of its obligations under this Addendum within fifteen (15) days after request of Landlord, or immediately in the event of emergency, (ii) immediately if such removal is required by any governmental agency having jurisdiction over the Equipment, and (iii) in any event, no later than fifteen (15) days after expiration or earlier termination of the Lease. If Tenant fails to remove the Equipment when and as required under this Addendum, Landlord reserves the right to do so, and the expense of the same shall be immediately due and payable from Tenant to Landlord as additional rent, together with interest and late charges as provided in the Lease. 14. SURVIVAL. The covenants, obligations and indemnities under this Addendum shall survive expiration or earlier termination of the Lease for any reason. -2- Except as expressly modified above, all terms and conditions of the Lease remain in full force and effect and are hereby ratified and confirmed. LANDLORD: TENANT: Spieker Properties, L.P., a eToys, INC., a Delaware corporation California limited partnership By: Spieker Properties, Inc., a Maryland By: /s/ corporation -------------------------- Its General Partner Name: ------------------- Its: -------------------- Date: ------------------------ By: /s/ -------------------------- Name: ------------------- Its: Senior Vice President Date: ------------------------ -3- EX-10.13 20 EXHIBIT 10.13 STANDARD INDUSTRIAL LEASE AGREEMENT between NEWCROW, a California general partnership as Landlord and eTOYS, Inc., a Delaware corporation as Tenant Premises Location: 6000 Peachtree Street Commerce, California 90040 STANDARD INDUSTRIAL LEASE AGREEMENT THIS STANDARD INDUSTRIAL LEASE AGREEMENT (this "Lease"), dated this ____ day of June, 1998, is made and entered into by and between NEWCROW, a California general partnership, hereinafter referred to as "Landlord", and eToys, Inc., a Delaware corporation hereinafter referred to as "Tenant". BASIC LEASE PROVISIONS 1. Area of Premises: Approximately 49,850 rentable square feet. (Paragraph 1.1) 2. Building Address: 6000 Peachtree Street Commerce, California 90040 (Paragraph 1.1) 3. Commencement Date: Subject to the terms of Paragraph 1.3, the Commencement Date shall be July 1, 1998. (Paragraph 1.3) 4. Term: Sixty (60) months. (Paragraph 1.2) 5. The amount of the First Month's Rent is as follows: (Paragraph 2.1) (a) Base Rent (See Paragraph 2.2 for adjustments thereto) $19,940.00 (b) Taxes $1,051.84 (c) Insurance $603.19 (d) Operating Expenses $1,164.55 FIRST MONTH'S RENT TOTAL $22,741.58
6. Security Deposit: $172,741.58. (Paragraphs 2.3 and 22.33) 7. Building Area and Tenant's Proportionate Share: The Building contains approximately 104,598 rentable square feet. The Premises comprise Forty-Seven and 66/100ths percent (47.66%) of the Building (such percentage shall be Tenant's Proportionate Share). (Paragraph 2.4) 8. Use of Premises: Warehousing and distribution of general merchandise and general office purposes and other lawful purposes directly incidental thereto. (Paragraph 3.1) 9. Parking: 40 automobiles and 6 trucks. (Paragraph 3.3) 10. Liability insurance amount: $2,000,000. (Paragraph 12.3.1) 11. Tenant's Address For Notices Until Commencement Date: 1640 5th Street, Suite 124 Santa Monica, California 90401 Attn: Jordan Posell (Paragraph 22.21) -1- 12. Landlord's Address For Payments and Notices: c/o Trammell Crow Company 5801 S. Eastern Avenue, Suite 100 Los Angeles, California 90040 (Paragraph 22.21) 13. Tenant's broker: Metrospace Corporation (Paragraph 22.24) 14. Exhibits: "A" Site Plan of Project "B" Intentionally Omitted "C" Form of Letter of Credit "D" Signage Program "E" Additional Provisions "F" Environmental Questionnaire The paragraphs of the Lease identified above in parentheses are those provisions where references to particular items from the Basic Lease Provisions appear, and such items are incorporated into the Lease as part thereof. In the event of any conflict between any Basic Lease Provision and the Lease, the former shall control. -2- 1. PREMISES AND TERM. 1.1 LEASE OF PREMISES. Landlord leases to Tenant, and Tenant hires from Landlord, certain premises (the "PREMISES") consisting of the rentable area shown in Item 1 of the Basic Lease Provisions within a building (the "BUILDING") described in Item 2 of the Basic Lease Provisions. The location of the Building and Premises are shown on the site plan attached hereto as "EXHIBIT A" and incorporated herein. The "PROJECT" shall refer to the land shown on the site plan (the "LAND") together with such additions and deletions to the Land as Landlord may from time to time designate, plus all buildings and improvements located thereon. Landlord and Tenant hereby agree that the rentable square footage of the Premises set forth in Item 1 of the Basic Lease Provisions shall be conclusive and binding on the parties. 1.2 TERM. The term of this Lease shall commence on the "COMMENCEMENT DATE" specified in or established pursuant to Item 3 of the Basic Lease Provisions, and except as otherwise provided herein, shall continue in full force and effect through the number of months provided in Item 4 of the Basic Lease Provisions (the "TERM"), provided, however, that if the Commencement Date is a date other than the first day of a calendar month, the Term shall consist of the remainder of the calendar month including and following the Commencement Date, plus said number of full calendar months. 1.3 CONDITION OF PREMISES. Tenant acknowledges that it has inspected and accepts the Premises in their present "as-is" condition as suitable for the purpose for which the Premises are leased. Notwithstanding the preceding sentence, Landlord shall re-paint and re-carpet the existing interior offices within the Premises with Landlord's Building standard paint and carpet in such Building standard colors as are mutually approved by Landlord and Tenant ("Landlord's Work"). Landlord shall use commercially reasonable efforts to complete Landlord's Work by September 1, 1998, but Tenant acknowledges that such target date is dependent upon no delay in the same resulting from a Force Majeure Event (as defined below) or an act or omission of Tenant or Tenant's Parties (as defined below). The taking of possession by Tenant shall be conclusive to establish that the Premises are in good and satisfactory condition when possession is taken. Notwithstanding the foregoing, Landlord hereby represents that the existing mechanical, plumbing, electrical (including light bulbs and tubes) and HVAC systems (collectively, the "Building Systems") shall be in good working order as of the Commencement Date (except to the extent any defects therein exist as a result of any act or omission of Tenant or Tenant's Parties (as defined below)); provided, however, if Tenant does not deliver written notice to Landlord of any material defects with respect to the condition of the Building Systems within thirty (30) days following the Commencement Date, then Tenant shall be deemed to have inspected and accepted the same in their present condition, and the correction of any subsequently discovered defects shall be the obligation of the applicable party pursuant to the other provisions of this Lease (including, without limitation, Landlord's right to treat the cost of the same as an Operating Expense). If a breach of the foregoing representation exists, and Tenant timely (i.e., within thirty (30) days following the Commencement Date) delivers written notice to Landlord setting forth in reasonable detail a description of such breach, Landlord shall, as Tenant's sole and exclusive remedy, rectify the same at Landlord's expense. Tenant further acknowledges that no representations or promises were made by Landlord or any agent of Landlord to repair, alter, remodel or improve the Premises, except as expressly set forth in this Lease. The Commencement Date shall be the date provided in Item 3 of the Basic Lease Provisions. If this Lease is executed before the Premises become vacant or otherwise available or if any present tenant or occupant of the Premises holds over, and Landlord cannot acquire possession of the Premises in time to deliver them by the Commencement Date, or if any required repairs, alterations or improvements are not substantially completed by Landlord prior to the Commencement Date, this Lease shall not be void or voidable, and Landlord shall not be deemed to be in default hereunder, nor shall Landlord be liable for any loss or damage directly or indirectly arising out of or resulting from such holdover. Tenant agrees to accept possession of the Premises at such time as Landlord is able to tender the same, which date shall thenceforth be deemed the Commencement Date. Notwithstanding the foregoing, if Landlord has failed to tender possession of the Premises to Tenant on or before August 1, 1998 (the "Outside Date") and such failure is not due in whole or in part to a "Force Majeure Event" or -3- any act or omission of Tenant or Tenant's Parties, then Tenant shall have the right to terminate this Lease upon written notice to Landlord within five (5) days following the Outside Date; provided however, if no such written notice is timely delivered by Tenant within five (5) days following the Outside Date, then Tenant shall have no further right to termination under this Paragraph 1.3 and this Lease shall remain in full force and effect. The term "Force Majeure Event" means delay by reason of fire, earthquake or other acts of God, strikes, boycotts, war, riot, insurrection, embargos, shortages of equipment, labor or materials, delays in issuance of governmental permits or approvals, weather delays or any other cause beyond the reasonable control of Landlord. After the Commencement Date, Tenant shall, upon demand, execute and deliver to Landlord a letter of acceptance of delivery of the Premises specifying the Commencement Date. 1.4 EARLY ENTRY INTO PREMISES. Provided that the existing occupant of the Premises has vacated and surrendered the Premises, Tenant may enter into the Premises upon receipt of Landlord's consent, solely for the purpose of and, subject to Tenant's compliance with Paragraph 7 below, a security system, installing furniture, special flooring or carpeting, trade fixtures, telephones, computers, photocopy equipment, and other business equipment including racks and inventory. Such early entry will not advance the Commencement Date so long as Tenant does not commence business operations from any part of the Premises. All of the provisions of this Lease shall apply to Tenant during any early entry, including the indemnity in Paragraph 12.1, but excluding the obligation to pay Rent unless and until Tenant has commenced business operations in the Premises, whereupon Rent shall commence. Landlord may revoke its permission for Tenant's early entry to the extent Tenant's activities or workers interfere with the completion of Landlord's Work. If Tenant is granted early entry, Landlord shall not be responsible for any loss, including theft, damage or destruction to any work or material installed or stored by Tenant at the Premises or for any injury to Tenant or its agents, employees, contractors, subcontractors, subtenants, assigns or invitees (collectively, "TENANT'S PARTIES"), except to the extent resulting from Landlord's gross negligence or willful misconduct. Landlord shall have the right to post appropriate notices of non-responsibility and to require Tenant to provide Landlord with evidence that Tenant has fulfilled its obligation to provide insurance pursuant to paragraphs 7(d) and 12.3 of this Lease. 2. RENT AND SECURITY DEPOSIT. 2.1 RENT. Rent (as defined below) shall accrue hereunder from the Commencement Date. The amounts per month provided in Item 5(a) of the Basic Lease Provisions, as adjusted pursuant to Paragraph 2.2 ("BASE RENT"), plus the "ADDITIONAL RENT" (as defined in Paragraph 2.5 below) together with any other sums payable by Tenant under this Lease shall collectively constitute the "RENT". The first full calendar month's Rent shall be due and payable upon execution of this Lease in the total amount shown in Item 5 of the Basic Lease Provisions. A like monthly installment, subject to the adjustments described herein, shall be due and payable without demand on or before the first day of each calendar month succeeding the Commencement Date during the Term, except that Rent for any fractional calendar month at the commencement or end of the Term shall be prorated on a daily basis. 2.2 ADJUSTMENT OF BASE RENT. Base Rent shall be increased as follows:
MONTHS OF TERM BASE RENT -------------- --------- 13-24 $20,438.50 per month 25-36 $20,949.46 per month 37-48 $21,473.19 per month 49-60 $22,010.03 per month
2.3 SECURITY DEPOSIT. Tenant shall deposit with Landlord upon execution of this Lease the sum provided in Item 6 of the Basic Lease Provisions ("SECURITY DEPOSIT"), which sum shall be held by Landlord in its general fund, without obligation for interest, as security for the performance of Tenant's covenants and obligations under this Lease, it being expressly understood and agreed that the Security Deposit is not an advance rental deposit or a measure -4- of Landlord's damages in case of Tenant's default beyond applicable notice and cure periods. Upon the occurrence of any event of default by Tenant, Landlord may, without prejudice to any other remedy provided herein or provided by law, use the Security Deposit to the extent necessary to make good any arrears of Rent or other payments due Landlord hereunder, all of which shall be deemed to be Rent, and any other damage, injury, expense or liability caused by such event of default; and Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. Any remaining balance of the Security Deposit shall be returned by Landlord to Tenant within fourteen (14) days after termination of this Lease, provided all of Tenant's obligations under this Lease have been fulfilled. 2.4 TENANT'S PROPORTIONATE SHARE. "TENANT'S PROPORTIONATE SHARE", as used in this Lease, shall mean (a) with respect to the cost of an item attributable to the Building, that portion of the cost of the applicable item that is obtained by multiplying such cost of the applicable item by a fraction, the numerator of which is the rentable square footage of the Premises and the denominator of which is the rentable square footage of the Building, which fraction is set forth as a percentage figure in Item 7 of the Basic Lease Provisions, and (b) with respect to the cost of an item attributable to the common areas or Land in the Project (but not any buildings in the Project), that portion of such cost of the applicable item that is obtained by multiplying the fraction described in clause (a) above by the portion of the cost of the applicable item that is allocated to the Building by Landlord in a reasonably consistent manner which reflects the size of the Building and other buildings, the types of uses to which the Building and other buildings are primarily suited and the relative demands and burdens that such uses place on the Project. 2.5 ADDITIONAL RENT. 2.5.1 DEFINITION. In addition to the Base Rent set forth in Paragraph 2.1, Tenant agrees to pay Tenant's Proportionate Share of (a) "TAXES" as defined in and payable by Landlord pursuant to Paragraph 4.1 below, (b) Landlord's costs of providing insurance on the Project pursuant to Paragraph 12.2 below, and (c) "OPERATING EXPENSES" as defined in and incurred pursuant to Paragraph 5.1 below (collectively, "ADDITIONAL RENT"). 2.5.2 MONTHLY PAYMENTS AND ANNUAL RECONCILIATION. On the first day of each month of the Term, Tenant shall pay Landlord a sum equal to 1/12 of the estimated amount of Additional Rent for that particular year based on Landlord's reasonable estimate thereof, to be delivered to Tenant on or about April of each year during the Term. The monthly payments are subject to increase or decrease as determined by Landlord to reflect revised estimates of such costs. Tenant shall pay within thirty (30) days following demand therefor by Landlord any increases in estimated Additional Rent upon receipt of any initial or revised estimate retroactive to January of that calendar year. The payments made by Tenant shall be reconciled annually. If Tenant's total payments of Additional Rent are less than the actual Additional Rent due under Paragraph 2.5.1, Tenant shall pay the difference within thirty (30) days following demand therefor by Landlord; if the total payments of Rent made by Tenant are more than the actual Additional Rent due under Paragraph 2.5.1, Landlord shall retain such excess and credit it to Tenant's next accruing Additional Rent payments, except at the end of the Term, when any excess will be refunded. Any failure or delay of less than two (2) years by Landlord in delivering any estimate, demand or reconciliation shall not affect the rights and obligations of the parties hereunder. 2.5.3 TENANT'S AUDIT RIGHTS. Provided that Tenant is not then in default beyond any applicable cure period of its obligations to pay Rent, or any other payments required to be made by it under this Lease and provided further that Tenant shall have the right, once each calendar year, to cause a Qualified Person (as defined below) to reasonably review supporting data for any portion of an actual statement of annual Operating Expenses delivered by Landlord (the "Actual Statement") (provided, however, Tenant may not have an audit right to all documentation relating to Building operations as this would far-exceed the relevant information necessary to properly document a pass-through billing statement, but real estate tax statements, and information on utilities, repairs, maintenance and insurance will be available), in accordance with the following procedure: -5- (i) Tenant shall, within one hundred eighty (180) days after any Actual Statement is delivered, deliver a written notice to Landlord specifying the portions of the Actual Statement that are claimed to be incorrect, and Tenant shall simultaneously pay to Landlord all amounts due from Tenant to Landlord as specified in the Actual Statement. In no event shall Tenant be entitled to withhold, deduct, or offset any monetary obligation of Tenant to Landlord under the Lease (including without limitation, Tenant's obligation to make all payments of Rent and all payments of Tenant's Operating Expenses) pending the completion of and regardless of the results of any review of records under this Paragraph. The right of Tenant under this Paragraph may only be exercised once for any Actual Statement, and if Tenant fails to meet any of the above conditions as a prerequisite to the exercise of such right, the right of Tenant under this Paragraph for a particular Actual Statement shall be deemed waived. (ii) Tenant acknowledges that Landlord maintains its records for the Project at Landlord's main office, and Tenant agrees that any review of records under this Paragraph shall be at the sole expense of Tenant and shall be conducted by a Qualified Person. Tenant acknowledges and agrees that any records reviewed under this Paragraph constitute confidential information of Landlord, which shall not be disclosed to anyone other than the Qualified Person performing the review, the principals of Tenant who receive the results of the review, and Tenant's accounting employees. The disclosure of such information to any other person, whether or not caused by the conduct of Tenant, shall constitute a material breach of this Lease. (iii) If the results of such review show that Landlord has overcharged Tenant, then Tenant may so notify Landlord in writing and if Landlord does not object in writing to such results within forty-five (45) days, Tenant shall deliver to Landlord a second written notice which shall provide that, pursuant to this Paragraph, Landlord's failure to object to such results may result in a required credit or reimbursement to Tenant as provided in the following sentence and possibly a reimbursement to Tenant of Tenant's review fees as provided below in this Paragraph. If within thirty (30) days after Tenant's delivery of the second notice Landlord does not object in writing to such results, Landlord shall, at Landlord's election, either give Tenant a credit against Additional Rent next due or reimburse Tenant, in either case, in an amount equal to the amount of such overcharge. If Landlord does timely object to such results (either following the first or second notices), then either party may submit such dispute to arbitration in accordance with the Commercial Rules of the American Arbitration Association, and Tenant shall not be entitled to reimbursement or a credit unless and until such time as the dispute is resolved in Tenant's favor. Tenant agrees to pay the cost of Tenant's review, provided that if any legal proceeding or the review (if Landlord fails to object) shows that Landlord's determination of the contested sums set forth in the Actual Statement was overstated by more than five percent (5%), Landlord shall pay the reasonable out-of-pocket cost of such review. The payment by Tenant of any amounts specified in the Actual Statement shall not preclude Tenant from questioning the correctness, within one hundred eighty (180) days after the date of delivery, of the Actual Statement, but the failure of Tenant to object thereto prior to the expiration of the one hundred eighty (180) day period shall be conclusively deemed Tenant's approval of the Actual Statement. A "Qualified Person" means an accountant or other person experienced in accounting for income and expenses of industrial projects engaged solely by Tenant on terms which do not entail any compensation based or measured in any way upon any savings in Additional Rent or reduction in Operating Expenses achieved through the inspection process. 2.6 PAYMENT. Tenant shall pay Landlord all amounts due from Tenant to Landlord hereunder, whether for Rent or otherwise, in lawful money of the United States, at the place designated for the delivery of notices to Landlord pursuant to Paragraph 22.21, without any deduction or offset whatsoever. 2.7 LATE CHARGES. Tenant acknowledges that late payment by Tenant of any sum owed to Landlord under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amounts of which are extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges, time spent addressing the -6- issue with Tenant, and late charges that may be imposed on Landlord by the terms of any obligation or note secured by any encumbrance covering the Premises. Therefore, if any installment of rent or other payment due from Tenant is not received by Landlord within five (5) business days from when due, Tenant shall pay to Landlord an additional sum equal to five percent (5%) of the overdue rent or other payment as a late charge. Late charges shall be deemed Additional Rent. The parties agree that this late charge represents a fair and reasonable estimate of the administrative and other costs that Landlord will incur by reason of a late payment by Tenant. Acceptance of any late payment charge shall not constitute a waiver of Tenant's default with respect to the overdue payment, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord under this Lease, at law or in equity, including, but not limited to, the interest charge imposed pursuant to Paragraph 22.2. 3. USE. 3.1 USE OF PREMISES. The Premises shall be used only for the purposes set forth in Item 8 of the Basic Lease Provisions and for such other lawful purposes as may be directly incidental thereto, and for no other use or purpose. Tenant acknowledges that Landlord has not made any representations or warranties with respect to the suitability of the Premises for Tenant's uses. Tenant and Tenant's Parties shall at all times comply with all rules and regulations regarding the Premises, the Building and/or the Project as Landlord may reasonably establish in a nondiscriminatory manner from time to time. Landlord shall not be responsible for nor liable to Tenant for any violation and/or enforcement of such rules and regulations by any other tenant of the Project. Tenant shall be responsible for and shall at its own cost and expense obtain any and all licenses and permits necessary for any such use. Landlord shall be responsible for the Premises being in compliance with all laws in effect as of the date of this Lease, but only to the extent compliance with the same is actually being enforced by the applicable governmental authority, and not in any manner required or triggered as a result of Tenant's particular use of or alterations to the Premises. Tenant shall comply with all governmental laws, ordinances and regulations applicable to the use of the Premises, including, without limitation, the Americans with Disabilities Act of 1990 triggered subsequent to the Commencement Date as a result of Tenant's alterations or use of the Premises. Without limiting the generality of the foregoing, and subject to Paragraph 7 below, Tenant shall at its own cost and expense install and construct all physical improvements to or needed to serve the Premises (i) required by any federal, state or local building code or other law or regulation enacted or becoming effective after the Commencement Date, including, but not limited to, special plumbing, railings, ramps and other improvements for use by the handicapped, or (ii) made necessary by the nature of Tenant's use of the Premises; provided, however, that Landlord shall have the option to install and construct such improvements, in which case the cost thereof shall be equitably allocated by Landlord in its reasonable discretion among the benefitted premises, and Tenant, upon demand, shall pay to Landlord, as Additional Rent, such portion of the cost thereof as may be allocated equitably, in Landlord's reasonable discretion, to the Premises. Tenant shall not place a load upon the floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Tenant shall promptly comply with all governmental orders and directives for the correction, prevention and abatement of nuisances in or upon, or connected with, the Premises, all at Tenant's sole expense. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the Premises, nor take any other action which would constitute a nuisance or would disturb or endanger any other tenants of the Project or unreasonably interfere with their use of their respective premises. Tenant shall not permit the Premises to be used for any purpose or in any manner (including without limitation any method of storage) which would render the insurance thereon void or the insurance risk more hazardous or cause the state insurance authority to disallow any sprinkler credits. If any increase in the fire and extended coverage insurance premiums paid by Landlord or other tenants for the Project is caused by Tenant's use and occupancy of the Premises, or if Tenant vacates the Premises and causes any increase in such premiums, then Tenant shall pay as Additional Rent the amount of such increase to Landlord, and, within thirty (30) days of demand by Landlord, correct at Tenant's expense the cause of -7- such disallowance, increased cost, penalty or surcharge to the satisfaction of the particular insurance provider or authority, as applicable. 3.2 HAZARDOUS MATERIALS. Except for the incidental use of certain products for routine cleaning and maintenance of floors, bathrooms, windows, kitchens, and administrative offices on the Premises or Project, Tenant hereby represents, warrants and covenants that Tenant will not produce, use, store or generate any "Hazardous Materials" (as defined below) on, under or about the Premises and/or Project. Tenant has fully and accurately completed Landlord's Pre-Leasing Environmental Exposure Questionnaire ("Environmental Questionnaire") attached hereto as Exhibit "F" incorporated herein by reference. If Tenant's Environmental Questionnaire indicates that Tenant will be utilizing Hazardous Materials, in addition to all other rights and remedies Landlord may have under this Lease, including, without limitation, declaring a default hereunder by Tenant for breach of representation, Landlord may require Tenant to execute an amendment to this Lease relating to such Hazardous Materials use and Tenant's failure to execute any such amendment within ten (10) days of Landlord's delivery thereof to Tenant shall constitute a default hereunder by Tenant. Tenant shall not cause or permit any Hazardous Material to be brought upon, placed, stored, manufactured, generated, blended, handled, recycled, disposed of, used or released on, in, under or about the Premises and/or Project by Tenant or Tenant's Parties. Tenant shall not excavate, disturb or conduct any testing of any soils on or about the Project without obtaining Landlord's prior written consent, and any investigation or remediation on or about the Project shall be conducted only by a consultant approved in writing by Landlord and pursuant to a work letter approved in writing by Landlord. Tenant shall keep, operate and maintain the Premises in full compliance with all federal, state and local environmental, health and/or safety laws, ordinances, rules, regulations, codes, orders, directives, guidelines, permits or permit conditions currently existing and as amended, enacted, issued or adopted in the future which are applicable to the Premises (collectively, "ENVIRONMENTAL LAWS") and relate to Hazardous Materials that are introduced or permitted on or about the Project by Tenant or Tenant's Parties. Landlord shall have the right (but not the obligation) to enter upon the Premises and cure any non-compliance by Tenant with the terms of this Paragraph 3.2 or any Environmental Laws or any release, discharge, spill, improper use, storage, handling or disposal of Hazardous Materials on, under, from, or about the Premises or Project, regardless of the quantity of any such release, discharge, spill, improper use, storage, handling or disposal of Hazardous Materials on or about the Premises or Project, the full cost of which shall be deemed to be Rent and shall be due and payable by Tenant to Landlord immediately upon demand if resulting from any act or omission of Tenant or Tenant's Parties or from any breach of Tenant's obligations hereunder. If Landlord elects to enter upon the Premises and cure any such non-compliance or release, discharge, spill, improper use, storage, handling or disposal of Hazardous Materials on, under, from, or about the Premises or Project, Tenant shall not be entitled to participate in Landlord's activities on the Premises. If any information provided to Landlord by Tenant in the Environmental Questionnaire, or otherwise relating to information concerning Hazardous Materials is false, incomplete, or misleading in any material respect, the same shall be deemed an event of default by Tenant under this Lease. Without limiting in any way Tenant's obligations under any other provision of this Lease, Tenant and its successors and assigns shall indemnify, protect, defend and hold Landlord, its partners, officers, directors, shareholders, employees, agents, lenders, contractors and each of their respective successors and assigns (collectively, the "INDEMNIFIED PARTIES") harmless from any and all claims, judgments, damages, penalties, enforcement actions, taxes, fines, remedial actions, liabilities, losses, costs and expenses (including, without limitation, actual attorneys' fees, litigation, arbitration and administrative proceeding costs, expert and consultant fees and laboratory costs) including, without limitation, damages arising out of the diminution in the value of the Premises or Project or any portion thereof, damages for the loss of the Premises or Project, damages arising from any adverse impact on the marketing of space in the Premises or Project, and sums paid in settlement of claims, which arise during or after the Term in whole or in part as a result of the presence or suspected -8- presence of any Hazardous Materials, in, on, under, from or about the Premises or the Project and/or other adjacent properties due to Tenant's or Tenant's Parties' activities, or failures to act (including, without limitation, Tenant's failure to report any spill or release to the appropriate regulatory agencies), on or about the Premises or Project. For purposes of this Lease, the term "HAZARDOUS MATERIAL" means any chemical, substance, material, controlled substance, object, waste or any combination thereof, which is or may be hazardous to human health, safety or to the environment due to its radioactivity, ignitability, corrosiveness, reactivity, explosiveness, toxicity, carcinogenicity, infectiousness or other harmful or potentially harmful properties or effects, including, without limitation, petroleum and petroleum products, benzene, toluene, ethyl benzene, xylenes, waste oil, asbestos, radon, polychlorinated biphenyls (PCBs), degreasers, solvents, and any and all of those chemicals, substances, materials, controlled substances, objects, wastes or combinations thereof which are now or may become in the future listed, defined or regulated in any manner as "hazardous substances", "hazardous wastes", "toxic substances", "solid wastes," or bearing similar or analogous definitions pursuant to any and all Environmental Laws. 3.3 USE OF COMMON AREAS. Tenant and Tenant's Parties shall have the non-exclusive right, in common with the other parties occupying the Project, to use the grounds, sidewalks, parking areas, driveways and alleys of the Project, subject to such reasonable and nondiscriminatory rules and regulations as Landlord may from time to time prescribe. Tenant and Tenant's Parties may park only up to the maximum number of automobiles and trucks shown in Item 9 of the Basic Lease Provisions near the Premises during normal business hours on a non-exclusive basis. Outside storage is prohibited without Landlord's prior written consent, which may be withheld in Landlord's sole and absolute discretion. Tenant shall not succeed to any of Landlord's easement rights over and relating to the Project, nor shall Tenant obtain any rights to common areas, as designated by Landlord, other than those rights specifically granted to Tenant in this Lease. Landlord shall have the sole right of control over the use, maintenance, configuration, repair and improvement of the common area. Landlord may make such changes to the use or configuration of, or improvements comprising, the common area as Landlord may elect without liability to Tenant (including the right to add or eliminate buildings from the Project), subject only to Tenant's vehicular parking rights shown in Item 9 of the Basic Lease Provisions so long as such changes do not materially and adversely impact Tenant's parking rights or access to the Premises. 4. TAXES. 4.1 PAYMENT OF REAL PROPERTY TAXES. Landlord agrees to pay, before they become delinquent, all real property taxes; current installments of any general or special assessments (which shall be paid in the maximum number of installments that such assessments may be paid without the imposition of any interest or penalties); license fees, commercial rental taxes, in lieu taxes, levies, charges, penalties or similar impositions imposed by any authority having the direct power to tax, and are paid or incurred by Landlord, including but not limited to, the following: (a) any tax on or measured by Rent received by Landlord from the Project or as against Landlord's business of leasing any of the Project; (b) any assessment, tax, fee, levy or charge imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, transportation, refuse removal and for other governmental services formerly provided without charge to property owners or occupants; (c) assessments due to deed restrictions and/or owner associations; and (d) reasonable costs of determining, filing, contesting and appealing any such tax, assessment or charge, including accountants', attorneys' and consultants' fees, but excluding any income, inheritance, estate or corporate franchise taxes of Landlord (collectively, "TAXES"). Taxes shall also include any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of Taxes. It is hereby acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of California in June 1978 and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, transportation, refuse removal and other governmental services formerly provided without charge to property owners or occupants. It -9- is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies and charges, and all similar assessments, taxes, fees, levies and charges be included within the definition of Taxes for purposes of this Lease. 4.2 LIABILITY FOR ALL PERSONAL PROPERTY TAXES. Tenant shall be liable for all taxes levied or assessed against personal property, furniture, fixtures, above-standard Tenant Improvements and alterations, additions or improvements placed by or for Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and if Landlord elects to pay the same or if the assessed value of Landlord's property is increased by inclusion of personal property, furniture, fixtures, above-standard Tenant Improvements or alterations, additions or improvements placed by or for Tenant in the Premises, and Landlord elects to pay the Taxes based on such increase, Tenant shall pay to Landlord, within thirty (30) days of Landlord's demand therefor, that portion of the Taxes. 5. LANDLORD'S MAINTENANCE AND REPAIR. 5.1 LANDLORD'S MAINTENANCE. Landlord shall, at its sole cost, maintain and repair only the exterior portions of the roof, and the foundation and the structural soundness of the exterior walls of the Building and utility facilities stubbed to the Premises in good condition, reasonable wear and tear excepted. The term "WALLS" as used herein shall not include windows, glass or plate glass, doors, special store fronts or office entries, unless otherwise specified by Landlord in writing. Landlord shall maintain, repair and repaint the exterior walls, overhead doors, canopies, entries, handrails, gutters and other exposed parts of the Building as deemed necessary by Landlord to maintain safety and aesthetic standards. Landlord shall maintain, repair, and operate the common areas of the Project in good order and condition, including but not limited to, mowing grass and general landscaping, maintenance of parking areas, driveways and alleys, parking lot sweeping, paving and restriping, exterior lighting, painting, pest control and window washing. The cost of all of the foregoing, including the cost of all supplies, uniforms, equipment, tools and materials, together with utility costs not otherwise charged directly to Tenant or other tenants, all wages and benefits of employees and independent contractors engaged in the operation, maintenance and repair of the Project, all expenses for security and safety services and equipment, any license, permit and inspection fees required in connection with the operation, maintenance or repair of the Project (but not related to improvements to tenant space), management, consulting, legal and accounting fees of independent contractors engaged by Landlord (but not related to the negotiation or enforcement of leases), other costs and expenses actually incurred by Landlord in connection with the ownership, operation, leasing and management of the Project, and other usual costs and expenses which are typically paid by other landlords to provide on-site operation of industrial, warehouse and service center projects, are collectively referred to herein as "OPERATING EXPENSES". To the extent that an Operating Expense consists of a maintenance or repair (including renovation and refurbishment) expense that is not properly fully deductible as an expense in the year incurred in accordance with generally accepted accounting principles, such expense shall be amortized over its useful life. Any amounts which are amortized, together with Landlord's actual cost of funds, shall result in equal payments being included in Operating Expenses for the year of expenditure and succeeding years during the amortization period. Landlord shall reduce the amount of expenses by any refunds actually received by Landlord in connection with any expenses previously included in Operating Expenses. Notwithstanding the foregoing, the following items shall not be treated as Operating Expenses: 1. Leasing Commissions, attorneys' fees, costs, disbursements and other expenses incurred in connection with negotiations or disputes with tenants or leasing, renovating, or improving rentable space for other tenants or occupants or prospective tenants or occupants of the Project. 2. Costs, including permits, licenses and inspection fees incurred with respect to the installation of tenant improvements made for -10- other occupants of the Project, or incurred in renovating or otherwise improving, decorating, painting or redecorating space for other tenants or occupants of the Project or other rentable vacant space in the Project. 3. Expenses in connection with services or other benefits which are not offered to Tenant, but which are provided to other tenants or occupants of the Building, the cost of which is included in Operating Expenses. 4. Costs incurred in conjunction with the remediation and/or monitoring of Hazardous Materials, except to the extent caused or exacerbated by Tenant or Tenant's Parties. 5. Overhead and profit increments paid to subsidiaries or affiliates of Landlord for management or other services provided to the Project, or for supplies or other materials, but only to the extent that the cost of such services, supplies or materials exceed the cost that would have been paid had the services, supplies or materials been provided by unaffiliated parties on a competitive basis. 6. Interest and principal on debt or amortization payments pursuant to any mortgages or rental under any ground or underlying lease. 7. Capital expenditures required by Landlord's failure to comply with laws enacted and in effect prior to the Commencement Date, except that such exclusion from Operating Expenses shall not apply to capital expenditures (a) which are reasonably intended to reduce Operating Expenses, but only to the extent of the savings of the Operating Expenses that are reasonably anticipated by Landlord, or (b) required to comply with (i) changes in, or new interpretations of, existing laws which occurred after the Commencement Date, or (ii) laws whose compliance was triggered as a result of Tenant's particular use of or alterations to the Premises. 8. Repair costs incurred to correct defects in the initial construction of the Project. 9. Tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments when due except to the extent such failure is due to Tenant's failure to pay Tenant's Proportionate Share of the same. 10. Costs for which Landlord is actually reimbursed from insurance proceeds. 5.2 PROCEDURE AND LIABILITY. Tenant shall immediately give Landlord written notice of any defect or the need for repair of the items for which Landlord is responsible, after which Landlord shall have reasonable opportunity to repair the same or cure such defect. Landlord's liability with respect to any defects, repairs or maintenance for which Landlord is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance or the curing of such defect. If Tenant or Tenant's Parties caused any damage necessitating such repair, then Tenant shall pay the cost thereof, upon demand. Tenant hereby waives the benefit of California Civil Code Sections 1941 and 1942, and any other statute providing a right to make repairs and deduct the cost thereof from the Rent. Tenant waives any right to terminate this Lease or offset or abate Rent by reason of any failure of Landlord to make repairs to the Premises. 60 TENANT'S MAINTENANCE AND REPAIR. 6.1 TENANT'S MAINTENANCE. Tenant shall, at its own cost and expense, keep and maintain all parts of the Premises (except those listed as Landlord's responsibility in Paragraph -11- 5.1 above) in good and sanitary condition, promptly making all necessary repairs and replacements, including but not limited to, windows, glass and plate glass, doors, any special store front or office entry, interior walls and finish work, floors and floor covering, heating and air conditioning systems (the "HVAC"), dock boards, truck doors, dock bumpers, plumbing work and fixtures, termite and pest extermination, and regular removal of trash and debris; provided, however, if the HVAC unit needs to be replaced and such replacement is not necessitated in whole or in part by Tenant or Tenant's Parties, Tenant shall only be responsible for the amortized portion of such replacement cost based on a five (5) year useful life. If Tenant shall fail to make any repair for which Tenant is responsible within thirty (30) days following notice from Landlord requiring the same, Landlord and its agents and contractors shall have the right, but not the obligation, to enter upon the Premises and perform such repairs, the full cost of which shall be deemed to be Rent and shall be due and payable by Tenant to Landlord immediately upon demand. In the case of emergency, Landlord, its agents and contractors may enter upon the Premises to perform such repairs without the necessity of prior notice to Tenant. Tenant shall maintain its trash receptacles within the Premises. Repairs shall be made in accordance with all applicable laws, including without limitation, the Americans with Disabilities Act of 1990. The cost of maintenance and repair of any common party wall (any wall, divider, partition or any other structure separating the Premises from any adjacent premises occupied by other tenants) shall be shared equally by Tenant and the tenant(s) occupying such adjacent premises. Tenant shall not damage any party wall or disturb the integrity and support provided by any party wall nd shall, at its sole cost and expense, promptly repair any damage or injury to any party wall caused by Tenant or Tenant's Parties. 6.2 MAINTENANCE/SERVICE CONTRACTS. Tenant shall, at its own cost and expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor for serving all hot water, heating and air conditioning systems and equipment within the Premises. The maintenance contractor and the contract must be approved in writing by Landlord in advance. The service contract shall include all services recommended by the equipment manufacturer within the operation/maintenance manual and shall become effective (and a copy thereof delivered to Landlord) within thirty (30) days following the date Tenant takes possession of the Premises. 70 ALTERATIONS. Tenant shall make no alterations, additions or improvements to the Premises (including, without limitation, roof and wall penetrations) or any part thereof without obtaining the prior written consent of Landlord in each instance. Such consent may be granted or withheld in Landlord's reasonable discretion, except if such alterations affect structural, exterior, electrical or mechanical aspects of the Premises, in which event Landlord may withhold its consent in its sole and absolute discretion; provided, however, Tenant may make minor cosmetic alterations which do not affect structural, exterior, electrical or mechanical aspects of the Premises without the prior written consent of Landlord (but nevertheless requiring at least ten (10) days prior written notice) provided that the cost of such alterations does not exceed Seven Thousand Five Hundred and 00/100 Dollars ($7,500.00) in any one instance or Twenty Five Thousand and 00/100 Dollars ($25,000.00) in the aggregate over the initial Term. Landlord may impose as a condition to such consent such requirements as Landlord may deem necessary, in its sole and absolute discretion, including, without limitation that: (a) Landlord be furnished with working drawings before work commences; (b) performance and labor and material payment bonds in form and amount and issued by a company satisfactory to Landlord be furnished; (c) Landlord approve the contractor by whom the work is to be performed; (d) adequate course of construction and general liability insurance be in place and Landlord be named as an additional insured under the contractor's liability and property insurance policies; (e) Landlord's instructions relating to the manner in which the work is to be performed and the times during which it is to be accomplished shall be complied with. Subject to (i) Landlord's review and approval of all plans and specifications, and (ii) Tenant's compliance with all laws, rules and regulations and such other requirements as Landlord may reasonably impose in connection with the same, Landlord hereby agrees that Tenant shall have the right to install a restroom within the Premises and Landlord shall not require such restroom (installed in compliance with clauses (i) and (ii) above to be removed upon the expiration of the Term. Tenant shall pay to Landlord all out-of-pocket costs incurred by Landlord for any architectural, -12- engineering, supervisory or legal services in connection with any alterations, including, without limitation, Landlord's review of the plans, specifications and budget for purposes of determining whether to consent. All such alterations, additions or improvements must be performed in a good and workmanlike manner in compliance with all laws, rules and regulations, including, without limitation, the Americans with Disabilities Act of 1990, and diligently prosecuted to completion. Tenant shall deliver to Landlord upon commencement of such work, a copy of the building permit with respect thereto, and a certificate of occupancy, if applicable, immediately upon completion of the work. All such work shall be performed so as not to obstruct the access to the premises of any other tenant in the Building or Project. Should Tenant make any alterations without Landlord's prior written consent, or without satisfaction of any of the conditions established by Landlord in conjunction with granting such consent, Landlord shall have the right, in addition to and without limitation of any right or remedy Landlord may have under this Lease, at law or in equity, to require Tenant to remove all or some of the alterations, additions or improvements at Tenant's sole cost and restore the Premises to the same condition as existed prior to undertaking the alterations, or if Tenant shall fail to do so, Landlord may cause such removal or restoration to be performed at Tenant's expense and the cost thereof shall be Additional Rent to be paid by Tenant immediately upon demand. Landlord shall have the right to require Tenant, at Tenant's expense, to remove any and all alterations, additions or improvements and to restore the Premises to its prior condition upon the expiration or sooner termination of this Lease. Tenant shall notify Landlord in writing at least ten (10) days prior to the commencement of any such work in or about the Premises, and Landlord shall have the right at anytime and from time to time to post and maintain notices of nonresponsibility in or about the Premises. 80 LIENS. Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord or Tenant in the Premises or to charge the Rent payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant shall pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed by Tenant on the Premises. Tenant shall discharge of record by payment, bonding or otherwise any lien filed against the Premises on account of any labor performed or materials furnished in connection with any work performed by Tenant on the Premises immediately upon the filing of any claim of lien. Tenant shall indemnify, defend and hold Landlord harmless from any and all liability, loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the right, title and interest of Landlord in the Project or this Lease arising from the act or agreement of Tenant. Tenant agrees to give Landlord immediate written notice of the placing of any lien or encumbrance against the Premises. Landlord shall have the right, at Landlord's option upon ten (10) business days prior written notice to Tenant, of paying and discharging the same or any portion thereof without inquiry as to the validity thereof, and any amounts so paid, including expenses and applicable late charge, shall be Additional Rent immediately due and payable by Tenant upon rendition of a bill therefor. 90 SIGNS. 9.1 LANDLORD'S SIGNAGE PROGRAM. Tenant shall abide by the terms of Landlord's signage program attached hereto as EXHIBIT "D" and incorporated herein as the same may be changed from time to time at Landlord's reasonable discretion. Following Tenant's proper installation of its sign in accordance with EXHIBIT "D" attached hereto, if Landlord requires Tenant to change its sign due to changes Landlord makes to the sign criteria, and such changes are not in any manner resulting from governmental laws, rules or regulations, Landlord shall be responsible for any reasonable costs incurred by Tenant necessary to comply with Landlord's changes in the signage criteria. Upon vacation of the Premises or the removal or alteration of its sign for any reason, Tenant shall be responsible, at its sole cost, for the repair, painting and/or replacement of the structure to which signs are attached to its original condition. If Tenant fails to perform such work, Landlord may cause -13- the same to be performed, and the cost thereof shall be Additional Rent immediately due and payable upon rendition of a bill therefor. 9.2 CRITERIA FOR CHANGES. Tenant shall not, without Landlord's prior written consent, which may be withheld in Landlord's reasonable discretion: (a) make any changes to or paint the exterior of the Building; (b) install any exterior lights, decorations or paintings; or (c) erect or install any signs, window or door lettering, placards, decorations or advertising media of any type which can be viewed from the exterior of the Premises. All signs, decorations, advertising media, blinds, draperies and other window treatment or bars or other security installations visible from outside the Premises shall be subject to the prior written approval of Landlord as to construction, method of attachment, size, shape, height, design, lighting, color and general appearance. All signs shall be in compliance with all applicable laws and regulations and all covenants, conditions and restrictions relating to the Premises. All signs shall be kept in good condition and in proper operating order at all times. 100 UTILITIES. Tenant shall pay for all separately metered water, gas, heat, light, telephone, sewer and sprinkler charges and for other utilities and services used on or from the Premises, together with any taxes, penalties, surcharges or the like pertaining thereto and any maintenance charges for utilities, and shall furnish all electric light bulbs and tubes. If any utilities serving the Premises are not separately metered, Tenant shall pay to Landlord its proportionate share of the cost thereof as reasonably determined by Landlord. Landlord shall in no event be liable for any damages directly or indirectly resulting from or arising out of the interruption or failure of utility services on the Premises. Tenant shall have no right to terminate this Lease nor shall Tenant be entitled to any abatement in Rent as a result of any such interruption or failure of utility services. No such interruption or failure of utility services shall be deemed to constitute a constructive eviction of Tenant. Notwithstanding the foregoing, if the utilities are interrupted and not available ("Interruption") for more than five (5) consecutive business days following notice to Landlord of the same, then beginning on the sixth (6th) consecutive business day of Interruption through the last day of such Interruption following notice to Landlord of the same, Tenant shall be entitled to an abatement of Base Rent, and the Term shall be extended the same number of days, but only if (i) the Interruption is not caused by a casualty covered by Paragraph 11 of this Lease or by an act or omission of Tenant or Tenant's Parties, (ii) Tenant is prevented by the Interruption from using and does not use the Premises or any portion thereof, and (iii) Tenant has timely provided Landlord with written notice of the same. 110 FIRE AND CASUALTY DAMAGE. 11.1 NOTICE OF DESTRUCTION. If the Premises are damaged or destroyed by fire, earthquake or other casualty, Tenant shall give immediate written notice thereof to Landlord. 11.2 LOSS COVERED BY INSURANCE. If at any time prior to the expiration or termination of this Lease, the Premises or the Project are wholly or partially damaged or destroyed, the loss to Landlord from which is fully covered by proceeds of insurance maintained by Landlord or for Landlord's benefit, which damage renders the Premises totally or partially inaccessible or unusable by Tenant in the ordinary conduct of Tenant's business, then: (a) If all repairs to the Premises or Project can, in Landlord's reasonable judgment, be completed within two hundred (200) days following the date of notice to Landlord of such damage or destruction without the payment of overtime or other premiums, Landlord shall, at Landlord's expense (provided Landlord can obtain all necessary governmental permits and approvals therefor at reasonable cost and on reasonable conditions), repair the same, and this Lease shall remain in full force and effect and a proportionate reduction of Rent shall be allowed Tenant for such portion of the Premises as shall be rendered inaccessible or unusable to Tenant during the period of time that such portion is unusable or inaccessible. There shall be no proportionate reduction of Rent by reason of any portion of the Premises being unusable or inaccessible for a period equal to five (5) consecutive business days -14- or less. Reduction of Rent shall only be permitted to the extent of Landlord's recovery upon its loss of rental income insurance, which Landlord shall maintain to the extent it remains commercially reasonable to do so. (b) If all such repairs cannot, in Landlord's reasonable judgment, be completed within two hundred (200) days following the date of notice to Landlord of such damage or destruction without the payment of overtime or other premiums, either party may, at its sole and absolute option, by written notice to the other given within twenty (20) days following the date of Landlord's notice to Tenant stating that all such repairs cannot, in Landlord's judgment, be completed within two hundred (200) days, terminate this Lease as of the date of the occurrence of such damage or destruction; provided, however, if neither party elects to terminate this Lease within said twenty (20) day period, then this Lease shall remain in full force and effect. If such repairs are not in fact completed within such two hundred (200) day period and such failure is not due in whole or in part to the acts or omissions of Tenant or Tenant's Parties, then Tenant may, within ten (10) days following such two hundred (200) day period, deliver notice to Landlord of Tenant's election to terminate this Lease unless Landlord completes the repairs within sixty (60) days following such notice; provided, however, if (i) Tenant fails to timely deliver such termination notice to Landlord within such ten (10) day period, or (ii) the repairs are completed within the sixty (60) day period following Landlord's receipt of notice from Tenant, then this Lease shall remain in full force and effect and Tenant's termination notice shall be deemed null and void and of no force or effect. Tenant shall pay to Landlord, within ten (10) days following Landlord's demand therefor, the amount of the deductible under Landlord's insurance policy (which amount shall not exceed commercially reasonable levels). If the damage involves portions of the Project other than the Premises, Tenant shall pay only a portion of the deductible based on the ratio of the cost of repairing the damage in the Premises to the total cost of repairing all of the damage in the Project. 11.3 LOSS NOT COVERED BY INSURANCE. If, at any time prior to the expiration or termination of this Lease, the Premises or the Project are totally or partially damaged or destroyed from a risk, the loss to Landlord from which is not fully covered by insurance maintained by Landlord or for Landlord's benefit, which damage renders the Premises inaccessible or unusable to Tenant in the ordinary course of its business, and if such damage or destruction is not the result of the negligence or willful misconduct or omission of Tenant or Tenant's Parties, Landlord may, at its option, upon written notice to Tenant within thirty (30) days after notice to Landlord of the occurrence of such damage or destruction, elect to repair or restore such damage or destruction, or Landlord may elect to terminate this Lease. If Landlord elects to repair or restore such damage or destruction, this Lease shall continue in full force and effect, but the Rent shall be proportionately reduced as provided in Paragraph 11.2(a). If Landlord elects to terminate this Lease, such termination shall be effective as of the date of the occurrence of such damage or destruction. 11.4 LOSS CAUSED BY TENANT OR TENANT'S PARTIES. Notwithstanding the foregoing, if the Premises or the Project are wholly or partially damaged or destroyed as a result of the negligence or willful misconduct or omission of Tenant or Tenant's Parties, Tenant shall forthwith diligently undertake to repair or restore all such damage or destruction at Tenant's sole cost and expense to the extent such damage results from the negligence or willful misconduct of Tenant or Tenant's Parties, or Landlord may at its option undertake such repair or restoration at Tenant's sole cost and expense to the extent such damage results from the negligence or willful misconduct of Tenant or Tenant's Parties; provided, however, that Tenant shall be relieved of its repair and payment obligations pursuant to this Paragraph 11.4 to the extent that insurance proceeds are collected by Landlord to repair such damage. Landlord shall use reasonable efforts to collect insurance although Tenant shall in all such events pay to Landlord the full amount of the deductible under Landlord's insurance policy and any amounts not insured. This Lease shall continue in full force and effect without any abatement or reduction in Rent or other payments owed by Tenant. 11.5 DESTRUCTION NEAR END OF TERM. Notwithstanding the foregoing, if the Premises or the Project are wholly or partially damaged or destroyed within the final six (6) -15- months of the Term, and such damage cannot be restored within sixty (60) days, then either party may, at its option, elect to terminate this Lease upon written notice given to the other within twenty (20) days following such damage or destruction. 11.6 DESTRUCTION OF IMPROVEMENTS AND PERSONAL PROPERTY. In the event of any damage to or destruction of the Premises or the Project, under no circumstances shall Landlord be required to repair, replace or compensate Tenant, Tenant's Parties or any other person for the personal property, trade fixtures, machinery, equipment or furniture of Tenant or any of Tenant's Parties, or any alterations, additions or improvements installed in the Premises by Tenant, and Tenant shall promptly repair and replace all such personal property and improvements at Tenant's sole cost and expense. 11.7 EXCLUSIVE REMEDY. The provisions of this Paragraph 11 shall constitute Tenant's sole and exclusive remedy in the event of damage or destruction to the Premises or the Project, and Tenant waives and releases all statutory rights and remedies in favor of Tenant in the event of damage or destruction, including without limitation those available under California Civil Code Sections 1932 and 1933(4). No damages, compensation or claim shall be payable by Landlord for any inconvenience, any interruption or cessation of Tenant's business, or any annoyance, arising from any damage or destruction of all or any portion of the Premises or the Project. 11.8 LENDER DISCRETION. Notwithstanding anything herein to the contrary, in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises requires that the insurance proceeds from insurance held by Landlord be applied to such indebtedness, then Landlord shall have the right to deliver written notice to Tenant terminating this Lease. 120 INDEMNITY AND INSURANCE. 12.1 INDEMNITY. Tenant hereby releases all Indemnified Parties, and shall indemnify, protect, defend and hold the Indemnified Parties harmless from any and all claims, judgments, damages, liabilities, losses, sums paid in settlement of claims, costs and expenses (including, but not limited to, reasonable attorneys' fees and litigation costs), obligations, liens and causes of action, whether threatened or actual, direct or indirect (collectively, "CLAIMS"), which arise in any way, directly or indirectly, resulting from or in connection with, in whole or in part, Tenant's or Tenant's Parties' activities in, on or about the Premises or Project, including, without limitation, Tenant's breach or default of any obligation of Tenant to be performed under the terms of this Lease, the conduct of Tenant's business, the nonobservance or nonperformance of any law, ordinance or regulation or the negligence or misconduct of Tenant or Tenant's Parties, the leakage of gas, oil, water, steam or electricity emanating from their usual conduits, or due to any cause whatsoever; except injury to persons or damage to property the sole cause of which is the gross negligence or willful misconduct of Landlord, or the wrongful failure of Landlord to repair any part of the Project which Landlord is obligated to repair and maintain hereunder within a reasonable time after the receipt of written notice from Tenant of needed repairs. Landlord hereby agrees to indemnify and hold Tenant harmless from and against any Claims to the extent the same results from the gross negligence or willful misconduct of Landlord, its authorized agents or employees or the default by Landlord hereunder. Landlord shall not be liable to Tenant for any damages arising from any act, omission or neglect of any other tenant in the Project. 12.2 LANDLORD'S INSURANCE. Landlord shall maintain standard fire and extended coverage insurance covering the Building in an amount equal to the "replacement cost" (except deductibles) thereof, and such other types and amounts of insurance as it deems necessary or desirable in its sole discretion, which may (but need not) include, without limitation, liability, property damage, earthquake and/or loss of rental income coverage. Such insurance shall be for the sole benefit of Landlord and under its sole control. The premiums for any such insurance shall be charged to Tenant as Additional Rent. -16- 12.3 TENANT'S INSURANCE OBLIGATIONS. Tenant agrees that at all times from and after the date Tenant is given access to the Premises for any reason, Tenant shall carry and maintain, at its sole cost and expense, the following types, amounts and forms of insurance: 12.3.1 GENERAL LIABILITY INSURANCE. A broad form comprehensive general liability or commercial general liability policy covering property damage, personal injury, advertising injury and bodily injury, and including blanket contractual liability coverage for obligations under this Lease, covering the Project in an amount of not less than the amount per occurrence specified in Item 10 of the Basic Lease Provisions. Such policy shall be in the occurrence form with a per location general aggregate. Each policy shall name Landlord and any management agent from time to time designated by Landlord and any lender of Landlord as additional insureds, and shall provide that any coverage to additional insureds shall be primary; when any policy issued to Landlord provides duplicate coverage or is similar in coverage, Landlord's policy will be excess over Tenant's policies. No deductibles in excess of Ten Thousand Dollars ($10,000) per occurrence shall be permitted. Tenant shall pay any deductibles. The amounts of such insurance required hereunder shall be subject to adjustment from time to time as required by Landlord based upon Landlord's reasonable determination as to (a) the amounts of such insurance generally required at such time for comparable tenants, premises and buildings in the general geographical location of the Building; (b) as requested by any lender with an interest in the Building or Project; (c) Tenant's activities; (d) increases in recovered liability claims; (e) increased claims consciousness by the public; or (f) any combination of the foregoing. 12.3.2 PROPERTY INSURANCE. A policy or policies, including the Boiler and Machinery Perils and the Special Causes of Loss form of coverage ("ALL RISKS"), including vandalism and malicious mischief, theft, sprinkler leakage (including earthquake sprinkler leakage) and water damage coverage in an amount equal to the full replacement value, new without deduction for depreciation, on an agreed amount basis (no co-insurance requirement), of all trade fixtures, furniture and equipment in the Premises, and all alterations, additions and improvements to the Premises installed by or for Tenant or provided to Tenant. Such insurance shall also include business interruption and extra expense coverage for Tenant's operations and debris removal coverage for removal of property of Tenant and Tenant's Parties which may be damaged within the Premises. Such coverage shall name the Landlord and any management agent from time to time designated by Landlord and any lender of Landlord as additional insureds and/or loss payees as its interest may appear. No deductibles in excess of Ten Thousand Dollars ($10,000) shall be permitted. Tenant shall pay any deductibles. 12.3.3 WORKERS' COMPENSATION INSURANCE. Workers' compensation insurance, including employers' liability coverage, shall comply with applicable California law. Such insurance shall include a waiver of subrogation in favor of Landlord, if available. 12.4 EVIDENCE OF COVERAGE. All of the policies required to be obtained by Tenant pursuant to Paragraph 12.3 shall be with companies and in form satisfactory to Landlord. Each insurance company providing coverage shall have a current Best's Rating of "A-X" or better. Tenant shall add Landlord and any management agent from time to time designated by Landlord and any lender of Landlord as an additional insured or loss payee, as their interests may appear. Tenant shall provide Landlord with certificates and copies of endorsements (and upon request, policies) of insurance acceptable to Landlord issued by each of the insurance companies issuing any of the policies required pursuant to the provisions of Paragraph 12.3, and said certificates and endorsements shall provide that the insurance issued thereunder shall not be altered, canceled or non-renewed until after thirty (30) days' written notice to Landlord. "CLAIMS MADE" policies shall not be permitted. Each policy shall permit the waiver in Section 12.5 below. Evidence of insurance coverage shall be furnished to Landlord prior to Tenant's possession of the Premises and thereafter not fewer than fifteen (15) days prior to the expiration date of any required policy. Tenant may satisfy its insurance obligations hereunder by carrying such insurance under a so-called blanket policy or policies of insurance which are acceptable to Landlord. If Tenant fails to obtain any insurance required hereby or provide evidence thereof to Landlord, upon one (1) business day notice, Landlord may, but shall not be obligated to, and Tenant hereby appoints Landlord as its agent to, procure such insurance and -17- bill the cost of the insurance plus a five percent (5%) handling charge to Tenant. Tenant shall pay such costs to Landlord as Additional Rent with the next monthly payment of Rent. 12.5 WAIVERS OF SUBROGATION. Landlord waives any and all rights of recovery against Tenant for or arising out of damage to, or destruction of the Building or the Premises to the extent that Landlord's insurance policies then in force or policies required by this Lease insure against such damage or destruction and permit such waiver and only to the extent of insurance proceeds actually received by Landlord for such damage or destruction. Tenant waives any and all rights of recovery against Landlord for or arising out of damage to or destruction of any property of Tenant to the extent that Tenant's insurance policies then in force or the policies required by this Lease, whichever is broader, insure against such damage or destruction. 130 LANDLORD'S RIGHT OF ACCESS. Tenant shall permit Landlord and its employees and agents, at all reasonable times upon 24 hours notice and at any time in case of emergency, in such manner as to cause as little disturbance to Tenant as reasonably practicable (a) to enter into and upon the Premises to inspect them, to protect the Landlord's interest therein, or to post notices of non-responsibility, (b) to take all necessary materials and equipment into the Premises, and perform necessary work therein, and (c) to perform periodic environmental audits, inspections, investigations, testing and sampling of the Premises and/or the Project, and to review and copy any documents, materials, data, inventories, financial data, notices or correspondence to or from private parties or governmental authorities in connection therewith. No such work shall cause or permit any rebate of Rent to Tenant for any loss of occupancy or quiet enjoyment of the Premises, or damage, injury or inconvenience thereby occasioned, or constitute constructive eviction. Landlord may at any time place on or about the Building any ordinary "for sale" and "for lease" signs. Tenant shall also permit Landlord and its employees and agents, upon request, to enter the Premises or any part thereof, upon 24 hours notice during normal business hours, to show the Premises to any fee owners, lessors of superior leases, holders of encumbrances on the interest of Landlord under the Lease, or prospective purchasers, mortgagees or lessees of the Project or Building as an entirety. During the period of six (6) months prior to the expiration date of this Lease, Landlord may exhibit the Premises to prospective tenants. 140 ASSIGNMENT AND SUBLETTING. 14.1 LANDLORD'S CONSENT. Tenant shall not assign all or any portion of its interest in this Lease, whether voluntarily, by operation of law or otherwise, and shall not sublet all or any portion of the Premises, including, but not limited to, sharing them, permitting another party to occupy them or granting concessions or licenses to another party, except with the prior written consent of Landlord, which Landlord may withhold for any reasonable condition, including, but not limited to: (a) Tenant is in default (beyond applicable notice and cure periods) of this Lease; (b) the assignee or subtenant is unwilling to assume in writing all of Tenant's obligations hereunder (prorated for a subtenant of less than all of the Premises); (c) the assignee or subtenant has a financial condition which is reasonably unsatisfactory to Landlord or Landlord's mortgagee; (d) the Premises will be used for different purposes than those set forth in Paragraph 3 or for a use requiring or generating increased or different Hazardous Materials; and (e) the proposed assignee or subtenant or its business is subject to compliance with additional requirements of the law (including related resolutions) commonly known as the Americans with Disabilities Act of 1990 beyond those requirements applicable to Tenant. 14.2 FEES. Tenant shall pay Landlord's reasonable attorneys' fees incurred in evaluating any proposed assignment or sublease and documenting Landlord's consent. 14.3 PROCEDURE. Whenever Tenant has obtained an offer to assign any interest in this Lease or to sublease all or any portion of the Premises, Tenant shall provide to Landlord the name and address of said proposed assignee or sublessee, the base rent and all other compensation to be paid to Tenant, the proposed use by the proposed assignee or sublessee, the -18- proposed effective date of the assignment or subletting, and any other business terms which are material to the offer and/or which differ from the provisions of this Lease ("NOTICE OF OFFER"). Tenant shall also provide to Landlord the nature of business, financial statement and business experience resume for the immediately preceding five (5) years of the proposed assignee or sublessee and such other information concerning such proposed assignee or sublessee as Landlord may reasonably require. The foregoing information shall be in writing and shall be received by Landlord no less than thirty (30) days prior to the effective date of the proposed assignment or sublease. Within fifteen (15) days following its receipt of a Notice of Offer for the proposed assignment or subletting, Landlord shall be entitled to terminate this Lease as to all of the Premises (unless Tenant proposes a sublease of a portion of the Premises, in which event Landlord may terminate this Lease as to such portion) by written notice to Tenant ("TERMINATION NOTICE"), and such termination shall be effective as of the proposed effective date of the proposed assignment or sublease. If Landlord does not elect to terminate this Lease, Landlord shall either notify Tenant that Landlord consents to the proposed assignment or subletting or withholds its consent for reasons to be specified in the notice. If Landlord does not provide a Termination Notice or a notice withholding its consent to Tenant within fifteen (15) days following its receipt of a Notice of Offer, Landlord shall be deemed to have consented to the proposed assignment or subletting. 14.4 BONUS RENT. If any interest in this Lease is assigned or all or any portion of the Premises is subleased, Landlord shall receive one-half (1/2) of all of the "BONUS RENT" to be realized from such assignment or subletting. The bonus rent shall mean any lump sum payment or other value received by Tenant that is attributable to the sublease, assignment and/or leasehold interest (as opposed to the sale of Tenant's business or assets [(other than the leasehold interest or property belonging to Landlord)]), plus any base rent, percentage rent or periodic compensation received by Tenant from or for the benefit of an assignee or sublessee in excess of (a) all amounts owed for Rent and other charges pursuant to this Lease, (b) all reasonable commissions and fees paid to any real estate broker or finder who is unaffiliated with Tenant in connection with the assignment or subletting, and (c) all reasonable and necessary out-of-pocket advertising fees, tenant improvement costs and attorneys' fees paid by Tenant to unaffiliated third parties for the sole purpose of consummating the assignment or sublease. If a portion of the Premises is subleased, the amount in clause (a) shall be prorated based on the portion of the Premises' rentable area to be subleased. The bonus rent shall be paid on the first (1st) day of each calendar month next following tenant's receipt of each payment from its assignee or sublessee, after reduction for all amounts described in clauses (a), (b) and (c) above, amortized over the full term of the assignment or sublease. 14.5 CONTINUING TENANT OBLIGATIONS. No subleasing or assignment shall relieve Tenant from liability for payment of all forms of Rent and other charges herein provided or from Tenant's obligations to keep and be bound by the terms, conditions and covenants of this Lease. 14.6 WAIVER, DEFAULT AND CONSENT. The acceptance of Rent from any other person shall not be deemed to be a waiver of any of the provisions of this Lease or a consent to the assignment or subletting of the Premises. Any assignment or sublease without the Landlord's prior written consent shall be voidable, at Landlord's election, and shall constitute a noncurable event of default under this Lease. Consent to any assignment or subletting shall not be deemed a consent to any future assignment or subletting. 14.7 RESTRUCTURING OF BUSINESS ORGANIZATIONS. Any transfer of corporate shares or partnership interests of Tenant, so as to result in a change in the present voting control of Tenant by the person or persons owning a majority of said corporate shares or partnership interests on the date of this Lease (except for trading on an exchange), shall constitute an assignment and shall be subject to the provisions of this Paragraph 14. Notwithstanding the foregoing, (A) an assignment of this Lease by operation of law as a result of a merger or consolidation of Tenant, or an assignment of this Lease in conjunction with (i) the sale of all or substantially all of Tenant's assets, or (ii) a public offering of the stock of Tenant, shall not constitute an assignment of this Lease under this Paragraph 14; and (B) an assignment of this -19- Lease or a subletting of the Premises to an entity ("Affiliate Entity") which owns, or is owned by, Tenant, shall not constitute an assignment of this Lease or a sublease under this paragraph 14, provided that such Affiliate Entity owns more than fifty percent (50%) of the outstanding shares of all classes of voting stock of Tenant, or Tenant owns more than fifty percent (50%) of all ownership and controlling interests of such Affiliate Entity. 14.8 ASSIGNMENT OF SUBLEASE RENT. Tenant immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rents from any subletting of all or any part of the Premises, and Landlord, as assignee and as attorney-in-fact for Tenant for purposes hereof, or a receiver for Tenant appointed on Landlord's application, may collect such rents and apply same toward Tenant's obligations under this Lease, except that, until the occurrence of an event of default (beyond applicable notice and cure periods) by Tenant, Tenant shall have the right and license to collect such rents. 14.9 ASSIGNMENT IN BANKRUPTCY. If this Lease is assigned to any person or entity pursuant to the provisions of the United States Bankruptcy Code, 11 U.S.C. Section 101 ET SEQ., or such similar laws or amendments thereto which may be enacted from time to time (the "BANKRUPTCY CODE"), any and all monies or other considerations payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. 14.10 ASSUMPTION OF OBLIGATIONS. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed, without further act or deed, to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. 150 CONDEMNATION. 15.1 TOTAL TAKING. If the whole or any substantial part of the Premises or the Project shall be taken or damaged because of the exercise of the power of eminent domain, whether by condemnation proceedings or otherwise, including acts or omissions constituting inverse condemnation, or any transfer of the Premises or Project or portion thereof in avoidance of the exercise of the power of eminent domain (collectively, a "TAKING"), and the Taking would prevent or materially interfere with the use of the Premises for the purpose for which they are being used, this Lease shall terminate effective when the physical Taking of the Premises shall occur. 15.2 PARTIAL TAKING. If part of the Premises shall be subject to a Taking and this Lease is not terminated as provided in the Paragraph 15.1 above, this Lease shall not terminate but the Rent payable hereunder during the unexpired portion of this Lease shall be reduced in proportion to the area of the Premises rendered unusable by Tenant. 15.3 CONDEMNATION AWARD. The entire award or compensation for any Taking of the Project and/or the Premises, or any part thereof, or for diminution in value, shall be the property of Landlord, and Tenant hereby assigns its interest in any such award to Landlord; provided, however, Landlord shall have no interest in any separate award made to Tenant for loss of business, for relocation purposes, or for the taking of Tenant's fixtures and improvements. 15.4 EXCLUSIVE REMEDY. This Paragraph 15 shall be Tenant's sole and exclusive remedy in the event of any Taking. Tenant hereby waives the benefits of California Code of Civil Procedure Section 1265.130 or any other statute granting Tenant specific rights in the event of a Taking which are contrary to the provisions of this Paragraph 15. 160 SURRENDER AND HOLDING OVER. -20- 16.1 SURRENDER. Upon the expiration or sooner termination of this Lease, Tenant shall surrender the Premises in as good condition as when received, reasonable wear and tear excepted, broom clean and free of trash and rubbish, and free from all tenancies or occupancies by any person. Tenant shall remove all trade fixtures, furniture, equipment and other personal property installed in the Premises prior to the expiration or earlier termination of this Lease. Unless otherwise provided in Paragraph 7 or waived by Landlord in writing prior to the expiration or earlier termination of this Lease, Tenant shall remove at its sole cost all alterations, additions and improvements made by Tenant to the Premises; provided, however, if Tenant requests Landlord to notify Tenant whether a particular alteration's removal will be required in conjunction with Tenant's request for Landlord's consent to any particular proposed alterations (together with such other documents, plans, etc. as Landlord may request in accordance with Paragraph 7), Landlord shall notify Tenant whether the removal of such alterations will be required at the expiration or earlier termination of this Lease. Notwithstanding the foregoing, at the election of Landlord, all (or such portion as Landlord shall designate) alterations, additions and improvements to the Premises including, without limitation, all wall coverings, floor coverings, built-in cabinets, paneling and the like, shall become the property of Landlord and remain on the Premises at the end of the Term. Tenant shall, at its own cost, completely repair any and all damage to the Premises and the Building resulting from or caused by such removal. The provisions of Paragraph 7 shall apply to such removal and repair work. 16.2 HOLDING OVER. If Landlord agrees in writing that Tenant may hold over after the expiration or earlier termination of this Lease, unless the parties hereto otherwise agree in writing as to the terms of such holding over, the holdover tenancy shall be subject to termination by Landlord or Tenant at any time upon not less than thirty (30) days' prior written notice. If Tenant holds over without the consent of Landlord, the same shall be a tenancy at will terminable at any time, and Tenant shall be liable to Landlord for, and Tenant shall indemnify, protect, defend and hold Landlord harmless from and against, any damages, liabilities, losses, costs, expenses or claims suffered or caused by such holdover, including damages and costs related to any successor tenant of the Premises to whom Landlord could not deliver possession of the Premises when promised. All of the other terms and provisions of this Lease shall be applicable during any holdover period, with or without consent, except that Tenant shall pay to Landlord from time to time upon demand, as Rent for the period of any holdover, an amount equal to one hundred fifty percent (150%) of the then applicable Base Rent plus all Additional Rent in effect on the termination date, computed on a daily basis for each day of the holdover period. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease. The preceding provisions of this Paragraph 16.2 shall not be construed as Landlord's consent to any holding over by Tenant. 16.3 ENTRY AT END OF TERM. If during the last month of the Term, Tenant shall have removed all of Tenant's property and personnel from the Premises, Landlord may enter the Premises and repair, alter and redecorate the same, without abatement of Rent and without liability to Tenant, and such acts shall have no effect on this Lease. Tenant shall, prior to vacating the Premises, arrange to meet with Landlord for a joint inspection of the Premises prior to vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacation of the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. 170 QUIET ENJOYMENT. Landlord represents and warrants that it has full rights and authority to enter into this Lease and that Tenant, upon paying the Rent and performing its other covenants and agreements herein set forth, shall peaceably and quietly have, hold and enjoy the Premises for the Term without hindrance or molestation from Landlord, subject to the terms and provisions of this Lease, any ground lease, any mortgage or deed of trust now or hereafter encumbering the Premises or the Project, and all matters of record. 180 EVENTS OF DEFAULT. -21- The following events shall be deemed to be events of default by Tenant under this Lease: 18.1 FAILURE TO PAY RENT. Tenant shall fail to pay any installment of the Rent herein reserved within five (5) business days from when due, or any other payment or reimbursement to Landlord required herein when due. 18.2 INSOLVENCY. Tenant or any guarantor of Tenant's obligations hereunder shall generally not pay its debts as they become due or shall admit in writing the inability to pay its debts or shall make a general assignment for the benefit of creditors. 18.3 APPOINTMENT OF RECEIVER. A receiver or trustee (or similar official) shall be appointed for all or substantially all of the assets of Tenant and not discharged within forty-five (45) days. 18.4 BANKRUPTCY. The filing of any voluntary petition by Tenant under the Bankruptcy Code, or the filing of an involuntary petition by Tenant's creditors, which involuntary petition remains undischarged for a period of forty-five (45) days. 18.5 ATTACHMENT. The attachment, execution or other judicial seizure or non-judicial seizure of all or substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease or the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of twenty (20) business days after the levy thereof. 18.6 INTENTIONALLY OMITTED. 18.7 CERTIFICATES. Tenant shall fail to deliver to Landlord any subordination agreement within the time limit prescribed in Paragraph 21 below, or a Certificate of Occupancy, all financial statements or an estoppel certificate within the time limits prescribed in Paragraph 22.7 below. 18.8 FAILURE TO DISCHARGE LIENS. Tenant shall fail to discharge any lien placed upon the Premises in violation of Paragraph 8 hereof. 18.9 FALSE FINANCIAL STATEMENT. Landlord discovers that any financial statement given to Landlord by Tenant, any assignee, subtenant or successor in interest of Tenant, or any guarantor of Tenant's obligations hereunder, or any of them, was materially false when given to Landlord. 18.10 FAILURE TO COMPLY WITH LEASE TERMS. Tenant shall fail to comply with any other term, provision or covenant of this Lease, and shall not cure such failure within thirty (30) days after written notice thereof to Tenant; provided, however, that if the nature of Tenant's obligation is such that it is not susceptible to cure within thirty (30) days, then Tenant shall not be in default if Tenant commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 18.11 GUARANTOR DEFAULT. Any guarantor of Tenant's obligations hereunder shall be in default under the terms of its guaranty. 18.12 Assignment or Subletting without Consent. Any assignment, subletting or other transfer for which the prior consent of Landlord is required under this Lease and has not been obtained. Any notices to be provided by Landlord under this Paragraph 18 shall be in lieu of, and not in addition to, any notice required under Section 1161 of the California Code of Civil Procedure. 190 LANDLORD'S REMEDIES. -22- Upon the occurrence of any event of default, Landlord may, at its option without further notice or demand and in addition to any other rights and remedies hereunder or at law or in equity, do any or all of the following: 19.1 TERMINATION. Terminate Tenant's right to possession of the Premises by any lawful means upon at least 3 days' written notice (which notice may be satisfied by any notice which may be given by Landlord pursuant to Paragraph 18, if applicable), in which case Tenant shall immediately surrender possession of the Premises to Landlord and, in addition to any rights and remedies Landlord may have at law or in equity, Landlord shall have the following rights: (a) To re-enter the Premises then or at any time thereafter and remove all persons and property and possess the Premises, without prejudice to any other remedies Landlord may have by reason of Tenant's default or of such termination, and Tenant shall have no further claim hereunder. (b) To recover all damages incurred by Landlord by reason of the default, including without limitation (i) the worth at the time of the award of the payments owed by Tenant to Landlord under this Lease that were earned but unpaid at the time of termination; (ii) the worth at the time of the award of the amount by which the payments owed by Tenant to Landlord under the Lease that would have been earned after the date of termination until the time of the award exceeds the amount of the loss of payments owed by Tenant to Landlord under this Lease for the same period that Tenant proves could have been reasonably avoided; (iii) the worth at the time of the award of the amount by which the payments owed by Tenant to Landlord for the balance of the Term after the time of the award exceeds the amount of the loss of payments owed by Tenant for the same period that Tenant proves could have been reasonably avoided; (iv) all costs incurred by Landlord in retaking possession of the Premises and restoring them to good order and condition; (v) all costs, including without limitation brokerage commissions, advertising costs and restoration and remodeling costs, incurred by Landlord in reletting the Premises; plus (vi) any other amount, including without limitation attorneys' fees and audit expenses, necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. "The worth at the time of the award," as used in clauses (i) and (ii) of this paragraph, is to be determined by computing interest as to each unpaid payment owed by Tenant to Landlord under the Lease, at the highest interest rate permitted by law. "The worth at the time of the award," as referred to in clause (iii) of this paragraph, is to be determined by discounting such amount, as of the time of award, at the discount rate of the San Francisco Federal Reserve Bank, plus 1%. (c) To remove, at Tenant's sole risk, any and all personal property in the Premises and place such in a public or private warehouse or elsewhere at the sole cost and expense and in the name of Tenant. Any such warehouser shall have all of the rights and remedies provided by law against Tenant as owner of such property. If Tenant shall not pay the cost of such storage within thirty (30) days following Landlord's demand, Landlord may, subject to the provisions of applicable law, sell any or all such property at a public or private sale in such manner and at such times and places as Landlord deems proper, without notice to or demand upon Tenant. Tenant waives all claims for damages caused by Landlord's removal, storage or sale of the property and shall indemnify and hold Landlord free and harmless from and against any and all loss, cost and damage, including without limitation court costs and attorneys' fees. Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in-fact, coupled with an interest, with all rights and powers necessary to effectuate the provisions of this subparagraph. -23- 19.2 CONTINUATION OF LEASE. Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event, Landlord may enforce all of Landlord's rights and remedies under this Lease, including the right to recover rent as it becomes due hereunder, and, at Landlord's election, to re-enter and relet the Premises on such terms and conditions as Landlord deems appropriate. Without limiting the generality of the foregoing, Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations). If Landlord relets the Premises or any portion thereof, any rent collected shall be applied against amounts due from Tenant. Landlord may execute any lease made pursuant hereto in its own name, and Tenant shall have no right to collect any such rent or other proceeds. Landlord's re-entry and/or reletting of the Premises, or any other acts, shall not be deemed an acceptance of surrender of the Premises or Tenant's interest therein, a termination of this Lease or a waiver or release of Tenant's obligations hereunder. Landlord shall have the same rights with respect to Tenant's improvements and personal property as under Paragraph 19.1 above, even though such re-entry and/or reletting do not constitute acceptance of surrender of the Premises or termination of this Lease. 19.3 APPOINTMENT OF RECEIVER. Cause a receiver to be appointed in any action against Tenant and to cause such receiver to take possession of the Premises and to collect the rents or bonus rent derived therefrom. The foregoing shall not constitute an election by Landlord to terminate this Lease unless specific notice of such intent is given. 19.4 LATE CHARGE. Charge late charges as provided in Paragraph 2.7. 19.5 INTEREST. Charge interest on any amount not paid when due as provided in Paragraph 22.2. Interest shall accrue from the date funds are first due or, if the payment is for funds expended by Landlord on Tenant's behalf, from the date Landlord expends such funds. 19.6 ATTORNEYS' FEES. Subject to Paragraph 22.11, collect, upon demand, all reasonable attorneys' fees and expenses incurred by Landlord in enforcing its rights and remedies hereunder. 19.7 INJUNCTION. To restrain by injunction or other equitable means any breach or anticipated breach of this Lease. 20. TENANT'S REMEDIES. 20.1 LANDLORD'S DEFAULT. Landlord shall not be in default under this Lease unless Landlord fails to perform obligations required of Landlord within thirty (30) days after written notice is delivered by Tenant to Landlord and to the holder of any mortgages or deeds of trust (collectively, "LENDER") covering the Premises whose name and address shall have theretofore been furnished to Tenant in writing, specifying the obligation which Landlord has failed to perform; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord or Lender commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. All obligations of Landlord hereunder shall be construed as covenants, not conditions. 20.2 TENANT'S REMEDIES. In the event of any default, breach or violation of Tenant's rights under this Lease by Landlord, Tenant's exclusive remedies shall be an action for specific performance or action for actual damages. Tenant hereby waives the benefit of any laws granting it the right to perform Landlord's obligation, or the right to terminate this Lease or withhold Rent on account of any Landlord default. 20.3 LANDLORD DEFAULT/SELF-HELP RIGHTS. If Landlord fails to perform any repair that Landlord is obligated to perform under this Lease ("Required Repair") within the time period within which Landlord is obligated to perform said repair work as set forth in Paragraph 20.1 above, then Tenant may proceed to perform the Required Repair upon delivery of an additional ten (10) business days notice to Landlord specifying that Tenant is performing -24- such Required Repair, and if such Required Repair was required under the terms of this Lease to be performed by Landlord, then Tenant shall be entitled to prompt reimbursement by Landlord of Tenant's reasonable costs and expenses in taking such action. In the event Tenant performs such Required Repair, such work shall be performed in accordance with Paragraph 7 hereof (other than the requirement of obtaining Landlord's prior consent). Further, if Landlord does not deliver a detailed written objection to Tenant within thirty (30) days after receipt of an invoice by Tenant of its costs of performing the Required Repair which Tenant claims should have been taken by Landlord, and if such invoice from Tenant sets forth a reasonably particularized breakdown of its costs and expenses in connection with taking such action on behalf of Landlord, then Tenant shall be entitled to deduct from Base Rent payable by Tenant under this Lease, the amount set forth in such invoice. If, however, Landlord delivers to Tenant within thirty (30) days after receipt of Tenant's invoice, a written objection to the payment of such invoice, setting forth with reasonable particularity Landlord's reasons for its claim that such Required Repair did not have to be taken by Landlord pursuant to the terms of this Lease or that the charges are excessive (in which case Landlord shall pay the amount it contends would not have been excessive), then Tenant shall not be entitled to such deduction from Base Rent, but as Tenant's sole remedy, Tenant may proceed to institute legal proceedings against Landlord to collect the amount set forth in the subject invoice. 20.4 NON-RECOURSE. Notwithstanding anything to the contrary in this Lease, any judgment obtained by Tenant or any of Tenant's Parties against Landlord or any Indemnified Parties shall be satisfied only out of Landlord's equity interest in the Building and the legal parcel of land on which it sits. Neither Landlord nor any Indemnified Parties shall have any personal liability for any matter in connection with this Lease or its obligations as Landlord of the Premises, except as provided above. Tenant shall not institute, seek or enforce any personal or deficiency judgment against Landlord or any Indemnified Parties, and none of their property shall be available to satisfy any judgment hereunder, except as provided in this Paragraph 20.4. 20.5 SALE OF PREMISES. In the event of any sale or transfer of the Premises (and provided that any security deposit held by the seller, transferor or assignor (collectively, "Seller") is delivered or credited to the purchaser, transferee or assignee (collectively, "Purchaser"), the Seller shall be and hereby is entirely freed and relieved of all agreements, covenants and obligations of Landlord thereafter to be performed and it shall be deemed and construed without further agreement between the parties or their successors in interest or between the Seller and the Purchaser on any such sale, transfer or assignment that such Purchaser has assumed and agreed to carry out any and all agreements, covenants and obligations of Landlord hereunder. 21. MORTGAGES. At the election of Landlord, or the holder of any mortgage or deed of trust affecting the Project or any ground lessor, this Lease and all of Tenant's rights hereunder shall be subject and subordinate at all times to any deed of trust, mortgage or ground lease which may now or hereafter affect the Project, and to all renewals, modifications, consolidations, replacements and extensions thereof. If any such mortgage or deed of trust is foreclosed or any ground lease terminated, at the election of Landlord's successor in interest, Tenant agrees, for the benefit of such successor in interest, to attorn to such successor in interest and become its tenant on the terms and conditions of this Lease for the remainder of the Term, and if required, to enter into a new lease with such successor in interest in the form of this Lease. Tenant's agreement to attorn shall survive the termination of this Lease. At the request of Landlord, the holder of such mortgage or deed of trust or any ground lessor, Tenant shall execute, acknowledge and deliver promptly in recordable form any instrument or subordination agreement that Landlord or such holder may request; provided, however, that such instrument shall include a provision requiring the purchaser at any foreclosure sale to continue this Lease in full force and effect in the same manner as if such purchaser were the Landlord so long as Tenant is not otherwise in default (beyond applicable notice and cure periods) and requiring Tenant to attorn to such purchaser. In addition, at the request of Landlord, the holder of any mortgage or deed of trust -25- or any ground lessor, Tenant shall execute, acknowledge and deliver promptly in recordable form any instrument that Landlord or such holder may request to make this Lease superior to such mortgage, deed or trust or ground lease. Provided that Landlord notifies Tenant that its failure to timely execute such documents shall constitute a default under this Lease, Tenant's failure to execute each instrument, release or document within ten (10) business days after written demand shall constitute an event of default by Tenant hereunder without further notice to Tenant, or at Landlord's option Landlord shall execute such instrument, release or document on behalf of Tenant as Tenant's attorney-in-fact. Tenant does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact, coupled with an interest, and in Tenant's name, place and stead, to execute such documents in accordance with this Paragraph 21. 22. GENERAL PROVISIONS. 22.1 SINGULAR AND PLURAL. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. 22.2 INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided to the contrary, any amount due to Landlord not paid within five (5) business days from when due shall bear interest at the lesser of 12% or the maximum rate then allowable by law from the date due. Payment of such interest shall not excuse or cure any default by Tenant under this Lease, provided, however, that interest shall not be payable on late charges incurred by Tenant. 22.3 TIME OF ESSENCE. Time is of the essence. 22.4 BINDING EFFECT. The terms, provisions and covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon, the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns, except as otherwise herein expressly provided. 22.5 CHOICE OF LAW. This Lease shall be governed by the laws of the State of California applicable to contracts made and to be performed in such state. 22.6 CAPTIONS. The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease. 22.7 CERTIFICATES. Tenant agrees from time to time within ten (10) business days after request of Landlord, to deliver to Landlord, or Landlord's designee, a Certificate of Occupancy for work performed by Tenant or Tenant's Parties in the Premises, annual financial statements for each of the previous three (3) fiscal years of Tenant, and an estoppel certificate stating that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect), the date to which Rent has been paid, the unexpired Term of this Lease and such other matters pertaining to this Lease as may be reasonably requested by Landlord or Landlord's designee. Any such certificate may be conclusively relied upon by Landlord or Landlord's designee. At Landlord's option, Tenant's failure to timely deliver such certificate shall be an event of default by Tenant, without further notice to Tenant, or it shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord's performance, and that not more than one (1) month's rent has been paid in advance. Landlord agrees from time to time within ten (10) business days after request of Tenant (but not more than three (3) times during the Term), to deliver to Tenant an estoppel certificate stating that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification), the date to which Rent has been paid and the unexpired Term of this Lease, and whether Tenant is (to Landlord's knowledge) in default under this Lease. -26- 22.8 AMENDMENTS. This Lease may not be altered, changed or amended except by an instrument in writing signed and dated by both parties hereto. Tenant agrees to make such reasonable modifications to this Lease as may be required by any lender in connection with the obtaining of financing or refinancing of the Project or any portion thereof, so long as such modifications do not increase Tenant's monetary obligations or adversely impact Tenant's use of or access to the Premises. 22.9 ENTIRE AGREEMENT. This Lease constitutes the entire understanding and agreement of Landlord and Tenant with respect to the subject matter of this Lease, and contains all of the covenants and agreements of Landlord and Tenant with respect thereto, and supersedes all prior agreements or understandings. Landlord and Tenant each acknowledge that no representations, inducements, promises or agreements, oral or written, have been made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not contained herein, and any prior agreements, promises, negotiations, or representations not expressly set forth in this Lease are of no force or effect. 22.10 WAIVERS. The waiver by either party of any term, covenant, agreement or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant, agreement or condition herein contained, nor shall any custom or practice which may arise between the parties in the administration of this Lease be construed to waive or lessen the right of such party to insist upon the performance by the other party in strict accordance with all of the provisions of this Lease. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any provisions, covenant, agreement or condition of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. 22.11 ATTORNEYS' FEES. If either Landlord or Tenant commences or engages in, or threatens to commence or engage in, an action by or against the other party arising out of or in connection with this Lease or the Premises, including but not limited to any action for recovery of Rent due and unpaid, to recover possession or for damages for breach of this Lease, the prevailing party shall be entitled to have and recover from the losing party reasonable attorneys' fees and other costs incurred in connection with the action, preparation for such action, any appeals relating thereto and enforcing any judgments rendered in connection therewith. 22.12 MERGER. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation hereof shall not constitute a merger. Such event shall, at the option of Landlord, either terminate all or any existing subtenancies or operate as an assignment to Landlord of any or all of such subtenancies. 22.13 SURVIVAL OF OBLIGATIONS. Paragraphs 2, 3.2, 4.2, 5.2, 8, 12.1, 12.5, 15.3, 16, 19, 20 and 22 and all obligations of Landlord and Tenant hereunder not fully performed as of the expiration or earlier termination of the Term shall survive the expiration or earlier termination of the Term, including without limitation, all payment obligations with respect to Rent and all obligations concerning the condition of the Premises. Upon the expiration or earlier termination of the Term, and prior to Tenant vacating the Premises, Tenant shall pay to Landlord any amount reasonably estimated by Landlord (i) as necessary to perform Tenant's duties under paragraphs 6.1 and 16.1 and put the Premises, including without limitation, all heating and air conditioning systems and equipment therein, in good condition and repair, and (ii) as sufficient to meet Tenant's obligation hereunder for prorated Additional Rent for the year in which the Lease expires or terminates. All such amounts shall be used and held by Landlord for payment of such obligations, with Tenant being liable for any additional costs therefor upon demand by Landlord, or with any excess to be returned to Tenant after all such obligations have been determined and satisfied as the case may be. Any Security Deposit held by Landlord shall be credited against the amounts payable by Tenant under this Paragraph 22.13. 22.14 SEVERABILITY. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the Term, the remainder of this -27- Lease shall not be affected thereby, and in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 22.15 SECURITY MEASURES. Tenant hereby acknowledges that the Rent payable to Landlord hereunder does not include the cost of guard service or other security measures, and that Landlord shall have no obligation whatsoever to provide same. Tenant assumes all responsibility for the protection of Tenant, Tenants' Parties and their property from acts of third parties. 22.16 EASEMENTS. Landlord reserves to itself the right, from time to time, to grant such easements, rights and dedications that Landlord deems necessary or desirable, and to cause the recordation of parcel maps, easement agreements and covenants, conditions and restrictions, so long as such easements, rights, dedications, maps and covenants, conditions and restrictions do not unreasonably interfere with the permitted use of the Premises by Tenant. Tenant shall sign any of the aforementioned documents upon request of Landlord and failure to do so shall constitute a material breach of this Lease. 22.17 MULTIPLE PARTIES. If more than one person or entity is named as Tenant herein, the obligations of Tenant hereunder shall be the joint and several responsibility of all persons or entities so named. 22.18 CONFLICT. Any conflict between the printed provisions of this Lease and any typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 22.19 NO THIRD PARTY BENEFICIARIES. This Lease is not intended by either party to confer any benefit on any third party, including without limitations any broker, finder, or brokerage firm. 22.20 EFFECTIVE DATE/NONBINDING OFFER. Submission of this Lease for examination or signature by Tenant does not constitute an offer or option for lease, and it is not effective as a lease or otherwise until executed and delivered by both Landlord and Tenant. 22.21 NOTICES. Each provision of this Lease or of any applicable governmental laws, ordinances, regulations and other requirements with reference to the sending, mailing or delivery of any notice or the making of any payment by one party to the other shall be deemed to be complied with when and if the following steps are taken: (a) All Rent and other payments required to be made hereunder shall be payable to the applicable party hereto as follows: to Landlord at the address set forth in Item 12 of the Basic Lease Provisions, and to Tenant at the Premises, or at such other addresses as the parties may have hereafter specified by written notice. All obligations to pay Rent and/or any other amounts under the terms of this Lease shall not be deemed satisfied until such Rent and other amounts have been actually received by the respective party. (b) Wherever any notice is required or permitted hereunder, such notice shall be in writing. Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered (i) upon personal delivery; (ii) seventy-two (72) hours after deposit thereof in the United States mail, postage prepaid, certified or registered mail, return receipt requested; (iii) upon confirmation of delivery by Federal Express or other reputable overnight delivery service; or (iv) upon written confirmation of delivery by telegraph, telecopy or other electronic written transmission device; correctly addressed to the parties hereto as follows: if to Tenant before the Commencement Date, then at the address specified in Item 11 of the Basic Lease Provisions; if to Tenant after the Commencement Date, then at the Premises; and if to Landlord, then at the address specified in Item 12 of the Basic Lease Provisions; or at such other address (but no more than one (1) address at a time, except as provided in Paragraph 20.1) as the recipient may theretofore have specified by written notice. -28- 22.22 WATER, OIL AND MINERAL RIGHTS. Landlord reserves all right, title or interest in water, oil, gas or other hydrocarbons, other mineral rights and air and development rights, together with the sole and exclusive right of Landlord to sell, lease, assign or otherwise transfer the same, but without any right of Landlord or any such transferee to enter upon the Premises during the Term except as otherwise provided herein. 22.23 CONFIDENTIALITY. Tenant agrees to keep the Lease and its terms, covenants, obligations and conditions strictly confidential and not to disclose such matters to any other landlord, tenant, prospective tenant, or broker; provided, however, Tenant may provide a copy of this Lease to its attorneys, accountants and bankers, and to a non-party solely in conjunction with Tenant's reasonable and good faith effort to secure an assignee or sublessee for the Premises. 22.24 BROKER'S FEES. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, other than the brokerage firm specified in Item 13 of the Basic Lease Provisions, if any, and Tenant shall indemnify, defend, protect and hold Landlord harmless from and against any claims, losses, liabilities, demands, costs, expenses or causes of action by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. 22.25 REMEDIES CUMULATIVE. All rights, privileges and remedies of the parties are cumulative and not alternative or exclusive to the extent permitted by law, except as otherwise provided herein. 22.26 RETURN OF CHECK. If Tenant's check, given to Landlord in payment of any sum, is returned by the bank for non-payment, Tenant shall pay to Landlord immediately on demand, as Additional Rent, all expenses incurred by Landlord as a result thereof. 22.27 NO RECORDATION OF LEASE. Neither this Lease nor any memorandum hereof may be recorded. 22.28 AUTHORITY. If Tenant is a corporation or partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease. Tenant shall, within thirty (30) days following execution of this Lease, deliver to Landlord evidence of such authority satisfactory to Landlord. 22.29 INTERPRETATION. This Lease shall be construed fairly according to its terms without regard to which party, or which party's attorneys, prepared its form. 22.30 ADDITIONAL PROVISIONS. Those additional provisions set forth in EXHIBIT "E", if any, are hereby incorporated by this reference as if fully set forth herein. 22.31 WAIVER OF RIGHT TO TRIAL BY JURY. Tenant and Landlord each hereby waives the right to trial by jury. 22.32 LETTER OF CREDIT. Notwithstanding anything to the contrary contained herein, upon ten (10) days prior written notice to Landlord, Tenant may replace $150,000 of the Security Deposit with an irrevocable standby letter of credit ("Letter of Credit") in favor of Landlord in the amount of $150,000.00 which shall be (i) from a bank reasonably acceptable to Landlord, (ii) in the form and content of that attached hereto as Exhibit "C", and (iii) subject to the conditions stated in this paragraph. The Letter of Credit shall have a term of at least 12 months and be automatically renewed (or a reasonably satisfactory replacement Letter of Credit from a bank acceptable to Landlord shall be in place in strict accordance with the terms hereof) at least thirty (30) days prior to expiration of each 12 month period for additional periods of 12 months each until the 30th day following the expiration of the Term. The Letter of Credit shall be held by Landlord as additional security for the full and faithful performance by Tenant -29- of the terms, covenants and conditions of this Lease during the Term. Provided that Tenant is not and has not been in default (beyond applicable notice and cure periods) under this Lease, the amount of the Letter of Credit shall be reduced on the first day of each of the following months in accordance with the schedule set forth below:
Letter of Credit Month of Term Reduced Amount ------------- ---------------- 19 $120,000 31 $ 96,000 43 $ 76,800 55 $ 61,440
Within five (5) days following Landlord's demand therefor, Tenant shall execute an amendment to this Lease to reflect Tenant's election to replace a portion of the cash Security Deposit with the Letter of Credit. If Tenant breaches any of the terms or conditions of this Lease (beyond applicable notice and cure periods), or if Tenant has filed a voluntary petition under the United States Bankruptcy Code, or Tenant's creditors have filed an involuntary petition under the United States Bankruptcy Code, then Landlord may draw upon the Letter of Credit for the payment of the required amount of any sum in default, and for the payment of any amount that Landlord may spend or may become obligated to spend by reason of Tenant's default, and to compensate Landlord for any other loss or damage that Landlord suffers by reason of Tenant's default to the extent Landlord is entitled to compensation therefor pursuant to the terms of this Lease (any amount of the Letter of Credit which is drawn upon by Landlord in accordance with the provisions hereof, but is not used or applied in accordance with this Lease, shall be deemed a part of the Security Deposit). The use, application or retention of the Letter of Credit, or any portion thereof, shall not prevent Landlord from exercising any other rights or remedies provided under this Lease, it being intended that Landlord shall not be required to proceed against the Security Deposit and/or the Letter of Credit, and shall not operate as a limitation on any recovery to which Landlord may otherwise be entitled. Notwithstanding the foregoing, if Tenant (a) becomes a publicly traded company on a major national exchange, AND (b) Tenant has maintained a tangible net worth of more than $50,000,000.00 (as reasonably determined by Landlord), then within ten (10) days following Landlord's receipt of evidence of the items described in (a) and (b), Tenant may cause the Letter of Credit to be canceled. LANDLORD: TENANT: NEWCROW, a California general eTOYS, INC., a Delaware corporation partnership By: Crow Los Angeles Limited, By: /s/ Edward C. Lenk ----------------------------- a Texas limited partnership Its: CEO -------------------------- By /s/ Illegible: By: /s/ Frank C. Han ---------------------------- ----------------------------- Authorized Agent Its: Secretary -------------------------- -30- EXHIBIT "A" Site Plan INTENTIONALLY OMITTED EXHIBIT "B" INTENTIONALLY OMITTED EXHIBIT "C" Form of Letter of Credit IRREVOCABLE STANDBY LETTER OF CREDIT NO. --------------- , 199 - ------------ -- - -------------------------- - -------------------------- - -------------------------- Ladies and Gentlemen: We hereby establish our Irrevocable Standby Letter of Credit in your favor for the account of ______________: for an aggregate amount of $_____________________ available to you by your drafts as SIGHT ON US and accompanied by the following documents: 1. Original Irrevocable Standby Letter of Credit; and 2. Beneficiary's or its designee's signed certificate dated not more than ten (10) calendar days before the date of the drawing under this letter of credit, executed by Beneficiary or its designee and stating that either one or more of the following events has occurred: (a) Tenant has defaulted (beyond applicable notice and cure periods) under any of the terms, covenants or conditions under that certain Lease Agreement dated _________, 199_, by and between Landlord and Tenant ("Lease"); or (b) The filing of any voluntary petition by Tenant (or involuntary petition by Tenant's creditors) under the United States Bankruptcy Code; or (c) Tenant has failed to procure and deliver a replacement Letter of Credit reasonably satisfactory to Beneficiary on or before thirty (30) days prior to the expiration of the Letter of Credit. It is a condition of this Irrevocable Standby Letter of Credit that it shall be deemed automatically extended for a period of one year from the present or each future expiration date, unless thirty (30) days prior to the expiration date we shall notify the Beneficiary by registered mail that we elect not to renew this Letter of Credit. Each draft drawn hereunder must bear the clause: "Drawn under __________ Irrevocable Standby Letter of Credit No. __________ dated __________." We hereby agree with you that drafts drawn under and in compliance with the terms of this Credit will be duly honored upon presentation and delivery of documents as specified to _______________ on or before _______________. This Letter of Credit is freely transferrable in its entirety without our consent or approval to a subsequent owner of the Building, but with written notice to us. In the event of such transfer, the transferee shall be deemed the beneficiaries hereunder in the full place and stead and with all the rights hereunder of the Original Beneficiary. This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500. - ------------------------------ Authorized Signature -1- EXHIBIT "D" TENANT SIGN CRITERIA INTENTIONALLY OMITTED EXHIBIT "E" ADDITIONAL LEASE PROVISIONS A. OPTION TO EXTEND TERM. Landlord grants to Tenant one (1) option to extend the Term of this Lease for a sixty (60) month period (the "Option") commencing upon the expiration of the initial Term (or upon the expiration of the preceding Option if any), upon each of the following conditions and terms: 1. Tenant shall give to Landlord, and Landlord shall actually receive, on a date which is at least six (6) months and not more than twelve (12) months prior to the then scheduled expiration date of the Term, a written notice of Tenant's exercise of such Option (the "Option Notice"), time being of the essence. If the Option Notice is not timely so given and received, such Option shall automatically expire. 2. Tenant shall have no right to exercise an Option, notwithstanding any provision hereof to the contrary, (a) during the time commencing from the date Landlord gives to Tenant a notice of default pursuant to Paragraph 18.10 of this Lease and continuing until the noncompliance alleged in said notice of default is cured, or (b) during the period of time commencing on the day after a monetary obligation to Landlord is due from Tenant and unpaid and continuing until the obligation is paid, or (c) if Landlord has given to Tenant three or more notices of default under Paragraph 18.10 of this Lease, whether or not the defaults are cured, or Tenant has been late on three or more occasions in the payment of a monetary obligation to Landlord (provided that Landlord has delivered notice of the same to Tenant), during the 12 month period of time immediately prior to the time that Tenant attempts to exercise the Option, or (d) if Tenant has committed any non-curable breach, or is otherwise in default (beyond applicable notice and cure periods) of any of the terms, covenants or conditions of this Lease. 3. The period of time within which the Option may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise an Option because of the provisions of Paragraph A.2 above. 4. All Option rights of Tenant under this Paragraph A. shall terminate and be of no further force or effect, notwithstanding Tenant's due and timely exercise of the Option, if, after such exercise and during the initial Term of this Lease (as and if previously extended), (a) Tenant fails to pay to Landlord a monetary obligation of Tenant for a period of ten (10) days after such obligation becomes due (provided that Landlord has delivered notice of the same to Tenant), or (b) Tenant fails to commence to cure a default specified in Paragraph 18.10 of this Lease within ten (10) days after the date that Landlord gives notice to Tenant of such default and/or Tenant fails thereafter to diligently prosecute said cure to completion within thirty (30) days after the date of such notice, or (c) Landlord gives to Tenant two (2) or more notices of default under Paragraph 18.10 of this Lease, or Tenant is late on two (2) or more occasions in the payment of a monetary obligation to Landlord (provided that Landlord has delivered notice of the same to Tenant), whether or not the defaults are cured, or (d) Tenant has committed any incurable breach, or is otherwise in default (beyond applicable notice and cure periods) of any of the terms, covenants and conditions of this Lease. 5. The Option granted to Tenant in this Lease is personal to the original Tenant and may be exercised only by the original Tenant or an Affiliate Entity that has been assigned this Lease while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Tenant. The Option herein granted to Tenant is not assignable separate and apart from this Lease, nor may the Option be separated from this Lease in any manner, either by reservation or otherwise. 6. All of the terms and conditions of this Lease except where specifically modified by this Paragraph A shall apply during the extended Term. -1- 7. The monthly Base Rent payable during the first year of any extended Term (each of which such extended Terms is herein referred to as an "Option Period") shall be equal to the then current fair market value for the Premises determined as of the beginning of such Option Period, as follows: (i Promptly following receipt by Landlord of Tenant's Option Notice, Landlord and Tenant shall attempt to reach agreement on the initial Base Rent for the Option Period, which Base Rent shall be set at the then current fair market monthly rental value for the Premises. If Landlord and Tenant are able to agree on the initial Base Rent for the Option Period, Landlord and Tenant shall immediately execute an amendment to this Lease stating the initial Base Rent for such Option Period. (ii If the parties are unable to agree on the initial Base Rent for the Option Period within forty-five (45) days following Landlord's receipt of the Option Notice, then each party, at its cost and by giving notice to the other party, shall have ten (10) days within which to appoint an MAI full-time commercial appraiser experienced in the area in which the Premises are located, to appraise and set the initial Base Rent for such Option Period at the then current fair market monthly rental value of the Premises for a term equal to the Option Period. If a party does not appoint an appraiser within such ten (10) day period, the single appraiser appointed shall be the sole appraiser and shall set the initial Base Rent for such Option Period. If two appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the initial Base Rent for such Option Period. If they are unable to agree within forty five (45) days after the second appraiser has been appointed, they shall attempt to select a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two appraisers are given to set the initial Base Rent for such Option Period. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days notice to the other party, may apply to the presiding judge of the Superior Court of the County in which the Premises are located, for the selection of a third appraiser who meets the qualifications stated in this paragraph. Each of the parties shall bear the cost of its own appraiser and one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. (iii Within twenty (20) days after the selection of the third appraiser, a majority of the appraisers shall set the initial Base Rent for the Option Period. If a majority of the appraisers are unable to agree upon the initial Base Rent within the stipulated period of time, the two closest appraisals shall be added together and their total divided by two, and the resulting quotient shall be the initial Base Rent for the Premises during such Option Period. In no event, however, shall the initial Base Rent for such Option Period be less than the Base Rent payable during the immediately preceding period. 8. If the Base Rent for the initial year of an Option Period has not been determined by the commencement date of the Option Period, then until such Base Rent is determined, Tenant shall pay Base Rent to Landlord at the rate in effect immediately preceding the Option Period, and if the actual Base Rent for the initial year of the Option Period is determined to be higher, then within ten (10) days after the determination of such higher Base Rent, Tenant shall pay to Landlord the difference for each month of the Option Period for which Base Rent has already become due. -2- EXHIBIT "F" ENVIRONMENTAL QUESTIONNAIRE FOR OFFICE USE ONLY: PROPOSED LEASE COMMENCEMENT DATE: _____________ MARKETING DIRECTOR: __________ ORIGINAL RENEWAL EXPANSION - ------------------------------------------------ - ------------------------------------------------ PRE-LEASING ENVIRONMENTAL EXPOSURE QUESTIONNAIRE (To be completed prior to Lease Approval) PROPERTY ADDRESS: 6000 Peachtree Street ------------------------------------------------------ Commerce, California 90040 ------------------------------------------------------ PROPOSED TENANT: eToys, Inc. ------------------------------------------------------ ------------------------------------------------------ (Include full legal name of proposed tenant and any d/b/a) CURRENT ADDRESS: 1640 Fifth Street, Suite 124 ------------------------------------------------------ Santa Monica, CA 90401 ------------------------------------------------------ DESCRIPTION OF PROPOSED USE OF PROPERTY: Warehousing and distribution of toys ------------------------------------- and general office purposes - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - ------------------------------------------ - ------------------------------------------ PLEASE ANSWER THE FOLLOWING QUESTIONS ACCURATELY AND FULLY, ATTACHING ADDITIONAL PAGES IF NECESSARY. YOUR RESPONSES TO THIS QUESTIONNAIRE, INCLUDING ANY AND ALL ATTACHMENTS, SHALL BE INCORPORATED AS REPRESENTATIONS AND WARRANTIES IN THE LEASE WHEN EXECUTED, AND INCORRECT, MISLEADING OR MATERIALLY INCOMPLETE RESPONSES SHALL BE DEEMED A BREACH OF SAID LEASE. 1. Will any of the following chemicals, petroleum products or hazardous materials be made, used, placed, or stored on the property in quantities GREATER than the minimum quantity listed in column (1) below? If yes, please mark column(s) (2), (3), and/or (4) as applicable.
(1) (2) (3) (4) (5) MINIMUM CATEGORIES OF CHEMICALS QUANTITY MADE USED PLACED STORED ----------------------- -------- ---- ---- ------ ------ Solvents, Degreasers 1 Gallon ____ ____ ____ ____ Paint Thinners/Remover 1 Gallon ____ ____ ____ ____ Paint 5 Gallons ____ ____ ____ ____ Oil (New) 5 Gallons ____ ____ ____ ____ Gasoline 1 Gallon ____ ____ ____ ____ Antifreeze 5 Gallons ____ ____ ____ ____ Other Automotive Fluids 1 Gallon ____ ____ ____ ____ Diesel Fuel 5 Gallons ____ ____ ____ ____ Heavy (Toxic) Metal Containing Compounds 1 Pound ____ ____ ____ ____ Liquid Plastics/Activators 1 Gallon ____ ____ ____ ____ Flammable Gases 20 Cu Ft ____ ____ ____ ____ Toxic Gases 20 Cu Ft ____ ____ ____ ____ Acids 1 Gl/5 Lb ____ ____ ____ ____ Bases (soda, ash, lye, etc.) 1 Gl/5 Lb ____ ____ ____ ____ Other Flammable Materials 1 Gl/5 Lb ____ ____ ____ ____ Other Corrosive Materials 1 Gl/5 Lb ____ ____ ____ ____ Other Toxic Materials 1 Gl/5 Lb ____ ____ ____ ____ Other Reactive Materials 1 Gl/5 Lb ____ ____ ____ ____ Liquid Hazardous Waste 1 Gallon ____ ____ ____ ____ Solid Hazardous Waste 1 Pound ____ ____ ____ ____
-1- 1.1 If required for your operations, please provide Landlord a copy of your Hazardous Material Business Management Plan. YES NO 1.2 Do your operations require H-occupancy storage or other special construction? X --- --- If yes, please explain: --------------------------------------------- --------------------------------------------- 2. Will any of the following structures be used on the property? If yes, describe the contents of each. X --- --- FEATURE CONTENTS ------- -------- Underground Tank ------------------------------- --- --- Above-ground Tank ------------------------------- --- --- Clarifier ------------------------------- --- --- Sump ------------------------------- --- --- Trench ------------------------------- --- --- Waste Pile ------------------------------- --- --- Chemical Piping ------------------------------- --- --- Floor Drain ------------------------------- --- --- Other ------ ------------------------------- --- --- ------------- ------------------------------- --- --- 2.1 Please describe plans for secondary containment and leak monitoring. --------------------------------------------- --------------------------------------------- 3. Will any hazardous wastes or liquid wastes be generated by on site operations or brought on to the property? X --- --- If yes, complete the following: 3.1 Identify each such hazardous waste or liquid waste. --------------------------------------------- --------------------------------------------- 3.2 Describe onsite storage, including secondary containment, and/or treatment. --------------------------------------------- --------------------------------------------- 3.3 Describe yours plans for disposal of hazardous wastes or liquid waste including off-site disposal. --------------------------------------------- --------------------------------------------- 4. Will operations result in any wastewater discharges to the sewer? X --- --- Will operations result in any wastewater discharges to locations other than the sewer (including storm drain)? --- --- If yes, describe each wastewater stream and plans for handling wastewater discharges: -2- --------------------------------------------- --------------------------------------------- 4.1 Have you performed any testing or analysis of X wastewater discharges or other wastewater --- --- effluent from your current facility? If yes, attach the results of any such testing or analysis. 4.2 Will your operations require any stormwater X discharge permits? --- --- If yes, describe: --------------------------------------------- --------------------------------------------- 5. Will activities on the property require warnings to X be given to workers or visitors on the Leased Premises --- --- or the surrounding community? If yes, please describe how you will provide such communications or warnings. --------------------------------------------------- --------------------------------------------------- 6. Will operations result in any air emissions (including X dust)? --- --- If yes, describe: --------------------------------------------------- --------------------------------------------------- 6.1 Will permits from the Southern Coast Air Quality X Management District be required? --- --- 7. Will operations result in air emissions which include X hazardous or toxic air pollutants? --- --- 7.1 If yes, will any public notice or disclosure be --- --- required? 8. Will operations be subject to Risk Management & X Preview Planning requirements or other risk reductionc --- --- requirements? 9. Will your operations involve any on-site vehicle or X equipment maintenance, repair or cleaning, including --- --- but not limited to oil changes, oil filter changes, brake pad replacement, battery changes, radiator flushing, radiator fluid replacement, and equipment, and equipment wash down and cleaning? If yes, describe all such maintenance: --------------------------------------------------- --------------------------------------------------- 9.1 Will these on-site vehicles or equipment use --- --- batteries? If yes, describe battery storage method: --------------------------------------------- --------------------------------------------- 10. Will your operations include a machine shop? X --- --- If yes, describe all operation: -3- --------------------------------------------------- --------------------------------------------------- 11. Will your operations include any metal plating or X --- --- metal fabrication? If yes, describe: --------------------------------------------------- --------------------------------------------------- 12. Will your operations include the use of solvents? X --- --- If yes, describe: --------------------------------------------------- --------------------------------------------------- 13. Has your present facility or operation ever been the X subject of an environmental investigation, an --- --- environmental enforcement action, or permit revocation proceeding? If yes describe: --------------------------------------------------- --------------------------------------------------- 14. Have you ever been identified as a potentially X responsible party for any environmental cleanup, --- --- compliance or abatement proceedings? If yes, describe: --------------------------------------------------- --------------------------------------------------- 15. Have you ever received a notice of violation or notice X to comply from any environmental regulatory agency --- --- within the past five years? If yes, describe: --------------------------------------------------- --------------------------------------------------- 16. Have you had any complaints from neighbors relating X to noise, odor, air emissions, or dust at your --- --- present facility? If yes, describe: --------------------------------------------------- --------------------------------------------------- 16.1 Have you had any complaints relating to X hazardous materials handling, storage, --- --- treatment or disposal from neighbors at your present facility? If yes, describe: --------------------------------------------- --------------------------------------------- -4- 17. Will the proposed use of the property require the X filing of any environmental reports or other --- --- documents to any agencies? 18. Attach copies of all Material Safety Data Sheets ("MSDS") for all chemicals you intend to use, sore, or handle on the property. 19. Has an Environmental Audit been conducted at your X present facility? (If yes, attach a copy of any --- --- report prepared in connection with any such audit.) 20. Please provide the Landlord your Emergency Response Plan and any contingency or emergency plans for the property in case of an accidental release of hazardous materials. 21. Identify the name, title and qualifications/experience of person responsible for your environmental, health and safety program: Name: Randy Villa ---------------------------------------------------------------------- Title: Director, Distribution --------------------------------------------------------------------- Qualifications/experience: 10 year warehouse management experience ------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- 22. Name and telephone number of person to contact for additional information: Name: Randy Villa ---------------------------------------------------------------------- Title: Director, Distribution --------------------------------------------------------------------- Telephone Number: (510) 487-2467 ---------------------------------------------------------- 23. Please provide any additional information/comments concerning your environmental compliance program and environmental compliance history: --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- The undersigned hereby certifies that the information above is correct and complete. eToys Inc. - ------------------------------------------------------------- Name of Proposed Tenant By: /s/ Jordan Posell -------------------------------------------------------- Name: Jordan Posell -------------------------------------------------------- Title: Director, Finance ------------------------------------------------------- Date:06/22/98 ------------------------------------------------------- -5- TABLE OF CONTENTS
Page ---- 1. PREMISES AND TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.1 Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . 3 1.2 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 Condition of Premises . . . . . . . . . . . . . . . . . . . . . 3 1.4 Early Entry into Premises . . . . . . . . . . . . . . . . . . . 4 2. RENT AND SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . 4 2.1 Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2 Adjustment of Base Rent . . . . . . . . . . . . . . . . . . . . 4 2.3 Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . 4 2.4 Tenant's Proportionate Share. . . . . . . . . . . . . . . . . . 5 2.5 Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . 5 2.5.1 Definition. . . . . . . . . . . . . . . . . . . . . . 5 2.5.2 Monthly Payments and Annual Reconciliation. . . . . . 5 2.5.3 Tenant's Audit Rights . . . . . . . . . . . . . . . . 5 2.6 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.7 Late Charges. . . . . . . . . . . . . . . . . . . . . . . . . . 7 3. USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.1 Use of Premises . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . 8 3.3 Use of Common Areas . . . . . . . . . . . . . . . . . . . . . . 9 4. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.1 Payment of Real Property Taxes. . . . . . . . . . . . . . . . . 9 4.2 Liability for all Personal Property Taxes . . . . . . . . . . .10 5. LANDLORD'S MAINTENANCE AND REPAIR . . . . . . . . . . . . . . . . . . .10 5.1 Landlord's Maintenance. . . . . . . . . . . . . . . . . . . . .10 5.2 Procedure and Liability . . . . . . . . . . . . . . . . . . . .12 6. TENANT'S MAINTENANCE AND REPAIR . . . . . . . . . . . . . . . . . . . .12 6.1 Tenant's Maintenance. . . . . . . . . . . . . . . . . . . . . .12 6.2 Maintenance/Service Contracts . . . . . . . . . . . . . . . . .12 7. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 8. LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 9. SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 9.1 Landlord's Signage Program. . . . . . . . . . . . . . . . . . .14 9.2 Criteria for Changes. . . . . . . . . . . . . . . . . . . . . .14 10. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 11. FIRE AND CASUALTY DAMAGE. . . . . . . . . . . . . . . . . . . . . . . .15 11.1 Notice of Destruction . . . . . . . . . . . . . . . . . . . . .15 11.2 Loss Covered by Insurance . . . . . . . . . . . . . . . . . . .15 11.3 Loss Not Covered by Insurance . . . . . . . . . . . . . . . . .15 11.4 Loss Caused by Tenant or Tenant's Parties . . . . . . . . . . .16 11.5 Destruction Near End of Term. . . . . . . . . . . . . . . . . .16 11.6 Destruction of Improvements and Personal Property . . . . . . .16 11.7 Exclusive Remedy. . . . . . . . . . . . . . . . . . . . . . . .16 11.8 Lender Discretion . . . . . . . . . . . . . . . . . . . . . . .16 12. INDEMNITY AND INSURANCE . . . . . . . . . . . . . . . . . . . . . . . .16 12.1 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . .16 12.2 Landlord's Insurance. . . . . . . . . . . . . . . . . . . . . .17
-2- 12.3 Tenant's Insurance Obligations. . . . . . . . . . . . . . . . .17 12.3.1 General Liability Insurance . . . . . . . . . . . . .17 12.3.2 Property Insurance. . . . . . . . . . . . . . . . . .17 12.3.3 Workers' Compensation Insurance . . . . . . . . . . .18 12.4 Evidence of Coverage. . . . . . . . . . . . . . . . . . . . . .18 12.5 Waivers of Subrogation. . . . . . . . . . . . . . . . . . . . .18 13. LANDLORD'S RIGHT OF ACCESS. . . . . . . . . . . . . . . . . . . . . . .18 14. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . .19 14.1 Landlord's Consent. . . . . . . . . . . . . . . . . . . . . . .19 14.2 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 14.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . .19 14.4 Bonus Rent. . . . . . . . . . . . . . . . . . . . . . . . . . .19 14.5 Continuing Tenant Obligations . . . . . . . . . . . . . . . . .20 14.6 Waiver, Default and Consent . . . . . . . . . . . . . . . . . .20 14.7 Restructuring of Business Organizations . . . . . . . . . . . .20 14.8 Assignment of Sublease Rent . . . . . . . . . . . . . . . . . .20 14.9 Assignment in Bankruptcy. . . . . . . . . . . . . . . . . . . .20 14.10 Assumption of Obligations . . . . . . . . . . . . . . . . . . .20 15. CONDEMNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 15.1 Total Taking. . . . . . . . . . . . . . . . . . . . . . . . . .21 15.2 Partial Taking. . . . . . . . . . . . . . . . . . . . . . . . .21 15.3 Condemnation Award. . . . . . . . . . . . . . . . . . . . . . .21 15.4 Exclusive Remedy. . . . . . . . . . . . . . . . . . . . . . . .21 16. SURRENDER AND HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . .21 16.1 Surrender . . . . . . . . . . . . . . . . . . . . . . . . . . .21 16.2 Holding Over. . . . . . . . . . . . . . . . . . . . . . . . . .21 16.3 Entry at End of Term. . . . . . . . . . . . . . . . . . . . . .22 17. QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 18. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . .22 18.1 Failure to Pay Rent . . . . . . . . . . . . . . . . . . . . . .22 18.2 Insolvency. . . . . . . . . . . . . . . . . . . . . . . . . . .22 18.3 Appointment of Receiver . . . . . . . . . . . . . . . . . . . .22 18.4 Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . .22 18.5 Attachment. . . . . . . . . . . . . . . . . . . . . . . . . . .22 18.6 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . .22 18.7 Certificates. . . . . . . . . . . . . . . . . . . . . . . . . .23 18.8 Failure to Discharge Liens. . . . . . . . . . . . . . . . . . .23 18.9 False Financial Statement . . . . . . . . . . . . . . . . . . .23 18.10 Failure to Comply with Lease Terms. . . . . . . . . . . . . . .23 18.11 Guarantor Default . . . . . . . . . . . . . . . . . . . . . . .23 19. LANDLORD'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . .23 19.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . .23 19.2 Continuation of Lease . . . . . . . . . . . . . . . . . . . . .24 19.3 Appointment of Receiver . . . . . . . . . . . . . . . . . . . .24 19.4 Late Charge . . . . . . . . . . . . . . . . . . . . . . . . . .24 19.5 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . .25 19.6 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . .25 19.7 Injunction. . . . . . . . . . . . . . . . . . . . . . . . . . .25 20. TENANT'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . .25 20.1 Landlord's Default. . . . . . . . . . . . . . . . . . . . . . .25 20.2 Tenant's Remedies . . . . . . . . . . . . . . . . . . . . . . .25 20.3 Landlord Default/Self-Help Rights . . . . . . . . . . . . . . .25 20.4 Non-Recourse. . . . . . . . . . . . . . . . . . . . . . . . . .26 20.5 Sale of Premises. . . . . . . . . . . . . . . . . . . . . . . .26
-3- 21. MORTGAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 22. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .26 22.1 Singular and Plural . . . . . . . . . . . . . . . . . . . . . .26 22.2 Interest on Past-Due Obligations. . . . . . . . . . . . . . . .27 22.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . .27 22.4 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . .27 22.5 Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . .27 22.6 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . .27 22.7 Certificates. . . . . . . . . . . . . . . . . . . . . . . . . .27 22.8 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . .27 22.9 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . .27 22.10 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 22.11 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . .28 22.12 Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 22.13 Survival of Obligations . . . . . . . . . . . . . . . . . . . .28 22.14 Severability. . . . . . . . . . . . . . . . . . . . . . . . . .28 22.15 Security Measures . . . . . . . . . . . . . . . . . . . . . . .28 22.16 Easements . . . . . . . . . . . . . . . . . . . . . . . . . . .28 22.17 Multiple Parties. . . . . . . . . . . . . . . . . . . . . . . .29 22.18 Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . . .29 22.19 No Third Party Beneficiaries. . . . . . . . . . . . . . . . . .29 22.20 Effective Date/Nonbinding Offer . . . . . . . . . . . . . . . .29 22.21 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 22.22 Water, Oil and Mineral Rights . . . . . . . . . . . . . . . . .29 22.23 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . .29 22.24 Broker's Fees . . . . . . . . . . . . . . . . . . . . . . . . .30 22.25 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . .30 22.26 Return of Check . . . . . . . . . . . . . . . . . . . . . . . .30 22.27 No Recordation of Lease . . . . . . . . . . . . . . . . . . . .30 22.28 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . .30 22.29 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . .30 22.30 Additional Provisions . . . . . . . . . . . . . . . . . . . . .30 22.31 Waiver of Right to Trial by Jury. . . . . . . . . . . . . . . .30 22.32 Letter of Credit. . . . . . . . . . . . . . . . . . . . . . . .30
-4- FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE ("Amendment") is made and entered into as of the 15th day of October, 1998, by and between NEWCROW, a California general partnership ("Landlord"), on the one hand, and eTOYS, INC., a Delaware corporation ("Tenant"), on the other hand. RECITALS A. Pursuant to the Standard Industrial Lease Agreement between Landlord and Tenant dated June 26, 1998 (the "Lease"), Tenant has leased from Landlord approximately 49,850 rentable square feet of space commonly known as 6000 Peachtree Street, Commerce, California (the "Premises"). B. Landlord and Tenant desire to modify the Lease to expand the Premises in accordance with the terms of this Amendment. C. Unless otherwise defined herein, all capitalized terms used herein shall have the meanings ascribed to them in the Lease. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. PREMISES. Effective as of the Additional Premises Commencement Date (as defined below), the "Premises" shall be expanded to also include those certain premises consisting of nine thousand seven hundred ninety (9,790) rentable square feet of space commonly known as 6060 Peachtree Street, Commerce, California and identified on Exhibit "1" attached hereto and made a part hereof (the "Additional Premises"), resulting in the aggregate rentable square footage of the Premises as of the Additional Premises Commencement Date being fifty nine thousand six hundred forty (59,640) rentable square feet. Landlord and Tenant accept the above measurement of the Additional Premises and agree that it shall not be remeasured or changed. From and after the Additional Premises Commencement Date, the term "Premises" shall mean the original Premises plus the Additional Premises. 2. ADDITIONAL PREMISES COMMENCEMENT DATE. The "Additional Premises Commencement Date" shall be October 15, 1998, on or before which date Landlord has or will deliver possession of the Additional Premises to Tenant. To prepare the Additional Premises for Tenant's occupancy, Landlord has moved the existing demising wall to the east to incorporate the Additional Premises in the Premises and demolished the L-shaped wall, as shown on Exhibit "2" attached hereto and made a part hereof (collectively, "Landlord's Work"). Tenant has agreed to pay the existing subtenant occupying a portion of the Additional Premises the sum of One Thousand Dollars ($1,000) to induce it to vacate the Additional Premises early. 3. BASE RENT. (a) Effective as of the Additional Premises Commencement Date through the end of the twelfth (12th) month of the Term, Base Rent shall be increased by Three Thousand Nine Hundred Sixteen and 00/100 Dollars ($3,916.00) per month, resulting in the Base Rent being Twenty Three Thousand Eight Hundred Fifty Six and 00/100 Dollars ($23,856.00) per month. On or before the Additional Premises Commencement Date, Tenant shall pay to Landlord the additional Base Rent for the Additional Premises on a prorated basis for the period from and including the Additional Premises Commencement Date through the end of the calendar month in which the Additional Premises Commencement Date occurs. (b) Paragraph 2.2 of the Lease is deleted, and the following is substituted therefor: "2.2 ADJUSTMENT OF BASE RENT
MONTHS OF TERM BASE RENT -------------- --------- 13-24 $24,452.40 per month 25-36 $25,063.71 per month 37-48 $25,690.30 per month 49-60 $26,332.56 per month"
4. TENANT'S PROPORTIONATE SHARE. Effective as of the Additional Premises Commencement Date, "Tenant's Proportionate Share" shall increase to fifty seven and two/one hundredth's percent (57.02%) of the Building, and Tenant shall be responsible for fifty seven and two/one hundredth's percent (57.02%) of all Taxes, Landlord's cost of insurance and Operating Expenses pursuant to Paragraph 2.5 of the Lease. 5. PARKING. Effective as of the Additional Premises Commencement Date, Item 9 of the Basic Lease Provisions is amended to read as follows: "9. Parking: 44 automobiles and 12 trucks (Paragraph 3.3)." 6. CONDITION OF ADDITIONAL PREMISES. Tenant acknowledges that it has inspected and accepts the Additional Premises in their present "as-is," "where-is" condition as suitable for the purpose for which the Additional Premises are leased. Landlord has completed the Landlord's Work. Tenant shall not be required to bear any of the cost of the Landlord's Work. Tenant will complete at its expense any lighting and electrical work necessitated by the movement of the demising wall which is part of the Landlord's Work. Utilities will be separately metered to the Additional Premises or added to the separate meters for the Premises. -2- 7. DEMOLITION OF EXISTING OFFICE. Tenant shall be permitted to demolish the existing approximately 800 square foot office in the Additional Premises. Except as hereafter provided in this Section 7, Tenant shall bear the cost and expense of such demolition. The terms of Paragraph 7 of the Lease shall be applicable to Tenant's demolition of the existing office, except that Landlord hereby approves of the demolition and will not require bonding or plan or working drawing approval with respect to such demolition work. Unless Landlord otherwise notifies Tenant, Tenant at its sole expense shall be required to reconstruct the existing office in the Additional Premises to its original condition upon the expiration or sooner termination of the Lease, or if Tenant fails to do so, then Landlord may reconstruct such existing office, and Tenant shall be required to reimburse to Landlord immediately upon demand the reasonable, out of pocket expenses paid by Landlord for such reconstruction. Upon delivery by Tenant to Landlord of a factually correct notice of the completion of Tenant's demolition of the existing office, Landlord shall give a credit to Tenant of Two Thousand Dollars ($2,000) against the next monthly payment of Base Rent becoming due after delivery to Landlord of such notice. 8. BROKER. Tenant and Landlord each represent and warrant to the other that it has dealt with no broker, agent or other person in connection with this transaction other than Metrospace Corporation (Matthew Miller) and Trammell Crow Southern California ("Brokers"), and that, except for Brokers, no broker, agent or other person which it has dealt with brought about this transaction, and Tenant and Landlord each hereby agrees to indemnify, defend, protect and hold the other harmless from and against any claims, losses, liabilities, demands, costs, expenses or causes of action by any other broker, agent or other person, claiming any commission or other form of compensation by virtue of having dealt with the indemnifying party with regard to this transaction. 9. FURTHER ASSURANCES. In addition to the obligations required to be performed under the Lease, as amended hereby, Landlord and Tenant shall each perform such other acts, and shall execute, acknowledge and/or deliver such other instruments, documents and other materials, as may be reasonably required in order to accomplish the intent and purposes of the Lease, as hereby amended. 10. AUTHORITY. Each party hereby represents and warrants to the other that it has the due power and authority to enter into this Amendment and to be bound by the terms hereof. 11. BINDING EFFECT. This Amendment shall be binding upon and inure to the benefit of Landlord, its successors and assigns and Tenant and its permitted successors and permitted assigns. 12. ATTORNEYS' FEES. Should any party initiate a legal proceeding against any other party, including an arbitration, then the prevailing party shall be entitled to receive reasonable attorneys' fees and costs incurred in connection with such legal proceeding. -3- 13. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. 14. NO OTHER AMENDMENT. Except as modified by this Amendment, the provisions of the Lease shall remain unaffected and in full force and effect. To the extent that any terms or provisions of this Amendment are inconsistent with any terms or provisions of the Lease, the terms and provisions of this Amendment shall control. 15. ESTOPPEL. Tenant warrants, represents and certifies to Landlord that as of the date of this Amendment, to Tenant's actual knowledge, (a) Landlord is not in default under the Lease, and (b) Tenant does not have any defenses or offsets to payment of rent and performance of its obligations under the Lease as and when the same becomes due. IN WITNESS WHEREOF, this Amendment is executed as of the day and year aforesaid. LANDLORD TENANT NEWCROW, a California general eTOYS, INC., a Delaware corporation partnership By: Crow Los Angeles Limited, a Texas By: /s/ Edward C. Lenk limited partnership, General --------------------------- Partner Name: Edward C. Lenk ------------------------- Title: President --------------- By: /s/ illegible By: /s/ Frank Han ------------------------ --------------------------- Authorized Agent Name: Frank Han ------------------------- Title: Secretary --------------- -4- EXHIBIT "1" ADDITIONAL PREMISES INTENTIONALLY OMITTED EXHIBIT "2" LANDLORD'S WORK INTENTIONALLY OMITTED EX-10.14 21 EXHIBIT 10.14 INDEMNIFICATION AGREEMENT This Indemnification Agreement (the "AGREEMENT") is made as of ____________, 199__, by and between eToys Inc., a Delaware corporation (the "COMPANY"), and _________ (the "INDEMNITEE"). RECITALS The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and key employees, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and agents of the Company may not be willing to continue to serve as agents of the Company without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, and to indemnify its directors, officers and key employees so as to provide them with the maximum protection permitted by law. AGREEMENT In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows: 1. INDEMNIFICATION. (a) THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) MANDATORY PAYMENT OF EXPENSES. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a) or Section 1(b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 2. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment. 3. EXPENSES; INDEMNIFICATION PROCEDURE. (a) ADVANCEMENT OF EXPENSES. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in Section l(a) or Section 1(b) hereof (including amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. (b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in -2- writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company and shall be given in accordance with the provisions of Section 12(d) below. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) PROCEDURE. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than twenty (20) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within twenty (20) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) NOTICE TO INSURERS. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) SELECTION OF COUNSEL. In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel -3- by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. (a) SCOPE. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) NONEXCLUSIVITY. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested members of the Company's Board of Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in any such capacity at the time of any action, suit or other covered proceeding. 5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. -4- For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. 8. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or -5- advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; (c) INSURED CLAIMS. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such expenses or liabilities have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; or (d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 10. CONSTRUCTION OF CERTAIN PHRASES. (a) For purposes of this Agreement, references to the "COMPANY" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "OTHER ENTERPRISES" shall include employee benefit plans; references to "FINES" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "SERVING AT THE REQUEST OF THE COMPANY" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "NOT OPPOSED TO THE BEST INTERESTS OF THE COMPANY" as referred to in this Agreement. 11. ATTORNEYS' FEES. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee -6- with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 12. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of law. (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) CONSTRUCTION. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (d) NOTICES. Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. (e) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee's heirs, legal representatives and assigns. (g) SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of -7- Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company to effectively bring suit to enforce such rights. [Signature Page Follows] -8- The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement. ETOYS INC. By: ------------------------------ Title: ------------------------------ Address: 1640 Fifth Street, Suite 124 Santa Monica, CA 90401 AGREED TO AND ACCEPTED: INDEMNITEE: - --------------------------------------- (Signature) Address: ------------------------------ ------------------------------ -9- EX-10.19 22 EXHIBIT 10.19 EXHIBIT 10.19 December 5, 1998 John Hnanicek 2570 S.W. Beacon Hill Drive West Linn, Oregon 97068 Dear Candidate: eToys Inc. (the "Company") is pleased to offer you employment on the following terms: POSITION. You will serve in a full-time capacity as Chief Information Officer of the Company. You will report to the Company's Chief Executive Officer. You will be encouraged to participate in meetings of the Company's Board of Directors (the "Board") at the discretion of the Company's Chief Executive Officer. Your start date will be mutually agreed by you and the Company but will be no later than Monday January 18th, 1999. CASH COMPENSATION. You will be paid a monthly salary of not less than $12,500.00, which is equivalent to $150,000 on an annual basis, payable in monthly installments in accordance with the Company's standard payroll practices for salaried employees. In addition, you will receive a signing bonus of $60,000 payable in a lump sum in cash on or about your first day of employment with the Company. You will vest with respect to your signing bonus in 12 equal monthly installments for each of the 12 months during which you continue to be employed by the Company following the commencement of your employment. If your employment with the Company is terminated prior to the end of this 12th month period, you will be obligated to refund to the Company the unvested portion of your signing bonus. Your cash compensation will be reviewed annually by the Board. STOCK OPTIONS. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you stock options to purchase 200,000 shares of the Company's Common Stock. The exercise price will be equal to the fair market value of the Common Stock on the date of grant. The option will be an incentive stock option to the maximum extent permitted by applicable tax law and will be subject to the terms and conditions applicable to options granted under the Company's 1997 Stock Plan, as described in that Plan and the applicable stock option agreement (including customary transfer and "lock-up" restrictions). The option will be immediately exercisable, but the purchased shares will be subject to repurchase by the Company at the exercise price in the event that your employment terminates before you vest in the shares. You will vest in 1/4th of the option shares after twelve months of employment, and the balance will vest in monthly installments over the next 36 months of employment, as described in the applicable stock option agreement. If you are terminated by the Company without Cause within the first 6 months of employment, you will vest a number of shares equivalent to 1/8th of the option shares. If you are terminated by the Company without Cause within the first 6-12 months of employment, you will vest a number of shares equivalent to 1/48th of the option shares for each month of employment. "Cause" means (a) willful and repeated failure to comply with the lawful directions of the Board, (b) gross negligence or willful misconduct in the performance of your duties to the Company, (c) commission of any act of fraud against, or the misappropriation of material property belonging to, the Company or (d) 1 conviction of a crime that is materially injurious to the business or reputation of the Company, in each case as determined in good faith by the Board. BENEFITS. a. INSURANCE BENEFITS. The Company will provide you with standard medical and dental insurance benefits. In addition, the Company currently indemnifies all officers and directors to the maximum extent permitted by law, and you will be requested to enter into the Company's standard form of Indemnification Agreement giving you such protection. Pursuant to the Indemnification Agreement, the Company will agree to advance any expenses for which indemnification is available to the extent allowed by applicable law. b. VACATION. You will be entitled to 2 weeks paid vacation per year. MOVING ASSISTANCE. The Company will, on a basis mutually agreed to by you and the Company, enter into a relocation agreement with a relocation specialist to assist in the sale of your current residence. In addition, the company will pay a moving company to transport your belongings to the Los Angeles area. The Company will also pay for two months of rent, at a reasonable and mutually agreed monthly rental rate, toward temporary housing. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company employees, you will be required, as a condition to your employment with the Company, to sign the Company's standard Employee Information and Inventions Agreement, a copy of which is attached hereto as Exhibit A. PERIOD OF EMPLOYMENT. Your employment with the Company will be "at will", meaning that either you or the Company will be entitled to terminate your employment at any time and for any reason, with or without cause. Any contrary representations which may have been made to you are superseded by this offer. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation and benefits, as well as the Company's personnel policies and procedures, may change from time to time, the "at will" nature of your employment may only be changed in an express written agreement signed by you and a duly authorized officer of the Company. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated and, in such event, you would not be entitled to the severance payment set forth in the preceding paragraph. WITHHOLDING TAXES. All forms of cash compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes. CONFIDENTIALITY OF TERMS: You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. ENTIRE AGREEMENT. This letter and the Exhibit attached hereto contain all of the terms of your employment with the Company and supersede any prior understandings or agreements, whether oral or written, between you and the Company. AMENDMENT AND GOVERNING LAW. This letter agreement may not be amended or modified except by an express written agreement signed by you and a duly authorized officer of the Company. The terms of this letter agreement and the resolution of any disputes will be governed by California law. We hope that you find the foregoing terms acceptable. You may indicate your agreement with these terms and accept this offer by signing and dating both the enclosed duplicate original of this letter and the 2 enclosed Employee Information and Inventions Agreement and returning them to me. This offer of employment is contingent upon the satisfactory completion of reference checks regarding you past employment. As required by law, your employment with the Company is also contingent upon your providing legal proof of your identity and authorization to work in the United States. We look forward to your decision to join eToys Inc. no later than December 7th, 1998 at 5 p.m. Pacific Standard Time. Very truly yours, By: /s/ TOBY LENK -------------------------- Toby Lenk Chief Executive Officer eToys Inc. I have read and accept this employment offer: /s/ John R. Hnanicek Signature of Candidate Dated December 5, 1998 3 EX-10.20 23 EXHIBIT 10.20 [LETTERHEAD] December 28, 1998 Lou Zambello 50 Woodland Road Pownal, Maine 04609 Dear Candidate: eToys Inc. (the "Company") is pleased to offer you employment on the following terms: POSITION. You will serve in a full-time capacity as Senior Vice President of Operations of the Company. You will report to the Company's Chief Executive Officer. You will be encouraged to participate in meetings of the Company's Board of Directors (the "Board") at the discretion of the Company's Chief Executive Officer. Your start date will be December 31st, 1998. CASH COMPENSATION. You will be paid a monthly salary of not less than $16,667.00, which is equivalent to $200,000 on an annual basis, payable in monthly installments in accordance with the Company's standard payroll practices for salaried employees. In addition, you will receive a signing bonus of $115,000 payable on a schedule to be mutually agreed to by you and the Company, but in no case later than January 31st, 2000. You will vest with respect to your signing bonus in 12 equal monthly installments for each of the 12 months during which you continue to be employed by the Company following the commencement of your employment. If the Company terminates your employment for any reason, with or without cause (see definition of "cause" below) prior to the end of this 12 month period, or if you end your employment with the Company, you will be obligated to refund to the Company the unvested portion of your signing bonus. If the Company terminates your employment without cause within the first 12 months of your employment, you will receive a severance payment of $100,000, which is equivalent to 6 months of salary. Your cash compensation will be reviewed annually by the Board. STOCK OPTIONS. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you stock options to purchase 275,000 shares of the Company's Common Stock. The exercise price will be equal to the fair market value of the Common Stock on the date of grant. The option will be an incentive stock option to the maximum extent permitted by applicable tax law and will be subject to the terms and conditions applicable to options granted under the Company's 1997 Stock Plan, as described in that Plan and the applicable stock option agreement (including customary transfer and "lock-up" restrictions.) The option will be immediately exercisable, but the purchased shares will be subject to repurchase by the Company at the exercise price in the event that your employment terminates before you vest in the shares. You will vest in 1/4th of the option shares after twelve months of employment, and the balance will vest in monthly installments over the next 36 months of employment, as described in the applicable stock option agreement. If you are terminated by the Company without Cause within the first 6 months of employment, you will vest a number of shares equivalent to 1/8th of the option shares. If you are terminated by the Company without Cause within the first 6-12 months of employment, you will vest a number of shares equivalent to 1/48th of the option shares for each month of employment. If there is a change of control of the Company during the two year period immediately following the date of the commencement of your employment with the Company, you will vest in an additional number of unvested option shares equal to the number in which you would have vested if your employment had continued through the expiration of such two year period. 1 "Cause" means (a) willful and repeated failure to comply with the lawful directions of the Board, (b) gross negligence or willful misconduct in the performance of your duties to the Company, (c) commission of any act of fraud against, or the misappropriation of material property belonging to, the Company or (d) conviction of a crime that is materially injurious to the business or reputation of the Company, in each case as determined in good faith by the Board. BENEFITS. a. INSURANCE BENEFITS. The Company will provide you with standard medical and dental insurance benefits. In addition, the Company currently indemnifies all officers and directors to the maximum extent permitted by law, and you will be requested to enter into the Company's standard form of Indemnification Agreement giving you such protection. Pursuant to the Indemnification Agreement, the Company will agree to advance any expenses for which indemnification is available to the extent allowed by applicable law. b. VACATION. You will be entitled to 3 weeks paid vacation per year MOVING ASSISTANCE. For the first 6 months of your employment, it is anticipated that your family will remain in Maine, until the end of the school year. After 6 months, it is expected that you and your family will move to the Los Angeles area. The company will pay a moving company to transport your belongings to the Los Angeles area. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company employees, you will be required, as a condition to your employment with the Company, to sign the Company's standard Employee Information and Inventions Agreement, a copy of which is attached hereto as Exhibit A. PERIOD OF EMPLOYMENT. Your employment with the Company will be "at will", meaning that either you or the Company will be entitled to terminate your employment at any time and for any reason, with or without cause. Any contrary representations which may have been made to you are superseded by this offer. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation and benefits, as well as the Company's personnel policies and procedures, may change from time to time, the "at will" nature of your employment may only be changed in an express written agreement signed by you and a duly authorized officer of the Company. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated and, in such event, you would not be entitled to the severance payment set forth in the preceding paragraph. WITHHOLDING TAXES. All forms of cash compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes. CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax, or accounting specialists who provide you with individual legal, tax or accounting advice. ENTIRE AGREEMENT. This letter and the Exhibit attached hereto contain all of the terms of your employment with the Company and supersede any prior understandings or agreements, whether oral or written, between you and the Company. AMENDMENT AND GOVERNING LAW. This letter agreement may not be amended or modified except by an express written agreement signed by you and a duly authorized officer of the Company. The terms of this letter agreement and the resolution of any disputes will be governed by California law. 2 We hope that you find the foregoing terms acceptable. You may indicate your agreement with these terms and accept this offer by signing and dating both the enclosed duplicate original of this letter and the enclosed Employee Information and Inventions Agreement and returning them to me. This offer of employment is contingent upon the satisfactory completion of reference checks regarding you past employment. As required by law, your employment with the Company is also contingent upon your providing legal proof of your identity and authorization to work in the United States. We look forward to your decision to join eToys Inc. no later than December 29th, 1998 at 5 p.m. Pacific Standard Time. Very truly yours, /s/ Toby Lenk By: Toby Lenk Chief Executive Officer eToys Inc. I have read and accept this employment offer: /s/ Lou Zambello Signature of Candidate Dated December 29th, 1998 3 EX-10.21 24 EXHIBIT 10.21 [LETTERHEAD] January 12, 1999 Steven J. Schoch 24445 Valley Street Newhall, California 91321 Dear Candidate: eToys Inc. (the "Company") is pleased to offer you employment on the following terms: POSITION. You will serve in a full-time capacity as Senior Vice President and Chief Financial Officer of the Company. You will report to the Company's Chief Executive Officer. You will be encouraged to participate in meetings of the Company's Board of Directors (the "Board") at the discretion of the Company's Chief Executive Officer. Your start date will be January 31st, 1999. CASH COMPENSATION. You will be paid a monthly salary of not less than $10,416.67, which is equivalent to $125,000 on an annual basis, payable in monthly installments in accordance with the Company's standard payroll practices for salaried employees. In addition, you will receive a base signing bonus of $25,000 payable within your first week of employment. In addition, in the event that your previous employer does not pay you your expected $200,000 cash bonus for fiscal '98 due to your departure, you will be paid an additional signing bonus of up to 50% of your lost fiscal '98 cash bonus, but in no case greater than $100,000. In the event your employer does pay you your fiscal '98 cash bonus, you will not receive an additional signing bonus. You will vest with respect to your base and additional signing bonus in 12 equal monthly installments for each of the 12 months during which you continue to be employed by the Company following the commencement of your employment. If the Company terminates your employment for any reason, with or without cause (see definition of "cause" below) prior to the end of this 12 month period, or if you end your employment with the Company, you will be obligated to refund to the Company the unvested portion of your base and additional signing bonus. If the Company terminates your employment without cause within the first 12 months of your employment, you will receive a severance payment of $93,750, which is equivalent to 9 months of salary. Your cash compensation will be reviewed annually by the Board. STOCK OPTIONS. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you stock options to purchase 250,000 shares of the Company's Common Stock. The exercise price will be equal to the fair market value of the Common Stock on the date of grant. The option will be an incentive stock option to the maximum extent permitted by applicable tax law and will be subject to the terms and conditions applicable to options granted under the Company's 1997 Stock Plan, as described in that Plan and the applicable stock option agreement (including customary transfer and "lock-up" restrictions). The option will be immediately exercisable, but the purchased shares will be subject to repurchase by the Company at the exercise price in the event that your employment terminates before you vest in the shares. You will vest in 1/4th of the option shares after twelve months of employment, and the balance will vest in monthly installments over the next 36 months of employment, as described in the applicable stock option agreement. If you are terminated by the 1 Company without Cause within the first 6 months of employment, you will vest a number of shares equivalent to 1/8th of the option shares. If you are terminated by the Company without Cause within the first 6-12 months of employment, you will vest a number of shares equivalent to 1/48th of the option shares for each month of employment. If there is a change of control of the Company during the eighteen month period immediately following the date of the commencement of your employment with the Company, you will vest in an additional number of unvested option shares equal to the number in which you would have vested if your employment had continued through the expiration of such eighteen month period. "Cause" means (a) willful and repeated failure to comply with the lawful directions of the Board, (b) gross negligence or willful misconduct in the performance of your duties to the Company, (c) commission of any act of fraud against, or the misappropriation of material property belonging to, the Company or (d) conviction of a crime that is materially injurious to the business or reputation of the Company, in each case as determined in good faith by the Board. BENEFITS. a. INSURANCE BENEFITS. The Company will provide you with standard medical and dental insurance benefits. In addition, the Company currently indemnifies all officers and directors to the maximum extent permitted by law, and you will be requested to enter into the Company's standard form of Indemnification Agreement giving you such protection. Pursuant to the Indemnification Agreement, the Company will agree to advance any expenses for which indemnification is available to the extent allowed by applicable law. b. VACATION. You will be entitled to 2 weeks paid vacation per year. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company employees, you will be required, as a condition to your employment with the Company, to sign the Company's standard Employee Information and Inventions Agreement, a copy of which is attached hereto as Exhibit A. PERIOD OF EMPLOYMENT. Your employment with the Company will be "at will", meaning that either you or the Company will be entitled to terminate your employment at any time and for any reason, with or without cause. Any contrary representations which may have been made to you are superseded by this offer. This is the full and complete agreement between you and the Company on this term. Although your job duties, title, compensation and benefits, as well as the Company's personnel policies and procedures, may change from time to time, the "at will" nature of your employment may only be changed in an express written agreement signed by you and a duly authorized officer of the Company. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated and, in such event, you would not be entitled to the severance payment set forth in the preceding paragraph. WITHHOLDING TAXES. All forms of cash compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes. CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. ENTIRE AGREEMENT. This letter and the Exhibit attached hereto contain all of the terms of your employment with the Company and supersede any prior understandings or agreements, whether oral or written, between you and the Company. 2 We hope that you find the foregoing terms acceptable. You may indicate your agreement with these terms and accept this offer by signing and dating both the enclosed duplicate original of this letter and the enclosed Employee Information and Inventions Agreement and returning them to me. This offer of employment is contingent upon the satisfactory completion of reference checks regarding your past employment. As required by law, your employment with the Company is also contingent upon your providing legal proof of your identity and authorization to work in the United States. We look forward to your decision to join eToys Inc. no later than January 20th, 1999 at 5 p.m. Pacific Standard Time. Very truly yours, /s/ Toby Lenk By: Toby Lenk Chief Executive Officer eToys Inc. I have read and accept this employment offer: /s/ Steven J. Schoch Signature of Candidate Dated January 10, 1999 3 EX-10.22 25 EXHIBIT 10.22 M A S T E R L E A S E A G R E E M E N T MASTER LEASE AGREEMENT (the "Master Lease") dated December 24, 1998 by and between COMDISCO, INC. ("Lessor") and ETOYS INC. ("Lessee"). IN CONSIDERATION of the mutual agreements described below, the parties agree as follows (all capitalized terms are defined in Section 14.18): 1. PROPERTY LEASED. Lessor leases to Lessee all of the Equipment described on each Summary Equipment Schedule. In the event of a conflict, the terms of the applicable Schedule prevail over this Master Lease. 2. TERM. On the Commencement Date, Lessee will be deemed to accept the Equipment, will be bound to its rental obligations for each item of Equipment and the term of a Summary Equipment Schedule will begin and continue through the Initial Term and thereafter until terminated by either party upon prior written notice received during the Notice Period. No termination may be effective prior to the expiration of the Initial Term. 3. RENT AND PAYMENT. Rent is due and payable in advance on the first day of each Rent Interval at the address specified in Lessor's invoice. Interim Rent is due and payable when invoiced. If any payment is not made when due, Lessee will pay a Late Charge on the overdue amount. Upon Lessee's execution of each Schedule, Lessee will pay Lessor the Advance specified on the Schedule. The Advance will be credited towards the final Rent payment if Lessee is not then in default. No interest will be paid on the Advance. 4. SELECTION; WARRANTY AND DISCLAIMER OF WARRANTIES. 4.1 SELECTION. Lessee acknowledges that it has selected the Equipment and disclaims any reliance upon statements made by the Lessor, other than as set forth in the Schedule. 4.2 WARRANTY AND DISCLAIMER OF WARRANTIES. Lessor warrants to Lessee that, so long as Lessee is not in default, Lessor will not disturb Lessee's quiet and peaceful possession, and unrestricted use of the Equipment. To the extent permitted by the manufacturer, Lessor assigns to Lessee during the term of the Summary Equipment Schedule any manufacturer's warranties for the Equipment. LESSOR MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT OR ITS FITNESS FOR A PARTICULAR PURPOSE. Lessor is not responsible for any liability, claim, loss, damage or expense of any kind (including strict liability in tort) caused by the Equipment except for any loss or damage caused by the willful misconduct or negligent acts of Lessor. In no event is Lessor responsible for special, incidental or consequential damages. 5. TITLE; RELOCATION OR SUBLEASE; AND ASSIGNMENT. 5.1 TITLE. Lessee holds the Equipment subject and subordinate to the rights of the Owner, Lessor, any Assignee and any Secured Party. Lessee authorizes Lessor, as Lessee's agent, and at Lessor's expense, to prepare, execute and file in Lessee's name precautionary Uniform Commercial Code financing statements showing the interest of the Owner, Lessor, and any Assignee or Secured Party in the Equipment and to insert serial numbers in Summary Equipment Schedules as appropriate. Lessee will, at its expense, keep the Equipment free and clear from any liens or encumbrances of any kind (except any caused by Lessor) and will indemnify and hold the Owner, Lessor, any Assignee and Secured Party harmless from and against any loss caused by Lessee's failure to do so, except where such is caused by Lessor. 5.2 RELOCATION OR SUBLEASE. Upon prior written notice, Lessee may relocate Equipment to any location within the continental United States provided (i) the Equipment will not be used by an entity exempt from federal income tax, and (ii) all additional costs (including any administrative fees, additional taxes and insurance coverage) are reconciled and promptly paid by Lessee. Lessee may sublease the Equipment upon the reasonable consent of the Lessor and the Secured Party. Such consent to sublease will be granted if: (i) Lessee meets the relocation requirements set out above, (ii) the sublease is expressly subject and subordinate to the terms of the Schedule, (iii) Lessee assigns its rights in the sublease to Lessor and the Secured Party as additional collateral and security, (iv) Lessee's obligation to maintain and insure the Equipment is not altered, (v) all financing statements required to continue the Secured Party's prior perfected security interest are filed, and (vi) Lessee executes sublease documents acceptable to Lessor. No relocation or sublease will relieve Lessee from any of its obligations under this Master Lease and the relevant Schedule. 5.3 ASSIGNMENT BY LESSOR. The terms and conditions of each Schedule have been fixed by Lessor in order to permit Lessor to sell and/or assign or transfer its interest or grant a security interest in each Schedule and/or the Equipment to a Secured Party or Assignee. In that event, the term Lessor will mean the Assignee and any Secured Party. However, any assignment, sale, or other transfer by Lessor will not relieve Lessor of its obligations to Lessee and will not materially change Lessee's duties or materially increase the burdens or risks imposed on Lessee. The Lessee consents to and will acknowledge such assignments in a written notice given to Lessee. Lessee also agrees that: (a) The Secured Party will be entitled to exercise all of Lessor's rights, but will not be obligated to perform any of the obligations of Lessor. The Secured Party will not disturb Lessee's quiet and peaceful possession and unrestricted use of the Equipment so long as Lessee is not in default and the Secured Party continues to receive all Rent payable under the Schedule; and (b) Lessee will pay all Rent and all other amounts payable to the Secured Party, despite any defense or claim which it has against Lessor. Lessee reserves its right to have recourse directly against Lessor for any defense or claim; (c) Subject to and without impairment of Lessee's leasehold rights in the Equipment, Lessee holds the Equipment for the Secured Party to the extent of the Secured Party's rights in that Equipment. 6. NET LEASE; TAXES AND FEES. 6.1 NET LEASE. Each Summary Equipment Schedule constitutes a net lease. Lessee's obligation to pay Rent and all other amounts due hereunder is absolute and unconditional and is not subject to any abatement, reduction, set-off, defense, counterclaim, interruption, deferment or recoupment for any reason whatsoever. 6.2 TAXES AND FEES. Lessee will pay when due or reimburse Lessor for all taxes, fees or any other charges (together with any related interest or penalties not arising from the negligence of Lessor) accrued for or arising during the term of each Summary Equipment Schedule against Lessor, Lessee or the Equipment by any governmental authority (except only Federal, state, local and franchise taxes on the capital or the net income of Lessor). Lessor will file all personal property tax returns for the Equipment and pay all such property taxes due. Lessee will reimburse Lessor for property taxes within thirty (30) days of receipt of an invoice. 7. CARE, USE AND MAINTENANCE; INSPECTION BY LESSOR. 7.1 CARE, USE AND MAINTENANCE. Lessee will maintain the Equipment in good operating order and appearance, protect the Equipment from deterioration, other than normal wear and tear, and will not use the Equipment for any purpose other than that for which it was designed. If commercially available and considered common business practice for each item of Equipment, Lessee will maintain in force a standard maintenance contract with the manufacturer of the Equipment, or another party acceptable to Lessor, and will provide Lessor with a complete copy of that contract. If Lessee has the Equipment maintained by a party other than the manufacturer or self maintains, Lessee agrees to pay any costs necessary for the manufacturer to bring the Equipment to then current release, revision and engineering change levels, and to re-certify the Equipment as eligible for manufacturer's maintenance at the expiration of the lease term, provided re-certification is available and is required by Lessor. The lease term will continue upon the same terms and conditions until recertification has been obtained. 7.2 INSPECTION BY LESSOR. Upon reasonable advance notice, Lessee, during reasonable business hours and subject to Lessee's security requirements, will make the Equipment and its related log and maintenance records available to Lessor for inspection. 8. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee hereby represents, warrants and covenants that with respect to the Master Lease and each Schedule executed hereunder: (a) The Lessee is a corporation duly organized and validly existing in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to do business in each jurisdiction (including the jurisdiction where the Equipment is, or is to be, located) where its ownership or lease of property or the conduct of its business requires such qualification, except for where such lack of qualification would not have a material adverse effect on the Company's business; and has full corporate power and authority to hold property under the Master Lease and each Schedule and to enter into and perform its obligations under the Master Lease and each Schedule. (b) The execution and delivery by the Lessee of the Master Lease and each Schedule and its performance thereunder have been duly authorized by all necessary corporate action on the part of the Lessee, and the Master Lease and each Schedule are not inconsistent with the Lessee's Articles of Incorporation or Bylaws, do not - 1 - contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Master Lease and each Schedule constitute legal, valid and binding agreements of the Lessee, enforceable in accordance with their terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and rules of law concerning equitable remedies. (c) There are no actions, suits, proceedings or patent claims pending or, to the knowledge of the Lessee, threatened against or affecting the Lessee in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Lessee to perform its obligations under the Master Lease and each Schedule. (d) The Equipment is personal property and when subjected to use by the Lessee will not be or become fixtures under applicable law. (e) The Lessee has no material liabilities or obligations, absolute or contingent (individually or in the aggregate), except the liabilities and obligations of the Lessee as set forth in the Financial Statements and liabilities and obligations which have occurred in the ordinary course of business, and which have not been, in any case or in the aggregate, materially adverse to Lessee's ongoing business. (f) To the best of the Lessee's knowledge, the Lessee owns, possesses, has access to, or can become licensed on reasonable terms under all patents, patent applications, trademarks, trade names, inventions, franchises, licenses, permits, computer software and copyrights necessary for the operations of its business as now conducted, with no known infringement of, or conflict with, the rights of others. (g) All material contracts, agreements and instruments to which the Lessee is a party are in full force and effect in all material respects, and are valid, binding and enforceable by the Lessee in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally, and rules of law concerning equitable remedies. 9. DELIVERY AND RETURN OF EQUIPMENT. Lessee hereby assumes the full expense of transportation and in-transit insurance to Lessee's premises and installation thereat of the Equipment. Upon termination (by expiration or otherwise) of each Summary Equipment Schedule, Lessee shall, pursuant to Lessor's instructions and at Lessee's full expense (including, without limitation, expenses of transportation and in-transit insurance), return the Equipment to Lessor in the same operating order, repair, condition and appearance as when received, less normal depreciation and wear and tear. Lessee shall return the Equipment to Lessor at 6111 North River Road, Rosemont, Illinois 60018 or at such other address within the continental United States as directed by Lessor, provided, however, that Lessee's expense shall be limited to the cost of returning the Equipment to Lessor's address as set forth herein. During the period subsequent to receipt of a notice under Section 2, Lessor may demonstrate the Equipment's operation in place and Lessee will supply any of its personnel as may reasonably be required to assist in the demonstrations. 10. LABELING. Upon request, Lessee will mark the Equipment indicating Lessor's interest with labels provided by Lessor. Lessee will keep all Equipment free from any other marking or labeling which might be interpreted as a claim of ownership. 11. INDEMNITY. With regard to bodily injury and property damage liability only, Lessee will indemnify and hold Lessor, any Assignee and any Secured Party harmless from and against any and all claims, costs, expenses, damages and liabilities, including reasonable attorneys' fees, arising out of the ownership (for strict liability in tort only), selection, possession, leasing, operation, control, use, maintenance, delivery, return or other disposition of the Equipment during the term of this Master Lease or until Lessee's obligations under the Master Lease terminate. However, Lessee is not responsible to a party indemnified hereunder for any claims, costs, expenses, damages and liabilities occasioned by the negligent acts of such indemnified party. Lessee agrees to carry bodily injury and property damage liability insurance during the term of the Master Lease in amounts and against risks customarily insured against by the Lessee on equipment owned by it. Any amounts received by Lessor under that insurance will be credited against Lessee's obligations under this Section. 12. RISK OF LOSS. Effective upon delivery and until the Equipment is returned, Lessee relieves Lessor of responsibility for all risks of physical damage to or loss or destruction of the Equipment. Lessee will carry casualty insurance for each item of Equipment in an amount not less than the Casualty Value. All policies for such insurance will name the Lessor and any Secured Party as additional insured and as loss payee, and will provide for at least thirty (30) days prior written notice to the Lessor of cancellation or expiration, and will insure Lessor's interests regardless of any breach or violation by Lessee of any representation, warranty or condition contained in such policies and will be primary without right of contribution from any insurance effected by Lessor. Upon the execution of any Schedule, the Lessee will furnish appropriate evidence of such insurance acceptable to Lessor. Lessee will promptly repair any damaged item of Equipment unless such Equipment has suffered a Casualty Loss. Within fifteen (15) days of a Casualty Loss, Lessee will provide written notice of that loss to Lessor and Lessee will, at Lessee's option, either (a) replace the item of Equipment with Like Equipment and marketable title to the Like Equipment will automatically vest in Lessor or (b) pay the Casualty Value and after that payment and the payment of all other amounts due and owing with respect to that item of Equipment, Lessee's obligation to pay further Rent for the item of Equipment will cease. 13. DEFAULT, REMEDIES AND MITIGATION. 13.1 DEFAULT. The occurrence of any one or more of the following Events of Default constitutes a default under a Summary Equipment Schedule: (a) Lessee's failure to pay Rent or other amounts payable by Lessee when due if that failure continues for five (5) business days after written notice; or (b) Lessee's failure to perform any other term or condition of the Schedule or the material inaccuracy of any representation or warranty made by the Lessee in the Schedule or in any document or certificate furnished to the Lessor hereunder if that failure or inaccuracy continues for ten (10) business days after written notice; or (c) An assignment by Lessee for the benefit of its creditors, the failure by Lessee to pay its debts when due, the insolvency of Lessee, the filing by Lessee or the filing against Lessee of any petition under any bankruptcy or insolvency law or for the appointment of a trustee or other officer with similar powers, the adjudication of Lessee as insolvent, the liquidation of Lessee, or the taking of any action for the purpose of the foregoing; or (d) The occurrence of an Event of Default under any Schedule, Summary Equipment Schedule or other agreement between Lessee and Lessor or its Assignee or Secured Party. 13.2 REMEDIES. Upon the occurrence of any of the above Events of Default, Lessor, at its option, may: (a) enforce Lessee's performance of the provisions of the applicable Schedule by appropriate court action in law or in equity; (b) recover from Lessee any damages and or expenses, including Default Costs; (c) with notice and demand, recover all sums due and accelerate and recover the present value of the remaining payment stream of all Rent due under the defaulted Schedule (discounted at the same rate of interest at which such defaulted Schedule was discounted with a Secured Party plus any prepayment fees charged to Lessor by the Secured Party or, if there is no Secured Party, then discounted at 6%) together with all Rent and other amounts currently due as liquidated damages and not as a penalty; (d) with notice and process of law and in compliance with Lessee's security requirements, Lessor may enter on Lessee's premises to remove and repossess the Equipment without being liable to Lessee for damages due to the repossession, except those resulting from Lessor's, its assignees', agents' or representatives' negligence; and (e) pursue any other remedy permitted by law or equity. The above remedies, in Lessor's discretion and to the extent permitted by law, are cumulative and may be exercised successively or concurrently. 13.3 MITIGATION. Upon return of the Equipment pursuant to the terms of Section 13.2, Lessor will use its best efforts in accordance with its normal business procedures (and without obligation to give any priority to such Equipment) to mitigate Lessor's damages as described below. EXCEPT AS SET FORTH IN THIS SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY ANY OF LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. Lessor may sell, lease or otherwise dispose of all or any part of the Equipment at a public or private sale for cash or credit with the privilege of purchasing the Equipment. The proceeds from any sale, lease or other disposition of the Equipment are defined as either: (a) if sold or otherwise disposed of, the cash proceeds less the Fair Market Value of the Equipment at the expiration of the Initial Term less the Default Costs; or - 2 - (b) if leased, the present value (discounted at three percent (3%) over the U.S. Treasury Notes of comparable maturity to the term of the re-lease) of the rentals for a term not to exceed the Initial Term, less the Default Costs. Any proceeds will be applied against liquidated damages and any other sums due to Lessor from Lessee. However, Lessee is liable to Lessor for, and Lessor may recover, the amount by which the proceeds are less than the liquidated damages and other sums due to Lessor from Lessee. 14. ADDITIONAL PROVISIONS. 14.1 BOARD ATTENDANCE. Upon invitation of Lessee, one representative of Lessor will have the right to attend Lessee's corporate Board of Directors meetings and Lessee will give Lessor reasonable notice in advance of any special Board of Directors meeting, which notice will provide an agenda of the subject matter to be discussed at such board meeting. Lessee will provide Lessor with a certified copy of the minutes of each Board of Directors meeting within thirty (30) days following the date of such meeting held during the term of this Master Lease. 14.2 FINANCIAL STATEMENTS. As soon as practicable at the end of each month (and in any event within thirty (30) days), Lessee will provide to Lessor the same information which Lessee provides to its Board of Directors, but which will include not less than a monthly income statement, balance sheet and statement of cash flows prepared in accordance with generally accepted accounting principles, consistently applied (the "Financial Statements"). As soon as practicable at the end of each fiscal year, Lessee will provide to Lessor audited Financial Statements setting forth in comparative form the corresponding figures for the fiscal year (and in any event within ninety (90) days), and accompanied by an audit report and opinion of the independent certified public accountants selected by Lessee. Lessee will promptly furnish to Lessor any additional information (including, but not limited to, tax returns, income statements, balance sheets and names of principal creditors) as Lessor reasonably believes necessary to evaluate Lessee's continuing ability to meet financial obligations. After the effective date of the initial registration statement covering a public offering of Lessee's securities, the term "Financial Statements" will be deemed to refer to only those statements required by the Securities and Exchange Commission. 14.3 OBLIGATION TO LEASE ADDITIONAL EQUIPMENT. Upon notice to Lessee, Lessor will not be obligated to lease any Equipment which would have a Commencement Date after said notice if: (i) Lessee is in default under this Master Lease or any Schedule; (ii) Lessee is in default under any loan agreement, the result of which would allow the lender or any secured party to demand immediate payment of any material indebtedness; (iii) there is a material adverse change in Lessee's credit standing; or (iv) Lessor determines (in reasonable good faith) that Lessee will be unable to perform its obligations under this Master Lease or any Schedule. 14.4 MERGER AND SALE PROVISIONS. Lessee will notify Lessor of any proposed Merger at least sixty (60) days prior to the closing date. Lessor may, in its discretion, either (i) consent to the assignment of the Master Lease and all relevant Schedules to the successor entity, or (ii) terminate the Master Lease and all relevant Schedules. If Lessor elects to consent to the assignment, Lessee and its successor will sign the assignment documentation provided by Lessor. If Lessor elects to terminate the Master Lease and all relevant Schedules, then Lessee will pay Lessor all amounts then due and owing and a termination fee equal to the present value (discounted at 6%) of the remaining Rent for the balance of the Initial Term(s) of all Schedules, and will return the Equipment in accordance with Section 9. Lessor hereby consents to any Merger in which the acquiring entity has a Moody's Bond Rating of BA3 or better or a commercially acceptable equivalent measure of creditworthiness as reasonably determined by Lessor. 14.5 ENTIRE AGREEMENT. This Master Lease and associated Schedules and Summary Equipment Schedules supersede all other oral or written agreements or understandings between the parties concerning the Equipment including, for example, purchase orders. ANY AMENDMENT OF THIS MASTER LEASE OR A SCHEDULE, MAY ONLY BE ACCOMPLISHED BY A WRITING SIGNED BY THE PARTY AGAINST WHOM THE AMENDMENT IS SOUGHT TO BE ENFORCED. 14.6 NO WAIVER. No action taken by Lessor or Lessee will be deemed to constitute a waiver of compliance with any representation, warranty or covenant contained in this Master Lease or a Schedule. The waiver by Lessor or Lessee of a breach of any provision of this Master Lease or a Schedule will not operate or be construed as a waiver of any subsequent breach. 14.7 BINDING NATURE. Each Schedule is binding upon, and inures to the benefit of Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHTS OR OBLIGATIONS. 14.8 SURVIVAL OF OBLIGATIONS. All agreements, obligations including, but not limited to those arising under Section 6.2, representations and warranties contained in this Master Lease, any Schedule, Summary Equipment Schedule or in any document delivered in connection with those agreements are for the benefit of Lessor and any Assignee or Secured Party and survive the execution, delivery, expiration or termination of this Master Lease. 14.9 NOTICES. Any notice, request or other communication to either party by the other will be given in writing and deemed received upon the earlier of (1) actual receipt or (3) three days after mailing if mailed postage prepaid by regular or airmail to Lessor (to the attention of "the Comdisco Venture Group") or Lessee, at the address set out in the Schedule, (3) one day after it is sent by courier or (4) on the same day as sent via facsimile transmission, provided that the original is sent by personal delivery or mail by the sending party. 14.10 APPLICABLE LAW. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE WILL HAVE BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE GOVERNED AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE. 14.11 SEVERABILITY. If any one or more of the provisions of this Master Lease or any Schedule is for any reason held invalid, illegal or unenforceable, the remaining provisions of this Master Lease and any such Schedule will be unimpaired, and the invalid, illegal or unenforceable provision replaced by a mutually acceptable valid, legal and enforceable provision that is closest to the original intention of the parties. 14.12 COUNTERPARTS. This Master Lease and any Schedule may be executed in any number of counterparts, each of which will be deemed an original, but all such counterparts together constitute one and the same instrument. If Lessor grants a security interest in all or any part of a Schedule, the Equipment or sums payable thereunder, only that counterpart Schedule marked "Secured Party's Original" can transfer Lessor's rights and all other counterparts will be marked "Duplicate." 14.13 LICENSED PRODUCTS. Lessee will obtain no title to Licensed Products which will at all times remain the property of the owner of the Licensed Products. A license from the owner may be required and it is Lessee's responsibility to obtain any required license before the use of the Licensed Products. Lessee agrees to treat the Licensed Products as confidential information of the owner, to observe all copyright restrictions, and not to reproduce or sell the Licensed Products. 14.14 SECRETARY'S CERTIFICATE. Lessee will, upon execution of this Master Lease, provide Lessor with a secretary's certificate of incumbency and authority. Upon the execution of each Schedule with a purchase price in excess of $1,000,000, Lessee will provide Lessor with an opinion from Lessee's counsel in a form acceptable to Lessor regarding the representations and warranties in Section 8. 14.15 ELECTRONIC COMMUNICATIONS. Each of the parties may communicate with the other by electronic means under mutually agreeable terms. 14.16 LANDLORD/MORTGAGEE WAIVER. Lessee agrees to provide Lessor with a Landlord/Mortgagee Waiver with respect to the Equipment. Such waiver shall be in a form satisfactory to Lessor. 14.17 EQUIPMENT PROCUREMENT CHARGES/PROGRESS PAYMENTS. Lessee hereby agrees that Lessor shall not, by virtue of its entering into this Master Lease, be required to remit any payments to any manufacturer or other third party until Lessee accepts the Equipment subject to this Master Lease. 14.18 DEFINITIONS. ADVANCE - means the amount due to Lessor by Lessee upon Lessee's execution of each Schedule. ASSIGNEE - means an entity to whom Lessor has sold or assigned its rights as owner and Lessor of Equipment. CASUALTY LOSS - means the irreparable loss or destruction of Equipment. CASUALTY VALUE - means the greater of the aggregate Rent remaining to be paid for the balance of the lease term or the Fair Market Value of the Equipment immediately prior to the Casualty Loss. However, if a Casualty Value Table is attached to the relevant Schedule its terms will control. COMMENCEMENT DATE - is defined in each Schedule. DEFAULT COSTS - means reasonable attorney's fees and remarketing costs resulting from a Lessee default or Lessor's enforcement of its remedies. DELIVERY DATE - means date of delivery of Inventory Equipment to Lessee's address. EQUIPMENT - means the property described on a Summary Equipment Schedule and any replacement for that property required or permitted by this Master Lease or a Schedule. EVENT OF DEFAULT - means the events described in Subsection 13.1. - 3 - FAIR MARKET VALUE - means the aggregate amount which would be obtainable in an arm's-length transaction between an informed and willing buyer/user and an informed and willing seller under no compulsion to sell. INITIAL TERM - means the period of time beginning on the first day of the first full Rent Interval following the Commencement Date for all items of Equipment and continuing for the number of Rent Intervals indicated on a Schedule. INTERIM RENT - means the pro-rata portion of Rent due for the period from the Commencement Date through but not including the first day of the first full Rent Interval included in the Initial Term. LATE CHARGE - means the lesser of five percent (5%) of the payment due or the maximum amount permitted by the law of the state where the Equipment is located. LICENSED PRODUCTS - means any software or other licensed products attached to the Equipment. LIKE EQUIPMENT - means replacement Equipment which is lien free and of the same model, type, configuration and manufacture as Equipment. MERGER - means any consolidation or merger of the Lessee with or into any other corporation or entity, any sale or conveyance of all or substantially all of the assets or stock of the Lessee by or to any other person or entity in which Lessee is not the surviving entity. NOTICE PERIOD - means not less than ninety (90) days nor more than twelve (12) months prior to the expiration of the lease term. OWNER - means the owner of Equipment. RENT - means the rent Lessee will pay for each item of Equipment expressed in a Summary Equipment Schedule either as a specific amount or an amount equal to the amount which Lessor pays for an item of Equipment multiplied by a lease rate factor plus all other amounts due to Lessor under this Master Lease or a Schedule. RENT INTERVAL - means a full calendar month or quarter as indicated on a Schedule. SCHEDULE - means either an Equipment Schedule or a Licensed Products Schedule which incorporates all of the terms and conditions of this Master Lease. SECURED PARTY - means an entity to whom Lessor has granted a security interest for the purpose of securing a loan. SUMMARY EQUIPMENT SCHEDULE - means a certificate provided by Lessor summarizing all of the Equipment for which Lessor has received Lessee approved vendor invoices, purchase documents and/or evidence of delivery during a calendar quarter which will incorporate all of the terms and conditions of the related Schedule and this Master Lease and will constitute a separate lease for the equipment leased thereunder. IN WITNESS WHEREOF, the parties hereto have executed this Master Lease on or as of the day and year first above written. eTOYS INC. COMDISCO, INC., as Lessee as Lessor By: /s/ Jordan Posell By: /s/ [ILLEGIBLE] -------------------------------- -------------------------------- Title: VP - Finance Title: SR VP - 4 - ADDENDUM TO THE MASTER LEASE AGREEMENT DATED AS OF DECEMBER 24, 1998 BETWEEN ETOYS INC., AS LESSEE AND COMDISCO, INC., AS LESSOR The undersigned hereby agree that the terms and conditions of the above-referenced Master Lease are hereby modified and amended as follows: 1) Section 3., "RENT AND PAYMENT" In the third line after "is not made" insert "within five (5) business days of". 2) Section 4.2., "WARRANTY AND DISCLAIMER OF WARRANTIES" In the second line, delete "Lessee is not in default" and insert "no Event of Default has occurred and is continuing". 3) Section 5.3., "ASSIGNMENT BY LESSOR" In the first paragraph, line 8, after "a written notice given to Lessee" insert "provided that Lessor will continue to perform its obligations hereunder". In subparagraph (a), line 4, delete Lessee is not in default and the Secured Party continues to receive all Rent payable under the schedule and" and replace with "no Event of Default has occurred and is continuing". In subparagraph (b), at the beginning of the first sentence insert "Upon receipt of written notice from Lessor". 4) Section 6.1., "NET LEASE" To the end of this section add "provided, however, that Lessee's ablility to bring suit against Lessor for breach of this Master Lease shall not be affected by this Section 6.1." 5) Section 6.2., "TAXES AND FEES" In line 3, delete "accrued for" and after "arising during" insert "and attributable to". 6) Section 8., "REPRESENTATIONS AND WARRANTIES OF LESSOR" In subparagraph (c), add to the beginning of the first sentence, "To the best of Lessee's knowledge," and in line 2, delete "To the knowledge of Lessee,". In subparagraph (f), to the end of this paragraph add "except where the failure to do so would not have a material adverse effect on the Company's business taken as a whole". 7) Section 9., "DELIVERY AND RETURN OF EQUIPMENT" In line 10, after "limited to the " insert "reasonable". 8) Section 11., "INDEMNITY" In line 9, after "negligent acts" insert "or willfull misconduct". 9) Section 13., "DEFAULT" In subparagraph (b), line 4, delete "ten (10)" and replace with "thirty (30)". In subparagraph (c), line 6, after "purpose of the foregoing" insert "and any such involuntary event has not been dismissed or vacated within thirty (30) days". 10) Section 14.1., "BOARD ATTENDANCE" Delete this section in its entirety. 11) Section 14.2., FINANCIAL STATEMENTS" In line 8, delete "ninety (90)" and replace with 'one hundred twenty (120)". 12) Section 14.4., "MERGER AND SALE PROVSIONS" In line 1, after "Lessor will" insert "use reasonable efforts". In line 2, delete "sixty (60)" and replace with "twenty (20)". In line 10, after "accordance with Section 9" insert "or purchase the Equipment" and delete the last sentence and replace with "Lessor hereby consents to any Merger in which the surviving entity has a net worth equal to or greater than ten (10) times the present value of the remaining Rent due or to become due under the Summary Equipment Schedules, and such entity has a net worth of at least $10,000,000.". 13) Section 14.6., "NO WAIVER" At the beginning of the first sentence, insert "Except for a written waiver,". 14) Section 14.7., "BINDING NATURE" To the end of this section add ",except as contemplated by Section 14.4". 15) Section 14.10., "APPLICABLE LAW" Delete "Illinois" and replace with "California" everywhere it appears and in the second sentence, delete "Article 2A of the Uniform Commercial Code" and insert "California Commercial Code Sections 10508-10522". 16) Section 14.14., "SECRETARY'S CERTIFICATE" Delete the last sentence in its entirety. 17) Section 14.18., "DEFINITIONS" In the definition of "Casualty Value", first line, after "greater of the" insert "present value (discounted at 6%) of the" ETOYS INC. COMDISCO, INC. AS LESSEE AS LESSOR By: /s/ Jordan Posell By: /s/ [ILLEGIBLE] -------------------------- ------------------------- Title: VP Finance Title: Sr. VP ------------------------ ----------------------- Date: 12/24/98 Date: JAN 06 1999 ------------------------- ------------------------ EQUIPMENT SCHEDULE VL-1 DATED AS OF DECEMBER 24, 1998 TO MASTER LEASE AGREEMENT DATED AS OF DECEMBER 24, 1998 (THE "MASTER LEASE") LESSEE: ETOYS INC. LESSOR: COMDISCO, INC. ADMIN. CONTACT/PHONE NO.: ADDRESS FOR ALL NOTICES: Contact: Jordan Posell 6111 North River Road TEL: (310) 576-6776 Rosemont, Illinois 60018 FAX: (310) 664-8101 Attn.: Venture Group ADDRESS FOR NOTICES: 2850 Ocean Park Blvd., Suite 225 Santa Monica, CA 90405 CENTRAL BILLING LOCATION: RENT INTERVAL: Monthly same as above Attn.: Lessee Reference No.: -------------- (24 digits maximum) LOCATION OF EQUIPMENT: INITIAL TERM: 36 months same as above (Number of Rent Intervals) LEASE RATE FACTOR: 3.091% Attn.: EQUIPMENT (as defined below): ADVANCE: $43,274 INTERIM RENT: None Equipment specifically approved by Lessor, which shall be delivered to and accepted by Lessee during the period December 24, 1998 through December 24, 1999 ("Equipment Delivery Period"), for which Lessor receives vendor invoices approved for payment, up to an aggregate purchase price of $1,400,000 ("Commitment Amount"). Equipment shall exclude custom use equipment, leasehold improvements, installation costs and delivery costs, rolling stock, special tooling, "stand-alone" software, application software bundled into computer hardware, hand held items, molds and fungible items. 1. EQUIPMENT PURCHASE This Schedule contemplates Lessor's acquisition of Equipment for lease to Lessee, either by one of the first three categories listed below or by providing Lessee with Equipment from the fourth category, in an aggregate value up to the Commitment Amount referred to on the face of this Schedule. If the Equipment acquired is of category (i), (ii) , (iii) below, the effectiveness of this Schedule as it relates to those items of Equipment is contingent upon Lessee's acknowledgment at the time Lessor acquires the Equipment that Lessee has either received or approved the relevant purchase documentation between vendor and Lessor for that Equipment. (i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is obtained from a vendor by Lessee for its use subject to Lessor's prior approval of the Equipment. (ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale-Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no later than 30 days from the date hereof*. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale-leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value pursuant to the schedule below:
ORIGINAL EQUIPMENT INVOICE PERCENT OF ORIGINAL MANUFACTURER'S DATE NET EQUIPMENT COST PAID BY LESSOR -------------- ---------------------------------- Sept. 24, 1998 - Dec. 24, 1998 100%
Lessee represents that it has paid all California sales tax due on the cost of that portion of Equipment to be installed in California and agrees to provide evidence of such payment to Lessor. As a result of the election, Lessor agrees that it will not invoice Lessee for use tax on the monthly rent for any item of Sale- Leaseback Equipment as long as the Sale/Leaseback Transaction occurs within 90 days of Lessee's first functional use of the equipment, as represented to Lessor. Lessee agrees to pay any taxes, fees, or any other charges (together with interest or penalties) related to any dispute of Lessee's election hereunder and Lessee understands that this is an irrevocable election to measure the tax by the Equipment cost and cannot be changed except prior to installation of the Equipment. (iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment which is obtained from a third party by Lessee for its use subject to Lessor's prior approval of the Equipment and at Lessor's appraised value for such used Equipment. (iv) 800 NUMBER EQUIPMENT. Upon Lessee's use of Comdisco's 1-800 Direct Service, Lessor will purchase new or used Equipment from a third party or Lessor will supply new or used Equipment from its inventory for use by Lessee at rates provided by Lessor. 2. COMMENCEMENT DATE The Commencement Date for each item of new on-order or used on-order Equipment will be the install date as confirmed in writing by Lessee as set forth on the vendor invoice of which a facsimile transmission will constitute an original document. The Commencement Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase price. The Commencement Date for 800 Number Equipment shall be fifteen (15) days from the ship date, such ship date to be set forth on the vendor invoice or if unavailable on the vendor invoice the ship date will be determined by Lessor upon other supporting shipping documentation. Lessor will summarize all approved invoices, purchase documentation and evidence of delivery, as applicable, received in the same calendar month into a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1, and the Initial Term will begin the first day of the calendar month thereafter. Each Summary Equipment Schedule will contain the Equipment location, description, serial number(s) and cost and will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate lease. 2 3. OPTION TO EXTEND So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term of a Summary Equipment Schedule, Lessee will have the right to extend the Initial Term of such Summary Equipment Schedule for a period of one (1) year. In such event, the rent to be paid during said extended period shall be mutually agreed upon and if the parties cannot mutually agree, then the Summary Equipment Schedule shall continue in full force and effect pursuant to the existing terms and conditions until terminated in accordance with its terms. The Summary Equipment Schedule will continue in effect following said extended period until terminated by either party upon not less than ninety (90) days prior written notice, which notice shall be effective as of the date of receipt. 4. PURCHASE OPTION So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety (90) days prior to the expiration of the Initial Term or the extended term of the applicable Summary Equipment Schedule, Lessee will have the option at the expiration of the Initial Term of the Summary Equipment Schedule to purchase all, but not less than all, of the Equipment listed therein for a purchase price not to exceed 15% of Lessor's cost hereunder and upon terms and conditions to be mutually agreed upon by the parties following Lessee's written notice, plus any taxes applicable at time of purchase. Said purchase price shall be paid to Lessor at least thirty (30) days before the expiration date of the Initial Term or extended term. Title to the Equipment shall automatically pass to Lessee upon payment in full of the purchase price but, in no event, earlier than the expiration of the fixed Initial Term or extended term, if applicable. If the parties are unable to agree on the purchase price or the terms and conditions with respect to said purchase, then the Summary Equipment Schedule with respect to this Equipment shall remain in full force and effect. Notwithstanding the exercise by Lessee of this option and payment of the purchase price, until all obligations under the applicable Summary Equipment Schedule have been fulfilled, it is agreed and understood that Lessor shall retain a purchase money security interest in the Equipment listed therein and the Summary Equipment Schedule shall constitute a Security Agreement under the Uniform Commercial Code of the state in which the Equipment is located. 5. TECHNOLOGY EXCHANGE OPTION So long as no Event of Default has occurred and is continuing, and there is no material adverse change in Lessee's credit, on or after the expiration of the 12th month of any Summary Equipment Schedule, Lessee shall have the option to replace any of the Equipment subject to such summary Equipment Schedule with new technology equipment ("New Technology Equipment") utilizing the following guidelines: A. Equipment being replaced with New Technology Equipment shall have an aggregate original cost equal to or greater than $20,000 and be comprised of full configurations of equipment. B. This technology Exchange Option shall be limited to a maximum in the aggregate of fifty percent (50%) of the original equipment cost and shall not apply to software or any soft costs financed hereunder including but not limited to tenant improvements and custom equipment. C. The cost of the New Technology Equipment must be equal to or greater than the original equipment cost of the replaced equipment, but in no event shall exceed 200% of the original equipment cost. D. The remaining lease payments applicable to the equipment being replaced by the New Technology Equipment will be discounted to present value at 6%. The wholesale market value of the equipment being replaced will be established by Comdisco based upon then current market conditions. Upon the return of the replaced equipment, the wholesale price will be deducted from the present value of the remaining rentals and the differential will be added to the cost of the New Technology Equipment in calculating the new rental. The lease for the New Technology Equipment will contain terms and conditions substantially similar to those for the replaced equipment and will have an Initial Term not less than the balance of the remaining Initial Term for the replaced equipment. 6. OPTION AMOUNT So long as no Event of Default shall have occurred and is continuing and upon Lessee's request, subject to final review by Lessor, Lessor agrees to provide to Lessee an additional $1,000,000 of Equipment upon rates and terms to be negotiated. 3 7. SPECIAL TERMS The terms and conditions of the Lease as they pertain to this Schedule are hereby modified and amended as follows: Master Lease: This Schedule is issued pursuant to the Lease identified on page 1 of this Schedule. All of the terms and conditions of the Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Lease (including, without limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties. ETOYS INC. COMDISCO, INC. AS LESSEE AS LESSOR By: /s/ Jordan Posell By: /s/ [ILLEGIBLE] -------------------------------- ------------------------------ Title: VP - Finance Title: Sr. VP ----------------------------- --------------------------- Date: 12/24/98 Date: JAN 06 1998 ------------------------------ ---------------------------- 4 EXHIBIT 1 SUMMARY EQUIPMENT SCHEDULE This Summary Equipment Schedule dated XXXX is executed pursuant to Equipment Schedule No. X to the Master Lease Agreement dated XXXX between Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. X are incorporated herein and made a part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices. 1. FOR PERIOD BEGINNING: AND ENDING: 2. INITIAL TERM STARTS ON: INITIAL TERM: (Number of Rent Intervals) 3. TOTAL SUMMARY EQUIPMENT COST: 4. LEASE RATE FACTOR: 5. RENT: 6. ACCEPTANCE DOC TYPE: 5 EQUIPMENT SCHEDULE VL-2 DATED AS OF DECEMBER 24, 1998 TO MASTER LEASE AGREEMENT DATED AS OF DECEMBER 24, 1998 (THE "MASTER LEASE") LESSEE: ETOYS INC. LESSOR: COMDISCO, INC. ADMIN. CONTACT/PHONE NO.: ADDRESS FOR ALL NOTICES: Contact: Jordan Posell 6111 North River Road TEL: (310) 576-6776 Rosemont, Illinois 60018 FAX: (310) 664-8101 Attn.: Venture Group ADDRESS FOR NOTICES: 2850 Ocean Park Blvd., Suite 225 Santa Monica, CA 90405 CENTRAL BILLING LOCATION: RENT INTERVAL: Monthly same as above Attn.: Lessee Reference No.: --------------- (24 digits maximum) LOCATION OF EQUIPMENT: INITIAL TERM: 36 months (Number of Rent Intervals) LEASE RATE FACTOR: 3.091% Attn.: EQUIPMENT (as defined below): ADVANCE: $18,546 INTERIM RENT: None Software and tenant improvements specifically approved by Lessor, which shall be delivered to and accepted by Lessee during the period December 24, 1998 through December 24, 1999 ("Equipment Delivery Period") for which Lessor receives vendor invoices approved for payment, up to an aggregate purchase price of $600,000 ("Commitment Amount"). 1 1. EQUIPMENT PURCHASE This Schedule contemplates Lessor's acquisition of Equipment for lease to Lessee, either by one of the first three categories listed below or by providing Lessee with Equipment from the fourth category, in an aggregate value up to the Commitment Amount referred to on the face of this Schedule. If the Equipment acquired is of category (i), (ii) , (iii) below, the effectiveness of this Schedule as it relates to those items of Equipment is contingent upon Lessee's acknowledgment at the time Lessor acquires the Equipment that Lessee has either received or approved the relevant purchase documentation between vendor and Lessor for that Equipment. (i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is obtained from a vendor by Lessee for its use subject to Lessor's prior approval of the Equipment. (ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale-Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no later than 30 days from the date hereof*. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale-leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value pursuant to the schedule below:
ORIGINAL EQUIPMENT INVOICE PERCENT OF ORIGINAL MANUFACTURER'S DATE NET EQUIPMENT COST PAID BY LESSOR ---------------- --------------------------------- 9/24/98 and 12/24/98 100%
Lessee represents that it has paid all California sales tax due on the cost of that portion of Equipment to be installed in California and agrees to provide evidence of such payment to Lessor. As a result of the election, Lessor agrees that it will not invoice Lessee for use tax on the monthly rent for any item of Sale- Leaseback Equipment as long as the Sale/Leaseback Transaction occurs within 90 days of Lessee's first functional use of the equipment, as represented to Lessor. Lessee agrees to pay any taxes, fees, or any other charges (together with interest or penalties) related to any dispute of Lessee's election hereunder and Lessee understands that this is an irrevocable election to measure the tax by the Equipment cost and cannot be changed except prior to installation of the Equipment. (iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment which is obtained from a third party by Lessee for its use subject to Lessor's prior approval of the Equipment and at Lessor's appraised value for such used Equipment. (iv) 800 NUMBER EQUIPMENT. Upon Lessee's use of Comdisco's 1-800 Direct Service, Lessor will purchase new or used Equipment from a third party or Lessor will supply new or used Equipment from its inventory for use by Lessee at rates provided by Lessor. 2. COMMENCEMENT DATE The Commencement Date for each item of new on-order or used on-order Equipment will be the install date as confirmed in writing by Lessee as set forth on the vendor invoice of which a facsimile transmission will constitute an original document. The Commencement Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase price. The Commencement Date for 800 Number Equipment shall be fifteen (15) days from the ship date, such ship date to be set forth on the vendor invoice or if unavailable on the vendor invoice the ship date will be determined by Lessor upon other supporting shipping documentation. Lessor will summarize all approved invoices, purchase documentation and evidence of delivery, as applicable, received in the same calendar month into a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1, and the Initial Term will begin the first day of the calendar month thereafter. Each Summary Equipment Schedule will contain the Equipment location, description, serial number(s) and cost and will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate lease. 2 3. MISCELLANEOUS In consideration of Lessor financing software and tenant improvements hereunder, Lessee agrees in addition to its last Monthly Rent Payment to remit to Lessor an amount equal to 15% of Lessor's aggregate cost of software and tenant improvements provided hereunder. 4. SPECIAL TERMS The terms and conditions of the Lease as they pertain to this Schedule are hereby modified and amended as follows: (a) SECTION 9, DELIVERY AND RETURN OF EQUIPMENT Delete second, third and fourth sentences in their entirety. Master Lease: This Schedule is issued pursuant to the Lease identified on page 1 of this Schedule. All of the terms and conditions of the Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Lease (including, without limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties. ETOYS INC. COMDISCO, INC. AS LESSEE AS LESSOR By: /s/ Jordan Posell By: /s/ [ILLEGIBLE] -------------------------------- ------------------------------ Title: VP - Finance Title: Sr. VP ----------------------------- --------------------------- Date: 12/24/98 Date: JAN 06 1999 ------------------------------ ---------------------------- 3 EXHIBIT 1 SUMMARY EQUIPMENT SCHEDULE This Summary Equipment Schedule dated XXXX is executed pursuant to Equipment Schedule No. X to the Master Lease Agreement dated XXXX between Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. X are incorporated herein and made a part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices. 1. FOR PERIOD BEGINNING: AND ENDING: 2. INITIAL TERM STARTS ON: INITIAL TERM: (Number of Rent Intervals) 3. TOTAL SUMMARY EQUIPMENT COST: 4. LEASE RATE FACTOR: 5. RENT: 6. ACCEPTANCE DOC TYPE: 4 [LETTERHEAD] December 7, 1998 Mr. Jordan Posell eToys Inc. 2850 Ocean Park Blvd. Suite 225 Santa Monica, CA 90405 RE: EQUIPMENT SCHEDULE VL-1 AND VL-2 DATED AS OF DECEMBER 7, 1998 AND RELATED SUMMARY EQUIPMENT SCHEDULES TO THE MASTER LEASE AGREEMENT DATED AS OF DECEMBER 7, 1998 BETWEEN COMDISCO, INC. AS LESSOR AND eTOYS INC. AS LESSEE (THE EQUIPMENT SCHEDULES, SUMMARY EQUIPMENT SCHEDULES AND THE MASTER LEASE AGREEMENT, COLLECTIVELY THE "LEASES"). Dear Mr. Posell: Reference is made to the subject Leases. This writing shall serve to confirm the agreement by and between the undersigned in connection with and in consideration of the funding of the Leases by Comdisco, Inc. (hereinafter "Comdisco") in the amount of $2,000,000 to eToys Inc. (hereinafter "eToys"). eToys will execute and deliver to Comdisco a Warrant Agreement in form and substance reasonably satisfactory to Comdisco, upon the earlier of the following (i) 15 days after the closing of the next preferred stock financing ("Next Round"); or (ii) prior to the effective date of an initial public offering of eToys' securities ("IPO"); or (iii) prior to the effective date of a consolidation or merger of eToys with or into any other corporation or entity, or any sale or conveyance of all or substantially all of the assets of stock of eToys by or to any other person or entity ("Merger Event"). Such Warrant Agreement shall grant to Comdisco the right to purchase that number of shares of eToys' preferred stock (or common stock in the case of a IPO) equal to $80,000 divided by the exercise price ("Exercise Price") as defined below and shall be in substantially the same format as Exhibit A (attached hereto and made a part hereof) and shall contain anti-dilution and registration rights in parity with those rights provided other investors. eToys shall use reasonable efforts to provide Comdisco with at least twenty (20) days' prior written notice of any proposed (i) Next Round; (ii) Merger Event; or (iii) IPO, where permissable by law. The Exercise Price shall equal to the sum of (x) $2.1032 ("Last Round Price"), and (y) the product of (A) the difference between (i) the price per share (the "Next Round Price") paid by investors for shares of preferred stock of the Company issued in the Company's next private equity financing (the "Next Round"), the initial price to public of the Common Stock sold by the Company in its initial public offering (the "IPO") or the per share (based on the number of then outstanding shares of the Company's capital stock) value of the consideration to be received by the Company's securityholders upon the execution by the Company of a definitive agreement to enter into a Merger Event (as defined in the Warrant Agreement as Exhibit A) ('Merger") whichever event is the first to occur, and (ii)the Last Round Price, multiplied by (B) the quotient obtained by dividing (i) the number of days from the closing date of the Company's sale and issuance of its Series B Preferred Stock ("Last Round") to the date of execution of the Leases, by (ii) the number of days from the date from the last closing of the Last Round to the closing date of the first to occur of the Next Round, the IPO or the Merger. Notwithstanding the foregoing, if such closing date occurs after June 30, 1999, the Exercise Price shall be $2.1032. COMDISCO, INC. By: /s/ [ILLEGIBLE] ----------------------- Title: SR VP ----------------------- AGREED AND ACCEPTED BY: eToys, Inc. By: /s/ Jordan Posell ------------------------ Title: VP Finance ------------------------ EXHIBIT A THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. WARRANT AGREEMENT TO PURCHASE SHARES OF THE SERIES _ PREFERRED STOCK OF eTOYS INC. DATED AS OF __________ __, 1998 (THE "EFFECTIVE DATE") WHEREAS, eToys Inc., a ____________ corporation (the "Company") has entered into a Master Lease Agreement dated as of ____________, 1998, Equipment Schedule No. VL-1 and VL-2 dated as of _____________, 1998, and related Summary Equipment Schedules (collectively, the "Leases") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and WHEREAS, the Company desires to grant to Warrantholder, in consideration for such Leases, the right to purchase shares of its Series _ Preferred Stock; NOW, THEREFORE, in consideration of the Warrantholder executing and delivering such Leases and in consideration of mutual covenants and agreements contained herein, the Company and Warrantholder agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK. The Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe to and purchase, from the Company, ______ fully paid and non-assessable shares of the Company's Series _ Preferred Stock ("Preferred Stock") at a purchase price of $____ per share (the "Exercise Price"). The number and purchase price of such shares are subject to adjustment as provided in Section 8 hereof. 2. TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Preferred Stock as granted herein shall commence on the Effective Date and shall be exercisable for a period of (i) seven (7) years or (ii) three (3) years from the effective date of the Company's initial public offering or (iii) the consummation of a Merger Event (as defined in Section 8(a)), whichever is earlier. 3. EXERCISE OF THE PURCHASE RIGHTS. The purchase rights set forth in this Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of exercise in the form attached hereto as Exhibit I (the "Notice of Exercise"), duly completed and executed. Promptly upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, and in no event later than twenty-one (21) days thereafter, the Company shall issue to the Warrantholder a certificate for the number of shares of Preferred Stock purchased and shall execute the acknowledgment of exercise in the form attached hereto as Exhibit II (the "Acknowledgment of Exercise") indicating the number of shares which remain subject to future purchases, if any. The Exercise Price may be paid at the Warrantholder's election either (i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as determined below. If the Warrantholder elects the Net Issuance method, the Company will issue Preferred Stock in accordance with the following formula: X = Y(A-B) ------ - 1 - A Where: X = the number of shares of Preferred Stock to be issued to the Warrantholder. Y = the number of shares of Preferred Stock requested to be exercised under this Warrant Agreement. A = the fair market value of one (1) share of Preferred Stock. B = the Exercise Price. For purposes of the above calculation, current fair market value of Preferred Stock shall mean with respect to each share of Preferred Stock: (i) if the exercise is in connection with an initial public offering of the Company's Common Stock, and if the Company's Registration Statement relating to such public offering has been declared effective by the SEC, then the fair market value per share shall be the product of (x) the initial "Price to Public" specified in the final prospectus with respect to the offering and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; (ii) if this Warrant is exercised after, and not in connection with the Company's initial public offering, and: (a) if traded on a securities exchange, the fair market value shall be deemed to be the product of (x) the average of the closing prices over a twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; or (b) if actively traded over-the-counter, the fair market value shall be deemed to be the product of (x) the average of the closing bid and asked prices quoted on the NASDAQ system (or similar system) over the twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; (iii) if at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Preferred Stock shall be the product of (x) the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the fair market value of Preferred Stock shall be deemed to be the value received by the holders of the Company's Preferred Stock on a common equivalent basis pursuant to such merger or acquisition. Upon partial exercise by either cash or Net Issuance, the Company shall promptly issue an amended Warrant Agreement representing the remaining number of shares purchasable hereunder. All other terms and conditions of such amended Warrant Agreement shall be identical to those contained herein, including, but not limited to the Effective Date hereof. 4. RESERVATION OF SHARES. (a) AUTHORIZATION AND RESERVATION OF SHARES. During the term of this Warrant Agreement, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of the rights to purchase Preferred Stock as provided for herein. (b) REGISTRATION OR LISTING. If any shares of Preferred Stock required to be reserved hereunder require registration with or approval of any governmental authority under any Federal or State law (other than any registration under the Securities Act of 1933, as amended ("1933 Act"), as then in effect, or any similar Federal - 2 - statute then enforced, or any state securities law, required by reason of any transfer involved in such conversion), or listing on any domestic securities exchange, before such shares may be issued upon conversion, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered, listed or approved for listing on such domestic securities exchange, as the case may be. 5. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 6. NO RIGHTS AS SHAREHOLDER. This Warrant Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of the Warrant. 7. WARRANTHOLDER REGISTRY. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 8. ADJUSTMENT RIGHTS. The purchase price per share and the number of shares of Preferred Stock purchasable hereunder are subject to adjustment, as follows: (a) MERGER AND SALE OF ASSETS. If at any time there shall be a capital reorganization of the shares of the Company's stock (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), including, but not limited to, a merger effected solely for the purpose of changing domicile, or a merger or consolidation of the Company with or into another corporation whether or not the Company is the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person, or any other transaction or series of related transactions in which more that 50% of the voting power of the Company is disposed of (hereinafter referred to as a "Merger Event"), then, as a part of such Merger Event, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive, upon exercise of the Warrant, the number of shares of preferred stock or other securities of the successor corporation resulting from such Merger Event, equivalent in value to that which would have been issuable if Warrantholder had exercised this Warrant immediately prior to the Merger Event. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interest of the Warrantholder after the Merger Event to the end that the provisions of this Warrant Agreement (including adjustments of the Exercise Price and number of shares of Preferred Stock purchasable) shall be applicable to the greatest extent possible. (b) RECLASSIFICATION OF SHARES. If the Company at any time shall, by combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change. (c) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time shall combine or subdivide its Preferred Stock, the Exercise Price shall be proportionately decreased in the case of a subdivision, or proportionately increased in the case of a combination. (d) STOCK DIVIDENDS. If the Company at any time shall pay a dividend payable in, or make any other distribution (except any distribution specifically provided for in the foregoing subsections (a) or (b)) of the Company's stock, then the Exercise Price shall be adjusted, from and after the record date of such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of all shares of the Company's stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of all shares of the Company's stock outstanding immediately after such dividend or distribution. The Warrantholder shall thereafter be - 3 - entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred Stock (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (e) RIGHT TO PURCHASE ADDITIONAL STOCK. If, the Warrantholder's total cost of equipment leased pursuant to the Leases exceeds $2,000,000, Warrantholder shall have the right to purchase from the Company, at the Exercise Price (adjusted as set forth herein), an additional number of shares, which number shall be determined by (i) multiplying the amount by which the Warrantholder's total equipment cost exceeds $2,000,000 by 4%, and (ii) dividing the product thereof by the Exercise Price per share referenced above. (f) ANTIDILUTION RIGHTS. Additional antidilution rights applicable to the Preferred Stock purchasable hereunder are as set forth in the Company's Certificate of Incorporation, as amended through the Effective Date, a true and complete copy of which is attached hereto as Exhibit ___ (the "Charter"). The Company shall promptly provide the Warrantholder with any restatement, amendment, modification or waiver of the Charter. The Company shall provide Warrantholder with prior written notice of any issuance of its stock or other equity security to occur after the Effective Date of this Warrant, which notice shall include (a) the price at which such stock or security is to be sold, (b) the number of shares to be issued, and (c) such other information as necessary for Warrantholder to determine if a dilutive event has occurred. (g) NOTICE OF ADJUSTMENTS. If: (i) the Company shall declare any dividend or distribution upon its stock, whether in cash, property, stock or other securities; (ii) the Company shall offer for subscription prorata to the holders of any class of its Preferred or other convertible stock any additional shares of stock of any class or other rights; (iii) there shall be any Merger Event; (iv) there shall be an initial public offering; or (v) there shall be any voluntary dissolution, liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (A) at least twenty (20) days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Preferred Stock shall be entitled thereto) or for determining rights to vote in respect of such Merger Event, dissolution, liquidation or winding up; (B) in the case of any such Merger Event, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Preferred Stock shall be entitled to exchange their Preferred Stock for securities or other property deliverable upon such Merger Event, dissolution, liquidation or winding up); and (C) in the case of a public offering, the Company shall give the Warrantholder at least twenty (20) days written notice prior to the effective date thereof. Each such written notice shall set forth, in reasonable detail, (i) the event requiring the adjustment, if applicable (ii) the amount of the adjustment, if applicable (iii) the method by which such adjustment was calculated, (iv) the Exercise Price, and (v) the number of shares subject to purchase hereunder after giving effect to such adjustment, and shall be given by first class mail, postage prepaid, addressed to the Warrantholder, at the address as shown on the books of the Company. (h) TIMELY NOTICE. Failure to timely provide such notice required by subsection (g) above shall entitle Warrantholder to retain the benefit of the applicable notice period notwithstanding anything to the contrary contained in any insufficient notice received by Warrantholder. The notice period shall begin on the date Warrantholder actually receives a written notice containing all the information specified above. 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. (a) RESERVATION OF PREFERRED STOCK. The Preferred Stock issuable upon exercise of the Warrantholder's rights has been duly and validly reserved and, when issued in accordance with the provisions of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided, however, that the Preferred Stock issuable pursuant to this Warrant Agreement may be subject to restrictions on transfer under state and/or Federal securities laws. The Company has made available to the Warrantholder true, correct and complete copies of its Charter and Bylaws, as amended. The issuance of certificates for shares of Preferred Stock upon exercise of the Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved and the issuance and delivery of any certificate in a name other than that of the Warrantholder. - 4 - (b) DUE AUTHORITY. The execution and delivery by the Company of this Warrant Agreement and the performance of all obligations of the Company hereunder, including the issuance to Warrantholder of the right to acquire the shares of Preferred Stock, have been duly authorized by all necessary corporate action on the part of the Company, and the Leases and this Warrant Agreement are not inconsistent with the Company's Charter or Bylaws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Leases and this Warrant Agreement constitute legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other laws of general application affecting enforcement of creditors' rights generally as limited by laws relating to the availability or specific performance, injunctions relief or other equitable remedies. (c) CONSENTS AND APPROVALS. No consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement, except for the filing of notices pursuant to Regulation D under the 1933 Act and any filing required by applicable state securities law, which filings will be effective by the time required thereby. (d) ISSUED SECURITIES. All issued and outstanding shares of Common Stock, Preferred Stock or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding shares of Common Stock, Preferred Stock and any other securities were issued in full compliance with all Federal and state securities laws. In addition: (i) The authorized capital of the Company consists of (A) __________ shares of Common Stock, of which __________ shares are issued and outstanding, and (B) __________ shares of preferred stock, of which __________ shares are issued and outstanding and are convertible into __________ shares of Common Stock at $______ per share. (ii) The Company has reserved (A) __________ shares of Common Stock for issuance under its 1997Stock Plan, under which __________ options are outstanding at an average price of $________ per share, and (B) ________ shares of Common Stock for issuance under its Incentive Stock Option Plan, under which __________ options are outstanding at an average price of $________ per share. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company. (iii) Other than as set forth in the Rights Agreement (as defined below), in accordance with the Company's Articles of Incorporation, no shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock. (e) INSURANCE. The Company has in full force and effect insurance policies, with extended coverage, insuring the Company and its property and business against such losses and risks, and in such amounts, as are customary for corporations engaged in a similar business and similarly situated and as otherwise may be required pursuant to the terms of any other contract or agreement. (f) OTHER COMMITMENTS TO REGISTER SECURITIES. Except as set forth in this Warrant Agreement and that certain Amended and Restated Investor Rights Agreement, dated June 4, 1998, by and among the Company and certain investors (the "Rights Agreement"), the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the 1933 Act any of its presently outstanding securities or any of its securities which may hereafter be issued. (g) EXEMPT TRANSACTION. Subject to the accuracy of the Warrantholder's representations in Section 10 hereof, the issuance of the Preferred Stock upon exercise of this Warrant will constitute a transaction exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of the applicable state securities laws. (h) COMPLIANCE WITH RULE 144. At the written request of the Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise of the Warrant in compliance with Rule 144 promulgated by the Securities and Exchange Commission, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. - 5 - 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder: (a) INVESTMENT PURPOSE. The right to acquire Preferred Stock or the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) PRIVATE ISSUE. The Warrantholder understands (i) that the Preferred Stock issuable upon exercise of this Warrant (and the Common Stock issuable upon conversion of such Preferred Stock) is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) DISPOSITION OF WARRANTHOLDER'S RIGHTS. In no event will the Warrantholder make a disposition of any of its rights to acquire Preferred Stock or Preferred Stock issuable upon exercise of such rights or the Common Stock issuable upon conversion of such Preferred Stock unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act has been taken, or (B) an exemption from the registration requirements of the 1933 Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Preferred Stock or Preferred Stock issuable on the exercise of such rights or the Common Stock issuable upon conversion of such Preferred Stock do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Preferred Stock when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Warrantholder or holder of a share of Preferred Stock of Common Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Preferred Stock or Common Stock not bearing any restrictive legend. (d) FINANCIAL RISK. The Warrantholder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment. (e) RISK OF NO REGISTRATION. The Warrantholder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the 1934 Act (the "1934 Act"), or file reports pursuant to Section 15(d), of the 1934 Act", or if a registration statement covering the securities under the 1933 Act is not in effect when it desires to sell (i) the rights to purchase Preferred Stock pursuant to this Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to purchase or the Common Stock issuable upon conversion of such Preferred Stock, it may be required to hold such securities for an indefinite period. The Warrantholder also understands that any sale of its rights of the Warrantholder to purchase Preferred Stock or Preferred Stock or Common Stock which might be made by it in reliance upon Rule 144 under the 1933 Act may be made only in accordance with the terms and conditions of that Rule. (f) ACCREDITED INVESTOR. Warrantholder is an "accredited investor" within the meaning of the Securities and Exchange Rule 501 of Regulation D, as presently in effect. 11. REQUESTS FOR REGISTRATION Warrantholder and Company agree that all shares of Common Stock issuable upon conversion of Preferred Stock subject to the Warrant Agreement shall be deemed "Registerable Securities" for purposes of the Rights - 6 - Agreement and shall have the same registration rights and be subject to the same terms, and conditions and obligations with respect to the registration and sale of such stock as possessed by Holders (as such terms is defined in the Rights Agreement) under the Rights Agreement. 12. TRANSFERS. Subject to the terms and conditions contained in Section 10 hereof, this Warrant Agreement and all rights hereunder are transferable in whole or in part by the Warrantholder and any successor transferee, provided, however, in no event shall the number of transfers of the rights and interests in all of the Warrants exceed three (3) transfers. The transfer shall be recorded on the books of the Company upon receipt by the Company of a notice of transfer in the form attached hereto as Exhibit III (the "Transfer Notice"), at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. 13. MISCELLANEOUS. (a) EFFECTIVE DATE. The provisions of this Warrant Agreement shall be construed and shall be given effect in all respects as if it had been executed and delivered by the Company on the date hereof. This Warrant Agreement shall be binding upon any successors or assigns of the Company. (b) ATTORNEY'S FEES. In any litigation, arbitration or court proceeding between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) GOVERNING LAW. This Warrant Agreement shall be governed by and construed for all purposes under and in accordance with the laws of the State of California. (d) COUNTERPARTS. This Warrant Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, facsimile transmission (provided that the original is sent by personal delivery or mail as hereinafter set forth) or seven (7) days after deposit in the United States mail, by registered or certified mail, addressed (i) to the Warrantholder at 6111 North River Road, Rosemont, Illinois 60018, Attention: Venture Lease Administration, cc: Legal Department, Attention.: General Counsel, (and/or, if by facsimile, (847) 518-5465 and (847)518-5088) and (ii) to the Company at 2850 Ocean Park Blvd. Suite 225, Santa Monica, CA 90405, Attention: Jordan Posell (and/or if by facsimile, (310) 664-8101 or at such other address as any such party may subsequently designate by written notice to the other party. (f) REMEDIES. In the event of any default hereunder, the non-defaulting party may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including but not limited to an action for damages as a result of any such default, and/or an action for specific performance for any default where Warrantholder will not have an adequate remedy at law and where damages will not be readily ascertainable. The Company expressly agrees that it shall not oppose an application by the Warrantholder or any other person entitled to the benefit of this Agreement requiring specific performance of any or all provisions hereof or enjoining the Company from continuing to commit any such breach of this Agreement. (g) NO IMPAIRMENT OF RIGHTS. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Warrantholder against impairment. (h) SURVIVAL. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) SEVERABILITY. In the event any one or more of the provisions of this Warrant Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. - 7 - (j) AMENDMENTS. Any provision of this Warrant Agreement may be amended by a written instrument signed by the Company and by the Warrantholder. (k) ADDITIONAL DOCUMENTS. The Company, upon execution of this Warrant Agreement, shall provide the Warrantholder with certified resolutions with respect to the representations, warranties and covenants set forth in subparagraphs (a) through (d), (f) and (g) of Section 9 above The Company shall also supply such other documents as the Warrantholder may from time to time reasonably request. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its officers thereunto duly authorized as of the Effective Date. COMPANY: ETOYS INC. By: ------------------------ Title: ------------------------ WARRANTHOLDER: COMDISCO, INC. By: ------------------------ Title: ------------------------ - 8 - EXHIBIT I NOTICE OF EXERCISE TO: -------------------------- (1) The undersigned Warrantholder hereby elects to purchase _______ shares of the Series ____ Preferred Stock of _________________, pursuant to the terms of the Warrant Agreement dated the ______ day of ________________________, 19__ (the "Warrant Agreement") between _____________________________________ and the Warrantholder, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. (2) In exercising its rights to purchase the Series ____ Preferred Stock of ________________________________________, the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 10 of the Warrant Agreement. (3) Please issue a certificate or certificates representing said shares of Series ____ Preferred Stock in the name of the undersigned or in such other name as is specified below. - ---------------------------------- (Name) - ---------------------------------- (Address) WARRANTHOLDER: COMDISCO, INC. By: -------------------------- Title: -------------------------- Date: -------------------------- - 9 - EXHIBIT II ACKNOWLEDGMENT OF EXERCISE The undersigned ____________________________________, hereby acknowledge receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase ____ shares of the Series ____ Preferred Stock of _________________, pursuant to the terms of the Warrant Agreement, and further acknowledges that ______ shares remain subject to purchase under the terms of the Warrant Agreement. COMPANY: By: ------------------------ Title: ------------------------ Date: ------------------------ - 10 - EXHIBIT III TRANSFER NOTICE (TO TRANSFER OR ASSIGN THE FOREGOING WARRANT AGREEMENT EXECUTE THIS FORM AND SUPPLY REQUIRED INFORMATION. DO NOT USE THIS FORM TO PURCHASE SHARES.) FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights evidenced thereby are hereby transferred and assigned to - ---------------------------------------------------------------- (Please Print) whose address is ------------------------------------------------ - ---------------------------------------------------------------- Dated: ------------------------------- Holder's Signature: ----------------- Holder's Address: ----------------- --------------------------------------- Signature Guaranteed: --------------------------------------- NOTE: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant Agreement, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant Agreement. - 11 - EX-23.1 26 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 15, 1999, in the Registration Statement (Form S-1) and related Prospectus of eToys Inc. for the registration of its common stock. Ernst & Young LLP Los Angeles, California February 16, 1999 EX-27 27 EXHIBIT 27
5 1,000 YEAR 9-MOS MAR-31-1998 MAR-31-1999 APR-01-1997 APR-01-1998 MAR-31-1998 DEC-31-1998 1,552 18,545 0 0 0 0 0 0 224 4,971 1,811 23,910 178 2,165 (18) (264) 2,459 27,199 355 13,793 0 0 3,917 28,899 0 0 1 1 (1,814) (15,529) 2,459 27,199 687 23,900 687 23,900 568 19,008 2,957 39,596 0 0 0 0 15 46 (2,267) (15,257) 1 1 (2,268) (15,258) 0 0 0 0 0 0 (2,268) (15,258) (.27) (1.38) (.27) (1.38)
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